<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended March 27, 1998 Commission file number: 0-23644
INVESTMENT TECHNOLOGY GROUP, INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 13-3757717
- ---------------------------------------- ------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
380 Madison Avenue, New York, New York (212) 588 - 4000
- ---------------------------------------- ------------------------------------
(Address of Principal Executive Offices) (Registrant's Telephone Number,
Including Area Code)
10017
- ----------------------------------------
(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 28, 1998, the Registrant had 18,280,361 shares of common stock,
$.01 par value, outstanding.
<PAGE>
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
Item 1. Financial Statements
Consolidated Statement of Financial Condition:
March 27, 1998 (unaudited) and December 31, 1997....................... 3
Consolidated Statement of Operations (unaudited):
Three Months Ended March 27, 1998 and March 28, 1997................... 4
Consolidated Statement of Changes in Stockholders' Equity (unaudited):
Three Months Ended March 27, 1998...................................... 5
Consolidated Statement of Cash Flows (unaudited):
Three Months Ended March 27, 1998 and March 28, 1997................... 6
Condensed Notes to Consolidated Financial Statements (unaudited).......... 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................. 12
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K......................................... 14
Signature......................................................................... 15
</TABLE>
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.
INVESTMENT TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
Page 2 of 15
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PART I. - FINANCIAL INFORMATION
Item 1. Financial Statements
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
MARCH 27, DECEMBER 31,
1998 1997
----------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Cash and cash equivalents................ $ 64,460 $ 51,263
Securities owned......................... - 358
Investment in limited partnership
(at market; cost $10,000).............. 11,153 10,935
Trade receivables, net of allowance
for doubtful accounts of $178 and $308. 7,752 7,071
Trade receivable from affiliate.......... 3,685 2,931
Due from affiliates...................... 1,170 1,365
Premises and equipment................... 18,753 19,506
Capitalized software..................... 6,930 5,973
Other assets............................. 9,075 9,857
Goodwill................................. 1,785 1,922
Deferred tax asset....................... 2,177 2,460
--------- ---------
$126,940 $113,641
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued expenses.... $ 18,972 $ 12,725
Software royalties payable............... 3,017 2,663
Securities sold, not yet purchased....... - 3
Due to affiliates........................ 1,618 2,999
Income taxes payable to affiliate........ 1,129 1,488
--------- ---------
24,736 19,878
--------- ---------
STOCKHOLDERS' EQUITY:
Preferred stock, par value $.01; shares
authorized: 5,000,000; shares
issued: none........................... - -
Common stock, par value $.01; shares
authorized: 30,000,000; shares issued:
18,869,294 and 18,818,468 at
March 27, 1998 and December 31, 1997... 189 188
Additional paid-in capital............... 39,719 38,554
Retained earnings........................ 68,893 61,531
Common stock held in treasury, at cost;
shares: 597,500 at March 27, 1998
and at December 31, 1997............... (6,510) (6,510)
Accumulated other comprehensive
income/(loss):
Currency translation adjustment...... (87) -
--------- ---------
Total stockholders' equity............... 102,204 93,763
--------- ---------
$126,940 $113,641
--------- ---------
--------- ---------
Book value per share..................... $ 5.59 $ 5.15
--------- ---------
--------- ---------
</TABLE>
SEE ACCOMPANYING UNAUDITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
INVESTMENT TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
Page 3 of 15
<PAGE>
CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------
MARCH 27, MARCH 28,
1998 1997
------------------------
<S> <C> <C>
Revenues............................................... $ 41,387 $ 30,654
Expenses:
Compensation and employee benefits................... 10,585 6,873
Transaction processing............................... 5,654 4,903
Software royalties................................... 2,985 2,382
Occupancy and equipment.............................. 2,797 1,858
Consulting........................................... 821 372
Telecommunications and data processing services...... 1,781 957
Loss on equity investments........................... 1,002 -
Other general and administrative..................... 2,712 1,948
------------------------
Total Expenses................................... 28,337 19,293
------------------------
Earnings before income tax expense................... 13,050 11,361
Income tax expense..................................... 5,688 4,830
------------------------
Net earnings........................................... $ 7,362 $ 6,531
