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, 2003
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 13-4134098
(State or Other Jurisdiction (IRS Employer
of Incorporation or Organization) 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 | |
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act
Yes |X| No | |
Number of shares outstanding of each of the registrant's classes of Common Stock
at May 9, 2003.
Common Stock, $0.01 par value 330,856,696 shares
INSTINET GROUP INCORPORATED
FORM 10-Q QUARTERLY REPORT
For the Quarter Ended March 31, 2003
Table of Contents Page
Part I. Financial Information
Item 1. Financial Statements
Consolidated Statements of Operations for the three
months ended March 31, 2003 and 2002 3
Consolidated Statements of Financial Condition as of
March 31, 2003 and December 31, 2002 4
Consolidated Statements of Cash Flows for the three
months ended March 31, 2003 and 2002 5
Notes To Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 16
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 27
Item 4. Controls and Procedures 29
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 30
Item 2. Changes in Securities and Use of Proceeds 30
Item 3. Defaults Upon Senior Securities 30
Item 4. Submission of Matters to a Vote of Security Holders 30
Item 5. Other Information 30
Item 6. Exhibits and Reports on Form 8-K 30
Signatures 32
Certifications 33
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 OPERATIONS
(In Thousands, Except Per Share Amounts)
(Unaudited)
Three Months Ended
March 31,
2003 2002
---- ----
REVENUES
Transaction fees .................................................... $ 255,224 $ 265,881
Interest ............................................................ 6,347 8,934
Investments ......................................................... (21,678) (5,714)
--------- ---------
Total revenues ............................................ 239,893 269,101
EXPENSES
Compensation and benefits ........................................... 63,984 86,218
Soft dollar and commission recapture 49,058 53,591
Broker-dealer rebates 50,420 3,291
Brokerage, clearing and exchange fees 34,025 36,681
Communications and equipment 30,720 33,309
Depreciation and amortization ....................................... 24,074 19,123
Occupancy ........................................................... 16,458 13,552
Professional fees ................................................... 6,338 5,018
Marketing and business development .................................. 2,781 3,407
Other ............................................................... 7,860 15,674
Restructuring ....................................................... 0 15,030
Insurance recovery of fixed assets lost at the World Trade Center (5,000) --
--------- ---------
Total expenses ............................................ 280,718 284,894
Loss from continuing operations before income taxes and
cumulative effect of change in accounting principle (40,825) (15,793)
Benefit from income taxes ........................................... (6,507) (5,703)
--------- ---------
Loss from continuing operations before cumulative effect
of change in accounting principle (34,318) (10,090)
Discontinued operations:
Loss from operations of fixed income business, net of tax -- (5,951)
--------- ---------
Loss before cumulative effect of change in accounting principle (34,318) (16,041)
Cumulative effect of change in accounting principle, net of tax -- (18,642)
--------- ---------
Net loss .................................................. $ (34,318) $ (34,683)
========= =========
Basic and diluted loss per share:
Loss from continuing operations before cumulative
effect of change in accounting principle $ (0.10) $ (0.04)
Discontinued operations:
Loss from operations of fixed income business, net of tax -- (0.02)
--------- ---------
Loss before cumulative effect of change in accounting (0.10) (0.06)
Cumulative effect of change in accounting principle, net of tax -- (0.08)
--------- ---------
Net loss .................................................. $ (0.10) $ (0.14)
========= =========
Shares used in basic and diluted loss per share calculation 330,764 248,730
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,
2003 2002
---- ----
ASSETS
Cash and cash equivalents ............................................................. $ 274,815 $ 275,837
Securities segregated under federal regulations ....................................... 240,735 251,775
Securities owned, at market value ..................................................... 294,616 348,051
Securities borrowed ................................................................... 602,115 608,475
Receivable from broker-dealers ........................................................ 129,496 159,695
Receivable from customers ............................................................. 67,406 56,257
Commissions and other receivables, net ................................................ 94,278 85,296
Receivable from affiliates, net ....................................................... -- 3,216
Investments ........................................................................... 24,481 41,837
Fixed assets and leasehold improvements, net .......................................... 165,065 176,775
Deferred tax assets, net .............................................................. 70,415 70,223
Other intangible assets, net .......................................................... 121,701 127,993
Other assets .......................................................................... 82,153 77,465
----------- -----------
Total assets ..................................................................... $ 2,167,276 $ 2,282,895
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Short-term borrowings ................................................................. $ 27,665 $ 27,279
Securities loaned ..................................................................... 449,462 453,251
Payable to broker-dealers ............................................................. 94,256 115,565
Payable to customers .................................................................. 320,448 278,569
Taxes payable ......................................................................... 20,785 19,943
Payable to Reuters .................................................................... 1,529 1,616
Accrued compensation .................................................................. 34,903 90,279
Accounts payable, accrued expenses and other liabilities .............................. 226,895 272,859
----------- -----------
Total liabilities ................................................................ 1,175,943 1,259,361
----------- -----------
Commitments and contingencies (Note 6)
STOCKHOLDERS' EQUITY
Common stock, $0.01 par value (950,000 shares authorized, 330,925 and 330,920 issued
as of March 31, 2003 and December 31, 2002, respectively) 3,309 3,309
Additional paid-in capital ............................................................ 1,661,122 1,661,118
Accumulated deficit (695,432) (661,114)
Treasury stock, at cost (67 and 206 shares as of March 31, 2003 and December 31,
2002, respectively) (683) (1,270)
Accumulated other comprehensive income ................................................ 24,311 23,235
Unearned compensation ................................................................. (1,294) (1,744)
----------- -----------
Total stockholders' equity ....................................................... 991,333 1,023,534
----------- -----------
Total liabilities and stockholders' equity ....................................... $ 2,167,276 $ 2,282,895
=========== ===========
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 MONTH ENDED
MARCH 31,
2003 2002
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss .................................................. $ (34,318) $ (34,683)
Adjustments to reconcile net income to cash used in
operating activities:
Unrealized loss on investments .......................... 17,356 965
Depreciation and amortization ........................... 24,074 20,163
Write off of fixed assets ............................... 1,126 19,046
Deferred tax assets, net ................................ (192) 4,659
Amortization of unearned compensation ................... 450 1,114
(Increases)/decreases in operating assets:
Securities segregated under federal regulations ......... 11,040 (4,748)
Securities borrowed ..................................... 6,360 (4,718)
Receivable from broker-dealers .......................... 30,199 227,538
Receivable from customers ............................... (11,149) (18,327)
Commissions and other receivables, net .................. (8,982) 25,800
Receivable from affiliates, net ......................... 3,216 --
Other assets ............................................ (4,688) 19,812
Increases/(decreases) in operating liabilities:
Short-term borrowings ................................... 386 (4,530)
Securities loaned (3,789) 46,225
Payable to broker-dealers ............................... (21,309) (259,262)
Payable to customers .................................... 41,879 9,650
Taxes payable ........................................... 842 (23,468)
Payable to Parent ....................................... (87) 310
Payable to affiliates, net .............................. -- (4,509)
Accrued compensation .................................... (54,789) (91,049)
Accounts payable, accrued expenses and other
liabilities .......................................... (45,964) 27,332
--------- ---------
Cash used in operating activities .................... (48,339) (42,680)
CASH FLOWS FROM INVESTING ACTIVITIES:
Securities owned, at market value ....................... 53,435 (121,761)
Purchase of fixed assets and leasehold improvements (7,198) (8,348)
Acquisitions of businesses, net of assets acquired
and liabilities assumed .............................. -- (5,305)
--------- ---------
Cash used in investing activities .................... 46,237 (135,414)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock ................................ 4 --
--------- ---------
Cash (used in)/provided by financing activities ...... 4 --
Effect of exchange rate differences 1,076 (3,105)
--------- ---------
Decrease in cash and cash equivalents ..................... (1,022) (181,199)
Cash and cash equivalents, beginning of year .............. 275,837 703,678
--------- ---------
Cash and cash equivalents, end of period .................. $ 274,815 $ 522,479
========= =========
Non-cash activities:
The Company issued $587 of Treasury Stock in connection with its restricted
stock plan.
