-----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, IJHh7ZAoyE+j8FO0yUzuDpmfN+2yzu3xp6CwgIbrBuz7U0B857uw4Pi+tDKM32RO xYWGx3lXXsNlVWcE1ZINTg== 0001047469-98-017707.txt : 19980504 0001047469-98-017707.hdr.sgml : 19980504 ACCESSION NUMBER: 0001047469-98-017707 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980327 FILED AS OF DATE: 19980501 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: INVESTMENT TECHNOLOGY GROUP INC CENTRAL INDEX KEY: 0000920424 STANDARD INDUSTRIAL CLASSIFICATION: SECURITY BROKERS, DEALERS & FLOTATION COMPANIES [6211] IRS NUMBER: 133757717 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-23644 FILM NUMBER: 98608318 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 FORM 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 March 27, 1998 Commission file number: 0-23644 INVESTMENT TECHNOLOGY GROUP, INC. (Exact Name of Registrant as Specified in Its Charter) DELAWARE 13-3757717 - ---------------------------------------- ------------------------------------ (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 April 28, 1998, the Registrant had 18,280,361 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 Statement of Financial Condition: March 27, 1998 (unaudited) and December 31, 1997....................... 3 Consolidated Statement of Operations (unaudited): Three Months Ended March 27, 1998 and March 28, 1997................... 4 Consolidated Statement of Changes in Stockholders' Equity (unaudited): Three Months Ended March 27, 1998...................................... 5 Consolidated Statement of Cash Flows (unaudited): Three Months Ended March 27, 1998 and March 28, 1997................... 6 Condensed Notes to Consolidated Financial Statements (unaudited).......... 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.................................................. 12 PART II OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K......................................... 14 Signature......................................................................... 15
FORWARD-LOOKING STATEMENTS In addition to the historical information contained throughout this Quarterly Report on Form 10-Q, there are forward-looking statements that reflect management's expectations for the future. A variety of important factors could cause results to differ materially from such statements. These factors are noted throughout this Quarterly Report on Form 10-Q and include: the actions of both current and potential new competitors, rapid changes in technology, financial market volatility, evolving industry regulation, cash flows into or redemptions from equity funds, effects of inflation, customer trading patterns, and new products and services. INVESTMENT TECHNOLOGY GROUP, INC. AND SUBSIDIARIES Page 2 of 15 PART I. - FINANCIAL INFORMATION Item 1. Financial Statements CONSOLIDATED STATEMENT OF FINANCIAL CONDITION (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
MARCH 27, DECEMBER 31, 1998 1997 ----------- ------------ (UNAUDITED) ASSETS Cash and cash equivalents................ $ 64,460 $ 51,263 Securities owned......................... - 358 Investment in limited partnership (at market; cost $10,000).............. 11,153 10,935 Trade receivables, net of allowance for doubtful accounts of $178 and $308. 7,752 7,071 Trade receivable from affiliate.......... 3,685 2,931 Due from affiliates...................... 1,170 1,365 Premises and equipment................... 18,753 19,506 Capitalized software..................... 6,930 5,973 Other assets............................. 9,075 9,857 Goodwill................................. 1,785 1,922 Deferred tax asset....................... 2,177 2,460 --------- --------- $126,940 $113,641 --------- --------- --------- --------- LIABILITIES AND STOCKHOLDERS' EQUITY Accounts payable and accrued expenses.... $ 18,972 $ 12,725 Software royalties payable............... 3,017 2,663 Securities sold, not yet purchased....... - 3 Due to affiliates........................ 1,618 2,999 Income taxes payable to affiliate........ 1,129 1,488 --------- --------- 24,736 19,878 --------- --------- STOCKHOLDERS' EQUITY: Preferred stock, par value $.01; shares authorized: 5,000,000; shares issued: none........................... - - Common stock, par value $.01; shares authorized: 30,000,000; shares issued: 18,869,294 and 18,818,468 at March 27, 1998 and December 31, 1997... 189 188 Additional paid-in capital............... 39,719 38,554 Retained earnings........................ 68,893 61,531 Common stock held in treasury, at cost; shares: 597,500 at March 27, 1998 and at December 31, 1997............... (6,510) (6,510) Accumulated other comprehensive income/(loss): Currency translation adjustment...... (87) - --------- --------- Total stockholders' equity............... 102,204 93,763 --------- --------- $126,940 $113,641 --------- --------- --------- --------- Book value per share..................... $ 5.59 $ 5.15 --------- --------- --------- ---------
