-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, I/mjk5QUgMrwYgIQB8HOdy7dntRE0Azh0FuTm+f8OXXsFsl19EdVrJ/4bM1aIgjZ UGprf/3jvIO671yhPpAVMA== /in/edgar/work/0000912057-00-048804/0000912057-00-048804.txt : 20001114 0000912057-00-048804.hdr.sgml : 20001114 ACCESSION NUMBER: 0000912057-00-048804 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000930 FILED AS OF DATE: 20001113 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INVESTMENT TECHNOLOGY GROUP INC CENTRAL INDEX KEY: 0000920424 STANDARD INDUSTRIAL CLASSIFICATION: [6211 ] IRS NUMBER: 133757717 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 333-78309 FILM NUMBER: 759449 BUSINESS ADDRESS: STREET 1: 380 MADISON AVE STREET 2: 2ND FLOOR CITY: NEW YORK STATE: NY ZIP: 10017 BUSINESS PHONE: 2125884000 MAIL ADDRESS: STREET 1: 11100 SANTA MONICA BLVD STREET 2: 12TH FLOOR CITY: LOS ANGELES STATE: CA ZIP: 90025 10-Q 1 a2030128z10-q.txt 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended September 30, 2000 Commission file number: 0 - 23644 INVESTMENT TECHNOLOGY GROUP, INC. (Exact Name of Registrant as Specified in Its Charter) DELAWARE 95 - 2848406 - ---------------------------------------- ------------------------------------ (State or Other Jurisdiction of (I.R.S. Employer Identification No.) Incorporation or Organization) 380 Madison Avenue, New York, New York (212) 588 - 4000 - ------------------------------------------ ------------------------------------ (Address of Principal Executive Offices) (Registrant's Telephone Number, Including Area Code) 10017 - ------------------------------------------ (Zip Code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] As of November 9, 2000, the Registrant had 31,520,803 shares of common stock, $.01 par value, outstanding. QUARTERLY REPORT ON FORM 10-Q TABLE OF CONTENTS PART I. - FINANCIAL INFORMATION Page ---- Item 1. Financial Statements Consolidated Statements of Financial Condition: September 30, 2000 (unaudited) and December 31, 1999............ 4 Consolidated Statements of Income (unaudited): Nine Months Ended September 30, 2000 and September 24, 1999..... 5 Three Months Ended September 30, 2000 and September 24, 1999.... 6 Consolidated Statement of Changes in Stockholders' Equity (unaudited): Nine Months Ended September 30, 2000............... 7 Consolidated Statements of Cash Flows (unaudited): Nine Months Ended September 30, 2000 and September 24, 1999..... 8 Condensed Notes to Consolidated Financial Statements (unaudited).... 9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............................................... 13 PART II. - OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders................. 19 Item 5. Other Information................................................... 19 Item 6. Exhibits and Reports on Form 8-K.................................... 19 Signatures.......................................................... 20 QUANTEX IS A REGISTERED TRADEMARK OF INVESTMENT TECHNOLOGY GROUP, INC. POSIT IS A REGISTERED SERVICE MARK OF THE POSIT JOINT VENTURE. SMARTSERVER, TCA, ACE AND ITG ACCESS ARE TRADEMARKS OF INVESTMENT TECHNOLOGY GROUP, INC. INVESTMENT TECHNOLOGY GROUP, INC. AND SUBSIDIARIES Page 2 of 20 FORWARD-LOOKING STATEMENTS In addition to the historical information contained throughout this Form 10-Q, there are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). All statements regarding our expected future financial position, results of operations, cash flows, dividends, financing plans, business strategies, competitive positions, plans and objectives of management for future operations, and concerning securities markets and economic trends are forward-looking statements. Although we believe our expectations reflected in such forward-looking statements are based on reasonable assumptions, there can be no assurance that such expectations will prove to have been correct. Important factors that could cause actual results to differ materially from the expectations reflected in the forward-looking statements herein include, among others, the actions of both current and potential new competitors, rapid changes in technology, fluctuations in market trading volumes, market volatility, changes in the regulatory environment, risk of errors or malfunctions in our systems or technology, cash flows into or redemptions from equity funds, effects of inflation, customer trading patterns, as well as general economic and business conditions; securities, credit and financial market conditions; and adverse changes or volatility in interest rates. INVESTMENT TECHNOLOGY GROUP, INC. AND SUBSIDIARIES Page 3 of 20 PART I. - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (DOLLARS IN THOUSANDS)
SEPTEMBER 30, DECEMBER 31, 2000 1999 --------- --------- ASSETS (UNAUDITED) Cash and cash equivalents .................................. $ 116,939 $ 53,081 Securities owned, at fair value ............................ 54,890 43,612 Receivables from brokers, dealers and other, net ........... 23,654 19,181 Investments in limited partnerships ........................ 15,774 13,922 Securities, available-for-sale, at fair value .............. -- 2,023 Premises and equipment ..................................... 22,775 20,229 Capitalized software ....................................... 5,363 5,629 Goodwill ................................................... 412 824 Deferred taxes ............................................. 3,970 13,324 Other assets ............................................... 23,125 7,663 --------- --------- Total assets ............................................... $ 266,902 $ 179,488 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Accounts payable and accrued expenses ...................... $ 46,678 $ 33,459 Payable to brokers, dealers and other ...................... 13,156 3,932 Software royalties payable ................................. 4,683 4,874 Securities sold, not yet purchased, at fair value .......... 7,090 5,861 Income taxes payable ....................................... 6,999 15,710 --------- --------- Total liabilities .......................................... 78,606 63,836 --------- --------- STOCKHOLDERS' EQUITY: Preferred stock, par value $0.01; shares authorized: 1,000,000; shares issued: none ....................... -- -- Common stock, par value $0.01; shares authorized: 100,000,000; shares issued: 33,669,170 and 32,179,106 at September 30, 2000 and December 31, 1999 .......... 337 322 Additional paid-in capital .............................. 129,561 96,534 Retained earnings ....................................... 124,755 75,727 Common stock held in treasury, at cost; shares: 2,453,921 and 2,213,721 at September 30, 2000 and December 31, 1999 ................................................. (66,182) (58,052) Accumulated other comprehensive income (loss): Currency translation adjustment ...................... (175) (7) Unrealized gain on securities, available-for-sale, net of tax ........................................... -- 1,128 --------- --------- Total stockholders' equity .............................. 188,296 115,652 --------- --------- Total liabilities and stockholders' equity ................. $ 266,902 $ 179,488 ========= =========
