<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
<TABLE>
<S> <C>
For the quarterly period ended June 25, 1999 Commission file number: 0 - 23644
</TABLE>
INVESTMENT TECHNOLOGY GROUP, INC.
(Exact Name of Registrant as Specified in Its Charter)
<TABLE>
<S> <C>
DELAWARE 95 - 2848406
- ------------------------------------------------------ ----------------------------------------------------
(State or Other Jurisdiction of Incorporation or (I.R.S. Employer Identification No.)
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)
</TABLE>
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 August 6, 1999, the Registrant had 31,949,704 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
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<S> <C>
Item 1. Financial Statements
Consolidated Statements of Financial Condition:
June 25, 1999 (unaudited) and December 31, 1998................................... 4
Consolidated Statements of Operations (unaudited):
Six Months Ended June 25, 1999 and June 26, 1998.................................. 5
Three Months Ended June 25, 1999 and June 26, 1998................................ 6
Consolidated Statement of Changes in Stockholders' Equity (unaudited):
Six Months Ended June 25, 1999.................................................... 7
Consolidated Statements of Cash Flows (unaudited):
Six Months Ended June 25, 1999 and June 26, 1998.................................. 8
Condensed Notes to Consolidated Financial Statements (unaudited)...................... 9
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................................. 12
PART II OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders................................... 20
Item 5. Other Information..................................................................... 20
Item 6. Exhibits and Reports on Form 8-K...................................................... 20
Signatures .............................................................................. 21
</TABLE>
QUANTEX (R) ("QUANTEX") IS A REGISTERED TRADEMARK OF INVESTMENT TECHNOLOGY
GROUP, INC. POSIT (R) ("POSIT") IS A REGISTERED SERVICE MARK OF THE POSIT JOINT
VENTURE. SMARTSERVER IS A SERVICE MARK OF INVESTMENT TECHNOLOGY GROUP, INC.
INVESTMENT TECHNOLOGY GROUP INC. AND SUBSIDIARIES
Page 2 of 21
<PAGE>
FORWARD-LOOKING STATEMENTS
In addition to the historical information contained throughout this
Form 10-Q, there are forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended (the "Securities Act"), and
Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). All statements regarding our expected future financial position, results
of operations, cash flows, dividends, financing plans, business strategies,
competitive positions, plans and objectives of management for future operations,
and concerning securities markets and economic trends are forward-looking
statements. Although we believe our expectations reflected in such
forward-looking statements are based on reasonable assumptions, there can be no
assurance that such expectations will prove to have been correct. Important
factors that could cause actual results to differ materially from the
expectations reflected in the forward-looking statements herein include, among
others, the actions of both current and potential new competitors, rapid changes
in technology, fluctuations in market trading volumes, market volatility,
changes in the regulatory environment, risk of errors or malfunctions in our
systems or technology, cash flows into or redemptions from equity funds, effects
of inflation, customer trading patterns, securities industry participants'
responses to Year 2000 issues, as well as general economic and business
conditions; securities, credit and financial and market conditions; adverse
changes or volatility in interest rates.
INVESTMENT TECHNOLOGY GROUP INC. AND SUBSIDIARIES
Page 3 of 21
<PAGE>
PART I. - FINANCIAL INFORMATION
Item 1. Financial Statements
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 25, DECEMBER 31,
1999 1998
----------- -----------
<S> <C> <C>
ASSETS (UNAUDITED)
Cash and cash equivalents................................. $ 80,955 $ 77,324
Securities owned, at fair value........................... 27,757 39,615
Receivables from brokers, dealers and other, net.......... 17,812 24,127
Due from affiliates....................................... - 722
Investments............................................... 6,066 1,000
Premises and equipment.................................... 19,060 19,662
Capitalized software...................................... 6,419 6,450
Goodwill.................................................. 1,098 1,373
Tax receivable............................................ 10,298 -
Deferred taxes............................................ 2,421 2,784
Other assets.............................................. 8,176 7,455
----------- -----------
Total assets.............................................. $ 180,062 $180,512
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued expenses..................... $ 41,890 $ 24,154
Payable to brokers, dealers and other..................... 5,918 1,881
Software royalties payable................................ 4,216 4,070
Securities sold, not yet purchased, at fair value......... 23 288
Due to affiliates......................................... - 2,557
Income taxes payable to affiliate......................... - 3,853
----------- -----------
Total liabilities......................................... 52,047 36,803
----------- -----------
STOCKHOLDERS' EQUITY:
Preferred stock, par value $0.01; shares authorized:
1,000,000; shares issued: none ...................... - -
Common stock, par value $0.01; shares authorized:
100,000,000; shares issued: 31,488,836 and 30,961,253
at June 25, 1999 and December 31, 1998............... 315 309
Additional paid-in capital............................. 80,654 51,396
Retained earnings...................................... 47,054 104,925
Common stock held in treasury, at cost; shares: none at
June 25, 1999 and 1,300,332 at December 31, 1998... - (12,760)
Accumulated other comprehensive loss:
Currency translation adjustment.................... (8) (161)
----------- -----------
Total stockholders' equity............................. 128,015 143,709
----------- -----------
Total liabilities and stockholders' equity $ 180,062 $ 180,512
----------- -----------
----------- -----------
</TABLE>
SEE ACCOMPANYING UNAUDITED CONDENSED NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS.
INVESTMENT TECHNOLOGY GROUP INC. AND SUBSIDIARIES
Page 4 of 21
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
-----------------------
JUNE 25, JUNE 26,
1999 1998
--------- -------
<S> <C> <C>
REVENUES:
Commissions:
POSIT........................................ $ 61,570 $51,726
Electronic trading desk...................... 21,478 21,805
Client....................................... 24,769 17,424
Other................................................ 1,123 1,337
-------- -------
Total revenues............................. 108,940 92,292
-------- -------
EXPENSES:
Compensation and employee benefits................... 25,915 22,810
Transaction processing............................... 15,357 12,364
Software royalties................................... 8,026 6,759
Occupancy and equipment.............................. 6,409 5,620
Telecommunications and data processing services...... 4,304 4,106
Net loss on long-term investments ................... 1,215 2,087
Spin-off costs ...................................... 6,759 625
Other general and administrative..................... 7,416 6,204
-------- -------
Total expenses.............................. 75,401 60,575
-------- -------
Income before income tax expense.......................... 33,539 31,717
Income tax expense........................................ 16,786 14,427
-------- -------
NET INCOME................................................ $ 16,753 $17,290
-------- -------
--------- -------
Basic net earnings per share of common stock ............. $ 0.55 $ 0.59
-------- -------
-------- -------
Diluted net earnings per share of common stock .......... $ 0.53 $ 0.57
-------- -------
-------- -------
Basic weighted average shares outstanding................. 30,191 29,162
-------- -------
-------- -------
Diluted weighted average shares and common stock
equivalents outstanding................................. 31,817 30,569
-------- -------
-------- -------
</TABLE>
SEE ACCOMPANYING UNAUDITED CONDENSED NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS.
