INGP Instinet Grp. Incorporated (MM)

Instinet Group Incorporated (Nasdaq: INGP) today announced net income of $84 million or $0.25 per diluted share for the third quarter of 2005 compared to net income of $11 million or $0.03 per diluted share for the third quarter of 2004 and net income of $8 million or $0.02 per diluted share for the second quarter of 2005. Excluding the discontinued operations of Lynch Jones & Ryan ("LJR"), Instinet Group incurred a net loss of $5 million or $(0.02) per diluted share for the third quarter of 2005 compared to net income of $8 million or $0.02 per diluted share for the third quarter of 2004 and net income of $7 million or $0.02 per diluted share for the second quarter of 2005. Discontinued operations for the third quarter of 2005 included an after-tax gain on the sale of LJR of $90 million. The third quarter 2005 results included $20 million in charges related to facility and asset write-offs, $9 million in severance charges and $6 million in merger related advisory fees, partially offset by $9 million in net investment gains. Excluding these items and the related tax effects, pro forma net income from continuing operations for the third quarter of 2005 was $11 million, or $0.03 per diluted share compared to pro forma net income from continuing operations of $5 million or $0.02 per diluted share for the third quarter of 2004 and pro forma net income from continuing operations of $6 million, or $0.02 per diluted share for the second quarter of 2005.(1) Financial Performance(2) Instinet Group Revenues Total consolidated revenues for Instinet Group, net of interest, were $254 million for the third quarter of 2005, up 2% from the third quarter of 2004 and down 2% from the second quarter of 2005. Expenses Total expenses for the third quarter of 2005 were $269 million, up 12% from $240 million in the third quarter of 2004 and up 9% from $246 million in the second quarter of 2005. The third quarters of 2005 and 2004 and second quarter of 2005 included net investment gains of $9 million, $4 million and $25 million, respectively. Excluding these gains, total expenses were $278 million in the third quarter of 2005, up 14% from $244 million in the third quarter of 2004 and up 3% from $271 million in the second quarter of 2005. Cost of revenues was $154 million for the third quarter of 2005, down 4% from the second quarter of 2005 primarily due to lower transaction volumes. Direct expenses were $124 million for the third quarter of 2005, up 12% from the second quarter of 2005. -- Compensation and benefits expense was $57 million for the third quarter of 2005, down 6% from the previous quarter primarily due to lower severance charges partially offset by higher variable compensation. The third quarter of 2005 included a $9 million severance charge while the second quarter of 2005 included $16 million in severance expense. These severance charges are part of our ongoing efforts to streamline the institutional broker business. These cost reductions are not related to the pending transaction with The Nasdaq Stock Market, Inc. ("NASDAQ"). -- Depreciation and amortization expense was $14 million, up 34% from the previous quarter primarily due to $5 million of asset write-offs associated with facility consolidation in the U.S. -- Occupancy expense was $23 million for the third quarter of 2005, up $13 million from the previous quarter due to $15 million in facility write-offs associated with the consolidation of space in the U.S. and the move to new space in London. At September 30, 2005, Instinet Group had net cash (cash and cash equivalents and securities owned less short-term borrowings) of approximately $938 million, up $2 million from $936 million at December 31, 2004. The increase in cash was primarily due to proceeds received from the sale of LJR partially offset by a special dividend paid to shareholders, firm cash used in customer settlement activities and seasonal payments related to incentive compensation. At September 30, 2005, total assets were approximately $1.8 billion and shareholders' equity was approximately $1.1 billion. There were approximately 341 million shares of common stock outstanding as of September 30, 2005. On September 30, 2005, Instinet Group's total headcount was 785 employees compared to 938 on June 30, 2005. Headcount at September 30, 2005 included 614 employees from Instinet, 82 employees from INET and 89 employees from Instinet Group. Business Segments(3) Instinet, The Institutional Broker -- Instinet reported a net loss