UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES AND EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 000-32717
---------
Instinet Group Incorporated
(Exact Name of Registrant as Specified in Its Charter)
Delaware
(State or Other Jurisdiction 13-4134098
of Incorporation or Organization) (IRS Employer
Identification No.)
3 Times Square, New York, NY 10036
(Address of Principal Executive Offices) (Zip Code)
(212) 310-9500
(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
-- --
Number of shares outstanding of each of the registrant's classes of Common Stock
at August 13, 2002.
Common Stock, $0.01 par value 248,553,515 shares
INSTINET GROUP INCORPORATED
FORM 10-Q QUARTERLY REPORT
For the Quarter Ended June 30, 2002
Table of Contents Page
Part I. Financial Information
Item 1. Financial Statements
Consolidated Statements of Income for the three
months and six months June 30, 2002 and 2001 ..................... 3
Consolidated Statements of Financial Condition as
of June 30, 2002 and December 31, 2001 ........................... 4
Consolidated Statements of Cash Flows for the six months ended
June 30, 2002 and 2001 ........................................... 5
Notes To Consolidated Financial Statements ......................... 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations ................ 18
Item 3. Quantitative and Qualitative Disclosures about
Market Risk .................................................. 35
Part II. OTHER INFORMATION
Item 1. Legal Proceedings ............................................ 37
Item 2. Changes in Securities and Use of Proceeds .................... 37
Item 3. Defaults Upon Senior Securities .............................. 42
Item 4. Submission of Matters to a Vote of Security Holders .......... 42
Item 5. Other Information ............................................ 42
Item 6. Exhibits and Reports on Form 8-K ............................. 44
Signatures ........................................................... 47
Unless otherwise indicated or the context otherwise requires, references to the
"company," "we," "us," and "our" mean Instinet Group Incorporated and its
subsidiaries.
Forward-Looking Statements:
We have made forward-looking statements in this report on Form 10-Q that are
based on our management's beliefs and assumptions and on information currently
available to our management. From time to time, we may also include oral or
written forward-looking statements in other materials released to the public.
Forward-looking statements include information concerning our possible or
assumed future results of operations, business strategies, financing plans,
competitive position, potential growth opportunities and the effects of
competition and regulation. Forward-looking statements include all statements
that are not historical facts. You can identify these statements by the use of
forward-looking terminology, such as the words "believes," "expects,"
"anticipates," "intends," "plans," "estimates," "may" or "might" or other
similar expressions. The forward-looking statements contained in this report
speak only as of the date hereof, and we do not undertake any obligation to
update any of them publicly in light of new information or future events.
Forward-looking statements involve significant risks, uncertainties and
assumptions. Although we believe that the expectations reflected in the
forward-looking statements are reasonable, actual results may differ materially
from those expressed in these forward-looking statements. You should not put
undue reliance on any forward-looking statements. You should understand that
many important factors could cause our results to differ materially from those
expressed or suggested in forward-looking statements, including those discussed
below under "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Quantitative and Qualitative Disclosures About
Market Risk," and under the caption "Risk Factors" in our Prospectus dated
August 1, 2002, as filed with the SEC pursuant to Rule 424(b) under the
Securities Act of 1933 (the "Prospectus"). We hereby incorporate by reference
those risk factors from our Prospectus into this report on Form 10-Q.
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
INSTINET GROUP INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands, Except Per Share Amounts)
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
---- ---- ---- ----
REVENUES
Transaction fees.............................. $ 269,933 $ 378,891 $ 535,814 $ 793,387
Interest...................................... 11,958 11,199 20,892 23,480
Investments................................... (13,181) 3,689 (18,895) 5,901
-------- -------- -------- --------
Total revenues...................... 268,710 393,779 537,811 822,768
EXPENSES
Compensation and benefits..................... 70,989 112,735 157,207 237,532
Communications and equipment.................. 29,187 42,560 62,496 86,191
Soft dollar and commission recapture ......... 61,738 54,228 115,329 110,281
Brokerage, clearing and exchange fees ........ 33,767 36,185 70,448 72,575
Depreciation and amortization................. 17,930 19,669 37,053 38,279
Professional fees............................. 6,646 9,012 11,664 24,025
Occupancy........................ 13,595 13,796 27,147 23,907
Marketing and business development............ 7,480 8,477 10,887 18,561
Broker-dealer rebates 25,503 - 28,794 -
Other......................................... 16,852 13,545 32,526 26,480
Restructuring................................. 42,410 - 57,440 -
-------- -------- ------- -------
Total expenses...................... 326,097 310,207 610,991 637,831
Income/(loss) from continuing operations before
income taxes and cumulative effect of change in
accounting principle ....................... (57,387) 83,572 (73,180) 184,937
Provision for /(benefit from) income ......... (14,117) 36,198 (19,820) 79,863
taxes....... ................................. --------- ------- -------- -------
Income/(loss) from continuing operations before
cumulative effect of change in accounting
principle .................................. (43,270) 47,374 (53,360) 105,074
Discontinued operations:
Loss from operations of fixed income
business, net of tax ..................... (16,635) (6,644) (22,586) (14,236)
--------- -------- --------- --------
Income/(loss) before cumulative effect of
change in accounting principle,
net of tax ................................ (59,905) 40,730 (75,946) 90,838
Cumulative effect of change in
accounting principle ...................... - - (18,642) -
--------- -------- -------- -------
Net income/(loss)................... $(59,905) $40,730 $(94,588) $90,838
========= ======== ======== =======
Basic and diluted earnings/(loss) per share:
Income/(loss) from continuing operations before
cumulative effect of change in accounting
principle .................................. $(0.17) $0.21 $(0.22) $0.49
Discontinued operations:
Loss from operations of fixed income
business, net of tax ..................... (0.07) (0.03) (.09) (0.07)
-------- ------- ------- ------
Income/(loss) before cumulative effect of
change in accounting principle, net of tax. (0.24) 0.18 (0.31) 0.42
Cumulative effect of change in accounting
principle ................................. - - (0.07) -
------- ------- ------- -----
Net income/(loss)................... $ (0.24) $ 0.18 $ (0.38) $0.42
======= ======= ======= =====
Weighted average shares outstanding:
Basic ..................................... 248,554 222,675 248,641 214,831
Diluted ................................... 248,585 223,122 248,720 215,060
The accompanying notes are an integral part of these consolidated
financial statements.
INSTINET GROUP INCORPORATED
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In Thousands, Except Per Share Amounts)
(Unaudited)
June 30, December 31,
2002 2001
---- ----
ASSETS
Cash and cash equivalents................................. $ 422,712 $ 703,678
Securities segregated under federal regulations........... 276,278 310,692
Securities owned, at market value......................... 309,284 236,007
Securities borrowed....................................... 627,258 455,922
Receivable from broker-dealers............................ 220,163 421,196
Receivable from customers................................. 79,983 68,280
Commissions and other receivables, net.................... 100,172 116,027
Taxes receivable 11,757 -
Receivable from affiliate 293 -
Investments............................................... 79,685 91,899
Fixed assets and leasehold improvements, net.............. 181,706 205,136
Deferred tax assets, net.................................. 47,295 52,165
Goodwill, net............................................. 130,640 145,066
Other intangible asset, net............................... 63,184 63,664
Other assets.............................................. 115,096 125,109
---------- ----------
Total assets.............................................. $2,665,506 $2,994,841
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Short-term borrowings..................................... $ 105,378 $ 69,299
Securities loaned......................................... 372,631 257,000
Payable to broker-dealers................................. 120,825 369,817
Payable to customers...................................... 320,757 389,803
Taxes payable... ......................................... - 30,229
Payable to Parent......................................... 8,052 2,254
Payable to affiliates, net................................ - 12,707
Accrued compensation...................................... 77,426 128,175
Accounts payable, accrued expenses and other liabilities.. 279,331
273,048
---------- ----------
Total liabilities......................................... 1,284,400 1,532,332
---------- ----------
Commitments and contingencies (Note 6)
STOCKHOLDERS' EQUITY
Common stock, $0.01 par value (950,000 shares authorized,.
248,739 and 248,351 issued as of June 30, 2002 and
December 31, 2001, respectively, and 248,554 and 2,487 2,483
248,351 shares outstanding as of June 30, 2002 and
December 31, 2001, respectively)........................
Additional paid-in capital................................ 1,397,694 1,396,551
Retained earnings/(accumulated deficit)................... (20,472) 74,116
Treasury stock, at cost (185 shares) (1,335)
Accumulated other comprehensive (income/loss)............. 6,931 (726)
Unearned compensation..................................... (4,199) (9,915)
---------- ----------
Total stockholders' equity................................ 1,381,106 1,462,509
---------- ----------
Total liabilities and stockholders' equity................ $2,665,506 $2,994,841
========== ==========
The accompanying notes are an integral part of
these consolidated financial statements.
INSTINET GROUP INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
Six Months Ended
June 30,
2002 2001
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income/(loss).......................................... $ (94,588) $90,838
Adjustments to reconcile net income to cash used
in operating activities:
Write-off of fixed assets 4,513
Depreciation and amortization............................ 37,053 40,007
Goodwill impairment, pre-tax............................. 19,046 -
Deferred tax assets, net................................. 4,870 3,428
Amortization of unearned compensation.................... 3,000 3,790
(Increases)/decreases in operating assets:
Securities segregated under federal regulations 34,414 (43,049)
Securities borrowed...................................... (171,336) (392,144)
Receivable from broker-dealers........................... 201,033 260,372
Receivable from customers................................ (11,703) 74,412
Commissions and other receivables, net................... 15,855 (29,312)
Receivable from Parent.......... ........................ - (10,372)
Receivable from affiliate, net........................... (293) 14,267
Taxes receivable (11,757)
Other assets 10,233 22,821
Increases/(decreases) in operating liabilities:
Short-term borrowings.................................... 36,079 13,675
Securities loaned 115,631 285,928
Payable to broker-dealers................................ (248,992) (337,244)
Payable to customers..................................... (69,046) (88,717)
Taxes payable............................................ (30,229) (9,442)
Payable to Parent........................................ 5,798 (22,488)
Payable to affiliates, net............................... (12,707) 25,878
Accrued compensation..................................... (50,749) (32,229)
Accounts payable, accrued expenses and other liabilities 6,283 35,980
--------- ----------
Cash used in operating activities..................... (207,592) (93,601)
CASH FLOWS FROM INVESTING ACTIVITIES:
Securities owned, at market value........................ (73,277) 104,678
Investments.............................................. 12,214 (5,281)
Purchase of fixed assets and leasehold improvements (13,314) (75,143)
Acquisitions of businesses, net of assets acquired and
liabilities assumed..................................... (5,319) -
--------- ---------
Cash (used in)/provided by investing activities....... (79,696) 24,254
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase of treasury stock............................... (1,335) -
Repayment of subordinated debt from affiliate............ - (50,417)
Loan from Parent ........................................ - 150,000
Capital distribution to Parent........................... - (150,000)
Net proceeds from initial public offering................ - 488,097
Repayment of loan from Parent............................ - (150,000)
Proceeds from issuance of common shares.................. - 210
-------- ----------
Cash (used in)/provided by financing activities....... (1,335) 287,890
Effect of exchange rate differences........................ 7,657 228
--------- ---------
Decrease in cash and cash equivalents...................... (280,966) 218,771
Cash and cash equivalents, beginning of year............... 703,678 415,199
--------- ---------
Cash and cash equivalents, end of period................... $422,712 $633,970
========= =========
The accompanying notes are an integral part of
these consolidated financial statements.
INSTINET GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. ORGANIZATION AND DESCRIPTION OF BUSINESS
Instinet Group Incorporated (the "Company" or "Instinet") is a Delaware
holding company which, through its operating subsidiaries, provides agency and
other brokerage services to broker-dealers, institutional customers, hedge funds
and professional traders. The Company is 83.3% owned by subsidiaries of Reuters
Group PLC ("Reuters" or "Parent").
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts
of the Company and its wholly-owned subsidiaries. All significant transactions
and balances between and among the Company and its subsidiaries have been
eliminated in consolidation. These financial statements have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission
("SEC") and, in the opinion of management, reflect all adjustments, consisting
only of normal recurring adjustments, necessary for a fair statement of the
financial position, results of operations and cash flows for the periods
presented in conformity with generally accepted accounting principles. These
unaudited financial statements should be read in conjunction with the Company's
audited financial statements and notes thereto included in the Company's Annual
Report on Form 10-K, as filed with the SEC on March 27,2002.
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 reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities as of the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates. Our
accounting policy related to our strategic alliances and long term investments
is the most critical accounting policy that requires us to make estimates and
use judgements that could affect our results (See "INVESTMENTS" accounting
policy below).
TRANSACTION FEES
Transaction fees and related expenses arising from securities brokerage
transactions are recorded on a trade date basis.
SOFT DOLLAR AND COMMISSION RECAPTURE
Soft dollar and commission recapture expenses primarily relate to the
purchase of third party research products as well as payments made as part of
the Company's commission recapture services. The Company reports its transaction
fee revenue from these businesses separately from its soft dollar and commission
recapture expenses.
INVESTMENTS
Investments are stated at estimated fair value as determined in good
faith by management. Generally, management will initially value investments at
cost and require that changes in value be established by meaningful third-party
transactions or a significant impairment in the financial condition or operating
performance of the issuer, unless meaningful developments occur that otherwise
warrant a change in the valuation of an investment. Factors considered in
valuing individual investments include, without limitation, available market
prices, type of security, purchase price, purchases of the same or similar
securities by other investors, marketability, restrictions on disposition,
current financial position and operating results, and other pertinent
information.
Management uses its best judgment in estimating the fair value of these
investments. There are inherent limitations in any estimation technique. The
fair value estimates presented herein are not necessarily indicative of an
amount which the Company could realize in a current transaction. Because of the
inherent uncertainty of valuation, these estimated fair values do not
necessarily represent amounts that might be ultimately realized, since such
amounts depend on future circumstances, and the differences could be material.
Investments are accounted for under the equity method if the Company
has the ability to exercise significant influence over the investee, but not
control. Significant influence is deemed to exist if the Company has ownership
of between 20% to 50%.
Unrealized gains and losses from investments are included in investment
income on the consolidated statements of income.
DEPRECIATION AND AMORTIZATION OF FIXED ASSETS ($ IN THOUSANDS)
Depreciation of capitalized furniture and equipment is provided on a
straight-line basis using estimated useful lives of three to ten years.
Leasehold improvements are amortized on a straight-line basis over the lesser of
the lease term or the estimated useful life. Fixed assets are stated at cost,
net of accumulated amortization of $270,753 and $373,689 as of June 30, 2002 and
December 31, 2001, respectively.
ACQUISITIONS AND GOODWILL
All business acquisitions have been accounted for under the purchase
method and, accordingly, the excess of the purchase price over the fair value of
the net assets acquired has been recorded as goodwill on the consolidated
statements of financial condition.
The carrying value of goodwill is reviewed on a periodic basis for
impairment based upon the discounted cash flows of the businesses. Should the
review indicate that goodwill is impaired, the Company's carrying value of
goodwill would be reduced by the estimated shortfall of the discounted cash
flows.
In accordance with SFAS 142 "Goodwill and other Intangible Assets,"
goodwill existing as of June 30, 2001 was amortized until December 31, 2001. For
goodwill arising from acquisitions after June 30, 2001, the Company did not
amortize goodwill but reviewed it for impairment in accordance with the
Company's impairment policy noted above.
Pursuant to the purchase method, the results of operations, changes in
stockholders' equity and cash flows of acquired companies and businesses are
included in consolidated operations only for those periods following the date of
their acquisition.
