Exhibit 99.1
INVESTOR RELATIONS: MEDIA RELATIONS:
John Pitt Alicia Curran
Instinet Group Incorporated Instinet Group Incorporated
212 310 7481 212 310 7462
john.pitt@instinet.com alicia.curran@instinet.com
INSTINET ANNOUNCES FIRST QUARTER RESULTS
NEW YORK, April 22, 2003 - Instinet Group Incorporated (Nasdaq: INET) today
announced a net loss of $34 million or $0.10 per share, compared to a net loss
of $35 million, or $0.14 per share, for the first quarter of 2002.(1) The pro
forma operating loss was $6 million, or $0.02 per share, for the first quarter
of 2003. The pro forma operating loss excludes investment gains and losses, the
effect of charges related to our recently announced cost reductions, insurance
recovery for assets lost at the World Trade Center in 2001, and the related tax
effect of these items.(2)
Ed Nicoll, Chief Executive Officer of Instinet, commented: "Under tough
first-quarter business conditions both in the U.S. and elsewhere, Instinet made
significant progress with our comprehensive plan to reduce costs and deliver
technologically advanced products and services in the most efficient manner
possible. Over the coming months, we will also seize the opportunity to provide
our customers enhanced automated services for the trading of U.S. listed
securities, which will allow our fully electronic, unconflicted marketplace to
compete more aggressively against the manual, floor-based markets."
BUSINESS HIGHLIGHTS
- - Our clients traded 31.5 billion U.S. equity shares through Instinet in the
first quarter of 2003, up from 15.2 billion shares executed in the first
quarter of 2002, and down 14% from 36.8 billion shares executed in the
fourth quarter of 2002. The decline versus the fourth quarter of 2002 was
due to lower overall average daily market volumes and three fewer trading
days in 1Q03. The Island ECN accounted for 12.4 billion shares of this
volume in the first quarter of 2003.
- - U.S. equity shares executed through Instinet during the first quarter of
2003 consisted of 26.3 billion Nasdaq-listed shares and 5.2 billion U.S.
exchange-listed shares.
- - Our share of total U.S. equity volume was 15.4% in the first quarter. This
compares to 7.1% in the first quarter of 2002 and 16.1% in the fourth
quarter of 2002. The decline in our overall market share versus the fourth
quarter was due to a shift in the mix of total volume between the
exchange-listed and Nasdaq-listed markets, as our share of each market
remained level.
- - Our share of Nasdaq-listed equity volume was 29.6% in the first quarter,
and our share of U.S. exchange-listed equity volume was 4.5%.
- ----------
(1) Unless otherwise specified, financial results and statistical information
referred to in this release include data for Island Holding Company, Inc.
following the closing of our acquisition of Island on September 20, 2002.
(2) See table titled "Reconciliation of Pro Forma Operating Results for 1Q03".
1
- - We have achieved a significant portion of our fourth quarter 2002 cost
reduction targets. Our annualized fixed-cost base was approximately $563
million in the first quarter. This was $142 million, or 20%, below its
level in the first quarter of 2002. (The fixed-cost base excludes variable
costs - soft dollar and commission recapture, broker-dealer rebates and
brokerage, clearing and exchange fees - and non-operating expenses, which
include charges related to goodwill and our cost-reduction
initiatives).(2)
FINANCIAL PERFORMANCE
Revenues
Total revenues for the first quarter were $240 million, down 10% from the fourth
quarter of 2002.
Transaction fee revenue for the first quarter was $255 million, down 8% from the
fourth quarter of 2002. Our net equity transaction fee revenue was $152 million,
down 9% from the fourth quarter of 2002.(2)
During the first quarter, Instinet recorded a net investment loss of $22
million, resulting primarily from a write-down in the carrying value of certain
of the company's non-public investments.
Expenses
Instinet's total expenses from continuing operations for the first quarter of
2003 were $281 million, down 25% from the fourth quarter of 2002. Operating
expenses, which exclude severance and occupancy charges of $11 million (included
in compensation and benefits, and occupancy) related to our recently announced
cost reductions, $5 million insurance recovery of fixed assets lost at the World
Trade Center in 2001, and restructuring charges in 2002, were $274 million, or
12% lower than the comparable expenses in the fourth quarter of 2002.(2)
- - Compensation and benefits expense was $64 million in the first quarter of
2003. Excluding a $9 million severance charge for our recently announced
cost reductions, compensation and benefits expense was down 10% from the
previous period, reflecting lower staff levels.
