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 March 31, 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 May 10, 2002.
Common Stock, $0.01 par value 248,738,970 shares
INSTINET GROUP INCORPORATED
FORM 10-Q QUARTERLY REPORT
For the Quarter Ended March 31, 2002
Table of Contents Page
Part I. Financial Information
Item 1. Financial Statements
Consolidated Statements of Income for the three months ended
March 31, 2002 and 2001 3
Consolidated Statements of Financial Condition as of March 31, 2002
and December 31, 2001 4
Consolidated Statements of Cash Flows for the three months ended
March 31, 2002 and 2001 5
Notes To Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 15
Item 3. Quantitative and Qualitative Disclosures about Market Risk 27
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 29
Item 2. Changes in Securities and Use of Proceeds 29
Item 3. Defaults Upon Senior Securities 29
Item 4. Submission of Matters to a Vote of Security Holders 29
Item 5. Other Information 29
Item 6. Exhibits and Reports on Form 8-K 29
Signatures
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 "Certain Factors that May Affect Our
Business" in our Annual Report on Form 10-K.
-2-
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
March 31,
2002 2001
--------- ---------
REVENUES
Transaction fees .............................. $ 266,989 $ 415,463
Interest ...................................... 9,104 12,807
Investments ................................... (5,714) 2,405
--------- ---------
Total revenues ...................... 270,379 430,675
EXPENSES
Compensation and benefits ..................... 92,182 133,785
Communications and equipment .................. 35,498 45,391
Soft dollar and commission recapture .......... 53,591 56,053
Brokerage, clearing and exchange fees ......... 37,567 36,734
Depreciation and amortization ................. 20,163 19,502
Professional fees ............................. 5,227 15,684
Occupancy ..................................... 14,153 10,890
Marketing and business development ............ 3,512 10,154
Broker-dealer rebates ......................... 3,291 --
Other ......................................... 15,733 13,003
Restructuring ................................. 15,030 --
--------- ---------
Total expenses ...................... 295,947 341,196
--------- ---------
Income/(loss) before income taxes and
cumulative effect of change in
accounting principle......................... (25,568) 89,479
Provision for /(benefit from) income taxes .... (9,527) 39,371
--------- ---------
Income/(loss) before cumulative
effect of change in accounting
principle........................... (16,041) 50,108
Cumulative effect of change in accounting
principle related to goodwill, net of tax...... (18,642) --
-------- ---------
Net income/(loss) $(34,683) $ 50,108
========= =========
Earnings/(loss) per common share-basic
and diluted:
Income/(loss) before cumulative effect of
change in accounting principle.............. $ (0.06) $ 0.24
Cumulative effect of change in accounting
principle, net of tax....................... (0.08) --
-------- --------
Net earnings/(loss) per share $ (0.14) $ 0.24
========= ========
Weighted average shares
outstanding - basic and diluted .......... 248,730 206,900
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
-3-
INSTINET GROUP INCORPORATED
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In Thousands, Except Per Share Amounts)
(Unaudited)
March 31, December 31,
2002 2001
---- ----
ASSETS
Cash and cash equivalents ..................... $ 522,479 $ 703,678
Securities segregated under federal regulations 315,440 310,692
Securities owned, at market value ............. 357,768 236,007
Securities borrowed ........................... 460,640 455,922
Receivable from broker-dealers ................ 193,658 421,196
Receivable from customers ..................... 86,607 68,280
Commissions and other receivables, net ........ 90,227 116,027
Investments ................................... 90,934 91,899
Fixed assets and leasehold improvements, net .. 195,842 205,136
Deferred tax assets, net ...................... 47,506 52,165
Goodwill, net ................................. 130,626 145,066
Other intangible asset, net ................... 65,705 63,664
Other assets .................................. 105,297 125,109
----------- -----------
Total assets .................................. $ 2,662,729 $ 2,994,841
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Short-term borrowings ......................... $ 64,769 $ 69,299
Securities loaned ............................. 303,225 257,000
Payable to broker-dealers ..................... 110,555 369,817
Payable to customers .......................... 399,453 389,803
Taxes payable ................................. 6,761 30,229
Payable to Parent ............................. 2,564 2,254
Payable to affiliates, net .................... 8,198 12,707
Accrued compensation .......................... 37,126 128,175
Accounts payable, accrued expenses and
other liabilities ........................... 300,380 273,048
----------- -----------
Total liabilities ............................. 1,233,031 1,532,332
----------- -----------
Commitments and contingencies (Note 6)
STOCKHOLDERS' EQUITY
Common stock, $0.01 par value (950,000 shares
authorized, 248,739 issued and outstanding
as of March 31, 2002, 248,351 as of
December 31, 2001) .......................... 2,487 2,483
Additional paid-in capital .................... 1,399,592 1,396,551
Retained earnings ............................. 39,433 74,116
Accumulated other comprehensive loss .......... (3,831) (726)
Unearned compensation ......................... (7,983) (9,915)
----------- -----------
Total stockholders' equity .................... 1,429,698 1,462,509
----------- -----------
Total liabilities and stockholders' equity .... $ 2,662,729 $ 2,994,841
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
-4-
INSTINET GROUP INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
THREE MONTHS ENDED
MARCH 31,
2002 2001
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income/(loss) ...................................... $ (34,683) $ 50,108
Adjustments to reconcile net income/(loss) to cash used
in operating activities:
Depreciation and amortization ........................ 20,163 19,502
Goodwill impairment, pre-tax.......................... 19,046
Deferred tax assets, net ............................. 4,659 (1,674)
Amortization of unearned compensation ................ 1,114 1,509
(Increases)/decreases in operating assets:
Securities segregated under federal regulations ...... (4,748) (16,000)
Securities borrowed .................................. (4,718) (57,409)
Receivable from broker-dealers ....................... 227,538 165,814
Receivable from customers ............................ (18,327) 35,209
Commissions and other receivables, net ............... 25,800 (37,374)
