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 June 30, 2000 Commission file number: 0 - 23644
INVESTMENT TECHNOLOGY GROUP, INC.
(Exact Name of Registrant as Specified in Its Charter)
<TABLE>
<S> <C>
DELAWARE 95 - 2848406
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(State or Other Jurisdiction of Incorporation or (I.R.S. Employer Identification No.)
Organization)
380 Madison Avenue, New York, New York (212) 588 - 4000
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(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 11, 2000, the Registrant had 31,047,225 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:
June 30, 2000 (unaudited) and December 31, 1999................. 4
Consolidated Statements of Income (unaudited):
Six Months Ended June 30, 2000 and June 25, 1999................ 5
Three Months Ended June 30, 2000 and June 25, 1999.............. 6
Consolidated Statement of Changes in Stockholders' Equity (unaudited):
Six Months Ended June 30, 2000.................................. 7
Consolidated Statements of Cash Flows (unaudited):
Six Months Ended June 30, 2000 and June 25, 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 IS A SERVICE MARK OF INVESTMENT TECHNOLOGY GROUP, INC.
TCA IS A TRADEMARK OF INVESTMENT TECHNOLOGY GROUP, INC.
ACE IS A TRADEMARK 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; adverse
changes or volatility in interest rates.
INVESTMENT TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
Page 3 of 20
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PART I. - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
------------------------- -------------------------
JUNE 30, DECEMBER 31,
2000 1999
------------------------- -------------------------
<S> <C> <C>
ASSETS (UNAUDITED)
Cash and cash equivalents................................. $ 92,195 $ 53,081
Securities owned, at fair value........................... 185,462 43,612
Receivables from brokers, dealers and other, net.......... 28,862 19,181
Investments in limited partnerships....................... 15,596 13,922
Securities, available-for-sale, at fair value............. 1,828 2,023
Due from affiliates....................................... 11,363 -
Premises and equipment.................................... 22,463 20,229
Capitalized software...................................... 5,494 5,629
Goodwill.................................................. 549 824
Deferred taxes............................................ 7,792 13,324
Other assets.............................................. 10,109 7,663
------------------------- -------------------------
Total assets.............................................. $ 381,713 $ 179,488
========================= =========================
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued expenses..................... $ 47,071 $ 33,459
Payable to brokers, dealers and other..................... 73,264 3,932
Software royalties payable................................ 5,650 4,874
Securities sold, not yet purchased, at fair value......... 78,513 5,861
Income taxes payable...................................... 9,883 15,710
------------------------- -------------------------
Total liabilities......................................... 214,381 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: 33,374,162 and 32,179,106
at June 30, 2000 and
December 31, 1999................................... 334 322
Additional paid-in capital............................. 122,861 96,534
Retained earnings...................................... 109,311 75,727
Common stock held in treasury, at cost; shares: 2,453,921
and 2,213,721 at June 30, 2000 and December 31, 1999
(66,174) (58,052)
Accumulated other comprehensive income (loss):
Currency translation adjustment..................... (19) (7)
Unrealized gain on securities, available-for-sale,
net of tax.......................................... 1,019 1,128
------------------------- -------------------------
Total stockholders' equity............................. 167,332 115,652
------------------------ -------------------------
Total liabilities and stockholders' equity $ 381,713 $ 179,488
========================= =========================
</TABLE>
SEE ACCOMPANYING UNAUDITED CONDENSED NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS.
