<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 September 30, 2000 Commission file number:
0 - 23644
INVESTMENT TECHNOLOGY GROUP, INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 95 - 2848406
---------------------------------------- ------------------------------------
(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 November 9, 2000, the Registrant had 31,520,803 shares of common stock,
$.01 par value, outstanding.
<PAGE>
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
PART I. - FINANCIAL INFORMATION
Page
----
Item 1. Financial Statements
Consolidated Statements of Financial Condition:
September 30, 2000 (unaudited) and December 31, 1999............ 4
Consolidated Statements of Income (unaudited):
Nine Months Ended September 30, 2000 and September 24, 1999..... 5
Three Months Ended September 30, 2000 and September 24, 1999.... 6
Consolidated Statement of Changes in Stockholders' Equity
(unaudited): Nine Months Ended September 30, 2000............... 7
Consolidated Statements of Cash Flows (unaudited):
Nine Months Ended September 30, 2000 and September 24, 1999..... 8
Condensed Notes to Consolidated Financial Statements (unaudited).... 9
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................... 13
PART II. - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders................. 19
Item 5. Other Information................................................... 19
Item 6. Exhibits and Reports on Form 8-K.................................... 19
Signatures.......................................................... 20
QUANTEX IS A REGISTERED TRADEMARK OF INVESTMENT TECHNOLOGY GROUP, INC.
POSIT IS A REGISTERED SERVICE MARK OF THE POSIT JOINT VENTURE.
SMARTSERVER, TCA, ACE AND ITG ACCESS ARE TRADEMARKS OF INVESTMENT TECHNOLOGY
GROUP, INC.
INVESTMENT TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
Page 2 of 20
<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, as well as general economic and
business conditions; securities, credit and financial market conditions; and
adverse changes or volatility in interest rates.
INVESTMENT TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
Page 3 of 20
<PAGE>
PART I. - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
--------- ---------
ASSETS (UNAUDITED)
<S> <C> <C>
Cash and cash equivalents .................................. $ 116,939 $ 53,081
Securities owned, at fair value ............................ 54,890 43,612
Receivables from brokers, dealers and other, net ........... 23,654 19,181
Investments in limited partnerships ........................ 15,774 13,922
Securities, available-for-sale, at fair value .............. -- 2,023
Premises and equipment ..................................... 22,775 20,229
Capitalized software ....................................... 5,363 5,629
Goodwill ................................................... 412 824
Deferred taxes ............................................. 3,970 13,324
Other assets ............................................... 23,125 7,663
--------- ---------
Total assets ............................................... $ 266,902 $ 179,488
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued expenses ...................... $ 46,678 $ 33,459
Payable to brokers, dealers and other ...................... 13,156 3,932
Software royalties payable ................................. 4,683 4,874
Securities sold, not yet purchased, at fair value .......... 7,090 5,861
Income taxes payable ....................................... 6,999 15,710
--------- ---------
Total liabilities .......................................... 78,606 63,836
--------- ---------
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: 33,669,170 and 32,179,106
at September 30, 2000 and December 31, 1999 .......... 337 322
Additional paid-in capital .............................. 129,561 96,534
Retained earnings ....................................... 124,755 75,727
Common stock held in treasury, at cost; shares: 2,453,921
and 2,213,721 at September 30, 2000 and December 31,
1999 ................................................. (66,182) (58,052)
Accumulated other comprehensive income (loss):
Currency translation adjustment ...................... (175) (7)
Unrealized gain on securities, available-for-sale,
net of tax ........................................... -- 1,128
--------- ---------
Total stockholders' equity .............................. 188,296 115,652
--------- ---------
Total liabilities and stockholders' equity ................. $ 266,902 $ 179,488
========= =========
</TABLE>
SEE ACCOMPANYING UNAUDITED CONDENSED NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS.