- - Brokerage, clearing and exchange fees were $34 million, down 8% from the
previous quarter, reflecting lower volume and the integration of Island's
clearing in the first quarter of 2003, partly offset by higher
international clearing costs.
- - Communications and equipment expense was $31 million, down 16% from the
previous quarter due to lower spending on equipment, hardware and
software, as well as lower costs related to our core communications due to
system efficiencies.
- - Other expenses were $8 million, down 53% from the fourth quarter of 2002,
primarily due to higher bad debt reserves in the fourth quarter of 2002
related to loans made in prior periods to certain companies in which
Instinet has strategic investments.
2
Balance Sheet
At March 31, 2003, Instinet had net cash (cash and cash equivalents and
securities owned less short-term borrowings) of approximately $540 million,
tangible net assets of approximately $870 million, and shareholders' equity of
approximately $990 million. There were approximately 331 million shares of
common stock outstanding.
COST REDUCTION
During the first quarter, Instinet announced that, as part of its continuing
cost-reduction effort, it would reduce its workforce by approximately 175
employees (or approximately 12 percent of its full-time employees), across its
operations, both in the U.S. and internationally. These reductions result from
attrition and the elimination of positions. They are expected to produce an
estimated $20 million reduction in annualized operating costs. This decrease is
in addition to the $100 million cost reduction target announced in the fourth
quarter of 2002. As noted above, in the first quarter of 2003 we incurred costs
of $11 million related to this cost reduction program.
Instinet's Chief Financial Officer, John F. Fay, commented: "In the first
quarter, we reduced our operating costs significantly compared to the fourth
quarter. We are operating in a very tough environment and continue to be focused
on looking for cost reductions and efficiencies. We believe that with our
strong, debt-free balance sheet, we are well positioned to weather the current
market conditions and are focused on transforming to a low-cost organization to
better serve our customers."
OPERATING REVIEW
Important operating achievements during the quarter included:
- Instinet Trading Portal(SM), the company's new front-end trading
application, was deployed at over 700 Instinet client sites by the
end of the first quarter, well ahead of original deployment targets.
By quarter-end, over 25% of Instinet's total institutional order
flow was being processed through Portal.
- Newport(TM), Instinet's patent-pending global program-trading and
execution management solution, was deployed at 75 clients by the end
of the quarter. Customers use Newport to trade in global markets,
access Instinet Crossing, implement rules-based automated trading,
and route orders to other unaffiliated broker-dealers. Newport is
also used actively on Instinet's own trading desks to receive and
trade orders on behalf of clients. During the first quarter, shares
with a value of $14.5 billion were executed via Newport, an increase
of 36% over the previous quarter.
- Instinet Crossing was made accessible through Portal. The
functionality allows Portal customers to route orders to the
after-hours cross as a destination choice in the Portal order
ticket, and provides next-day execution reports. Access to the cross
is already a feature of Newport and other Instinet front-ends.
3
- Instinet began implementing smart-routing for trading in U.S.
exchange-listed stocks. The technology will give clients fast,
one-stop access with complete anonymity to all major sources of
upstairs listed liquidity, including ECNs and ITS-CAES (which
combined account for over 17% of average daily volume in NYSE-listed
stocks), together with DOT connectivity. The enhancement includes
upgraded order-entry functionality.
- Instinet Clearing Services migrated Instinet's U.S. broker business
to its new high-performance clearing system, a scalable transaction
processing system that significantly increases Instinet's clearing
capacities.
- As part of its continuing program to achieve additional cost savings
through the integration of Instinet and Island, the company
successfully converted Island's clearing to Instinet Clearing
Services. This was one of the largest such conversions in Wall
Street history, and is expected to significantly reduce clearing
costs.