from continuing operations before income taxes of $28 million for the third quarter of 2005, 32% lower than the second quarter of 2005. -- Total revenues, net of interest, were $142 million for the third quarter of 2005, 2% lower than the second quarter of 2005, primarily due to lower U.S. revenues partially offset by higher revenues from our international business. -- Instinet's customers traded an average of 99 million U.S. shares a day in the third quarter of 2005, up 6% from 93 million shares a day during the second quarter of 2005. Average daily consideration in non-U.S. equities for the third quarter of 2005 was $1,011 million, a 11% increase from the second quarter of 2005. -- Gross margin of $71 million for the third quarter of 2005 was level with the second quarter of 2005. -- Direct expenses of $99 million for the third quarter of 2005 were up 8% from the second quarter of 2005. INET, The electronic marketplace -- INET reported net income before income taxes of $4 million for the third quarter of 2005, down 54% from $10 million in the second quarter of 2005. -- Total revenues, net of interest, were $116 million for the third quarter of 2005, 2% lower than the previous quarter primarily due to lower U.S. equity market volumes in the third quarter of 2005. -- INET reported NASDAQ-listed average matched equity share volume of 416 million shares per day in the third quarter of 2005, down 8% from the previous quarter. INET's share of the total market in NASDAQ-listed equity trading was 25.8% in the third quarter of 2005, down from 26.0% in the previous quarter. -- INET reported U.S. exchange-listed average matched equity share volume of 100 million shares per day in the third quarter of 2005, up from 85 million in the previous quarter. INET's share of the total market in U.S. exchange-listed equity trading was 4.5% in the third quarter of 2005, up from 3.9% in the previous quarter. -- Cost of revenues as a percentage of total transaction fees was 80% in the third quarter of 2005 compared to 79% in the second quarter of 2005. -- Gross margin was $24 million for the third quarter of 2005, 3% lower than the previous quarter. -- Direct expenses of $20 million for the third quarter of 2005 were up 29% from the second quarter of 2005. Company Announcements and Updates Instinet Group announced on April 22, 2005 that it has entered into a definitive agreement pursuant to which NASDAQ will acquire Instinet Group. -- NASDAQ will acquire all outstanding shares of Instinet Group for an aggregate purchase price of approximately $1.88 billion in cash, or $5.10 per share (on a fully diluted basis) (reflecting a reduction of the purchase price for the special cash dividend) subject to certain adjustments. The $1.88 billion included proceeds from a separate sale of Lynch Jones and Ryan to The Bank of New York for $174 million. Instinet Group paid a special cash dividend of $0.32 per common share to Instinet Group stockholders on August 15, 2005, based upon the net after-tax proceeds of the sale of Lynch Jones and Ryan. -- The merger agreement was adopted on September 21, 2005 by a majority of Instinet Group shareholders. Instinet Group expects that the merger will be completed during the fourth quarter of 2005, at which time each shareholder will have the right to receive approximately $5.10 per share (on a fully diluted basis) (reflecting a reduction of the purchase price for the special cash dividend) subject to certain adjustments. Completion of the transaction is still subject to customary conditions, including regulatory approvals. -- On June 17, 2005 the Department of Justice ("DOJ") issued a Request for Additional Information and Documentary Materials (a "second request") to Instinet Group and NASDAQ in connection with the DOJ's investigation under the Hart-Scott Rodino Antitrust Improvements Act of the pending acquisition of Instinet Group by NASDAQ. Based on discussions with the DOJ staff responsible for reviewing the NASDAQ/Instinet transaction, we understand that the staff has forwarded its recommendation to senior DOJ officials and that we anticipate a formal decision from the DOJ soon. -- In April and May 2005, four purported class action lawsuits were filed in the Court of Chancery in the State of Delaware against Instinet Group, each of our directors and Reuters alleging, among other things, that defendants breached their fiduciary duties as to our public stockholders in connection with the proposed merger by approving the transaction at an allegedly unfair and inadequate