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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the quarterly period ended March 28, 1997 Commission file number: 0 - 23644
INVESTMENT TECHNOLOGY GROUP, INC.
(Exact Name of Registrant as Specified in Its Charter)
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DELAWARE 13 - 3757717
- ------------------------------------------------ ----------------------------------------------
(State or Other Jurisdiction of Incorporation or (I.R.S. Employer Identification No.)
Organization)
900 Third Avenue, New York, New York (212) 755 - 6800
- ------------------------------------------------ ----------------------------------------------
(Address of Principal Executive Offices) (Registrant's Telephone Number, Including Area
Code)
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10022
- ------------------------------------------------
(Zip 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 [ ]
As of April 22, 1997, the Registrant had 18,102,500 shares of common stock, $.01
par value, outstanding.
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QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
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Item 1. Financial Statements
Consolidated Statement of Financial Condition:
March 28, 1997 (unaudited) and December 31, 1996...................... 3
Consolidated Statement of Operations (unaudited):
Three Months Ended March 28, 1997 and March 29, 1996.................. 4
Consolidated Statement of Changes in Stockholders' Equity (unaudited):
Three Months Ended March 28, 1997..................................... 5
Consolidated Statement of Cash Flows (unaudited):
Three Months Ended March 28, 1997 and March 29 ,1996.................. 6
Condensed Notes to Consolidated Financial Statements (unaudited).......... 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations..................................................... 8
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.......................................... 9
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INVESTMENT TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
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PART I. - FINANCIAL INFORMATION
Item 1. Financial Statements
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA
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March 28, December 31,
1997 1996
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ASSETS (unaudited)
Cash and cash equivalents .................................... $ 46,834 $ 43,955
Securities owned ............................................. 5,381 4,808
Investment in limited partnership (at market; cost $5,000) ... 5,316 5,193
Trade receivables ............................................ 6,217 4,806
Trade receivable from affiliate .............................. 2,573 2,812
Due from affiliates .......................................... 973 1,459
Premises and equipment ....................................... 11,854 8,442
Capitalized software ......................................... 3,031 3,028
Other assets ................................................. 3,269 3,467
Goodwill ..................................................... 2,334 2,471
Deferred tax asset ........................................... 2,343 2,357
-------- --------
$ 90,125 $ 82,798
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued expenses ........................ $ 9,744 $ 8,648
Software royalties payable ................................... 2,349 2,274
Securities sold, not yet purchased ........................... 46 1,226
Due to affiliates ............................................ 4,030 1,922
Income taxes payable to affiliate ............................ 396 1,635
-------- --------
16,565 15,705
Stockholders' equity:
Preferred stock, par value $.01; shares authorized:
5,000,000; none issued .................................. -- --
Common stock, par value $.01; shares authorized:
30,000,000; shares issued: 18,700,000 ................... 187 187
Additional paid-in capital ................................ 36,055 36,055
Retained earnings ......................................... 41,145 34,614
Common stock held in treasury, at cost; shares:448,500
at March 28, 1997 and 445,200 at December 31, 1996 ...... (3,827) (3,763)
-------- --------
Total stockholders' equity ................................ 73,560 67,093
-------- --------
$ 90,125 $ 82,798
======== ========
Book value per share ......................................... $ 4.03 $ 3.68
======== ========
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See accompanying unaudited notes to consolidated financial statements.
INVESTMENT TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
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CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
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Three Months Ended
------------------
March 28, March 29,
1997 1996
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Revenues .................................................... $30,654 $26,667
Expenses:
Compensation and employee benefits ..................... 6,873 5,869
Transaction processing ................................. 4,903 3,699
Software royalties ..................................... 2,382 2,221
Occupancy and equipment ................................ 1,858 1,027
Consulting ............................................. 372 854
Telecommunications and data processing services ........ 957 1,251
Other general and administrative ....................... 1,948 2,112
------- -------
19,293 17,033
------- -------
Earnings before income tax expense ..................... 11,361 9,634
Income tax expense .......................................... 4,830 4,238
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Net earnings ................................................ $ 6,531 $ 5,396
------- =======
Primary earnings per share .................................. $ 0.35 $ 0.29
======= =======
Fully diluted earnings per share ............................ $ 0.35 $ 0.29
======= =======
Primary weighted average shares of common stock and
common stock equivalents outstanding ........................ 18,816 18,425
======= =======
Fully diluted weighted average shares of common stock and
common stock equivalents outstanding ........................ 18,816 18,632
======= =======
</TABLE>
See accompanying unaudited notes to consolidated financial statements.