INVESTMENT TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
Page 4 of 20
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CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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<CAPTION>
SIX MONTHS ENDED
-----------------------------------------
JUNE 30, JUNE 25,
2000 1999
-----------------------------------------
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REVENUES:
Commissions:
POSIT.............................................. $ 82,533 $ 61,570
Electronic trading desk............................ 32,838 21,478
Client............................................. 38,047 24,769
Other................................................ 5,155 1,123
-------------------- ------------------
Total revenues................................... 158,573 108,940
-------------------- ------------------
EXPENSES:
Compensation and employee benefits................... 38,759 25,915
Transaction processing............................... 21,654 15,357
Software royalties................................... 10,798 8,026
Occupancy and equipment.............................. 8,203 6,409
Telecommunications and data processing services...... 6,298 4,304
Net loss on long-term investments ................... 2,593 1,215
Spin-off costs ...................................... - 6,759
Other general and administrative..................... 10,340 7,416
-------------------- ------------------
Total expenses................................... 98,645 75,401
-------------------- ------------------
Income before income tax expense.......................... 59,928 33,539
Income tax expense........................................ 26,344 16,786
-----------------------------------------
Net income................................................ $ 33,584 $ 16,753
=========================================
Basic net earnings per share of common stock.............. $ 1.09 $ 0.55
=========================================
Diluted net earnings per share of common stock............ $ 1.07 $ 0.53
=========================================
Basic weighted average shares outstanding................. 30,712 30,191
=========================================
Diluted weighted average shares and common stock
equivalents outstanding............................... 31,385 31,817
=========================================
</TABLE>
SEE ACCOMPANYING UNAUDITED CONDENSED NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS.
INVESTMENT TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
Page 5 of 20
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CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------
JUNE 30, JUNE 25,
2000 1999
-----------------------------------------
<S> <C> <C>
REVENUES:
Commissions:
POSIT.............................................. $ 44,431 $ 32,824
Electronic trading desk............................ 15,471 10,878
Client............................................. 19,471 12,080
Other................................................ 3,588 530
-------------------- ------------------
Total revenues................................... 82,961 56,312
-------------------- ------------------
EXPENSES:
Compensation and employee benefits................... 20,319 13,667
Transaction processing............................... 10,945 7,821
Software royalties................................... 5,810 4,274
Occupancy and equipment.............................. 4,307 3,296
Telecommunications and data processing services...... 3,265 2,384
Net loss on long-term investments ................... 1,811 329
Spin-off costs ...................................... - 4,505
Other general and administrative..................... 5,182 3,734
-------------------- ------------------
Total expenses................................... 51,639 40,010
-------------------- ------------------
Income before income tax expense.......................... 31,322 16,302
Income tax expense........................................ 13,642 7,908
-----------------------------------------
Net income................................................ $ 17,680 $ 8,394
=========================================
Basic net earnings per share of common stock.............. $ 0.57 $ 0.27
=========================================
Diluted net earnings per share of common stock............ $ 0.56 $ 0.26
=========================================
Basic weighted average shares outstanding................. 30,930 30,670
=========================================
Diluted weighted average shares and common stock
equivalents outstanding.............................. 31,526 32,040
=========================================
</TABLE>
SEE ACCOMPANYING UNAUDITED CONDENSED NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS.
INVESTMENT TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
Page 6 of 20
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CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 2000
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
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<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, 1999............... $ - $ 322 $ 96,534 $ 75,727 $ (58,052)
Purchase of common stock for treasury
(240,200 shares)........................ - - - - (8,122)
Issuance of common stock in connection
with the employee stock option plan
(1,174,631 shares)...................... - 12 25,723 - -
Issuance of common stock in connection
with the employee stock purchase plan
(20,429 shares)......................... - - 604 - -
Comprehensive income:
Net income.............................. - - - 33,584 -
Other comprehensive income:
Currency translation adjustment..... - - - - -
Unrealized holding gain on securities
available-for-sale, net of tax ($86). - - - - -
Comprehensive income.......................
-------------------------------------------------------------------------
Balance at June 30, 2000................... $ - $ 334 $ 122,861 $ 109,311 $ (66,174)
=========================================================================
</TABLE>
<TABLE>
<CAPTION>
Accumulated Total
Comprehensive Stockholders'
Income Equity
---------------------------------------
<S> <C> <C>
Balance at December 31, 1999............... $ 1,121 $ 115,652
Purchase of common stock for treasury
(240,200 shares)........................ - (8,122)
Issuance of common stock in connection
with the employee stock option plan
(1,174,631 shares)...................... - 25,735
Issuance of common stock in connection
with the employee stock purchase plan
(20,429 shares)......................... - 604
Comprehensive income:
Net income.............................. - 33,584
Other comprehensive income:
Currency translation adjustment..... (12) (12)
Unrealized holding gain on securities
available-for-sale, net of tax ($86). (109) (109)
---------------
Comprehensive income....................... 33,463
---------------------------------------
Balance at June 30, 2000................... $ 1,000 $ 167,332
=======================================
</TABLE>
SEE ACCOMPANYING UNAUDITED CONDENSED NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS.
