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 September 30, 2004
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 of Incorporation or Organization) | (I.R.S. Employer Identification No.) | |
| 3 Times Square, New York, NY | 10036 | |
| (Address of Principal Executive Offices) | (Zip Code) | |
(212) 310-9500
(Registrant’s Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes x No ¨
As of November 8, 2004, there were 334,227,851 shares of the registrant’s common stock outstanding.
Instinet Group Incorporated
FORM 10-Q QUARTERLY REPORT
For the Quarter Ended September 30, 2004
| Part I. FINANCIAL INFORMATION |
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| Item 1. Financial Statements |
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| 3 | ||
| Consolidated Statements of Financial Condition as of September 30, 2004 and December 31, 2003 |
4 | |
| Consolidated Statements of Cash Flows for the nine months ended September 30, 2004 and 2003 |
5 | |
| 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 |
35 | |
| Item 4. Controls and Procedures |
37 | |
| Part II. OTHER INFORMATION |
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| Item 1. Legal Proceedings |
38 | |
| Item 2. Unregistered Sales of Equity Securities and Use of Proceeds |
38 | |
| Item 3. Defaults Upon Senior Securities |
38 | |
| 38 | ||
| Item 5. Other Information |
39 | |
| Item 6. Exhibits |
39 | |
| 40 | ||
| 41 | ||
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 |
Consolidated Statements of Operations
(In thousands, except per share amounts)
(Unaudited)
| Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
| 2004 |
2003 |
2004 |
2003 |
|||||||||||||
| Revenue |
||||||||||||||||
| Transaction fees |
$ | 257,713 | $ | 268,210 | $ | 844,229 | $ | 799,343 | ||||||||
| Interest income |
3,934 | 4,931 | 12,604 | 17,929 | ||||||||||||
| Interest expense |
(756 | ) | (1,237 | ) | (2,624 | ) | (5,454 | ) | ||||||||
| Interest income, net |
3,178 | 3,694 | 9,980 | 12,475 | ||||||||||||
| Total revenues, net |
260,891 | 271,904 | 854,209 | 811,818 | ||||||||||||
| Cost of Revenues |
||||||||||||||||
| Soft dollar and commission recapture |
50,044 | 54,894 | 163,247 | 153,556 | ||||||||||||
| Broker-dealer rebates |
59,859 | 53,552 | 190,394 | 162,602 | ||||||||||||
| Brokerage, clearing and exchange fees |
41,257 | 35,553 | 127,982 | 103,024 | ||||||||||||
| Total cost of revenues |
151,160 | 143,999 | 481,623 | 419,182 | ||||||||||||
| Gross margin |
109,731 | 127,905 | 372,586 | 392,636 | ||||||||||||
| Direct Expenses |
||||||||||||||||
| Compensation and benefits |
46,460 | 51,450 | 161,837 | 176,183 | ||||||||||||
| Communications and equipment |
18,894 | 24,917 | 57,486 | 87,254 | ||||||||||||
| Depreciation and amortization |
12,912 | 22,408 | 43,804 | 70,016 | ||||||||||||
| Occupancy |
9,170 | 12,567 | 27,737 | 42,200 | ||||||||||||
| Professional fees |
7,406 | 5,739 | 20,595 | 19,305 | ||||||||||||
| Marketing and business development |
3,522 | 2,958 | 12,146 | 9,219 | ||||||||||||
| Other |
5,085 | 4,491 | 10,791 | 16,541 | ||||||||||||
| Total direct expenses |
103,449 | 124,530 | 334,396 | 420,718 | ||||||||||||
| Contractual settlement |
— | — | (7,250 | ) | — | |||||||||||
| Investments |
(4,031 | ) | 667 | (8,705 | ) | 19,504 | ||||||||||
| Insurance recovery |
— | (2,989 | ) | (5,116 | ) | (7,989 | ) | |||||||||
| Total expenses |
250,578 | 266,207 | 794,948 | 851,415 | ||||||||||||
| Income (loss) from operations before income taxes |
10,313 | 5,697 | 59,261 | (39,597 | ) | |||||||||||
| Income tax provision (benefit) |
2,656 | 1,652 | 24,348 | (4,123 | ) | |||||||||||
| Net income (loss) |
$ | 7,657 | $ | 4,045 | $ | 34,913 | $ | (35,474 | ) | |||||||
| EARNINGS (LOSS) PER SHARE |
||||||||||||||||
| Basic EPS |