------------------------
------------------------
Basic net earnings per share of common stock........... $ 0.40 $ 0.36
------------------------
------------------------
Diluted net earnings per share of common stock......... $ 0.38 $ 0.35
------------------------
------------------------
Basic weighted average shares outstanding.............. 18,226 18,254
------------------------
------------------------
Diluted weighted average shares and common stock
equivalents outstanding.............................. 19,147 18,809
------------------------
------------------------
</TABLE>
SEE ACCOMPANYING UNAUDITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
INVESTMENT TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
Page 4 of 15
<PAGE>
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 27, 1998
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
Common
Additional Stock Accumulated Total
Preferred Common Paid-in Retained Held in Comprehensive Stockholders'
Stock Stock Capital Earnings Treasury Income/(loss) Equity
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1997............... $ - $ 188 $38,554 $61,531 $(6,510) $ - $ 93,763
Issuance of common stock
in connection with the employee
stock option plan (50,826 shares)........ 1 1,165 1,166
Comprehensive income/(loss):
Net earnings........................... 7,362 7,362
Other comprehensive loss, net of tax:
Currency translation adjustment.... (87) (87)
--------
Comprehensive income/(loss)................ 7,275
------------------------------------------------------------------------------------
Balance at March 27, 1998.................. $ - $ 189 $39,719 $68,893 $(6,510) $(87) $102,204
------------------------------------------------------------------------------------
------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING UNAUDITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
INVESTMENT TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
Page 5 of 15
<PAGE>
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------
MARCH 27, MARCH 28,
1998 1997
-----------------------------
<S> <C> <C>
Cash flows from operating activities:
Net earnings..................................... $ 7,362 $ 6,531
Adjustments to reconcile net earnings
to net cash provided by operating
activities:
Deferred income tax expense ................ 283 14
Depreciation and amortization............... 1,983 1,344
Unrealized gain on investment in limited
partnership............................ (218) (123)
Undistributed loss of affiliates............ 98 156
Provision for doubtful accounts receivable.. 24 21
Decrease (increase) in operating assets:
Securities owned............................ 358 (573)
Trade receivables........................... (705) (1,432)
Trade receivables from affiliate............ (754) 239
Due from affiliates......................... 195 486
Other assets................................ 658 18
Increase (decrease) in operating liabilities:
Accounts payable and accrued expenses....... 6,272 1,119
Software royalties payable.................. 354 75
Securities sold, not yet purchased.......... (3) (1,180)
Due to affiliates........................... (1,381) 2,108
Income taxes payable to affiliate........... (359) (1,239)
-----------------------------
Net cash provided by operating
activities........................ 14,167 7,564
-----------------------------
Cash flows from financing activities:
Purchase of common stock for treasury....... - (64)
Issuance of common stock.................... 1,166 -
-----------------------------
Net cash provided by (used in)
financing activities.............. 1,166 (64)
Cash flows from investing activities:
Purchase of premises and equipment.......... (802) (4,210)
Capitalization of software development
costs.................................. (1,247) (411)
-----------------------------
Net cash used in investing activities.. (2,049) (4,621)
-----------------------------
Effect of foreign currency translation on cash
and cash equivalents........................ (87) -
Net increase in cash and cash equivalents... 13,197 2,879
Cash and cash equivalents - beginning of period.. 51,263 43,955
-----------------------------
Cash and cash equivalents - end of period........ $ 64,460 $ 46,834
-----------------------------
-----------------------------
Supplemental cash flow information:
Interest paid............................... $ 13 $ 17
-----------------------------
-----------------------------
Income taxes paid to affiliate.............. $ 5,263 $ 6,055
-----------------------------
-----------------------------
</TABLE>
SEE ACCOMPANYING UNAUDITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
INVESTMENT TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
Page 6 of 15
<PAGE>
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,
ITG Global Trading, Inc. ("Global Trading") which is a 50% partner in the
Global POSIT joint venture, ITG Australia PTY Limited, which is a 50% partner
in ITG Pacific holdings, ITG Ventures Inc., and ITG International Limited and
its wholly-owned subsidiary ITG Israel. Jefferies Group, Inc. ("Jefferies
Group") owned over 80% of the Company's common stock at March 27, 1998.