Receivable from affiliates, net ...................... -- 14,267
Other assets ......................................... 19,812 595
Increases/(decreases) in operating liabilities:
Short-term borrowings ................................ (4,530) 67,543
Securities loaned .................................... 46,225 --
Payable to broker-dealers ............................ (259,262) (172,900)
Payable to customers ................................. 9,650 (85,149)
Taxes payable ........................................ (23,468) 16,489
Payable to Parent .................................... 310 (1,022)
Payable to affiliates, net ........................... (4,509) 102
Accrued compensation ................................. (91,049) (68,854)
Accounts payable, accrued expenses and other
liabilities ....................................... 27,332 9,436
--------- ---------
Cash used in operating activities ................. (43,645) (59,808)
CASH FLOWS FROM INVESTING ACTIVITIES:
Securities owned, at market value .................... (121,761) 35,429
Investments .......................................... 965 (1,900)
Purchase of fixed assets and leasehold improvements .. (8,348) (49,473)
Acquisitions of businesses, net of assets acquired
and liabilities assumed ........................... (5,305) --
--------- ---------
Cash used in investing activities ................. (134,449) (15,944)
CASH FLOWS FROM FINANCING ACTIVITIES:
Subordinated debt from affiliate ..................... -- (1,126)
--------- ---------
Cash used in financing activities ................. -- (1,126)
Effect of exchange rate differences .................... (3,105) (1,929)
--------- ---------
Decrease in cash and cash equivalents .................. (181,199) (78,807)
Cash and cash equivalents, beginning of year ........... 703,678 415,199
--------- ---------
Cash and cash equivalents, end of period ............... $ 522,479 $ 336,392
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
-5-
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 a subsidiary 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.
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.
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.
-6-
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.
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.
Pursuant to SFAS 142, the Company changed its accounting policy
related to goodwill effective January 1, 2002. SFAS 142 requires that goodwill
no longer be amortized to earnings, but instead be reviewed at least annually
for impairment. Under SFAS 142, impairment is deemed to exist when the carrying
value of goodwill is greater than its implied fair value. Fair value is
determined 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. This methodology differs from the Company's previous policy, as
permitted under accounting standards existing before SFAS 142, of using
undiscounted cash flows of the businesses acquired over its estimated life.
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 based upon the
undiscounted cash flows of the businesses acquired over its estimated useful
life for the period ended December 31, 2001, after which the Company changed its
accounting policy as described 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.
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 Group, L.P. ("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 $4,878 as of March 31,
2002. Amortization expense for the three months ended March 31, 2002 was $2,521.
Estimated amortization expense for each of the next 5 years is $10,084.
MARKETING AND BUSINESS DEVELOPMENT
Advertising costs are expensed when incurred.
-7-
SOFTWARE COSTS
Costs for internal use software, whether developed or obtained, are
assessed to determine whether they should be capitalized or expensed in
accordance with American Institute of Certified Public Accountants' Statement
("SOP") 98-1 "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use."
INCOME TAXES
The Company files a consolidated income tax return in the U.S. and in
other countries and combined U.S. state and local income tax returns with an
affiliate.
The Company records deferred tax assets and liabilities for the
difference between the tax basis of assets and liabilities and the amounts
recorded for financial reporting purposes, using current tax rates. Deferred tax
expenses and benefits are recognized in the consolidated statements of income
for changes in deferred tax assets and liabilities.
STOCK-BASED COMPENSATION
The Company accounts for its stock-based compensation plans in
accordance with APB Opinion No. 25, Accounting for Stock Issued to Employees
("APB No. 25"), SFAS 123, Accounting for Stock-Based Compensation ("SFAS No.
123"), and related accounting interpretations. The Company has chosen to account
for stock options granted to employees using the intrinsic value method
prescribed in APB No. 25 and accordingly compensation expense is measured as the
excess, if any, of the estimated fair value of the Company at the date of grant
over the option exercise price and is recorded over the vesting period. For
options granted to non-employees, the Company uses the fair value method
prescribed in SFAS No. 123 and accordingly records compensation expense over the
vesting period.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents.
SECURITIES OWNED ($ 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:
March 31, December 31,
2002 2001
-------- --------
U.S. government and federal agency obligations $ 69,967 $ 42,446
Municipal bonds 136,218 73,637
Corporate bonds 94,679 72,408
Foreign sovereign obligations 27,397 18,317
Shares of stock exchanges 29,309 29,199
Other 198 --
-------- --------
Total $357,768 $236,007
======== ========
SECURITIES BORROWED AND LOANED
Securities borrowed and loaned are recorded at the amount of cash
collateral advanced or received. Securities borrowed require the Company to
deposit cash with the lender. For securities loaned, the Company receives
collateral in the form of cash in an amount generally in excess of the market
value of the securities loaned. The Company monitors the market value of the
securities borrowed and loaned on a daily basis, with additional collateral
obtained or refunded, as necessary.
-8-
RECEIVABLE FROM AND PAYABLE TO BROKER-DEALERS
Receivable from broker-dealers are primarily comprised of fails to
deliver. Fails to deliver arise when the Company does not deliver securities on
settlement date. The Company records the selling price as a receivable due from
the purchasing broker-dealer. The receivable is collected upon delivery of the
securities. Payable to broker-dealers are primarily comprised of fails to
receive. Fails to receive arise when the Company does not receive securities on
settlement date. The Company records the amount of the purchase price as a
payable due to the selling broker-dealer. The liability is paid upon receipt of
the securities.