INVESTMENT TECHNOLOGY GROUP INC. AND SUBSIDIARIES
Page 5 of 21
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------
JUNE 25, JUNE 26,
1999 1998
-------- --------
<S> <C> <C>
REVENUES:
Commissions:
POSIT........................................ $32,824 $28,926
Electronic trading desk...................... 10,878 12,123
Client....................................... 12,080 9,315
Other................................................ 530 541
-------- --------
Total revenues............................. 56,312 50,905
-------- --------
EXPENSES:
Compensation and employee benefits................... 3,667 12,225
Transaction processing............................... 7,821 6,710
Software royalties................................... 4,274 3,774
Occupancy and equipment.............................. 3,296 2,823
Telecommunications and data processing services...... 2,384 2,325
Net loss on long-term investments ................... 329 1,085
Spin-off costs ...................................... 4,505 374
Other general and administrative..................... 3,734 2,922
-------- --------
Total expenses.............................. 40,010 32,238
-------- --------
Income before income tax expense.......................... 16,302 18,667
Income tax expense........................................ 7,908 8,739
-------- --------
NET INCOME................................................ $ 8,394 $ 9,928
-------- --------
-------- --------
Basic net earnings per share of common stock ............. $ 0.27 $ 0.34
-------- --------
-------- --------
Diluted net earnings per share of common stock .......... $ 0.26 $ 0.32
-------- --------
-------- --------
Basic weighted average shares outstanding................. 30,670 29,246
-------- --------
-------- --------
Diluted weighted average shares and common stock
Equivalents outstanding................................. 32,040 30,647
-------- --------
-------- --------
</TABLE>
SEE ACCOMPANYING UNAUDITED CONDENSED NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS.
INVESTMENT TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
Page 6 of 21
<PAGE>
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 25, 1999
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
Common
Additional Stock
Preferred Common Paid-in Retained Held in
Stock Stock Capital Earnings Treasury
--------- ------ ---------- -------- --------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1998............... $ - $ 309 $ 51,396 $104,925 $(12,760)
Retirement of Common Stock held in
Treasury (1,300,332 shares).............. - - (12,760) - 12,760
Payment of special cash dividend........... - - - (74,624) -
Issuance of common stock in connection
with the employee stock option plan
(1,757,615 shares)....................... - 6 41,707 - -
Issuance of common stock in connection
with the employee stock purchase plan
(20,449 shares).......................... - - 311 - -
Comprehensive income/(loss):
Net income............................... - - - 16,753 -
Other comprehensive income, net oftax:
Currency translation adjustment ... - - - - -
Comprehensive income....................... - - - - -
--------- ------ ---------- -------- ---------
Balance at June 25, 1999................... $ - $ 315 $ 80,654 $ 47,054 $ -
--------- ------ ---------- -------- ---------
--------- ------ ---------- -------- ---------
</TABLE>
<TABLE>
<CAPTION>
Accumulated Total
Comprehensive Stockholders
Income/(loss) Equity
------------- ------------
<S> <C> <C>
Balance at December 31, 1998............... $ (161) $143,709
Retirement of Common Stock held in
Treasury (1,300,332 shares).............. - -
Payment of special cash dividend........... - (74,624)
Issuance of common stock in connection
with the employee stock option plan
(1,757,615 shares)....................... - 41,713
Issuance of common stock in connection
with the employee stock purchase plan
(20,449 shares).......................... - 311
Comprehensive income/(loss):
Net income............................... - 16,753
Other comprehensive income, net oftax:
Currency translation adjustment ... 153 153
Comprehensive income.......................
--------
Balance at June 25, 1999................... - 16,906
---------- ---------
(8) $128,015
---------- ---------
---------- ---------
</TABLE>
SEE ACCOMPANYING UNAUDITED CONDENSED NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS.
INVESTMENT TECHNOLOGY GROUP INC. AND SUBSIDIARIES
Page 7 of 21
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
-------------------------------
JUNE 25, JUNE 26,
1999 1998
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income.......................................................................... $ 16,753 $17,290
Adjustments to reconcile net income to net cash provided by operating activities:
Deferred income tax expense/(benefit) ........................................ 362 (276)
Depreciation and amortization.................................................. 6,574 4,053
Undistributed loss of affiliates............................................... 1,165 77
Provision for doubtful receivables............................................. 60 48
Decrease (increase) in operating assets:
Securities owned, at fair value................................................. 11,858 1,081
Receivables from brokers, dealers and other..................................... 6,254 (5,632)
Tax receivable.................................................................. (10,298) -
Due from affiliates............................................................. 722 1,074
Investments..................................................................... (66) (405)
Other assets.................................................................... (970) (1,079)
Increase (decrease) in operating liabilities:
Accounts payable and accrued expenses........................................... 17,786 11,153
Payable to brokers, dealers and other........................................... 4,037 1,260
Software royalties payable...................................................... 146 1,178
Securities sold, not yet purchased, at fair value............................... (265) 139
Due to affiliates............................................................... (2,557) (1,421)
Income taxes payable to affiliate............................................... (3,853) 2,191
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES...................................... 47,708 30,731
--------- ---------
Cash flows from investing activities:
Purchase of premises and equipment.............................................. (3,376) (3,746)
Purchase of investment securities............................................... (5,000) -
Other assets.................................................................... (964) -
Capitalization of software development costs.................................... (2,291) (2,135)
--------- ---------
NET CASH USED IN INVESTING ACTIVITIES.......................................... (11,631) (5,881)
--------- ---------
Cash flows from financing activities:
Dividends paid.................................................................. (74,624) -
Retirement of common stock held in treasury at cost............................. 12,760 -
Issuance of common stock........................................................ 29,265 3,833
--------- ---------
NET CASH (USED)/PROVIDED BY FINANCING ACTIVITIES............................. (32,599) 3,833
--------- ---------
Effect of foreign currency translation on cash and cash equivalents................. 153 (135)
Net increase in cash and cash equivalents...................................... 3,631 28,548
Cash and cash equivalents - beginning of period..................................... 77,324 14,263
--------- ---------
--------- ---------
Cash and cash equivalents - end of period........................................... $ 80,955 $42,811
--------- ---------
--------- ---------
Supplemental cash flow information:
Interest paid................................................................... $ 19 $ 14
--------- ---------
--------- ---------
Income taxes paid to affiliate.................................................. $ 6,538 $11,081
--------- ---------
--------- ---------
</TABLE>
SEE ACCOMPANYING UNAUDITED CONDENSED NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS.