SEE ACCOMPANYING UNAUDITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. INVESTMENT TECHNOLOGY GROUP, INC. AND SUBSIDIARIES Page 3 of 15 CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED ------------------------ MARCH 27, MARCH 28, 1998 1997 ------------------------ Revenues............................................... $ 41,387 $ 30,654 Expenses: Compensation and employee benefits................... 10,585 6,873 Transaction processing............................... 5,654 4,903 Software royalties................................... 2,985 2,382 Occupancy and equipment.............................. 2,797 1,858 Consulting........................................... 821 372 Telecommunications and data processing services...... 1,781 957 Loss on equity investments........................... 1,002 - Other general and administrative..................... 2,712 1,948 ------------------------ Total Expenses................................... 28,337 19,293 ------------------------ Earnings before income tax expense................... 13,050 11,361 Income tax expense..................................... 5,688 4,830 ------------------------ Net earnings........................................... $ 7,362 $ 6,531 ------------------------ ------------------------ Basic net earnings per share of common stock........... $ 0.40 $ 0.36 ------------------------ ------------------------ Diluted net earnings per share of common stock......... $ 0.38 $ 0.35 ------------------------ ------------------------ Basic weighted average shares outstanding.............. 18,226 18,254 ------------------------ ------------------------ Diluted weighted average shares and common stock equivalents outstanding.............................. 19,147 18,809 ------------------------ ------------------------
SEE ACCOMPANYING UNAUDITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. INVESTMENT TECHNOLOGY GROUP, INC. AND SUBSIDIARIES Page 4 of 15 CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED) FOR THE THREE MONTHS ENDED MARCH 27, 1998 (DOLLARS 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/(loss) Equity ------------------------------------------------------------------------------------ Balance at December 31, 1997............... $ - $ 188 $38,554 $61,531 $(6,510) $ - $ 93,763 Issuance of common stock in connection with the employee stock option plan (50,826 shares)........ 1 1,165 1,166 Comprehensive income/(loss): Net earnings........................... 7,362 7,362 Other comprehensive loss, net of tax: Currency translation adjustment.... (87) (87) -------- Comprehensive income/(loss)................ 7,275 ------------------------------------------------------------------------------------ Balance at March 27, 1998.................. $ - $ 189 $39,719 $68,893 $(6,510) $(87) $102,204 ------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------
SEE ACCOMPANYING UNAUDITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. INVESTMENT TECHNOLOGY GROUP, INC. AND SUBSIDIARIES Page 5 of 15 CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED) (DOLLARS IN THOUSANDS)
THREE MONTHS ENDED ----------------------------- MARCH 27, MARCH 28, 1998 1997 ----------------------------- Cash flows from operating activities: Net earnings..................................... $ 7,362 $ 6,531 Adjustments to reconcile net earnings to net cash provided by operating activities: Deferred income tax expense ................ 283 14 Depreciation and amortization............... 1,983 1,344 Unrealized gain on investment in limited partnership............................ (218) (123) Undistributed loss of affiliates............ 98 156 Provision for doubtful accounts receivable.. 24 21 Decrease (increase) in operating assets: Securities owned............................ 358 (573) Trade receivables........................... (705) (1,432) Trade receivables from affiliate............ (754) 239 Due from affiliates......................... 195 486 Other assets................................ 658 18 Increase (decrease) in operating liabilities: Accounts payable and accrued expenses....... 