INVESTMENT TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
Page 7 of 20
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CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(DOLLARS IN THOUSANDS)
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<CAPTION>
SIX MONTHS ENDED
---------------------------------------------
JUNE 30, 2000 JUNE 25, 1999
---------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income...................................................................... $ 33,584 $ 16,753
Adjustments to reconcile net income to net cash provided by operating
activities:
Deferred income tax expense .............................................. 5,618 362
Depreciation and amortization.............................................. 6,429 6,574
Undistributed loss of affiliates........................................... 2,793 1,165
Provision for doubtful receivables......................................... 140 60
Loss on sale of Premises and equipment..................................... 5 -
Decrease (increase) in operating assets:
Securities owned, at fair value............................................. (141,850) 11,858
Receivables from brokers, dealers and other, net............................ (9,822) 6,254
Tax receivable.............................................................. - (10,298)
Due from affiliates......................................................... (11,363) 722
Investments in limited partnerships......................................... (923) (66)
Other assets................................................................ (2,433) (970)
Increase (decrease) in operating liabilities:
Accounts payable and accrued expenses....................................... 13,613 17,786
Payable to brokers, dealers and other....................................... 69,332 2,902
Software royalties payable.................................................. 776 146
Securities sold, not yet purchased, at fair value........................... 72,652 (265)
Due to affiliates........................................................... - (1,422)
Income taxes payable to affiliate........................................... - (3,853)
Income taxes payable........................................................ (5,828) -
Securities available-for-sale gains............................................. (1,973) -
-----------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES.................................. 30,750 47,708
-----------------------------------------------
Cash flows from investing activities:
Purchase of premises and equipment.......................................... (6,911) (3,376)
Proceeds from sales of securities, available-for-sale....................... 1,973 -
Proceeds from sales of premises and equipment............................... 5 -
Purchase of investment in limited partnership............................... (750) (5,000)
Investment in joint venture................................................. (2,805) (964)
Capitalization of software development costs................................ (1,353) (2,291)
-----------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES...................................... (9,841) (11,631)
-----------------------------------------------
Cash flows from financing activities:
Dividends paid.............................................................. - (74,624)
Retirement of common stock held in treasury at cost......................... - 12,760
Purchase of common stock for treasury....................................... (8,122) -
Issuance of common stock under employee stock plan.......................... 26,339 29,265
-----------------------------------------------
NET CASH PROVIDED BY/(USED IN) FINANCING ACTIVITIES........................ 18,217 (32,599)
-----------------------------------------------
Effect of foreign currency translation on cash and cash equivalents......... (12) 153
Net increase in cash and cash equivalents.................................. 39,114 3,631
Cash and cash equivalents - beginning of period................................. 53,081 77,324
-----------------------------------------------
Cash and cash equivalents - end of period....................................... $ 92,195 $ 80,955
===============================================
Supplemental cash flow information:
Interest paid............................................................... $ 86 $ 19
===============================================
Income taxes paid .......................................................... $ 13,539 $ -
===============================================
Income taxes paid to affiliate.............................................. $ - $ 6,538
===============================================
</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 design-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; 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
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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 June 30, 2000 and December 31,
1999 consisted of the following;
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<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
--------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Accounts payable and accrued expenses......................... $ 13,737 $ 11,754
Accrued compensation ......................................... 10,276 580
Deferred compensation ........................................ 11,206 9,424
Deferred options.............................................. - 2,280
Accrued soft dollars payable.................................. 9,255 6,688
Accrued rent expense.......................................... 2,597 2,733
--------------------------------
Total ........................................................ $ 47,071 $ 33,459
================================
</TABLE>
OTHER COMPREHENSIVE INCOME (LOSS)
The following summarizes other comprehensive income (loss) as of June 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..................................... $ (12) $ (195) $ (207)
Tax benefit........................................ - 86 86
--------------------------------------------------------
Net of tax amount.................................. $ (12) $ (109) $ (121)
========================================================
<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 June 30, 2000.......... (12) (109) (121)
--------------------------------------------------------
Balance at June 30, 2000.......................... $ (19) $ 1,019 $ 1,000
========================================================
</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 six months ended June 30, 2000 and
June 25, 1999 was 31.4 million and 31.8 million, respectively. The diluted
weighted average number of outstanding shares for the three months ended June
30, 2000 and June 25, 1999 was 31.5 million and 32.0 million, respectively.