INVESTMENT TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
Page 4 of 20
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------
SEPTEMBER 30, SEPTEMBER 24,
------------- -------------
2000 1999
-------- --------
<S> <C> <C>
REVENUES:
Commissions
POSIT ............................................... $ 37,618 $ 31,361
Electronic trading desk ............................. 15,695 11,558
Client site ......................................... 17,641 10,755
Other ................................................. 4,725 890
-------- --------
Total revenues .................................... 75,679 54,564
-------- --------
EXPENSES:
Compensation and employee benefits .................... 19,388 11,402
Transaction processing ................................ 10,496 7,677
Software royalties .................................... 4,914 4,083
Occupancy and equipment ............................... 4,317 3,201
Telecommunications and data processing services ....... 2,754 2,701
Net loss on long-term investments ..................... 1,233 275
Spin-off costs ........................................ -- (85)
Other general and administrative ...................... 5,058 4,170
-------- --------
Total expenses .................................... 48,160 33,424
-------- --------
Income before income tax expense ........................... 27,519 21,140
Income tax expense ......................................... 12,075 10,039
-------------------
Net income ................................................. $ 15,444 $ 11,101
===================
Basic net earnings per share of common stock ............... $ 0.50 $ 0.35
===================
Diluted net earnings per share of common stock ............. $ 0.49 $ 0.34
===================
Basic weighted average shares outstanding .................. 31,057 31,685
===================
Diluted weighted average shares and common stock equivalents
outstanding ........................................... 31,729 32,665
===================
</TABLE>
SEE ACCOMPANYING UNAUDITED CONDENSED NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS.
INVESTMENT TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
Page 5 of 20
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
---------------------------
SEPTEMBER 30, SEPTEMBER 24,
------------- -------------
2000 1999
-------- --------
<S> <C> <C>
REVENUES:
Commissions
POSIT ............................................... $120,276 $ 92,931
Electronic trading desk ............................. 48,533 33,037
Client site ......................................... 55,688 35,523
Other ................................................. 9,755 2,013
-------- --------
Total revenues .................................... 234,252 163,504
-------- --------
EXPENSES:
Compensation and employee benefits .................... 58,147 37,317
Transaction processing ................................ 32,150 23,035
Software royalties .................................... 15,712 12,109
Occupancy and equipment ............................... 12,520 9,610
Telecommunications and data processing services ....... 9,052 7,005
Net loss on long-term investments ..................... 3,826 1,490
Spin-off costs ........................................ -- 6,674
Other general and administrative ...................... 15,398 11,585
-------- --------
Total expenses .................................... 146,805 108,825
-------- --------
Income before income tax expense ........................... 87,447 54,679
Income tax expense ......................................... 38,419 26,825
-------------------
Net income ................................................. $ 49,028 $ 27,854
===================
Basic net earnings per share of common stock ............... $ 1.59 $ 0.91
===================
Diluted net earnings per share of common stock ............. $ 1.56 $ 0.87
===================
Basic weighted average shares outstanding .................. 30,828 30,695
===================
Diluted weighted average shares and common stock equivalents
outstanding ........................................... 31,490 32,098
===================
</TABLE>
SEE ACCOMPANYING UNAUDITED CONDENSED NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS.
INVESTMENT TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
Page 6 of 20
<PAGE>
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 2000
(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 Equity
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1999 ............... $ -- $ 322 $ 96,534 $ 75,727 $ (58,052) $ 1,121 $ 115,652
Purchase of common stock for treasury
(240,200 shares) ........................ -- -- -- -- (8,130) -- (8,130)
Issuance of common stock in connection
with the employee stock option plan
(1,454,236 shares) ...................... -- 15 31,915 -- -- -- 31,930
Issuance of common stock in connection
with the employee stock purchase plan
(35,832 shares) ......................... -- -- 1,112 -- -- -- 1,112
Comprehensive income:
Net income .............................. -- -- -- 49,028 -- -- 49,028
Other comprehensive income:
Currency translation adjustment ..... -- -- -- -- -- (168) (168)
Unrealized holding gain on securities
available-for-sale, net of tax ($895) -- -- -- -- -- (1,128) (1,128)
---------
Comprehensive income ....................... 47,732
---------------------------------------------------------------------------------------
Balance at September 30, 2000 .............. $ -- $ 337 $ 129,561 $ 124,755 $ (66,182) $ (175) $ 188,296
=======================================================================================
</TABLE>
SEE ACCOMPANYING UNAUDITED CONDENSED NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS.