6,272 1,119 Software royalties payable.................. 354 75 Securities sold, not yet purchased.......... (3) (1,180) Due to affiliates........................... (1,381) 2,108 Income taxes payable to affiliate........... (359) (1,239) ----------------------------- Net cash provided by operating activities........................ 14,167 7,564 ----------------------------- Cash flows from financing activities: Purchase of common stock for treasury....... - (64) Issuance of common stock.................... 1,166 - ----------------------------- Net cash provided by (used in) financing activities.............. 1,166 (64) Cash flows from investing activities: Purchase of premises and equipment.......... (802) (4,210) Capitalization of software development costs.................................. (1,247) (411) ----------------------------- Net cash used in investing activities.. (2,049) (4,621) ----------------------------- Effect of foreign currency translation on cash and cash equivalents........................ (87) - Net increase in cash and cash equivalents... 13,197 2,879 Cash and cash equivalents - beginning of period.. 51,263 43,955 ----------------------------- Cash and cash equivalents - end of period........ $ 64,460 $ 46,834 ----------------------------- ----------------------------- Supplemental cash flow information: Interest paid............................... $ 13 $ 17 ----------------------------- ----------------------------- Income taxes paid to affiliate.............. $ 5,263 $ 6,055 ----------------------------- -----------------------------
SEE ACCOMPANYING UNAUDITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. INVESTMENT TECHNOLOGY GROUP, INC. AND SUBSIDIARIES Page 6 of 15 CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) BASIS OF PRESENTATION The Consolidated Financial Statements include the accounts of Investment Technology Group, Inc. and its wholly-owned subsidiaries (collectively, the "Company"), principally ITG Inc. ("ITG"), a Delaware corporation, registered as a broker-dealer in securities under the Securities Exchange Act of 1934, ITG Global Trading, Inc. ("Global Trading") which is a 50% partner in the Global POSIT joint venture, ITG Australia PTY Limited, which is a 50% partner in ITG Pacific holdings, ITG Ventures Inc., and ITG International Limited and its wholly-owned subsidiary ITG Israel. Jefferies Group, Inc. ("Jefferies Group") owned over 80% of the Company's common stock at March 27, 1998. All material intercompany balances and transactions are eliminated in consolidation. The consolidated financial statements reflect all adjustments which are, in the opinion of management, necessary for the fair statement of the results for the interim periods and should be read in conjunction with the Company's 1997 annual report on Form 10-K. BUSINESS SEGMENT Through its wholly-owned, broker/dealer subsidiary, ITG, the Company, is a leading provider of technology-based equity trading services and transaction research to institutional investors and brokers. ITG services help clients to access liquidity, execute trades more efficiently and make better trading decisions. GOODWILL In May 1991, Jefferies Group acquired Integrated Analytics Corporation ("IAC") and contributed its business to ITG in 1992. IAC's principal product, MarketMind, was used to develop the Company's QuantEX product. Goodwill, which represents the excess of purchase price for IAC over the fair value of the IAC net assets acquired, is amortized on a straight-line basis over ten years. The Company assesses the recoverability of this intangible asset by determining whether the amortization of the goodwill balance over its remaining life can be recovered through undiscounted future operating cash flows of the acquired operation. At March 27, 1998 and December 31, 1997, goodwill amounted to $1.8 million and $1.9 million, net of accumulated amortization of $3.5 million and $3.4 million, respectively. PREMISES AND EQUIPMENT Premises and equipment are carried at cost and are depreciated using the straight-line method over the estimated useful lives of the assets (generally three to five years). Leasehold improvements are amortized using the straight-line method over the lesser of the estimated useful lives of the related assets or the non-cancelable lease term. REVENUES Revenues primarily consist of commission revenues. TRADE RECEIVABLE FROM AFFILIATE consists of commissions receivable. Transactions in securities, commission revenues