- Other integration developments during the quarter included reduction
of office space, rationalization of vendor contracts, optimization
of client connectivity and re-organization of internal human
resource programs and policies that together are expected to produce
annual savings of over $30 million.
"Despite one of the most challenging business environments in its history,
Instinet has successfully maintained its leadership position in the market for
Nasdaq-listed securities, and at the same time taken steps to deliver new
products and services to our customers to further increase our presence in the
market for U.S. exchange-listed securities," said Jean-Marc Bouhelier, Chief
Operating Officer of Instinet. "We also continue to take steps to further reduce
our unit costs and improve profitability."
WEBCAST
Instinet will webcast a conference call to discuss its first quarter results at
11:00 a.m. New York time today at http://www.investor.instinet.com. A replay
will be available at the same address following the call.
ABOUT INSTINET
Instinet, through affiliates, is the largest global electronic agency securities
broker and has been providing investors with electronic trading solutions for
more than 30 years. Our services enable buyers and sellers worldwide to trade
securities directly and anonymously with each other, have the opportunity to
gain price improvement for their trades, manage their orders 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. Our customers primarily consist of institutional investors,
such as mutual funds, pension funds, insurance companies and hedge funds, as
well as market professionals, including broker-dealers. We act solely as an
agent for our customers and do not trade securities for our own account or
maintain inventories of securities for sale.
# # #
4
This press release is for information purposes only and is not intended as an
offer or solicitation with respect to the purchase or sale of any security.
(C) 2003 Instinet Corporation and its affiliated companies. All rights reserved.
Instinet Clearing Services, Inc. is a wholly owned subsidiary of Instinet
Corporation, both members NASD/SIPC, and subsidiaries of Instinet Group
Incorporated. INSTINET, the Instinet Trading Portal and Newport are trademarks
and service marks in the United States and in other countries throughout the
world. Island Holding Company and the Island ECN, Inc., member NASD/CSE/SIPC,
are subsidiaries of Instinet Group Incorporated. The Island ECN operates as an
entity separate from Instinet Corporation's ECN.
This news release may be deemed to include forward-looking statements relating
to Instinet. Certain important factors that could cause actual results to differ
materially from those disclosed in such forward-looking statements are included
in Instinet's Annual Report on Form 10-K for the fiscal year ended December 31,
2002, and other documents filed with the SEC and available on the Company's
website. Certain information regarding trading volumes is also included in
Instinet's Annual Report on Form 10-K for the fiscal year ended December 31,
2002 and on the Company's website at www.instinet.com. These statements speak
only as of the date of this news release, and the Company does not undertake any
obligation to update them.
5
Instinet Group Incorporated
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited) Pct Chg -- inc/(decr)
---------------------
Three months ended Mar 31 2003 versus:
------------------------------------- ---------------------
Mar 31, Dec 31, Mar 31, Dec 31, Mar 31,
2003 2002 2002 2002 2002
---- ---- ---- ---- ----
REVENUES
Transaction fees $ 255,224 $ 278,441 $ 265,881 (8.3) (4.0)
Interest 6,347 8,546 8,934 (25.7) (29.0)