INVESTMENT TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
Page 7 of 20
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
-----------------------------------------
SEPTEMBER 30, 2000 SEPTEMBER 24, 1999
-----------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income ............................................................ $ 49,028 $ 27,854
Adjustments to reconcile net income to net cash provided by operating
activities:
Deferred income tax expense ...................................... 10,248 362
Depreciation and amortization .................................... 9,892 9,808
Undistributed loss of affiliates ................................. 4,026 1,827
Provision for doubtful receivables ............................... 310 173
Loss on sale of Premises and equipment ........................... 5 --
Decrease (increase) in operating assets:
Securities owned, at fair value ................................... (11,278) (2,097)
Receivables from brokers, dealers and other, net .................. (4,783) 4,459
Tax receivable .................................................... -- (4,485)
Investments in limited partnerships ............................... (1,102) (176)
Other assets ...................................................... (16,682) 1,081
Increase (decrease) in operating liabilities:
Accounts payable and accrued expenses ............................. 13,219 13,786
Payable to brokers, dealers and other ............................. 9,224 2,078
Software royalties payable ........................................ (190) 20
Securities sold, not yet purchased, at fair value ................. 1,229 5,032
Due to affiliates ................................................. -- (2,557)
Income taxes payable to affiliate ................................. -- (3,853)
Income taxes payable .............................................. (8,711) --
Securities available-for-sale gains ................................... (4,258) --
--------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES ...................... 50,177 53,312
--------------------------------
Cash flows from investing activities:
Purchase of premises and equipment ................................ (9,686) (5,898)
Proceeds from sales of securities, available-for-sale ............. 4,258 --
Proceeds from sales of premises and equipment ..................... 5 --
Purchase of investment in limited partnership ..................... (750) (5,000)
Investment in joint venture ....................................... (2,805) (1,591)
Capitalization of software development costs ...................... (2,085) (3,673)
--------------------------------
NET CASH USED IN INVESTING ACTIVITIES .......................... (11,063) (16,162)
--------------------------------
Cash flows from financing activities:
Dividends paid .................................................... -- (74,624)
Retirement of common stock held in treasury at cost ............... -- 3,499
Purchase of common stock for treasury ............................. (8,130) --
Issuance of common stock under employee stock plan ................ 33,042 39,670
--------------------------------
NET CASH PROVIDED BY/(USED IN) FINANCING ACTIVITIES ............ 24,912 (31,455)
--------------------------------
Effect of foreign currency translation on cash and cash equivalents (168) 153
Net increase in cash and cash equivalents ...................... 63,858 5,848
Cash and cash equivalents - beginning of period ....................... 53,081 77,324
--------------------------------
Cash and cash equivalents - end of period ............................. $ 116,939 $ 83,172
================================
Supplemental cash flow information:
Interest paid ..................................................... $ 86 $ 21
================================
Income taxes paid ................................................. $ 19,399 $ --
================================
Income taxes paid to affiliate .................................... $ -- $ 6,742
================================
</TABLE>
SEE ACCOMPANYING UNAUDITED CONDENSED NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS.
INVESTMENT TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
Page 8 of 20
<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, (2)
Investment Technology Group International Limited, which is a 50% partner in the
ITG Europe joint venture, (3) ITG Australia Holdings Pty Limited, which is a 50%
partner in ITG Pacific Holdings Pty Limited, (4) ITG Canada Corp., an
institutional broker-dealer in Canada, and (5) Inference Group LLC, an internal
asset management subsidiary. Our investments in the ITG Europe joint venture and
ITG Pacific Holdings Pty Limited 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 and services include: POSIT, an
electronic stock crossing system; QuantEX, a Unix-based decision-support, trade
management and order routing system; ITG Platform, a PC-based order routing and
trade management system; Electronic Trading Desk, an agency-only trading desk
offering clients the ability to efficiently access multiple sources of
liquidity; SmartServers, which offer server-based implementation of trading
strategies; ITG Access, an internet browser-based order routing tool for sending
orders to POSIT and the Electronic Trading Desk; ACE and TCA, a set of pre- and
post-trade tools for systematically analyzing and lowering transaction costs;
ITG/OPT, a computer-based equity portfolio selection system; and research,
development, sales and consulting services to our 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. 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).