SEE ACCOMPANYING UNAUDITED CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. INVESTMENT TECHNOLOGY GROUP, INC. AND SUBSIDIARIES Page 4 of 20 CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED --------------------------- SEPTEMBER 30, SEPTEMBER 24, ------------- ------------- 2000 1999 -------- -------- REVENUES: Commissions POSIT ............................................... $ 37,618 $ 31,361 Electronic trading desk ............................. 15,695 11,558 Client site ......................................... 17,641 10,755 Other ................................................. 4,725 890 -------- -------- Total revenues .................................... 75,679 54,564 -------- -------- EXPENSES: Compensation and employee benefits .................... 19,388 11,402 Transaction processing ................................ 10,496 7,677 Software royalties .................................... 4,914 4,083 Occupancy and equipment ............................... 4,317 3,201 Telecommunications and data processing services ....... 2,754 2,701 Net loss on long-term investments ..................... 1,233 275 Spin-off costs ........................................ -- (85) Other general and administrative ...................... 5,058 4,170 -------- -------- Total expenses .................................... 48,160 33,424 -------- -------- Income before income tax expense ........................... 27,519 21,140 Income tax expense ......................................... 12,075 10,039 ------------------- Net income ................................................. $ 15,444 $ 11,101 =================== Basic net earnings per share of common stock ............... $ 0.50 $ 0.35 =================== Diluted net earnings per share of common stock ............. $ 0.49 $ 0.34 =================== Basic weighted average shares outstanding .................. 31,057 31,685 =================== Diluted weighted average shares and common stock equivalents outstanding ........................................... 31,729 32,665 ===================
SEE ACCOMPANYING UNAUDITED CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. INVESTMENT TECHNOLOGY GROUP, INC. AND SUBSIDIARIES Page 5 of 20 CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NINE MONTHS ENDED --------------------------- SEPTEMBER 30, SEPTEMBER 24, ------------- ------------- 2000 1999 -------- -------- REVENUES: Commissions POSIT ............................................... $120,276 $ 92,931 Electronic trading desk ............................. 48,533 33,037 Client site ......................................... 55,688 35,523 Other ................................................. 9,755 2,013 -------- -------- Total revenues .................................... 234,252 163,504 -------- -------- EXPENSES: Compensation and employee benefits .................... 58,147 37,317 Transaction processing ................................ 32,150 23,035 Software royalties .................................... 15,712 12,109 Occupancy and equipment ............................... 12,520 9,610 Telecommunications and data processing services ....... 9,052 7,005 Net loss on long-term investments ..................... 3,826 1,490 Spin-off costs ........................................ -- 6,674 Other general and administrative ...................... 15,398 11,585 -------- -------- Total expenses .................................... 146,805 108,825 -------- -------- Income before income tax expense ........................... 87,447 54,679 Income tax expense ......................................... 38,419 26,825 ------------------- Net income ................................................. $ 49,028 $ 27,854 =================== Basic net earnings per share of common stock ............... $ 1.59 $ 0.91 =================== Diluted net earnings per share of common stock ............. $ 1.56 $ 0.87 =================== Basic weighted average shares outstanding .................. 30,828 30,695 =================== Diluted weighted average shares and common stock equivalents outstanding ........................................... 31,490 32,098 ===================
SEE ACCOMPANYING UNAUDITED CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. INVESTMENT TECHNOLOGY GROUP, INC. AND SUBSIDIARIES Page 6 of 20 CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED) NINE MONTHS ENDED SEPTEMBER 30, 2000 (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Common Additional Stock Accumulated Total Preferred Common Paid-in Retained Held in Comprehensive Stockholders' Stock Stock Capital Earnings Treasury Income Equity --------------------------------------------------------------------------------------- Balance at December 31, 1999 ............... $ -- $ 322 $ 96,534 $ 75,727 $ (58,052) $ 1,121 $ 115,652 Purchase of common stock for treasury (240,200 shares) ........................ -- -- -- -- (8,130) -- (8,130) Issuance of common stock in connection with the employee stock option plan (1,454,236 shares) ...................... -- 15 31,915 -- -- -- 31,930 Issuance of common stock in connection with the employee stock purchase plan (35,832 shares) ......................... -- -- 1,112 -- -- -- 1,112 Comprehensive income: Net income .............................. -- -- -- 49,028 -- -- 49,028 Other comprehensive income: Currency translation adjustment ..... -- -- -- -- -- (168) (168) Unrealized holding gain on securities available-for-sale, net of tax ($895) -- -- -- -- -- (1,128) (1,128) --------- Comprehensive income ....................... 47,732 --------------------------------------------------------------------------------------- Balance at September 30, 2000 .............. $ -- $ 337 $ 129,561 $ 124,755 $ (66,182) $ (175) $ 188,296 =======================================================================================