and related expenses are recorded on a trade-date basis. EXPENSES COMPENSATION AND EMPLOYEE BENEFITS include base salaries, bonuses, employment agency fees, part-time employees, commissions paid to Jefferies & Company, Inc. ("Jefferies & Co.") employees, the employee portion of capitalized software and fringe benefits, including employer contributions for medical insurance, life insurance, retirement plans and payroll taxes. TRANSACTION PROCESSING consists of floor brokerage and clearing fees. SOFTWARE ROYALTIES are payments to BARRA Inc. ("BARRA"), INVESTMENT TECHNOLOGY GROUP, INC. AND SUBSIDIARIES Page 7 of 15 the Company's joint venture partner in POSIT-Registered Trademark-(1). Royalty payments are calculated at an effective rate of 13% of adjusted POSIT revenues. The royalty payments related to Global Trading are calculated at an effective rate of 50% of pretax earnings. OCCUPANCY AND EQUIPMENT includes rent, depreciation, amortization of leasehold improvements, maintenance, utilities, occupancy taxes and property insurance. CONSULTING is for equity research, product development and other activities which the Company believes it is advantageous to out-source. 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. LOSS ON EQUITY INVESTMENTS includes goodwill amortization, equity loss pick-up, and initial start up costs associated with an European joint venture, the investment in the LongView Group and the Australian joint venture. OTHER GENERAL AND ADMINISTRATIVE includes goodwill amortization, legal, audit, tax and promotional expenses. INCOME TAXES The Company is a member of the Jefferies affiliated group ("Group") for purposes of filing a Federal income tax return (i.e., Jefferies Group owns more than 80% of the Company). The Company's tax liability is determined on a "separate return" basis. That is, the Company is required to pay to Jefferies Group its proportionate share of the consolidated tax liability plus any excess of its "separate" tax liability (assuming a separate tax return were to be filed by the Company) over its proportionate amount of the consolidated Group tax liability. Alternatively, Jefferies Group is required to pay the Company an "additional amount" for the amount by which the consolidated tax liability of the Group is decreased by reason of inclusion of the Company in the Group. Deferred tax assets and liabilities reflect the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to reverse. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Past effects of such changes in the rates were not material to the combined financial statements. CAPITALIZED SOFTWARE The Company capitalizes software development costs where technological feasibility of the product has been established. The establishment of technological feasibility and the ongoing assessment of recoverability of capitalized software development costs requires considerable judgment by management with respect to certain external factors, including, but not limited to, technological feasibility, anticipated future gross revenues, estimated economic life and changes in software and hardware technologies. The Company is amortizing capitalized software costs using the straight-line method over the estimated economic useful life, the average life of which is under two years. Amortization begins when the product is available for release to customers. CASH AND CASH EQUIVALENTS The Company generally invests its excess cash in money market funds and other short-term investments that generally mature within 90 days. At March 27, 1998 and December 31, 1997, such cash equivalents amounted to $61.3 million and $49.3 million, respectively. - ----------------------- (1) POSIT-Registered Trademark- is a registered service mark of the POSIT Joint Venture. INVESTMENT TECHNOLOGY GROUP, INC. AND SUBSIDIARIES Page 8 of 15 INVESTMENT IN LIMITED PARTNERSHIP Investment in limited partnership consists of an investment in TQA Arbitrage Fund L.P. ( the "Fund"), a Delaware limited partnership. The Fund invests primarily in convertible securities, and seeks capital appreciation from its convertible securities portfolio through a combination of convertible securities purchases and short sales of related stocks focusing on the current income and capital appreciation available from such strategies with convertibles. The Company may withdraw any or all of its investment from the Fund upon at least thirty days notice. Investment in limited partnership is valued at market, and unrealized gains or losses are reflected in revenues. FAIR VALUE OF FINANCIAL INSTRUMENTS Substantially all of the Company's financial instruments are carried at fair value or amounts approximating fair value. SECURITIES OWNED Securities owned are valued at market, and unrealized gains or losses are reflected in revenues. Securities owned consisted of municipal securities as of December 31, 1997. ACCOUNTS PAYABLE AND ACCRUED EXPENSES Accounts payable and accrued expenses at March 27, 1998 and December 31, 1997 consisted of the following;