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.
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 1999 annual
report on Form 10-K.
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.
INVESTMENT TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
Page 9 of 20
<PAGE>
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.
ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses at September 30, 2000 and December
31, 1999 consisted of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
---------------- ---------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Accounts payable and accrued expenses......................... $ 9,165 $ 11,754
Accrued compensation ......................................... 11,988 580
Deferred compensation ........................................ 12,433 9,424
Deferred options.............................................. - 2,280
Accrued soft dollars payable.................................. 10,463 6,688
Accrued rent expense.......................................... 2,629 2,733
----------- -----------
Total ........................................................ $ 46,678 $ 33,459
=========== ===========
</TABLE>
OTHER COMPREHENSIVE INCOME (LOSS)
The following summarizes other comprehensive income (loss) as of September
30, 2000 (Dollars in thousands):
<TABLE>
<CAPTION>
UNREALIZED
CURRENCY HOLDING GAIN ON OTHER
TRANSLATION SECURITIES, COMPREHENSIVE
ADJUSTMENT AVAILABLE FOR SALE INCOME/(LOSS)
---------------- --------------------- -----------------
<S> <C> <C> <C>
Pre-tax amount..................................... $ (168) $ (2,023) $ (2,191)
Tax benefit........................................ - 895 895
------------ ------------ ---------------
Net of tax amount.................................. $ (168) $ (1,128) $ (1,296)
============ ============ ===============
<CAPTION>
UNREALIZED
HOLDING GAIN ON ACCUMULATED
CURRENCY SECURITIES, OTHER
TRANSLATION AVAILABLE FOR SALE, COMPREHENSIVE
ADJUSTMENT NET OF TAX INCOME/(LOSS)
---------------- --------------------- -----------------
<S> <C> <C> <C>
Balance at December 31,1999........................ $ (7) $ 1,128 $ 1,121
Change during period ended
September 30, 2000......................... (168) (1,128) (1,296)
------------ ------------ ---------------
Balance at September 30, 2000...................... $ (175) $ - $ (175)
============ ============ ===============
</TABLE>
INVESTMENT TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
Page 10 of 20
<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 diluted weighted
average number of outstanding shares for the three months ended September 30,
2000 and September 24, 1999 was 31.7 million and 32.7 million, respectively. The
diluted weighted average number of outstanding shares for the nine months ended
September 30, 2000 and September 24, 1999 was 31.5 million and 32.1 million,
respectively.
The following is a reconciliation of the basic and diluted earnings per
share computations for the three months ended September 30, 2000 and September
24, 1999.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------
SEPTEMBER 30, SEPTEMBER 24,
2000 1999
--------------- --------------
(AMOUNTS IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
-------------------------------
<S> <C> <C>
Net income ...................................................... $15,444 $11,101
======= =======
Shares of common stock and common stock equivalents:
Average number of common shares used in basic computation .. 31,057 31,685
Effect of dilutive securities - options .................... 672 980
------- -------
Average number of common shares used in diluted computation 31,729 32,665
======= =======
Earnings per share:
Basic ...................................................... $ 0.50 $ 0.35
======= =======
Diluted .................................................... $ 0.49 $ 0.34
======= =======
</TABLE>
The following is a reconciliation of the basic and diluted earnings per
share computations for the nine months ended September 30, 2000 and September
24, 1999.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
-------------------------------
SEPTEMBER 30, SEPTEMBER 24,
2000 1999
--------------- --------------
(AMOUNTS IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
-------------------------------
<S> <C> <C>
Net income ...................................................... $49,028 $27,854
======= =======
Shares of common stock and common stock equivalents:
Average number of common shares used in basic computation .. 30,828 30,695
Effect of dilutive securities - options .................... 662 1,403
------- -------
Average number of common shares used in diluted computation 31,490 32,098
======= =======
Earnings per share:
Basic ...................................................... $ 1.59 $ 0.91
======= =======
Diluted .................................................... $ 1.56 $ 0.87
======= =======
</TABLE>
NET CAPITAL REQUIREMENT
ITG Inc. is subject to the Uniform Net Capital Rule (Rule 15c3-1) under the
Securities Exchange Act of 1934, which requires the maintenance of minimum net
capital. ITG Inc. has elected to use the alternative method permitted by Rule
15c3-
INVESTMENT TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
Page 11 of 20
<PAGE>
1, which requires that ITG Inc. maintain minimum net capital equal to the
greater of $250,000 or 2% of aggregate debit balances arising from customer
transactions, as defined.
