<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 Commission file number:
March 31, 2000 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
Incorporation or Organization) Identification No.)
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 May 12, 2000, the Registrant had 30,965,015 shares of common stock, $.01
par value, outstanding.
<PAGE>
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
PART I. - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page
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<S> <C> <C>
Item 1. Financial Statements
Consolidated Statements of Financial Condition:
March 31, 2000 (unaudited) and December 31, 1999.................. 4
Consolidated Statements of Income (unaudited):
Three Months Ended March 31, 2000 and March 26, 1999.............. 5
Consolidated Statement of Changes in Stockholders' Equity (unaudited):
Three Months Ended March 31, 2000................................. 6
Consolidated Statements of Cash Flows (unaudited):
Three Months Ended March 31, 2000 and March 26, 1999.............. 7
Condensed Notes to Consolidated Financial Statements (unaudited)...... 8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................. 11
PART II. - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders................... 15
Item 5. Other Information..................................................... 15
Item 6. Exhibits and Reports on Form 8-K...................................... 15
Signatures............................................................ 16
</TABLE>
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 16
<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 16
<PAGE>
PART I. - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
------------------- -------------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Cash and cash equivalents....................................... $ 90,876 $ 53,081
Securities owned, at fair value................................. 47,994 43,612
Receivables from brokers, dealers and other, net................ 31,256 19,181
Investments in limited partnerships............................. 15,272 13,922
Securities, available-for-sale, at fair value................... 2,241 2,023
Premises and equipment.......................................... 21,964 20,229
Capitalized software............................................ 5,487 5,629
Goodwill........................................................ 686 824
Deferred taxes.................................................. 13,197 13,324
Other assets.................................................... 8,978 7,663
----------------- ------------------
Total assets.................................................... $ 237,951 $ 179,488
================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued expenses........................... $ 43,246 $ 33,459
Payable to brokers, dealers and other........................... 11,017 3,932
Software royalties payable...................................... 4,894 4,874
Securities sold, not yet purchased, at fair value............... 8,281 5,861
Income taxes payable............................................ 17,510 15,710
------------------- -------------------
Total liabilities............................................... 84,948 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: 33,207,241 and 32,179,106
at March 31, 2000 and
December 31, 1999......................................... 332 322
Additional paid-in capital................................... 119,612 96,534
Retained earnings............................................ 91,631 75,727
Common stock held in treasury, at cost; shares: 2,262,721
and 2,213,721 at March 31, 2000 and December 31, 1999..... (59,815) (58,052)
Accumulated other comprehensive income (loss):
Currency translation adjustment........................... (6) (7)
Unrealized gain on securities, available-for-sale,
net of tax................................................ 1,249 1,128
------------------- ------------------
Total stockholders' equity................................... 153,003 115,652
------------------- ------------------
Total liabilities and stockholders' equity $ 237,951 $ 179,488
=================== ==================
</TABLE>
SEE ACCOMPANYING UNAUDITED CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
INVESTMENT TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
Page 4 of 16
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------
MARCH 31, MARCH 26,
2000 1999
-------------------- ------------------
<S> <C> <C>
REVENUES:
Commissions:
POSIT.............................................. $ 38,102 $ 28,747
Electronic trading desk............................ 17,367 10,601
Client............................................. 18,576 12,688
Other................................................ 1,567 592
-------------------- ------------------
Total revenues................................... 75,612 52,628
-------------------- ------------------
EXPENSES:
Compensation and employee benefits................... 18,440 12,248
Transaction processing............................... 10,709 7,536
Software royalties................................... 4,988 3,752
Occupancy and equipment.............................. 3,896 3,113
Telecommunications and data processing services...... 3,033 1,920
Net loss on long-term investments ................... 782 886
Spin-off costs ...................................... - 2,254
Other general and administrative..................... 5,158 3,682
-------------------- ------------------
Total expenses................................... 47,006 35,391
-------------------- ------------------
Income before income tax expense.......................... 28,606 17,237
Income tax expense........................................ 12,702 8,878
-------------------- ------------------
Net income................................................ $ 15,904 $ 8,359
==================== ==================
Basic net earnings per share of common stock.............. $ 0.52 $ 0.28
==================== ==================
Diluted net earnings per share of common stock............ $ 0.51 $ 0.26
==================== ==================
Basic weighted average shares outstanding................. 30,495 29,707
==================== ==================
Diluted weighted average shares and common stock
equivalents outstanding............................. 31,244 31,563
==================== ==================
</TABLE>
SEE ACCOMPANYING UNAUDITED CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