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 approximately 63% owned by subsidiaries
of Reuters Group PLC ("Reuters" or "Parent").
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries. All significant transactions and
balances between and among the Company and its subsidiaries have been eliminated
in consolidation. These financial statements have been prepared pursuant to the
rules and regulations of the Securities and Exchange Commission ("SEC") and, in
the opinion of management, reflect all adjustments, consisting only of normal
recurring adjustments, necessary for a fair statement of the financial position,
results of operations and cash flows for the periods presented in conformity
with generally accepted accounting principles. These unaudited financial
statements should be read in conjunction with the Company's audited financial
statements and notes thereto included in the Company's Annual Report on Form
10-K, as filed with the SEC.
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,
-6-
marketability, restrictions on disposition, current financial position and
operating results, and other pertinent information.
Management uses its best judgment in estimating the fair value of these
investments. There are inherent limitations in any estimation technique. The
fair value estimates presented herein are not necessarily indicative of an
amount which the Company could realize in a current transaction. Because of the
inherent uncertainty of valuation, these estimated fair values do not
necessarily represent amounts that might be ultimately realized, since such
amounts depend on future circumstances, and the differences could be material.
Investments are accounted for under the equity method if the Company has
the ability to exercise significant influence, but not control over the
investee. Significant influence is deemed to exist if the Company has ownership
of between 20% and 50%.
Realized and unrealized gains and losses from investments are included in
investment income on the Consolidated Statements of Operations.
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.
MARKETING AND BUSINESS DEVELOPMENT
Advertising costs are expensed when incurred.
SOFTWARE COSTS
Costs for internal use software, whether developed or obtained, are
assessed to determine whether they should be capitalized or expensed in
accordance with American Institute of Certified Public Accountants' Statement
("SOP") 98-1 "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use."
INCOME TAXES
The Company files a consolidated income tax return in the U.S. and
combined U.S. state and local income tax returns, where applicable.
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 Operations 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 No. 123, "Accounting for Stock-Based Compensation" ("SFAS 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 per share 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 123 and accordingly, records compensation expense over the vesting period.
Had the Company determined compensation cost based on the estimated fair
value at the grant dates for its stock based plans under SFAS 123, the Company's
net loss for the three months ended March 31, 2003 and 2002 would have been as
follows:
-7-
THREE MONTHS ENDED
MARCH 31,
2003 2002
---- ----
Net loss, as reported $(34,318) $(34,683)
Add: Stock based employee compensation expense, net of
related tax benefits, included in reported net loss 288 751
Deduct: Stock based employee compensation, net of related
tax effects, determined under fair value based methods
for all awards (9,057) (6,469)
-------- --------
Proforma net loss $(43,087) $(40,401)
======== ========
Loss per share, as reported - basic and diluted $ (0.10) $ (0.14)
Proforma loss per share - basic and diluted $ (0.13) $ (0.16)
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 Operations. 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,
2003 2002
---- ----
U.S. government and federal agency obligations $ 6,805 $ 10,867
Municipal bonds 137,485 157,683
Corporate bonds 82,784 91,909
Foreign sovereign obligations 43,075 58,146
Shares of stock exchanges 24,467 29,246
Other -- 200
-------- --------
Total $294,616 $348,051
======== ========
SECURITIES BORROWED AND LOANED
Securities borrowed and loaned are recorded at the amount of cash
collateral advanced or received. Securities borrowed require the Company to
deposit cash with the lender. For securities loaned, the Company receives
collateral in the form of cash in an amount generally in excess of the market
value of the securities loaned. The Company monitors the market value of the
securities borrowed and loaned on a daily basis, with additional collateral
obtained or refunded, as necessary.
RECEIVABLE FROM AND PAYABLE TO BROKER-DEALERS
Receivable from broker-dealers are primarily comprised of fails to deliver
with broker-dealers. Fails to deliver arise when the Company does not deliver
securities on settlement date. The Company records the selling price as a
receivable due from the purchasing broker-dealer. The receivable is collected
upon delivery of the securities. Payable to broker-dealers are primarily
comprised of fails to receive. Fails to receive arise when the Company does not
receive securities on settlement date. The Company records the amount of the
purchase price as a payable due to the selling broker-dealer. The liability is
paid upon receipt of the securities.
-8-
RECEIVABLE FROM AND PAYABLE TO CUSTOMERS
Receivable from and payable to customers are primarily comprised of
institutional debit balances and payable to customers represent free credit
balances in customer accounts.
COMMISSIONS AND OTHER RECEIVABLES, NET ($ IN THOUSANDS)
Commissions and other receivables are reported net of a provision for
doubtful accounts of $23,241 and $22,002 as of March 31, 2003 and December 31,
2002, 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.
TREASURY STOCK
The Company's purchases of shares of its own common stock are recorded as
treasury stock under the cost method and are shown as a reduction to
stockholders' equity on the statement of financial condition.
RESTRUCTURING
The Company has accounted for its cost reduction initiatives and resulting
restructuring charges in accordance with EITF 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including
-9-
Certain Costs Incurred in a Restructuring)," SFAS No. 112, "Employer's
Accounting for Post Retirement Benefits," and SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 146, which the Company
adopted January 1, 2003, eliminates the future use of EITF 94-3 for
restructuring initiatives.
3. INVESTMENTS ($ IN THOUSANDS)
From time to time, the Company makes strategic alliances and long-term
investments in other companies. The changes in the carrying values at the end of
each period result from additional investments, sales, and unrealized and
realized gains and losses, as well as fluctuations in exchange rates for
investments made in non-U.S. dollars. The value of the Company's investments as
of March 31, 2003 and December 31, 2002 are as follows:
MARCH 31, DECEMBER 31,
INVESTMENT 2003 2002
TP Group LDC $ 2,982 $ 2,695
Archipelago Holdings LLC 10,000 15,000
The Nasdaq Stock Market, Inc 7,499 14,792
Tradeware S.A -- 3,254
JapanCross Securities Co. Ltd. -- 2,096
Starmine Corporation 2,000 2,000
e-Xchange Advantage Corporation 2,000 2,000
-------- --------
Total $ 24,481 $ 41,837
======== ========
4. COLLATERAL ARRANGEMENTS ($ IN THOUSANDS)
As of March 31, 2003 and December 31, 2002, the fair value of collateral
held by the Company that can be sold or repledged totaled $787,305 and $777,286,
respectively. Such collateral is generally obtained under resale and securities
borrowing agreements. Of this collateral, $713,990 and $699,037 had been sold or
repledged generally to cover short sales or effect deliveries of securities as
of March 31, 2003 and December 31, 2002, respectively. In addition, securities
in customer accounts with a fair value of $53,576 and $47,549 could be sold or
repledged by the Company as of March 31, 2003 and December 31, 2002,
respectively.