SEE ACCOMPANYING UNAUDITED CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. INVESTMENT TECHNOLOGY GROUP, INC. AND SUBSIDIARIES Page 7 of 20 CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (DOLLARS IN THOUSANDS)
NINE MONTHS ENDED ----------------------------------------- SEPTEMBER 30, 2000 SEPTEMBER 24, 1999 ----------------------------------------- Cash flows from operating activities: Net income ............................................................ $ 49,028 $ 27,854 Adjustments to reconcile net income to net cash provided by operating activities: Deferred income tax expense ...................................... 10,248 362 Depreciation and amortization .................................... 9,892 9,808 Undistributed loss of affiliates ................................. 4,026 1,827 Provision for doubtful receivables ............................... 310 173 Loss on sale of Premises and equipment ........................... 5 -- Decrease (increase) in operating assets: Securities owned, at fair value ................................... (11,278) (2,097) Receivables from brokers, dealers and other, net .................. (4,783) 4,459 Tax receivable .................................................... -- (4,485) Investments in limited partnerships ............................... (1,102) (176) Other assets ...................................................... (16,682) 1,081 Increase (decrease) in operating liabilities: Accounts payable and accrued expenses ............................. 13,219 13,786 Payable to brokers, dealers and other ............................. 9,224 2,078 Software royalties payable ........................................ (190) 20 Securities sold, not yet purchased, at fair value ................. 1,229 5,032 Due to affiliates ................................................. -- (2,557) Income taxes payable to affiliate ................................. -- (3,853) Income taxes payable .............................................. (8,711) -- Securities available-for-sale gains ................................... (4,258) -- -------------------------------- NET CASH PROVIDED BY OPERATING ACTIVITIES ...................... 50,177 53,312 -------------------------------- Cash flows from investing activities: Purchase of premises and equipment ................................ (9,686) (5,898) Proceeds from sales of securities, available-for-sale ............. 4,258 -- Proceeds from sales of premises and equipment ..................... 5 -- Purchase of investment in limited partnership ..................... (750) (5,000) Investment in joint venture ....................................... (2,805) (1,591) Capitalization of software development costs ...................... (2,085) (3,673) -------------------------------- NET CASH USED IN INVESTING ACTIVITIES .......................... (11,063) (16,162) -------------------------------- Cash flows from financing activities: Dividends paid .................................................... -- (74,624) Retirement of common stock held in treasury at cost ............... -- 3,499 Purchase of common stock for treasury ............................. (8,130) -- Issuance of common stock under employee stock plan ................ 33,042 39,670 -------------------------------- NET CASH PROVIDED BY/(USED IN) FINANCING ACTIVITIES ............ 24,912 (31,455) -------------------------------- Effect of foreign currency translation on cash and cash equivalents (168) 153 Net increase in cash and cash equivalents ...................... 63,858 5,848 Cash and cash equivalents - beginning of period ....................... 53,081 77,324 -------------------------------- Cash and cash equivalents - end of period ............................. $ 116,939 $ 83,172 ================================ Supplemental cash flow information: Interest paid ..................................................... $ 86 $ 21 ================================ Income taxes paid ................................................. $ 19,399 $ -- ================================ Income taxes paid to affiliate .................................... $ -- $ 6,742 ================================
SEE ACCOMPANYING UNAUDITED CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. INVESTMENT TECHNOLOGY GROUP, INC. AND SUBSIDIARIES Page 8 of 20 CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) ORGANIZATION AND BASIS OF PRESENTATION The Consolidated Financial Statements include the accounts of Investment Technology Group, Inc. and its wholly-owned subsidiaries ("ITG"), which principally include: (1) ITG Inc., a broker-dealer in equity securities, (2) Investment Technology Group International Limited, which is a 50% partner in the ITG Europe joint venture, (3) ITG Australia Holdings Pty Limited, which is a 50% partner in ITG Pacific Holdings Pty Limited, (4) ITG Canada Corp., an institutional broker-dealer in Canada, and (5) Inference Group LLC, an internal asset management subsidiary. Our investments in the ITG Europe joint venture and ITG Pacific Holdings Pty Limited are accounted for using the equity method. We are a leading financial technology firm that provides a fully integrated set of value-added electronic equity analysis and trade execution tools. We provide services that help our clients optimize their portfolio construction and trading strategies, efficiently access liquidity in multiple markets and achieve superior, low-cost trade execution. Our clients are major institutional investors and broker/dealers. Our products and services include: POSIT, an electronic stock crossing system; QuantEX, a Unix-based decision-support, trade management and order routing system; ITG Platform, a PC-based order routing and trade management system; Electronic Trading Desk, an agency-only trading desk offering clients the ability to efficiently access multiple sources of liquidity; SmartServers, which offer server-based implementation of trading strategies; ITG Access, an internet browser-based order routing tool for sending orders to POSIT and the Electronic Trading Desk; ACE and TCA, a set of pre- and post-trade tools for systematically analyzing and lowering transaction costs; ITG/OPT, a computer-based equity portfolio selection system; and