The following is a reconciliation of the basic and diluted earnings per
share computations for the six months ended June 30, 2000 and June 25, 1999.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
-----------------------------------
JUNE 30, JUNE 25,
2000 1999
--------------- ----------------
(AMOUNTS IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
-----------------------------------
<S> <C> <C>
Net income......................................................... $ 33,584 $ 16,753
=============== =============
Shares of common stock and common stock equivalents:
Average number of common shares used in basic computation... 30,712 30,191
Effect of dilutive securities - options....................... 673 1,626
--------------- -------------
Average number of common shares used in diluted computation. 31,385 31,817
=============== =============
Earnings per share:
Basic......................................................... $ 1.09 $ 0.55
=============== =============
Diluted....................................................... $ 1.07 $ 0.53
=============== =============
The following is a reconciliation of the basic and diluted earnings per
share computations for the three months ended June 30, 2000 and June 25, 1999.
<CAPTION>
THREE MONTHS ENDED
-----------------------------------
JUNE 30, JUNE 25,
2000 1999
--------------- ----------------
(AMOUNTS IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
-----------------------------------
<S> <C> <C>
Net income......................................................... $ 17,680 $ 8,394
=============== =============
Shares of common stock and common stock equivalents:
Average number of common shares used in basic computation... 30,930 30,670
Effect of dilutive securities - options....................... 596 1,370
--------------- -------------
Average number of common shares used in diluted computation. 31,526 32,040
=============== =============
Earnings per share:
Basic......................................................... $ 0.57 $ 0.27
=============== =============
Diluted....................................................... $ 0.56 $ 0.26
=============== =============
</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 15c3-1, 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 June 30, 2000, ITG Inc. had net capital of $33.8 million, which was
$33.5 million in excess of required minimum net capital.
INVESTMENT TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
Page 11 of 20
<PAGE>
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. 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 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 the
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 June 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 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 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 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. 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 - SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO SIX MONTHS
ENDED JUNE 25, 1999
The table below sets forth, certain items in the statement of operations
expressed as a percentage of revenues for the periods indicated:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
-------------------------------
JUNE 30, JUNE 25,
-------------------------------
2000 1999
-------------------------------
100.0% 100.0%
<S> <C> <C>
Revenues:
Commissions
POSIT............................................ 52.0 56.5
Electronic trading desk.......................... 20.7 19.7
Client........................................... 24.0 22.7
Other................................................ 3.3 1.1
Expenses:
Compensation and employee benefits................... 24.4 23.8
Transaction processing............................... 13.7 14.1
Software royalties................................... 6.8 7.4
Occupancy and equipment.............................. 5.2 5.9
Telecommunications and data processing services...... 4.0 4.0
Net loss on long-term investments ................... 1.6 1.1
Spin-off costs ...................................... 0.0 6.2
Other general and administrative..................... 6.5 6.8
--------------- ---------------
Total expenses................................... 62.2 69.3
--------------- ---------------
Income before income tax expense.......................... 37.8 30.8
Income tax expense........................................ 16.6 15.4
--------------- ---------------
Net income................................................ 21.2 15.4
=============== ===============
</TABLE>
EARNINGS PER SHARE:
Basic net earnings per share for the six months ended June 30, 2000
("First Half 2000") increased $0.54, or 98%, to $1.09 from $0.55 for the six
months ended June 25, 1999 ("First Half 1999"). Diluted net earnings per share
increased $0.54, or 102%, from $0.53 to $1.07. Diluted net earnings per share
for First Half 1999, excluding non-recurring charges of $6.8 million incurred in
connection with our spin-off from Jefferies Group, were $0.69. There were no
such spin-off charges in First Half 2000.