INVESTMENT TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
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CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)
THREE MONTHS ENDED MARCH 28, 1997
DOLLARS IN THOUSANDS
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Common Total
Additional Stock Stock-
Preferred Common Paid-in Retained Held in holders'
Stock Stock Capital Earnings Treasury Equity
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Balance at December 31, 1996 ... $ -- $ 187 $36,055 $34,614 $(3,763) $67,093
Purchase of common stock
for treasury (3,300 shares) ... (64) (64)
Net earnings ................... 6,531 6,531
------- ------- ------- ------- ------- -------
Balance at March 28, 1997 ...... $ -- $ 187 $36,055 $41,145 $(3,827) $73,560
======= ======= ======= ======= ======= =======
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See accompanying unaudited notes to consolidated financial statements.
INVESTMENT TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
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CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
DOLLARS IN THOUSANDS
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Three Months Ended
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March 28, March 29,
1997 1996
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Cash flows from operating activities:
Net earnings .............................................................. $ 6,531 $ 5,396
Adjustments to reconcile net earnings to net cash provided by operating
activities:
Deferred income tax (benefit) expense ................................. 14 (1,046)
Depreciation and amortization ......................................... 1,344 772
Unrealized gain on investment in limited partnership .................. (123) --
Undistributed loss of affiliates ...................................... 156 --
Provision for doubtful accounts receivable ............................ 21 21
Decrease (increase) in operating assets:
Securities owned ................................................. (573) 92
Trade receivables ................................................ (1,432) (1,175)
Trade receivable from affiliate .................................. 239 (1,802)
Due from affiliates .............................................. 486 4,096
Other assets ..................................................... 18 (113)
Increase (decrease) in operating liabilities:
Accounts payable and accrued expenses ............................ 1,119 2,083
Software royalties payable ....................................... 75 512
Securities sold, not yet purchased ............................... (1,180) 1,452
Due to affiliates ................................................ 2,108 (1,489)
Income taxes payable to affiliate ................................ (1,239) 1,097
-------- --------
Net cash provided by operating activities ................................. 7,564 9,896
-------- --------
Cash flows from financing activities:
Purchase of common stock for treasury ..................................... (64) (1,348)
-------- --------
Net cash used by financing activities ..................................... (64) (1,348)
-------- --------
Cash flows from investing activities:
Investment in VERSUS Technologies, Inc. ................................... -- 8
Purchase of premises and equipment ........................................ (4,210) (1,180)
Capitalization of software development costs .............................. (411) (477)
-------- --------
Net cash used by investing activities ..................................... (4,621) (1,649)
-------- --------
Net increase in cash and cash equivalents ................................. 2,879 6,899
Cash and cash equivalents - beginning of period ................................ 43,955 17,960
-------- --------
Cash and cash equivalents - end of period ...................................... $ 46,834 $ 24,859
======== ========
Supplemental cash flow information:
Interest paid ............................................................. $ 17 $ 12
======== ========
Income taxes paid to affiliate ............................................ $ 6,055 $ 4,187
======== ========
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See accompanying unaudited notes to consolidated financial statements.
INVESTMENT TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
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CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Investment
Technology Group, Inc. and its wholly-owned subsidiaries (collectively, the
"Company"), principally ITG Inc. ("ITG"), a Delaware corporation, registered as
a broker-dealer in securities under the Securities Exchange Act of 1934, and ITG
Global Trading, Inc. ("Global Trading") which is a 50% partner in the Global
POSIT joint venture. Jefferies Group, Inc. ("Jefferies Group") owned over 80% of
the Company's common stock at March 28, 1997.