price. On June 22, 2005, plaintiffs filed a consolidated amended complaint consolidating three of the lawsuits while voluntarily dismissing the fourth lawsuit. The amended complaint seeks, among other things, class action status, an injunction against consummation of the transaction, invalidation of certain provisions of the Merger Agreement, damages in an unspecified amount, rescission in the event the transaction is consummated and attorney's fees. On September 9, 2005, the parties entered into a proposed settlement of the action pursuant to a Stipulation and Agreement of Compromise, Settlement and Release. Pursuant to the proposed settlement: (i) Instinet revised the definitive proxy statement to include certain disclosures that have been agreed upon and reviewed by plaintiffs; (ii) Nasdaq and Instinet agreed to reduce by 15%, from $66,500,000 to $56,525,000, the break-up fee that Instinet would pay to Nasdaq under certain conditions pursuant to Section 8.6(a) of the merger agreement; and (iii) Nasdaq agreed to waive, with respect to members of the purported plaintiff class only, the provisions of the merger agreement pursuant to which the aggregate merger consideration was to have been reduced by up to $2.5 million based on the total amount of certain of our transaction liabilities, the net effect of which is an increase of approximately $0.007 per share (or approximately $1.0 million in the aggregate) in the merger consideration that will be received by Instinet stockholders other than the defendants. On September 16, 2005, Instinet mailed a notice of settlement to its stockholders. On October 25, 2005, the Delaware Court of Chancery certified the class of Instinet Group shareholders and approved the proposed settlement as fair and reasonable. Separately, on November 30, 2005, the Court will hold a hearing to consider plaintiffs' counsel's application for an award of attorneys' fees and reimbursement of expenses. The settlement is still subject to the entry of a final and non-appealable judgment dismissing the consolidated action with prejudice and the delivery of appropriate releases. Webcast Instinet Group will webcast a conference call to discuss its third quarter results at 10:00 a.m. New York time on November 2, 2005 at http://www.investor.instinetgroup.com. A replay will be available at the same address following the call. About Instinet Group Instinet Group, through affiliates, is the largest global electronic agency securities broker and has been providing investors with electronic trading solutions and execution services for more than 30 years. We operate our two major businesses through Instinet, LLC, The Institutional Broker, and Inet ATS, Inc., The electronic marketplace. -- Instinet, The Institutional Broker, gives its customers the opportunity to use its sales-trading expertise and advanced technology tools to interact with global securities markets, improve trading performance and lower overall transaction costs. Through Instinet's electronic platforms, customers can access other U.S. trading venues, including NASDAQ and the NYSE, and almost 30 securities markets throughout the world. Instinet acts solely as an agent for its customers, including institutional investors, such as mutual funds, pension funds, insurance companies and hedge funds. -- INET, The electronic marketplace, represents the consolidation of the order flow of the former Instinet ECN and former Island ECN, providing its U.S. broker-dealer customers one of the largest liquidity pools in NASDAQ-listed securities. This news release may be deemed to include forward-looking statements relating to Instinet Group. Certain important factors that could cause actual results to differ materially from those disclosed in such forward-looking statements are included in Instinet Group's Annual Report on Form 10-K for the fiscal year ended December 31, 2004, and other documents filed with the SEC and available on the Company's website at www.investor.instinetgroup.com. (C)2005 Instinet Group Incorporated and its affiliated companies. All rights reserved. INSTINET and INET are service marks in the United States. Instinet, LLC, member NASD/SIPC, branded as Instinet, The Institutional Broker, Inet ATS, Inc., member NASD/NSX/SIPC, branded as INET, The electronic marketplace and Bridge Trading Company, member NASD/SIPC are subsidiaries of Instinet Group Incorporated which is a member of the Reuters family of companies. -0- *T (1) The comparative quarters exclude asset write-offs, advisory fees, severance