Investments (21,678) (19,878) (5,714) 9.1 279.4
--------- --------- ---------
TOTAL REVENUES 239,893 267,109 269,101 (10.2) (10.9)
EXPENSES
Compensation and benefits 63,984 60,745 86,218 5.3 (25.8)
Soft dollar and commission recapture 49,058 50,161 53,591 (2.2) (8.5)
Broker-dealer rebates 50,420 56,601 3,291 (10.9)
Brokerage, clearing and exchange fees 34,025 36,994 36,681 (8.0) (7.2)
Communications and equipment 30,720 36,604 33,309 (16.1) (7.8)
Depreciation and amortization 24,074 24,659 19,123 (2.4) 25.9
Occupancy 16,458 16,158 13,552 1.9 21.4
Professional fees 6,338 7,820 5,018 (19.0) 26.3
Marketing and business development 2,781 3,756 3,407 (26.0) (18.4)
Other 7,860 16,559 15,674 (52.5) (49.9)
Restructuring -- 62,405 15,030 -- --
Insurance recovery of fixed assets lost at the World Trade
Center (5,000) -- -- -- --
--------- --------- ---------
TOTAL EXPENSES 280,718 372,462 284,894 (24.6) (1.5)
--------- --------- ---------
Income/(loss) from continuing operations before income taxes (40,825) (105,353) (15,793) (61.2) 158.5
Income tax provision (6,507) 6,690 (5,703) (197.3) 14.1
--------- --------- ---------
Income/(loss) from continuing operations (34,318) (112,043) (10,090) (69.4) 240.1
Discontinued operations:
Loss from operations of fixed income business -- (412) (9,775) (100.0) (100.0)
Income tax benefit -- 252 3,824 (100.0) (100.0)
--------- --------- ---------
Income/(loss) before cumulative effect of change in
accounting principle (34,318) (112,203) (16,041) (69.4) 113.9
Cumulative effect of change in accounting principle related
to goodwill, net of tax -- -- (18,642) (100.0)
--------- --------- ---------
NET INCOME/(LOSS) $ (34,318) $(112,203) $ (34,683) (69.4) (1.1)
========= ========= =========
EARNINGS/(LOSS) PER SHARE - BASIC AND DILUTED
Income/(loss) from continuing operations $ (0.10) $ (0.34) $ (0.04)
Discontinued operations:
Loss from operations of fixed income business -- (0.00) (0.04)
Income tax benefit -- 0.00 0.02
--------- --------- ---------
NET INCOME/(LOSS) $ (0.10) $ (0.34) $ (0.14) (69.5) (25.6)
========= ========= =========
Weighted average shares outstanding - basic 330,764 329,933 248,730 0.3 33.0
Weighted average shares outstanding - diluted 330,764 329,933 248,730 0.3 33.0
Note: Results for Island Holding Company, Inc. are included subsequent to
9/20/02.
6
Instinet Group Incorporated
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
Quarter ended:
------------------------------------------------------------------------------------
Mar 31, Dec 31, Sept 30, June 30, Mar 31, Dec 31,
2003 2002 2002 2002 2002 2001
--------- --------- --------- --------- --------- ---------
REVENUE
Transaction fees $ 255,224 $ 278,441 $ 263,917 $ 269,933 $ 265,881 $ 319,219
Interest 6,347 8,546 10,699 11,958 8,934 11,562
Investments (21,678) (19,878) (20,336) (13,181) (5,714) 17,817
--------- --------- --------- --------- --------- ---------
TOTAL REVENUES 239,893 267,109 254,280 268,710 269,101 348,598
EXPENSES
Compensation and benefits 63,984 60,745 63,809 70,989 86,218 83,996
Soft dollar and commission
recapture 49,058 50,161 51,824 61,738 53,591 58,174
Broker-dealer rebates 50,420 56,601 39,004 25,503 3,291 --
Brokerage, clearing and exchange
fees 34,025 36,994 42,079 33,767 36,681 40,364
Communications and equipment 30,720 36,604 26,620 29,187 33,309 32,872
Depreciation and amortization 24,074 24,659 16,712 17,930 19,123 21,269
Occupancy 16,458 16,158 12,223 13,595 13,552 11,587
Professional fees 6,338 7,820 5,110 6,646 5,018 7,880
Marketing and business development 2,781 3,756 2,451 7,480 3,407 2,739
Other 7,860 16,559 9,899 16,852 15,674 13,742
Restructuring -- 62,405 955 42,410 15,030 1,557
Goodwill impairment -- -- 551,991 -- -- --