RECEIVABLE FROM AND PAYABLE TO CUSTOMERS
Receivable from customers primarily represent customer debit balances
and payable to customers represent free credit balances in customer accounts.
COMMISSIONS AND OTHER RECEIVABLES, NET ($ IN THOUSANDS)
Commissions and other receivables are reported net of a provision for
doubtful accounts of $7,605 and $7,472 as of March 31, 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 on the consolidated statements of
changes in stockholders' equity.
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.
-9-
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 results 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 March 31, 2002 and December 31, 2001, the Company
carried its investment at estimated fair value of $16,450.
- - 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 March 31, 2002 and December 31, 2001, the Company carried its investment
at estimated fair value of $8,279 and $8,816, respectively.
- - Archipelago Holdings LLC ("Archipelago") -- In 1999, the Company made an
investment of 15,528 GBP, now representing a 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, LLC merged with REDIBook ECN LLC, another
ECN. As of March 31, 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 March 31,
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 March 31, 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 March 31,
2002 and December 31, 2001, the Company carried its investment at $4,127 and
$4,492, respectively, as determined under the equity method.
- - 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. As of March 31, 2002 and December 31, 2001, the Company carried its
investment at estimated fair value of $250.
- - JapanCross Securities Co. Ltd. ("JapanCross") -- In 2001, and in January and
March of 2002, the Company made a series of investments totaling $5,646, now
representing a 50% interest in JapanCross, a joint venture which was established
to provide a crossing service for Japanese equity securities. As of March 31,
2002 and December 31, 2001, the Company carried its investment at $ 4,092 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 $2,373, as determined under the equity method. In March 2002,
Vencast ceased operations and the Company completely wrote off its investment.
-10-
4. COLLATERAL ARRANGEMENTS ($ IN THOUSANDS)
As of March 31, 2002 and December 31, 2001, the fair value of
collateral held by the Company that can be sold or repledged totaled $663,866
and $607,069, respectively. Such collateral is generally obtained under resale
and securities borrowing agreements. Of this collateral, approximately $641,113
and $548,487 has been sold or repledged generally to cover short sales or effect
deliveries of securities as of March 31, 2002 and December 31, 2001,
respectively. In addition, securities in customer accounts with a fair value of
approximately $30,911 and $76,462 could be sold or repledged by the Company as
of March 31, 2002 and December 31, 2001, respectively.
5. NET CAPITAL REQUIREMENTS ($ 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 March 31, 2002
and December 31, 2001, Instinet Clearing Services Inc., which is the
counterparty to each of our customer transactions, had net capital of $260,774
and $259,990, which was $256,076 and $256,443 in excess of its required net
capital of $4,698 and $3,547, respectively. Certain other U.S. broker-dealer
subsidiaries of the Company are also subject to capital adequacy requirements
and were in compliance with their respective requirements.
The Company's international broker-dealer subsidiaries are subject to
capital adequacy requirements promulgated by authorities of the countries in
which they operate. As of March 31, 2002 and December 31, 2001, these
subsidiaries had met their local capital adequacy requirements.
6. COMMITMENTS AND CONTINGENCIES ($ 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
MARCH 31,
-----------------------
2002 2001
----------- -----------
Total revenues:
U.S $ 204,894 $ 340,246
Non-U.S 65,485 90,429
----------- -----------
Total $ 270,379 $ 430,675
=========== ===========
-11-
Income/(loss) before income taxes:
U.S. $ (45,544) $ 78,104
Non-U.S. 930 11,375
----------- -----------
Total $ (44,614) $ 89,479
=========== ===========
March 31, December 31,
2002 2001
----------- ------------
Identifiable assets:
U.S. $ 2,306,738 $ 2,102,145
Non-U.S. 355,991 892,696
----------- -----------
Total $ 2,662,729 $ 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
March 31,
-----------------------
2002 2001
-------- --------
Net income / (loss) $(34,683) $ 50,108
Changes in other comprehensive income/(loss):
Foreign currency translation adjustment (3,105) 100
-------- --------
Total comprehensive income / (loss), net of tax (37,788) $ 50,208
======== ========
9. EARNINGS PER SHARE ($ AND SHARES IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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
20,598 shares of common stock at a weighted average exercise price of $16.06 per
share were outstanding as of March 31, 2002. The exercise price for all the
options outstanding exceeded the average market price of the Company's common
stock for the three months ended March 31, 2002. Accordingly, the diluted EPS
computation does not include the antidilutive effect of these options. Options
expire on dates ranging from August 2006 to November 2008.
The number of common shares outstanding, both basic and diluted, for
the three months ended March 31, 2001 reflects the number of shares that would
have been held by Renters after giving effect to the return of capital payment
of $150,000 to Renters and conversion of the Company from a limited liability
company to a corporation, which is pushed back for EPS calculation purposes.
Earnings per share under the basic and diluted computations are as
follows:
Three Months Ended
March 31,
----------------------
2002 2001
--------- ---------
Income / (loss) before cumulative effect of change in
accounting principle $ (16,041) $ 50,108
Cumulative effect of change in accounting principle
related to goodwill, net of tax (18,642) --
--------- ---------
Net income / (loss) $(34,683) $ 50,108
========= =========
Weighted average number of common shares
outstanding -- basic 248,730 206,900
Common stock equivalent shares related to stock
incentive plans -- --
--------- --------
Weighted average number of common shares
outstanding -- diluted 248,730 206,900
========= =========
Earnings / (loss) per common share-basic and diluted:
Income / (loss) before cumulative effect of change
in accounting principle $ (0.06) $ 0.24
Cumulative effect of change in accounting principle,
net of tax $ (0.08) $ --
--------- ----------
Net earnings / (loss) per share $ (0.14) $ 0.24
========= ==========
-12-
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 4,606
Goodwill impairment, pre-tax (19,046)
---------
Balance as of March 31, 2002 $ 130,626
=========
The Company completed its acquisition of ProTrader on January 3, 2002,
thereby increasing its goodwill.