At September 30, 2000, ITG Inc. had net capital of $75.1 million, which was
$74.8 million in excess of required minimum net capital.
CONTINGENCIES
In 1998, we received a "30-day letter" from the IRS 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. On September 18, 2000, we entered into a
closing agreement with the IRS with respect to the compensation plan deductions,
whereby the IRS agreed that the deductions taken were allowable deductions. This
agreement eliminates approximately $7.6 million of the $9.6 million potential
tax deficiency raised by the IRS in 1998. We are continuing to pursue the
resolution of the research and development tax credit issue and we believe that
the ultimate resolution will not be material to the financial position of the
company.
Our company may continue to be liable for certain liabilities of our 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 executed in connection with the spin-off, 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 company. ITG's ability to recover any
costs under such indemnity will depend upon the future financial strength of New
Jefferies.
At September 30, 2000 and December 31, 1999, we had outstanding capital
contribution commitments to a limited partnership in the amount of $750,000 and
$1,500,000, respectfully.
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.
INVESTMENT TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
Page 12 of 20
<PAGE>
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:
o POSIT: a confidential electronic stock crossing system;
o Electronic Trading Desk: an agency-only trading desk;
o Client Site: front end software;
o QuantEX: a Unix-based front-end software system providing market
analysis, trade management and electronic connectivity to POSIT
and multiple trade execution destinations; and
o 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 in 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 in 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 Site 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 and dividend income/expense, market
gains/losses, financing costs resulting from temporary positions in securities
assumed in the normal course of our agency trading business and fee income from
the development of European software products.
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
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, Inc. 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 amortization of
goodwill and equity gain/loss on our ITG Europe, ITG Australia and Vostock (our
joint venture with WIT Capital Corporation to market an online auction system
for secondary and follow-on equity offerings). 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 capitalized software and
goodwill, legal, audit, tax, consulting and promotional expenses.
INVESTMENT TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
Page 13 of 20
<PAGE>
RESULTS OF OPERATIONS - NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE
MONTHS ENDED SEPTEMBER 24, 1999
The table below sets forth, certain items in the statement of operations
expressed as a percentage of total revenues for the periods indicated:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
--------------------------------
SEPTEMBER 30, SEPTEMBER 24,
--------------------------------
2000 1999
--------------------------------
<S> <C> <C>
Revenues: 100.0% 100.0%
Commissions
POSIT............................................ 51.3 56.9
Electronic trading desk.......................... 20.7 20.2
Client site...................................... 23.8 21.7
Other................................................ 4.2 1.2
Expenses:
Compensation and employee benefits................... 24.8 22.8
Transaction processing............................... 13.7 14.1
Software royalties................................... 6.7 7.4
Occupancy and equipment.............................. 5.3 5.9
Telecommunications and data processing services...... 3.9 4.3
Net loss on long-term investments ................... 1.6 0.9
Spin-off costs ...................................... 0.0 4.1
Other general and administrative..................... 6.7 7.1
--------------------------------
Total expenses................................... 62.7 66.6
--------------------------------
Income before income tax expense.......................... 37.3 33.4
Income tax expense........................................ 16.4 16.4
--------------------------------
Net income................................................ 20.9 17.0
================================
</TABLE>
EARNINGS PER SHARE:
Basic net earnings per share for the nine months ended September 30,
2000 ("First Nine Months 2000") increased $0.68, or 75%, from $0.91 to $1.59 for
the nine months ended September 24, 1999 ("First Nine Months 1999"). Diluted net
earnings per share increased $0.69, or 79%, from $0.87 to $1.56. Diluted net
earnings per share for the First Nine Months 1999, excluding non-recurring
charges of $6.7 million incurred in connection with our spin-off from Jefferies
Group, were $1.05. There were no such spin-off charges in First Nine Months
2000.