INVESTMENT TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
Page 5 of 16
<PAGE>
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 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
(49,000 shares).......................... -- -- -- -- (1,763) -- (1,763)
Issuance of common stock in connection
with the employee stock option plan
(1,007,710 shares)....................... -- 10 22,474 -- -- -- 22,484
Issuance of common stock in connection
with the employee stock purchase plan
(20,429 shares).......................... -- -- 604 -- -- -- 604
Comprehensive income:
Net income............................... -- -- -- 15,904 -- -- 15,904
Other comprehensive income:
Currency translation adjustment........ -- -- -- -- -- 1 1
Unrealized holding gain on securities
available-for-sale, net of tax ($97).. -- -- -- -- -- 121 121
-----------
16,026
--------- --------- ---------- --------- ---------- ------------- -------------
Comprehensive income........................ $ -- $ 332 $ 119,612 $ 91,631 $ (59,815) $ 1,243 $ 153,003
Balance at March 31, 2000................... $
--------- --------- ---------- --------- ---------- ------------- -------------
--------- --------- ---------- --------- ---------- ------------- -------------
</TABLE>
SEE ACCOMPANYING UNAUDITED CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
INVESTMENT TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
Page 6 of 16
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------------------
MARCH 31, 2000 MARCH 26, 1999
------------------ --------------------
<S> <C> <C>
Cash flows from operating activities:
Net income....................................................................... $ 15,904 $ 8,359
Adjustments to reconcile net income to net cash provided by operating
activities:
Deferred income tax expense ................................................ 30 52
Depreciation and amortization................................................ 2,293 3,238
Undistributed loss of affiliates............................................. 782 861
Provision for doubtful receivables........................................... 80 30
Decrease (increase) in operating assets:
Securities owned, at fair value............................................... (4,382) 7,850
Receivables from brokers, dealers and other, net.............................. (12,155) 7,925
Due from affiliates........................................................... - 255
Investments in limited partnerships........................................... (600) (29)
Other assets.................................................................. (566) (57)
Increase (decrease) in operating liabilities:
Accounts payable and accrued expenses......................................... 9,787 10,802
Payable to brokers, dealers and other......................................... 7,085 910
Software royalties payable.................................................... 20 (614)
Securities sold, not yet purchased, at fair value............................. 2,420 (139)
Due to affiliates............................................................. - (946)
Income taxes payable.......................................................... 1,800 7
------------------ --------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES.................................... 22,498 38,504
------------------ --------------------
Cash flows from investing activities:
Purchase of premises and equipment............................................ (3,278) (1,778)
Purchase of investment in limited partnership................................. (750) -
Investment in joint venture................................................... (1,529) (637)
Capitalization of software development costs.................................. (471) (1,068)
------------------ --------------------
NET CASH USED IN INVESTING ACTIVITIES........................................ (6,028) (3,483)
------------------ --------------------
Cash flows from financing activities:
Purchase of common stock for treasury......................................... (1,763) -
Issuance of common stock in connection with employee stock option plan........ 23,088 3,024
------------------ --------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES.................................... 21,325 3,024
------------------ --------------------
Effect of foreign currency translation on cash and cash equivalents........... - 73
Net increase in cash and cash equivalents..................................... 37,795 38,118
Cash and cash equivalents - beginning of period................................... 53,081 77,518
------------------ --------------------
Cash and cash equivalents - end of period......................................... $ 90,876 $ 115,636
================== ====================
Supplemental cash flow information:
Interest paid................................................................ $ 41 $ 28
================== ====================
Income taxes paid ........................................................... $ 128 $ -
================== ====================
Income taxes paid to affiliate............................................... $ - $ 7,074
================== ====================
</TABLE>
SEE ACCOMPANYING UNAUDITED CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
INVESTMENT TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
Page 7 of 16
<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; SmartServers, which offer server-based
implementation of trading strategies; Electronic Trading Desk, an agency-only
trading desk offering clients the ability to efficiently access multiple sources
of liquidity; ITG Platform, a PC-based order routing and trade management
system; 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. ("New
ITG"). The merger occurred following the transfer by Jefferies Group of
substantially all of its assets and liabilities to its wholly-owned subsidiary
("New Jefferies"), and the pro rata distribution by Jefferies Group to its
stockholders of all of the New Jefferies common stock. After these transactions,
New Jefferies owned all of the assets of Jefferies Group other than Jefferies
Group's equity interest in ITG, and Jefferies Group's existing stockholders
owned all of the equity interest in New Jefferies. Following the merger, New
Jefferies was renamed Jefferies Group, Inc., and, through its subsidiaries,
carries on the businesses of Jefferies Group prior to the transactions (other
than the businesses of our company).