The Company's subsidiary, ProTrader Group, L.P. ("ProTrader"), had
previously entered into agreements whereby additional consideration would be
paid to former owners of trading offices it had purchased. The additional
consideration is generally based on actual trading volumes of the respective
trading office and is generally effective for a period of two years from the
date of acquisition. In accordance with EITF 95-8: "Accounting for Contingent
Consideration Paid to Shareholders of an Acquired Enterprise in a Purchase
Business Combination", APB 16 "Business Combinations" and APB 17 "Intangible
Assets", the Company records these contingent payments as additional goodwill.
INTANGIBLE ASSET ($ IN THOUSANDS)
The identifiable intangible asset consists primarily of intellectual
property and related technology in connection with the Company's acquisition of
ProTrader in October 2001. The intangible asset is being amortized on a straight
line basis over its estimated useful life of 7 years and is shown net of
accumulated amortization of $7,400 as of June 30, 2002. Amortization expense for
the three months and six months ended June 30, 2002 was $2,521 and $5,042,
respectively. Estimated amortization expense for each of the next 5 years is
$10,083.
MARKETING AND BUSINESS DEVELOPMENT
Advertising costs are expensed when incurred.
SOFTWARE COSTS
Costs for internal use software, whether developed or obtained, are
assessed to determine whether they should be capitalized or expensed in
accordance with American Institute of Certified Public Accountants' Statement
("SOP") 98-1 "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use."
INCOME TAXES
The Company files a consolidated income tax return in the U.S. and in
other countries and combined U.S. state and local income tax returns with an
affiliate.
The Company records deferred tax assets and liabilities for the
difference between the tax basis of assets and liabilities and the amounts
recorded for financial reporting purposes, using current tax rates. Deferred tax
expenses and benefits are recognized in the consolidated statements of income
for changes in deferred tax assets and liabilities.
STOCK-BASED COMPENSATION
The Company accounts for its stock-based compensation plans in
accordance with APB Opinion No. 25, Accounting for Stock Issued to Employees
("APB No. 25"), SFAS 123 Accounting for Stock-Based Compensation ("SFAS No.
123"), and related accounting interpretations. The Company has chosen to account
for stock options granted to employees using the intrinsic value method
prescribed in APB No. 25 and accordingly compensation expense is measured as the
excess, if any, of the estimated fair value of the Company at the date of grant
over the option exercise price and is recorded over the vesting period. For
options granted to non-employees, the Company uses the fair value method
prescribed in SFAS No. 123 and accordingly records compensation expense over the
vesting period.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents.
SECURITIES OWNED ($ IN THOUSANDS)
Securities owned are recorded on a trade date basis and are carried at
their market value with unrealized gains and losses reported in investment
income on the consolidated statements of income. Securities owned, with the
exception of shares in stock exchanges, have maturities of less than 3 years and
consisted of the following:
June 30, December 31,
2002 2001
----------- ------------
U.S. government and federal agency obligations $ 69,107 $42,446
Municipal bonds 84,740 73,637
Corporate bonds 97,911 72,408
Foreign sovereign obligations 29,203 18,317
Shares of stock exchanges 28,123 29,199
Other 200 --
--------- -------
Total $309,284 $ 236,007
========= =======
SECURITIES BORROWED AND LOANED
Securities borrowed and loaned are recorded at the amount of cash
collateral advanced or received. Securities borrowed require the Company to
deposit cash with the lender. For securities loaned, the Company receives
collateral in the form of cash in an amount generally in excess of the market
value of the securities loaned. The Company monitors the market value of the
securities borrowed and loaned on a daily basis, with additional collateral
obtained or refunded, as necessary.
RECEIVABLE FROM AND PAYABLE TO BROKER-DEALERS
Receivable from broker-dealers are primarily comprised of fails to
deliver. Fails to deliver arise when the Company does not deliver securities on
settlement date. The Company records the selling price as a receivable due from
the purchasing broker-dealer. The receivable is collected upon delivery of the
securities. Payable to broker-dealers are primarily comprised of fails to
receive. Fails to receive arise when the Company does not receive securities on
settlement date. The Company records the amount of the purchase price as a
payable due to the selling broker-dealer. The liability is paid upon receipt of
the securities.
RECEIVABLE FROM AND PAYABLE TO CUSTOMERS
Receivable from customers primarily represent customer debit balances
and payable to customers represent free credit balances in customer accounts.
COMMISSIONS AND OTHER RECEIVABLES, NET ($ IN THOUSANDS)
Commissions and other receivables are reported net of a provision for
doubtful accounts of $13,601 and $7,472 as of June 30, 2002 and December 31,
2001, respectively.
SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL AND SECURITIES SOLD
UNDER AGREEMENTS TO REPURCHASE
Transactions involving purchases of securities under agreements to
resell and securities sold under agreements to repurchase are treated as
collateralized financing transactions and are recorded at their contracted
resale amounts plus accrued interest. It is the Company's policy to take
possession of securities with a market value in excess of the principal amount
loaned plus the accrued interest thereon, in order to collateralize reverse
repurchase agreements. Similarly, the Company is required to provide securities
to counterparties in order to collateralize repurchase agreements. The Company's
agreements with counterparties generally contain contractual provisions allowing
for additional collateral to be obtained, or excess collateral returned, when
necessary. It is the Company's policy to value collateral daily and to obtain
additional collateral, or to retrieve excess collateral from counter-parties,
when deemed appropriate.
FOREIGN CURRENCY TRANSLATION
Assets and liabilities of subsidiaries whose functional currency is not
the U.S. dollar are translated based on the end of period exchange rates from
local currency to U.S. dollars. Results of operations are translated at the
average exchange rates in effect during the period. The resulting gains or
losses are reported as comprehensive income.
DERIVATIVES
The Company may enter into forward foreign currency contracts to
facilitate customers' settling transactions in various currencies, primarily the
U.S. dollar, British pound or Euro. These forward foreign currency contracts are
entered into with third parties and with terms generally identical to its
customers' transactions, thereby mitigating exposure to currency risk. Forward
foreign currency contracts generally do not extend beyond 14 days and realized
and unrealized gains and losses resulting from these transactions are recognized
in the consolidated statements of income as transaction fees in the period
during which they are incurred. These activities have not resulted in a material
impact to the Company's operations to date.
TREASURY STOCK
The Company's purchases of shares of its own common stock are recorded
as treasury stock under the cost method and are shown as a reduction to
stockholders' equity on the statement of financial condition.
3. INVESTMENTS ($ IN THOUSANDS)
From time to time, the Company makes strategic alliances and long-term
investments in other companies. The changes in the carrying values at the end of
each period result from additional investments, sales, and unrealized and
realized gains and losses, as well as fluctuations in exchange rates for
investments made in non-U.S. dollars. A description of the Company's more
significant investments are as follows:
- - WR Hambrecht + Co ("Hambrecht") -- In 1999 and 2000, the Company made
investments totaling $27,500, now representing a 7.8% interest, in Hambrecht.
Hambrecht underwrites initial public offerings through its auction-based
securities offering via the Internet, performs research and analysis, places and
invests in private equity transactions, and offers mergers and acquisition
advisory services. As of June 30, 2002 and December 31, 2001, the Company
carried its investment at estimated fair value of $10,000 and $16,450,
respectively. In addition, as of June 30, 2002, the Company recorded a loan
receivable from Hambrecht in the amount of $1,969. This loan accrues interest at
prevailing market rates and matures in February 2007 and June 2007.
- - TP Group LDC -- In 1999 and 2000, the Company made investments, and also sold
certain portions of its investment, in TP Group LDC, now representing a 13.8%
interest. TP Group LDC is a consortium led by the Company that owns 38.9% of
virt-x, an electronic order driven equities market for pan-European securities.
As of June 30, 2002 and December 31, 2001, the Company carried its investment at
estimated fair value of $4,826 and $8,816, respectively.
- - Archipelago Holdings LLC ("Archipelago") -- In 1999, the Company made an
investment of 15,528 GBP, now representing approximately 4.8% interest, in
Archipelago. Archipelago, through its subsidiary, provides order entry and
execution capabilities using proprietary systems while providing customers
access to liquidity, including access to other electronic communication
networks. In March 2002, Archipelago merged with REDIBook ECN LLC, another ECN.
As of June 30, 2002 and December 31, 2001, the Company carried its investment at
estimated fair value of $40,000.
- - Starmine Corporation ("Starmine") -- In February 2002, the Company made an
investment of $2,000 representing a 12.8% interest in Starmine. Starmine
provides independent ratings of Wall Street equity analysts. As of June 30,
2002, the Company carried its investment at estimated fair value of $2,000.
- - The Nasdaq Stock Market, Inc. ("Nasdaq") -- In 2000, the Company made an
investment of $15,475 in Nasdaq and its subsidiary ProTrader carried an
investment in Nasdaq of $261. As of June 30, 2002 and December 31, 2001, the
Company carried its investment at estimated fair value, which was unchanged from
its original cost.
- - Tradeware S.A. ("Tradeware") -- In 2000, the Company made investments of 4,000
euros, and in 2001, 66,925 Belgian francs and 1,500 euros, now representing a
47.9% interest, in Tradeware. Tradeware is a European based provider of
integrated order routing solutions to broker-dealers in Europe. As of June 30,
2002 and December 31, 2001, the Company carried its investment at $3,870 and
$4,492, respectively, as determined under the equity method. In addition, as of
June 30, 2002, the Company recorded a loan receivable from Tradeware in the
amount of $1,779. This loan accrues interest at prevailing market rates and
matures on December 31, 2003.
- - Knight Roundtable Europe Ltd. ("Roundtable") -- In 2001, the Company made an
investment of $1,000 in Roundtable. Roundtable is a pan-European broker
consortium designed to compete for order flow from small investors in the
region. At December 31, 2001, the Company carried its investment at estimated
fair value of $250. At June 30, 2002, the Company wrote off its investment in
Roundtable.
- - JapanCross Securities Co. Ltd. ("JapanCross") -- In 2001 and 2002, the Company
made a series of investments totaling $6,871, representing a 50% interest in
JapanCross, a joint venture which was established to provide a crossing service
for Japanese equity securities. As of June 30, 2002 and December 31, 2001, the
Company carried its investment at $ 3,253 and $3,782, respectively, as
determined under the equity method.
- - Vencast, Inc. ("Vencast") -- In 2000 and 2001, the Company made investments of
5,031 GBP and $1,500, respectively, in Vencast. Vencast provided solutions by
using the Internet to facilitate the process of raising capital and investing
for the private equity industry. As of December 31, 2001, the Company carried
its investment at $2,373, as determined under the equity method. In March 2002,
Vencast ceased operations and the Company wrote off its carrying value. In
addition, as of December 31, 2001, the Company recorded a loan receivable from
Vencast in the amount of $3,000, which was subsequently written off.
4. COLLATERAL ARRANGEMENTS ($ IN THOUSANDS)
As of June 30, 2002 and December 31, 2001, the fair value of collateral
held by the Company that could be sold or repledged totaled $719,582 and
$607,069, respectively. Such collateral is generally obtained under resale
and securities borrowing agreements. Of this collateral, $576,999 and $548,487
had been sold or repledged generally to cover short sales or effect deliveries
of securities as of June 30, 2002 and December 31, 2001, respectively. In
addition, securities in customer accounts with a fair value of $104,103 and
$76,462 could be sold or repledged by the Company as of June 30, 2002 and
December 31, 2001, respectively.
5. NET CAPITAL REQUIREMENTS ($ IN THOUSANDS)
The Company's U.S. broker-dealer subsidiaries are subject to the SEC's
Uniform Net Capital Rule, which requires the maintenance of minimum net capital.
The subsidiaries have elected to use the alternative method, which requires that
they maintain minimum net capital equal to the greater of $250 or 2% of
aggregate debit items arising from customer transactions. As of June 30, 2002
and December 31, 2001, Instinet Clearing Services Corp., which is the
counterparty to each of our customer transactions, had net capital of $269,653
and $259,990, which was $266,211 and $256,443 in excess of its required net
capital of $3,442 and $3,547, respectively. Certain other U.S. broker-dealer
subsidiaries of the Company are also subject to capital adequacy requirements
and were in compliance with their respective requirements.
The Company's international broker-dealer subsidiaries are subject to
capital adequacy requirements promulgated by authorities of the countries in
which they operate. As of June 30, 2002 and December 31, 2001, these
subsidiaries had met their local capital adequacy requirements.
6. COMMITMENTS AND CONTINGENCIES ($ IN THOUSANDS)
In the normal course of conducting its securities business, the Company has
been involved in various legal proceedings. In the opinion of management, after
consultation with legal counsel, the ultimate outcome of pending litigation
matters will not have a material adverse effect on the financial condition or
results of operations of the Company.
7. SEGMENT/GEOGRAPHIC DATA ($ IN THOUSANDS)
The Company's activities as a provider of agency brokerage services
constitute a single business segment pursuant to SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information." The accompanying table
summarizes select data about the Company's U.S. and non-U.S. operations. Because
of the highly integrated nature of the financial markets in which the Company
competes and the integration of the Company's worldwide business activities, the
Company believes that results by geographic region are not necessarily
meaningful in understanding its business.
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------ -----------------------------
2002 2001 2002 2001
------------- ------------- ------------- -------------
Total revenues:
U.S.......................... $ 218,064 $ 300,067 $ 422,586 $640,013
Non-U.S..................... 50,646 93,712 115,225 182,755
--------- -------- ------- ---------
Total....................... $ 268,710 $ 393,779 $ 537,811 $ 822,768
========= ======== ======= =========
Income/(loss) from continuing operations
before income taxes and operations and
cumulative effect of change in accounting
principle:
U.S.......................... $ (55,738) $ 52,993 $ (79,130) $ 136,656
Non-U.S..................... (1,649) 30,579 5,950 48,281
--------- -------- --------- ---------
Total....................... $ (57,387) $ 83,572 $ (73,180) $ 184,937
========= ======== ========= =========
June 30, December 31,
2002 2001
----------- ------------
Identifiable assets:
U.S.......................... $ 2,255,801 $ 2,102,145
Non-U.S..................... 409,705 892,696
----------- -----------
Total............................. $ 2,665,506 $ 2,994,841
=========== ===========
8. COMPREHENSIVE INCOME ($ IN THOUSANDS)
Comprehensive income includes net income and changes in stockholders'
equity except those resulting from investments by, or distributions to,
stockholders. Comprehensive income is as follows:
Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
--------- --------- --------- ---------
Net income / (loss) $ (59,905) $ 40,730 $(94,588) $ 90,838
Changes in other comprehensive
income/(loss):
Foreign currency translation adjustment 10,762 128 7,657 228
--------- -------- -------- --------
Total comprehensive income / (loss),net
of tax $ (49,143) $ 40,858 $ (7,657) $ 91,066
========= ======== ======== ========
9. EARNINGS PER SHARE ($ AND SHARES IN THOUSANDS)
Basic earnings per share ("EPS") excludes dilution and is computed by
dividing net income by the weighted average number of common shares outstanding
for the period. Diluted EPS reflects the potential reduction in EPS that could
occur if securities or other contracts to issue common stock were exercised or
converted into common stock.
The Company has authorized the issuance of a maximum of 34,118 shares of
common stock under the Company's stock option plan. Options to purchase 26,320
shares of common stock at a weighted average exercise price of $13.50 per share
were outstanding as of June 30, 2002. However, options to purchase 19,126 and
14,025 shares of common stock were not included in the computation of dilutive
EPS for the three and six months ended June 30, 2002 and 2001, respectively, as
the exercise price for these options exceeded the average market price of the
Company's common stock for each of the respective periods. Accordingly, the
diluted EPS computation does not include the antidilutive effect of these
options. Options expire on dates ranging from August 2006 to May 2009.