REVENUES:
Total revenues increased $70.7 million, or 43%, from $163.5 million to
$234.3 million. There were 184 trading days in the First Nine Months 1999 and
189 trading days in the First Nine Months 2000. Revenues per trading day
increased by $351,000, or 39%, from $889,000 to $1,239,000. Revenues per
employee increased $72,000, or 14%, from $524,000 to $596,000.
POSIT, Electronic Trading Desk and Client Site revenues increased 39%
over the First Nine Months 1999 as a result of providing our clients with
broadened access to liquidity sources, such as linking to electronic
communications networks ("ECNs"), and tools for understanding and minimizing
trading costs. The increase in revenues reflects both an increase in trading
volume from existing clients and an increase in the number of customers.
INVESTMENT TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
Page 14 of 20
<PAGE>
The number of shares crossed on the POSIT system increased 1.5 billion,
or 33%, from 4.6 billion in the First Nine Months 1999 to 6.1 billion in the
First Nine Months 2000. The number of shares crossed on the POSIT system per day
increased 7.3 million, or 29%, from 25.1 million to 32.4 million.
Electronic Trading Desk revenues increased 47%, as a result of
volume increases including the impact of our Company becoming the clearing
and execution broker for two large introducing brokers.
Of Client Site revenues, our QuantEx and ITG Platform products
increased 44%, representing 70% of the increase in Client Site revenues. The
remaining increase was from customers for whom we developed custom connections
to reach liquidity sources, primarily the NYSE's Super Designated Order
Turn-around System ("DOT") and ECNs.
Other revenues increased primarily from a gain recorded on the sale of
our remaining investment in Versus Technologies, Inc. and increases in
investment income arising from larger average interest-earning balances and
improved rates of return.
EXPENSES:
Total expenses excluding income tax expense for the First Nine Months
2000 increased $38.0 million, or 35%, from $108.8 million in the First Nine
Months 1999 to $146.8 million in the First Nine Months 2000.
COMPENSATION AND EMPLOYEE BENEFITS: Salaries, bonuses and related
employee benefits increased as a result of increases in headcount, financial
performance based compensation and additional compensation necessary to attract
and retain quality personnel. As of September 30, 2000 we had 393 employees,
representing an increase of 26% or 81 employees since September 24, 1999.
Approximately 57% of the increase in 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. In addition, the increase in headcount includes 18
employees staffed in ITG Canada Corp.. Average compensation and employee
benefits expenses per person increased $28,000, or 23%, from $120,000 to
$148,000.
TRANSACTION PROCESSING: Transaction processing as a percentage of
revenues decreased from 14.1% to 13.7% of revenues. Execution costs decreased as
a result of a decrease in floor brokerage costs as we are no longer charged by
NYSE Specialists for trades executed within five minutes. These savings were
offset by increases in ECN related costs as we continue to expand our clients'
access to new liquidity sources and increases in clearing costs related to
volume increases.
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: We continue to enhance our infrastructure and
add to our employee base. Depreciation/amortization, rent and maintenance
contracts represented 91% of the increase. We expanded our research and
development facility in Culver City, California in December 1999 and our New
York headquarters in January 2000. We added facilities in Canada in June 2000
and Waltham, Massachusetts in April 2000.
TELECOMMUNICATIONS AND DATA PROCESSING SERVICES: Increases in our
client base and employee base have resulted in increased fees for additional
client data services, including market data line connections, increases in
communication charges for linking clients to ITG in New York and Boston, and
increases in the costs associated with infrastructure improvements.
NET LOSS ON LONG-TERM INVESTMENTS: The increase in loss on long-term
investments primarily resulted from the start-up costs of Vostock combined with
losses of our ITG Europe joint venture during its second full year of
operations.
INVESTMENT TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
Page 15 of 20
<PAGE>
SPIN-OFF COSTS: The spin-off expenses in the First Nine Months 1999
were 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." The
Spin-off was concluded in 1999 and as a result there are no associated costs in
the First Nine Months 2000.
