Exhibit 99.1
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FOR IMMEDIATE RELEASE
Investor Relations: Media Relations:
John Pitt Calvin Mitchell
Instinet Group Incorporated Instinet Group Incorporated
212 310 7481 212 310 7520
john.pitt@instinet.com calvin.mitchell@instinet.com
INSTINET ANNOUNCES THIRD QUARTER 2002 RESULTS
Company Takes Charge for Goodwill Impairment
NEW YORK, October 15, 2002 - Instinet Group Incorporated (Nasdaq: INET) today
announced a net loss of $528.4 million, or $2.05 per share on a fully diluted
basis, for the third quarter ended September 30, 2002, compared to a net profit
of $8.2 million, or $0.03 per share, for the third quarter of 2001. Instinet's
results included a pre-tax, non-cash charge of $552 million for impairment of
goodwill in the third quarter.
Excluding the goodwill impairment charge, as well as net investment results and
a restructuring charge, together with the related tax effects, pro forma
operating results in the third quarter was $3.0 million, or $0.01 per share. 1
"There's no denying that we are facing tough business conditions and a very
competitive landscape," said Ed Nicoll, Instinet's Chief Executive Officer.
"Even so, we are committed to rationalizing our cost structure to make our
company profitable at the current level of business. Once we reduce costs, we
believe we'll be in an excellent position to leverage our commanding market
share position to serve our customers while improving profitability."
Goodwill Charge
The charge for goodwill impairment is based on the application of impairment
tests prescribed by recently enacted accounting standards (FAS 142), and
eliminates all goodwill from Instinet's balance sheet as of September 30, 2002.
These accounting standards required the company to initiate a goodwill
impairment test as a result of the recent decline of Instinet's stock price. The
company performed a valuation of its tangible and intangible assets, and based
on this valuation and the application of the new accounting standards, believes
that an impairment charge is appropriate. This charge results in a non-cash
charge to the company and no reduction to tangible book value. A related tax
benefit of $26 million has been recorded.
Business Highlights
o Instinet and Island Holding Company, Inc. completed their merger on
September 20, 2002. Island became a wholly owned subsidiary of Instinet.
This combination offers professional investors and traders superior
trading platforms and diverse trading choices in worldwide marketplaces.
Island's operating and financial data, subsequent to September 20, 2002,
are aggregated with Instinet's results for the third quarter.
o In connection with the Island transaction, Instinet paid a one-time
special cash distribution of $1.00 per share on all shares that were
issued and outstanding prior to the closing. The aggregate amount of the
distribution was approximately $249 million, and it was paid on October 3,
2002.
o A record 26.5 billion U.S. equity shares was traded through Instinet in
the third quarter of 2002, up 38% from 19.2 billion shares in the previous
quarter, and up 70% from 15.6 billion executed in the third quarter of
2001. U.S. equity shares executed during the third quarter of 2002
consisted of 22.6 billion Nasdaq-listed shares and 3.9 billion
exchange-listed shares.
o Instinet's share of Nasdaq-listed volume was a record 20.5% in the third
quarter compared to 13.8% in the previous quarter and 13.5% in the third
quarter of 2001. The company's share of total U.S. equity volume was a
record 11.1% in the third quarter versus 8.5% in the previous quarter and
8.6% in the comparable period last year.
o The company's annualized fixed-cost base was $547 million in the third
quarter, down $175 million or 24% from the year-ago quarter. (The
fixed-cost base excludes non-recurring expenses - charges for goodwill
impairment and restructuring -- and variable costs, including soft dollar
and commission recapture, brokerage, clearing and exchange fees, and
broker-dealer rebates.)
Financial Performance
Revenues
Total revenues for the third quarter were $254.3 million, down $65.4 million or
21% from the third quarter of 2001 and $14.4 million or 5% from the previous
quarter. Transaction fee revenue for the third quarter was $263.9 million, down
15% from $311.7 million in the comparable period in 2001. Net of soft dollar
expenses and commission recapture expenses, and broker-dealer rebates, third
quarter transaction fee revenue declined 34% from the third quarter of 2001, and
5% from the previous quarter.