REVENUES:
Total revenues increased $49.7 million, or 46%, from $108.9 million to
$158.6 million. There were 121 trading days in the First Half 1999 and 126
trading days in the First Half 2000. Revenues per trading day increased by
$359,000, or 40%, from $900,000 to $1,259,000. Revenues per employee increased
$79,000, or 22%, from $364,000 to $443,000.
POSIT, Client and Electronic Trading Desk revenues increased 42% over
the First Half 1999 as a result of providing our clients with broadened access
to liquidity sources, such as linking to electronic communications networks
("ECN's"), and tools for understanding and minimizing trading costs. In
addition, there were increases in trading volume from existing clients as well
as an increase in the number of our customers.
INVESTMENT TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
Page 14 of 20
<PAGE>
The number of shares crossed on the POSIT system increased 1.2 billion,
or 40%, from 3.0 billion in the First Half 1999 to 4.2 billion. The number of
shares crossed on the POSIT system per day increased 8.4 million, or 34%, from
25.1 million to 33.5 million. POSIT's quarterly volume hit a record 2.3 billion
shares during the second quarter of 2000 and a single day record of over 80
million shares crossed on June 27th.
Of Client revenues, our QuantEx and Platform products increased 39%
representing 66% of the increase in Client revenues.
Electronic Trading Desk revenues increased 53%, in part due to the
impact of our Company becoming the clearing and execution broker for two large
introducing brokers.
Other revenues increased primarily from a gain recorded on the partial
sale of our investment in Versus Technologies, Inc. and increases in investment
income, larger average interest-earning balances and improved rates of return.
EXPENSES:
Total expenses excluding income tax expense for First Half 2000
increased $23.2 million, or 31%, from $75.4 million in First Half 1999 to $98.6
million.
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 the end of the First Half 2000 we had 358
employees, representing an increase of 20% or 59 over First Half 1999.
Approximately 78% 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. Average compensation and employee benefits expenses
per person increased $21,000, or 24%, from $87,000 to $108,000.
TRANSACTION PROCESSING: Transaction processing as a percentage of
revenues decreased from 14.1% to 13.7% of revenues. Reductions in clearing and
execution costs resulted from 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.
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 90% of the increase as we expanded our research and
development facility in Culver City, California in December 1999, our New York
headquarters in January 2000 and we added a new office in Waltham, Massachusetts
for our new internal asset management subsidiary, Inference Group LLC.
TELECOMMUNICATIONS AND DATA PROCESSING SERVICES: The increase in
telecommunications and data processing services stems primarily from 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 on 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 Half 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 First
Half 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 50.0% to 44.0%
resulted primarily from non-deductible spin-off expenses which were incurred in
First Half 1999.
RESULTS OF OPERATIONS - THREE MONTHS ENDED JUNE 30, 2000 COMPARED TO THREE
MONTHS ENDED JUNE 25, 1999
The table below sets forth, certain items in the statement of operations
expressed as a percentage of revenues for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------
JUNE 30, JUNE 25,
-------------------------------
2000 1999
-------------------------------
100.0% 100.0%
<S> <C> <C>
Revenues:
Commissions
POSIT............................................ 53.6 58.3
Electronic trading desk.......................... 18.6 19.3
Client........................................... 23.5 21.5
Other................................................ 4.3 0.9
Expenses:
Compensation and employee benefits................... 24.5 24.3
Transaction processing............................... 13.2 13.9
Software royalties................................... 7.0 7.6
Occupancy and equipment.............................. 5.2 5.9
Telecommunications and data processing services...... 3.9 4.2
Net loss on long-term investments ................... 2.2 0.6
Spin-off costs ...................................... 0.0 8.0
Other general and administrative..................... 6.2 6.6
--------------- ---------------
Total expenses................................... 62.2 71.2
--------------- ---------------
Income before income tax expense.......................... 37.8 28.9
Income tax expense........................................ 16.4 14.0
--------------- ---------------
Net income................................................ 21.4 14.9
=============== ===============
</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 June 30, 2000
("Second Quarter 2000") increased $0.30, or 111%, to $0.57 from $0.27 for the
three months ended June 25, 1999 ("Second Quarter 1999"). Diluted net earnings
per share increased $0.30, or 115%, to $0.56 from $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. There were no such spin-off charges in Second Quarter 2000.