During the first quarter of 2002, 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 level of goodwill
impairment pre-tax 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, was impaired.
Therefore, the Company recorded an impairment loss pre-tax of $3,296, the
remaining carrying value of its goodwill.
For comparative purposes, the following table reflects the Company's
results as of March 31, 2001, adjusted as though it had adopted SFAS 142 on
January 1, 2001 and not amortized goodwill:
Net income, as reported $ 50,108
Goodwill amortization 2,011
Tax effect (356)
--------
Net income, as adjusted $ 51,763
========
Basic and diluted earnings per share, as reported $ 0.24
Basic and diluted earnings per share, as adjusted $ 0.25
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 three months ended March 31, 2001. All
of 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
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.
-13-
- - 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.
As of March 31, 2002, the Company carried a liability of $5,197
associated with this restructuring on its consolidated statements of financial
condition, which consisted of the following:
Balance Balance
Dec. 31, Mar. 31, Due by Due by
2001 Payments 2002 12/31/02 12/31/03
--------- -------- -------- -------- ---------
Workforce reduction Office $ 5,694 $(1,252) $ 4,442 $ 2,999 $ 1,443
closures/consolidation 1,085 (330) 755 498 257
-------- -------- -------- -------- ---------
Total $ 6,779 $(1,582) $ 5,197 $ 3,497 $ 1,700
======== ======== ======== ======== =========
In March, 2002, the Company announced that it would reduce its
annualized operating costs by approximately $120,000 in order to offset the
impact of reduced revenues due to its price reductions to U.S. broker-dealer
customers, and as a result, incur a restructuring charge of approximately
$55,000 in the first half of 2002. This restructuring includes reducing staff
levels and related occupancy costs, improving system and network efficiencies,
and restructuring non-core businesses. During the three months ended March 31,
2002, the Company incurred a pre-tax restructuring charge of $15,030, which
included:
- - Workforce reduction -- the Company reduced its employee headcount levels by
167 to 1,937 as of March 31, 2002. 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 $9,230 related to its
workforce reduction.
- - Office closures/consolidation -- the Company closed the Houston, Los Angeles
and San Jose trading offices of its ProTrader subsidiary and consolidated its
European trading and clearing operations, closed its office in Germany and
significantly reduced the size of its offices in Switzerland, U.K. and France.
The Company recorded a pre-tax charge of $5,800 related to its office closures.
As of March 31, 2002, the Company carried a liability of $10,427
associated with this restructuring on its consolidated statements of financial
condition, which consisted of the following:
Balance
Original Mar. 31, Due by Due by
Accrual Payments 2002 12/31/02 12/31/03
------- -------- --------- -------- --------
Workforce reduction Office $ 9,230 $(3,731) $ 5,499 $ 5,499 --
closures/consolidation 5,800 (872) 4,928 4,115 $ 813
------- ------- --------- -------- ------
Total $15,030 $(4,603) $ 10,427 $ 9,614 $ 813
======= ======= ========= ======== ======
12. CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE ($ IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
Pursuant to SFAS 142, the Company changed its accounting policy
related to goodwill effective January 1, 2002. SFAS 142 requires that goodwill
no longer be amortized to earnings, but instead be reviewed for impairment at
least annually. Under SFAS 142, impairment is deemed to exist when the carrying
value of goodwill is greater than its implied fair value. This methodology
differs from the Company's previous policy, as permitted under accounting
standards existing before SFAS 142, of using undiscounted cash flows of the
businesses acquired over its estimated life. As a result of this change, the
Company recorded a goodwill impairment, net of taxes, of $18,642 or $0.08 a
share, for the three months ended March 31, 2002 as a change in accounting
principle.
13. SUBSEQUENT EVENT
On May 3, 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 of the closure, the Company expects to incur a
charge of approximately $15-$20 million as part of its previously announced cost
reduction initiatives in the second quarter of 2002.
-14-
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.
As a result of decimalization, reduced investment banking activities
and the impact of Nasdaq's SuperSoes system, in the second half of 2001 and the
first quarter of 2002 we have experienced a decrease in the volumes we receive
from our broker-dealer customers, which as a result, contributed to a decrease
in our Nasdaq market share. This, in combination with a decrease in our average
pricing and decline in overall trading volumes, contributed to a decline in our
transaction fee revenues from $415.5 million for the three months ended March
31, 2001 to $267.0 million for the comparable period in 2002. Our lower
transaction fee revenues, a net loss from our investments, primarily as a result
of a writedown in certain of our investments, impairment of goodwill, and the
restructuring charge related to our cost reduction initiatives contributed to
our net loss of $34.7 million for the three months ended March 31, 2002,
compared to net income of $50.1 million for the comparable period in 2001.
The three months ended March 31, 2001 represented a record quarter for
us, both in terms of revenue and profitability, as well as market share and
trading volumes.
Total U.S. market share volume in the three months ended March 31, 2002
declined to 212.3 billion shares from 222.4 billion in the three months ended
March 31, 2001. Total Nasdaq share volumes were 109.4 billion shares in the
three months ended March 31, 2002, down from 132.7 billion shares in the three
months ended March 31, 2001. U.S. exchange-listed share volumes were 102.9
billion shares in the three months ended March 31, 2002, up from 89.7 billion
shares in the three months ended March 31, 2001. Our percentage of market share
decreased to 7.1% of total U.S. market share volume and 11.0% of Nasdaq share
volume, and remained steady at 3.0% of U.S. exchange-listed share volume, in the
three months ended March 31, 2002.