Net transaction fee revenue from U.S. equity transactions decreased 7% from the
prior quarter with a 38% increase in shares traded on Instinet being offset by a
31% decrease in average pricing. The decline in average pricing resulted
primarily from a shift in the mix of volume towards customers at lower price
levels, primarily U.S. broker-dealers.
Net transaction fee revenue from U.S. equities traded by U.S. broker-dealers
represented approximately 24% of total net transaction fee revenue in the third
quarter compared to 22% in the second quarter of 2002, and 40% in the year-ago
quarter. This shift was largely due to the broker-dealer rate-card changes
Instinet began implementing in the first quarter of 2002. Buy-side institutions
trading U.S. equities made up approximately 49% of total net transaction fee
revenue in the third quarter versus 52% in the previous quarter and 43% in the
comparable period in 2001.
Net transaction fee revenue from non-U.S. equities increased slightly from the
previous quarter, and made up 24% of the total, compared to 22% in the prior
quarter and 17% a year earlier.
Interest income for the third quarter was $10.7 million, down 25% from the
comparable period in 2001. During the quarter, Instinet recorded a net
investment loss of $20.3 million, resulting mainly from a write-down in the
carrying value of some of the company's non-public investments, primarily
Archipelago Holdings LLC.
Expenses
Instinet's total expenses from continuing operations for the third quarter were
$822.7 million. Excluding goodwill impairment and restructuring charges,
expenses were down approximately 5% from the previous quarter and 2%
year-over-year. Further excluding soft dollar expenses and commission recapture
expenses, brokerage, clearing and exchange fees, and broker-dealer rebates
(costs directly related to transactions), expenses were down 16% from the
previous quarter and 24% year-over-year.
The following cost lines decreased from the prior quarter:
o Compensation and benefits expense was $63.8 million, down 10% from the
previous quarter, and 25% from the previous year, reflecting lower staff
levels and lower levels of discretionary incentive compensation.
o Communications and equipment expense was $26.6 million, down 9% from the
previous quarter and 28% from the year-ago quarter, primarily due to
successful efforts to gain network and systems efficiencies.
o Soft dollar and commission recapture expenses were $51.8 million, down 16%
from the previous quarter and essentially in line with the previous year.
An increase in commission recapture only partly offset a decline in
Instinet's soft dollar business, reflecting the decrease in buy-side
trading volumes.
o Depreciation and amortization expenses were $16.7 million, down 7% from
the previous quarter and 21% from the previous year, due to lower levels
of capital spending and the exclusion of goodwill amortization as a result
of recent accounting changes.
o Professional fees fell 23% from the prior quarter, and 37% from the
year-ago quarter, to $5.1 million, reflecting successful efforts to limit
the company's use of external consultants.
o Occupancy costs decreased 10% from the previous quarter, and 15% from the
third quarter of 2001, to $12.2 million as the company continued to
consolidate office facilities.
o Marketing and business development expenses were $2.5 million, down 67%
from the previous quarter, reflecting reduced discretionary spending,
although they were higher than the unusually low $0.8 million recorded in
the year-ago quarter.
o Other costs decreased 41% from the previous quarter, and 31% from the
year-ago quarter, to $9.9 million, due to cost reduction efforts.
The following cost lines showed increases over the prior quarter:
o Brokerage, clearing and exchange fees were $42.1 million, up 25% from the
prior quarter and 26% from the third quarter of 2001, reflecting higher
transaction volumes.
o Broker-dealer rebates increased 53% to $39.0 million from $25.5 million in
the previous quarter, reflecting the impact of the liquidity-based
broker-dealer pricing plan first implemented in March 2002.