MARCH 27, DECEMBER 31, 1998 1997 ------------------------- (DOLLARS IN THOUSANDS) Accounts payable and accrued expenses............ $ 7,564 $ 4,475 Accrued bonus expense............................ 5,323 2,849 Soft dollars payable ............................ 3,789 3,125 Accrued rent .................................... 2,296 2,276 ------------------------- Total ........................................... $ 18,972 $ 12,725 ------------------------- -------------------------
OTHER COMPREHENSIVE INCOME/(LOSS) The following summarizes other comprehensive income/(loss) for the quarter ended March 27, 1998 (dollars in thousands):
TAX NET PRE-TAX (EXPENSE) OF TAX AMOUNT OR BENEFIT AMOUNT ---------------------------------- Currency translation adjustment............. $ (87) $ - $ (87) ---------------------------------- Other Comprehensive income/(loss)........... $ (87) $ - $ (87) ---------------------------------- ----------------------------------
ACCUMULATED CURRENCY OTHER TRANSLATION COMPREHENSIVE ADJUSTMENT INCOME/(LOSS) ---------------------------------- Balance at December 31, 1997.................. $ - $ - Change during quarter ended March 27, 1998.... (87) (87) ---------------------------------- Balance at March 27, 1998..................... $ (87) $ (87) ---------------------------------- ----------------------------------
INVESTMENT TECHNOLOGY GROUP, INC. AND SUBSIDIARIES Page 9 of 15 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 average number of outstanding shares for the three months ended March 27, 1998 and March 28, 1997 were 18.2 million and 18.3 million, respectively. The following is a reconciliation of the basic and diluted earnings per share computations for the three months ended March 27, 1998 and March 28, 1997.
MARCH 27 MARCH 28 1998 1997 --------- --------- (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Net earnings for basic and diluted earnings per share....... $ 7,362 $ 6,531 -------- -------- -------- -------- Shares of common stock and common stock equivalents: Average number of common shares........................ 18,226 18,254 -------- -------- Average shares used in basic computation............... 18,226 18,254 Effect of dilutive securities--options................. 921 555 -------- -------- Average shares used in diluted......................... 19,147 18,809 -------- -------- -------- -------- Earnings per share: Basic.................................................. $ 0.40 $ 0.36 -------- -------- -------- -------- Diluted................................................ $ 0.38 $ 0.35 -------- -------- -------- --------
USE OF ESTIMATES Management of the Company 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 years' amounts to conform to the current year's presentation. JEFFERIES GROUP AND THE COMPANY ANNOUNCE INTENTION TO CONSIDER SEPARATING INTO TWO INDEPENDENT COMPANIES On March 17, 1998, Jefferies Group and the Company jointly announced that they are considering the separation of Jefferies & Co. and other Jefferies Group subsidiaries ("JEFCO") from the Company through a spin-off. If the separation is completed, Jefferies Group shareholders will own 100% of JEFCO and approximately 82.3% of the Company. The public Company shareholders will continue to own 17.7% of the Company. (The Company percentage ownership interests could change slightly as a result of the Company's stock repurchases or issuances before the transaction closing date.) The spin-off will be accomplished by a tax-free distribution of 100% of the shares of a new company, JEFCO, to Jefferies Group shareholders. Jefferies Group's 15 million shares of the Company would then be its only asset. The spin-off would be followed immediately by a tax-free merger of Jefferies Group and the Company, with the Company's public shareholders receiving shares of Jefferies Group. Jefferies Group would then be renamed Investment Technology Group, Inc. INVESTMENT TECHNOLOGY GROUP, INC. AND SUBSIDIARIES Page 10 of 15 The spin-off and restructuring transactions