expense and investment gains. See table titled "Reconciliation of Pro Forma Operating Results for 3Q05" on our website at www.investor.instinetgroup.com under the heading "Earnings Releases - Financial Tables." (2) All financial information disclosed in this section of the release excludes the discontinued operations of LJR unless otherwise noted. (3) See also "Earnings Releases - Financial Tables" on our website at www.investor.instinetgroup.com. Instinet Group Incorporated Consolidated Statements of Operations (In thousands, except per share amounts) (Unaudited) Three Months Ended Nine Months Ended ----------------------------- ------------------- Sep 30, Jun 30, Sep 30, Sep 30, Sep 30, 2005 2005 2004 2005 2004 --------- --------- -------- --------- -------- Revenue Transaction fees $246,449 $252,960 $245,696 $771,000 $828,385 Interest income 9,414 7,073 4,061 22,522 12,923 Interest expense (1,449) (739) (743) (3,005) (2,565) -------- -------- -------- -------- -------- Interest income, net 7,965 6,334 3,318 19,517 10,358 -------- -------- -------- -------- -------- Total revenues, net 254,414 259,294 249,014 790,517 838,743 -------- -------- -------- -------- -------- Cost of Revenues Soft dollar 33,416 36,260 36,943 110,129 128,664 Broker-dealer rebates 63,811 67,992 59,859 204,823 190,394 Brokerage, clearing and exchange fees 56,467 56,141 47,078 165,295 159,294 -------- -------- -------- -------- -------- Total cost of revenues 153,694 160,393 143,880 480,247 478,352 -------- -------- -------- -------- -------- Gross margin 100,720 98,901 105,134 310,270 360,391 -------- -------- -------- -------- -------- Direct Expenses Compensation and benefits 57,390 61,047 43,467 167,313 153,320 Communications and equipment 13,655 14,092 18,775 41,015 57,564 Depreciation and amortization 13,886 10,382 13,363 34,396 45,139 Occupancy 22,804 9,769 9,351 42,728 28,197 Professional fees 11,160 10,815 7,410 29,087 20,568 Marketing and business development 1,111 1,559 2,725 3,781 10,655 Other 4,110 2,768 4,802 12,476 9,993 -------- -------- -------- -------- -------- Total direct expenses 124,116 110,432 99,893 330,796 325,436 -------- -------- -------- -------- -------- Contractual settlement - - - - (7,250) Investments (8,768) (24,690) (4,031) (36,373) (8,705) Insurance recovery - - - - (5,116) -------- -------- -------- -------- -------- Total expenses 269,042 246,135 239,742 774,670 782,717 -------- -------- -------- -------- -------- Income (loss) from continuing operations before income taxes (14,628) 13,159 9,272 15,847 56,026 Income tax expense (benefit) (9,325) 6,410 1,440 2,975 20,961 -------- -------- -------- -------- -------- Net income (loss) from continuing operations (5,303) 6,749 7,832 12,872 35,065 Discontinued operations, net of tax 89,591 1,635 2,784 93,702 9,465 -------- -------- -------- -------- -------- Net income $ 84,288 $ 8,384 $ 10,616 $106,574 $ 44,530 ======== ======== ======== ======== ======== BASIC AND DILUTED EARNINGS PER SHARE Income (loss) from continuing operations $ (0.02) $ 0.02 $ 0.02 $ 0.04 $ 0.10 Discontinued operations, net of tax 0.27 - 0.01 0.27 0.03 -------- -------- -------- -------- -------- Net income $ 0.25 $ 0.02 $ 0.03 $ 0.31 $ 0.13 ======== ======== ======== ======== ======== Weighted average shares outstanding - basic 340,474 339,765 337,327 339,513 336,127 Weighted average shares outstanding - diluted 341,876 341,505 339,226 341,044 338,111 Instinet Group Incorporated Operating Data (Unaudited) Three Months Ended ----------------------------- Sep 30, Jun 30, Mar 31, 2005 2005 2005 -------- --------- --------- U.S. Market ----------- Trade Days 64 64 61 Average daily NASDAQ-listed equity share volume (millions) 1,615 1,746 1,981 Average daily U.S. exchange-listed equity share volume (millions) 2,217 2,193 2,252 -------- --------- --------- Average daily U.S. equity share volume (millions) 3,832 3,939 4,233 Total U.S. equity share volume (millions) 245,255 252,113 258,190 Instinet, The Institutional Broker ---------------------------------- A. U.S. Equities (1) Our total average daily volume (million shares) 99 93 111 Our share of total market 2.6% 2.4% 2.6% Our average daily volume (million shares) - Institutional and Crossing 58 61 77 Average amount charged to client per share (cents per share) (2) - Institutional and Crossing 1.34 1.38 1.34 Our average daily volume (million shares) - Institutional Correspondents 41 32 34 Average amount charged to client per share (cents per share) (2) - Institutional Correspondents 0.04 0.05 