5. NET CAPITAL REQUIREMENTS ($ 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, 2003
and December 31, 2002, Instinet Clearing Services, Inc., which is the
counterparty to each of the customer transactions in U.S. securities executed
through Instinet Corporation, had net capital of $164,505 and $163,084, which
was $160,566 and $160,179 in excess of its required net capital of $3,939 and
$2,905, respectively. Certain other U.S. broker-dealer subsidiaries of the
Company are also subject to capital adequacy requirements and were in compliance
with their respective requirements.
The Company's international broker-dealer subsidiaries are subject to
capital adequacy requirements promulgated by authorities of the countries in
which they operate. As of March 31, 2003 and December 31, 2002, these
subsidiaries had met their local capital adequacy requirements.
6. COMMITMENTS AND CONTINGENCIES ($ IN THOUSANDS)
From time to time, the Company is involved in various legal proceedings
arising in the ordinary course of business. The Company is also subject to
periodic regulatory audits and inspections. While any litigation contains an
element of uncertainty, management believes that the outcomes of such
proceedings or claims are unlikely to have a material adverse effect in the
Company.
-10-
7. 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,
------------------------
2003 2002
-------- --------
Net loss $(34,318) $(34,683)
Changes in other comprehensive loss:
Foreign currency translation adjustment 1,076 (3,105)
-------- --------
Total comprehensive loss, net of tax $(33,242) $(37,788)
======== ========
8. EARNINGS PER SHARE ($ AND SHARES IN THOUSANDS)
Basic earnings per share ("EPS") excludes dilution and is computed by
dividing net income by the weighted average number of common shares outstanding
for the period. Diluted EPS reflects the potential reduction in EPS that could
occur if securities or other contracts to issue common stock were exercised or
converted into common stock.
-11-
Options and warrants to purchase 43,957 and 20,598 shares of common stock
were not included in the computation of diluted EPS for the thee months ended
March 31, 2003 and 2002, respectively, as the Company incurred losses during the
period. Accordingly, the diluted EPS computation does not include the
anti-dilutive effect of these options and warrants.
Earnings per share under the basic and diluted computations is as follows:
Three Months Ended
March 31,
--------------------------
2003 2002
--------- ---------
Loss from continuing operations before cumulative effect of
change in accounting principle $ (34,318) $ (10,090)
Discontinued operations:
Loss from operations of fixed income business, net of tax -- (5,951)
--------- ---------
Loss before cumulative effect of change in accounting principle (16,041)
Cumulative effect of change in accounting principle, net of tax -- (18,642)
--------- ---------
Net loss $ (34,318) $ (34,683)
========= =========
Weighted average number of common shares outstanding -- basic 330,764 248,730
Common stock equivalent shares related to stock incentive plans -- --
--------- ---------
Weighted average number of common shares outstanding -- diluted 330,764 248,730
========= =========
Loss from continuing operations before cumulative effect of
change in accounting principle $ (0.10) $ (0.04)
Discontinued operations:
Loss from operations of fixed income business, net of tax -- (0.02)
--------- ---------
Loss before cumulative effect of change in accounting principle (0.10) (0.06)
Cumulative effect of change in accounting principle, net of tax -- (0.08)
--------- ---------
Net loss $ (0.10) $ (0.14)
========= =========
Diluted earnings per share $ (0.10) $ (0.14)
========= =========
9. CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE ($ IN THOUSANDS)
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.
During the first quarter of 2002, the Company identified indicators of
possible impairment of its recorded goodwill related to its ProTrader Group, LP
("ProTrader") acquisition and Montag Popper & Partner GmbH ("Montag"). For
ProTrader, such indicators were an overall decrease in customer transaction
volumes, which primarily led to operating losses. As a result, the Company
closed several trading offices and restructured its operations. Based on the
results of a discounted cash flow analysis, the Company calculated a level of
goodwill impairment of $15,750, which was represented by the shortfall of the
discounted cash flows versus the carrying amount of goodwill. In May 2002, the
Company closed its fixed income trading platform. Due to a global economic
slowdown and the uneven pace of acceptance of electronic fixed income trading
platforms, the business had been unable to reach a critical mass. Therefore, the
Company's goodwill related to its acquisition of Montag, a fixed income
broker-dealer, was impaired and the Company recorded an impairment loss of
$3,296, the remaining carrying value of its goodwill.
-12-
The Company recorded a goodwill impairment, net of taxes, of $18,642 or
$0.08 a share, for the three months ended March 31, 2002 as a change in
accounting principle.
10. RESTRUCTURING ($ IN THOUSANDS)
The Company has initiated several cost reduction programs, which have
resulted in restructuring charges. Information regarding the Company's
restructuring charges follows:
In July 2001, the Company announced a review of spending initiatives with
the aim of reducing its underlying operating cost structure. This restructuring
was completed in 2001 at a cost of $24,400 in the year ended December 31, 2001.
As of March 31, 2003, the Company carried a liability of $2,655 associated with
this restructuring on its Consolidated Statements of Financial Condition, which
is reflected as follows:
BALANCE BALANCE
DECEMBER 31, MARCH 31,
2002 PAYMENTS 2003
------------ -------- ---------
Workforce reduction $ 2,798 $ 143 $ 2,655
Office closures/consolidation 475 475 --
-------- -------- --------
Total $ 3,273 $ 618 $ 2,655
======== ======== ========
The Company expects to pay the remaining liability by December 31, 2003.
In March 2002, the Company announced that it would reduce its annualized
fixed operating costs in order to offset the impact of reduced revenues due to
its price reductions to U.S. broker-dealer customers. This restructuring
included reducing staff levels and related occupancy costs, improving system and
network efficiencies, and restructuring non-core businesses. During the year
ended December 31, 2002, the Company incurred a charge of $58,395. As of March
31, 2003, the Company carried a liability of $17,812 associated with this
restructuring on its Consolidated Statements of Financial Condition, which is
reflected as follows:
BALANCE BALANCE
DECEMBER 31, MARCH 31,
2002 PAYMENTS 2003
------------ -------- ---------
Workforce reduction $ 14,870 $ 4,782 $ 10,088
Office closures/consolidation 14,673 6,949 7,724
-------- -------- --------
Total $ 29,543 $ 11,731 $ 17,812
======== ======== ========
The Company expects to pay most of the remaining liability by December 31,
2003.
In December 2002, the Company announced that it had commenced a
cost-reduction plan to reduce operating costs in order to achieve cost synergies
in connection with its acquisition of The Island ECN. This restructuring
included reducing staff levels and related occupancy costs. During the year
ended December 31, 2002, the Company incurred a charge of $62,405. As of March
31, 2003, the Company carried a liability of $35,420 associated with this
restructuring on its Consolidated Statements of Financial Condition, which is
reflected as follows:
BALANCE BALANCE
DECEMBER 31, MARCH 31,
2002 PAYMENTS 2003
------------ -------- ---------
Workforce reduction $ 19,496 $ 13,650 $ 5,846
Office closures/consolidation 31,213 1,639 29,574
-------- -------- --------
Total $ 50,709 $ 15,289 $ 35,420
======== ======== ========
-13-
The Company expects to pay approximately $13 million to $15 million of the
remaining liability by December 31, 2003.