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 1997 annual report on Form 10-K.
BUSINESS SEGMENT
Through its wholly-owned, broker/dealer subsidiary, ITG, the Company, is
a leading provider of technology-based equity trading services and
transaction research to institutional investors and brokers. ITG services
help clients to access liquidity, execute trades more efficiently and make
better trading decisions.
GOODWILL
In May 1991, Jefferies Group acquired Integrated Analytics Corporation
("IAC") and contributed its business to ITG in 1992. IAC's principal product,
MarketMind, was used to develop the Company's QuantEX product. Goodwill,
which represents the excess of purchase price for IAC over the fair value of
the IAC net assets acquired, is amortized on a straight-line basis over ten
years. The Company assesses the recoverability of this intangible asset by
determining whether the amortization of the goodwill balance over its
remaining life can be recovered through undiscounted future operating cash
flows of the acquired operation. At March 27, 1998 and December 31, 1997,
goodwill amounted to $1.8 million and $1.9 million, net of accumulated
amortization of $3.5 million and $3.4 million, respectively.
PREMISES AND EQUIPMENT
Premises and equipment are carried at cost and are depreciated using the
straight-line method over the estimated useful lives of the assets (generally
three to five years). Leasehold improvements are amortized using the
straight-line method over the lesser of the estimated useful lives of the
related assets or the non-cancelable lease term.
REVENUES
Revenues primarily consist of commission revenues. TRADE RECEIVABLE FROM
AFFILIATE consists of commissions receivable. Transactions in securities,
commission revenues and related expenses are recorded on a trade-date basis.
EXPENSES
COMPENSATION AND EMPLOYEE BENEFITS include base salaries, bonuses,
employment agency fees, part-time employees, commissions paid to Jefferies &
Company, Inc. ("Jefferies & Co.") employees, the employee portion of
capitalized software and fringe benefits, including employer contributions
for medical insurance, life insurance, retirement plans and payroll taxes.
TRANSACTION PROCESSING consists of floor brokerage and clearing fees.
SOFTWARE ROYALTIES are payments to BARRA Inc. ("BARRA"),
INVESTMENT TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
Page 7 of 15
<PAGE>
the Company's joint venture partner in POSIT-Registered Trademark-(1).
Royalty payments are calculated at an effective rate of 13% of adjusted POSIT
revenues. The royalty payments related to Global Trading are calculated at an
effective rate of 50% of pretax earnings. OCCUPANCY AND EQUIPMENT includes
rent, depreciation, amortization of leasehold improvements, maintenance,
utilities, occupancy taxes and property insurance. CONSULTING is for equity
research, product development and other activities which the Company believes
it is advantageous to out-source. TELECOMMUNICATIONS AND DATA PROCESSING
services include costs for computer hardware, office automation and
workstations, data center equipment, market data services and voice, data,
telex and network communications. LOSS ON EQUITY INVESTMENTS includes
goodwill amortization, equity loss pick-up, and initial start up costs
associated with an European joint venture, the investment in the LongView
Group and the Australian joint venture. OTHER GENERAL AND ADMINISTRATIVE
includes goodwill amortization, legal, audit, tax and promotional expenses.
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.