0.05 B. Non-US Equities (3) Our average daily consideration (millions) $ 1,011 $ 907 $ 844 Average basis points charged to client per consideration traded 4.5 4.5 5.0 INET, The electronic marketplace -------------------------------- A. Our Matched Average Daily Volume (4) Our NASDAQ-listed equity share volume (million shares) 416 453 521 Our share of total market 25.8% 26.0% 26.3% Our U.S. exchange-listed equity share volume (million shares) 100 85 70 Our share of total market 4.5% 3.9% 3.1% Our total U.S. equity share volume (million shares) 516 538 591 Our share of total market 13.5% 13.6% 14.0% B. Our Routed Average Daily Volume (million shares) (5) 202 180 143 Headcount (6) 785 938 1,029 ------------- Three Months Ended --------------------------------------- Dec 31, Sep 30, Jun 30, Mar 31, 2004 2004 2004 2004 -------- -------- -------- -------- U.S. Market ----------- Trade Days 64 64 62 62 Average daily NASDAQ-listed equity share volume (millions) 1,865 1,542 1,735 2,030 Average daily U.S. exchange- listed equity share volume (millions) 2,119 1,853 2,072 2,255 -------- -------- -------- -------- Average daily U.S. equity share volume (millions) 3,984 3,395 3,807 4,285 Total U.S. equity share volume (millions) 254,969 217,305 236,023 265,685 Instinet, The Institutional Broker ---------------------------------- A. U.S. Equities (1) Our total average daily volume (million shares) 106 92 101 111 Our share of total market 2.7% 2.7% 2.7% 2.6% Our average daily volume (million shares) - Institutional and Crossing 77 67 77 89 Average amount charged to client per share (cents per share) (2) - Institutional and Crossing 1.40 1.52 1.49 1.46 Our average daily volume (million shares) - Institutional Correspondents 29 25 24 22 Average amount charged to client per share (cents per share) (2) - Institutional Correspondents 0.06 0.06 0.08 0.11 B. Non-US Equities (3) Our average daily consideration (millions) $ 742 $ 678 $ 901 $ 932 Average basis points charged to client per consideration traded 5.3 5.4 5.2 5.3 INET, The electronic marketplace -------------------------------- A. Our Matched Average Daily Volume (4) Our NASDAQ-listed equity share volume (million shares) 459 401 433 505 Our share of total market 24.6% 26.0% 25.0% 24.9% Our U.S. exchange-listed equity share volume (million shares) 73 72 71 64 Our share of total market 3.4% 3.9% 3.4% 2.8% Our total U.S. equity share volume (million shares) 532 473 504 569 Our share of total market 13.4% 13.9% 13.2% 13.3% B. Our Routed Average Daily Volume (million shares) (5) 119 115 115 91 Headcount (6) 1,049 1,128 1,138 1,176 ------------- (1) Instinet average daily U.S. equity share volume is counted as the sum of our customers' share volume per side related to a trade. For example a matched trade where one customer buys 100 shares and the other sells 100 shares is counted as 200 shares; if the buy or sell order were routed out, we would count 100 shares on the customer side. Institutional and Crossing comprise certain U.S. buy-side clients, hedge funds and other clients. Crossing includes order flow from both buy-side and sell-side clients who execute through our after hours cross. Institutional Correspondents represent our direct market access U.S. buy-side clients. All periods presented have been restated to exclude Lynch, Jones & Ryan which is a discontinued operation. (2) The amount charged per share is the average cents per share charged net of soft dollar and commission recapture expenses. (3) Commissions on international transactions are presented as basis points (one hundred of one percent) of the total value (consideration) of the transaction. (4) In computing our U.S. share volume for INET in either NASDAQ-listed or U.S. exchange-listed equities, we count the customer share volume on one side of the matched trade. Matched volume reflects transactions where the buyer and seller are matched on INET. For example, where a customer sells 100 shares to another customer as a matched trade, we count 100 shares. INET share volume includes transactions sent to it by Instinet, the Institutional Broker and prior quarters have been recalculated to include this volume. In computing our total market share, our numerator share volume is counted as described above for each market where we disclose a market share statistic. The denominator for NASDAQ market share is total NASDAQ share volume as published by NASDAQ. For U.S. exchange-listed market share, the denominator is the total share volume of U.S. listed markets obtained from a widely