research, development, sales and consulting services to our clients. SPIN-OFF FROM JEFFERIES GROUP On April 27, 1999, we were effectively spun off from Jefferies Group, Inc. ("Jefferies Group"). The spin-off was effected through a series of transactions including our merger with and into Jefferies Group, with Jefferies Group surviving the merger and being renamed Investment Technology Group, Inc. The merger occurred following the transfer by Jefferies Group of substantially all of its assets and liabilities to its wholly-owned subsidiary ("New Jefferies"), and the pro rata distribution by Jefferies Group to its stockholders of all of the New Jefferies common stock. After these transactions, New Jefferies owned all of the assets of Jefferies Group other than Jefferies Group's equity interest in ITG, and Jefferies Group's existing stockholders owned all of the equity interest in New Jefferies. Following the merger, New Jefferies was renamed Jefferies Group, Inc., and, through its subsidiaries, carries on the businesses of Jefferies Group prior to the transactions (other than the businesses of our company). The merger and related transactions resulted in the stockholders of Jefferies Group becoming direct stockholders of our company and Jefferies Group ceasing to be our parent company. The merger was accounted for as a "merger of entities under common control" in accordance with generally accepted accounting principles and accordingly, reflected the historical cost basis of assets and liabilities of ITG. The consolidated financial statements reflect all adjustments, which are in the opinion of management, necessary for the fair presentation of the results for the interim periods and should be read in conjunction with our 1999 annual report on Form 10-K. FAIR VALUE OF FINANCIAL INSTRUMENTS Substantially all of our financial instruments are carried at fair value or amounts approximating fair value. Cash and cash equivalents, securities owned and certain receivables, are carried at fair value or contracted amounts which approximate fair value due to the short period to maturity and repricing characteristics. Similarly, liabilities are carried at amounts approximating fair value. Securities sold, not yet purchased, are valued at quoted market prices. INVESTMENT TECHNOLOGY GROUP, INC. AND SUBSIDIARIES Page 9 of 20 USE OF ESTIMATES ITG's management has made a number of estimates and assumptions relating to the reporting of assets, liabilities, revenues and expenses and the disclosure of contingent assets, liabilities, revenues and expenses to prepare these financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. RECLASSIFICATIONS Certain reclassifications have been made to the prior year's amounts to conform to the current year's presentation. ACCOUNTS PAYABLE AND ACCRUED EXPENSES Accounts payable and accrued expenses at September 30, 2000 and December 31, 1999 consisted of the following:
SEPTEMBER 30, DECEMBER 31, 2000 1999 ---------------- --------------- (DOLLARS IN THOUSANDS) Accounts payable and accrued expenses......................... $ 9,165 $ 11,754 Accrued compensation ......................................... 11,988 580 Deferred compensation ........................................ 12,433 9,424 Deferred options.............................................. - 2,280 Accrued soft dollars payable.................................. 10,463 6,688 Accrued rent expense.......................................... 2,629 2,733 ----------- ----------- Total ........................................................ $ 46,678 $ 33,459 =========== ===========
OTHER COMPREHENSIVE INCOME (LOSS) The following summarizes other comprehensive income (loss) as of September 30, 2000 (Dollars in thousands):
UNREALIZED CURRENCY HOLDING GAIN ON OTHER TRANSLATION SECURITIES, COMPREHENSIVE ADJUSTMENT AVAILABLE FOR SALE INCOME/(LOSS) ---------------- --------------------- ----------------- Pre-tax amount..................................... $ (168) $ (2,023) $ (2,191) Tax benefit........................................ - 895 895 ------------ ------------ --------------- Net of tax amount.................................. $ (168) $ (1,128) $ (1,296) ============ ============ =============== UNREALIZED HOLDING GAIN ON ACCUMULATED CURRENCY SECURITIES, OTHER TRANSLATION AVAILABLE FOR SALE, COMPREHENSIVE ADJUSTMENT NET OF TAX INCOME/(LOSS) ---------------- --------------------- ----------------- Balance at December 31,1999........................ $ (7) $ 1,128 $ 1,121 Change during period ended September 30, 2000......................... (168) (1,128) (1,296) ------------ ------------ --------------- Balance at September 30, 2000...................... $ (175) $ - $ (175) ============ ============ ===============
INVESTMENT TECHNOLOGY GROUP, INC. AND SUBSIDIARIES Page 10 of 20 EARNINGS PER SHARE Net earnings per share of common stock is based upon an adjusted weighted average number of shares of common stock outstanding. The diluted weighted average number of outstanding shares for the three months ended September 30, 2000 and September 24, 1999 was 31.7 million and 32.7 million, respectively. The diluted weighted average number of outstanding shares for the nine months ended September 30, 2000 and September 24, 1999 was 31.5 million and 32.1 million, respectively. The following is a reconciliation of the basic and diluted earnings per share computations for the three months ended September 30, 2000 and September 24, 1999.
THREE MONTHS ENDED ------------------------------- SEPTEMBER 30, SEPTEMBER 24, 2000 1999 --------------- -------------- (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) ------------------------------- Net income ...................................................... $15,444 $11,101 ======= ======= Shares of common stock and common stock equivalents: Average number of common shares used in basic computation .. 31,057 31,685 Effect of dilutive securities - options .................... 672 980 ------- ------- Average number of common shares used in diluted computation 31,729 32,665 ======= ======= Earnings per share: Basic ...................................................... $ 0.50 $ 0.35 ======= ======= Diluted .................................................... $ 0.49 $ 0.34 ======= =======
The following is a reconciliation of the basic and diluted earnings per share computations for the nine months ended September 30, 2000 and September 24, 1999.