Balance Sheet
At September 30, 2002, Instinet had net cash of approximately $821 million and
$953 million of tangible net assets. (After allowing for the $1.00 per share
special distribution made in early October, net cash would be $572 million.) At
September 30, 2002, there were approximately 329.2 million shares of common
stock outstanding.
Business Review
Instinet's average daily share volume in Nasdaq-listed stocks rose 40% in the
third quarter from the previous quarter, while overall market volume in
Nasdaq-listed stocks declined by 6%, leading to an increase in Instinet's share
of Nasdaq volume to 20.5% from 13.8%. Instinet's U.S. broker-dealer customer
group accounted for most of this gain, following business initiatives taken by
the company earlier this year, most notably the introduction of a revised rate
schedule in the first quarter. The new rates resulted in a substantial decrease
in the effective commission rates paid by this group, and an overall decline in
associated revenue, despite increased volumes.
Important operating achievements during the quarter included:
o Instinet Trading PortalSM, the company's new front-end trading
application, was deployed at approximately 300 Instinet client sites by
the end of the third quarter, many with multiple site licenses. Deployment
was ahead of schedule. Portal has achieved significant volume penetration;
on its peak trading day to date - 14.1 million shares on October 1 - the
new application contributed approximately 20% of Instinet's total
institutional order flow. The company is targeting a total of 400 Portal
installations by year-end.
o NewportTM , Instinet's patent-pending global program-trading & execution
management solution, was being used by 22 major clients in the U.S. and
Europe by the end of the quarter, more than twice the number of clients
than in the previous quarter. These were primarily multinational banks and
global index fund managers, with between one and eight users at each
customer site. The company continues to target a total of 40-50
client-site installations by year-end. In addition, Newport is used
actively on Instinet's own program-trading and working-order desks to
receive and trade portfolios and discretionary orders on behalf of
clients.
o Continuing progress was made in the company's efforts to develop its block
trading functionality known as Targeted Orders, which is designed to allow
clients to maximize their order exposure while minimizing information
exposure. Our development team is on schedule to begin beta tests this
month, and to go into full production by the end of the year.
"Instinet's gains in volume and market share are encouraging signs of the
company's success in connecting with its customers and putting a highly
competitive offering into the marketplace," said Jean-Marc Bouhelier, Chief
Operating Officer, Instinet Group Incorporated. "The business environment
remains extremely challenging, but we believe that our core strategy of aligning
with our client groups, delivering innovative new products and reducing our cost
base, will continue to improve our competitive position and the profitability of
our operations."
Regulatory Challenges
Instinet's ECNs face a number of regulatory challenges, such as integration into
the national market system for listed securities, as well as ongoing SEC
initiatives affecting access fees and market data revenue sharing. These
challenges have had, and may continue to have, a negative impact on Instinet's
transaction revenues.
Outlook
"As we look ahead to achieving our company's goals and serving our customers,
two priorities will be paramount," said Ed Nicoll. "First, we are absolutely
committed to achieving cost synergies from the Instinet-Island combination. At
the time of the merger, we identified cost synergies of approximately $25
million per year. We are thoroughly reviewing the company's entire cost
structure, and will have more details soon. At this time, I can say that we
expect to achieve substantially more than $25 million per year. The total cost
synergies should fall in four areas: technology, clearing, facilities, and
compensation."
Nicoll added that in technology, the company was working to rationalize
Instinet's and Island's trading platforms and infrastructure over the long term
and to adopt a technology solution that will be both low-cost and robust and,
for customers, reliable, scalable, and highly efficient. In clearing, the
company intends to move Island's clearing to Instinet Clearing Services. In
facilities, the company intends to rationalize office space and data centers. In
terms of compensation expense, the company is reviewing headcount at all levels
to produce a leaner and more efficient structure.