In order to address the decline in our Nasdaq share volume, in
September 2001, we reduced our pricing, implementing a new pricing schedule for
our U.S. broker-dealer customers and adjusted certain pre-set volume levels at
which we offer those customers lower per share transaction fees. 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 Nasdaq liquidity pool. As a
result of these various pricing changes, we expect transaction fee revenue we
receive from this customer group to decline significantly, even if their volumes
increase.
Given the impact of price reductions on revenue from our U.S.
broker-dealer customers, we have taken further action to reduce costs. We intend
to reduce our annualized operating costs by approximately $120 million through a
number of measures including reducing staff levels and related occupancy costs,
improving system and network efficiencies, and restructuring non-core
businesses. During the first quarter 2002, we incurred a pre-tax restructuring
charge of $15 million in connection with the cost reduction program. We reduced
our employee headcount levels by 167 to 1,937 as of March 31, 2002. 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
-15-
offices. We recorded a pre-tax charge of approximately $9.2 million related to
our workforce reduction. In addition, we closed the Houston, Los Angeles and San
Jose trading offices of our ProTrader subsidiary and consolidated our European
trading and clearing operations, closed our office in Germany and significantly
reduced the size of our offices in Switzerland, U.K. and France. We recorded a
pre-tax charge of approximately $5.8 million related to our office closures and
consolidations. We expect to incur an additional pre-tax charge of approximately
$40 million during the second quarter. We expect to achieve these reductions
without diminishing our ability to provide high quality service to our
customers, without diminishing our capacity to design, develop and deploy
innovative new technology, and without diminishing our control environment. We
continue to evaluate further cost initiatives, which might result in further
charges.
Our annualized fixed cost run-rate in the first quarter of 2002 of
approximately $746 million was 25% below its level in the first quarter of 2001
of approximately $994 million. The 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).
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
has been unable to reach a critical mass. Our fixed income business had 107
employees as of March 31, 2002. As a result of the closure, we expect to incur a
charge of approximately $15-$20 million, and realize net annual cost savings of
approximately $37 million. These cost savings are included in our $120 million
cost reduction target. We incurred costs of $11.1 million related to the
development of our fixed income securities platform for the three months ended
March 31, 2002, compared to $13.6 million for the comparable period of 2001. We
incurred costs of $4.7 million for the three months ended March 31, 2001 related
to closing our retail brokerage initiative, comprised primarily of a $4.0
million restructuring charge.
During the first quarter of 2002, we continued to develop our
technology, pricing and service options. In March, we introduced a new service
initiative for U.S. broker-dealer customers that includes faster response times,
enhanced functionality, reduced fees for taking liquidity and offered rebates
for providing liquidity. These actions were designed to stimulate growth in our
Nasdaq liquidity pool.
We continued to improve our core trading functionality to enhance our
customers' ability to execute large share blocks cost efficiently. We also made
considerable progress in deploying our new Direct-FIX technology, an upgrade
that offers flexible order management, fast response times and access to
external global liquidity pools to our customers. Currently, more than 40 of our
customers are using the Direct-FIX technology, and we are targeting to
transition an additional 90 customers by the end of the second quarter of 2002.
Instinet Trading Portal, the new trading application primarily for our
active asset managers and hedge funds, completed its first major round of beta
testing during the first quarter of 2002 and is expected to move to production
rollout in the second quarter of 2002. The application's Internet-based
deployment strategy is designed to substantially reduce communication and field
service costs associated
-16-
with our traditional customer display screens. Twenty customers were using
Portal by the end of the first quarter 2002 and we expect to have 50 installed
clients by mid-year 2002.
Newport(TM), 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 four beta
clients in the United States and Europe by the end of the first quarter of 2002.
Newport(TM) is expected to go into full production deployment in the second half
of 2002.
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 decreases 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.
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.
-17-
KEY STATISTICAL INFORMATION
The following table presents key transaction volume information, as well as
certain other operating information.
THREE MONTHS ENDED
March 31,
-----------------------
2002 2001
-------- --------
Total U.S. market share volume (millions)(1) 212,299 222,389
Our total U.S. market share volume (millions)(1) 15,160 22,742
Our percentage of total U.S. market share volume(1) 7.1% 10.2%
-------- --------
Nasdaq share volume (millions)(2) 109,429 132,707
Our Nasdaq share volume (millions)(2) 12,043 20,053
Our percentage of Nasdaq share volume(2) 11.0% 15.1%
-------- --------
U.S. exchange-listed share volume (millions) 102,870 89,682
Our U.S. exchange-listed share volume (millions) 3,117 2,689
Our percentage of U.S. exchange-listed share volume 3.0% 3.0%
-------- --------
Our U.S. equity transaction volume (thousands) 18,953 27,488
Our international equity transaction volume (thousands) 1,957 1,702
-------- --------
Our total equity transaction volume (thousands) 20,910 29,190
-------- --------
Our average U.S. equity transaction size (shares per
transaction) 800 827
Our average equity transactions per day (thousands) 349 471
-------- --------
Our net transaction fees from U.S. equities
(thousands)(3) $166,773 $295,629
Our net transaction fees from non-U.S. equities
(thousands)(3) $ 39,217 $ 59,777
-------- --------
Our total net equity transaction fees
(thousands)(3) $205,990 $355,406
(1) U.S. shares consist of shares of U.S exchange-listed and Nasdaq-quoted
stocks.
(2) 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.
(3) Our net equity transaction fee revenues are calculated by subtracting the
soft dollar and commission recapture expenses for equity transactions from
the related transaction fees, as well as broker-dealer rebates. The
required accounting for our soft dollar and commission recapture businesses
is to add the related dollar-for-dollar expenses to those equity
transaction fee revenues.