NINE MONTHS ENDED ------------------------------- SEPTEMBER 30, SEPTEMBER 24, 2000 1999 --------------- -------------- (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) ------------------------------- Net income ...................................................... $49,028 $27,854 ======= ======= Shares of common stock and common stock equivalents: Average number of common shares used in basic computation .. 30,828 30,695 Effect of dilutive securities - options .................... 662 1,403 ------- ------- Average number of common shares used in diluted computation 31,490 32,098 ======= ======= Earnings per share: Basic ...................................................... $ 1.59 $ 0.91 ======= ======= Diluted .................................................... $ 1.56 $ 0.87 ======= =======
NET CAPITAL REQUIREMENT ITG Inc. is subject to the Uniform Net Capital Rule (Rule 15c3-1) under the Securities Exchange Act of 1934, which requires the maintenance of minimum net capital. ITG Inc. has elected to use the alternative method permitted by Rule 15c3- INVESTMENT TECHNOLOGY GROUP, INC. AND SUBSIDIARIES Page 11 of 20 1, which requires that ITG Inc. maintain minimum net capital equal to the greater of $250,000 or 2% of aggregate debit balances arising from customer transactions, as defined. At September 30, 2000, ITG Inc. had net capital of $75.1 million, which was $74.8 million in excess of required minimum net capital. CONTINGENCIES In 1998, we received a "30-day letter" from the IRS proposing certain adjustments which, if sustained, would result in a tax deficiency of approximately $9.6 million plus interest. The adjustments proposed relate to (i) the disallowance of deductions taken in connection with the termination of certain compensation plans at the time of our initial public offering in 1994 and (ii) the disallowance of tax credits taken in connection with certain research and development expenditures. On September 18, 2000, we entered into a closing agreement with the IRS with respect to the compensation plan deductions, whereby the IRS agreed that the deductions taken were allowable deductions. This agreement eliminates approximately $7.6 million of the $9.6 million potential tax deficiency raised by the IRS in 1998. We are continuing to pursue the resolution of the research and development tax credit issue and we believe that the ultimate resolution will not be material to the financial position of the company. Our company may continue to be liable for certain liabilities of our former parent, Jefferies Group, despite the express assignment of such liabilities to, and the express assumption of such liabilities by, New Jefferies. Pursuant to the distribution agreement, benefits agreement and tax sharing and indemnification agreement executed in connection with the spin-off, New Jefferies will be obligated to indemnify ITG for liabilities related to ITG's former parent and its subsidiaries, but not for liabilities related to our company. Under those agreements, ITG will be obligated to indemnify New Jefferies for liabilities related to our company. ITG's ability to recover any costs under such indemnity will depend upon the future financial strength of New Jefferies. At September 30, 2000 and December 31, 1999, we had outstanding capital contribution commitments to a limited partnership in the amount of $750,000 and $1,500,000, respectfully. DIVIDENDS Any future payments of dividends will be at the discretion of our Board of Directors and will depend on our financial condition, results of operations, capital requirements and other factors deemed relevant. INVESTMENT TECHNOLOGY GROUP, INC. AND SUBSIDIARIES Page 12 of 20 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL REVENUES: We generate substantially all of our revenues from the following four products and services, each contributing to our single line of business: o POSIT: a confidential electronic stock crossing system; o Electronic Trading Desk: an agency-only trading desk; o Client Site: front end software; o QuantEX: a Unix-based front-end software system providing market analysis, trade management and electronic connectivity to POSIT and multiple trade execution destinations; and o ITG Platform: a PC-based front-end software system providing market analysis, trade management and electronic connectivity to POSIT and multiple trade execution destinations. Revenues primarily consist of commissions from customers' use of our trade execution and analytical services. Because these commissions are paid on a per-transaction basis, revenues fluctuate from period to period depending on the volume of securities traded through our services. We record as POSIT revenue any order that is executed in the POSIT system regardless of the manner in which the order was submitted to POSIT. ITG collects a commission from each side of a trade matched in POSIT. We record as Electronic Trading Desk revenue any order that is handled by our trading desk personnel and executed at any trade execution destination other than POSIT. We record as Client Site revenue any order that is sent by our clients, through ITG's front-end systems but without assistance from the Electronic Trading Desk, to any third party trade execution destination. Other revenue includes interest and dividend income/expense, market gains/losses, financing costs resulting from temporary positions in securities assumed in the normal course of our agency trading business and fee income from the development of European software products. EXPENSES: Expenses consist of compensation and employee benefits, transaction processing, software royalties, occupancy and equipment, telecommunications and data processing services, net loss on long-term investments, spin-off costs and other general and administrative expenses. Compensation and employee benefits expenses include base salaries, bonuses, employment agency fees, part-time employee compensation, fringe benefits, including employer contributions for medical insurance, life insurance, retirement plans and payroll taxes, offset by capitalized software. Transaction processing expenses consist of floor brokerage and clearing fees and connection fees for use of certain third party execution services. Software royalties are payments to our POSIT joint venture partner, BARRA, Inc. Occupancy and equipment expenses include rent, depreciation, amortization of leasehold improvements, maintenance, utilities, occupancy taxes and property insurance. Telecommunications and data processing services include