OTHER GENERAL AND ADMINISTRATIVE: The increase in other general and
administrative expenses primarily related to consulting and marketing costs
geared towards developing new business opportunities. Additionally, subsequent
to our spin-off, specified administrative services previously provided to us for
a fixed monthly fee by Jefferies Group were performed by ITG. This change
resulted in reduced administrative service fees offset by higher legal, audit
and accounting fees.
INCOME TAX EXPENSE:
The decrease in the effective tax rate from 49.1% to 43.9%
resulted primarily from non-deductible spin-off expenses, which were incurred in
the First Nine Months 1999.
RESULTS OF OPERATIONS - THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THREE
MONTHS ENDED SEPTEMBER 24, 1999
The table below sets forth, certain items in the statement of operations
expressed as a percentage of total revenues for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------
SEPTEMBER 30, SEPTEMBER 24,
--------------------------------
2000 1999
--------------------------------
<S> <C> <C>
Revenues: 100.0% 100.0%
Commissions
POSIT............................................ 49.6 57.5
Electronic trading desk.......................... 20.7 21.2
Client site...................................... 23.3 19.7
Other................................................ 6.4 1.6
Expenses:
Compensation and employee benefits................... 25.6 20.9
Transaction processing............................... 13.9 14.1
Software royalties................................... 6.5 7.5
Occupancy and equipment.............................. 5.7 5.9
Telecommunications and data processing services...... 3.6 5.0
Net loss on long-term investments ................... 1.6 0.5
Spin-off costs ...................................... 0.0 (0.2)
Other general and administrative..................... 6.7 7.6
--------------------------------
Total expenses................................... 63.6 61.3
--------------------------------
Income before income tax expense.......................... 36.4 38.7
Income tax expense........................................ 16.0 18.4
--------------------------------
Net income................................................ 20.4 20.3
================================
</TABLE>
INVESTMENT TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
Page 16 of 20
<PAGE>
EARNINGS PER SHARE:
Basic net earnings per share for the three months ended September 30,
2000 ("Third Quarter 2000") increased $0.15, or 43%, to $0.50 from $0.35 for the
three months ended September 24, 1999 ("Third Quarter 1999"). Diluted net
earnings per share increased $0.15, or 44%, from $0.34 to $0.49.
REVENUES:
Total revenues increased $21.1 million, or 38.7%, from $54.6 million to
$75.7 million. There were 63 trading days in both the Third Quarter 1999 and
the Third Quarter 2000. Revenues per trading day increased by $335,000, or
38.7%, from $866,000 to $1,201,000. Revenues per employee increased $18,000,
or 10%, from $175,000 to $193,000.
POSIT, Electronic Trading Desk and Client Site revenues increased 32%
over the Third Quarter 1999 as a result of providing our clients with broadened
access to liquidity sources, such as ECNs, and tools for understanding and
minimizing trading costs. Other contributing factors were increases in trading
volume from existing clients and an increase in the number of customers.
The number of shares crossed on the POSIT system increased 0.3 billion,
or 19%, from 1.6 billion in theThird Quarter 1999 to 1.9 billion. The number of
shares crossed on the POSIT system per day increased 5.5 million, or 22%, from
24.9 million to 30.4 million.
Electronic Trading Desk revenues increased 36%, as a result of
volume increases including the impact of our Company becoming the clearing
and execution broker for two large introducing brokers.
Of Client Site revenues, our QuantEx and ITG Platform products
increased 54% representing 77% of the increase in Client Site revenues. The
remaining increase was from customers for whom we developed custom connections
to reach liquidity sources, primarily DOT and ECNs.
Other revenues increased primarily from a gain recorded on the sale of
our remaining investment in Versus Technologies, Inc. and increases in
investment income arising from larger average interest-earning balances and
improved rates of return.
EXPENSES:
Total expenses excluding income tax expense for Third Quarter 2000
increased $14.8 million, or 44.2%, from $33.4 million in the Third Quarter 1999
to $48.2 million in the Third Quarter 2000.