Deferred tax assets and liabilities reflect the future tax consequences
attributable to differences between the financial statement carrying amounts
of existing assets and liabilities and their respective tax bases. Deferred
tax assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences are
expected to reverse. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date. Past effects of such changes in the rates were not material
to the combined financial statements.
CAPITALIZED SOFTWARE
The Company capitalizes software development costs where technological
feasibility of the product has been established. The establishment of
technological feasibility and the ongoing assessment of recoverability of
capitalized software development costs requires considerable judgment by
management with respect to certain external factors, including, but not
limited to, technological feasibility, anticipated future gross revenues,
estimated economic life and changes in software and hardware technologies.
The Company is amortizing capitalized software costs using the straight-line
method over the estimated economic useful life, the average life of which is
under two years. Amortization begins when the product is available for
release to customers.
CASH AND CASH EQUIVALENTS
The Company generally invests its excess cash in money market funds and
other short-term investments that generally mature within 90 days. At March
27, 1998 and December 31, 1997, such cash equivalents amounted to $61.3
million and $49.3 million, respectively.
- -----------------------
(1) POSIT-Registered Trademark- is a registered service mark of the POSIT
Joint Venture.
INVESTMENT TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
Page 8 of 15
<PAGE>
INVESTMENT IN LIMITED PARTNERSHIP
Investment in limited partnership consists of an investment in TQA
Arbitrage Fund L.P. ( the "Fund"), a Delaware limited partnership. The Fund
invests primarily in convertible securities, and seeks capital appreciation
from its convertible securities portfolio through a combination of
convertible securities purchases and short sales of related stocks focusing
on the current income and capital appreciation available from such strategies
with convertibles. The Company may withdraw any or all of its investment from
the Fund upon at least thirty days notice. Investment in limited partnership
is valued at market, and unrealized gains or losses are reflected in revenues.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Substantially all of the Company's financial instruments are carried at
fair value or amounts approximating fair value.
SECURITIES OWNED
Securities owned are valued at market, and unrealized gains or losses
are reflected in revenues. Securities owned consisted of municipal securities
as of December 31, 1997.
ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses at March 27, 1998 and December 31,
1997 consisted of the following;
<TABLE>
<CAPTION>
MARCH 27, DECEMBER 31,
1998 1997
-------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Accounts payable and accrued expenses............ $ 7,564 $ 4,475
Accrued bonus expense............................ 5,323 2,849
Soft dollars payable ............................ 3,789 3,125
Accrued rent .................................... 2,296 2,276
-------------------------
Total ........................................... $ 18,972 $ 12,725
-------------------------
-------------------------
</TABLE>
OTHER COMPREHENSIVE INCOME/(LOSS)
The following summarizes other comprehensive income/(loss) for the
quarter ended March 27, 1998 (dollars in thousands):
<TABLE>
<CAPTION>
TAX NET
PRE-TAX (EXPENSE) OF TAX
AMOUNT OR BENEFIT AMOUNT
----------------------------------
<S> <C> <C> <C>
Currency translation adjustment............. $ (87) $ - $ (87)
----------------------------------
Other Comprehensive income/(loss)........... $ (87) $ - $ (87)
----------------------------------
----------------------------------
</TABLE>
<TABLE>
<CAPTION>
ACCUMULATED
CURRENCY OTHER
TRANSLATION COMPREHENSIVE
ADJUSTMENT INCOME/(LOSS)
----------------------------------
<S> <C> <C>
Balance at December 31, 1997.................. $ - $ -
Change during quarter ended March 27, 1998.... (87) (87)
----------------------------------
Balance at March 27, 1998..................... $ (87) $ (87)
----------------------------------
----------------------------------
</TABLE>
INVESTMENT TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
Page 9 of 15
<PAGE>
EARNINGS PER SHARE
Net earnings per share of common stock is based upon an adjusted
weighted average number of shares of common stock outstanding. The average
number of outstanding shares for the three months ended March 27, 1998 and
March 28, 1997 were 18.2 million and 18.3 million, respectively.