"Our second priority," noted Nicoll, "is to realize as much benefit as possible
from our two liquidity pools and from complementary customer bases. Instinet has
set the standard for providing its customers with value-added tools to execute
large orders while minimizing market impact. With the benefit of our two
liquidity pools, the Island customer base will have the chance to interact with
this Instinet liquidity. In return, Instinet customers will, of course, have the
opportunity to interact with the extra liquidity from Island. In the first two
weeks after the closing of the merger, the latest period for which we have
disclosed data, Instinet's and Island's two liquidity pools averaged about 34%
OTC market share. This liquidity means that we can offer our customers better
execution opportunities."
Webcast
Instinet will webcast a conference call to discuss its third quarter results at
5:00 p.m. New York time today at http://www.investor.instinet.com. After the
call, a replay will be available at the same address for approximately three
days, followed by a transcript of the call.
About Instinet
Instinet, through affiliates, is the largest global electronic agency securities
broker and has 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, have the opportunity to
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. Unlike most traditional broker-dealers, we act solely as an agent for our
customers and do not trade securities for our own account or maintain
inventories of securities for sale.
1. See table titled "Reconciliation of Pro Forma Results".
# # #
This press release is for information purposes only and is not intended as an
offer or solicitation with respect to the purchase or sale of any security.
(C)2002 Instinet Corporation and its affiliated companies. All rights reserved.
Instinet Clearing Services, Inc. is a wholly owned subsidiary of Instinet
Corporation, both members NASD/SIPC, and subsidiaries of Instinet Group
Incorporated. INSTINET, the INSTINET Mark, the Instinet Trading Portal and
Newport are trade marks and service marks in the United States and in other
countries throughout the world. The Island ECN, Inc., member NASD/CSE/SIPC, is a
subsidiary of Instinet Group Incorporated.
This news release may be deemed to include forward-looking statements relating
to Instinet. Certain important factors that could cause actual results to differ
materially from those disclosed in such forward-looking statements are included
in Instinet's Quarterly Report on Form 10-Q for the period ended June 30, 2002
as Exhibit 99.1, and other documents filed with the SEC and available on the
Company's website. Certain information regarding Nasdaq trading volumes is also
included in Instinet's Annual Report on Form 10-K for the fiscal year ended
December 31, 2001 and on the Company's website at www.instinet.com. These
statements speak only as of the date of this news release, and the Company does
not undertake any obligation to update them.
Instinet Group Incorporated
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(Unaudited)
Three months ended
-------------------------------- Pct Chg
Sep 30, 2002 Sep 30, 2001 inc/(decr)
-------------- --------------
REVENUES
Transaction fees $ 263,917 $ 311,737 (15.3)%
Interest 10,699 14,254 (24.9)
Investments (20,336) (6,330) -
------------ ------------
Total revenues
254,280 319,661 (20.5)
EXPENSES
Compensation and benefits 63,809 84,820 (24.8)
Communications and equipment 26,620 36,939 (27.9)
Soft dollar and commission recapture 51,824 51,595 0.4
Brokerage, clearing and exchange fees 42,079 33,284 26.4
Depreciation and amortization 16,712 21,206 (21.2)
Professional fees 5,110 8,085 (36.8)
Occupancy 12,223 14,424 (15.3)
Marketing and business development 2,451 843 -
Broker-dealer rebates 39,004 - -
Other 9,899 14,312 (30.8)
Restructuring 955 22,821 -
Goodwill impairment 551,991 - -
Loss of fixed assets at World Trade Center 19,528 -
Recovery of fixed asset lost (19,528) -
------------ ------------
Total expenses 822,677 288,329 -
------------ ------------
Income/(loss) from continuing operations before income
taxes and discontinued operations (568,397) 31,332
Income tax provision/(benefit) (39,958) 15,685
------------ ------------
Income/(loss) from continuing operations (528,439) 15,647
Discontinued operations:
Loss from operations of fixed income business - (11,871)
Income tax benefit - 4,434
------------ ------------
Net income/(loss) $ (528,439) $ 8,210
============ ============
Earnings/(loss) per share - basic and diluted:
Income/(loss) from continuing operations $ (2.05) $ 0.06
Discontinued operations:
Loss from operations of fixed income business (0.05)
Income tax benefit - 0.02
------------ ------------
Net income/(loss) $ (2.05) $ 0.03
============ ============
Weighted average shares outstanding - basic 258,206 243,719 5.9
Weighted average shares outstanding - diluted 258,487 243,722 6.1
Note: Results for Island Holding Company, Inc. are
included from 9/23/02.