COMPENSATION AND EMPLOYEE BENEFITS: Salaries, bonuses and related
employee benefits increased primarily due to growth in our employee base of 81
or 26% from 312 to 393. Factors contributing to the increase were the additional
compensation necessary to attract and retain quality personnel and the increase
in our financial performance upon which we model our bonus compensation. During
theThird Quarter 2000, we added 12 staff members to ITG Canada Corp., which
increased the total to 18 employees. Average compensation and employee benefits
expenses per person increased $13,000, or 36%, from $36,000 to $49,000 on a
quarter to quarter basis.
TRANSACTION PROCESSING: Transaction processing as a percentage of
revenues decreased from 14.1% to 13.9% of revenues. Execution costs decreased as
a result of lower floor brokerage costs, as we are no longer charged by NYSE
Specialists for trades executed within five minutes. These savings were offset
by increases in ECN related costs as we continue to expand our clients' access
to new liquidity sources and increases in clearing costs related to volume
increases.
INVESTMENT TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
Page 17 of 20
<PAGE>
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: Growth in our employee base and infrastructure
enhancements were the primary reasons for cost increases.
Depreciation/amortization on equipment purchases and leasehold improvements and
increased rent expenses represented 97% of the increase. We expanded our
research and development facility in Culver City, California in December 1999
and our New York headquarters in January 2000. We added facilities in Canada in
June 2000 and in Waltham, Massachusetts in April 2000.
TELECOMMUNICATIONS AND DATA PROCESSING SERVICES: Telecommunications and
data processing costs remained relatively unchanged over the Third Quarter 1999.
NET LOSS ON LONG-TERM INVESTMENTS: The increase in loss on long-term
investments primarily resulted from losses of our ITG Europe joint venture
during its second full year of operations and a gain recognized in the Third
Quarter 1999 on the sale of our equity ownership in the Long View Group, Inc. in
August 1998 which was held in escrow for one year.
SPIN-OFF COSTS: The spin-off expenses adjustments in the Third Quarter
1999 were 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." The
Spin-off was concluded in 1999 and as a result there are no associated costs in
theThird Quarter 2000.
OTHER GENERAL AND ADMINISTRATIVE: The increase in other general and
administrative expenses primarily related to consulting and marketing costs from
exploring new business opportunities and as a result of increasing our client
base through new installations and deeper penetration in our existing client
base.
INCOME TAX EXPENSE
The decrease in the effective tax rate from 47.5% to 43.9% resulted
primarily from the spin-off tax expense adjustments in the Third Quarter
1999. There were no such spin-off adjustments in the Third Quarter 2000.
LIQUIDITY AND CAPITAL RESOURCES
Our liquidity and capital resource requirements result from our working
capital needs, primarily consisting of compensation and benefits, 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, common stock, variable rate municipal securities
and auction rate preferred stock. At September 30, 2000, such cash equivalents
amounted to $171.8 million and net receivables from brokers, dealers and other,
of $ 22.2 million were due within 30 days.
We also invest a portion of our excess cash balances in cash
enhanced strategies through third parties and Inference Group, our internal
asset management subsidiary, which we believe should yield higher returns
without any significant effect on risk. As of September 30, 2000, we had
investments in (i) limited partnerships (including through Inference Group)
investing in marketable securities, (ii) a hedged convertible managed account
and (iii) a venture capital fund amounting to $45.1 million in the aggregate.
The limited partnerships employ various strategies, including hedged
convertible strategies and long/short strategies to capitalize on short term
price movements. Our managed account is employing a hedged
INVESTMENT TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
Page 18 of 20
<PAGE>
convertible strategy. We may engage in other cash management strategies from
time to time. We classify the securities under our managed account within
securities owned, at fair value and securities sold, not yet purchased, at fair
value.
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 September 30,
2000, we had excess regulatory net capital of $74.8 million. Although we believe
that the combination of our existing net regulatory capital and operating cash
flows will be sufficient to meet regulatory capital requirements, a shortfall in
net regulatory capital would have a material adverse effect on us.
PART II. - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- None.
ITEM 5. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 27 - Financial Data Schedule.
INVESTMENT TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
Page 19 of 20
<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: NOVEMBER 9, 2000 By: /s/ HOWARD C. NAPHTALI
---------------------- ----------------------
Howard C. Naphtali
Chief Financial Officer and
Duly Authorized Signatory of Registrant
INVESTMENT TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
Page 20 of 20