The following is a reconciliation of the basic and diluted earnings per
share computations for the three months ended March 27, 1998 and March 28,
1997.
<TABLE>
<CAPTION>
MARCH 27 MARCH 28
1998 1997
--------- ---------
(AMOUNTS IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
<S> <C> <C>
Net earnings for basic and diluted earnings per share....... $ 7,362 $ 6,531
-------- --------
-------- --------
Shares of common stock and common stock equivalents:
Average number of common shares........................ 18,226 18,254
-------- --------
Average shares used in basic computation............... 18,226 18,254
Effect of dilutive securities--options................. 921 555
-------- --------
Average shares used in diluted......................... 19,147 18,809
-------- --------
-------- --------
Earnings per share:
Basic.................................................. $ 0.40 $ 0.36
-------- --------
-------- --------
Diluted................................................ $ 0.38 $ 0.35
-------- --------
-------- --------
</TABLE>
USE OF ESTIMATES
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets, liabilities, revenues and expenses and
the disclosure of contingent assets, liabilities, revenues and expenses to
prepare these financial statements in conformity with generally accepted
accounting principles. Actual results could differ from those estimates.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior years' amounts to
conform to the current year's presentation.
JEFFERIES GROUP AND THE COMPANY ANNOUNCE INTENTION TO CONSIDER SEPARATING
INTO TWO INDEPENDENT COMPANIES
On March 17, 1998, Jefferies Group and the Company jointly announced
that they are considering the separation of Jefferies & Co. and other
Jefferies Group subsidiaries ("JEFCO") from the Company through a spin-off.
If the separation is completed, Jefferies Group shareholders will own
100% of JEFCO and approximately 82.3% of the Company. The public Company
shareholders will continue to own 17.7% of the Company. (The Company
percentage ownership interests could change slightly as a result of the
Company's stock repurchases or issuances before the transaction closing
date.) The spin-off will be accomplished by a tax-free distribution of 100%
of the shares of a new company, JEFCO, to Jefferies Group shareholders.
Jefferies Group's 15 million shares of the Company would then be its only
asset. The spin-off would be followed immediately by a tax-free merger of
Jefferies Group and the Company, with the Company's public shareholders
receiving shares of Jefferies Group. Jefferies Group would then be renamed
Investment Technology Group, Inc.
INVESTMENT TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
Page 10 of 15
<PAGE>
The spin-off and restructuring transactions are contingent on a number
of factors, including receipt of all Board of Directors and shareholder
approvals of Jefferies Group and the Company, receipt of a favorable tax
ruling from the Internal Revenue service and other required regulatory and
contractual approvals.
DIVIDENDS
Any future payments of dividends will be at the discretion of the
Company's Board of Directors and will depend on the Company's financial
condition, results of operations, capital requirements and other factors
deemed relevant. The Company is contemplating a special dividend in
conjunction with the proposed spin-off.
INVESTMENT TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
Page 11 of 15
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FIRST QUARTER 1998 VERSUS FIRST QUARTER 1997 (Dollars in millions, except as
noted)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------- %
MARCH 27, 1998 MARCH 28, 1997 CHANGE CHANGE
-------------- -------------- ------- -------
<S> <C> <C> <C> <C>
Revenues........................... $41.4 $30.7 $10.7 35%
Number of Trading Days............. 59 60 (1) (2)%
Revenues per Trading Day
(Dollars in thousands)......... $701 $511 $190 37%
</TABLE>
Increased revenues were attributed to the continued growth of POSIT,
QuantEX(2) and the Company's Electronic Trading Desk. For the three months
ended March 27, 1998 ("First Quarter 1998"), POSIT revenues were
approximately 25% or $4.6 million above the comparable three months ended
March 28, 1997 ("First Quarter 1997"). The number of shares per day traded
via POSIT increased by approximately 4.5 million or 31% to 19.2 million in
the First Quarter 1998 over the First Quarter 1997 amount of 14.7 million.