INVESTMENT TECHNOLOGY GROUP INC. AND SUBSIDIARIES
Page 8 of 21
<PAGE>
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
ORGANIZATION AND BASIS OF PRESENTATION
The Consolidated Financial Statements include the accounts of Investment
Technology Group, Inc. and its wholly-owned subsidiaries ("ITG"), which
principally include: (1) ITG Inc., a broker-dealer in equity securities
registered under the Exchange Act, (2) Investment Technology Group International
Limited, which is a 50% partner in the ITG Europe joint venture, and (3) ITG
Australia Holdings Pty Limited, which is a 50% partner in ITG Pacific Holdings
Pty Limited. Investments in companies of fifty percent or less are accounted for
using the equity method.
We are a leading financial technology firm that provides a fully integrated
set of value-added electronic equity analysis and trade execution tools. We
provide services that help our clients optimize their portfolio construction and
trading strategies, efficiently access liquidity in multiple markets and achieve
superior, low-cost trade execution. Our clients are major institutional
investors and broker/dealers. Our products include: POSIT, the world's largest
intra-day electronic equity matching system; QuantEX, a fully-integrated trade
routing, analysis and management system; ITG Platform, a tool that provides
connections to POSIT, ITG's electronic trading desk and SuperDOT; pre- and
post-trade analysis, a set of analytical tools for systematically lowering the
costs of trading; SmartServers, which offer server based implementation of
trading strategies; ITG/OPT, a computer-based equity portfolio selection system;
and research, development, sales and consulting services to clients.
SPIN-OFF FROM JEFFERIES GROUP
On April 27, 1999, we were effectively spun off from Jefferies
Group, Inc ("Jefferies Group"). The spin-off was effected through a series of
transactions including our merger with and into Jefferies Group, with Jefferies
Group surviving the merger and being renamed Investment Technology Group, Inc.
("New ITG"). The merger occurred following the transfer by Jefferies Group of
substantially all of its assets and liabilities to its wholly-owned subsidiary
("New Jefferies"), and the pro rata distribution by Jefferies Group to its
stockholders of all of the New Jefferies common stock. After these transactions,
New Jefferies owned all of the assets of Jefferies Group other than Jefferies
Group's equity interest in ITG, and Jefferies Group's existing stockholders
owned all of the equity interest in New Jefferies. Following the merger, New
Jefferies was renamed Jefferies Group, Inc., and, through its subsidiaries,
carries on the businesses of Jefferies Group prior to the transactions (other
than the businesses of our company).
In connection with these transactions, on April 21, 1999, we paid a special
cash dividend of $4.00 per share, payable pro rata to all of our stockholders of
record as of April 20, 1999, including Jefferies Group. The aggregate amount of
the special cash dividend was $74.6 million, of which we paid $60.0 million to
Jefferies Group. As a result of the merger and based upon the number of shares
of Jefferies Group common stock outstanding on the date of the merger
(23,931,814) and the number of shares of the ITG common stock held by Jefferies
Group (15,000,000), ITG's stockholders, other than Jefferies Group received
1.5955 shares of common stock of New ITG for each share of ITG common stock held
by them. Through June 25, 1999, we had incurred spin-off costs of approximately
$8.7 million, consisting of approximately $1.9 million through December 31, 1998
and approximately $6.8 million in the first six months of 1999. The merger and
related transactions resulted in the stockholders of Jefferies Group becoming
direct stockholders of our company and Jefferies Group ceasing to be our parent
company. The merger was accounted for as a "merger of entities under common
control" in accordance with generally accepted accounting principles and
accordingly, reflected the historical cost basis of assets and liabilities of
ITG.
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 presentation of
the results for the interim periods and should be read in conjunction with our
1998 annual report on Form 10-K, as amended by Form 10-K-A.
INVESTMENT TECHNOLOGY GROUP INC. AND SUBSIDIARIES
Page 9 of 21
<PAGE>
FAIR VALUE OF FINANCIAL INSTRUMENTS
Substantially all of our financial instruments are carried at fair value or
amounts approximating fair value. Cash and cash equivalents, securities owned
and certain receivables, are carried at fair value or contracted amounts which
approximate fair value due to the short period to maturity and repricing
characteristics. Similarly, liabilities are carried at amounts approximating
fair value. Securities sold, not yet purchased, are valued at quoted market
prices.
USE OF ESTIMATES
ITG's management 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 year's amounts to
conform to the current year's presentation.
INCOME TAXES
Until April 27, 1999, we were a member of Jefferies Group affiliated tax
group ("Group") for purposes of filing a Federal income tax return (i.e.,
Jefferies Group owned more than 80% of ITG). With respect to tax periods ending
prior to April 28, 1999, our tax liability was determined on a "separate return"
basis. That is, we were required to pay to Jefferies Group our proportionate
share of the Group's consolidated tax liability plus any excess of our
"separate" tax liability (assuming a separate tax return were to be filed by us)
over our proportionate amount of the consolidated Group tax liability.