-18-
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
March 31,
---------
REVENUES:
Transaction fees 98.7% 96.5%
Interest 3.4 3.0
Investments (2.1) 0.5
------- -------
Total revenues 100.0 100.0
EXPENSES:(1)
Compensation and benefits 34.1 31.1
Communications and equipment 13.1 10.5
Soft dollar and commission recapture 19.8 13.0
Brokerage, clearing and exchange fees 13.9 8.5
Depreciation and amortization 7.5 4.5
Professional fees 1.9 3.7
Occupancy 5.2 2.5
Marketing and business development 1.3 2.4
Broker-dealer rebates 1.2 --
Other 5.8 3.0
Restructuring costs 5.6 --
------- -------
Total expenses 109.5 79.2
Income/(loss) before income taxes
and cumulative effect of change
in accounting principle (9.5) 20.8
Provision for income taxes (3.5) 9.2
------- -------
Income/(loss) before
cumulative effect of change
in accounting principle
(5.9%) 11.6%
Cumulative effect of change in
accounting principle related
to goodwill, net of tax (6.9) --
------- -------
Net income/(loss) (12.8) 11.6
======= =======
- ---------------
(1) The expenses in various categories in this table include costs incurred by
us in developing our fixed income securities business. See "-- Overview."
-19-
THREE MONTHS ENDED MARCH 31, 2002 VERSUS THREE MONTHS ENDED MARCH 31, 2001
Overview
Net income decreased from $50.1 million for the three months ended
March 31, 2001 to a net loss of $34.7 million for the comparable period in 2002.
Our revenues decreased 37.2% from $430.7 million for the three months ended
March 31, 2001 to $270.4 million for the comparable period in 2002 primarily as
a result of decreased trading volumes from our broker-dealer customers and lower
average pricing. The three months ended March 31, 2001 represented a record
quarter for us, both in terms of revenue and profitability, as well as market
share and trading volumes.
Expenses decreased 13.3% from $341.2 million for the three months ended
March 31, 2001 to $295.9 million for the comparable period in 2002. Our expenses
for the first three months of 2002 included a restructuring charge of $15.0
million related to our cost reduction initiatives. Excluding this charge, our
expenses decreased 17.7% from $341.2 million for the three months ended March
31, 2001 to $280.9 million for the comparable period in 2002.
There was an overall decrease in our business development costs in
connection with our efforts to expand and diversify our activities. Our expenses
related to the development of our fixed income securities platform, which we
launched in March 2000, decreased from $13.6 million for the three months ended
March 31, 2001 to $11.1 million for the comparable period in 2002. We incurred
expenses of $4.7 million in the three months ended March 31, 2001 related to our
retail brokerage initiative, which we shut down in December 2000.
Revenues
Transaction fee revenue decreased 35.7% from $415.5 million for the
three months ended March 31, 2001 to $267.0 million for the comparable period in
2002. This decrease was primarily due to a decrease in our average pricing as a
result of our pricing changes, our lower trading volumes in Nasdaq quoted
stocks, particularly from broker-dealers, and a decline in overall trading
volumes.
Our trading volumes in Nasdaq-quoted stocks decreased 39.9% and our
trading volumes in U.S. exchange-listed stocks increased 15.9% for the three
months ended March 31, 2002, compared to the comparable period in 2001. Our
share of volume in Nasdaq-quoted stocks decreased from 15.1% for the three
months ended March 31, 2001 to 11.0% for the comparable period in 2002, and our
share of volume in U.S. exchange-listed stocks remained steady at 3.0% for the
three months ended March 31, 2002 and 2001. Our average number of transactions
in Nasdaq-quoted and U.S. exchange-listed stocks per day decreased 26.0% from
470,806 for the three months ended March 31, 2001 to 348,500 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, decreased 4.4% from $56.1
million for the three months ended March 31, 2001 to $53.6 million for the
comparable period in 2002, primarily due to decreased volumes. Partly offsetting
this decrease was an increase in our commission recapture revenues from our
Lynch Jones & Ryan subsidiary. Transaction fee revenue excluding revenues
directly related to soft dollar and commission recapture and broker-dealer
rebates, declined 41.5% from $359.4 million for the three months ended March 31,
2001 to $210.1 million for the comparable period in 2002.
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 43.6% from $295.6 million for the three
months ended March 31, 2001 to $166.8 million for the comparable period in 2002
due to the combination of a 15% decrease in our average pricing, a contraction
in our Nasdaq market share and a 15% 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, declined 34.4% from $59.8 million for the three months ended March
31, 2001 to $39.2 million for the comparable period in 2002. This amount
represented 16.8% of our total net equity transaction fee revenue for the three
months ended March 31, 2001, and 19.0% for the comparable period in 2001. This
increase is primarily due
-20-
to a greater decrease in our U.S. net equity transaction fees as a result of our
price changes, our lower Nasdaq market share and lower overall trading volumes,
versus our non-U.S. net equity transaction fees.
Interest revenue decreased 28.9% from $12.8 million for the three
months ended March 31, 2001 to $9.1 million for the comparable period in 2002.
This decrease was primarily due to a decrease in interest rates which effects
the revenue generated by our stock borrowing activities related to our clearing
services.
Investment income decreased from a gain of $2.4 million for the three
months ended March 31, 2001 to a loss of $5.7 million for the comparable period
in 2002. This decrease was primarily due to a net writedown in our investments
of $4.8 million, in particular Vencast, Inc., which ceased operations in March
2002, as well as a decrease in the carrying value of our investment in
JapanCross. In addition , we recognized a net unrealized loss of $0.9 million on
our securities owned.
Expenses
Compensation and benefits expense decreased 31.1% from $133.8 million
for the three months ended March 31, 2001 to $92.2 million for the comparable
period in 2001. This decrease was primarily due to a decrease in our worldwide
headcount, particularly in our U.S. offices, as part of our cost reduction
initiatives, as well as a decline in incentive compensation due to our lower
revenues. Our headcount decreased from 2,267 employees as of March 31, 2001 to
1,937 employees as of March 31, 2002.