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 8 of 16
<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 March 31, 2000 and December 31,
1999 consisted of the following;
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
---------------- ---------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Accounts payable and accrued expenses......................... $ 14,480 $ 11,754
Accrued compensation ......................................... 7,337 580
Deferred compensation ........................................ 10,242 9,424
Deferred options.............................................. - 2,280
Accrued soft dollars payable.................................. 8,464 6,688
Accrued rent expense.......................................... 2,723 2,733
---------------- ---------------
Total ........................................................ $ 43,246 $ 33,459
================ ===============
</TABLE>
OTHER COMPREHENSIVE INCOME (LOSS)
The following summarizes other comprehensive income (loss) as of March 31,
2000 (Dollars in thousands):
<TABLE>
<CAPTION>
TAX NET
PRE-TAX (EXPENSE) OF TAX
AMOUNT OR BENEFIT AMOUNT
---------------- --------------------- -----------------
<S> <C> <C> <C>
Currency translation adjustment..................... $ 1 $ -- $ 1
Unrealized holding gain on securities,
available for sale............................. 218 (97) 121
---------------- --------------------- -----------------
Other Comprehensive income.......................... $ 219 $ (97) $ 122
================ ===================== =================
</TABLE>
<TABLE>
<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 March 31, 2000........... 1 121 122
---------------- -------------------- ------------------
Balance at March 31, 2000........................... $ (6) $ 1,249 $ 1,243
================ ===================== =================
</TABLE>
INVESTMENT TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
Page 9 of 16
<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 March 31, 2000
and March 26, 1999 was 31.2 million and 31.6 million, respectively.
The following is a reconciliation of the basic and diluted earnings per
share computations for the three months ended March 31, 2000 and March 26, 1999.
<TABLE>
<CAPTION>
MARCH 31, MARCH 26,
2000 1999
--------------- ----------------
(AMOUNTS IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
<S> <C> <C>
Net income......................................................... $ 15,904 $ 8,359
=============== =============
Shares of common stock and common stock equivalents:
Average number of common shares used in basic computation... 30,495 29,707
Effect of dilutive securities - options....................... 749 1,856
--------------- -------------
Average number of common shares used in diluted computation. 31,244 31,563
=============== =============
Earnings per share:
Basic......................................................... $ 0.52 $ 0.28
=============== =============
Diluted....................................................... $ 0.51 $ 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 March 31, 2000, ITG Inc. had net capital of $67.9 million, which was
$67.6 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. 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.
INVESTMENT TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
Page 10 of 16
<PAGE>
At March 31, 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.
In 1998, we established a $2 million credit line with a bank to fund
temporary regulatory capital shortfalls encountered periodically by ITG
Australia. The lender charges us interest at the Federal Funds rate plus 1%. We
lend amounts borrowed to ITG Australia and charge interest at the Federal Funds
rate plus 2%. At March 31, 2000 and December 31, 1999, no amounts were
outstanding under this bank credit line.
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.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
REVENUES:
We generate substantially all of our revenues from the following four
products and services, each contributing to our single line of business:
- -- POSIT: a confidential electronic stock crossing system;
- -- Electronic Trading Desk: an agency-only trading desk;
- -- Front End Software;
-- QuantEX: a Unix-based front-end software system providing market
analysis, trade management and electronic connectivity to POSIT
and multiple trade execution destinations; and
-- ITG Platform: a PC-based front-end software system providing
market analysis, trade management and electronic connectivity to
POSIT and multiple trade execution destinations.
Revenues primarily consist of commissions from customers' use of our
trade execution and analytical services. Because these commissions are paid on a
per-transaction basis, revenues fluctuate from period to period depending on the
volume of securities traded through our services. We record as POSIT revenue any
order that is executed on the POSIT system regardless of the manner in which the
order was submitted to POSIT. ITG collects a commission from each side of a
trade matched on POSIT. We record as Electronic Trading Desk revenue any order
that is handled by our trading desk personnel and executed at any trade
execution destination other than POSIT. We record as Client revenue any order
that is sent by our clients, through ITG's front-end systems but without
assistance from the Electronic Trading Desk, to any third party trade execution
destination. Other revenue includes interest income/expense and market
gains/losses and financing costs resulting from temporary positions in
securities assumed in the normal course of our agency trading business.
INVESTMENT TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
Page 11 of 16
<PAGE>
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 and ITG Australia operations. Spin-off costs include legal,
accounting, consulting and various other expenses in connection with the
spin-off from Jefferies Group and related transactions. Other general and
administrative expenses include amortization of software and goodwill, legal,
audit, tax, consulting and promotional expenses.