costs for computer hardware, office automation and workstations, data center equipment, market data services and voice, data, telex and network communications. Net loss on long-term investments includes amortization of goodwill and equity gain/loss on our ITG Europe, ITG Australia and Vostock (our joint venture with WIT Capital Corporation to market an online auction system for secondary and follow-on equity offerings). Spin-off costs include legal, accounting, consulting and various other expenses in connection with the spin-off from Jefferies Group and related transactions. Other general and administrative expenses include amortization of capitalized software and goodwill, legal, audit, tax, consulting and promotional expenses. INVESTMENT TECHNOLOGY GROUP, INC. AND SUBSIDIARIES Page 13 of 20 RESULTS OF OPERATIONS - NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED SEPTEMBER 24, 1999 The table below sets forth, certain items in the statement of operations expressed as a percentage of total revenues for the periods indicated:
NINE MONTHS ENDED -------------------------------- SEPTEMBER 30, SEPTEMBER 24, -------------------------------- 2000 1999 -------------------------------- Revenues: 100.0% 100.0% Commissions POSIT............................................ 51.3 56.9 Electronic trading desk.......................... 20.7 20.2 Client site...................................... 23.8 21.7 Other................................................ 4.2 1.2 Expenses: Compensation and employee benefits................... 24.8 22.8 Transaction processing............................... 13.7 14.1 Software royalties................................... 6.7 7.4 Occupancy and equipment.............................. 5.3 5.9 Telecommunications and data processing services...... 3.9 4.3 Net loss on long-term investments ................... 1.6 0.9 Spin-off costs ...................................... 0.0 4.1 Other general and administrative..................... 6.7 7.1 -------------------------------- Total expenses................................... 62.7 66.6 -------------------------------- Income before income tax expense.......................... 37.3 33.4 Income tax expense........................................ 16.4 16.4 -------------------------------- Net income................................................ 20.9 17.0 ================================
EARNINGS PER SHARE: Basic net earnings per share for the nine months ended September 30, 2000 ("First Nine Months 2000") increased $0.68, or 75%, from $0.91 to $1.59 for the nine months ended September 24, 1999 ("First Nine Months 1999"). Diluted net earnings per share increased $0.69, or 79%, from $0.87 to $1.56. Diluted net earnings per share for the First Nine Months 1999, excluding non-recurring charges of $6.7 million incurred in connection with our spin-off from Jefferies Group, were $1.05. There were no such spin-off charges in First Nine Months 2000. REVENUES: Total revenues increased $70.7 million, or 43%, from $163.5 million to $234.3 million. There were 184 trading days in the First Nine Months 1999 and 189 trading days in the First Nine Months 2000. Revenues per trading day increased by $351,000, or 39%, from $889,000 to $1,239,000. Revenues per employee increased $72,000, or 14%, from $524,000 to $596,000. POSIT, Electronic Trading Desk and Client Site revenues increased 39% over the First Nine Months 1999 as a result of providing our clients with broadened access to liquidity sources, such as linking to electronic communications networks ("ECNs"), and tools for understanding and minimizing trading costs. The increase in revenues reflects both an increase in trading volume from existing clients and an increase in the number of customers. INVESTMENT TECHNOLOGY GROUP, INC. AND SUBSIDIARIES Page 14 of 20 The number of shares crossed on the POSIT system increased 1.5 billion, or 33%, from 4.6 billion in the First Nine Months 1999 to 6.1 billion in the First Nine Months 2000. The number of shares crossed on the POSIT system per day increased 7.3 million, or 29%, from 25.1 million to 32.4 million. Electronic Trading Desk revenues increased 47%, as a result of volume increases including the impact of our Company becoming the clearing and execution broker for two large introducing brokers. Of Client Site revenues, our QuantEx and ITG Platform products increased 44%, representing 70% of the increase in Client Site revenues. The remaining increase was from customers for whom we developed custom connections to reach liquidity sources, primarily the NYSE's Super Designated Order Turn-around System ("DOT") and ECNs. Other revenues increased primarily from a gain recorded on the sale of our remaining investment in Versus Technologies, Inc. and increases in investment income arising from larger average interest-earning balances and improved rates of return. EXPENSES: Total expenses excluding income tax expense for the First Nine Months 2000 increased $38.0 million, or 35%, from $108.8 million in the First Nine Months 1999 to $146.8 million in the First Nine Months 2000. COMPENSATION AND EMPLOYEE BENEFITS: Salaries, bonuses and related employee benefits increased as a result of increases in headcount, financial performance based compensation and additional compensation necessary to attract and retain quality personnel. As of September 30, 2000 we had 393 employees, representing an increase of 26% or 81 employees since September 24, 1999. Approximately 57% of the increase in employees were staffed in technology, product development and production infrastructure. This is consistent with our ongoing effort to respond to continuous changes in the securities industry and demand for increased efficiencies by enhancing existing software and developing new software and services. In addition, the increase in headcount includes 18 employees staffed in ITG Canada Corp.. Average compensation and employee benefits expenses per person increased $28,000, or 23%, from $120,000 to $148,000. TRANSACTION PROCESSING: Transaction processing as a percentage of revenues decreased from 14.1% to 13.7% of revenues. Execution costs decreased as a result of a decrease in floor brokerage costs as we are no longer charged by NYSE Specialists for trades executed within five minutes. These savings were offset by increases in ECN related costs as we continue to expand our clients' access to new liquidity sources and increases in clearing costs related to volume increases. SOFTWARE ROYALTIES: Because software royalties are contractually