Loss of fixed assets at World -- -- -- -- -- 818
Trade Center
Insurance recovery of fixed
assets lost (5,000) -- -- -- -- (1,472)
--------- --------- --------- --------- --------- ---------
TOTAL EXPENSES 280,718 372,462 822,677 326,097 284,894 273,526
Income/(loss) from continuing
operations before income taxes,
cumulative effect of change in
accounting principle (40,825) (105,353) (568,397) (57,387) (15,793) 75,072
Income tax provision/(benefit) (6,507) 6,690 (39,958) (14,117) (5,703) 26,662
--------- --------- --------- --------- --------- ---------
Income/(loss) from continuing
operations before cumulative
effect of change in accounting
principle (34,318) (112,043) (528,439) (43,270) (10,090) 48,410
Discontinued operations:
Loss from operations of fixed
income business -- (412) -- (23,581) (9,775) (4,535)
Income tax benefit -- 252 -- 6,946 3,824 1,844
--------- --------- --------- --------- --------- ---------
Income before cumulative effect $ (34,318) $(112,203) $(528,439) $ (59,905) $ (16,041) $ 45,719
of change in accounting principle
Cumulative effect of change in
accounting principle, net of tax -- -- -- -- (18,642) --
--------- --------- --------- --------- --------- ---------
NET INCOME / (LOSS) $ (34,318) $(112,203) $(528,439) $ (59,905) $ (34,683) $ 45,719
========= ========= ========= ========= ========= =========
Basic and diluted:
--------- --------- --------- --------- --------- ---------
EARNINGS/(LOSS) PER SHARE $ (0.10) $ (0.34) $ (2.05) $ (0.24) $ (0.14) $ 0.18
========= ========= ========= ========= ========= =========
Quarter ended:
-------------------------------------
Sept 30, June 30, Mar 31,
2001 2001 2001
--------- --------- ---------
REVENUE
Transaction fees $ 311,737 $ 378,891 $ 414,496
Interest 14,254 11,199 12,281
Investments (6,330) 3,689 2,212
--------- --------- ---------
TOTAL REVENUES 319,661 393,779 428,989
EXPENSES
Compensation and benefits 84,820 112,735 124,797
Soft dollar and commission
recapture 51,595 54,228 56,053
Broker-dealer rebates -- -- --
Brokerage, clearing and exchange
fees 33,284 36,185 36,390
Communications and equipment 36,939 42,560 43,631
Depreciation and amortization 21,206 19,669 18,610
Occupancy 14,424 13,796 10,111
Professional fees 8,085 9,012 15,013
Marketing and business development 843 8,477 10,084
Other 14,312 13,545 12,935
Restructuring 22,821 -- --
Goodwill impairment -- -- --
Loss of fixed assets at World 19,528 -- --
Trade Center
Insurance recovery of fixed
assets lost (19,528) -- --
--------- --------- ---------
TOTAL EXPENSES 288,329 310,207 327,624
Income/(loss) from continuing
operations before income taxes,
cumulative effect of change in
accounting principle 31,332 83,572 101,365
Income tax provision/(benefit) 15,685 36,198 43,665
--------- --------- ---------
Income/(loss) from continuing
operations before cumulative
effect of change in accounting
principle 15,647 47,374 57,700
Discontinued operations:
Loss from operations of fixed
income business (11,871) (10,841) (11,886)
Income tax benefit 4,434 4,197 4,294
--------- --------- ---------
Income before cumulative effect $ 8,210 $ 40,730 $ 50,108
of change in accounting principle
Cumulative effect of change in
accounting principle, net of tax -- -- --
--------- --------- ---------
NET INCOME / (LOSS) $ 8,210 $ 40,730 $ 50,108
========= ========= =========
Basic and diluted:
--------- --------- ---------
EARNINGS/(LOSS) PER SHARE $ 0.03 $ 0.18 $ 0.24
========= ========= =========
Note: Results for Island Holding Company, Inc. are included subsequent to
9/20/02.
7
Instinet Group Incorporated
KEY STATISTICAL INFORMATION
The following table presents key transaction volume information, as well as
certain other operating information.