The Company experienced a record breaking day on January 28, 1998, when 32
million shares were traded using POSIT. The Company's QuantEX revenues were
approximately 15% or $0.9 million above the First Quarter 1997. The
Electronic Trading Desk posted an 89% or $4.9 million increase over the First
Quarter 1997. Other revenues increased by 66% or $0.3 million primarily from
a 49% increase in interest income.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------- %
MARCH 27, 1998 MARCH 28, 1997 CHANGE CHANGE
-------------- -------------- ------- -------
<S> <C> <C> <C> <C>
Compensation and employee benefits
expense........................ $10.6 $6.9 $3.7 54%
Number of employees at period end... 226 169 57 34%
Revenues per employee
(Dollars in thousands)......... $183 $182 $ 1 1%
Compensation and employee
benefits expense per employee
(Dollars inthousands).......... $47 $41 $6 15%
</TABLE>
The increase is primarily due to increases in salaries, bonuses and related
employee benefits as a result of the Company's 34% growth in personnel, as
well as increases in compensation due to market pressures to attract and
retain quality personnel. The increase was slightly offset by capitalization
of the employee portion of software costs from additional software projects.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------- %
MARCH 27, 1998 MARCH 28, 1997 CHANGE CHANGE
-------------- -------------- ------- -------
<S> <C> <C> <C> <C>
Transaction processing expense.... $5.7 $4.9 $0.8 16%
Transaction processing expense
as a percentage of revenues..... 13.7% 16.0% (2.3)pts. (14)%
</TABLE>
The increase is primarily due to the expense associated with a higher volume
of transactions and shares in First Quarter 1998. However, as a percentage of
revenues, transaction processing expenses declined by 2.3 points primarily
from the Company's ability to leverage its technology by a mix of business in
higher margin POSIT (no floor costs) and volume discounts realized with
clearing and execution services.
- --------------------------
(2) QuantEX is a registered trademark of the Company.
INVESTMENT TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
Page 12 of 15
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------- %
MARCH 27, 1998 MARCH 28, 1997 CHANGE CHANGE
-------------- -------------- ------- -------
<S> <C> <C> <C> <C>
Software royalties expense..... $3.0 $2.4 $0.6 25%
Software royalties expense
as a percentage of POSIT
revenues.................. 13.1% 13.1% - -%
</TABLE>
Software royalties are a contractually fixed percentage of POSIT revenues.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------- %
MARCH 27, 1998 MARCH 28, 1997 CHANGE CHANGE
-------------- -------------- ------- -------
<S> <C> <C> <C> <C>
Occupancy and equipment expense ... $2.8 $1.9 $0.9 47%
</TABLE>
The increase was primarily the result of the Company's relocation of its
corporate headquarters to 380 Madison Avenue in mid-June 1997. Increases in
depreciation, amortization of leasehold improvements and rent expense
accounted for the change.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------- %
MARCH 27, 1998 MARCH 28, 1997 CHANGE CHANGE
-------------- -------------- ------- -------
<S> <C> <C> <C> <C>
Consulting expense................ $0.8 $0.4 $0.4 100%
</TABLE>
The Company outsources certain expertise that is viewed as advantageous in
implementing certain strategies and tactics. During the First Quarter 1998,
costs were incurred in exploring joint venture opportunities, assisting in a
major telecom conversion and for expenses incurred for the proposed
Investment Technology Group, Inc./Jefferies & Co. spin-off.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------- %
MARCH 27, 1998 MARCH 28, 1997 CHANGE CHANGE
-------------- -------------- ------- -------
<S> <C> <C> <C> <C>
Telecommunications and data
processing services expense... $1.8 $1.0 $0.8 80%
</TABLE>
The First Quarter 1998 increase stems from the Company's growth in both
client base which requires market data lines and other telecom hookups,
Company's increased headcount and facilities expansion.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------- %
MARCH 27, 1998 MARCH 28, 1997 CHANGE CHANGE
-------------- -------------- ------- -------
<S> <C> <C> <C> <C>
Loss on equity investments........ $1.0 - $1.0 N/A
</TABLE>
In the First Quarter 1998 the Company recorded losses from investments made
to enhance the products and diversity of the Company via joint ventures
worldwide. Costs include goodwill amortization, the Company's equity loss
pick-up and initial start-up costs in conjunction with work on potential
joint venture partnerships.