RESULTS OF OPERATIONS - THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO THREE
MONTHS ENDED MARCH 26, 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
-------------------------------
MARCH 31, MARCH 26,
--------------- ---------------
2000 1999
--------------- ---------------
<S> <C> <C>
Revenues: 100.0% 100.0%
Commissions
POSIT............................................ 50.4 54.6
Electronic trading desk.......................... 23.0 20.1
Client........................................... 24.6 24.1
Other................................................ 2.0 1.2
Expenses:
Compensation and employee benefits................... 24.4 23.3
Transaction processing............................... 14.2 14.3
Software royalties................................... 6.6 7.1
Occupancy and equipment.............................. 5.2 5.9
Telecommunications and data processing services...... 4.0 3.6
Net loss on long-term investments ................... 1.0 1.7
Spin-off costs ...................................... 0.0 4.3
Other general and administrative..................... 6.8 7.0
--------------- ---------------
Total expenses................................... 62.2 67.2
--------------- ---------------
Income before income tax expense.......................... 37.8 32.8
Income tax expense........................................ 16.8 16.9
--------------- ---------------
Net income................................................ 21.0 15.9
=============== ===============
</TABLE>
INVESTMENT TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
Page 12 of 16
<PAGE>
EARNINGS PER SHARE:
Basic net earnings per share for the three months ended March 31, 2000
("First Quarter 2000") increased $0.24, or 86%, to $0.52 from $0.28 for the
three months ended March 26, 1999 ("First Quarter 1999"). Diluted net earnings
per share increased $0.25, or 96%, from $0.26 to $0.51. Diluted net earnings per
share for First Quarter 1999, excluding non-recurring charges of $2.3 million
incurred in connection with our spin-off from Jefferies Group, were $0.34. There
were no such spin-off charges in First Quarter 2000.
REVENUES:
Total revenues increased $23.0 million, or 44%, from $52.6 million to
$75.6 million. There were 58 trading days in the First Quarter 1999 and 63
trading days in the First Quarter 2000. Revenues per trading day increased by
$293,000, or 32%, from $907,000 to $1,200,000. Revenues per employee increased
$37,000, or 19%, from $193,000 to $230,000.
The increases in POSIT and Client revenues were attributable to an
increase in trading volume by existing customers, an increase in the number of
trading days and an increase in the number of customers. The number of shares
crossed on the POSIT system increased 0.5 billion, or 36%, from 1.4 billion to
1.9 billion. The number of shares crossed on the POSIT system per day increased
5.7 million, or 23%, from 24.4 million to 30.1 million. POSIT reported record
crosses in February 2000 with 61.9 million shares crossed on February 1 and 204
million shares crossed for the week ending February 28. Of Client revenues, our
QuantEx and Platform products increased 31% representing 60% of the increase in
Client revenues.
Electronic Trading Desk revenues increased 64%, in part due to the
impact of our Company becoming the clearing and execution broker for two large
introducing brokers during First Quarter 2000. Other revenues increased
primarily due to incremental royalty income from international versions of
POSIT, larger average balances in our investment portfolio and decreased errors
and accommodations. These were partially offset by increased financing costs
resulting from temporary positions in securities assumed in the normal course of
business.
EXPENSES:
Total expenses excluding income tax expense for First Quarter 2000
increased $11.6 million, or 33%, from $35.4 million in First Quarter 1999 to
$47.0 million.
COMPENSATION AND EMPLOYEE BENEFITS: Salaries, bonuses and related
employee benefits increased primarily due to growth in our employee base of 21%
from 272 to 329, additional compensation necessary to attract and retain quality
personnel and the increase in our financial performance upon which we model our
bonus compensation. Approximately 58% 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 $11,000, or 24%, from $45,000 to
$56,000.
TRANSACTION PROCESSING: Transaction processing as a percentage of
revenues decreased from 14.3% to 14.2% of revenues. Ticket charges where in
line with revenue growth. Execution charges increased 43% as a result of
growth in ECN volume. As more shares are delivered to Electronic
Communications Networks ("ECN's"), there is a concurrent increase in access
fees. This increase was partially offset by lower charges from NYSE
specialists.
SOFTWARE ROYALTIES: Because software royalties are contractually fixed
at 13% of POSIT revenues, the increase is wholly attributable to an increase in
POSIT revenues.