Earnings per share under the basic and diluted computations are as
follows:
Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
----------- ---------- --------- ---------
Net income / (loss) $ (59,905) $ 40,730 $(94,588) $ 90,838
========== ======== ========= ========
Weighted average number of common
Shares outstanding - basic 248,554 222,675 248,641 214,831
Common stock equivalent shares related
to stock incentive plans 31 447 79 229
------- ------- ------- -------
Weighted average number of common shares
Outstanding - diluted 248,585 223,122 248,720 215,060
Basic earnings per share $ (0.24) $0.18 $(0.38) $0.42
Diluted earnings per share $ (0.24) $0.18 $(0.38) $0.42
10. GOODWILL ($ in thousands)
The following table sets forth the changes in the carrying amount of
goodwill:
Balance as of December 31, 2001 $ 145,066
Goodwill acquired during the period 4,620
Goodwill impairment (19,046)
---------
Balance as of June 30, 2002 $ 130,640
=========
The Company completed its acquisition of ProTrader Group, L.P.
("ProTrader") on January 3, 2002, thereby increasing its goodwill by $4,606. In
addition, the Company recorded additional goodwill of $14 related to contingency
consideration paid to former owners of trading offices purchased by its
subsidiary ProTrader.
In the first quarter of 2002, during the Company's adoption of SFAS 142
and its transitional review test of goodwill, the Company identified indicators
of possible impairment of its recorded goodwill related to its ProTrader
acquisition. Such indicators were an overall decrease in customer transaction
volumes during the first quarter, which led to operating losses. As a result,
the Company closed several trading offices and restructured its operations in
the first quarter of 2002. In accordance with SFAS 142, based on the results of
a discounted cash flow analysis, the Company calculated a pre-tax level of
goodwill impairment of $15,750, which was represented by the shortfall of the
discounted cash flows versus the carrying amount of goodwill.
In May 2002, the Company closed its fixed income trading platform. Due to
a global economic slowdown and the uneven pace of acceptance of electronic fixed
income trading platforms, the business had been unable to reach a critical mass.
As a result, the Company's goodwill related to its acquisition of Montag Poepper
& Partner GmbH ("Montag"), a fixed income broker-dealer in Germany, was
impaired. Therefore, the Company recorded a pre-tax impairment loss of $3,296,
the remaining carrying value of its goodwill.
For comparative purposes, the following table reflects the Company's
results as of June 30, 2001, adjusted as though the Company had adopted SFAS 142
on January 1, 2001:
Three Months Six Months
Ended Ended
June 30, June 30,
2001 2001
----------- ----------
Net income, as reported $40,730 $90,838
Goodwill amortization 2,011 4,022
Tax effect (356) (711)
------- -------
Net income, as adjusted $ 42,385 $94,149
======== =======
Basic and diluted earnings per share, as reported $0.18 $0.42
Basic and diluted earnings per share, as adjusted $0.19 $0.44
11. RESTRUCTURING ($ IN THOUSANDS)
In 1998, the Company began to design and develop a web-based retail
brokerage operation. In December 2000, based upon a review of market conditions
and an evaluation of possible alternate strategies, the Company decided to
re-direct its retail brokerage efforts. As part of this redeployment, the
Company recorded a restructuring charge of $4,000 for the six months ended June
30, 2001. All of the liability related to this restructuring charge had been
paid as of December 31, 2001.
In July 2001, the Company announced a review of spending initiatives
with the aim of reducing its underlying operating cost structure by
approximately $70,000 annually. This restructuring was completed in 2001 at a
pre-tax cost of $24,400 in the year ended December 31, 2001 and included:
- - Workforce reduction -- the Company reduced its employee headcount levels by
226. The departments primarily affected were various operational areas in
technology support functions, sales and trading, administrative functions and
clearing operations in its U.S. and international offices. The Company recorded
a pre-tax charge of approximately $21,000 related to its workforce reduction
during the second half of 2001.
- - Office closures/consolidation -- the Company closed its office in Sydney,
Australia and consolidated its European trading and clearing operations,
significantly reducing the size of its Zurich office. In the U.S., the Company
closed the Greenwich, Detroit and Seattle trading offices of its ProTrader
subsidiary. The Company recorded a pre-tax charge of approximately $3,000
related to its office closures during the second half of 2001.
As of June 30, 2002, the Company carried a liability of $4,736
associated with this restructuring on its consolidated statements of financial
condition, which is reflected as follows:
Balance Balance
Dec. 31, June 30, Due by Due after
2001 Payments 2002 12/31/02 12/31/02
-------- -------- -------- -------- --------
Workforce reduction $ 5,694 $ (1,623) $ 4,071 $ 2,628 $ 1,443
Office closures/consolidation 1,085 (420) 665 408 257
------- -------- ------- ------- -------
Total $ 6,779 $ (2,043) $ 4,736 $ 3,036 $ 1,700
======= ======== ======= ======= =======
In March, 2002, the Company announced that it would reduce its
annualized operating costs by approximately $120,000, compared to its annualized
fixed cost run rate in the fourth quarter of 2001, in order to offset the impact
of reduced revenues due to its price reductions to U.S. broker-dealer customers.
This restructuring included reducing staff levels and related occupancy costs,
improving system and network efficiencies, and restructuring non-core
businesses. During the three months and six months ended June 30, 2002, the
Company incurred a pre-tax restructuring charge of $42,410 and $57,440,
respectively, which included:
- - Workforce reduction -- the Company reduced its employee headcount levels by
471. The departments primarily affected were various operational areas in
technology support functions, clearing operations, sales and trading, and
administrative functions in its U.S. and international offices. The Company
recorded a pre-tax charge of $29,804 and $39,034 for the three months and six
months ended June 30, 2002, respectively, related to its workforce reduction.
- - Office closures/consolidation -- the Company closed the Houston, Los Angeles
and San Jose trading offices of its ProTrader subsidiary, consolidated its
European trading and clearing operations, closed its office in Germany,
significantly reduced the size of its offices in Switzerland, U.K. and France,
and consolidated its office space in the U.S. given its lower headcount. The
Company recorded a pre-tax charge of $12,606 and $18,406 for the three months
ended June 30, 2002, respectively, related to its office closures.
As of June 30, 2002, the Company carried a liability of $41,927
associated with this restructuring on its consolidated statements of financial
condition, which is reflected as follows:
Balance
Original Additional June 30, Due by Due after
Accrual Payments Accrual 2002 12/31/02 12/31/02
-------- -------- ---------- -------- -------- --------
Workforce reduction $ 9,230 $(14,414) $ 29,804 $ 24,620 $ 13,929 $ 10,691
Office closures/consolidation 5,800 (1,099) 12,606 17,307 8,643 8,664
------- -------- -------- -------- -------- --------
Total $15,030 $(15,513) $ 42,410 $ 41,927 $ 22,572 $ 19,355
======= ======== ======== ======== ======== ========
12. EMPLOYEE BENEFIT PLANS
The Company has granted Restricted Stock Units ("RSU") to certain
members of senior management in lieu of cash for a portion of each members
calendar year 2001 bonus. The RSUs are convertible into an equal number of
shares of the Company's common stock and generally vest either one or two years
from the date of grant. As of June 30, 2002, the Company had granted 185,455
RSUs.
13. CAPITAL STOCK ($ in thousands)
The Company purchased 185,455 shares of its own common stock at a cost
of $1,335 in connection with its RSU plan.
14. DISCONTINUED OPERATIONS
On May 3, 2002, the Company closed its fixed income trading platform.
The Company began developing its fixed income business in 1998 and started
trading in the spring of 2000. Against the background of a global economic
slowdown and the uneven pace of acceptance of electronic fixed income trading
platforms, the business had been unable to reach a critical mass. As a result of
the closure, the Company incurred the following charges:
Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
--------- --------- --------- ---------
Loss from discontinued operations:
Loss from operation of fixed income business $ 23,581 $10,841 $ 33,356 $ 22,727
Income tax benefit (6,946) (4,197) (10,770) (8,491)
------- ------- -------- --------
Net loss from discontinued operations $ 16,635 $6,644 $ 22,586 $ 14,236
======= ======= ======== ========
Loss per share - basic and diluted:
Loss from operation of fixed income business $ 0.10 $ 0.05 $ 0.13 $ 0.11
Income tax benefit (0.03) (0.02) (0.04) (0.04)
------ ------ ------ ------
Net loss from discontinued operations $ 0.07 $ 0.03 $ 0.09 $ 0.07
====== ====== ====== ======
A restructuring charge of $22,514 related to the closure of the
Company's fixed income platform is reflected in the three and six months periods
ended June 30, 2002. As of June 30, 2002, the Company carried a liability of
$7,279 associated with this restructuring on its consolidated statements of
financial condition, which is expected to be paid by December 31, 2002.
15. MERGER WITH ISLAND
On June 9, 2002, the Company entered into a definitive agreement to
acquire Island ECN. Subject to completion of the transaction, the Company
expects to pay a one-time special cash dividend of $1.00 per share to its
stockholders of record as of a date prior to closing. Upon closing, Island's
stockholders will own approximately 25% of Instinet common stock on a fully
diluted basis. The transaction is expected to close in the second half of 2002,
subject to customary closing conditions including regulatory approvals. If the
merger occurs, the Company expects to incur various charges related to the
amortization of identified intangible assets, the conversion of existing Island
equity options and one-time charges to achieve on-going cost synergies.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
OVERVIEW
We are the largest global electronic agency securities broker and have
been providing investors with electronic trading solutions for more than 30
years. Our services enable buyers and sellers worldwide to trade securities
directly and anonymously with each other, gain price improvement for their
trades and lower their overall trading costs. Through our electronic platforms,
our customers also can access over 40 securities markets throughout the world,
including Nasdaq, the NYSE, and stock exchanges in Frankfurt, Hong Kong, London,
Paris, Sydney, Tokyo, Toronto and Zurich. We also provide our customers with
access to research generated by us and by third parties, as well as various
informational and decision-making tools. Our customers primarily consist of
institutional investors, such as mutual funds, pension funds, insurance
companies and hedge funds, as well as broker-dealers.
We have been operating in a challenging business and economic
environment. The introduction of decimalization, reduced investment banking
activities, and the impact of Nasdaq's SuperSoes system have contributed to
decreases in customer trading volumes, particularly our broker-dealer clients.
These events have adversely affected our Nasdaq market share and have prompted
us to significantly reduce our prices. As a result, our transaction fee revenues
have declined from $793.4 million for the six months ended June 30, 2001 to
$535.8 million for the comparable period in 2002. Our lower transaction fee
revenues, a net loss from our investments primarily as a result of write-downs
in certain of our investments, our restructuring charge related to our cost
reduction initiatives, and the institution of our broker-dealer rebate program
contributed to our net loss of $94.6 million for the six months ended June 30,
2002, compared to net income of $90.8 million for the comparable period in 2001.
Total U.S. market share volume in the six months ended June 30, 2002
increased slightly to 436.6 billion shares from 431.2 billion in the six months
ended June 30, 2001. Total Nasdaq share volumes were 225.4 billion shares in the
six months ended June 30, 2002, down from 255.6 billion shares in the six months
ended June 30, 2001. U.S. exchange-listed share volumes were 211.3 billion
shares in the six months ended June 30, 2002, up from 175.6 billion shares in
the six months ended June 30, 2001. Our percentage of overall market share
decreased to 7.9% of total U.S. market share volume, which represented 12.5% of
Nasdaq share volume, and 2.9% of U.S. exchange-listed share volume, in the six
months ended June 30, 2002.
Pricing Changes and Cost Reduction Initiatives
In order to address the decline in our Nasdaq share volume and related
transaction fee revenues, in the second half of 2001 we reduced our pricing for
our U.S. broker-dealer customers, adjusted certain pre-set volume levels at
which we offer those customers lower per share transaction fees, and established
a pilot program to test pricing incentives for liquidity providers. In March
2002, we implemented a new pricing plan to offer further pricing incentives to
our U.S. broker-dealer customers, reducing prices paid by broker-dealers trading
Nasdaq-quoted stocks by approximately 60% and simplifying the pricing schedule
by further adjusting certain pre-set volume levels. These initiatives were in
response to intense price competition that we experienced in the fourth quarter
of 2001 and into 2002, particularly for Nasdaq-quoted trading. We will continue
to monitor future price competition and evaluate our pricing structure as part
of our ongoing efforts to maintain and expand our liquidity pool.
Given the impact of price reductions on revenue from our U.S.
broker-dealer customers, we have taken further action to reduce costs. We
previously announced that we intended to reduce our annualized operating costs
by approximately $120 million, compared to our annualized fixed cost run rate in
the fourth quarter of 2001, through a number of measures including reducing
staff levels and related occupancy costs, improving system and network
efficiencies, and restructuring non-core businesses. We incurred a pre-tax
restructuring charge of $57.4 million for the six months ended June 30, 2002 in
connection with the cost reduction program, which entailed the following:
o We reduced our employee headcount levels by 471 (excluding our fixed
income business). The departments primarily affected were various
operational areas in technology support functions, clearing
operations, sales and trading, and administrative functions in its
U.S. and international offices. We recorded a pre-tax charge of
approximately $38.0 million for the six months ended June 30, 2002
related to our workforce reduction.
o We closed the Houston, Los Angeles and San Jose trading offices of
our ProTrader subsidiary, consolidated our European trading and
clearing operations, closed our office in Germany, significantly
reduced the size of our offices in Switzerland, U.K. and France, and
consolidated our U.S. office space given our lower headcount. We
recorded a pre-tax charge of approximately $19.4 million for the six
months ended June 30, 2002 related to our office closures and
consolidations.
o On May 3, 2002, we closed our fixed income trading platform. We
began developing our fixed income business in 1998 and started
trading in the spring of 2000. Against the background of a global
economic slowdown and the uneven pace of acceptance of electronic
fixed income trading platforms, the business had been unable to
reach a critical mass. Our fixed income business had 105 employees
at the time of its closure. As a result of the closure, we incurred
a discontinued operations charge, net of tax, of $22.6 million.
As a result of these actions, we have met our cost reduction target. We
achieved these reductions without diminishing our ability to provide high
quality service to our customers, our capacity to design, develop and deploy
innovative new technology, and our control environment. We continue to evaluate
further cost initiatives, which might result in further charges.
Our annualized fixed-cost base relating to continuing operations was
$678.0 million in the six months ended June 30, 2002, down $232.0 million from
the comparable period in 2001. Our fixed-cost base excludes non-operating
expenses (restructuring costs) and variable costs (soft dollar and commission
recapture, broker-dealer rebates and brokerage, clearing and exchange fees).
Our expenses are generally related to transaction volumes rather than
share volumes. The average number of shares per transaction, both in the markets
generally and in our business, has declined due to a decrease in investors'
costs per transaction, coupled with the fact that investors can often better
achieve their trading objectives by executing a larger number of smaller
transactions. In addition, the decline in transaction size, combined with
increased competition in the markets in which we operate, has resulted in lower
average revenue per transaction. Although our average cost per transaction has
also declined, average revenue per transaction has decreased at a faster rate,
resulting in pressure on our margins. We expect that both our average cost per
transaction and our average revenue per transaction will continue to decline,
but at approximately equivalent rates.