REVENUES:
Total revenues increased $26.7 million, or 47%, from $56.3 million to
$83.0 million. There were 63 trading days in both Second Quarter 1999 and Second
Quarter 2000. Revenues per trading day increased by $423,000, or 47%, from
$894,000 to $1,317,000. Revenues per employee increased $44,000, or 23%, from
$188,000 to $232,000.
POSIT, Electronic Trading Desk and Client revenues increased 42% over
the Second Quarter 1999 as a result of providing our clients with broadened
access to liquidity sources, such as ECN's, and tools for understanding and
managing trading costs. In addition, there were increases in trading volume from
existing clients as well as an increase in the number of our customers.
The number of shares crossed on the POSIT system increased 0.7 billion,
or 44%, from 1.6 billion in Second Quarter 1999 to 2.3 billion. The number of
shares crossed on the POSIT system per day increased 11.1 million, or 43%, from
25.7 million to 36.8 million. POSIT's volume hit a record 2.3 billion shares for
the Second Quarter 2000 and a single day record of over 80 million shares
crossed on June 27th.
Of Client revenues, our QuantEx and Platform product revenues
increased 47% representing 70% of the increase in Client revenues.
Electronic Trading Desk revenues increased 42%, in part due to the
impact of our Company becoming the clearing and execution broker for two large
introducing brokers.
Other revenues increased primarily from a gain recorded on the partial
sale of our investment in Versus Technologies, Inc. and increases in investment
income, larger average interest-earning balances and improved rates of return.
EXPENSES:
Total expenses excluding income tax expense for Second Quarter 2000
increased $11.6 million, or 29%, from $40.0 million in Second Quarter 1999 to
$51.6 million.
COMPENSATION AND EMPLOYEE BENEFITS: Salaries, bonuses and related
employee benefits increased primarily due to growth in our employee base of 59
or 20% from 299 to 358. Further contributing to the increase was the additional
compensation necessary to attract and retain quality personnel and the increase
in our financial performance upon which we model our bonus compensation. Average
compensation and employee benefits expenses per person increased $11,000, or
24%, from $46,000 to $57,000 on a quarter to quarter basis.
TRANSACTION PROCESSING: Transaction processing as a percentage of
revenues decreased from 13.9% to 13.2% of revenues. Reductions in clearing and
execution costs resulted from 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.
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: We continue to enhance our infrastructure and
add to our employee base. Depreciation/amortization, rent and maintenance
contracts represented 80% of the increase as we expanded our research and
development facility in Culver City, California in December 1999, our New York
headquarters in January 2000 and we established a new office in Waltham,
Massachusetts for our new internal asset management subsidiary, Inference Group
LLC.
TELECOMMUNICATIONS AND DATA PROCESSING SERVICES: The increase in
telecommunications and data processing services stems primarily from 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 on our ITG Europe joint during its second full year of operations.
SPIN-OFF COSTS: The spin-off expenses in the Second 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 Second
Quarter 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 at
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 48.5% to 43.6% resulted
primarily from non-deductible spin-off expenses which were incurred in the
Second Quarter 1999.
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 June 30, 2000, such cash equivalents
amounted to $277.7 million and net receivables from brokers, dealers and other,
of $27.9 million were due within 30 days.
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 30, 2000,
we had net excess regulatory capital of $33.5 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.
INVESTMENT TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
Page 18 of 20
<PAGE>
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: August 11, 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