Pct Chg -- inc/(decr)
---------------------
Three months ended (5) Mar 31 2003 versus:
---------------------------------- ---------------------
Mar 31, Dec 31, Mar 31, Dec 31, Mar 31,
2003 2002 2002 2002 2002
---- ---- ---- ---- ----
Total U.S. equity share volume (millions)(1,2) 204,359 228,692 212,299 (10.6) (3.7)
Instinet's U.S. equity share volume (millions)(1,2) 31,541 36,771 15,160 (14.2) 108.1
Instinet's share of total U.S. equity share volume(1,2) 15.4% 16.1% 7.1%
-------- -------- --------
Total Nasdaq-listed equity share volume (millions)(2) 89,015 105,116 109,429 (15.3) (18.7)
Instinet's Nasdaq-listed equity share volume
(millions)(2) 26,341 31,182 12,043 (15.5) 118.7
Instinet's share of total Nasdaq-listed equity
share volume(2) 29.6% 29.7% 11.0%
-------- -------- --------
Total U.S. exchange-listed equity share volume (millions) 115,343 123,576 102,870 (6.7) 12.1
Instinet's U.S. exchange-listed equity share volume
(millions)(2) 5,200 5,589 3,117 (7.0) 66.8
Instinet's share of total U.S. exchange-listed
equity share volume(2) 4.5% 4.5% 3.0%
-------- -------- --------
Instinet's U.S. equity transaction volume (thousands) 67,987 64,673 18,953 5.1 258.7
Instinet's non-U.S. equity transaction volume (thousands) 2,161 2,329 1,957 (7.2) 10.4
-------- -------- --------
Instinet's total equity transaction volume (thousands) 70,148 67,002 20,910 4.7 235.5
-------- -------- --------
Instinet's average U.S. equity transaction size (shares
per transaction) 464 569 800 (18.4) (42.0)
Instinet's average equity transactions per day (thousands) 1,150 1,031 349 11.5 229.5
-------- -------- --------
Transaction fees from US equities (thousands) $211,934 $231,620 $215,518 (8.5) (1.7)
Transaction fees from non-US equities (thousands) $ 43,290 $ 46,821 $ 50,363 (7.5) (14.0)
-------- -------- --------
Total equity transaction fees (thousands) $255,224 $278,441 $265,881 (8.3) (4.0)
Net transaction fees from US equities (thousands)
(non-GAAP financial measure)(3) $122,370 $133,547 $166,773 (8.4) (26.6)
Net transaction fees from non-US equities (thousands)
(non-GAAP financial measure)(3) $ 30,019 $ 34,635 $ 39,217 (13.3) (23.5)
-------- -------- --------
Total net equity transaction fees (thousands)(non-GAAP
financial measure)(3) $152,389 $168,182 $205,990 (9.4) (26.0)
Instinet's average equity transaction fee revenue
(U.S. cents per share per side)(4) $ 0.0034 $ 0.0032 $ 0.0071 6.2 52.1
Instinet's average net equity transaction fee revenue
(U.S. cents per share per side)(non-GAAP financial
measure)(4) $ 0.0019 $ 0.0018 $ 0.0055 5.6 (65.5)
-------- -------- --------
Full time employees at period end 1,428 1,474 1,937 (3.1) (26.3)
-------- -------- --------
(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 -
"Nasdaq Volume Calculations" and "Calculation of Instinet ATS and Island ATS
Volume Combined Volumes" in our Annual Report on Form 10-K for the year ended
December 31, 2002.
(3) Our net equity transaction fee revenues are calculated by subtracting the
soft dollar and commission recapture expenses and broker-dealer rebates from the
related equity transaction fees. GAAP requires us to add our soft dollar and
commission recapture expenses and broker-dealer rebates, dollar-for-dollar, to
related equity transaction fee revenues.
(4) Our average U.S. net equity transaction fee revenue is calculated by
dividing our net U.S. equity transaction fee revenue for the buy and sell side
of each transaction by our total U.S. share volume.
(5) Represents Instinet Group Incorporated volume from all sources, including
the Island ECN subsequent to 9/20/02, ProTrader Securities L.P. subsequent to
10/1/01, and Instinet Corporation. U.S. shares consist of shares of
exchange-listed and Nasdaq-quoted stocks.