New Products and Services
We continue to develop and enhance our technology, pricing and service
options with the aim of providing tailored solutions that improve our clients
performance as well as stimulate growth in our liquidity pool:
o We continued to improve our core trading functionality to enhance
our customers' ability to execute large share blocks cost
efficiently. Our newest initiative in this area is 'targeted
orders'. Scheduled for deployment in the third quarter of 2002, this
functionality is designed to help traders with a block order
identify potential counterparties for the order, and negotiate
directly with them, without diminishing their ability to expose the
order anonymously to the market as a whole.
o We continued our program to convert our FIX clients to our new
Direct-FIX technology. This upgrade combines faster connectivity
with richer trading functionality than its predecessor and is more
cost-effective for us. During the second quarter, we exceeded our
conversion goals for clients and third-party vendors and have now
converted more than two-thirds of our FIX client base. We expect to
complete the entire conversion process by the end of the year, ahead
of our original schedule.
o Instinet Trading Portal, the new trading application primarily
developed for our active asset manager and hedge fund customers,
completed its first major round of beta testing during the first
quarter of 2002 and is now deployed at over 175 client sites, many
with multiple site licenses. We expect to have more than 300 clients
using Portal by year-end, more than double our original target. The
application's Internet-based deployment strategy is designed to
substantially reduce communication and field service costs
associated with our traditional customer display screens.
o Newport(SM)(patent pending), a program-trading solution aimed
primarily at passive and quantitative fund managers, which combines
global liquidity with sophisticated trading analytics and support
for collaboration, was being used by 10 major clients in the U.S.
and Europe by the end of the second quarter of 2002, primarily
multinational banks and global index fund managers. Newport's
development team is targeting an additional 40-50 client-site
installations by year-end. In addition, Newport is used actively on
our own program-trading desk to trade portfolios on behalf of
clients.
o On May 14, 2002, we entered into a strategic alliance with Citibank,
N.A. to operate the Instinet FX Cross(SM), a foreign exchange
crossing service that will enable customers to execute large
currency transactions anonymously at a transparent market price. We
expect that Instinet FX Cross(SM) will be operational for North
American customers in the fourth quarter of 2002 and rolled out for
European customers soon thereafter. Instinet FX Cross(SM) will
initially offer two crossing sessions per day in 12 currencies.
Citibank, N.A. will act as counterparty to all transactions, which
will be executed at CitiFX Benchmark rates.
Merger with Island
On June 9, 2002, we entered into an agreement and plan of merger with
Island Holding Company, Inc., the parent company of Island ECN. In this merger,
we would combine a newly formed subsidiary of Instinet with Island, resulting in
Island becoming our wholly-owned subsidiary. Island is a leading electronic
securities marketplace, with a large liquidity pool of orders to buy and sell
securities that are published in its marketplace. Island's proprietary
technology enables it to offer low cost, rapid and reliable order display and
matching services to its customers. For the year ended December 31, 2001, Island
had revenue of $166 million and net income of $22 million. As of December 31,
2001, Island's stockholders' equity was $61 million. In the three months ended
March 31, 2002, Island's trading volume in Nasdaq-quoted stocks was 12.2 billion
shares, and its share of volume in Nasdaq-quoted stocks was 11.1%. (In the same
time period, Island's trading volume in U.S. exchange-listed stocks was 1.9
billion shares, and its share of volume in U.S.
exchange-listed stocks was 1.8%.)
In connection with the merger, we expect to pay a $1.00 per share cash
dividend to our stockholders of record as of a date prior to the closing of the
merger, which would represent a distribution in the aggregate of approximately
$249 million. We will not pay this dividend if the merger does not occur. Under
the terms of the merger agreement, we would issue shares of our common stock to
Island stockholders and would issue substitute options, warrants and stock
appreciation rights to holders of Island options, warrants and stock
appreciation rights outstanding at the effective time of the merger. The merger
agreement sets forth a formula by which we would issue an aggregate number of
shares of our common stock to Island stockholders equal to 85 million shares
less a number of shares determined by reference to our share price and to Island
options, warrants and stock appreciation rights that are exercised or forfeited
prior to the merger or converted to equivalent Instinet options, warrants and
stock appreciation rights in the merger. We estimate that former holders of
Island common shares, options and warrants will become holders of our common
stock, options and warrants representing, or having the right to acquire,
approximately 25% of our common stock on a fully diluted basis after the merger.
The merger is subject to customary closing conditions, including
regulatory approvals. Reuters and all of Island's principal stockholders have
committed to grant all necessary stockholder approvals. We anticipate that this
merger will be completed in the second half of 2002.
The combined company would be led by a management team consisting of
top executives of both Instinet and Island and bring together complementary
capabilities in the global equity markets, creating a company that we believe
would be better able to serve customer needs. Island has concentrated on program
trading, direct access and professional investor customers in the U.S. domestic
market, as compared to our focus on large institutions and market makers both in
the United States and abroad.
If the merger occurs, we expect to incur various non-cash charges
related to the amortization of identified intangible assets and the conversion
of existing Island equity options. In addition, we expect to incur one-time
charges to enable us to achieve on-going cost synergies. We expect the merger to
deliver synergies as a result of expanded liquidity and cost savings in
clearing, technology, facilities and administration. We currently expect these
cost savings to amount to approximately $25 million per year on an annualized
basis by the end of 2003. Excluding these non-cash costs and one-time charges,
we expect the transaction to be accretive to earnings per share by the end of
2003.
Completion of the merger requires that Island's stockholders adopt the
merger agreement and an amendment to Island's certificate of incorporation and
that Instinet's stockholders approve the issuance of Instinet common shares in
the merger and adopt an amendment to Instinet's certificate of incorporation.
Island will hold a special meeting of its stockholders to consider and vote on
the merger agreement and the proposed amendment to Island's certificate of
incorporation on September 10, 2002. Reuters has entered into a voting agreement
with Island in which it has agreed, among other things, to consent to the
Instinet common share issuance and the proposed amendment to Instinet's
certificate of incorporation and to vote against any action that would
materially delay or prevent the merger and against any transaction prohibited by
the merger agreement and not to transfer any of its Instinet common shares while
the merger is pending. Reuters owns approximately 83% of Instinet's outstanding
common shares and Instinet has already received Reuters consent to the share
issuance and the amendment to Instinet's certificate of incorporation.
Seasonality
We have experienced, and may continue to experience, significant
seasonality in our business. As a result of this and other factors described
above and under "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Quarterly Results" in our Annual Report on Form 10-K,
period-to-period comparisons of our revenues and operating results are not
necessarily meaningful, and the results for any quarter are not necessarily
indicative of results for any future period.
KEY STATISTICAL INFORMATION
The following table presents key transaction volume information, as well as
certain other operating information.
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- -----------------------
2002 2001 2002 2001
-------- ------- -------- -------
Total U.S. market share volume (millions)(1)(2)........ 224,527 208,858 436,640 431,248
Our total U.S. market share volume (millions)(1)....... 19,221 21,389 34,381 44,131
Our percentage of total U.S. market share volume(1)(2). 8.6% 10.3% 7.9% 10.2%
- -------------------------------------------------------
Nasdaq share volume (millions)(2)(3)................... 116,114 122,928 225,357 255,635
Our Nasdaq share volume (millions)(3).................. 16,149 18,776 28,192 38,829
Our percentage of Nasdaq share volume (2)(3)........... 13.9% 15.3% 12.5% 15.2%
- -------------------------------------------------------
U.S. exchange-listed share volume (millions)........... 108,413 85,931 211,283 175,613
Our U.S. exchange-listed share volume (millions)....... 3,072 2,613 6,189 5,302
Our percentage of U.S. exchange-listed share volume.... 2.8% 3.0% 2.9% 3.0%
- -------------------------------------------------------
Our U.S. equity transaction volume (thousands)......... 27,000 27,208 45,953 54,695
Our international equity transaction volume (thousands) 1,955 1,622 3,912 3,324
Our total equity transaction volume (thousands)........ 28,955 28,830 49,865 58,019
- -------------------------------------------------------
Our average U.S. equity transaction size (shares per
transaction) ........................................ 712 786 748 807
Our average equity transactions per day (thousands).... 452 457 402 464
- -------------------------------------------------------
Our net transaction fees from U.S. equities
(thousands)(4) $140,212 $ 273,268 $306,985 $ 568,897
Our net transaction fees from non-U.S. equities
(thousands)(4) ...................................... $ 39,942 $ 48,811 $ 79,159 $ 108,588
Our total net equity transaction fees (thousands)(4)... $180,154 $322,079 $386,144 $677,485
(1) U.S. shares consist of shares of U.S exchange-listed and Nasdaq-quoted
stocks.
(2) Historical amounts may be restated due to updates of volume information
from Nasdaq.
(3) For a description of how we calculate our Nasdaq share volumes, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Nasdaq Volume Calculations" in our Annual Report on Form 10-K.
(4) Our net equity transaction fee revenues are calculated by subtracting the
soft dollar and commission recapture expenses for equity transactions, as
well as broker-dealer rebates from the related transaction fees. The
required accounting for our soft dollar and commission recapture businesses
and broker-dealer rebates is to add the related dollar-for-dollar expenses
to those equity transaction fee revenues.
RESULTS OF OPERATIONS
The following table sets forth our consolidated statements of income data
for the periods presented as a percentage of total revenues:
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- -------------------
2002 2001 2002 2001
--------- -------- -------- --------
REVENUES
Transaction fees............. 100.5% 96.2% 99.6% 96.4%
Interest..................... 4.5% 2.8% 3.9% 2.9%
Investments.................. (4.2%) 0.9% (3.5%) 0.7%
------- ------- ------- -------
Total revenues..... 100.0% 100.0% 100.0% 100.0%
EXPENSES
Compensation and benefits.... 26.4% 28.6% 29.2% 28.9%
Communications and equipment. 10.9% 10.8% 11.6% 10.5%
Soft dollar and commission recapture 23.0% 13.8% 21.4% 13.4%
Brokerage, clearing and exchange fees 12.6% 9.2% 13.1% 8.8%
Depreciation and amortization.... 6.7% 5.0% 6.9% 4.7%
Professional fees................ 2.5% 2.3% 2.2% 2.9%
Occupancy........................ 5.1% 3.5% 5.0% 2.9%
Marketing and business development. 2.8% 2.2% 2.0% 2.3%
Broker-dealer rebates 9.5% - 5.4% -
Other............................ 6.3% 3.4% 6.0% 3.2%
Restructuring.............. 15.8% - 10.7% -
------- --------- --------- -------
Total expenses......... 121.4% 78.8% 113.6% 77.5%
Income/(loss) from continuing operations before
income taxes and cumulative effect of change in
accounting principle (21.4%) 21.2% (13.6%) 22.5%
Provision for /(benefit from) income taxes....... (5.3%) 9.2% (3.7%) 9.7%
------- -------- -------- --------
Income/(loss) from continuing operations before
cumulative effect of change in accounting
principle (16.1%) 12.0% (10.0%) 12.8%
Discontinued operations:
Loss from operations of fixed income
business, net of tax (6.2%) (1.7%) (4.2%) -1.7%
------- -------- -------- --------
Income/(loss) before cumulative effect of
change in accounting principle, net of tax (22.3%) 10.3% (14.1%) 11.0%
Cumulative effect of change in accounting principle - - (3.5%) -
------- -------- -------- --------
Net income/(loss)............. (22.3%) 10.3% (17.6%) 11.0%
======= ======== ======== ========
THREE MONTHS ENDED JUNE 30, 2002 VERSUS THREE MONTHS ENDED JUNE 30, 2001
Overview
Net income decreased from $40.7 million for the three months ended June 30,
2001 to a net loss of $59.9 million for the comparable period in 2002. Our
revenues decreased 31.8% from $393.8 million for the three months ended June 30,
2001 to $268.7 million for the comparable period in 2002, primarily as a result
of decreased trading volumes from our broker-dealer customers and lower average
pricing.
Expenses increased 5.1% from $310.2 million for the three months ended June
30, 2001 to $326.1 million for the comparable period in 2002. Our expenses for
the three months ended June 30, 2002 included a restructuring charge of $42.4
million related to our cost reduction initiatives. Excluding this charge, our
expenses decreased 8.5% from $310.2 million for the three months ended June 30,
2001 to $283.7 million for the comparable period in 2002.
Revenues
Transaction fee revenue decreased 28.8% from $378.9 million for the three
months ended June 30, 2001 to $269.9 million for the comparable period in 2002.
Transaction fee revenue excluding revenues directly related to soft dollar and
commission recapture and broker-dealer rebates, declined 43.7% from $324.7
million for the three months ended June 30, 2001 to $182.7 million for the
comparable period in 2002. These decreases were primarily due to a decline in
overall trading volumes, our lower trading volumes in Nasdaq quoted shares,
particularly from broker-dealers, and a decreases in our average pricing as a
result of our pricing changes.
Our trading volumes in Nasdaq-quoted stocks decreased 14.0% and our
trading volumes in U.S. exchange-listed stocks increased 17.6% for the three
months ended June 30, 2002, compared to the comparable period in 2001. Our share
of volume in Nasdaq-quoted stocks decreased from 15.3% for the three months
ended June 30, 2001 to 13.9% for the comparable period in 2002, and our share of
volume in U.S. exchange-listed stocks decreased from 3.0% for the three months
ended June 30, 2001 to 2.8% for the comparable period in 2002. Our average
number of transactions in Nasdaq-quoted and U.S. exchange-listed stocks per day
decreased 1.1% from 457,619 for the three months ended June 30, 2001 to 452,422
for the comparable period in 2002.
Our soft dollar revenues and our revenues that are subject to
commission recapture, which are offset dollar-for-dollar by our soft dollar
research payments and commission recapture expenses, increased 13.8% from $54.2
million for the three months ended June 30, 2001 to $61.7 million for the
comparable period in 2002, primarily due to increased use of our commission
recapture services provided by our Lynch, Jones and Ryan subsidiary. Partly
offsetting this increase was a decrease in our soft dollar revenues due to
decreased volumes.
Our net transaction fee revenue earned from U.S. equity transactions,
which excludes revenues directly related to soft dollar and commission recapture
and broker-dealer rebates, decreased 48.7% from $273.3 million for the three
months ended June 30, 2001 to $140.2 million for the comparable period in 2002,
due to the combination of a decrease in our average pricing resulting from lower
rates for U.S. broker-dealer customers following the price reduction we
initiated for this group in March 2002, a contraction in our Nasdaq market share
and a decline in average daily volume in the Nasdaq market overall. Our net
transaction fee revenue earned from non-U.S. equities, which excludes revenues
directly related to soft dollar and commission recapture and broker-dealer
rebates, declined 18.2% from $48.8 million for the three months ended June 30,
2001 to $39.9 million for the comparable period in 2002. This amount represented
15.2% of our total net equity transaction fee revenue for the three months ended
June 30, 2001, and 22.2% for the comparable period in 2002. This increase is
primarily due to a greater decrease in our U.S. net equity transaction fees as a
result of our price changes versus our non-U.S. net equity transaction fees.
Interest revenue increased 6.8% from $11.2 million for the three months
ended June 30, 2001 to $12.0 million for the comparable period in 2002. This
increase was primarily due to greater activity generated by our clearing
services.
Investment income decreased from a gain of $3.7 million for the three
months ended June 30, 2001 to a loss of $11.2 million for the comparable period
in 2002. This decrease was primarily due to write-downs in our investments of
$12.5 million, in particular, WR Hambrecht + Co, TP Group LDC and JapanCross
Securities Co. Ltd. In addition, we recognized an unrealized loss of $1.4
million on shares we own in certain non-U.S. stock exchanges.
Expenses
Compensation and benefits expense decreased 37.0% from $112.7 million for
the three months ended June 30, 2001 to $71.0 million for the comparable period
in 2002. This decrease was primarily due to a decrease in our worldwide
headcount, particularly in our U.S. offices, the closure of our fixed income
business as part of our cost reduction initiatives, as well as a decline in
incentive compensation due to our lower revenues. Our headcount decreased from
2,112 employees as of June 30, 2001 to 1,559 employees as of June 30, 2002. In
addition, employees have also been given incentives through the issuance of
stock options. The Company's policy is not to reflect an expense for stock
options.