INVESTMENT TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
Page 13 of 16
<PAGE>
OCCUPANCY AND EQUIPMENT: Depreciation and amortization increased 27%
resulting from infrastructure enhancements and the addition of workspace as a
result of our growth in our employee base. 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 decrease in loss on long-term
investments primarily resulted from improved performance of our ITG Europe
Venture. ITG Europe increased revenues 345% over First Quarter 1999.
SPIN-OFF COSTS: The spin-off expenses in the First 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 - Organization and Basis of Presentation -
Spin-Off from Jefferies Group." The Spin-off was concluded in 1999 and as a
result there are no associated costs in First 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 51.5% to 44.4% was due to a
reduction in foreign-based losses in First Quarter 2000 and an increase in
dividends received deduction. In addition, our spin-off was completed in 1999
and as a result we did not incur non-deductible spin-off expenses in the First
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, variable rate municipal securities, auction rate
preferred stock and common stock. At March 31, 2000, such cash equivalents
amounted to $139.0 million and net receivables from brokers, dealers and other,
of $30.8 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 March 31, 2000,
we had net excess regulatory capital of $67.6 million. We had an agreement with
a bank to borrow up to $20 million on a revolving basis to enable ITG Inc. to
satisfy its regulatory net capital requirements. This commitment expired on
March 14, 2000. 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 14 of 16
<PAGE>
PART II. - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) Date of the Meeting - May 9, 2000
Type of Meeting - Annual Meeting of Stockholders
(b) At the meeting, the following directors were elected by the
stockholders to hold office until the next annual meeting of
stockholders or until their successors have been duly elected and
qualified:
Frank E. Baxter
Neal S. Garonzik
William I Jacobs
Raymond L. Killian, Jr.
Robert L. King
Mark A. Wolfson
(c) At the meeting, with respect to the election of the directors and
ratification of the appointment of KPMG LLP as our independent auditors
for the 2000 fiscal year, the votes were cast in the following manner:
Election of Directors:
<TABLE>
<CAPTION>
NAME FOR WITHHELD
--------------------------------------------------------
<S> <C> <C>
Frank E. Baxter 26,670,534 70,171
Neal S. Garonzik 26,670,970 69,735
William I Jacobs 26,670,870 69,835
Raymond L. Killian, Jr. 26,670,870 69,835
Robert L. King 26,424,094 316,611
Mark A. Wolfson 26,670,970 69,735
</TABLE>
Ratification of the appointment of KPMG LLP as our independent auditors for
the 2000 fiscal year:
<TABLE>
<CAPTION>
NUMBER OF SHARES
----------------
<S> <C>
For 26,719,264
Against 18,435
Abstain 3,006
</TABLE>
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 15 of 16
<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.
<TABLE>
<S> <C>
INVESTMENT TECHNOLOGY GROUP, INC.
(Registrant)
Date: MAY 12, 2000 By: /S/ HOWARD C. NAPHTALI
----------------------- -----------------------
Howard C. Naphtali
Chief Financial Officer and
Duly Authorized Signatory of Registrant
</TABLE>
INVESTMENT TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
Page 16 of 16
<TABLE> <S> <C>
<PAGE>
<ARTICLE> BD
<LEGEND>
THE SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED STATEMENT OF
FINANCIAL CONDITION AND THE CONSOLIDATED STATEMENT OF OPERATIONS AS OF MARCH 31,
2000 AND FOR THE THREE MONTHS THEN ENDED AND THE NOTES THERETO AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS FILED IN THE 1999
INVESTMENT TECHNOLOGY GROUP, INC. ANNUAL 10-K FILING.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 90,876
<RECEIVABLES> 31,256
<SECURITIES-RESALE> 0
<SECURITIES-BORROWED> 0
<INSTRUMENTS-OWNED> 65,507
<PP&E> 21,964
<TOTAL-ASSETS> 237,951
<SHORT-TERM> 0
<PAYABLES> 59,157
<REPOS-SOLD> 0
<SECURITIES-LOANED> 0
<INSTRUMENTS-SOLD> 8,281
<LONG-TERM> 0
0
0
<COMMON> 332
<OTHER-SE> 152,671
<TOTAL-LIABILITY-AND-EQUITY> 237,951
<TRADING-REVENUE> (1,555)
<INTEREST-DIVIDENDS> 1,572
<COMMISSIONS> 74,045
<INVESTMENT-BANKING-REVENUES> 0
<FEE-REVENUE> 1,549
<INTEREST-EXPENSE> 56
<COMPENSATION> 18,440
<INCOME-PRETAX> 28,606
<INCOME-PRE-EXTRAORDINARY> 28,606
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15,904
<EPS-BASIC> 0.52
<EPS-DILUTED> 0.51
</TABLE>