Alternatively, Jefferies Group was required to pay us an "additional amount" for
the amount by which the consolidated tax liability of the Group was decreased by
reason of inclusion of ITG in the Group.
We account for income taxes on the asset and liability method. Deferred tax
assets and liabilities are recognized for 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
be recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in the Consolidated Statement of Operations in
the period that includes the enactment date.
At June 25, 1999, we had a tax receivable balance of $10.3 million resulting
from the exercise of stock options that were exercised prior to their expiration
at the end of April 1999.
INVESTMENT TECHNOLOGY GROUP INC. AND SUBSIDIARIES
Page 10 of 21
<PAGE>
ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses at June 25, 1999 and December 31,
1998 consisted of the following;
<TABLE>
<CAPTION>
JUNE 25, DECEMBER 31,
1999 1998
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Accounts payable and accrued expenses...... $17,858 $ 6,681
Deferred compensation...................... 7,447 6,579
Accrued soft dollars expenses.............. 8,383 6,692
Accrued bonus expense...................... 5,716 1,757
Accrued rent expense....................... 2,486 2,445
------- -------
Total...................................... $41,890 $24,154
------- -------
------- -------
</TABLE>
OTHER COMPREHENSIVE LOSS
The following summarizes other comprehensive income (loss) as of June 25,
1999 (Dollars in thousands):
<TABLE>
<CAPTION>
TAX NET
PRE-TAX (EXPENSE) OF TAX
AMOUNT OR BENEFIT AMOUNT
------------- ------------------- -----------
<S> <C> <C> <C>
Currency translation adjustment............................... $ 153 $ - $ 153
Other Comprehensive loss...................................... $ 153 $ - $ 153
------------- ------------------- -----------
------------- ------------------- -----------
</TABLE>
<TABLE>
<CAPTION>
ACCUMULATED
CURRENCY OTHER
TRANSLATION COMPREHENSIVE
ADJUSTMENT INCOME/(LOSS)
------------- -------------------
<S> <C> <C>
Balance at December 31,1998............................ $ (161) $ (161)
Change during quarter ended June 25, 1999.............. 153 153
------------- -------------------
Balance at June 25, 1999............................... $ (8) $ (8)
------------- -------------------
------------- -------------------
</TABLE>
EARNINGS PER SHARE
Net earnings per share of common stock, is based upon an adjusted
weighted average number of shares of common stock outstanding adjusted to
reflect our company's spin-off transaction from Jefferies Group. The adjusted
average number of outstanding shares for the six months ended June 25, 1999 and
June 26, 1998 was 31.8 million and 30.6 million, respectively. The adjusted
average number of outstanding shares for the three months ended June 25, 1999
and June 26, 1998 was 32.0 million and 30.6 million, respectively.
INVESTMENT TECHNOLOGY GROUP INC. AND SUBSIDIARIES
Page 11 of 21
<PAGE>
The following is a reconciliation of the basic and diluted earnings per
share computations for the six months ended June 25, 1999 and June 26, 1998.
<TABLE>
<CAPTION>
JUNE 25, JUNE 26,
1999 1998
-------------- --------------
<S> <C> <C>
(AMOUNTS IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
Net income............................................................ $ 16,753 $ 17,290
-------------- --------------
-------------- --------------
Shares of common stock and common stock equivalents:
Average number of common shares used in basic computation....... 30,191 29,162
Effect of dilutive securities - options......................... 1,626 1,407
-------------- --------------
Average number of common shares used in diluted computation..... 31,817 30,569
-------------- --------------
-------------- --------------
Earnings per share:
Basic................................................................. $ 0.55 $ 0.59
-------------- --------------
-------------- --------------
Diluted............................................................... $ 0.53 $ 0.57
-------------- --------------
-------------- --------------
</TABLE>
The following is a reconciliation of the basic and diluted earnings per share
computations for the three months ended June 25, 1999 and June 26, 1998 on a
post spin-off basis. In calculating the per share data, the historical numbers
of shares outstanding, stated below, have been adjusted to reflect the spin-off
and merger transactions effective on April 27, 1999 and discussed in "Condensed
Notes to Consolidated Financial Statements - Spin-Off from Jefferies Group."
<TABLE>
<CAPTION>
JUNE 25, JUNE 26,
1999 1998
-------------- --------------
(AMOUNTS IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
<S> <C> <C>
Net income......................................................... $ 8,394 $ 9,928
-------------- --------------
-------------- --------------
Shares of common stock and common stock equivalents:
Average number of common shares used in basic computation....... 30,670 29,246
Effect of dilutive securities - options......................... 1,370 1,401
-------------- --------------
-------------- --------------
Average number of common shares used in diluted computation..... 32,040 30,647
-------------- --------------
-------------- --------------
Earnings per share:
Basic................................................................. $ 0.27 $ 0.34
-------------- --------------
-------------- --------------
Diluted............................................................... $ 0.26 $ 0.32
-------------- --------------
-------------- --------------
</TABLE>
CONTINGENCIES
In 1998, we received a "30-day letter" from the Internal
Revenue Service proposing certain adjustments which, if sustained, would result
in a tax deficiency of approximately $9.6 million plus interest. The adjustments
proposed relate to (i) the disallowance of deductions taken in connection with
the termination of certain compensation plans at the time of our initial public
offering in 1994 and (ii) the disallowance of tax credits taken in connection
with certain research and development expenditures. We believe that the tax
benefits in question were taken properly and intend to vigorously contest the
proposed adjustments. Based on the facts and circumstances known at this time,
we are unable to predict when this matter will be resolved or the costs
associated with its resolution.
Our company may continue to be liable for certain liabilities of its
former parent, Jefferies Group despite the express assignment of such
liabilities to and the express assumption of such liabilities by New Jefferies.
Pursuant to the distribution agreement, benefits agreement and tax sharing and
indemnification agreement, New Jefferies will be obligated to indemnify ITG for
liabilities related to ITG's former parent and its subsidiaries, but not for
liabilities related to our company. Under those agreements, ITG will be
obligated to indemnify New Jefferies for liabilities related to our
INVESTMENT TECHNOLOGY GROUP INC. AND SUBSIDIARIES
Page 12 of 21
<PAGE>
company. ITG's ability to recover any costs under such indemnity will
depend upon the future financial strength of New Jefferies.