Communications and equipment expense decreased 31.4% from $42.6 million for
the three months ended June 30, 2001 to $29.2 million for the comparable period
in 2002. This decrease was due in large part to lower equipment and software
costs for upgrading our existing systems and other enhancements which decreased
55.4% from $13.3 million for the three months ended June 30, 2001 to $5.9
million for the comparable period in 2002. Our core communications costs
decreased 15.9% from $17.7 million for the three months ended June 30, 2001 to
$14.9 million for the comparable period in 2002, reflecting the benefit of
improved network and systems efficiencies. Our exchange data access charges also
decreased 34.8% from $7.8 million for the three months ended June 30, 2001 to
$5.1 million, primarily due to the sale of our Research and Analytics product to
Reuters in September 2001.
Soft dollar and commission recapture expense increased 13.8% from $54.2
million for the three months ended June 30, 2001 to $61.7 million for the
comparable period in 2002. This expense is offset dollar-for-dollar by soft
dollar revenues and revenues that are subject to commission recapture. This
increase was primarily due to expanded use of our commission recapture services
offered by our Lynch Jones & Ryan subsidiary, partly offset by a decrease in our
soft dollar costs as a result of decreased transaction volumes.
Brokerage, clearing and exchange fees decreased 6.7% from $36.2 million for
the three months ended June 30, 2001 to $33.8 million for the comparable period
in 2002. This decrease primarily resulted from a reduction in our U.S. clearing
costs as a result of
implementing certain technology efficiencies, such as trade compression. Partly
offsetting this decrease was an increase in our brokerage and exchange fees as a
result of our acquisition of ProTrader in October 2001.
Depreciation and amortization expense decreased 8.8% from $19.7 million for
the three months ended June 30, 2001 to $17.9 million for the comparable period
in 2002. This decrease was primarily due to lower levels of capital spending as
part of our cost reduction initiatives. In addition, we ceased amortizing
goodwill as a result of our adoption of SFAS 142 on January 1, 2002. Offsetting
this decrease in goodwill amortization was amortization related to our
intangible asset, which we acquired in connection with our acquisition of
ProTrader.
Professional fees decreased 26.3% from $9.0 million for the three months
ended June 30, 2001 to $6.6 million for the comparable period in 2002. This
decrease was primarily due to reduced use of technical and management
consultants, partly offset by an increase in our legal expenses.
Occupancy expense decreased 1.5% from $13.8 million for the three months
ended June 30, 2001 to $13.6 million for the comparable period in 2002 primarily
due to one time costs in the three months ended June 30, 2001 associated with
our move to new corporate headquarters in New York.
Marketing and business development decreased 11.8% from $8.5 million for
the three months ended June 30, 2001 to $7.5 million for the comparable period
in 2002. This decrease was due to a scaling back of our branding campaign as a
result of our cost reduction initiatives, offset by one-time costs related to
previous commitments.
Broker-dealer rebates were $25.5 million for the three months ended June
30, 2002. As noted above, as part of our pricing incentives for broker-dealers,
we now offer commission rebates to broker-dealers who provide liquidity, which
is recorded as an expense, and charge commissions to broker-dealers who consume
liquidity, which is recorded as transaction fee revenue. The commissions we
charge to liquidity consumers more than offset the amount of broker-dealer
rebate expenses for liquidity providers.
Other expenses increased 24.4% from $13.5 million for the three months
ended June 30, 2001 to $16.9 million for the comparable period in 2002. This
increase was primarily due to an increase in our provision for bad debts,
interest costs related to our securities
lending and other clearing activities, and payments to Reuters in connection
with the sale of our R&A product in order to allow our customers to receive this
service and support from Reuters instead of us. Partly offsetting these
increases were decreases in our travel expenses as part of our cost reduction
initiatives, as well as interest expenses related to a loan Reuters provided to
us to fund our acquisition of Lynch Jones & Ryan in February 2000. This loan was
repaid in June 2001.
Provision for Income Taxes
Our tax provision on our income/(loss) from continuing operations decreased
from a charge of $36.2 million for the three months ended June 30, 2001 to a
benefit of $14.1 million for the comparable period in 2002 as a result of our
loss from continuing operations before income taxes and discontinued operations.
Our effective income tax rate decreased from 43.3% for the three months ended
June 30, 2001 to 24.6% for the comparable period in 2002. This decrease resulted
from the permanent impairment of goodwill that was not deductible for tax
purposes, and restructuring charges and operating losses in tax jurisdictions
where utilization of tax losses is doubtful.
Discontinued operations
On May 3, 2002, we closed our fixed income trading platform. As a
result of the closure, we incurred a charge for discontinued operations, net of
tax, of $16.6 million for the three months ended June 30, 2002 compared to $6.6
million in the comparable period in 2001.
SIX MONTHS ENDED JUNE 30, 2002 VERSUS SIX MONTHS ENDED JUNE 30, 2001
Overview
Net income decreased from $90.8 million for the six months ended June
30, 2001 to a net loss of $94.6 million for the comparable period in 2002. Our
revenues decreased 34.6% from $822.8 million for the six months ended June 30,
2001 to $537.8 million for the comparable period in 2002, primarily as a result
of decreased trading volumes from our broker-dealer customers and lower average
pricing.
Expenses decreased 4.2% from $637.8 million for the six months ended
June 30, 2001 to $611.0 million for the comparable period in 2002. Our expenses
for the six months ended June 30, 2002 included a restructuring charge of $57.4
million related to our cost reduction initiatives. Excluding this charge, our
expenses decreased 13.2% from $637.9 million for the six months ended June 30,
2001 to $553.6 million for the comparable period in 2002. We incurred costs of
$4.7 million for the six months ended June 30, 2001 related to closing our
retail brokerage initiative in December 2000, comprised primarily of a $4.0
million restructuring charge.
Revenues
Transaction fee revenue decreased 32.5% from $793.4 million for the six
months ended June 30, 2001 to $535.8 million for the comparable period in 2002.
Transaction fee revenue excluding revenues directly related to soft dollar and
commission recapture and broker-dealer rebates, declined 42.7% from $683.1
million for the six months ended June 30, 2001 to $391.7 million for the
comparable period in 2002.These decreases were primarily due to a decline in
overall trading volumes, our lower trading volumes in Nasdaq quoted shares,
particularly from broker-dealers, and a decrease in our average pricing as a
result of our pricing changes.
Our trading volumes in Nasdaq-quoted stocks decreased 27.4% and our
trading volumes in U.S. exchange-listed stocks increased 16.7% for the six
months ended June 30, 2002, compared to the comparable period in 2001. Our share
of volume in Nasdaq-quoted stocks decreased from 15.2% for the six months ended
June 30, 2001 to 12.5% for the comparable period in 2002, and our share of
volume in U.S. exchange-listed stocks decreased from 3.0% for the six months
ended June 30, 2001 to 2.9% for the comparable period in 2002. Our average
number of transactions in Nasdaq-quoted and U.S. exchange-listed stocks per day
decreased from 464,160 for the six months ended June 30, 2001 to 402,137 for the
comparable period in 2002.
Our soft dollar revenues and our revenues that are subject to
commission recapture, which are offset dollar-for-dollar by our soft dollar
research payments and commission recapture expenses, increased 4.6% from $110.3
million for the six months ended June 30, 2001 to $115.3 million for the
comparable period in 2002, primarily due to increased use of our commission
recapture services provided by our Lynch, Jones and Ryan subsidiary. Partly
offsetting this increase was a decrease in our soft dollar revenues due to
decreased volumes.
Our net transaction fee revenue earned from U.S. equity transactions,
which excludes revenues directly related to soft dollar and commission recapture
and broker-dealer rebates, decreased 46.0% from $568.9 million for the six
months ended June 30, 2001 to $307.0 million for the comparable period in 2002
due to the combination of a decrease in our average pricing resulting from lower
rates for U.S. broker-dealer customers following the price reductions we
initiated for this group in March 2002, a contraction in our Nasdaq market share
and a decline in average daily volume in the Nasdaq market overall. Our net
transaction fee revenue earned from non-U.S. equities, which excludes revenues
directly related to soft dollar and commission recapture and broker-dealer
rebates, declined 27.1% from $108.6 million for the six months ended June 30,
2001 to $79.2 million for the comparable period in 2002. This amount represented
16.0% of our total net equity transaction fee revenue for the six months ended
June 30, 2001, and 20.5% for the comparable period in 2002. This increase is
primarily due to a greater decrease in our U.S. net equity transaction fees as a
result of our price changes versus our non-U.S. net equity transaction fees.
Interest revenue decreased 11.0% from $23.5 million for the six months
months ended June 30, 2001 to $20.9 million for the comparable period in 2002.
This decrease was primarily due to a decrease in interest rates which affects
the revenue generated by our stock borrowing activities related to our clearing
services, as well as a decrease in our interest bearing cash and cash
equivalents.
Investment income decreased from a gain of $5.9 million for the six months
ended June 30, 2001 to a loss of $18.9 million for the comparable period in
2002. This decrease was primarily due to write-downs in our investments of $17.3
million, in particular, WR Hambrecht + Co, TP Group LDC, JapanCross Securities
Co. Ltd. and Vencast, Inc. In addition, we recognized an unrealized loss of $1.2
million on shares we own in certain non-U.S. stock exchanges.
Expenses
Compensation and benefits expense decreased 33.8% from $237.5 million for
the six months ended June 30, 2001 to $157.2 million for the comparable period
in 2002. This decrease was primarily due to a decrease in our worldwide
headcount, particularly in our U.S. offices, the closure of our fixed income
business as part of our cost reduction initiatives, as well as a decline in
incentive compensation due to our lower revenues. Our headcount decreased from
2,112 employees as of June 30, 2001 to 1,559 employees as of June 30, 2002. In
addition, employees have also been given incentives through the issuance of
stock options. The Company's policy is not to reflect an expense for stock
options.
Communications and equipment expense decreased 27.5% from $86.2 million for
the six months ended June 30, 2001 to $62.5 million for the comparable period
in 2002. This decrease was due in large part to lower costs related to our core
communications costs, which decreased 31.6% from $44.4 million for the six
months ended June 30, 2001 to $30.4 million for the comparable period in 2002,
reflecting the benefit of improved network and systems efficiencies. Our
equipment and software costs for upgrading our existing systems and other
enhancements decreased 26.9% from $21.6 million for the six months ended June
30, 2001 to $15.8 million for the comparable period in 2002. Our exchange data
access charges also decreased 36.5% from $13.4 million for the six months ended
June 30, 2001 to $8.5 million, primarily due to the sale of our Research and
Analytics product to Reuters in September 2001.
Soft dollar and commission recapture expense increased 4.6% from $110.3
million for the six months ended June 30, 2001 to $115.3 million for the
comparable period in 2002. This expense is offset dollar-for-dollar by soft
dollar revenues and revenues that are subject to commission recapture. This
increase was primarily due to expanded use of our commission recapture services
offered by our Lynch Jones & Ryan subsidiary, partly offset by a decrease in our
soft dollar costs as a result of decreased transaction volumes.
Brokerage, clearing and exchange fees decreased 2.9% from $72.6 million for
the six months ended June 30, 2001 to $70.4 million for the comparable period in
2002. This decrease primarily resulted from a reduction in our U.S. clearing
costs as a result of implementing certain technology efficiencies, such as trade
compression, and a reduction in our non-U.S.
clearing charges. Partly offsetting this decrease was an increase in our
brokerage and exchange fees as a result of our new order routing technology,
which allows us to route trades to other ECNs, who in turn, charge us fees, as
well as fees charged to our ProTrader subsidiary.
Depreciation and amortization expense decreased 3.2% from $38.3 million for
the six months ended June 30, 2001 to $37.1 million for the comparable period in
2002. This decrease was primarily due a reduction in depreciation of our
capitalizable assets, which decreased as part of our cost reduction initiatives.
In addition, we ceased amortizing goodwill as a result of our adoption of SFAS
142 on January 1, 2002. Offsetting this decrease in goodwill amortization was
amortization related to our intangible asset, which we acquired in connection
with our acquisition of ProTrader.
Professional fees decreased 51.5% from $24.0 million for the six months
ended June 30, 2001 to $11.7 million for the comparable period in 2002. This
decrease was primarily due to reduced use of technical and management
consultants, partly offset by an increase in our legal expenses.
Occupancy expense increased 13.6% from $23.9 million for the six months
ended June 30, 2001 to $27.1 million for the comparable period in 2002 primarily
due to increased property insurance costs and increased maintenance and one time
costs associated with our move to new corporate headquarters in New York.
Marketing and business development decreased 41.3% from $18.6 million for
the six months ended June 30, 2001 to $10.9 million for the comparable period
in 2002. This decrease was due to a scaling back of our branding campaign as a
result of our cost reduction initiatives, offset by one-time costs related to
previous commitments.
Broker-dealer rebates were $28.8 million for the six months ended June 30,
2002. As noted above, as part of our pricing incentives for broker-dealers, we
now offer commission rebates to broker-dealers who provide liquidity, which is
recorded as an expense, and charge commissions to broker-dealers who consume
liquidity, which is recorded as transaction fee revenue. The commissions we
charge to liquidity consumers more than offset the amount of broker-dealer
rebate expenses for liquidity providers.
Other expenses increased 22.8% from $26.5 million for the six months ended
June 30, 2001 to $32.5 million for the comparable period in 2002. This increase
was primarily due to an increase in our provision for bad debts, interest costs
related to our securities lending and other clearing activities, and payments to
Reuters in connection with the sale of our R&A product in order to allow our
customers to receive this service and support from Reuters instead of us. Partly
offsetting these increases were decreases in our travel expenses as part of our
cost reduction initiatives, as well as interest expense related to a loan
Reuters provided to us to fund our acquisition of Lynch Jones & Ryan in February
2000. This loan was repaid in June 2001.
Provision for Income Taxes
Our tax provision on income/(loss) from continuing operations decreased
from a charge of $79.9 million for the six months ended June 30, 2001 to a
benefit of $19.8 million for the comparable period in 2002 as a result of our
loss from continuing operations before income taxes, discontinued operations and
cumulative effect of change in change in accounting principle. Our effective
income tax rate decreased from 43.2% for the six months ended June 30, 2001 to
27.1% for the comparable period in 2002. This decrease resulted from the
permanent impairment of goodwill that was not deductible for tax purposes, and
restructuring charges and operating losses in tax jurisdictions where
utilization of tax losses is doubtful.
Discontinued operations
On May 3, 2002, we closed our fixed income trading platform. As a
result of the closure, we incurred a charge for discontinued operations, net of
tax, of $22.6 million for the six months ended June 30, 2002 compared to $14.2
million in the comparable period in 2002.
Cumulative Effect of Change in Accounting Principle.
The cumulative effect of a change in accounting principle related to
goodwill, net of tax, was $18.6 million for the six months ended June 30, 2002.
We adopted SFAS 142 on January 1, 2002. SFAS 142 requires that goodwill no
longer be amortized to earnings, but instead be reviewed for impairment.
Impairment is deemed to exist when the carrying value of goodwill exceeds its
implied fair value. This methodology differs from our previous policy, as
permitted under accounting standards existing before SFAS 142, of using
undiscounted cash flows of the businesses acquired over its estimated life. We
incurred goodwill impairment before tax of $15.7 million related to our
acquisition of ProTrader and $3.3 related to our acquisition of Montag, a fixed
income broker-dealer in Germany. Decreased customer transaction volumes led to
operating losses, closure of several trading offices and restructuring of our
Pro Trader subsidiary. In addition, after a review of market conditions we
determined our fixed income operations could not reach critical mass and
therefore the carrying value of goodwill related to our acquisition of Montag
was impaired and written off.