$ | 0.02 | $ | 0.01 | $ | 0.11 | $ | (0.11 | ) | |||||||
| Diluted EPS |
$ | 0.02 | $ | 0.01 | $ | 0.10 | $ | (0.11 | ) | |||||||
| Weighted average shares outstanding - basic |
333,575 | 330,893 | 332,375 | 330,833 | ||||||||||||
| Weighted average shares outstanding - diluted |
335,474 | 332,289 | 334,359 | 330,833 | ||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
3
Consolidated Statements of Financial Condition
(In thousands, except per share amounts)
(unaudited)
| September 30, 2004 |
December 31, 2003 |
|||||||
| ASSETS | ||||||||
| Cash and cash equivalents |
$ | 691,139 | $ | 534,562 | ||||
| Cash and securities segregated under federal regulations |
31,700 | 177,400 | ||||||
| Securities owned, at market value |
133,705 | 261,552 | ||||||
| Securities borrowed |
158,503 | 314,443 | ||||||
| Receivable from broker-dealers |
197,272 | 162,432 | ||||||
| Receivable from customers |
52,697 | 107,221 | ||||||
| Commissions and other receivable, net |
87,852 | 124,137 | ||||||
| Investments |
26,096 | 29,499 | ||||||
| Fixed assets and leasehold improvements, net |
91,860 | 119,051 | ||||||
| Deferred tax asset, net |
62,733 | 73,658 | ||||||
| Intangible assets, net |
69,431 | 82,281 | ||||||
| Other assets |
78,073 | 80,403 | ||||||
| Total assets |
$ | 1,681,061 | $ | 2,066,639 | ||||
| LIABILITIES & STOCKHOLDERS’ EQUITY | ||||||||
| LIABILITIES |
||||||||
| Short-term borrowings |
$ | 6,947 | $ | 21,372 | ||||
| Securities loaned |
170,663 | 220,465 | ||||||
| Payable to broker-dealers |
114,621 | 141,821 | ||||||
| Payable to customers |
69,216 | 306,763 | ||||||
| Taxes payable |
54,697 | 60,538 | ||||||
| Accounts payable, accrued expenses and other liabilities |
250,994 | 344,897 | ||||||
| Total liabilities |
667,138 | 1,095,856 | ||||||
| Commitments and contingencies (Note 9) |
||||||||
| STOCKHOLDERS’ EQUITY |
||||||||
| Common stock, $0.01 par value (950,000 shares authorized, 334,218 and 331,032 issued as of September 30, 2004 and December 31, 2003, respectively, and 334,218 and 330,991 outstanding as of September 30, 2004 and December 31, 2003, respectively) |
3,342 | 3,310 | ||||||
| Additional paid-in capital |
1,669,210 | 1,661,476 | ||||||
| Accumulated deficit |
(700,009 | ) | (734,922 | ) | ||||
| Treasury stock, at cost (41 shares as of December 31, 2003) |
— | (78 | ) | |||||
| Accumulated other comprehensive income |
39,276 | 41,339 | ||||||
| Restricted stock units |
12,400 | — | ||||||
| Unearned compensation |
(10,296 | ) | (342 | ) | ||||
| Total stockholders’ equity |
1,013,923 | 970,783 | ||||||
| Total liabilities and stockholders’ equity |
$ | 1,681,061 | $ | 2,066,639 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
4
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
| Nine Months Ended September 30, |
||||||||
| 2004 |
2003 |
|||||||
| Cash flows from operating activities |
||||||||
| Net income (loss) |
$ | 34,913 | $ | (35,474 | ) | |||
| Adjustments to reconcile net income (loss) to cash provided by operating activities: |
||||||||
| Loss (gain) on investments |
(4,273 | ) | 19,258 | |||||
| Insurance recovery of fixed assets |
— | (7,989 | ) | |||||
| Depreciation, amortization and other non-cash items |
45,262 | 72,099 | ||||||
| Deferred tax assets, net |
10,925 | (192 | ) | |||||
| Stock based compensation |
3,916 | 2,416 | ||||||
| Changes in operating assets and liabilities: |
||||||||
| Cash and securities segregated under federal regulation |
145,700 | 53,875 | ||||||
| Securities borrowed, net of securities loaned |
106,138 | 105,627 | ||||||
| Net receivable/payable from/to broker-dealers |
(62,040 | ) | (94,116 | ) | ||||
| Net receivable/payable from/to customers |
(183,023 | ) | 24,510 | |||||
| Receivables and other assets |
38,615 | (12,723 | ) | |||||
| Payables and other liabilities | ||||||||