11. DISCONTINUED OPERATIONS ($ IN THOUSANDS)
On May 3, 2002, the Company closed its fixed income trading platform. The
Company began developing its fixed income business in 1998 and started trading
in the spring of 2000. Against the background of a global economic slowdown and
the uneven pace of acceptance of electronic fixed income trading platforms, the
business had been unable to reach a critical mass. As a result of the closure,
the Company incurred the following charges:
Three Months
Ended
March 31,
2002
------------
Loss from discontinued operations:
Loss from operation of fixed income business $ (9,775)
Income tax benefit 3,824
---------
Net loss from discontinued operations $ (5,951)
==========
Loss per share - basic and diluted:
Loss from operation of fixed income business $ (0.04)
Income tax benefit (0.02)
---------
Net loss from discontinued operations $ (0.06)
=========
The Company recorded a restructuring charge of $22,514 related to the
closure of its fixed income platform for the year ended December 31, 2002. As of
March 31, 2003, the Company carried a liability of $247 associated with this
restructuring on its consolidated statements of financial condition, which is
expected to be substantially paid by June 30, 2003.
12. INTANGIBLE ASSETS ($ IN THOUSANDS)
Information regarding the Company's identifiable intangible assets are as
follows:
Estimated
Life Identifiable
Intangible Assets (Years) Value
----------------- --------- ------------
Technology 7.0 $ 122,984
Customer relationships 5.0 15,500
Trade name 1.5 4,800
Non-compete agreements 1.0 1,300
March 31, December 31,
--------- ------------
2003 2002
---- ----
Gross carrying amount $ 144,584 $ 144,584
Accumulated amortization (22,883) (16,591)
--------- ---------
Net carrying amount $ 121,701 $ 127,993
========= =========
Intangible assets arose in connection with the Company's acquisitions of
ProTrader in October 2001 and Island in September 2002. The intangible assets
are amortized on a straight-line basis over their respective estimated useful
lives as shown above. Amortization expense for the three months ended March 31,
2003 and 2002 was $6,292 and 2,521, respectively. Estimated amortization expense
for each of the next 5 years is:
-14-
Year Expense
---- -------
2004 $21,390
2005 20,670
2006 20,670
2007 19,817
2008 15,211
13. STOCK-BASED PLANS
During the three months ended March 31, 2003, the Company issued
10,001,999 options with an exercise price of $3.25 per option, expiring in March
2010.
14. TREASURY STOCK
During the three months ended March 31, 2003, the Company reissued 137,827
shares of treasury stock at a cost of $587 in connection with its Restricted
Stock Unit plan.
-15-
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, 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.
Business Environment
We continue to operate in a difficult and challenging business, economic
and regulatory environment characterized by weak markets and lower overall
trading volumes, particularly, Nasdaq-quoted trading. Over the past twelve
months, price competition in our industry has increased as well. As a result of
these market and competitive factors, our transaction fee revenues declined from
$265.9 million for the three months ended March 31, 2002 to $255.2 million for
the comparable period in 2003 and our average net transaction fee revenue per
U.S. share (a non-GAAP financial measure) decreased 65.5% from $0.0055 for the
three months ended March 31, 2002 to $0.0019 for the comparable period in 2003.
Our average transaction fee revenue per U.S. share (the equivalent GAAP
financial measure) decreased 52.1% from $0.0071 for the three months ended March
31, 2002 to $0.0034 for the comparable period in 2003.
Market share and market volumes
During the first three months of 2003, trading volumes in the U.S. markets
continued to decline. Total U.S. market share volume in the three months ended
March 31, 2003 decreased to 204.4 billion shares from 212.3 billion for the
comparable period in 2002. Total Nasdaq-quoted share volume was 89.0 billion
shares in the three months ended March 31, 2003, down 18.7% from 109.4 billion
shares for the comparable period in 2002. U.S. exchange-listed share volume was
115.3 billion shares in the three months ended March 31, 2003, up from 102.9
billion shares for the comparable period in 2002. Our percentage of overall
market share increased to 15.4% of total U.S. market share volume, which
comprised 29.6% of Nasdaq share volume, and 4.5% of U.S. exchange-listed share
volume, in the three months ended March 31, 2003. Our market share in
Nasdaq-quoted stocks and trading volumes has increased significantly due to our
acquisition of The Island ECN in September 2002, our various pricing changes,
and the introduction of our broker-dealer rebates.
Cost reduction
In March 2003, as part of our continuing cost-reduction efforts, we
announced a reduction of 12% of our global staffing levels (approximately 175
positions) resulting from attrition and the eliminations of positions. We expect
that these staff reductions will result in an estimated $20 million reduction in
our operating costs, on an annualized basis, by the end of 2003. We recorded
total expenses of $11.5 million related to this cost reduction initiative. This
staff reduction is part of our continued focus on cost reduction and is in
addition to the $100 million cost reduction target we previously announced in
December 2002.
Fixed and variable cost base
As a result of our cost reduction initiatives, our total expenses, which
included charges for our cost reduction initiatives and insurance recovery of
fixed assets lost at the World Trade Center, fell to $280.7 million ($1.0
billion annualized) for the three months ended March 31, 2003, compared to
$284.9 million ($1.1 billion annualized) for the comparable period in 2002. Our
acquisition of Island has partly offset the effect of our cost reduction efforts
as well as the
-16-
insurance proceeds for assets lost at the World Trade Center. Our annualized
fixed-cost base (a non-GAAP financial measure) decreased to $562.9 million for
the three months ended March 31, 2003, compared to $705.2 million for the
comparable period in 2002. Our fixed-cost base excludes variable costs (soft
dollar and commission recapture, broker-dealer rebates and brokerage, clearing
and exchange fees) and non-operating expenses (charges related to goodwill and
our cost-reduction initiatives).
Our variable expenses are generally related to transaction volumes as well
as share volumes. Our average number of shares per transaction has declined
primarily due to a change in our customer mix and increased volumes,
particularly from our broker-dealer clients.
Non-GAAP Financial Measurements
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 context with our GAAP results. Reconciliations of our non-GAAP
measurements are provided below:
- - 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 non-equity related transaction fee
revenues, soft dollar and commission recapture expenses and broker-dealer
rebates from transaction fee revenues. A reconciliation of transaction fee
revenue to net equity transaction fee revenue is calculated as follows:
Three Months Ended,
Mar 31, 2003 Mar 31, 2002
------------ ------------
Total
Transaction fee revenue, as reported $255,224 $265,881
Less non equity related transaction fee revenue 3,357 3,009
Less soft dollar revenues and commission recapture expenses 49,058 53,591
Less broker-dealer rebates 50,420 3,291
-------- --------
Net equity transaction fee revenue $152,389 $205,990
U.S.