Liquidity and Capital Resources
We finance our business primarily through cash generated by our
operating activities. In addition, we have access to a number of credit
facilities, although our borrowings under these facilities have been
traditionally low. The net proceeds from our initial public offering are also a
source of funding for us. Prior to our reorganization, in order to fund our
international operations, we paid dividends to Reuters, which then made capital
contributions to those companies. We currently anticipate that the remaining net
proceeds from our initial public offering, together with our cash resources and
credit facilities, will be more than sufficient to meet our anticipated working
capital, capital expenditures and regulatory capital requirements as well as
other anticipated requirements for at least the next twelve months. To the
extent that we further develop our correspondent clearing operations, we may
need to obtain additional financing.
Our financial liquidity is primarily determined by the performance of
our business and partly by the return on our investments. We maintain a highly
liquid balance sheet that can fluctuate significantly between financial
statement dates. Our cash equivalents and securities owned are primarily
comprised of highly liquid investments that can be sold in the secondary market,
if necessary. To the extent that overall market volumes and our trading volumes
decrease beyond certain levels, we may be required to obtain additional
financing from third parties or Reuters.
Cash and cash equivalents, together with assets readily convertible
into cash, accounted for 65.0% and 65.8% of our assets as of June 30, 2002 and
December 31, 2001, respectively. Cash and cash equivalents decreased to $422.7
million as of June 30, 2002 from $703.7 million as of December 31, 2001
primarily due to decreases in our receivable from and payable to broker-dealers
and customers and increases in our securities owned and securities borrowed and
loaned.
The decrease in our cash and cash equivalents and receivable from
broker-dealers contributed to the decrease in our total assets. Offsetting these
factors were increases in our securities borrowed and securities owned. Changes
in our total assets and liabilities, in particular, receivable from and payable
to broker-dealers and customers, securities borrowed and loaned, and commissions
receivable generally lead to large fluctuations in our cash flows from operating
activities from period to period and within periods.
Capital expenditures for the six months ended June 30, 2002 and the
year ended December 31, 2001 related to the purchase of data processing and
communications equipment and leasehold improvements. Capital expenditures and
investments in new technology were financed primarily through our operations.
Additionally, we made cash payments in excess of net assets acquired of $5.3
million in January 2002 which completes our acquisition of ProTrader.
Acquisitions are generally funded from the proceeds from our initial public
offering and cash generated by our operations. We also repurchased $1.3 million
of our common stock to satisfy future conversions of restricted stock units into
common stock under our Restricted Stock Unit plan. Our aggregate minimum lease
commitments are approximately $15.2 million for the remainder of 2002, $27.5
million in 2003, $22.3 million in 2004, $18.5 million in 2005, and $17.3 million
in 2006. Our aggregate minimum lease commitments after 2006 are $203.9 million
and relate primarily to our 20 year lease for our headquarters in New York. We
anticipate that we will meet our 2002 capital expenditure needs out of operating
cash flows.
In connection with our merger with Island, we expect to pay a $1.00 per
share cash dividend to our stockholders of record as of a date prior to the
closing of the merger, which would represent a distribution in the aggregate of
approximately $249 million. We will not pay this dividend if the merger does not
occur. We expect to pay this dividend from the remaining proceeds from our
initial public offering and cash generated by our operations. If cash or capital
resources are insufficient to pay the dividend in addition to our working
capital and capital expenditure requirements, we may need to raise additional
funds, which we may seek from commercial banks or from Reuters. Reuters has
indicated it may make additional financing available to us in the short term for
this purpose.
As of June 30, 2002, we had access to $211 million of uncommitted
credit lines from commercial banking institutions to meet the funding needs of
our U.S. operations. These credit lines are collateralized by a combination of
customer securities and our marketable securities. As of June 30, 2002, there
were no borrowings outstanding under these credit lines. We currently pay no
annual fees to maintain these facilities. In addition, as of June 30, 2002, we
had access to $718.5 million of uncommitted credit lines from commercial banking
institutions to meet the funding needs of our European and Asian subsidiaries.
These credit lines are uncollateralized, and we currently pay no annual fees to
maintain these facilities. As of June 30, 2002, there was $105.4 million
outstanding under these credit lines.
Our broker-dealer subsidiaries are subject to regulatory requirements
intended to ensure their respective general financial soundness and liquidity,
which require that they comply with certain minimum capital requirements. These
regulations, which differ in each country, generally prohibit a broker-dealer
subsidiary from repaying borrowings from us or our affiliates, paying cash
dividends, making loans to us or our affiliates or otherwise entering into
transactions that would result in a significant reduction in its regulatory net
capital position without prior notification or approval of its principal
regulator. Our capital structure is designed to provide each of our subsidiaries
with capital and liquidity consistent with its business and regulatory
requirements. As of June 30, 2002, our U.S. registered broker-dealer subsidiary
Instinet Clearing Services, Inc., which is the counterparty to each of our
customer transactions in U.S. securities, had net capital of $269.7 million,
which was $266.2 million in excess of its required net capital of $3.4 million.
In connection with our correspondent clearing business, we are required
to maintain segregated funds in a special reserve bank account for the exclusive
benefit of our customers. As of June 30, 2002, these funds amounted to $276.3
million.
In addition, as long as Reuters owns a majority of our common stock, we
will need Reuters consent to incur net indebtedness (indebtedness for borrowed
money less cash on hand) in excess of an aggregate of $400.0 million, excluding
any indebtedness incurred by us in the ordinary course of our brokerage or
similar business or in connection with the clearance of securities or
obligations to securities exchanges or clearing systems. We cannot assure you
that we will receive Reuters consent to incur indebtedness above this amount in
the future if we need to do so for any reason.
Recently Issued Accounting Standards
SFAS No. 143, "Accounting for Asset Retirement Obligations," was issued
in August 2001 and is effective for fiscal years beginning after June 15, 2002.
SFAS No. 143 provides accounting and reporting standards for obligations
associated with the retirement of tangible long-lived assets and the associated
asset retirement costs. At this time, management is reviewing the potential
impact, if any, that adoption of this statement may have on our financial
condition and results of operations.
SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities," was issued in June 2002 and is effective for fiscal years beginning
after December 31, 2002. SFAS No. 146 addresses financial accounting and
reporting for costs associated with exit or disposal activities and nullifies
Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring)." SFAS 146 requires that a liability
for a cost associated with an exit or disposal activity be recognized when the
liability is incurred. Under Issue 94-3, a liability for an exit cost as defined
in Issue 94-3 was recognized at the date of an entity's commitment to an exit
plan. At this time, management is reviewing the potential impact, if any, that
adoption of this statement may have on our financial condition and results of
operations.
Critical Accounting Polices and Estimates
Our accounting policy related to our strategic alliances and long term
investments ("investments") is the most critical accounting policy that requires
us to make estimates and use judgements that could affect our results. Our
investments are stated at estimated fair value as determined in good faith by
management. Generally, we will initially value investments at cost as a proxy
for fair value, and require that changes in value be established by meaningful
third-party transactions or a significant impairment in the financial condition
or operating performance of the issuer, unless meaningful developments occur
that otherwise warrant a change in the valuation of an investment. Factors
considered in valuing individual investments include, without limitation,
available market prices, type of security, purchase price, purchases of the same
or similar securities by other investors, marketability, restrictions on
disposition, current financial position and operating results, and other
pertinent information.
We use our best judgment in estimating the fair value of these
investments. There are inherent limitations in any estimation technique. The
fair value estimates presented herein are not necessarily indicative of an
amount which we could realize in a current transaction. Because of the inherent
uncertainty of valuation, these estimated fair values do not necessarily
represent amounts that might be ultimately realized, since such amounts depend
on future circumstances, and the differences could be material.
See Note 2 to the consolidated financial statements for a summary of
our significant accounting policies.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Market risk generally represents the risk of changes in value of a
financial instrument that might result from fluctuations in interest rates,
foreign exchange rates and equity prices. We have established policies,
procedures and internal processes governing our management of market risks in
the normal course of our business operations. Our Global Risk Management
Department is responsible for establishing this risk management framework, as
well as defining, measuring and managing our risks both for existing and planned
services, within ranges set by our management.
INTEREST RATE RISK
We invest a portion of our available cash in marketable securities,
classified as securities owned in our consolidated statements of financial
condition, to maximize yields while continuing to meet our cash and liquidity
needs and the net capital requirements of our regulated subsidiaries. We
maintain a short-term investment portfolio consisting mainly of U.S. government,
U.S. agency and municipal bonds, euro-denominated, Canadian and Japanese
government bonds, and corporate bonds. Our portfolio has an average maturity of
less than two years. The aggregate fair market value of this portfolio was
$281.0 million and $206.8 million as of June 30, 2002 and December 31, 2001,
respectively. These securities are subject to interest rate risk and will fall
in value if interest rates increase. If interest rates had increased immediately
and uniformly by 100 basis points, or 65 basis points in the case of municipal
bonds, as of June 30, 2002 and December 31, 2001, the fair value of the
portfolio would have declined by $2.3 and $2.1 million, respectively. We
generally hold these securities until maturity and therefore would not expect
our financial condition, operating results or cash flows to be affected to any
significant degree by a sudden change in interest rates.
In addition, as a part of our brokerage business, we invest portions of
our excess cash in short-term interest earning assets (mainly cash and money
market instruments), which totaled $422.7 million and $703.7 million as of June
30, 2002 and December 31, 2001, respectively. We also had short-term borrowings
of $105.4 million and $69.3 million as of June 30, 2002 and December 31, 2001,
respectively, on which we are generally charged rates that approximate the U.S.
Federal Funds rate or the equivalent local rate. As a result, we do not
anticipate that changes in interest rates will have a material impact on our
financial condition, operating results or cash flows.
EXCHANGE RATE RISK
Historically, our exposure to exchange rate risk has been managed on an
enterprise-wide basis as part of Reuters risk management strategy. We are
currently evaluating our own exchange rate risk management strategy.
A portion of our operations consists of brokerage services provided
outside the United States. Therefore, our results of operations could be
adversely affected by factors such as changes in foreign currency exchange rates
or economic conditions in the foreign markets in which we have operations. We
are primarily exposed to changes in exchange rates on the British pound and the
Euro. When the U.S. dollar strengthens against these currencies, the U.S. dollar
value of non-U.S. dollar-based revenues decreases. When the U.S. dollar weakens
against these currencies, the U.S. dollar value of non-U.S. dollar-based
revenues increases. Correspondingly, the U.S. dollar value of non-U.S.
dollar-based costs increases when the U.S. dollar weakens and decreases when the
U.S. dollar strengthens. Accordingly, changes in exchange rates may affect our
results. However, we do not believe that our exchange rate exposure will have a
material adverse effect on our financial condition, results of operations or
cash flows. In the future, we may enter into derivative financial instruments as
a means of hedging this risk.
We manage currency exposure related to our brokerage business on a
geographic basis. We generally match each of the non-U.S. subsidiaries'
liabilities with assets denominated in the same local currency. This generally
results in the net equity of the subsidiary being reported in its functional
currency and subject to the effect of changes in currency exchange rates. We
currently do not seek to mitigate this exchange rate exposure, but we may in the
future.
We may enter into forward foreign currency contracts to facilitate our
customers' settling transactions in various currencies, primarily the U.S.
dollar, British pound or Euro. These forward foreign currency contracts are with
third parties and with terms generally identical to our customers' transactions.
Because our customers' transactions are matched to the forward foreign exchange
contract, our exposure to exchange rate risk is not material.
The following is a breakdown of the currency denominations of our
securities owned (in millions):
June 30, December 31,
Currency 2002 2001
-------- ------------ -------------
Euros $30.6 $20.9
British pound 12.0 12.1
Japanese yen 8.2 7.6
Canadian dollar 5.2 5.7
Hong Kong dollar 1.3 1.2
------------ -------------
Total $57.3 $47.5
Our resulting exposure to exchange rate risk is estimated as the
potential loss in fair value resulting from a hypothetical 10% adverse change in
foreign exchange rates due to functional versus reporting currency exposure and
was $ 5.2 million and $4.3 million as of June 30, 2002 and December 31, 2001,
respectively.
A portion of our revenues and expenses are denominated in non-U.S.
dollar currencies. Approximately 21.4% of our revenues and 17.9% of our expenses
as of June 30, 2002, and 24.2% of our revenues and 20.4% of our expenses as of
December 31, 2001 were so denominated. Our profits are therefore exposed to
foreign currency risk -- not of a loss of funds but rather of a loss for
financial reporting purposes. We estimate this risk as the potential loss in
pre-tax income resulting from a hypothetical 10% adverse change in foreign
exchange rates on the mix in our profits between our functional currency and the
respective reporting currencies of our subsidiaries. On this basis, the
estimated risk was approximately $7.3 and $7.6 million as of June 30, 2002 and
December 31, 2001, respectively.
EQUITY PRICE RISK
As an agency broker, we do not trade securities for our own account or
maintain inventories of securities for sale. However, we own marketable
securities of the London, Hong Kong and Euronext stock exchanges as a result of
their demutualizations, which exposes us to market price risk. This risk is
estimated as the potential loss in fair value resulting from a hypothetical 10%
adverse change in quoted market prices and amounted to approximately $2.8
million and $5.6 million as of June 30, 2002 and December 31, 2001,
respectively.
CREDIT RISK ON UNSETTLED TRADES
We are exposed to substantial credit risk from both parties to a
securities transaction during the period between the transaction date and the
settlement date. This period is three business days in the U.S. equities markets
and can be as much as 30 days in some international markets. In addition, we
have credit exposure that extends beyond the settlement date in the case of a
party that does not settle in a timely manner by failing either to make payment
or to deliver securities. We hold the securities that are the subject of the
transaction as collateral for our customer receivables. Adverse movements in the
prices of these securities can increase our credit risk. Over the last three
years, our loss from transactions in which a party refused or was unable to
settle and other credit losses have been immaterial.
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
For a discussion of our legal and administrative proceedings, see "Legal
Proceedings" in our Annual Report on Form 10-K. There have been no material
developments with respect to legal and administrative proceedings.
Item 2. Changes in Securities and Use of Proceeds
CHANGES IN SECURITIES
The following is a summary of the material changes in the rights of capital
shareholders that would occur as a result of our proposed merger with Island.
AMENDED AND RESTATED CORPORATE AGREEMENT
We and Reuters have entered into an amended and restated corporate
agreement that will become effective, and will replace the existing corporate
agreement, at the effective time of the merger. A description of the existing
corporate agreement, which remains in effect while the merger is pending and
will remain in effect if the merger is not completed, is included in our proxy
materials on Schedule 14A for our 2002 annual stockholders meeting, dated April
17, 2002, which is incorporated by reference in this prospectus. We summarize
the principal changes from the existing corporate agreement below.
So long as Reuters beneficially owns at least 8,000,000 shares of our
common stock, but less than 10% of our then-outstanding voting stock, Reuters
will have the right to nominate one director to our board of directors.
Additionally, so long as Reuters beneficially owns at least 8,000,000
shares and 10% or more but less than a majority of our then-outstanding voting
stock, Reuters will have the right to nominate a number of directors
approximately equal to its percentage ownership multiplied by the total number
of members of our board of directors. However, while Reuters beneficially owns
at least 8,000,000 shares and 10% or more but less than a majority of our
then-outstanding voting stock, Reuters may nominate at least one director but
not 50% or more of the directors of our board.
As of the date on which Reuters ceases to beneficially own at least
8,000,000 shares of Instinet's then-outstanding voting stock, Reuters will not
have the right to nominate any directors, except that if we grant any third
party the right to nominate directors based on an ownership threshold less than
10%, then Reuters will have director nomination rights that correspond with that
threshold.