Communications and equipment expense decreased 21.8% from $45.4 million
for the three months ended March 31, 2001 to $35.5 million for the comparable
period in 2002. This decrease was due in large part to lower costs related to
our core communications, which decreased 40.3% from $27.5 million for the three
months ended March 31, 2001 to $16.4 million for the comparable period in 2002,
reflecting the benefit of improved network and systems efficiencies. Our
exchange data access charges also decreased 39.1% from $5.7 million for the
three months ended March 31, 2001 to $3.4 million, primarily due to the sale of
our Research and Analytics product to Reuters in September 2001, as well as an
increase in recovery of charges from our clients. Our equipment and software
costs for upgrading our existing systems and other enhancements increased 23.4%
from $8.8 million for the three months ended March 31, 2001 to $10.9 million for
the comparable period in 2002. Our office communication costs increased 39.3%
from $3.4 million for the three months ended March 31, 2001 to $4.8 million for
the comparable period in 2002 primarily due to the move to our new corporate
headquarters in May 2001.
Soft dollar and commission recapture expense decreased 4.4% from $56.1
million for the three months ended March 31, 2001 to $53.6 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
decrease was primarily due to decreased transaction volumes. Offsetting this
decrease was an increase in our commission recapture expenses from our Lynch
Jones & Ryan subsidiary.
Brokerage, clearing and exchange fees increased 2.3% from $36.7 million
for the three months ended March 31, 2001 to $37.6 million for the comparable
period in 2002. This increase primarily resulted from our new order routing
technology, which allows us to route trades to other ECNs, who in turn, charge
us fees. Partly offsetting this increase was a decrease in our clearing fees due
to lower overall transaction volumes.
Depreciation and amortization expense increased 3.4% from $19.5 million
for the three months ended March 31, 2001 to $20.2 million for the comparable
period in 2002. This increase was primarily due to an increase in our
amortization of leasehold improvements in connection with our move to our new
corporate headquarters in New York. In addition, as part of our adoption of SFAS
142 on January 1, 2002, we ceased amortizing goodwill. Offsetting this decrease
in goodwill amortization was amortization related to our intangible asset, which
we acquired in connection with our acquisition of ProTrader in October 2001.
Professional fees decreased 66.7% from $15.7 million for the three
months ended March 31, 2001 to $5.2 million for the comparable period in 2002.
This
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decrease was primarily due to reduced use of technical and management
consultants, as well as reduced legal expenses. These fees were higher in the
three months ended March 31, 2001 as we were preparing for our initial public
offering.
Occupancy expense increased 30.0% from $10.9 million for the three
months ended March 31, 2001 to $14.2 million for the comparable period in 2002.
This increase was primarily due to higher lease payments and related expenses
from our move to new corporate headquarters in New York.
Marketing and business development decreased 65.4% from $10.2 million
for the three months ended March 31, 2001 to $3.5 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.
Broker-dealer rebates were $3.3 million for the three months ended
March 31, 2002. As noted above, as part of our pricing incentives for
broker-dealers, we now offer commission rebates for broker-dealers who provide
liquidity and charge additional commissions for broker-dealers who take
liquidity, which is recorded as transaction fee revenue. The additional
commissions we receive from liquidity takers more than offset the amount of
broker-dealer rebates paid to liquidity providers.
Other expenses increased 21.0% from $13.0 million for the three months
ended March 31, 2001 to $15.7 million for the comparable period in 2002. This
increase was primarily due to a write off of a loan to Vencast, interest costs
related to our securities lending activities, and payments to Reuters in
connection with the sale of our R&A product in order to allow customers to
receive this service and support from Reuters instead of us. Partly offsetting
these increases, was a decrease in our travel costs as part of our cost
reduction initiatives.
Provision for Income Taxes
Our tax provision decreased from a charge of $39.3 million for the
three months ended March 31, 2001 to a benefit of $9.5 million for the
comparable period in 2002 as a result of our decreased income before income
taxes. Our effective income tax rate decreased from 44.0% for the three months
ended March 31, 2001 to 37.3% for the comparable period in 2002. This decrease
resulted from the write down in goodwill and losses in lower-tax jurisdictions,
primarily from our non-U.S. operations.
Cumulative Effect of Change in Accounting Principle.
Cumulative effect of change in accounting principle related to
goodwill, net of tax, was $18.6 million for the three months ended March 31,
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.
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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. See "-- Our Reorganization." For a discussion
of our dividend policy following the offering, see "Market for the Company's
Common Equity and Related Stockholders' Equity." We currently anticipate that
the 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. 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 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 63.2% and 65.8% of our assets as of March 31, 2002 and
December 31, 2001, respectively. Cash and cash equivalents decreased to $522.5
million as of March 31, 2002 from $703.7 million as of December 31, 2001
primarily due to decreases in our receivable from and payable to broker-dealers
and increases in our securities owned.
The decrease in our receivable from broker-dealers and cash and cash
equivalents contributed to the decrease in our total assets. Offsetting these
factors were the increase in our securities owned. Changes in our total assets
and liabilities, in particular, receivable from broker-dealers and customers,
securities borrowed, commissions receivable and payable to broker-dealers and
customers, generally lead to large fluctuations in our cash flows from operating
activities from period to period and within periods.
Capital expenditures for the three months ended March 31, 2002 and the
year ended December 31, 2001 related to the purchase of data processing and
communications equipment, leasehold improvements and purchases of furniture for
our additional office facilities to support our growth. 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. Our aggregate minimum lease
commitments are $22.7 million in 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 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.