Transaction fee revenue from U.S. securities $211,934 $215,518
Less non-equity related transaction fee revenue 3,357 3,009
Less soft dollar revenues and commission recapture expenses
from U.S. equities 35,787 42,445
Less broker-dealer rebates 50,420 3,291
-------- --------
Net equity transaction fee revenue from U.S. equities $122,370 $166,773
-17-
U.S. revenue per share
Average U.S. security transaction fee revenue (per share, per side) $ 0.0034 $ 0.0071
Less non equity related transaction fee revenue 0.0001 0.0001
Less soft dollar revenues and commission recapture expenses
from U.S. equities 0.0006 0.0014
Less broker-dealer rebates 0.0008 0.0001
-------- --------
Average U.S. equity net transaction fee revenue (per share, per side) $ 0.0019 $ 0.0055
Non-U.S
Transaction fee revenue from non-U.S. equities $ 43,290 $ 50,363
Less soft dollar revenues and commission recapture expenses
from non-U.S. equities 13,271 11,146
-------- --------
Net equity transaction fee revenue from non-U.S. equities $ 30,019 $ 39,217
- - Our expense structure includes a certain level of fixed costs, as well as
variable costs that fluctuate 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 non-operating expenses and then subtracting 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, 2003 Mar 31, 2002
------------ ------------
Reconciliation of fixed cost base:
Total expenses, as reported $ 280,718 $284,894
Less brokerage, clearing and exchange fees 34,025 36,681
Less soft dollar and commission recapture 49,058 53,591
Less broker-dealer rebates 50,420 3,291
Add insurance recovery of fixed assets at the World Trade Center (5,000) --
Less restructuring -- 15,030
Less severance included in compensation and benefits 9,146 --
Less real estate abandonment costs included in occupancy 2,333 --
--------- --------
Total fixed costs 140,736 176,301
--------- --------
Annualized (total fixed costs times four) $ 562,944 $705,204
-18-
Critical Accounting Policies
Our accounting policy related to our strategic alliances and long term
investments ("investments") is the most critical accounting policy that requires
us to make estimates and use judgments that could affect our results.
Our investments are stated at estimated fair value as determined in good
faith by management. Generally, we will initially value investments at cost as a
proxy for fair value, and require that changes in value be established by
meaningful third-party transactions or a significant impairment in the financial
condition or operating performance of the issuer, unless meaningful developments
occur that otherwise warrant a change in the valuation of an investment. Factors
considered in valuing individual investments include, without limitation,
available market prices, type of security, purchase price, purchases of the same
or similar securities by other investors, marketability, restrictions on
disposition, current financial position and operating results, and other
pertinent information.
We use our best judgment in estimating the fair value of these
investments. There are inherent limitations to any estimation technique. The
fair value estimates presented herein are not necessarily indicative of an
amount that 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.
For the three months ended March 31, 2003, we wrote down our investments
in Archipelago Holding LLC, The Nasdaq Stock Market, Inc. Tradeware S.A., and
JapanCross Securities Co. Ltd. by and aggregate $17.6 million, based upon
management's best judgment of each investment's respective fair market value.
For the three months ended March 31, 2002, we wrote down our investment in
Vencast, Inc. by $2.4 million, based upon management's best judgment of the
investment's fair market value.
Recently Issued Accounting Standards
None
-19-
KEY STATISTICAL INFORMATION
The following table presents key transaction volume information, as well
as certain other operating information.
Three Months Ended
March 31,
-------------------------
2003 (4) 2002
--------- ---------
Total U.S. equity share volume (millions) 1,2 204,359 212,299
Instinet's U.S. equity share volume (millions) 1,2 31,541 15,160
Instinet's share of total U.S. equity share volume 1,2 15.4% 7.1%
Total Nasdaq-listed equity share volume (millions) 2 89,015 109,429
Instinet's Nasdaq-listed equity share volume (millions) 2 26,341 12,043
Instinet's share of total Nasdaq-listed equity share volume 2 29.6% 11.0%
Total U.S. exchange-listed equity share volume (millions) 115,343 102,870
Instinet's U.S. exchange-listed equity share volume (millions) 2 5,200 3,117
Instinet's share of total U.S. exchange-listed equity share volume 2 4.5% 3.0%
Instinet's U.S. equity transaction volume (thousands) 67,987 18,953
Instinet's non-U.S. equity transaction volume (thousands) 2,161 1,957
Instinet's total equity transaction volume (thousands) 70,148 20,910
Instinet's average U.S. equity transaction size (shares per transaction) 464 800
Instinet's average equity transactions per day (thousands) 1,150 349
Transaction fees from US equities (thousands) $ 211,934 $ 215,518
Transaction fees from non-US equities (thousands) $ 43,290 $ 50,363
Total equity transaction fees (thousands) $ 255,224 $ 265,881
Net transaction fees from US
equities (thousands) (non-GAAP financial measure)3 $ 122,370 $ 166,773
Net transaction fees from non-US
equities (thousands)(non-GAAP financial measure)3 $ 30,019 $ 39,217
Total net equity transaction fees
(thousands)(non-GAAP financial measure)3 $ 152,389 $ 205,990
Instinet's average equity transaction fee
revenue (U.S. cents per share per side) 3 $ 0.0034 $ 0.0071
Instinet's average net equity transaction fee revenue
(U.S. cents per share per side)(non-GAAP financial measure) 3 $ 0.0019 $ 0.0055
(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) See - "Non-GAAP Financial Measurements
(4) Represents Instinet Group Incorporated volume from all sources, including
the Island ECN subsequent to 9/20/02 and Instinet Corporation.
-20-
RESULTS OF OPERATIONS
The following table sets forth our consolidated statements of operations
data for the periods presented as a percentage of total revenues:
Three Months Ended
March 31,
---------------------
2003 2002
------- -------
REVENUE
Transaction fees 106.4% 98.8%
Interest 2.6% 3.3%
Investments -9.0% -2.1%
------- -------
Total revenues 100.0% 100.0%
EXPENSES
Compensation and benefits 26.7% 32.0%
Soft dollar and commission recapture 20.4% 19.9%
Broker Dealer Rebates 21.0% 1.2%
Brokerage, clearing and exchange fees 14.2% 13.6%
Communications and equipment 12.8% 12.4%
Depreciation and amortization 10.0% 7.1%
Occupancy 6.9% 5.0%
Professional fees 2.6% 1.9%
Marketing and business development 1.2% 1.3%
Other 3.3% 5.8%
Restructuring 0.0% 5.6%
Recovery of fixed assets lost -2.1% 0.0%
------- -------
Total expenses 117.0% 105.9%
Income/(loss) from continuing operations before income taxes,
and cumulative effect of change in accounting principle -17.0% -5.9%
Income tax provision/(benefit) -2.7% -2.1%
Income/(loss) from continuing operations before cumulative
------- -------
change in accounting principle -14.3% -3.7%
Discontinued operations:
Loss from operations of fixed income business -- -3.6%
Income tax benefit -- 1.4%
------- -------
Income before cumulative effect of change in accounting principle -14.3% -6.0%
Cumulative effect of change in accounting principle, net of tax -- -6.9%
------- -------
Net income/(loss) -14.3% -12.9%
======= =======
-21-
THREE MONTHS ENDED MARCH 31, 2003 VERSUS THREE MONTHS ENDED MARCH 31, 2002
Overview
Our net loss declined from $34.7 million for the three months ended March
31, 2002 to a net loss of $34.3 million for the comparable period in 2003. Our
revenues decreased 10.9% from $269.1 million for the three months ended March
31, 2002 to $239.9 million for the comparable period in 2003 primarily as a
result of lower average pricing, which more than offset increased volumes due to
our acquisition of Island and market share growth.