At any time when Reuters beneficially owns at least 8,000,000 shares
(or, if applicable, the lower threshold as applied to third parties) but less
than a majority of our then-outstanding voting stock, and Reuters has not
nominated the full number of directors to which it is entitled, at the request
of Reuters, we will use commercially reasonable efforts to solicit stockholder
approval to increase the number of authorized directors permitted under the
certificate of incorporation and bylaws to allow Reuters to nominate the full
number of directors to which it is entitled. So long as Reuters beneficially
owns a majority of our then-outstanding voting stock, Reuters will have the
right to nominate as many directors as it chooses, subject to our certificate of
incorporation and bylaws, the Island stockholders agreement and applicable law.
These director nomination rights are transferable to a transferee of Reuters,
subject to some restrictions.
In addition, subject to applicable legal and regulatory requirements,
Reuters will continue to have board committee representation rights based upon
its percentage ownership of our outstanding common stock.
We have agreed not to take any action voluntarily that would reduce or
could reasonably be expected to reduce Reuters ownership of our outstanding
voting stock to less than 51% of our capital stock or our then-outstanding
voting stock or that would further dilute Reuters ownership during a period
immediately following a decrease in Reuters ownership below 51% of our
then-outstanding voting stock, without Reuters consent. If we become aware of
any event that has caused Reuters to own less than 51% of our capital stock or
our then-outstanding voting stock, or that could reasonably be expected to cause
a reduction in Reuters ownership of our common stock to less than 53% of our
capital stock or our then-outstanding voting stock, we will be required to
notify Reuters and to disclose publicly all material information about any such
event as soon as practicable to allow Reuters to acquire additional shares of
our stock in the public markets, subject to our limited right to temporarily
defer such disclosure if it would be materially detrimental to us.
So long as Reuters beneficially owns more than 30% of our
then-outstanding voting stock, we have agreed not to seek to become registered
as a national securities exchange without Reuters prior consent if registration
would materially affect Reuters ability to exercise its voting and other rights
related to its ownership of our 27 common stock. If the SEC seeks to require us
to register as a national securities exchange, we have agreed to take all
commercially reasonable actions to mitigate the effect on Reuters rights,
including implementing changes in our corporate structure and operations as
appropriate, although we would not be required to take any action that would
materially adversely affect any material part of our business or our
consolidated financial condition or results of operations.
The amended and restated corporate agreement continues to include
provisions relating to Reuters registration rights. If we enter into a new
registration rights agreement with Reuters, the principal Island stockholders
described under "Island Stockholders Agreement" below and other Island
stockholders, effective as of or following the merger, Reuters registration
rights under the amended and restated corporate agreement will be suspended so
long as the new registration rights agreement is in effect.
ISLAND STOCKHOLDERS AGREEMENT
In connection with the merger, we, Reuters, the Island stockholders
associated with TA Associates, Bain Capital and Silver Lake Partners and Edward
Nicoll entered into a stockholders agreement, which will become effective upon
the closing of the merger. We sometimes refer to the Island stockholders
associated with TA Associates, Bain Capital and Silver Lake Partners as the
principal Island stockholders. This agreement provides for governance rights for
the principal Island stockholders following the closing of the merger, transfer
restrictions relating to the shares of our common stock held by the principal
Island stockholders and Mr. Nicoll and related matters, as summarized below.
This agreement will terminate on the tenth anniversary of the effective time of
the merger.
CORPORATE GOVERNANCE AND VOTING
Each group of the principal Island stockholders will have the right to
nominate one director to our board of directors so long as it owns at least
8,000,000 shares of our common stock that were issued as merger consideration
and so long as it is a party to the Island stockholders agreement. The principal
Island stockholders will also be entitled to nominate additional directors in
most instances when the total number of directors on our board is increased
beyond 13. A director nominated by a principal Island stockholder may not hold a
position at any entity that the nominating committee of our board of directors
reasonably determines to be a competitor of ours. If a principal Island
stockholder ceases to own 8,000,000 shares of our common stock that are subject
to the Island stockholders agreement, then the director on our board of
directors nominated by such principal Island stockholder shall be required to
tender his or her resignation.
As long as at least two principal Island stockholders have the right to
designate a director, each committee of our board of directors will, subject to
applicable legal and regulatory requirements, include at least one of the
directors nominated by the principal Island stockholders. In addition, a new
committee consisting solely of one director designated by the principal Island
stockholders, one director nominated by Reuters and the chief executive officer
will be established to determine the process by which we will approve
transactions and relationships entered into between us, on the one hand, and
Reuters, on the other hand.
Reuters and the principal Island stockholders have agreed to vote in favor
of the election of, and, in the case of the individuals described in the second
and third bullet points below, Reuters has agreed not to vote in favor of the
removal (except for cause) of, the following individuals as directors of our
board:
o each other's director nominees;
o until the earliest of (i) the third anniversary of the merger, (ii) the
date on which Reuters ceases to own 35% of our then-outstanding voting
stock and (iii) the first date on which less than two of the principal
Island stockholders are entitled to nominate a director, three individuals
nominated in accordance with the terms of the Island stockholders agreement
who qualify as independent directors under Nasdaq rules; and
o until the earlier of the date on which Reuters ceases to own 35% of our
then-outstanding voting stock and the first date on which less than two of
the principal Island stockholders are entitled to nominate a director, our
chief executive officer.
Reuters and the principal Island stockholders have also agreed that, so
long as Reuters owns a majority of our then-outstanding voting stock and at
least two of the three principal Island stockholders are entitled to nominate
directors, they will vote in favor of any issuance of our equity securities that
has been approved by a majority of our directors, except that Reuters will not
be obligated to vote for any equity issuance that would cause it to own less
than 51% of our then-outstanding voting stock, or less than 51% of our capital
stock.
Except for sales made in the public markets or pursuant to the exercise
of its registration rights, Reuters may not sell shares of our common stock
representing 10% or more of our then-outstanding voting stock to a transferee
unless that transferee agrees to comply with Reuters voting obligations under
the Island stockholders agreement.
TRANSFER RESTRICTIONS
With some limited exceptions, no party to the Island stockholders
agreement will be permitted to transfer shares of our common stock received as
merger consideration prior to the earlier of the first anniversary of the merger
and the date on which Mr. Nicoll, current chairman of Island who will assume the
role as our chief executive officer upon completion of the merger, is terminated
as our chief executive officer, unless he is terminated for cause or with the
consent of at least two of the principal Island stockholders. After this initial
lock-up period and until the third anniversary of the merger, the principal
Island stockholders have agreed that their sales of our common stock will be
subject to volume restrictions applied to them as a group, except with respect
to sales in connection with underwritten public offerings.
As described below under "Datek Stockholders Agreement," in connection
with its pending merger with Ameritrade Holding Corporation, Datek currently
intends to distribute its shares of Island common stock to its stockholders
shortly before the closing of that merger. (If our merger with Island occurs
first, Datek would distribute the shares of our common stock that it receives in
our merger.) Prior to that distribution, Datek may issue shares of its capital
stock to its stockholders representing only the right to receive a number of
shares of Island common stock (or shares of our common stock) held by Datek in
exchange for those shares. Under the Island stockholders agreement, any such
shares that may be issued by Datek and held by the Island stockholders that are
party to the Island stockholders agreement will be subject to the same
restrictions on transfer as their shares of our common stock.
REUTERS STANDSTILL OBLIGATIONS
Under the Island stockholders agreement, Reuters has agreed to certain
restrictions that we refer to as standstill restrictions. Until the earlier of
the third anniversary of the merger and the date on which less than two of the
principal Island stockholders are entitled to nominate directors, Reuters will
not acquire more shares of our common stock other than in privately negotiated
transactions (provided that a specified number of shares of our common stock
remain in the public markets) and other specified situations, except to maintain
its ownership level at the effective time of the merger. Reuters has agreed
that, while the standstill restrictions are in effect, it will not engage in a
going-private transaction with us except on a confidential basis. We have agreed
with Reuters that if we hold discussions with any third party relating to an
acquisition of our company, we will participate in parallel discussions with
Reuters and will otherwise treat Reuters on a comparable basis with any third
party with whom we are discussing an acquisition transaction. The standstill
restrictions will no longer apply to Reuters 90 days after the first date on
which Reuters ceases to own 35% or more of our then-outstanding voting stock.
Except for sales made in the public markets or pursuant to the exercise
of its registration rights, so long as Reuters owns at least 20% of our
then-outstanding voting stock, it may not sell shares of our common stock to a
transferee who would, after such sale, own 35% or more of our then-outstanding
voting stock unless that transferee agrees to comply with Reuters standstill
obligations under the Island stockholders agreement, subject to certain
adjustments depending on the ownership level of the transferee.
RELATED PARTY TRANSACTIONS
The Island stockholders agreement provides that, so long as Reuters
owns a majority of our then-outstanding voting stock or directors affiliated
with Reuters constitute a majority of our board of directors and 29 at least two
Island stockholders are entitled to nominate directors, our board of directors
will maintain a committee consisting of one director nominated by the Island
stockholders, one director nominated by Reuters and our chief executive officer
that will determine the process by which transactions between Reuters and us are
reviewed and approved. Some types of transactions involving Reuters and us will
require the vote of a majority of our directors that qualify as independent
directors under the Nasdaq rules and the directors nominated by the principal
Island stockholders, voting together.
DATEK STOCKHOLDERS AGREEMENT
In connection with the merger, we, Reuters and Datek Online Holdings
Corp. entered into a stockholders agreement, which will become operative only
upon the effectiveness of the merger. Datek, whose principal stockholders
include affiliates of the principal Island stockholders, owns approximately 85%
of the Class L common stock of Island and less than 1% of the Class A common
stock of Island. Datek currently intends to distribute these shares to its
stockholders shortly before the closing of the Datek's pending merger with
Ameritrade Holding Corporation, which is expected to occur prior to our merger
with Island. If Datek distributes its shares of Island common stock to its
stockholders prior to the effectiveness of our merger with Island, Datek will
not be subject to any of the obligations described below. However, if Datek
continues to hold shares of Island common stock at the time of our merger with
Island, Datek will be bound by the Datek stockholders agreement so long as Datek
holds those shares. The Datek stockholders agreement provides for transfer
restrictions relating to our shares of common stock held by Datek, voting
agreements by Datek and related matters, as summarized below. The Datek
stockholders agreement will terminate on the tenth anniversary of the merger.
TRANSFER RESTRICTIONS
Datek has agreed not to transfer shares of our common stock that it
receives as merger consideration prior to the earlier of the first anniversary
of the merger and the date on which Mr. Nicoll is terminated as our chief
executive officer, unless he is terminated for cause or with the consent of at
least two principal Island stockholders, except:
o in connection with a distribution of the shares of our common stock to
Datek's securityholders in which the principal Island stockholders receive
at least their pro rata portion of our shares of common stock, based on
their holdings in Datek on June 9, 2002 (the date of the merger agreement),
and the other shares of our common stock are widely distributed; or
o in connection with a distribution of shares of our common stock to
securityholders that does not fit the description in the preceding bullet
point, provided that any transferee of capital stock of Datek from the
principal Island stockholders prior to such distribution has agreed to be
bound by the Datek stockholders agreement.
Following the initial period described above and until the second
anniversary of the merger, Datek has agreed not to transfer shares of our common
stock subject to the Island stockholders agreement except in underwritten public
offerings or in other limited circumstances, including as described in the two
preceding bullet points. Following the second anniversary of the merger, Datek
may transfer shares of our common stock without restriction.
VOTING
Datek has agreed, until the second anniversary of the merger and
thereafter so long as the principal Island stockholders control Datek (or Datek
is otherwise obligated to vote its shares of our common stock for the election
of the directors of our board nominated by the principal Island stockholders
under the Island stockholders agreement) and at least two of the principal
Island stockholders are each entitled to nominate directors under the Island
stockholders agreement, to vote its shares of our stock in favor of the election
as directors of the individuals nominated by Reuters under the terms of the
amended and restated corporate agreement. Except for sales made in the public
markets or pursuant to the exercise of its registration rights, 30 Datek may not
sell shares of our common stock representing 10% or more of our then-outstanding
voting stock to a transferee unless that transferee agrees to comply with
Datek's voting obligations under the Datek stockholders agreement.
REGISTRATION RIGHTS AGREEMENT
We, Reuters, the principal Island stockholders and other significant
Island stockholders, including Finanzas B.V., have agreed to take action to
cause a registration rights agreement upon the terms contemplated by the merger
agreement to be entered into among those parties, Mr. Nicoll and some of our
other stockholders. We have agreed to take action to cause this registration
rights agreement to be entered into as of the effective time of the merger or,
with the principal Island stockholders' consent, as promptly as practicable
after that time and, in any event, no later than the expiration of our current
registration rights agreement with the former stockholders of ProTrader Group,
L.P. (which will expire no later than October 1, 2003). Reuters existing
registration rights contained in the amended and restated corporate agreement
will be suspended, and replaced with the rights under the registration rights
agreement contemplated by the merger agreement, so long as the registration
rights agreement is in effect.
The merger agreement contemplates that the registration rights
agreement would provide that various groups of our stockholders would have the
right for a period of six years to demand that we register for resale some of
their shares of common stock (which, for Reuters, would be all of our shares
that it holds, and for groups of stockholders other than Reuters, would be the
shares they receive in the merger or in other acquisition transactions), subject
to various limitations. The registration rights agreement would provide that the
principal Island stockholders would receive six such demand rights, the former
ProTrader stockholders, if party to the agreement, would receive one demand
right (unless this registration statement is effective for at least 180 days)
and Reuters would have unlimited demand rights. In addition, if Datek is issued
shares of our common stock in the merger, the parties will negotiate in good
faith to make appropriate adjustments to the terms of the registration rights
agreement to take into account the addition of Datek as a party to the
registration rights agreement.
The registration rights agreement also would provide that, for a period
of six years, all of the parties to the registration rights agreement will have
"piggyback" registration rights with respect to any registered offering by us or
other stockholders. As a result, if we proposed to register under the Securities
Act any of our shares of common stock for sale to the public, we would be
obligated to give the stockholder parties to the registration rights agreement
the right to include shares of our common stock in the offering. However, if the
underwriters limited the number of shares that could be included in any
underwritten offering initiated by us, the shares to be offered by us would be
included prior to shares being offered by the stockholders.
Use of Proceeds
The effective date of the Company's first registration statement, filed
on Form S-1 under the Securities Act of 1933 (File Nos. 333-55190 and 333-61186)
relating to the Company's initial public offering of its Common Stock, par value
$0.01, and the related Preferred Stock Purchase Rights, was May 17, 2001. The
effective date of Post-Effective Amendment No. 1, filed solely to add an exhibit
pursuant to Rule 462(d) under the Securities Act of 1933, was May 22, 2001. Net
proceeds to the company from the offering of 36,800,000 shares of Common Stock
(together with the related Preferred Stock Purchase Rights and including the
underwriters' over-allotment shares) were $486.9 million after deduction of
underwriting discounts and commissions and other offering expenses.
We used $100 million of the proceeds for our acquisition of ProTrader
and intend to use the remaining proceeds for working capital and general
corporate purposes. Pending use, we have invested the remaining proceeds in high
grade corporate and municipal bonds, U.S. treasuries, and interest-bearing money
market investments.
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
We held our Annual Meeting of Stockholders on May 14, 2002.
The following individuals were nominated and elected to serve as
directors:
David J. Grigson, Mark D. Nienstedt and Ian Strachan
The stockholders voted as follows on the following matters:
1. Election of Directors. He voting results for each nominee are as
follows:
NAME VOTES FOR VOTES WITHHELD
David J. Grigson 236,560,734 2,274,056
Mark D. Nienstedt 236,571,169 2,263,621
Ian Strachan 236,560,739 2,274,051
2. The reappointment of the Company's independent auditors was approved
by a count of 238,221,867 votes for, 606,098 votes against and 6,825
votes abstaining.