are contingent on a number of factors, including receipt of all Board of Directors and shareholder approvals of Jefferies Group and the Company, receipt of a favorable tax ruling from the Internal Revenue service and other required regulatory and contractual approvals. DIVIDENDS Any future payments of dividends will be at the discretion of the Company's Board of Directors and will depend on the Company's financial condition, results of operations, capital requirements and other factors deemed relevant. The Company is contemplating a special dividend in conjunction with the proposed spin-off. INVESTMENT TECHNOLOGY GROUP, INC. AND SUBSIDIARIES Page 11 of 15 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FIRST QUARTER 1998 VERSUS FIRST QUARTER 1997 (Dollars in millions, except as noted)
THREE MONTHS ENDED -------------------------------- % MARCH 27, 1998 MARCH 28, 1997 CHANGE CHANGE -------------- -------------- ------- ------- Revenues........................... $41.4 $30.7 $10.7 35% Number of Trading Days............. 59 60 (1) (2)% Revenues per Trading Day (Dollars in thousands)......... $701 $511 $190 37%
Increased revenues were attributed to the continued growth of POSIT, QuantEX(2) and the Company's Electronic Trading Desk. For the three months ended March 27, 1998 ("First Quarter 1998"), POSIT revenues were approximately 25% or $4.6 million above the comparable three months ended March 28, 1997 ("First Quarter 1997"). The number of shares per day traded via POSIT increased by approximately 4.5 million or 31% to 19.2 million in the First Quarter 1998 over the First Quarter 1997 amount of 14.7 million. The Company experienced a record breaking day on January 28, 1998, when 32 million shares were traded using POSIT. The Company's QuantEX revenues were approximately 15% or $0.9 million above the First Quarter 1997. The Electronic Trading Desk posted an 89% or $4.9 million increase over the First Quarter 1997. Other revenues increased by 66% or $0.3 million primarily from a 49% increase in interest income.
THREE MONTHS ENDED -------------------------------- % MARCH 27, 1998 MARCH 28, 1997 CHANGE CHANGE -------------- -------------- ------- ------- Compensation and employee benefits expense........................ $10.6 $6.9 $3.7 54% Number of employees at period end... 226 169 57 34% Revenues per employee (Dollars in thousands)......... $183 $182 $ 1 1% Compensation and employee benefits expense per employee (Dollars inthousands).......... $47 $41 $6 15%
The increase is primarily due to increases in salaries, bonuses and related employee benefits as a result of the Company's 34% growth in personnel, as well as increases in compensation due to market pressures to attract and retain quality personnel. The increase was slightly offset by capitalization of the employee portion of software costs from additional software projects.
THREE MONTHS ENDED -------------------------------- % MARCH 27, 1998 MARCH 28, 1997 CHANGE CHANGE -------------- -------------- ------- ------- Transaction processing expense.... $5.7 $4.9 $0.8 16% Transaction processing expense as a percentage of revenues..... 13.7% 16.0% (2.3)pts. (14)%
The increase is primarily due to the expense associated with a higher volume of transactions and shares in First Quarter 1998. However, as a percentage of revenues, transaction processing expenses declined by 2.3 points primarily from the Company's ability to leverage its technology by a mix of business in higher margin POSIT (no floor costs) and volume discounts realized with clearing and execution services. - -------------------------- (2) QuantEX is a registered trademark of the Company. INVESTMENT TECHNOLOGY GROUP, INC. AND SUBSIDIARIES Page 12 of 15
THREE MONTHS ENDED -------------------------------- % MARCH 27, 1998 MARCH 28, 1997 CHANGE CHANGE -------------- -------------- ------- ------- Software royalties expense..... $3.0 $2.4 $0.6 25% Software royalties expense as a percentage of POSIT revenues.................. 13.1% 13.1% - -%
Software royalties are a contractually fixed percentage of POSIT revenues.
THREE MONTHS ENDED -------------------------------- % MARCH 27, 1998 MARCH 28, 1997 CHANGE CHANGE -------------- -------------- ------- ------- Occupancy and equipment expense ... $2.8 $1.9 $0.9 47%
The increase was primarily the result of the Company's relocation of its corporate headquarters to 380 Madison Avenue in mid-June 1997. Increases in depreciation, amortization of leasehold improvements and rent expense accounted for the change.