DIVIDENDS
Any future payments of dividends will be at the discretion of our Board of
Directors and will depend on our financial condition, results of operations,
capital requirements and other factors deemed relevant. Our revolving credit
facility substantially limits our ability to pay dividends. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources".
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
REVENUES:
We generate substantially all of our revenues from the following four
products and services, each contributing to our single line of business:
- POSIT: a confidential electronic stock crossing system;
- Electronic Trading Desk: an agency-only trading desk;
- Front End Software;
- QuantEX: a Unix-based front-end software system providing market
analysis, trade management and electronic connectivity to POSIT
and multiple trade execution destinations; and
- ITG Platform: a PC-based front-end software system providing market
analysis, trade management and electronic connectivity to POSIT
and multiple trade execution destinations.
Revenues primarily consist of commissions from customers' use of our
trade execution and analytical services. Because these commissions are paid on a
per-transaction basis, revenues fluctuate from period to period depending on the
volume of securities traded through our services. We record as POSIT revenue any
order that is executed on the POSIT system regardless of the manner in which the
order was submitted to POSIT. ITG collects a commission from each side of a
trade matched on POSIT. We record as Electronic Trading Desk revenue any order
that is handled by our trading desk personnel and executed at any trade
execution destination other than POSIT. We record as Client revenue any order
that is sent by our clients, through ITG's front-end systems but without
assistance from the Electronic Trading Desk, to any third party trade execution
destination. Other revenue includes interest income and market losses resulting
from temporary positions in securities assumed in the normal course of our
agency trading business.
EXPENSES:
Expenses consist of compensation and employee benefits,
transaction processing, software royalties, occupancy and equipment,
telecommunications and data processing services, net loss on long-term
investments, spin-off costs and other general and administrative expenses.
Compensation and employee benefits expenses include base salaries, bonuses,
employment agency fees, part-time employee compensation, fringe benefits,
including employer contributions for
INVESTMENT TECHNOLOGY GROUP INC. AND SUBSIDIARIES
Page 13 of 21
<PAGE>
medical insurance, life insurance, retirement plans and payroll taxes, offset
by capitalized software. Transaction processing expenses consist of floor
brokerage and clearing fees and connection fees for use of certain third
party execution services. Software royalties are payments to our POSIT joint
venture partner, BARRA, at the contractually fixed rate of 13% of POSIT
Revenues. Occupancy and equipment expenses include rent, depreciation,
amortization of leasehold improvements, maintenance, utilities, occupancy
taxes and property insurance. 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. Net loss on long-term investments includes gains on the sale
of equity investments, as offset by amortization of goodwill, equity
gain/loss pickup and initial start-up costs. Spin-off costs include legal,
accounting, consulting and various other expenses in connection with the
spin-off from Jefferies Group and related transactions. Other general and
administrative expenses include amortization of software and goodwill, legal,
audit, tax, consulting and promotional expenses.
RESULTS OF OPERATIONS - SIX MONTHS ENDED JUNE 25, 1999 COMPARED TO
SIX MONTHS ENDED JUNE 26, 1998
The table below sets forth, certain items in the statement of income
expressed as a percentage of revenues for the periods indicated:
<TABLE>
<CAPTION>
------------------
SIX MONTHS ENDED
------------------
JUNE 25, JUNE 26,
-------- -------
1999 1998
------ ------
<S> <C> <C>
Revenues: ........................................ 100.0% 100.0%
Commissions
POSIT ............................... 56.5 56.0
Electronic trading desk ............. 19.7 23.6
Client .............................. 22.7 18.9
Other ....................................... 1.1 1.5
Expenses:
Compensation and employee benefits .......... 23.8 24.7
Transaction processing ...................... 14.1 13.4
Software royalties .......................... 7.4 7.3
Occupancy and equipment ..................... 5.9 6.1
Telecommunications and data processing
services ................................... 4.0 4.4
Net loss on long-term investments ........... 1.1 2.3
Spin-off costs .............................. 6.2 0.7
Other general and administrative ............ 6.8 6.7
------ ------
Total expenses ..................... 69.3 65.6
------ ------
30.8 34.4
Income before income tax expense
Income tax expense ............................... 15.4 15.6
------ ------
Net income ....................................... 15.4 18.7
------ ------
------ ------
</TABLE>
EARNINGS PER SHARE:
Basic net earnings per share decreased $0.04, or 7%, from $0.59 for the
six months ended June 26, 1998 ("First Half 1998") to $0.55 for the six months
ended June 25, 1999 ("First Half 1999"). Diluted net earnings per share
decreased $0.04, or 7%, from $0.57 to $0.53. Diluted net earnings per share for
First Half 1999, excluding non-recurring
INVESTMENT TECHNOLOGY GROUP INC. AND SUBSIDIARIES
Page 14 of 21
<PAGE>
charges of $6.8 million incurred in connection with our spin-off from
Jefferies Group, were $0.69, or a 17% increase over $0.59 per share for First
Half 1998.
REVENUES:
Total revenues increased $16.6 million, or 18%, from $92.3 million to
$108.9 million. There were 122 trading days in First Half 1998 compared to 121
in First Half 1999. Revenues per trading day increased by $144,000, or 19%, from
$756,000 to $900,000. Revenues per employee decreased $29,000, or 7%, from
$393,000 to $364,000.
The increases in POSIT and Client revenues were attributable to an
increase in trading volume by existing customers and an increase in the number
of customers. The number of shares crossed on the POSIT system increased 400
million, or 19%, from 2.6 billion to 3.0 billion. The number of shares crossed
on the POSIT system per day increased 4.2 million, or 20%, from 20.9 million to
25.1 million. In addition, on June 24, 1999, a record breaking 49 million shares
were crossed on the POSIT system. Of Client revenues, ITG Platform increased
319% representing 32% of the increase in Client revenues.
Electronic Trading Desk revenues decreased due to a number of factors,
including, our clients winning fewer portfolio transitions, increased
competition from principal bids and lower turnover of portfolios for some of our
clients. Other revenues also decreased primarily as a result of an increase in
trading losses of $1.8 million over First Half 1998, reflecting market losses
from temporary positions in securities assumed in the normal course of our
agency trading business. This was somewhat offset by development fee income
charged to ITG Europe of $0.7 million and reimbursement from our joint venture
partner of $0.4 million for POSIT development work.