fixed at 13% of POSIT revenues, the increase is wholly attributable to an increase in POSIT revenues. OCCUPANCY AND EQUIPMENT: We continue to enhance our infrastructure and add to our employee base. Depreciation/amortization, rent and maintenance contracts represented 91% of the increase. We expanded our research and development facility in Culver City, California in December 1999 and our New York headquarters in January 2000. We added facilities in Canada in June 2000 and Waltham, Massachusetts in April 2000. TELECOMMUNICATIONS AND DATA PROCESSING SERVICES: Increases in our client base and employee base have resulted in increased fees for additional client data services, including market data line connections, increases in communication charges for linking clients to ITG in New York and Boston, and increases in the costs associated with infrastructure improvements. NET LOSS ON LONG-TERM INVESTMENTS: The increase in loss on long-term investments primarily resulted from the start-up costs of Vostock combined with losses of our ITG Europe joint venture during its second full year of operations. INVESTMENT TECHNOLOGY GROUP, INC. AND SUBSIDIARIES Page 15 of 20 SPIN-OFF COSTS: The spin-off expenses in the First Nine Months 1999 were attributable to our legal, accounting, consulting and other expenses incurred for the spin-off and merger transactions, as discussed in "Condensed Notes to Consolidated Financial Statements - Spin-Off from Jefferies Group." The Spin-off was concluded in 1999 and as a result there are no associated costs in the First Nine Months 2000. OTHER GENERAL AND ADMINISTRATIVE: The increase in other general and administrative expenses primarily related to consulting and marketing costs geared towards developing new business opportunities. Additionally, subsequent to our spin-off, specified administrative services previously provided to us for a fixed monthly fee by Jefferies Group were performed by ITG. This change resulted in reduced administrative service fees offset by higher legal, audit and accounting fees. INCOME TAX EXPENSE: The decrease in the effective tax rate from 49.1% to 43.9% resulted primarily from non-deductible spin-off expenses, which were incurred in the First Nine Months 1999. RESULTS OF OPERATIONS - THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THREE MONTHS ENDED SEPTEMBER 24, 1999 The table below sets forth, certain items in the statement of operations expressed as a percentage of total revenues for the periods indicated:
THREE MONTHS ENDED -------------------------------- SEPTEMBER 30, SEPTEMBER 24, -------------------------------- 2000 1999 -------------------------------- Revenues: 100.0% 100.0% Commissions POSIT............................................ 49.6 57.5 Electronic trading desk.......................... 20.7 21.2 Client site...................................... 23.3 19.7 Other................................................ 6.4 1.6 Expenses: Compensation and employee benefits................... 25.6 20.9 Transaction processing............................... 13.9 14.1 Software royalties................................... 6.5 7.5 Occupancy and equipment.............................. 5.7 5.9 Telecommunications and data processing services...... 3.6 5.0 Net loss on long-term investments ................... 1.6 0.5 Spin-off costs ...................................... 0.0 (0.2) Other general and administrative..................... 6.7 7.6 -------------------------------- Total expenses................................... 63.6 61.3 -------------------------------- Income before income tax expense.......................... 36.4 38.7 Income tax expense........................................ 16.0 18.4 -------------------------------- Net income................................................ 20.4 20.3 ================================
INVESTMENT TECHNOLOGY GROUP, INC. AND SUBSIDIARIES Page 16 of 20 EARNINGS PER SHARE: Basic net earnings per share for the three months ended September 30, 2000 ("Third Quarter 2000") increased $0.15, or 43%, to $0.50 from $0.35 for the three months ended September 24, 1999 ("Third Quarter 1999"). Diluted net earnings per share increased $0.15, or 44%, from $0.34 to $0.49. REVENUES: Total revenues increased $21.1 million, or 38.7%, from $54.6 million to $75.7 million. There were 63 trading days in both the Third Quarter 1999 and the Third Quarter 2000. Revenues per trading day increased by $335,000, or 38.7%, from $866,000 to $1,201,000. Revenues per employee increased $18,000, or 10%, from $175,000 to $193,000. POSIT, Electronic Trading Desk and Client Site revenues increased 32% over the Third Quarter 1999 as a result of providing our clients with broadened access to liquidity sources, such as ECNs, and tools for understanding and minimizing trading costs. Other contributing factors were increases in trading volume from existing clients and an increase in the number of customers. The number of shares crossed on the POSIT system increased 0.3 billion, or 19%, from 1.6 billion in theThird Quarter 1999 to 1.9 billion. The number of shares crossed on the POSIT system per day increased 5.5 million, or 22%, from 24.9 million to 30.4 million. Electronic Trading Desk revenues increased 36%, as a result of volume increases including the impact of our Company becoming the clearing and execution broker for two large introducing brokers. Of Client Site revenues, our QuantEx and ITG Platform products increased 54% representing 77% of the increase in Client Site revenues. The remaining increase was from customers for whom we developed custom connections to reach liquidity sources, primarily DOT and ECNs. Other revenues increased primarily from a gain recorded on the sale of our remaining investment in Versus Technologies, Inc. and increases in investment income arising from larger average interest-earning balances and improved rates of return. EXPENSES: Total expenses excluding income tax expense for Third Quarter 2000 increased $14.8 million, or 44.2%, from $33.4 million in the Third Quarter 1999 to $48.2 million in the Third Quarter 2000. COMPENSATION AND EMPLOYEE BENEFITS: Salaries, bonuses and related employee benefits increased primarily due to growth in our employee base of 81 or 26% from 312 to 393. Factors contributing to the increase were the additional compensation necessary to attract and retain quality personnel and the increase in our financial performance upon which we model our bonus compensation. During theThird Quarter 2000, we added 12 staff members to ITG Canada