recognized market data vendor. Listed markets include the New York Stock Exchange, American Stock Exchange, Boston Stock Exchange, Philadelphia Stock Exchange, National Stock Exchange, Chicago Stock Exchange and Pacific Stock Exchange. Historical amounts may be restated due to updates of volume information from these sources. (5) Routed volume reflects transactions where the trade was not matched on INET. (6) Instinet Group headcount is as of the end of the reporting period and includes LJR for all periods presented. Instinet Group Incorporated Consolidated Statement of Operations - Three Months Ended September 30, 2005 (In thousands) (Unaudited) Three Months Ended September 30, 2005 --------------------------------------------------- Instinet INET Eliminations Corporate Total --------------------------------------------------- Revenue Transaction fees $139,638 $114,865 $ (8,054) $ - $246,449 Interest income, net 2,009 953 - 5,003 7,965 --------- --------- ---------- --------- -------- Total revenue, net 141,647 115,818 (8,054) 5,003 254,414 --------- --------- ---------- --------- -------- Cost of revenues Soft dollar 33,416 - - - 33,416 Broker-dealer rebates - 63,811 - - 63,811 Brokerage, clearing and exchange fees 36,755 27,766 (8,054) - 56,467 --------- --------- ---------- --------- -------- Total cost of revenues 70,171 91,577 (8,054) - 153,694 --------- --------- ---------- --------- -------- -------------------------------------------------- Gross margin 71,476 24,241 - 5,003 100,720 --------- --------- ---------- --------- -------- Direct Expenses Compensation and benefits 41,296 3,834 - 12,260 57,390 Communications and equipment 12,251 1,109 - 295 13,655 Depreciation and amortization 6,736 2,089 - 5,061 13,886 Occupancy 10,456 380 - 11,968 22,804 Professional fees 3,283 720 - 7,157 11,160 Marketing and business development 913 43 - 155 1,111 Other 4,654 177 - (721) 4,110 Technology service company charges (1,242) 1,242 - - - Corporate overhead charges 20,917 10,255 - (31,172) - --------- --------- ---------- --------- -------- Total direct expenses 99,264 19,849 - 5,003 124,116 --------- --------- ---------- --------- -------- Investments - - - (8,768) (8,768) -------------------------------------------------- Total expenses 169,435 111,426 (8,054) (3,765) 269,042 --------- --------- ---------- --------- -------- Income (loss) from continuing operations before income taxes $(27,788) $ 4,392 $ - $ 8,768 $(14,628) ========= ========= ========== ========= ======== See also table titled "Statements of Operations - Segments" on our website at www.investor.instinetgroup.com under the heading "Investor Relations" for historical data. NOTE: All periods presented have been restated to include LJR as a discontinued operation. Instinet Group Incorporated Consolidated Statement of Operations - Nine Months Ended September 30, 2005 (In thousands) (Unaudited) Nine Months Ended September 30, 2005 --------------------------------------------------- Instinet INET Eliminations Corporate Total --------------------------------------------------- Revenue Transaction fees $436,487 $356,853 $ (22,340) $ - $771,000 Interest income, net 6,929 1,873 - 10,715 19,517 --------- --------- ---------- --------- -------- Total revenue, net 443,416 358,726 (22,340) 10,715 790,517 --------- --------- ---------- --------- -------- Cost of revenues Soft dollar 110,129 - - - 110,129 Broker-dealer rebates - 204,823 - - 204,823 Brokerage, clearing and exchange fees 110,882 76,753 (22,340) - 165,295 --------- --------- ---------- --------- -------- Total cost of revenues 221,011 281,576 (22,340) - 480,247 --------- --------- ---------- --------- -------- -------------------------------------------------- Gross margin 222,405 77,150 - 10,715 310,270 --------- --------- ---------- --------- -------- Direct Expenses Compensation and benefits 122,237 12,323 - 32,753 167,313 Communications and equipment 35,976 3,938 - 1,101 41,015 Depreciation and amortization 22,799 6,060 - 5,537 34,396 Occupancy 25,195 1,334 - 16,199 42,728 Professional fees 10,718 1,289 - 17,080 29,087 Marketing and business development 3,076 406 - 299 3,781 Other 10,359 1,302 - 815 12,476 Technology service company charges (6,015) 6,015 - - - Corporate overhead charges 42,306 20,763 - (63,069) - --------- --------- ---------- --------- -------- Total direct expenses 266,651 53,430 - 10,715 330,796 --------- --------- ---------- --------- -------- Investments - - - (36,373) (36,373) ------------------------------------------------- Total expenses 