EXPENSES:
Total expenses excluding income tax expense for the First Half 1999
increased $14.8 million, or 24%, from $60.6 million to $75.4 million.
COMPENSATION AND EMPLOYEE BENEFITS: Salaries, bonuses and related
employee benefits increased primarily due to growth in our employee base of 27%
from 235 to 299, and additional compensation necessary to attract and retain
quality personnel. Over 50% of the increase in new employees were staffed in
technology, product development and production infrastructure. This is
consistent with our ongoing effort to respond to continuous changes in the
securities industry and demand for increased efficiencies by enhancing existing
software and developing new software and services. Average compensation and
employee benefits expenses per person decreased $21,000, or 11%, from $194,000
to $173,000 on an annualized basis.
TRANSACTION PROCESSING: Transaction processing as a percentage of
revenues increased from 13.4% to 14.1% of revenues. Ticket charges have
increased 27%, which is more than our 18% revenue growth, primarily as a result
of customer requests to allocate transactions to a larger number of accounts.
SOFTWARE ROYALTIES: Because software royalties are contractually fixed
at 13% of POSIT revenues, the increase is wholly attributable to an increase in
POSIT revenues.
OCCUPANCY AND EQUIPMENT: The increase in headcount resulted in
increased equipment purchases and the associated depreciation expense. In
addition, we expanded our research and development facility in Culver City,
California in July 1998 that resulted in a rent expense increase.
INVESTMENT TECHNOLOGY GROUP INC. AND SUBSIDIARIES
Page 15 of 21
<PAGE>
TELECOMMUNICATIONS AND DATA PROCESSING SERVICES: The increase in
telecommunications and data processing services stems primarily from the data
feed upgrades for clients, including market data line connections and increases
in dial-up costs related to the ITG Platform installations. This increase was
offset in part by a $0.3 million decrease in spending on contingency-related
planning and implementation.
NET LOSS ON LONG-TERM INVESTMENTS: The net loss on long-term
investments in First Half 1999 primarily reflects losses incurred by ITG Europe.
In August 1998, we sold our equity ownership in the LongView Group, Inc., which
had incurred a loss in First Half 1998.
SPIN-OFF COSTS: The spin-off expenses are attributable to our
legal, accounting, consulting and other expenses incurred for the spin-off and
merger transactions, as discussed in "Condensed Notes to Consolidated Financial
Statements - Spin-Off from Jefferies Group."
OTHER GENERAL AND ADMINISTRATIVE: The increase in other general and
administrative expenses reflects software amortization for certain products that
were released in late 1998, offset in part by a decline in consulting expenses
for projects such as network migration and strategic market studies.
INCOME TAX EXPENSE: The increase in the effective tax rate from 45.5%
in First Half 1998 to 50.0% in First Half 1999 was due to increases in certain
non-deductible expenses, such as spin-off costs and the inability to offset
international losses against United States profits in calculating income tax
expense.
RESULTS OF OPERATIONS - THREE MONTHS ENDED JUNE 25, 1999 COMPARED TO THREE
MONTHS ENDED JUNE 26, 1998
The table below sets forth, certain items in the statement of income
expressed as a percentage of revenues for the periods indicated:
<TABLE>
<CAPTION>
------------------
THREE MONTHS ENDED
------------------
JUNE 25, JUNE 26,
------- -------
1999 1998
------- -------
<S> <C>
Revenues: ........................................... 100.0% 100.0%
Commissions
POSIT .................................. 58.3 56.8
Electronic trading desk ................ 19.3 23.8
Client ................................. 21.5 18.3
Other .......................................... 0.9 1.1
Expenses:
Compensation and employee benefits ............. 24.3 24.0
Transaction processing ......................... 13.9 13.2
Software royalties ............................. 7.6 7.4
Occupancy and equipment ........................ 5.9 5.5
Telecommunications and data processing services. 4.2 4.6
Net loss on long-term investments .............. 0.6 2.1
Spin-off costs ................................. 8.0 0.7
Other general and administrative ............... 6.6 5.7
------ ------
Total expenses ........................ 71.2 63.2
------ ------
28.9 36.7
Income before income tax expense
Income tax expense .................................. 14.0 17.2
------ ------
Net income .......................................... 14.9 19.5
------ ------
------ ------
</TABLE>
INVESTMENT TECHNOLOGY GROUP INC. AND SUBSIDIARIES
Page 16 of 21
<PAGE>
EARNINGS PER SHARE:
Basic net earnings per share decreased $0.07, or 21%, from $0.34 for
the three months ended June 26, 1998 ("Second Quarter 1998") to $0.27 for the
three months ended June 25, 1999 ("Second Quarter 1999"). Diluted net earnings
per share decreased $0.06, or 19%, from $0.32 to $0.26. Diluted net earnings per
share for Second Quarter 1999, excluding non-recurring charges of $4.5 million
incurred in connection with our spin-off from Jefferies Group, were $0.36, or a
6% increase over $0.34 per share for Second Quarter 1998.
REVENUES:
Total revenues increased $5.4 million, or 11%, from $50.9 million to
$56.3 million. There were 63 trading days in both Second Quarter 1998 and Second
Quarter 1999. Revenues per trading day increased by $86,000, or 11%, from
$808,000 to $894,000. Revenues per employee decreased $28,000, or 13%, from
$216,000 to $188,000.
The increases in POSIT and Client revenues were attributable to an
increase in trading volume by existing customers and an increase in the number
of customers. The number of shares crossed on the POSIT system increased 190
million, or 13%, from 1.4 billion to 1.6 billion. The number of shares crossed
on the POSIT system per day increased 3.0 million, or 13%, from 22.6 million to
25.7 million. In addition, on June 24, 1999, a record breaking 49 million shares
were crossed on the POSIT system. Of Client revenues, ITG Platform increased
307% representing 45% of the increase in Client revenues.
Electronic Trading Desk revenues decreased due to a number of factors,
including, our clients winning fewer portfolio transitions, increased
competition from principal bids and lower turnover of portfolios for some of our
clients. There was no significant change in our Other revenue from Second
Quarter 1998.