Expenses decreased 1.5% from $284.9 million for the three months ended
March 31, 2002 to $280.7 million for the comparable period in 2003. Our expenses
for the first three months of 2003 included $11.5 million of charges related to
our recently announced cost reduction initiative as well as an insurance
recovery of $5.0 million for fixed assets lost at the World Trade Center on
September 11, 2001. Our expenses for the first three months of 2002 included a
restructuring charge of $15.0 million related to our cost reduction initiatives.
Excluding these items, our expenses increased 1.6% from $269.9 million for the
three months ended March 31, 2002 to $274.2 million for the comparable period in
2003.
Revenues
Transaction fee revenue decreased 4.0% from $265.9 million for the three
months ended March 31, 2002 to $255.2 million for the comparable period in 2003.
Our average transaction fee revenue per U.S. share decreased 52.1% from $0.0071
for the three months ended March 31, 2002 to $0.0034 for the comparable period
in 2003. Our total net transaction fee revenue (a non-GAAP financial measure)
declined 26.0% from $206.0 million for the three months ended March 31, 2002 to
$152.4 million for the comparable period in 2003. Our average net transaction
fee revenue per U.S. share (a non-GAAP financial measure) decreased 65.5% from
$0.0055 in the three months ended March 31, 2002 to $0.0019 for the comparable
period in 2003. These decreases were primarily due to a decline in our average
pricing as a result of our pricing changes.
We increased our trading volumes and market share in Nasdaq-quoted and
U.S. exchange-listed stocks between 2002 and 2003; however as noted above, the
decrease in our average pricing more than offset the effect on revenues from
higher trading volumes. Our trading volumes in Nasdaq-quoted stocks increased
from 12.0 billion in the three months ended March 31, 2002 to 26.3 billion for
the comparable period in 2003. Island contributed 74.3%, or 10.6 billion shares,
of the increase. Our trading volumes in U.S exchange-listed stocks increased
from 3.1 billion shares in the three months ended March 31, 2002 to 5.2 billion
shares for the comparable period in 2003. Island contributed 83.4%, or 1.7
billion shares, of the increase. Our share of volume in Nasdaq-quoted stocks
increased from 11.0% in the three months ended March 31, 2002 to 29.6% for the
comparable period for the comparable period in 2003. Our average number of
transactions in Nasdaq-quoted and U.S. exchange-listed stocks per day increased
from 348,500 for the three months ended March 31, 2002 to 1.2 million for the
comparable period in 2003.
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 8.5% from $53.6 million
for the three months ended March 31, 2002 to $49.1 million for the comparable
period in 2003, primarily due to a decrease in our soft dollar service partly
offset by expanded use of our commission recapture services offered by our Lynch
Jones & Ryan subsidiary.
Our net transaction fee revenue earned from U.S. equity transactions (a
non-GAAP financial measure) decreased 26.6% from $166.8 million for the three
months ended March 31, 2002 to $122.4 million for the comparable period in 2003,
primarily for the reasons noted above. Our transaction fee revenue earned from
U.S. equity transactions (the equivalent GAAP financial measure) decreased 1.7%
from $215.5 million for the three months ended March 31, 2002 to $211.9 million
for the comparable period in 2003.
Our net transaction fee revenue earned from non-U.S. equities (a non-GAAP
financial measure) declined 23.5% from $39.2 million for the three months ended
-22-
March 31, 2002 to $30.0 million for the comparable period in 2003. This amount
represented 19.0% of our total net equity transaction fee revenue for the three
months ended March 31, 2002 and 19.7% for the comparable period in 2003. Our
transaction fee revenue earned from non-U.S. equities (the equivalent GAAP
financial measure) declined 14.0% from $50.4 million for the three months ended
March 31, 2002 to $43.3 million for the comparable period in 2003. This amount
represented 18.9% of our total equity transaction fee revenue for the three
months ended March 31, 2002, and 17.0% for the comparable period in 2003.
Interest revenue decreased 29.0% from $8.9 million for the three months
ended March 31, 2002 to $6.3 million for the comparable period in 2003. This
decrease was primarily due to a decrease in interest rates which affects the
revenue generated by our stock borrowing activities related to our clearing
services, as well as lower levels of free cash balances as a result of our
special dividend in October 2002 in connection with our acquisition of Island.
Unrealized losses on our investments increased from $5.7 million for the
three months ended March 31, 2002 to $21.7 million for the comparable period in
2003. This increase was primarily due to write downs of $17.6 million where
management made a determination that the fair value of investments was impaired,
as well as unrealized mark-to-market losses on shares we own in various stock
exchanges and other securities owned.
Expenses
Compensation and benefits expense decreased 25.8% from $86.2 million for
the three months ended March 31, 2002 to $64.0 million for the comparable period
in 2003. This decrease was primarily due to a decrease in our worldwide
headcount, as part of our cost reduction initiatives, as well as a decline in
incentive compensation due to our lower revenues. Partly offsetting this
decrease was a severance charge of $9.1 million related to headcount reduction
as a result of the cost reduction initiative we announced in March 2003. Our
total headcount decreased from 1,937 employees at March 31, 2002 to 1,428
employees at March 31, 2003. Employees have also been given incentives through
the issuance of stock options and it is the Company's policy not to reflect an
expense for stock options granted to employees.
Soft dollar and commission recapture expense decreased 8.5% from $53.6
million for the three months ended March 31, 2002 to $49.1 million for the
comparable period in 2003. This expense is offset dollar-for-dollar by soft
dollar revenues and revenues that are subject to commission recapture. The
decrease was primarily due to a reduced use of our soft dollar services partly
offset by expanded use of commission recapture services offered by our Lynch
Jones & Ryan subsidiary.
Broker-dealer rebates expense increased from $3.3 million for the three
months ended March 31, 2002 to $50.4 million for the comparable period in 2003.
In March 2002, we began offering commission rebates to broker-dealers who
provide liquidity to our ECNs, which is recorded as an expense, and charge
commissions to broker-dealers who consume liquidity, which is recorded as
transaction fee revenue. The commissions we charge to liquidity consumers more
than offset the amount we pay to broker-dealers who provide liquidity.
Brokerage, clearing and exchange fees decreased 7.2% from $36.7 million
for the three months ended March 31, 2002 to $34.0 million for the comparable
period in 2003. Higher transaction volumes were more than offset by lower
clearing costs, particularly in the U.S., due to a decline in trade reporting
expenses and benefits from technology efficiencies.
Communications and equipment expense decreased 7.8% from $33.3 million for
the three months ended March 31, 2002 to $30.7 million for the comparable period
in 2003. This decrease was due to lower core communications costs and lower
equipment and maintenance costs. Partly offsetting these decreases was an
increase in our exchange data access charges. Island contributed $2.6 million of
additional communications and equipment costs in the three months ended March
31, 2003.
Depreciation and amortization expense increased 25.9% from $19.1 million
for the three months ended March 31, 2002 to $24.1 million for the comparable
-23-
period in 2003. This increase was primarily due to amortization related to
intangible assets recorded in connection with our acquisition of Island in
September 2002.