8
Instinet Group Incorporated
RECONCILIATION OF PRO FORMA OPERATING RESULTS FOR 1Q03
In evaluating our financial performance and results of operations, management
reviews certain financial measures that are not in accordance with generally
accepted accounting standards in the United States ("non-GAAP"). Non-GAAP
measurements do not have any standardized meaning and are therefore unlikely to
be comparable to similar measures presented by other companies. Management uses
non-GAAP financials measures in evaluating our operating performance. In light
of the use by management of these non-GAAP measurements to assess our
operational performance, we believe it is useful to provide information with
respect to these non-GAAP measurements so as to share this perspective of
management. These non-GAAP financials measures should be considered in the
context with our GAAP results. A reconciliation of our non-GAAP measurements are
provided below:
(1) Management reviews adjusted operating income, in addition to GAAP financial
results. This non-GAAP financial measurement excludes non-operating items, which
by their nature, management does not consider to be a true reflection of the
operating results and financial performance of our global agency brokerage
business. These non-operating charges are investment gains and losses, charges
related to our cost reduction initiatives, goodwill impairment, fixed assets
losts at the World Trade Center and related insurance recovery, and the related
tax effects of those items. The following schedule reconciles our operating
income to our GAAP financial results:
Three months ended
-------------------------------------
Mar 31, Dec 31, Mar 31,
2003 2002 2002
--------- --------- ---------
Total revenues, as reported $ 239,893 $ 267,109 $ 269,101
Less Investments (21,678) (19,878) (5,714)
--------- --------- ---------
Pro forma revenues 261,571 286,987 274,815
--------- --------- ---------
Total expenses, as reported 280,718 372,462 284,894
Less severance included in compensation and benefits 9,146 -- --
Less real estate abandonment costs included in occupancy 2,333 -- --
Less restructuring -- 62,405 15,030
Add insurance recovery of fixed assets at the World
Trade Center (5,000) -- --
--------- --------- ---------
Pro forma operating expenses 274,239 310,057 269,864
--------- --------- ---------
--------- --------- ---------
Pro forma income/(loss) before income taxes (12,668) (23,070) 4,951
--------- --------- ---------
Income tax provision/(benefit), as reported (6,507) 6,690 (5,703)
Tax effect of pro forma adjustments 337 (19,773) 7,188
--------- --------- ---------
Pro forma provision/(benefit) for income taxes (6,170) (13,083) 1,485
--------- --------- ---------
Net loss, as reported (34,318) (112,203) (38,683)
Net effect of pro forma adjustments 27,820 102,056 17,556
Add loss from operations of fixed income business, net
of tax -- (160) (5,951)
Add cummulative effect of change in accounting principle -- -- (18,642)
--------- --------- ---------
Pro forma net income/(loss) $ (6,498) $ (9,987) $ 3,466
--------- --------- ---------
Earnings/(loss) per share - basic and diluted, as
reported $ (0.10) $ (0.34) $ (0.14)
Net effect of pro forma adjustments 0.08 0.31 0.15
--------- --------- ---------
Pro forma earnings/(loss) per share - basic and diluted $ (0.02) $ (0.03) $ 0.01
--------- --------- ---------
9
Instinet Group Incorporated
RECONCILIATION OF PRO FORMA OPERATING RESULTS FOR 1Q03
In evaluating our financial performance and results of operations, management
reviews certain financial measures that are not in accordance with generally
accepted accounting standards in the United States ("non-GAAP"). Non-GAAP
measurements do not have any standardized meaning and are therefore unlikely to
be comparable to similar measures presented by other companies. Management uses
non-GAAP financials measures in evaluating our operating performance. In light
of the use by management of these non-GAAP measurements to assess our
operational performance, we believe it is useful to provide information with
respect to these non-GAAP measurements so as to share this perspective of
management. These non-GAAP financials measures should be considered in the
context with our GAAP results. A reconciliation of our non-GAAP measurements are
provided below:
(2) Our expense structure includes a certain level of fixed costs, as well as a
variable cost base that fluctuates with customer transaction volumes. If demand
for our brokerage services declines and we are unable to respond by adjusting
our fixed cost base, our operating results could be materially adversely
affected. Therefore, we have undertaken cost reduction initiatives to reduce our
fixed cost base. We estimate our fixed cost base by subtracting line items that