EXPENSES:
Total expenses excluding income tax expense for the Second Quarter 1999
increased $7.8 million, or 24%, from $32.2 million to $40.0 million.
COMPENSATION AND EMPLOYEE BENEFITS: Salaries, bonuses and related
employee benefits increased primarily due to growth in our employee base of 27%
from 235 to 299, and additional compensation necessary to attract and retain
quality personnel. Over 50% of the increase in new employees were staffed in
technology, product development and production infrastructure. This is
consistent with our ongoing effort to respond to continuous changes in the
securities industry and demand for increased efficiencies by enhancing existing
software and developing new software and services. The Second Quarter 1999 also
included Medicare taxes of approximately $0.5 million resulting from option
exercises that were exercised as these options were to expire in April 1999.
Average compensation and employee benefits expenses per person decreased $6,000,
or 12%, from $52,000 to $46,000 on a quarterly basis.
TRANSACTION PROCESSING: Transaction processing as a percentage of
revenues increased from 13.2% to 13.9% primarily due to an increase in ticket
charges. The increase in ticket charges reflects a 30% increase in the number of
tickets, primarily as a result of customer requests to allocate transactions to
a larger number of accounts.
SOFTWARE ROYALTIES: Because software royalties are contractually fixed
at 13% of POSIT revenues, the increase is wholly attributable to an increase in
POSIT revenues.
OCCUPANCY AND EQUIPMENT: The increase in headcount resulted in
increased equipment purchases and the associated depreciation expense. In
addition, we expanded our research and development facility in Culver City,
California in July 1998 that resulted in a rent expense increase.
INVESTMENT TECHNOLOGY GROUP INC. AND SUBSIDIARIES
Page 17 of 21
<PAGE>
TELECOMMUNICATIONS AND DATA PROCESSING SERVICES: The increase in
telecommunications and data processing services stems primarily from the data
feed upgrades for clients, including market data line connections.
NET LOSS ON LONG-TERM INVESTMENTS: The net loss on long-term
investments in Second Quarter 1999 primarily reflects losses incurred by ITG
Europe. In August 1998, we sold our equity ownership in the LongView Group,
Inc., which had incurred a loss in Second Quarter 1998.
SPIN-OFF COSTS: The spin-off expenses are attributable to our
legal, accounting, consulting and other expenses incurred for the spin-off and
merger transactions, as discussed in "Condensed Notes to Consolidated Financial
Statements - Spin-Off from Jefferies Group."
OTHER GENERAL AND ADMINISTRATIVE: The increase in other general and
administrative expenses reflects software amortization for certain products that
were released in late 1998, combined with increased business development costs
to further promote the firm.
INCOME TAX EXPENSE: The increase was the result of an increase in
pretax income and an increase in the effective tax rate from 46.8% in Second
Quarter 1998 to 48.5% in Second Quarter 1999. The effective tax rate increased
due to certain non-deductible expenses, such as spin-off costs and the inability
to offset the Second Quarter 1999 international losses against United States
profits in calculating income tax expense.
LIQUIDITY AND CAPITAL RESOURCES
Our liquidity and capital resource requirements are the result of
the funding of working capital needs, primarily consisting of compensation,
benefits and transaction processing fees and software royalty fees.
Historically, cash from operations has met all working capital requirements. A
substantial portion of our assets are liquid, consisting of cash and cash
equivalents or assets readily convertible into cash.
We believe that our cash flow from operations and existing cash
balances will be sufficient to meet our cash requirements. We generally invest
our excess cash in money market funds and other short-term investments that
generally mature within 90 days or less. Additionally, securities owned at fair
value include highly liquid, variable rate municipal securities, auction rate
preferred stock and common stock. At June 25, 1999, such cash equivalents
amounted to $81.0 million and receivables from brokers, dealers and other, net,
of $10.1 million were due within 30 days. A special cash dividend of $74.6
million was paid on April 21, 1999 in connection with the spin-off from
Jefferies Group. See "Spin-Off from Jefferies Group."
Historically, all regulatory capital needs of ITG Inc. have been
provided by cash from operations. We believe that cash flows from operations
will provide ITG Inc. with sufficient regulatory capital. As of June 25, 1999,
we had net excess regulatory capital of $46.9 million. We have an agreement with
a bank to borrow up to $20 million on a revolving basis to enable ITG Inc. to
satisfy its regulatory net capital requirements. This commitment will expire on
March 14, 2000. Any amounts drawn may be prepaid at any time, but no later than
March 15, 2001. We incur a fee at a rate per annum equal to 0.35% on the daily
amount of the unused commitment to March 13, 2000. The interest rate on any
amounts drawn will be prime; if such amounts are not repaid within two weeks,
the interest rate will increase to prime plus 2%. The credit facility is secured
by a pledge of the stock of ITG Inc., ITG Ventures, Inc. and ITG Global Trading
Incorporated. This agreement limits our ability to pay cash dividends or incur
indebtedness and requires us to comply with certain financial covenants.
Although we believe that the combination of our existing net regulatory capital,
operating cash flows and the revolving credit facility will be sufficient to
meet regulatory capital requirements, a shortfall in net regulatory capital
would have a material adverse effect on us.
INVESTMENT TECHNOLOGY GROUP INC. AND SUBSIDIARIES
Page 18 of 21
<PAGE>
THE YEAR 2000 ISSUE
Some computer systems and software products were originally designed to
accept only two digit entries in the data code field. As a result, certain
computer systems and software packages will not be able to interpret dates
beyond December 31, 1999 and thus will interpret dates beginning January 1, 2000
incorrectly. This could potentially result in computer failure or
miscalculations, causing operating disruptions, including an inability to
process transactions, send invoices or engage in normal business operations.
Therefore, companies may have to upgrade or replace computer and software
systems in order to comply with the "Year 2000" requirements.
STRATEGY
We are well aware of and are actively addressing the Year 2000 issue
and the potential problems that can arise in any computer and software system.
Planning and evaluation work began in 1997 including the identification of those
systems affected. We established a "Year 2000 working group" to address the Year
2000 issue. We have targeted our efforts into three major areas: (1) vendors;
(2) company proprietary products; and (3) clients.