Occupancy expense increased 21.4% from $13.6 million for the three months
ended March 31, 2002 to $16.5 million for the comparable period in 2003. This
increase was primarily due to a one time charge of $2.3 million related to
consolidation of our office space as part of the cost reduction initiative
announced in March 2003, as well as our acquisition of Island, which contributed
$1.7 million.
Other expenses decreased 49.9% from $15.7 million for the three months
ended March 31, 2002 to $7.9 million for the comparable period in 2003. The
decrease was due to a lower expense for bad debt and the fact that other
expenses in the three months ended March 31, 2002 included an expense for a loan
to an investment which has since ceased operations. As part of our cost
reduction initiatives, travel and office related expenses also decreased.
Recovery of fixed assets lost at the World Trade Center relates to
insurance recovery losses we incurred in our office at the World Trade Center as
a result of the events of September 11, 2001. We recovered $5.0 million from our
insurance carrier in the three months ended March 31, 2003.
Provision for Income Taxes
Our tax benefit increased from $5.7 million in the three months ended
March 31, 2002 to a benefit of $6.5 million in the comparable period in 2003 as
a result of our increased loss before income taxes. Our effective income tax
rate decreased from 36.1% for the three months ended March 31, 2002 to 15.9% for
the comparable period in 2003 primarily due to the ability to realize our losses
in our non-U.S. entities and investments.
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.
-24-
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 uncommitted credit
facilities, although our borrowings under these facilities have been
traditionally low. Our financial liquidity is primarily determined by the
performance of our business. We maintain a highly liquid balance sheet that can
fluctuate significantly between financial statement dates. Our cash equivalents
and securities owned are primarily comprised of highly liquid investments that
can be sold in the secondary market, if necessary. We currently anticipate that
our existing cash resources and credit facilities will be more than sufficient
to meet our anticipated working capital, capital expenditures and regulatory
capital requirements, operating losses, restructuring charges as well as other
anticipated requirements for at least the next twelve months. To the extent that
overall market volumes and our trading volumes decrease beyond certain levels,
we may be required to obtain additional financing from third parties or Reuters.
Cash and cash equivalents, together with assets readily convertible into
cash, accounted for 66.4% and 67.7% of our assets as of March 31, 2003 and
December 31, 2002, respectively. Cash and cash equivalents decreased to $274.8
million as of March 31, 2003 from $275.8 million as of December 31, 2002. Our
cash and cash equivalents and securities owned decreased to $569.4 million as of
March 31, 2003 from $623.9 million as of December 31, 2002 primarily due to
decreases in our accrued compensation and other liabilities and accrued expenses
as a result of seasonal incentive compensation payments to our employees as well
as severance payments in connection with our cost reduction initiatives. 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, 2003 and 2002
related to the purchase of data processing and communications equipment,
leasehold improvements and purchases of furniture for our additional office
facilities. Capital expenditures and investments in new technology were financed
primarily through our operations.
We received $5.0 million from our insurance carrier for fixed assets lost
at the World Trade Center.
Our future cash payments associated with contractual obligations, which
are primarily leases for office space and equipment under non-cancelable
operating leases with third parties and Reuters, are summarized as follows:
Year ending December 31, 2004 $ 30.5 million
Year ending December 31, 2005 $ 26.7 million
Year ending December 31, 2006 $ 24.9 million
Year ending December 31, 2007 $ 24.1 million
Year ending December 31, 2008 $ 20.3 million
Thereafter $ 90.2 million
Our aggregate minimum lease commitments after 2008 primarily 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, 2003, we had access to $201.0 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, 2003, 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, 2003, we
had access to $619.5 million of uncommitted credit lines from commercial banking
institutions to meet the funding needs of our European and Asian subsidiaries.
These credit lines are uncollateralized, and we currently pay no annual fees to
maintain these facilities. As of March 31, 2003, there was $27.7 million
outstanding under these credit lines.
-25-
Our broker-dealer subsidiaries are subject to regulatory requirements
intended to ensure their respective general financial soundness and liquidity,
which require that they comply with certain minimum capital requirements. These
regulations, which differ in each country, generally prohibit a broker-dealer
subsidiary from repaying borrowings from us or our affiliates, paying cash
dividends, making loans to us or our affiliates or otherwise entering into
transactions that would result in a significant reduction in its regulatory net
capital position without prior notification or approval of its principal
regulator. Our capital structure is designed to provide each of our subsidiaries
with capital and liquidity consistent with its business and regulatory
requirements. As of March 31, 2003, 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 regulatory net capital of $164.5
million, which was $160.6 million in excess of its required net capital of $3.9
million.
We participate in securities borrowing and lending activities, where we
borrow securities from one party and lend them to another, primarily to
facilitate the settlement process to meet our customers' needs. Under these
transactions, we either receive or provide collateral, generally cash. When we
borrow securities, we provide cash to the lenders as collateral and earn
interest on the cash. Similarly, when we loan securities, we receive cash as
collateral and pay interest to the borrower. The initial collateral advanced or
received approximates, or is greater than, fair value of the securities borrowed
or loaned. In the event the counterparty is unable to meet its contractual
obligations to return the pledged collateral, we may be exposed to the market
risk of acquiring the collateral at prevailing market prices. We provided $602.1
million and $608.5 million as collateral for securities borrowed as of March 31,
2003 and December 31, 2002, respectively. We also received $449.5 million and
$453.3 million as collateral for securities loaned as of March 31, 2003 and
December 31, 2002, respectively.
Included in commissions and other receivables is approximately $29 million
from Archipelago L.L.C., B-Trade Services LLC and REDIBook ECN L.L.C. of which
we have commenced arbitration proceedings before the NASD for approximately $11
million. We have established an appropriate reserve against the disputed amount
based upon a review of the facts and circumstances surrounding the dispute.
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, 2003, these funds amounted to $240.7
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.
-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.
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 of securities consisting of the
following:
MARCH 31, DECEMBER 31,
--------- ------------
2003 2002
-------- --------
U.S. government and federal agency obligations $ 6.8 $ 10.9
Municipal bonds 137.5 157.7
Corporate bonds 82.8 91.9
Foreign sovereign obligations 43.1 58.1
-------- --------
Total $ 270.1 $ 318.6
======== ========
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, 2003 and December 31, 2002, the fair value of the
portfolio would have declined by $0.7 million and $1.5 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 $274.8 million and $275.8 million as of March
31, 2003 and December 31, 2002, respectively. We also had short-term borrowings
of $27.7 million and $27.3 million as of March 31, 2003 and December 31, 2002,
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
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; therefore, we have not hedged this exposure. 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. subsidiary's
liabilities with assets denominated in the same local currency and manage each
subsidiary's balance sheet in local currency. This generally results in the net
equity of the subsidiary being reported in its functional currency and subject
to the effect of changes in currency
-27-
exchange rates when translated into the U.S. dollar, our reporting currency. 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 2003 2002
------- -------
British pound $ 36.6 $ 52.7
Euros 14.7 18.1
Japanese yen 8.5 8.4
Canadian dollar 6.9 7.2
Hong Kong dollar 0.9 1.0
------- -------
Total $ 67.5 $ 87.4
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 $6.1
million and $7.9 million as of March 31, 2003 and December 31, 2002,
respectively.