Instinet Group Incorporated
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(Unaudited)
Nine months ended
--------------------------------- Pct Chg
Sep 30, 2002 Sep 30, 2001 inc/(decr)
--------------- --------------
REVENUES
Transaction fees $ 799,731 $1,105,124 (27.6)%
Interest 31,591 37,734 (16.3)
Investments (39,231) (429) -
------------ ------------
Total revenues 792,091 1,142,429 (30.7)
EXPENSES
Compensation and benefits 221,016 322,352 (31.4)
Communications and equipment 89,116 123,130 (27.6)
Soft dollar and commission recapture 167,153 161,876 3.3
Brokerage, clearing and exchange fees 112,527 105,859 6.3
Depreciation and amortization 53,765 59,485 (9.6)
Professional fees 16,774 32,110 (47.8)
Occupancy 39,370 38,331 2.7
Marketing and business development 13,338 19,404 (31.3)
Broker-dealer rebates 67,798 - -
Other 42,425 40,792 4.0
Restructuring 58,395 22,821 -
Goodwill impairment 551,991 - -
Loss of fixed assets at World Trade Center 19,528 -
Recovery of fixed asset lost (19,528) -
------------ ------------
Total expenses 1,433,668 926,160 54.8
------------ ------------
Income/(loss) from continuing operations before income
taxes and the cumulative effect of changes in
accounting principles (641,577) 216,269
Income tax provision/(benefit) (59,778) 95,548
------------ ------------
Income/(loss) from continuing operations before the
cumulative effect of changes in accounting principles (581,799) 120,721
Discontinued operations:
Loss from operations of fixed income business (33,356) (34,598)
Income tax benefit 10,770 12,925
------------ ------------
Income/(loss) before cumulative effect of change in
accounting principle (604,385) 99,048
Cumulative effect of change in accounting principle,
net of tax (18,642) -
------------ ------------
Net income/(loss) $ (623,027) $ 99,048
============ ============
Earnings/(loss) per share - basic and diluted $ (2.31) $ 0.54
Income/(loss) from continuing operations
Discontinued operations:
Loss from operations of fixed income business (0.13) (0.16)
Income tax benefit 0.04 0.06
------------ ------------
Income/(loss) before cumulative effect of change in
accounting principle (2.40) 0.44
Cumulative effect of change in accounting principle (0.07) -
------------ ------------
Net income/(loss) $ (2.47) $ 0.44
============ ============
Weighted average shares outstanding - basic 251,865 224,566 12.2
Weighted average shares outstanding - diluted 251,965 224,567 12.2
Note: Results for Island Holding Company, Inc. are included from 9/23/02.
Instinet Group Incorporated
RECONCILIATION OF PRO FORMA RESULTS
In evaluating the Company's financial performance, management reviews results
from operations, which excludes non-operating or one-time charges. The following
is a reconciliation of US GAAP results to pro forma operating results for the
three months ended September 30,. 2002.