All material intercompany balances and transactions are eliminated in
consolidation. The consolidated financial statements reflect all adjustments
which are, in the opinion of management, necessary for the fair statement of the
results for the interim periods and should be read in conjunction with the
Company's 1996 annual report on Form 10-K.
Certain reclassifications have been made to the financial statements for the
prior period to conform to the presentation for 1997.
FORWARD-LOOKING STATEMENTS
In addition to the historical information contained throughout this Quarterly
Report on Form 10-Q, there are forward-looking statements that reflect
management's expectations for the future. A variety of important factors could
cause results to differ materially from such statements. These factors are noted
throughout this Quarterly Report on Form 10-Q and include: the actions of both
current and potential new competitors, rapid changes in technology, financial
market volatility, evolving industry regulation, cash flows into or redemptions
from equity funds, effects of inflation, customer trading patterns, and new
products and services.
ACCOUNTING DEVELOPMENTS
In February 1997, the Financial Accounting Standards Board issued Statement No.
128, Earnings per Share, which is required to be adopted on December 31, 1997.
At that time, the Company will be required to change the method currently used
to compute earnings per share and to restate all prior periods. Under the new
requirements for calculating primary earnings per share, the dilutive effect of
stock options will be excluded. The impact is expected to result in an increase
in primary earnings per share for the first quarter ended March 28, 1997 of
$0.01 and have no impact on primary earnings per share for the first quarter
ended March 29, 1996. Statement 128 will have no impact on the calculation of
fully diluted earnings per share for either of these quarters.
INCOME TAXES
The Company is a member of the Jefferies affiliated group ("Group") for purposes
of filing a Federal income tax return (i.e., Jefferies Group owns more than 80%
of the Company). The Company's tax liability is determined on a "separate
return" basis. That is, the Company is required to pay to Jefferies Group its
proportionate share of the consolidated tax liability plus any excess of its
"separate" tax liability (assuming a separate tax return were to be filed by the
Company) over its proportionate amount of the consolidated Group tax liability.
Alternatively, Jefferies Group is required to pay the Company an "additional
amount" for the amount by which the consolidated tax liability of the Group is
decreased by reason of inclusion of the Company in the Group.
INVESTMENT TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
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Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
FIRST QUARTER 1997 VERSUS FIRST QUARTER 1996 (Dollars in millions, except as
noted)
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Three Months Ended Change
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March 28, 1997 March 29, 1996 Amount Percentage
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Revenues $30.7 $26.7 $ 4.0 15%
Number of Trading Days 60 63 (3) (5%)
Revenues per Trading Day (Dollars in thousands) $ 511 $ 423 $ 88 21%
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Increased revenues were attributed to a growing use of POSIT, QuantEX and the
Company's other electronic trading desk services. For the quarter ended March
28, 1997, POSIT revenues were approximately 6% or $1.1 million above the
comparable period for 1996, while QuantEX revenues were approximately 18% or
$1.0 million above the comparable period for 1996. For the quarter ended March
28, 1997, other electronic trading desk services were 44% or $1.6 million above
the comparable period for 1996.
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Three Months Ended Change
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March 28, 1997 March 29, 1996 Amount Percentage
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Compensation and employee benefits expense $6.9 $5.9 $1.0 17%
Number of employees at period end 169 127 42 33%
Revenues per employee (Dollars in thousands) $182 $210 $(28) (13%)
Compensation and employee benefits expense per
employee (Dollars in thousands) $ 41 $ 46 $ (5) (11%)
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The increase is due primarily to an increase in the number of employees offset
by a decrease in profitability based compensation.
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Three Months Ended Change
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March 28, 1997 March 29, 1996 Amount Percentage
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Transaction processing expense $ 4.9 $ 3.7 $1.2 32%
Transaction processing expense as a
percentage of revenues 16.0% 13.9% 2.1 pts. 15%
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The increase is primarily due to the expense associated with a higher volume of
transactions and shares in 1997. The increase as a percentage of revenues
increased by 15% primarily because the QuantEX and electronic trading desk
service revenues were a larger mix of the total revenues. The QuantEX product
and electronic trading desk services have slightly lower margins than POSIT
because there are no floor brokerage expenses associated with POSIT.