487,662 335,006 (22,340) (25,658) 774,670 --------- --------- ---------- --------- -------- Income (loss) from continuing operations before income taxes $(44,246) $ 23,720 $ - $ 36,373 $ 15,847 ========= ========= ========== ========= ======== See also table titled "Statements of Operations - Segments" on our website at www.investor.instinetgroup.com under the heading "Investor Relations" for historical data. NOTE: All periods presented have been restated to include LJR as a discontinued operation. Instinet Group Incorporated Statements of Operations - Instinet, The Institutional Broker (In thousands) (Unaudited) Three Months Ended Nine Months Ended ------------------------------------------------- Sep 30, Jun 30, Sep 30, Sep 30, Sep 30, 2005 2005 2004 2005 2004 -------- -------- -------- -------- -------- Revenue Transaction fee $134,001 $135,310 $140,624 $416,564 $485,114 Clearing revenue 5,637 6,987 5,981 19,923 23,102 -------- -------- -------- -------- -------- Total transaction fees 139,638 142,297 146,605 436,487 508,216 -------- -------- -------- -------- -------- Interest income, net 2,009 2,383 2,916 6,929 9,298 -------- -------- -------- -------- -------- Total revenues, net 141,647 144,680 149,521 443,416 517,514 -------- -------- -------- -------- -------- Cost of Revenues Soft dollar 33,416 36,260 36,943 110,129 128,664 Brokerage, clearing and exchange fees 36,755 37,898 30,140 110,882 111,101 -------- -------- -------- -------- -------- Total cost of revenues 70,171 74,158 67,083 221,011 239,765 -------- -------- -------- -------- -------- Gross margin 71,476 70,522 82,438 222,405 277,749 -------- -------- -------- -------- -------- Direct Expenses Compensation and benefits 41,296 47,385 35,943 122,237 123,207 Communications and equipment 12,251 12,217 16,839 35,976 48,524 Depreciation and amortization 6,736 8,187 10,502 22,799 36,632 Occupancy 10,456 7,296 5,922 25,195 22,269 Professional fees 3,283 3,550 5,219 10,718 13,129 Marketing and business development 913 1,194 2,507 3,076 7,670 Other 4,654 2,454 3,822 10,359 8,511 Technology service company charges (1,242) (1,344) (5,573) (6,015) (20,383) Corporate overhead charges 20,917 10,709 7,122 42,306 25,654 -------- -------- -------- -------- -------- Total direct expenses 99,264 91,648 82,303 266,651 265,213 -------- -------- -------- -------- -------- Total expenses 169,435 165,806 149,386 487,662 504,978 -------- -------- -------- -------- -------- Income (loss) from continuing operations before income taxes $(27,788) $(21,126) $ 135 $(44,246) $ 12,536 ======== ======== ======== ======== ======== NOTE: All periods presented have been restated to include LJR as a discontinued operation. Instinet Group Incorporated Statements of Operations - INET, The electronic marketplace (In thousands) (Unaudited) Three Months Ended Nine Months Ended ----------------------------- ------------------- Sep 30, Jun 30, Sep 30, Sep 30, Sep 30, 2005 2005 2004 2005 2004 -------- -------- -------- -------- -------- Revenue Transaction fees $114,865 $117,650 $104,057 $356,853 $334,915 Interest income, net 953 517 402 1,873 1,060 -------- -------- -------- -------- -------- Total revenues, net 115,818 118,167 104,459 358,726 335,975 -------- -------- -------- -------- -------- Cost of Revenues Broker-dealer rebates 63,811 67,992 59,859 204,823 190,394 Brokerage, clearing and exchange fees 27,766 25,230 21,904 76,753 62,939 -------- -------- -------- -------- -------- Total cost of revenues 91,577 93,222 81,763 281,576 253,333 -------- -------- -------- -------- -------- Gross margin 24,241 24,945 22,696 77,150 82,642 -------- -------- -------- -------- -------- Direct Expenses Compensation and benefits 3,834 4,116 3,590 12,323 10,470 Communications and equipment 1,109 1,556 1,418 3,938 7,262 Depreciation and amortization 2,089 1,977 2,518 6,060 7,512 Occupancy 380 518 503 1,334 1,456 Professional fees 720 443 383 1,289 1,263 Marketing and business development 43 234 206 406 2,274 Other 177 (200) (715) 1,302 (1,340) Technology service company charges 1,242 1,344 5,573 6,015 20,383 Corporate overhead charges 10,255 5,362 4,114 20,763 10,943 -------- -------- -------- -------- -------- Total direct expenses 19,849 15,350 17,590 53,430 60,223 -------- -------- -------- -------- -------- Total expenses 111,426 108,572 99,353 335,006 313,556 -------- -------- -------- -------- -------- Income (loss) from continuing operations before income taxes $ 4,392 $ 9,595 $ 5,106 $ 23,720 $ 22,419 ======== ======== ======== ======== ======== Instinet