Total revenues $ 254,280
Less Investments (20,336)
-----------
Pro forma revenues 274,616
-----------
Total expenses 822,677
Less Goodwill impairment 551,991
Less Restructuring 955
-----------
Pro forma expenses 269,731
-----------
Loss before taxes (568,397)
Less net effect of pro forma adjustments 573,282
-----------
Pro forma income before income taxes 4,885
-----------
Benefit from income taxes (39,958)
Tax effect of pro forma adjustments 41,833
-----------
Pro forma provision for income taxes 1,875
-----------
Net loss (528,439)
Net effect of pro forma adjustments 531,449
-----------
Pro forma net income $ 3,010
-----------
Loss per share - diluted (2.05)
Net effect of pro forma adjustments 2.06
-----------
Pro forma earnings per share 0.01
-----------
Instinet Group Incorporated
KEY STATISTICAL INFORMATION
The following table presents key transaction volume information, as well as
certain other operating information.
Pct Chg -- inc/(decr)
---------------------
Three months ended Sep 30 2002 versus:
-----------------------------------
Sep 30 Jun 30 Sep 30 Jun 30 Sep 30
2002 2002 2001 2002 2001
----------------------------------- ---------------------
Net transaction fees from US equities (thousands) (1) $130,121 $140,212 $214,578 (7.2) (39.4)%
Net transaction fees from non-US equities (thousands)(1) $40,495 $39,942 $43,662 1.4 (7.3)
-----------------------------------
Total net equity transaction fees (thousands)(1) $170,616 $180,154 $258,240 (5.3) (33.9)
- ----------------------------------------------------------- -----------------------------------
Total U.S. equity share volume (millions)(2), (3) 239,100 225,455 180,711 6.1 32.3
Instinet's U.S. equity share volume (millions) (2) 26,471 19,221 15,550 37.7 70.2
Instinet's share of total U.S. equity share volume (2), (3) 11.1% 8.6% 8.6%
- ----------------------------------------------------------- -----------------------------------
Total Nasdaq-listed equity share volume (millions) 3 110,195 117,032 96,496 (5.8) 14.2
Instinet's Nasdaq-listed equity share volume (millions) 22,569 16,149 13,048 39.8 73.0
Instinet's share of total Nasdaq-listed equity share
volume (3) 20.5% 13.8% 13.5%
- ----------------------------------------------------------- -----------------------------------
Total U.S. exchange-listed equity share volume (millions) 128,905 108,413 83,933 18.9 53.6
Instinet's U.S. exchange-listed equity share volume
(millions) 3,902 3,072 2,502 27.0 56.0
Instinet's share of total U.S. exchange-listed equity
share volume 3.0% 2.8% 3.0%
- ----------------------------------------------------------- -----------------------------------
Instinet's U.S. equity transaction volume (thousands) 37,789 27,000 19,713 40.0 91.7
Instinet's non-U.S. equity transaction volume (thousands) 2,376 1,955 1,887 21.5 25.9
-----------------------------------
Instinet's total equity transaction volume (thousands) 40,165 28,955 21,600 38.7 85.9
- ----------------------------------------------------------- -----------------------------------
Instinet's average net equity transaction fee revenue
(U.S. cents per share per side) (1) 0.25 0.36 0.69 (30.6) (63.8)
Instinet's average U.S. equity transaction size (shares
per transaction) 700 712 788 (1.6) (11.1)
Instinet's average equity transactions per day (thousands) 628 452 366 38.7 71.4
- ----------------------------------------------------------- -----------------------------------
Full time employees at period end 1,723 1,559 2,044 10.5 (15.7)
- ----------------------------------------------------------- -----------------------------------
1. Net equity transaction fees exclude revenues directly related to "Soft Dollar and Commission
Recapture" and "Broker-dealer Rebates", and thus do not represent U.S. GAAP.
2. U.S. shares consist of shares of exchange-listed and Nasdaq-quoted stocks. For a description
of how we calculate our Nasdaq volumes, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Key Statistical Information -- Nasdaq Volume Calculations"
in our Annual Report on Form 10-K for the fiscal year ended December 31, 2001.
3. Prior amounts may be restated due to updates in
volumes from Nasdaq.
Note: Results for Island Holding Company, Inc. are
included from 9/23/02.