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Three Months Ended Change
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March 28, 1997 March 29, 1996 Amount Percentage
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Software royalties expense $ 2.4 $ 2.2 $0.2 9%
Software royalties expense as a percentage of
POSIT revenues 13.1% 13.0% 0.1 pt. 1%
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The increase is due to higher revenue associated with POSIT.
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Three Months Ended Change
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March 28, 1997 March 29, 1996 Amount Percentage
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Occupancy and equipment expense $1.9 $1.0 $0.9 90%
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The increase is due primarily to increased depreciation from the purchase of
additional equipment associated with increased headcount. In addition, the
Company accelerated the write-off of unamortized leasehold improvements at 900
Third Avenue.
INVESTMENT TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
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Three Months Ended Change
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March 28, 1997 March 29, 1996 Amount Percentage
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Consulting expense $0.4 $0.9 ($0.5) (56%)
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Consulting is primarily for functions which the Company currently believes are
advantageous to out-source. The decrease is due primarily to the Firm
undertaking nonrecurring special projects in 1996 related to contingency
planning and systems' security.
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Three Months Ended Change
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March 28, 1997 March 29, 1996 Amount Percentage
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Telecommunications and data processing services
expense $1.0 $1.3 ($0.3) (23%)
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The decrease is due primarily to credits received as a result of renegotiated
bills and cost savings achieved from new vendors.
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Three Months Ended Change
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March 28, 1997 March 29, 1996 Amount Percentage
-------------- -------------- ------ ----------
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Other general and administrative expense $1.9 $2.1 ($0.2) (10%)
</TABLE>
Software amortization for the quarter ended March 28, 1997 increased over the
comparable period for 1996. The increase is offset by a decrease in marketing
costs and firm travel and entertainment.
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Three Months Ended Change
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March 28, 1997 March 29, 1996 Amount Percentage
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Income tax expense $4.8 $4.2 $0.6 14%
</TABLE>
The increase is primarily due to the increase in pretax earnings partially
offset by a decrease in the effective tax rate from 44% to 43% from research and
development credits taken in 1997.
PART II. - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K.
There were no reports filed on Form 8-K during the quarter ended
March 28, 1997.
INVESTMENT TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
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SIGNATURE
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.
INVESTMENT TECHNOLOGY GROUP, INC.
(Registrant)
Date: May 13, 1997 By: /s/ John R. MacDonald
-------------- ---------------------
John R. MacDonald
Chief Financial Officer and
Duly Authorized Signatory of Registrant
INVESTMENT TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
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<ARTICLE> BD
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION AND THE CONSOLIDATED STATEMENT OF
OPERATIONS AS OF 3-28-1997 AND FOR THE 3 MONTHS THEN ENDED AND THE NOTES THERETO
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS FILED
IN THE 1997 INVESTMENT TECHNOLOGY GROUP, INC. 1ST QUARTER 10-Q FILING.
</LEGEND>
<MULTIPLIER>1,000
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<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-28-1997
<CASH> 46,834
<RECEIVABLES> 9,763
<SECURITIES-RESALE> 0
<SECURITIES-BORROWED> 0
<INSTRUMENTS-OWNED> 10,697
<PP&E> 11,854
<TOTAL-ASSETS> 90,125
<SHORT-TERM> 0
<PAYABLES> 12,093
<REPOS-SOLD> 0
<SECURITIES-LOANED> 0
<INSTRUMENTS-SOLD> 46
<LONG-TERM> 0
0
0
<COMMON> 187
<OTHER-SE> 73,373
<TOTAL-LIABILITY-AND-EQUITY> 90,125
<TRADING-REVENUE> 0
<INTEREST-DIVIDENDS> 552
<COMMISSIONS> 30,102
<INVESTMENT-BANKING-REVENUES> 0
<FEE-REVENUE> 0
<INTEREST-EXPENSE> 17
<COMPENSATION> 6,873
<INCOME-PRETAX> 11,361
<INCOME-PRE-EXTRAORDINARY> 11,361
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,531
<EPS-PRIMARY> .35
<EPS-DILUTED> .35
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