THREE MONTHS ENDED -------------------------------- % MARCH 27, 1998 MARCH 28, 1997 CHANGE CHANGE -------------- -------------- ------- ------- Consulting expense................ $0.8 $0.4 $0.4 100%
The Company outsources certain expertise that is viewed as advantageous in implementing certain strategies and tactics. During the First Quarter 1998, costs were incurred in exploring joint venture opportunities, assisting in a major telecom conversion and for expenses incurred for the proposed Investment Technology Group, Inc./Jefferies & Co. spin-off.
THREE MONTHS ENDED -------------------------------- % MARCH 27, 1998 MARCH 28, 1997 CHANGE CHANGE -------------- -------------- ------- ------- Telecommunications and data processing services expense... $1.8 $1.0 $0.8 80%
The First Quarter 1998 increase stems from the Company's growth in both client base which requires market data lines and other telecom hookups, Company's increased headcount and facilities expansion.
THREE MONTHS ENDED -------------------------------- % MARCH 27, 1998 MARCH 28, 1997 CHANGE CHANGE -------------- -------------- ------- ------- Loss on equity investments........ $1.0 - $1.0 N/A
In the First Quarter 1998 the Company recorded losses from investments made to enhance the products and diversity of the Company via joint ventures worldwide. Costs include goodwill amortization, the Company's equity loss pick-up and initial start-up costs in conjunction with work on potential joint venture partnerships. INVESTMENT TECHNOLOGY GROUP, INC. AND SUBSIDIARIES Page 13 of 15
THREE MONTHS ENDED -------------------------------- % MARCH 27, 1998 MARCH 28, 1997 CHANGE CHANGE -------------- -------------- ------- ------- Other general and administrative expense ....................... $2.7 $1.9 $0.8 42%
The increase is largely attributable to increases in headcount of 57 employees. Business development costs increased by approximately $534,000 primarily from the Company's efforts to diversify its client base. Legal fees increased by approximately $219,000 primarily from an increased usage of legal counsel in connection with exploring possible joint ventures opportunities.
THREE MONTHS ENDED -------------------------------- % MARCH 27, 1998 MARCH 28, 1997 CHANGE CHANGE -------------- -------------- ------- ------- Income tax expense................ $5.7 $4.8 $0.9 19%
The increase is primarily due to the increase in pretax earnings and the increase in permanent tax adjustments, such as goodwill amortization related to equity investments, that were not present in the First Quarter 1997. The effective tax rate increased from 42.5% in the First Quarter 1997 to 43.6% in the First Quarter 1998. PART II. - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Exhibit 27 - Financial Data Schedule. (b) Reports on Form 8-K. On March 18, 1998, the Company filed a Form 8-K reporting the joint announcement by Jefferies Group, Inc. ("Group") and the Company of plans to separate Group's 100% owned subsidiary, Jefferies & Company, Inc. and Group's 82.3% owned subsidiary, the Company, through a proposed spin-off and related transactions. INVESTMENT TECHNOLOGY GROUP, INC. AND SUBSIDIARIES Page 14 of 15 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: May 1, 1998 By: /s/ John R. MacDonald ------------------------- John R. MacDonald Chief Financial Officer and Duly Authorized Signatory of Registrant INVESTMENT TECHNOLOGY GROUP, INC. AND SUBSIDIARIES Page 15 of 15 EX-27 2 EXHIBIT 27
BD THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLI- DATED STATEMENT OF FINANCIAL CONDITION AND THE CONSOLIDATED STATEMENT OF OPERA- TIONS AS OF MARCH 27, 1998 AND FOR THE 3 MONTHS THEN ENDED AND THE NOTES THERE- TO AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS FILED IN THE 1998 INVESTMENT TECHNOLOGY GROUP, INC. 1ST QUARTER 10-Q FILING. 1,000 3-MOS DEC-31-1998 JAN-01-1998 MAR-27-1998 64,460 12,607 0 0 11,153 18,753 126,940 0 21,989 0 0 0 0 0 0 189 102,015 126,940 0 800 40,587 0 0 13 10,585 13,050 13,050 0 0 7,362 0.40 0.38
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