INVESTMENT TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
Page 13 of 15
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------- %
MARCH 27, 1998 MARCH 28, 1997 CHANGE CHANGE
-------------- -------------- ------- -------
<S> <C> <C> <C> <C>
Other general and administrative
expense ....................... $2.7 $1.9 $0.8 42%
</TABLE>
The increase is largely attributable to increases in headcount of 57
employees. Business development costs increased by approximately $534,000
primarily from the Company's efforts to diversify its client base. Legal
fees increased by approximately $219,000 primarily from an increased usage of
legal counsel in connection with exploring possible joint ventures
opportunities.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------- %
MARCH 27, 1998 MARCH 28, 1997 CHANGE CHANGE
-------------- -------------- ------- -------
<S> <C> <C> <C> <C>
Income tax expense................ $5.7 $4.8 $0.9 19%
</TABLE>
The increase is primarily due to the increase in pretax earnings and the
increase in permanent tax adjustments, such as goodwill amortization related
to equity investments, that were not present in the First Quarter 1997. The
effective tax rate increased from 42.5% in the First Quarter 1997 to 43.6% in
the First Quarter 1998.
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.
On March 18, 1998, the Company filed a Form 8-K reporting the joint
announcement by Jefferies Group, Inc. ("Group") and the Company of
plans to separate Group's 100% owned subsidiary, Jefferies &
Company, Inc. and Group's 82.3% owned subsidiary, the Company,
through a proposed spin-off and related transactions.
INVESTMENT TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
Page 14 of 15
<PAGE>
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 1, 1998 By: /s/ John R. MacDonald
-------------------------
John R. MacDonald
Chief Financial Officer and
Duly Authorized Signatory of Registrant
INVESTMENT TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
Page 15 of 15
<TABLE> <S> <C>
<PAGE>
<ARTICLE> BD
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLI-
DATED STATEMENT OF FINANCIAL CONDITION AND THE CONSOLIDATED STATEMENT OF OPERA-
TIONS AS OF MARCH 27, 1998 AND FOR THE 3 MONTHS THEN ENDED AND THE NOTES THERE-
TO AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
FILED IN THE 1998 INVESTMENT TECHNOLOGY GROUP, INC. 1ST QUARTER 10-Q FILING.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-27-1998
<CASH> 64,460
<RECEIVABLES> 12,607
<SECURITIES-RESALE> 0
<SECURITIES-BORROWED> 0
<INSTRUMENTS-OWNED> 11,153
<PP&E> 18,753
<TOTAL-ASSETS> 126,940
<SHORT-TERM> 0
<PAYABLES> 21,989
<REPOS-SOLD> 0
<SECURITIES-LOANED> 0
<INSTRUMENTS-SOLD> 0
<LONG-TERM> 0
0
0
<COMMON> 189
<OTHER-SE> 102,015
<TOTAL-LIABILITY-AND-EQUITY> 126,940
<TRADING-REVENUE> 0
<INTEREST-DIVIDENDS> 800
<COMMISSIONS> 40,587
<INVESTMENT-BANKING-REVENUES> 0
<FEE-REVENUE> 0
<INTEREST-EXPENSE> 13
<COMPENSATION> 10,585
<INCOME-PRETAX> 13,050
<INCOME-PRE-EXTRAORDINARY> 13,050
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,362
<EPS-PRIMARY> 0.40
<EPS-DILUTED> 0.38
</TABLE>