Group Incorporated Statements of Operations - Corporate (In thousands) (Unaudited) Three Months Ended Nine Months Ended ---------------------------- ------------------- Sep 30, Jun 30, Sep 30, Sep 30, Sep 30, 2005 2005 2004 2005 2004 -------- -------- -------- -------- -------- Interest income, net $ 5,003 $ 3,434 $ - $ 10,715 $ - -------- -------- -------- -------- -------- Direct Expenses Compensation and benefits 12,260 9,546 3,934 32,753 19,643 Communications and equipment 295 319 518 1,101 1,778 Depreciation and amortization 5,061 218 343 5,537 995 Occupancy 11,968 1,955 2,926 16,199 4,472 Professional fees 7,157 6,822 1,808 17,080 6,176 Marketing and business development 155 131 12 299 711 Other (721) 514 1,695 815 2,822 Corporate overhead charges (31,172) (16,071) (11,236) (63,069) (36,597) -------- -------- -------- -------- -------- Total direct expenses 5,003 3,434 - 10,715 - -------- -------- -------- -------- -------- Income (loss) from operations before investments and income taxes $ - $ - $ - $ - $ - ======== ======== ======== ======== ======== Instinet Group Incorporated Reconciliation of Pro Forma Operating Results for 3Q05 (In thousands, except per share amounts) (Unaudited) In evaluating our financial performance and results of operations, management reviews certain financial measures that are not in accordance with generally accepted accounting principles 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 financial 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 financial measures should be considered in context with our GAAP results. A reconciliation of our non-GAAP measurements is provided below. Management reviews adjusted operating income, in addition to GAAP financial results. This non- GAAP financial measurement excludes non-operating items, which by their nature, management does not consider to be a true reflection of the operating results and financial performance of our business. These non-operating charges are investment gains and losses, charges related to our cost reduction initiatives, fixed asset write-offs, contractual settlements, goodwill and intangible asset impairment, insurance recoveries, advisory fees and the related tax effects of those items. The following schedule reconciles our pro forma net income to our GAAP financial results: Three Months Ended Nine Months Ended ----------------------------- ------------------- Sep 30, Jun 30, Sep 30, Sep 30, Sep 30, 2005 2005 2004 2005 2004 --------- --------- -------- --------- -------- Total revenues, net, as reported $254,414 $259,294 $249,014 $790,517 $838,743 Total expenses, as reported 269,042 246,135 239,742 774,670 782,717 Severance in compensation and benefits (9,466) (15,886) - (24,615) (3,668) Advisory fees in professional fees (5,770) (5,093) - (12,049) - Asset write-offs in depreciation and amortization (4,824) (804) - (5,628) (2,018) Facilities write- offs in occupancy (15,413) - - (15,413) - Contractual settlements - - - - 7,250 Investments 8,768 24,690 4,031 36,373 8,705 Insurance recovery - - - - 5,116 -------- -------- -------- -------- -------- Pro forma operating expenses 242,337 249,042 243,773 753,338 798,102 -------- -------- -------- -------- -------- Pro forma income from continuing operations before income taxes 12,077 10,252 5,241 37,179 40,641 -------- -------- -------- -------- -------- Income tax provision, as reported (9,325) 6,410 1,440 2,975 20,961 Tax effect of pro forma adjustments 10,135 (1,758) (1,495) 6,061 (5,803) -------- -------- -------- -------- -------- Pro forma provision for income taxes 810 4,652 (55) 9,036 15,158 -------- -------- -------- -------- -------- Income (loss) from continuing operations, as reported (5,303) 6,749 7,832 12,872 35,065 Net effect of pro forma adjustments 16,570 (1,149) (2,536) 15,271 (9,582) -------- -------- -------- -------- -------- Pro forma income from continuing operations $ 11,267 $ 5,600 $ 5,296 $ 28,143 $ 25,483 ======== ======== ======== ======== ======== Earnings per share from continuing operations - basic and diluted, as reported $ (0.02) $ 0.02 $ 0.02 $ 0.04 $ 0.10 Net effect of pro forma adjustments 0.05 - - 0.04 (0.03) -------- -------- -------- -------- -------- Pro forma earnings per share from continuing operations - basic and diluted $ 0.03 $ 0.02 $ 0.02 $ 0.08 $ 0.08 ======== ======== ======== ======== ======== Weighted average shares outstanding - basic 340,474 339,765 337,327 339,513 336,127 Weighted average shares outstanding - diluted 341,876 341,505 339,226 341,044 338,111 *T