Item 5. Other Information
RELATIONSHIP WITH REUTERS
Instinet continues to explore ways to take advantage of the synergies
between it and Reuters, as well as their respective capabilities, as part of its
effort to provide value-added products and services to customers in a
cost-effective manner. In connection with this effort, Instinet and Reuters have
recently embarked on a series of initiatives to expand their relationship. The
following are the key components of these initiatives:
o connecting the full range of Instinet's trading facilities to
Reuters institutional order entry network (IOE);
o providing Instinet's customers that use Reuters IOE with better
access to Instinet's trading functionality; and
o offering preferential terms to customers engaging in new business
with Instinet and Reuters.
The goals of these initiatives are to improve customers' investment and
trading performance, increase transactional capabilities for Instinet's and
Reuters customers and develop further operational efficiencies between Reuters
and Instinet. In connection with these initiatives, Instinet recently entered
into various agreements with Reuters, and intends to enter into additional
agreements.
Institutional Order Entry System. Instinet has entered into an
agreement with Bridge Trading, a wholly-owned broker-dealer subsidiary of
Reuters, to participate in its IOE network. This connectivity will give Instinet
customers the ability to submit orders to Instinet through the IOE network.
Instinet also expects to enter into an agreement with Reuters shortly to develop
enhancements to the IOE interface so that customers can better access Instinet's
proprietary trading functionality. Instinet will pay standard commercial rates
for orders it receives through IOE. The agreement will have an initial two-year
term and automatically renew annually thereafter.
NEWPORT(SM). Instinet also plans to adapt its new NEWPORT(SM) (patent
pending) program trading application for passive and quantitative fund managers
to allow customers to use it to submit trades through IOE. Instinet also plans
to design NEWPORT(SM) to use Reuters market data for its various functions that
require real-time market information. Instinet expects to enter into agreements
with Reuters regarding NEWPORT(SM).
Market Data. Under an existing data distribution agreement, Reuters has
the limited right to be the exclusive data vendor distributing some of
Instinet's proprietary equity securities data. Some of Instinet's information is
already made available through various Reuters products and services. In
connection with Instinet's new initiatives with Reuters, Instinet and Reuters
intend to work to expand the information available to include all customer limit
orders submitted through Instinet's platform. 68
Preferred Soft-Dollar Arrangement. Instinet has established a preferred
commercial and soft-dollar arrangement for customers that purchase Reuters
products and services. Institutional investors often allocate a portion of their
gross brokerage transaction fees -- commonly referred to as soft-dollar credits
- -- for the purchase of proprietary and independent third-party research products
as well as other brokerage services. Under a new arrangement with Reuters, some
of Instinet's customers would be able to obtain some Reuters products and
services on a preferential soft-dollar basis. This would be available to
customers who are increasing their level of business with Instinet, Reuters or
both.
Instinet expects to enter into a formal agreement with Reuters with
respect to this arrangement. Instinet anticipates that this agreement would have
an initial two-year term, automatically renew annually thereafter and be
terminable by either party on a change of control of Instinet, including if
Reuters ceases to own a majority of Instinet's voting stock. Instinet also
expects that Reuters would agree to compensate Instinet's sales personnel for
new sales of Reuters products and services, and that Instinet would agree to pay
Reuters an annual fee for various administrative and marketing services related
to training of Instinet's personnel.
Patent Licensing Agreement. Instinet has entered into a license
agreement with Reuters under which Reuters grants Instinet a patent license
permitting Instinet to make, use and sell products that include a system with
functionality that identifies counterparties to a transaction and enables
communication between the counterparties to negotiate the terms of the
transaction. This license is for the life of the patent, although it may be
terminated under customary conditions. In addition, Reuters has the right to
terminate in the event that Instinet uses the patent to create products that
compete with any Reuters product. Reuters also has the right to terminate the
license generally if Reuters ceases to own a majority of Instinet's voting
stock. If Reuters exercises this right to terminate, Instinet will retain some
rights to the patent for products existing on or before the date of such
termination. Instinet has also agreed that if it obtains a patent for a system
with substantially similar functionality, it would grant Reuters a license to
that patent on terms no worse than the terms of this license.
Bridge Trading Commission Sharing. Instinet has also entered into a
commission sharing agreement with Bridge Trading, under which Instinet has
agreed to open accounts for some institutional clients that Bridge Trading
introduces to Instinet. Instinet has agreed to rebate portions of the
commissions these customers pay at a commercially reasonable rate. This
agreement is terminable at will by either party.
Order-Routing in NYSE-listed Stocks. Instinet also expects to enter
into an agreement with Bridge Trading under which Instinet would route orders in
NYSE-listed stocks to Bridge Trading for execution. Unlike Instinet, Bridge
Trading is a member of the NYSE. Instinet anticipates that this agreement would
have an initial two-year term and automatically renew annually thereafter.
FX CROSS
On May 14, 2002, Instinet entered into a strategic alliance with
Citibank, N.A. to operate THE INSTINET FX CROSS(SM), a foreign exchange crossing
service that will enable customers to execute large currency transactions
anonymously at a transparent market price. Instinet expects that THE INSTINET FX
CROSS(SM) will be operational for North American customers in the fourth quarter
of 2002 and be rolled out for European customers soon thereafter. THE INSTINET
FX CROSS(SM) will initially offer two crossing sessions per day in 12
currencies. Citibank, N.A. will act as counterparty to all transactions, which
will be executed at CitiFX Benchmark rates.
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are filed or incorporated by reference as part
of this quarterly report on Form 10-Q:
Exhibit
Number Description
- --------- ------------------------------------------------------------------
2.1 Agreement and Plan of Merger, dated as of June 9, 2002, among
Instinet Group Incorporated, Instinet Merger Corporation and
Island Holding Company, Inc., (Incorporated by reference to
Exhibit 2.1 of the Company's Registration Statement on Form S-4
(Registration No. 333-97071))
3.1 Certificate of Incorporation of Instinet Group Incorporated
(Incorporated by reference to Exhibit 4.2 of the Company's
Registration Statement on Form S-1 (Registration No. 333-55190))
3.2 Bylaws of Instinet Group Incorporated (Incorporated by reference
to Exhibit 3.2 of the Company's Quarterly Report on Form 10-Q
(Commission File No. 000-32717)) for the quarterly period ended
June 30, 2001)
3.3 Form of Proposed Amended and Restated Certificate of Incorporation
of Instinet Group Incorporated (Incorporated by reference to
Exhibit 3.1 of the Company's Registration Statement on Form S-4
(Registration No. 333-97071))
3.4 Form of Proposed Amended and Restated Bylaws of Instinet Group
Incorporated (Incorporated by reference to Exhibit 3.2 of the
Company's Registration Statement on Form S-4 (Registration No.
333-97071))
4.1 Form of Common Stock Certificate (Incorporated by reference to
Exhibit 4.1 of the Company's Registration Statement on Form S-1
(Registration No. 333-55190))
4.2 Corporate Agreement between Instinet Group Incorporated and
Reuters Limited, dated May 17, 2001 (Incorporated by reference to
Exhibit 4.2 of the Company's Quarterly Report on Form 10-Q
(Commission File No. 000-32717)) for the quarterly period ended
June 30, 2001)
4.3 Rights Agreement between Instinet Group Incorporated and Mellon
Investor Services, dated May 15, 2001 (Incorporated by reference
to Exhibit 4.3 of the Company's Quarterly Report on Form 10-Q
(Commission File No. 000-32717)) for the quarterly period ended
June 30, 2001)
4.4 Amended and Restated Rights Agreement, dated as of June 9, 2002,
by and between Reuters Limited and Instinet Group Incorporated
(Incorporated by reference to Exhibit 10.1 of the Company's
Registration Statement on Form S-4 (Registration No. 333-97071))
10.1 Datek Stockholders Agreement, dated as of June 9, 2002, by and
among Instinet Group Incorporated, Reuters Limited and Datek
Online Holdings Corp. (Incorporated by reference to Exhibit 10.2
of the Company's Registration Statement on Form S-4 (Registration
No. 333-97071))
10.2 Stockholders Agreement, dated as of June 9, 2002, by and among
Instinet Group Incorporated, Reuters Limited, Reuters C Corp.,
Reuters Holdings Switzerland SA, the other entities listed on
Exhibit B thereto and Edward Nicoll (Incorporated by reference to
Exhibit 10.3 of the Company's Registration Statement on Form S-4
(Registration No. 333-97071))
10.3 Company Voting Agreement, dated as of June 9, 2002, by and among
Island Holding Company, Inc., the stockholders of Island Holding
Company, Inc., and Instinet Group Incorporated (Incorporated by
reference to Exhibit 10.4 of the Company's Registration Statement
on Form S-4 (Registration No. 333-97071))
10.4 Parent Voting Agreement, dated as of June 9, 2002, by and among
Reuters Limited, Reuters C Corp and Reuters Holdings Switzerland
SA, Island Holding Company, Inc., and Instinet Group Incorporated
(Incorporated by reference to Exhibit 10.5 of the Company's
Registration Statement on Form S-4 (Registration No. 333-97071))
10.5 Datek Voting Agreement, dated as of June 9, 2002, by and between
Datek Online Holdings Corp. and Instinet Group Incorporated
(Incorporated by reference to Exhibit 10.6 of the Company's
Registration Statement on Form S-4 (Registration No. 333-97071))
10.6 Registration Rights Agreement Term Sheet (Incorporated by
reference to Exhibit 10.7 of the Company's Registration Statement
on Form S-4 (Registration No. 333-97071))
10.7* Institutional Order Entry Agreement, dated as of May 4, 2001,
between Instinet Corporation and Bridge Trading Company
10.8* Commission Sharing Agreement, dated as of April 23, 2002, between
Instinet Corporation and Bridge Trading Company
10.9* Non-Exclusive Limited Patent License Agreement, effective as of
August 2, 2002, between Instinet Group Incorporated and Reuters
Limited
99.1 Information Incorporated by reference into Form 10-Q (Risk Factors
from the Prospectus)
- ---------------
* Filed herewith.
(b) The following reports on Form 8-K were filed for the last quarter
covered by this report, and subsequently through August 9, 2002:
Date of Report Item Number Financial Statements Required to be Filed
- --------------- ------------------ -----------------------------------------
April 10, 2002 Items 5 & 7 No
April 21, 2002 Items 5 & 7 No
June 10, 2002 Items 5 & 7 No
June 14, 2002 Items 5 & 7 No
July 23, 2002 Items 5 & 7 No
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: August 13, 2002
INSTINET GROUP INCORPORATED
By: /s/ MARK NIENSTEDT
-------------------------------
Name: Mark Nienstedt
Title: Acting President and
Chief Executive Officer,
Chief Financial Officer
and Director
(Duly Authorized Officer and
Principal Financial Officer)
By: /s/ MICHAEL CLANCY
-------------------------------
Name: Michael J. Clancy
Title: Senior Vice President
and Chief Accounting
Officer
EXHIBIT INDEX
Exhibit
Number Description
- --------- ------------------------------------------------------------------
2.1 Agreement and Plan of Merger, dated as of June 9, 2002, among
Instinet Group Incorporated, Instinet Merger Corporation and
Island Holding Company, Inc., (Incorporated by reference to
Exhibit 2.1 of the Company's Registration Statement on Form S-4
(Registration No. 333-97071))
3.1 Certificate of Incorporation of Instinet Group Incorporated
(Incorporated by reference to Exhibit 4.2 of the Company's
Registration Statement on Form S-1 (Registration No. 333-55190))
3.2 Bylaws of Instinet Group Incorporated (Incorporated by reference
to Exhibit 3.2 of the Company's Quarterly Report on Form 10-Q
(Commission File No. 000-32717)) for the quarterly period ended
June 30, 2001)
3.3 Form of Proposed Amended and Restated Certificate of Incorporation
of Instinet Group Incorporated (Incorporated by reference to
Exhibit 3.1 of the Company's Registration Statement on Form S-4
(Registration No. 333-97071))
3.4 Form of Proposed Amended and Restated Bylaws of Instinet Group
Incorporated (Incorporated by reference to Exhibit 3.2 of the
Company's Registration Statement on Form S-4 (Registration No.
333-97071))
4.1 Form of Common Stock Certificate (Incorporated by reference to
Exhibit 4.1 of the Company's Registration Statement on Form S-1
(Registration No. 333-55190))
4.2 Corporate Agreement between Instinet Group Incorporated and
Reuters Limited, dated May 17, 2001 (Incorporated by reference to
Exhibit 4.2 of the Company's Quarterly Report on Form 10-Q
(Commission File No. 000-32717)) for the quarterly period ended
June 30, 2001)
4.3 Rights Agreement between Instinet Group Incorporated and Mellon
Investor Services, dated May 15, 2001 (Incorporated by reference
to Exhibit 4.3 of the Company's Quarterly Report on Form 10-Q
(Commission File No. 000-32717)) for the quarterly period ended
June 30, 2001)
4.4 Amended and Restated Rights Agreement, dated as of June 9, 2002,
by and between Reuters Limited and Instinet Group Incorporated
(Incorporated by reference to Exhibit 10.1 of the Company's
Registration Statement on Form S-4 (Registration No. 333-97071))
10.1 Datek Stockholders Agreement, dated as of June 9, 2002, by and
among Instinet Group Incorporated, Reuters Limited and Datek
Online Holdings Corp. (Incorporated by reference to Exhibit 10.2
of the Company's Registration Statement on Form S-4 (Registration
No. 333-97071))
10.2 Stockholders Agreement, dated as of June 9, 2002, by and among
Instinet Group Incorporated, Reuters Limited, Reuters C Corp.,
Reuters Holdings Switzerland SA, the other entities listed on
Exhibit B thereto and Edward Nicoll (Incorporated by reference to
Exhibit 10.3 of the Company's Registration Statement on Form S-4
(Registration No. 333-97071))
10.3 Company Voting Agreement, dated as of June 9, 2002, by and among
Island Holding Company, Inc., the stockholders of Island Holding
Company, Inc., and Instinet Group Incorporated (Incorporated by
reference to Exhibit 10.4 of the Company's Registration Statement
on Form S-4 (Registration No. 333-97071))
10.4 Parent Voting Agreement, dated as of June 9, 2002, by and among
Reuters Limited, Reuters C Corp and Reuters Holdings Switzerland
SA, Island Holding Company, Inc., and Instinet Group Incorporated
(Incorporated by reference to Exhibit 10.5 of the Company's
Registration Statement on Form S-4 (Registration No. 333-97071))
10.5 Datek Voting Agreement, dated as of June 9, 2002, by and between
Datek Online Holdings Corp. and Instinet Group Incorporated
(Incorporated by reference to Exhibit 10.6 of the Company's
Registration Statement on Form S-4 (Registration No. 333-97071))
10.6 Registration Rights Agreement Term Sheet (Incorporated by
reference to Exhibit 10.7 of the Company's Registration Statement
on Form S-4 (Registration No. 333-97071))
10.7* Institutional Order Entry Agreement, dated as of May 4, 2001,
between Instinet Corporation and Bridge Trading Company
10.8* Commission Sharing Agreement, dated as of April 23, 2002, between
Instinet Corporation and Bridge Trading Company
10.9* Non-Exclusive Limited Patent License Agreement, effective as of
August 2, 2002, between Instinet Group Incorporated and Reuters
Limited
99.1 Information Incorporated by reference into Form 10-Q (Risk Factors
from the Prospectus)
- ---------------
* Filed herewith.