Corp., which increased the total to 18 employees. Average compensation and employee benefits expenses per person increased $13,000, or 36%, from $36,000 to $49,000 on a quarter to quarter basis. TRANSACTION PROCESSING: Transaction processing as a percentage of revenues decreased from 14.1% to 13.9% of revenues. Execution costs decreased as a result of lower floor brokerage costs, as we are no longer charged by NYSE Specialists for trades executed within five minutes. These savings were offset by increases in ECN related costs as we continue to expand our clients' access to new liquidity sources and increases in clearing costs related to volume increases. INVESTMENT TECHNOLOGY GROUP, INC. AND SUBSIDIARIES Page 17 of 20 SOFTWARE ROYALTIES: Because software royalties are contractually fixed at 13% of POSIT revenues, the increase is wholly attributable to an increase in POSIT revenues. OCCUPANCY AND EQUIPMENT: Growth in our employee base and infrastructure enhancements were the primary reasons for cost increases. Depreciation/amortization on equipment purchases and leasehold improvements and increased rent expenses represented 97% of the increase. We expanded our research and development facility in Culver City, California in December 1999 and our New York headquarters in January 2000. We added facilities in Canada in June 2000 and in Waltham, Massachusetts in April 2000. TELECOMMUNICATIONS AND DATA PROCESSING SERVICES: Telecommunications and data processing costs remained relatively unchanged over the Third Quarter 1999. NET LOSS ON LONG-TERM INVESTMENTS: The increase in loss on long-term investments primarily resulted from losses of our ITG Europe joint venture during its second full year of operations and a gain recognized in the Third Quarter 1999 on the sale of our equity ownership in the Long View Group, Inc. in August 1998 which was held in escrow for one year. SPIN-OFF COSTS: The spin-off expenses adjustments in the Third Quarter 1999 were attributable to our legal, accounting, consulting and other expenses incurred for the spin-off and merger transactions, as discussed in "Condensed Notes to Consolidated Financial Statements - Spin-Off from Jefferies Group." The Spin-off was concluded in 1999 and as a result there are no associated costs in theThird Quarter 2000. OTHER GENERAL AND ADMINISTRATIVE: The increase in other general and administrative expenses primarily related to consulting and marketing costs from exploring new business opportunities and as a result of increasing our client base through new installations and deeper penetration in our existing client base. INCOME TAX EXPENSE The decrease in the effective tax rate from 47.5% to 43.9% resulted primarily from the spin-off tax expense adjustments in the Third Quarter 1999. There were no such spin-off adjustments in the Third Quarter 2000. LIQUIDITY AND CAPITAL RESOURCES Our liquidity and capital resource requirements result from our working capital needs, primarily consisting of compensation and benefits, transaction processing fees and software royalty fees. Historically, cash from operations has met all working capital requirements. A substantial portion of our assets are liquid, consisting of cash and cash equivalents or assets readily convertible into cash. We believe that our cash flow from operations and existing cash balances will be sufficient to meet our cash requirements. We generally invest our excess cash in money market funds and other short-term investments that generally mature within 90 days or less. Additionally, securities owned at fair value include highly liquid, common stock, variable rate municipal securities and auction rate preferred stock. At September 30, 2000, such cash equivalents amounted to $171.8 million and net receivables from brokers, dealers and other, of $ 22.2 million were due within 30 days. We also invest a portion of our excess cash balances in cash enhanced strategies through third parties and Inference Group, our internal asset management subsidiary, which we believe should yield higher returns without any significant effect on risk. As of September 30, 2000, we had investments in (i) limited partnerships (including through Inference Group) investing in marketable securities, (ii) a hedged convertible managed account and (iii) a venture capital fund amounting to $45.1 million in the aggregate. The limited partnerships employ various strategies, including hedged convertible strategies and long/short strategies to capitalize on short term price movements. Our managed account is employing a hedged INVESTMENT TECHNOLOGY GROUP, INC. AND SUBSIDIARIES Page 18 of 20 convertible strategy. We may engage in other cash management strategies from time to time. We classify the securities under our managed account within securities owned, at fair value and securities sold, not yet purchased, at fair value. Historically, all regulatory capital needs of ITG Inc. have been provided by cash from operations. We believe that cash flows from operations will provide ITG Inc. with sufficient regulatory capital. As of September 30, 2000, we had excess regulatory net capital of $74.8 million. Although we believe that the combination of our existing net regulatory capital and operating cash flows will be sufficient to meet regulatory capital requirements, a shortfall in net regulatory capital would have a material adverse effect on us. PART II. - OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - None. ITEM 5. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits Exhibit 27 - Financial Data Schedule. INVESTMENT TECHNOLOGY GROUP, INC. AND SUBSIDIARIES Page 19 of 20 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. INVESTMENT TECHNOLOGY GROUP, INC. --------------------------------- (Registrant) Date: NOVEMBER 9, 2000 By: /s/ HOWARD C. NAPHTALI ---------------------- ---------------------- Howard C. Naphtali Chief Financial Officer and Duly Authorized Signatory of Registrant INVESTMENT TECHNOLOGY GROUP, INC. AND SUBSIDIARIES Page 20 of 20 EX-27 2 a2030128zex-27.txt EXHIBIT 27
BD THE SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED STATEMENT OF FINANCIAL CONDITION AND THE CONSOLIDATED STATEMENT OF OPERATIONS AS OF SEPTEMBER 30, 2000 AND FOR THE NINE 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. 1,000 9-MOS DEC-31-2000 JAN-01-2000 SEP-30-2000 116,939 23,654 0 0 70,664 22,775 266,902 0 64,517 0 0 7,090 0 0 0 337 187,959 266,902 (68) 5,493 244,497 0 4,331 86 58,147 87,447 87,447 0 0 49,028 1.59 1.56
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