As of March 31, 2002, we had access to $211.0 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 March 31, 2002, there
were no borrowings outstanding under these credit lines. We currently pay no
annual fees to maintain these facilities. In addition, as of March 31, 2002, we
had access to $711.4 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 March 31, 2002, there was $64.8 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
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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 March 31, 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 $260.8 million,
which was $256.1 million in excess of its required net capital of $4.7 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 March 31, 2002, the segregated funds amounted to
$315.4 million.
In addition, so 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 and 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.
-24-
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.
-25-
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 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 these 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.
Pursuant to SFAS 142, we have changed our accounting policy related to
goodwill effective January 1, 2002. SFAS 142 requires that goodwill no longer be
amortized to earnings, but instead be reviewed for impairment at least annually.
Under SFAS 142, impairment is deemed to exist when the carrying value of
goodwill is greater then 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 have changed the presentation of our consolidated statements
of income on this Form 10-Q from our preliminary consolidated statements of
income which appeared with our earnings release for the first quarter ended
March 31, 2002 to reflect this as a change in accounting policy.
-26-
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 and does not contain any securities with maturities greater
than three years. The aggregate fair market value of this portfolio was
$357.8 million and $206.8 million as of March 31, 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 March 31, 2002 and December 31, 2001, the fair value of the
portfolio would have declined by $2.7 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 $522.5 million and $703.7 million as of March 31,
2002 and December 31, 2001, respectively. We also had short-term borrowings of
$64.8 million and $69.3 million as of March 31, 2002 and December 31, 2001,
respectively, on which we are generally charged rates that approximate the U.S.
Federal Funds rate or the local equivalent 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 of 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
-27-
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):
March 31, December 31,
Currency 2002 2001
- ---------------- --------- ---------
Euro $ 30.5 $ 20.9
British pound 12.3 12.1
Japanese yen 7.3 7.6
Canadian dollar 5.3 5.7
Hong Kong dollar 1.3 1.2
--------- ---------
Total $ 56.7 $ 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 March 31, 2002 and December 31, 2001,
respectively.
A portion of our revenues and expenses are denominated in non-U.S.
dollar currencies. Approximately 24.2% of our revenues and 20.5% of our expenses
as of March 31, 2002, and 24.3% of our revenues and 22.0% 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
revenue 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 $60 thousand and $4.3 million as of March 31,
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 $2.9
million and $5.6 million as of March 31, 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.
-28-
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
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 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.
On October 1, 2001, we acquired ProTrader pursuant to an Interest
Purchase Agreement dated as of July 23, 2001, as amended as of October 1, 2001
(the "Purchase Agreement"), between us and David G. Jamail, David R. Burch,
Overunder, LLC, John A. McEntire IV, John Bunda, Laura Horne, Currin Van Eman
and Shayne Young (together, the "ProTrader Sellers"). Pursuant to the Purchase
Agreement, we paid the ProTrader Sellers a purchase price of $100 million in
cash and an aggregate of 5,017,058 shares of our common stock, valued at $50
million. We sold 4,629,427 shares to the ProTrader Sellers on October 1, 2001,
and the remaining 387,631 shares to one of the ProTrader Sellers on January 3,
2002 in a private placement pursuant to Regulation D of the Securities Act.
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
On April 9, 2002, Douglas Atkin resigned as President and Chief
Executive Officer of Instinet, a position he had held since 1998. Mr. Atkin
resigned as a director of Instinet on that date as well. Also on April 9, 2002,
Kenneth Marshall retired as Executive Vice President and Chief Operating Officer
of Instinet, but continues to serve as Special Consultant to the board until the
end of 2002. The board has appointed Mark Nienstedt to serve as Acting President
and Chief Executive Officer, and he will also continue to serve as Chief
Financial Officer. The board has also appointed Jean-Marc Bouhelier to serve as
Chief Operating Officer.
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
- --------- ------------------------------------------------------------
10.1 Settlement, Release, Covenant Not To Sue, Waiver and
Non-Disclosure Agreement between Instinet Group Incorporated and
Douglas M. Atkin, dated April 30, 2002.
10.2 Settlement, Release, Covenant Not To Sue, Waiver and
Non-Disclosure Agreement between Instinet Group Incorporated and
Kenneth K. Marshall, dated May 3, 2002.
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10.3 Consulting Agreement between Instinet Group Incorporated and Kenneth K.
Marshall, dated May 3, 2002.
(b) The following reports on Form 8-K were filed for the last quarter
covered by this report, and subsequently through May 10, 2002:
Filing Date of Report Item Number Financial Statements Required to be Filed
- --------------------- ------------------ -----------------------------------------
February 13, 2002 Items 5 & 7 No
March 22, 2002 Items 5 & 7 No
April 10, 2002 Items 5 & 7 No
April 21, 2002 Items 5 & 7 No
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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: May 15, 2002
INSTINET GROUP INCORPORATED
By:
-------------------------------------
Name: Mark Nienstedt
Title: Acting President and Chief Executive Officer,
Chief Financial Officer and Director
(Duly Authorized Officer and Principal Financial Officer)
By:
---------------------------
Name: Michael J. Clancy
Title: Senior Vice President and Chief Accounting Officer
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EXHIBIT INDEX
Exhibit
Number Description
- --------- ------------------------------------------------------------
10.1 Settlement, Release, Covenant Not To Sue, Waiver and
Non-Disclosure Agreement between Instinet Group Incorporated and
Douglas M. Atkin, dated April 30, 2002.
10.2 Settlement, Release, Covenant Not To Sue, Waiver and
Non-Disclosure Agreement between Instinet Group Incorporated and
Kenneth K. Marshall, dated May 3, 2002.
10.3 Consulting Agreement between Instinet Group Incorporated and
Kenneth K. Marshall, dated May 3, 2002.
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