A portion of our revenues and expenses is denominated in non-U.S. dollar
currencies. Approximately 16.9% of our revenues and 19.4% of our expenses as of
March 31, 2003 and 20.4% of our revenues and 10.1% of our expenses as of
December 31, 2002 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 $1.4 and $3.3 million as of March 31, 2003 and
December 31, 2002, respectively.
EQUITY PRICE RISK
As an agency broker, we do not trade securities for our own account nor
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 $2.4
million and $2.9 million as of March 31, 2003 and December 31, 2002,
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-
We are also exposed to credit risks from third parties that owe us money,
securities or other obligations. These parties include our customers, trading
counterparties clearing agents, exchanges and other financial institutions.
These parties may default on their obligations due to bankruptcy, lack of
liquidity, operational failure or other reasons. Over the last three years, our
loss from a counterparty refusing to pay or was unable to settle with us have
been immaterial.
We are exposed to the credit worthiness of agencies with which we invest a
portion of our available cash, primarily U.S and non-U.S. government and agency
obligations, as well as corporate and municipal bonds. For investments maturing
within six months, our credit policy is that all investments have at least an
A1/P1 credit rating from Standard & Poors and Moody's Investors Service. We also
maintain counterparty concentration limits that specify the amount that we can
invest with any one counterparty.
Item 4. Controls and Procedures
Evaluation Of Disclosure Controls And Procedures
Within the 90 days prior to the date of this report, we carried out an
evaluation under the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures. Based upon and as of the date of that evaluation, our Chief
Executive Officer and Chief Financial Officer concluded that the disclosure
controls and procedures are effective in all material respects to ensure that
information required to be disclosed in the reports we file and submit under the
Exchange Act are recorded, processed, summarized and reported as and when
required.
Changes In Internal Controls
There have been no significant changes in our internal controls or other factors
that could significantly affect our internal controls subsequent to the date of
their evaluation. There were no significant deficiencies or material weaknesses
identified in the evaluation and therefore no corrective actions were taken.
-29-
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, we are involved in various legal proceedings arising in
the ordinary course of business. We are also subject to periodic regulatory
audits and inspections. While any litigation contains an element of uncertainty,
it is the opinion of management after consultation with counsel, that the
outcomes of such proceedings or claims are unlikely to have a material adverse
effect on the business, financial condition or operating results of the company.
For a description of our previously reported legal proceedings, see "Legal
Proceedings" in our Annual Report on Form 10-K for 2002. There have been no
material developments with respect to the legal proceedings.
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
Recently, we continued our efforts to develop our global institutional
agency brokerage business by announcing our plans to further increase our
presence in the market for U.S. exchange-listed stocks.
We intend to provide our customers with enhanced automated services for
the trading of U.S. exchange-listed stocks. For example, during the first
quarter, we upgraded our smart order-routing technology to allow customers to
route orders to sources of U.S. exchange-listed volume that is not traded on the
U.S. exchanges, including Instinet, Island and other ECNs as well as to the
Super Designated Order Turnaround System (SuperDot), the NYSE's system by which
NYSE member firms' orders are electronically transmitted to the NYSE floor.
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
- --------- --------------------------------------------------------------
3.1 Amended and Restated Certificate of Incorporation of Instinet
Group Incorporated (Incorporated by reference to Exhibit 3.1
to the Registrant's Current Report on Form 8-K as filed with
the Commission on September 23, 2002).
3.2 Amended and Restated Bylaws of Instinet Group Incorporated
(Incorporated by reference to Exhibit 3.2 to the Registrant's
Current Report on Form 8-K as filed with the Commission on
September 23, 2002).
4.1 Form of Common Stock Certificate (Incorporated by reference to
Exhibit 4.1 to the Registrant's Form S-1 (Registration No.
333-55190))
4.2 Rights Agreement between Instinet Group Incorporated and
Mellon Investor Services LLC, dated May 15, 2001 (Incorporated
by reference to Exhibit 4.3 to the Registrant's Quarterly
Report on Form 10-Q (Commission file No. 000-32717) for the
-30-
quarterly period ended June 30, 2001).
4.3 Amendment No. 1 to the Rights Agreement, by and between
Instinet and Mellon Investor Services LLC, as Rights Agent,
dated as of September 3, 2002 (Incorporated by reference to
Exhibit 99.1 to the Registrant's Current Report on Form 8-K as
filed with the Commission on September 13, 2002).
10.1* Transaction System Agreement dated as of April 20, 2003,
between Instinet Corporation and Bridge Trading Company.
99.1* Certification Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
- ----------
* Filed herewith.
(b) The following reports on Form 8-K were filed for the last quarter
covered by this report, and subsequently through May 9, 2003:
Date of Report Item Number Financial Statements Required to be Filed
- -------------- ----------- -----------------------------------------
February 12, 2003 Items 7 & 9 No
February 12, 2003 Items 5 & 7 No
March 28, 2003 Items 5 & 7 No
March 28, 2003 Items 7 & 9 No
April 22, 2003 Items 7 & 12 No
-31-
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, 2003
INSTINET GROUP INCORPORATED
By: /s/ JOHN F. FAY
-------------------------------------
Name: John F. Fay
Title: Executive Vice President and
Chief Financial Officer
(Duly Authorized Officer and Principal
Financial Officer)
-32-
CERTIFICATIONS
I, Edward J. Nicoll, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Instinet Group
Incorporated;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: May 15, 2003
By: /s/ Edward J. Nicoll
------------------------------
Name: Edward J. Nicoll
Title: Chief Executive Officer
-33-
I, John F. Fay, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Instinet Group
Incorporated;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: May 15, 2003
By: /s/ John F. Fay
------------------
Name: John F. Fay
Title: Executive Vice President and Chief Financial Officer
-34-
EXHIBIT INDEX
Exhibit
Number Description
- --------- --------------------------------------------------------------
3.1 Amended and Restated Certificate of Incorporation of Instinet
Group Incorporated (Incorporated by reference to Exhibit 3.1
to the Registrant's Current Report on Form 8-K as filed with
the Commission on September 23, 2002).
3.2 Amended and Restated Bylaws of Instinet Group Incorporated
(Incorporated by reference to Exhibit 3.2 to the Registrant's
Current Report on Form 8-K as filed with the Commission on
September 23, 2002).
4.1 Form of Common Stock Certificate (Incorporated by reference to
Exhibit 4.1 to the Registrant's Form S-1 (Registration No.
333-55190))
4.2 Rights Agreement between Instinet Group Incorporated and
Mellon Investor Services LLC, dated May 15, 2001 (Incorporated
by reference to Exhibit 4.3 to the Registrant's Quarterly
Report on Form 10-Q (Commission file No. 000-32717)for the
quarterly period ended June 30, 2001).
4.3 Amendment No. 1 to the Rights Agreement, by and between
Instinet and Mellon Investor Services LLC, as Rights Agent,
dated as of September 3, 2002 (Incorporated by reference to
Exhibit 99.1 to the Registrant's Current Report on Form 8-K as
filed with the Commission on September 13, 2002).
10.1* Transaction System Agreement dated as of April 20, 2003,
between Instinet Corporation and Bridge Trading Company.
99.1* Certification Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
- ----------
* Filed herewith.
-35-