we have determined to be predominantly variable in nature. Some of these
variable line items may contain a fixed component. Similarly, some of our fixed
expense line items may contain a variable component. Management does not adjust
for the variable or fixed component within each line item when analyzing our
fixed cost base. Our fixed cost base is calculated as follows:
Three months ended
------------------------------------
Mar 31, Dec 31, Mar 31,
2003 2002 2002
--------- --------- ---------
Reconciliation of fixed cost base:
Total expenses, as reported $ 280,718 $ 372,462 $ 284,894
Less brokerage, clearing and exchange fees 34,025 36,994 36,681
Less soft dollar and commission recapture 49,058 50,161 53,591
Less broker-dealer rebates 50,420 56,601 3,291
Add insurance recovery of fixed assets at the World Trade Center (5,000) -- --
Less restructuring -- 62,405 15,030
Less severance included in compensation and benefits 9,146 -- --
Less real estate abandonment costs included in occupancy 2,333 -- --
--------- --------- ---------
Total fixed costs 140,736 166,301 176,301
--------- --------- ---------
Annualized $ 562,944 $ 665,204 $ 705,204
========= ========= =========
10
Instinet Group Incorporated
RECONCILIATION OF PRO FORMA OPERATING RESULTS FOR 1Q03
In evaluating our financial performance and results of operations, management
reviews certain financial measures that are not in accordance with generally
accepted accounting standards in the United States ("non-GAAP"). Non-GAAP
measurements do not have any standardized meaning and are therefore unlikely to
be comparable to similar measures presented by other companies. Management uses
non-GAAP financials measures in evaluating our operating performance. In light
of the use by management of these non-GAAP measurements to assess our
operational performance, we believe it is useful to provide information with
respect to these non-GAAP measurements so as to share this perspective of
management. These non-GAAP financials measures should be considered in the
context with our GAAP results. A reconciliation of our non-GAAP measurements are
provided below:
(3) Our transaction fees earned from our customers trading equity securities
have represented, and continue to represent, a substantial part of our revenues.
GAAP requires us to add our soft dollar and commission recapture expenses and
broker-dealer rebates, dollar-for-dollar, to related equity transaction fee
revenues, which has a dilutive effect on our operating margins. Therefore, when
evaluating our revenues from equity transactions, management reviews our net
equity transaction fee revenue, based on U.S. securities and non-U.S.
securities. Our net equity transaction fee revenues are calculated by
subtracting the soft dollar and commission recapture expenses as well as
broker-dealer rebates from the related equity transaction fees, as well as
non-equity related revenues, and is calculated as follows:
Three months ended
----------------------------------------
Mar 31, Dec 31, Mar 31,
2003 2002 2002
-------- -------- --------
Total
Transaction fee revenue, as reported $255,224 $278,441 $265,881
Less non equity related transaction fee revenue 3,357 3,497 3,009
Less soft dollar revenues and commission recapture expenses 49,058 50,161 53,591
Less broker-dealer rebates 50,420 56,601 3,291
-------- -------- --------
Net equity transaction fee revenue $152,389 $168,182 $205,990
======== ======== ========
U.S.
Transaction fee revenue from U.S. equities $211,934 $231,620 $215,518
Less non equity related transaction fee revenue 3,357 3,497 3,009
Less soft dollar revenues and commission recapture expenses
from U.S. equities 35,787 37,975 42,445
Less broker-dealer rebates 50,420 56,601 3,291
-------- -------- --------
Net equity transaction fee revenue from U.S. equities $122,370 $133,547 $166,773
======== ======== ========
U.S. revenue per share
Average U.S. equity transaction fee revenue (per share, per side) $ 0.0034 $ 0.0032 $ 0.0071
Less non equity related transaction fee revenue 0.0001 0.0001 0.0001
Less soft dollar revenues and commission recapture expenses from U.S. equities 0.0006 0.0005 0.0014
Less broker-dealer rebates 0.0008 0.0008 0.0001
-------- -------- --------
Average U.S. equity net transaction fee revenue (per share, per side) $ 0.0019 $ 0.0018 $ 0.0055
======== ======== ========
Non-U.S
Transaction fee revenue from non-U.S. equities $ 43,290 $ 46,821 $ 50,363
Less non equity related transaction fee revenue -- -- --
Less soft dollar revenues and commission recapture expenses from non-U.S. equities 13,271 12,186 11,146
-------- -------- --------
Net equity transaction fee revenue from non-U.S. equities $ 30,019 $ 34,635 $ 39,217
======== ======== ========
11