VENDORS. Our ability to successfully meet the Year 2000 challenge is in part
dependent on our vendors. We have contacted our vendors to determine the status
of their Year 2000 programs and have created a database recording each vendor's
readiness status. Over 95% of our vendors have responded that their systems are
currently Year 2000 compliant, and substantially all of our vendors have
indicated that they expect their systems to be Year 2000 compliant by September
30, 1999. Based upon the results of our testing to date, we are satisfied with
the representations we have received from our vendors. We are in the process of
integrating Year 2000 compliant versions of our vendors' software and hardware
with our proprietary products.
COMPANY PROPRIETARY PRODUCTS. We have evaluated our trading systems and have
endeavored to examine all code contained in our internally produced software. We
have completed regression testing and date-forward testing of all mission
critical systems and released Year 2000 compliant versions of all such systems.
We also participated in the Securities Industry Association's industry-wide
testing program in March and April 1999.
CLIENTS. We have periodically informed our clients of the progress of our Year
2000 program. In June 1999, we sent our clients a letter to inform them that
Year 2000 compliant versions of all our products were available and to identify
the Year 2000 compliant version of each product. In addition, we contacted
clients on a project-by-project basis to ascertain compatibility between our
systems and changes made to the clients' systems. We have provided
point-to-point testing opportunities for our clients since April 1999.
YEAR 2000 CONTINGENCY PLANNING
We have prepared a Year 2000 contingency plan to deal with both
internal and external failures of critical systems. The Year 2000 issue can
affect all businesses that rely heavily on automated systems. Our Year 2000
contingency plan is therefore intended to address failures of internal systems,
client connections and connections to trading destinations, as well as failures
of major infrastructure components. We intend to update and refine our
contingency plan as needed on a continuing basis. We believe, however, that such
contingency plan will not provide satisfactory solutions for our worst-case
scenario: the general failure of computer and communication systems relied upon
by the securities industry, such as the systems provided by long distance
telephone companies, the stock exchanges, Nasdaq, The Depository Trust Company
and ADP Brokerage Services, and the failure of our securities clearing and
execution firms to provide services under agreements with us. Such failure would
prevent us from operating in whole or in part until such systems or services
have been restored and could have a material adverse effect on us.
INVESTMENT TECHNOLOGY GROUP INC. AND SUBSIDIARIES
Page 19 of 21
<PAGE>
In the event any of our internally developed systems fails, we will
undertake to remediate such system on an emergency basis at the time of such
failure. To ensure that adequate staff will be available to handle any such
emergencies in January of 2000, we have imposed a moratorium on employee
vacations during the first two weeks of January 2000, and have made arrangements
to have a number of software development personnel (normally based in our Culver
City office) at our New York headquarters during the final week of December 1999
and the first week of January 2000. Our inability to remediate a failure of any
of our internally developed mission critical systems would prevent us from
operating in whole or in part until such systems have been restored and could
have a material adverse effect on us.
COSTS
We do not believe that the costs incurred to ready our systems for the
Year 2000 will have a material effect on our financial condition. Total costs
for the whole project are estimated to be approximately $3.0 million, which
includes the cost of personnel, consultants and software and hardware costs.
Costs incurred for the Year 2000 project were approximately $1.1 million for the
First Half 1999 and totaled $2.6 million to date.
PART II. - OTHER INFORMATION
Item 4. Submission of Matters to a vote of Security Holders
- None
Item 5. Other Information
On May 20, 1999, ITG and Bloomberg Tradebook LLC announced their
intention to jointly develop the Tradebook SuperECN, a strategic partnership
that will combine the benefits of Bloomberg's Tradebook ECN and ITG's electronic
execution products including QuantEX, Platform and POSIT. The partnership will
offer our customers access to both a continuous and a crossing market for listed
and Nasdaq stocks. Both partners plan to commit capital, technology and order
flow to the venture, and expect to add additional partners. Our agreements with
Bloomberg Tradebook LLC remain subject to final documentation; there can be no
assurance that we will reach mutual agreement with respect to such final
documentation.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27 - Financial Data Schedule.
INVESTMENT TECHNOLOGY GROUP INC. AND SUBSIDIARIES
Page 20 of 21
<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: AUGUST 6, 1999 By: /s/ John R. Macdonald
----------------- ----------------------
John R. MacDonald
Chief Financial Officer and
Duly Authorized Signatory of
Registrant
INVESTMENT TECHNOLOGY GROUP INC. AND SUBSIDIARIES
Page 21 of 21
<TABLE> <S> <C>
<PAGE>
<ARTICLE> BD
<LEGEND>
THE SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED STATEMENT OF
FINANCIAL CONDITION AND THE CONSOLIDATED STATEMENT OF OPERATIONS AS OF JUNE 25,
1999 AND FOR THE SIX MONTHS THEN ENDED AND THE NOTES THERETO AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS FILED IN THE 1998
INVESTMENT TECHNOLOGY GROUP, INC. ANNUAL 10-K FILING.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-25-1999
<CASH> 80,955
<RECEIVABLES> 17,812
<SECURITIES-RESALE> 0
<SECURITIES-BORROWED> 0
<INSTRUMENTS-OWNED> 33,823
<PP&E> 19,060
<TOTAL-ASSETS> 180,062
<SHORT-TERM> 0
<PAYABLES> 52,024
<REPOS-SOLD> 0
<SECURITIES-LOANED> 0
<INSTRUMENTS-SOLD> 23
<LONG-TERM> 0
0
0
<COMMON> 315
<OTHER-SE> 127,700
<TOTAL-LIABILITY-AND-EQUITY> 180,062
<TRADING-REVENUE> 0
<INTEREST-DIVIDENDS> 2,061
<COMMISSIONS> 107,817
<INVESTMENT-BANKING-REVENUES> 0
<FEE-REVENUE> 0
<INTEREST-EXPENSE> 19
<COMPENSATION> 25,915
<INCOME-PRETAX> 33,539
<INCOME-PRE-EXTRAORDINARY> 33,539
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 16,753
<EPS-BASIC> 0.55
<EPS-DILUTED> 0.53
</TABLE>
