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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999 COMMISSION FILE NUMBER 0--23644
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INVESTMENT TECHNOLOGY GROUP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE IRS NO. 95-2848406
(State of incorporation) (IRS Employer 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)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
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COMMON STOCK, $0.01 PAR VALUE NEW YORK STOCK EXCHANGE
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(Title of class) (Name of exchange on which registered)
Aggregate market value of the voting stock Number of shares outstanding of the
held by non-affiliates of the Registrant at Registrant's Class of common stock at March
March 13, 2000: 13, 2000:
$1,154,946,763 30,849,585
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: None
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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 / /
Indicate by check mark if disclosure of delinquent filers pursuant to item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this form 10-K or any amendment to this
form 10-K [ ]
DOCUMENTS INCORPORATED BY REFERENCE:
Proxy Statement relating to the 2000 Annual Meeting of Stockholders
(incorporated, in part, in Form 10-K Part III).
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1999 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PAGE
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PART I
Item 1. Business.................................................... 1
Item 2. Properties.................................................. 11
Item 3. Legal Proceedings........................................... 12
Item 4. Submission of Matters to a Vote of Security Holders......... 12
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder
Matters................................................... 13
Item 6. Selected Financial Data..................................... 14
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 16
Item 7A. Quantitative and Qualitative Disclosure About Market Risk... 22
Item 8. Financial Statements and Supplementary Data................. 24
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................. 47
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 47
Item 11. Executive Compensation...................................... 47
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................ 47
Item 13. Certain Relationships and Related Transactions.............. 47
PART IV
Item 14. Exhibits, Financial Statements, Schedules and Reports on
Form 8-K.................................................. 48
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.
i
FORWARD-LOOKING STATEMENTS
In addition to the historical information contained throughout this Annual
Report on Form 10-K, 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 and market conditions;
adverse changes or volatility in interest rates.
ii
PART I
ITEM 1. BUSINESS.
Investment Technology Group, Inc. ("ITG" or the "Company") was formed as a
Delaware corporation under the name Jefferies Group, Inc. on July 22, 1983 and
its principal subsidiaries 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, and (3) ITG Australia Holdings Pty
Limited, which is a 50% partner in ITG Pacific Holdings Pty Limited. We provide
equity trading services and transaction research to institutional investors and
brokers.
We are a full service trade execution firm that uses technology to increase
the effectiveness and lower the cost of trading. With an emphasis on ongoing
research, we offer the following services:
- POSIT: an electronic stock crossing system.
- QuantEX: a Unix-based decision-support, trade management and order routing
system.
- SmartServers: 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.
- Research: research, development, sales and consulting services to our
clients.
We generate revenues on a "per transaction" basis for all orders executed.
Orders are delivered to us from our "front-end" software products, QuantEX and
ITG Platform, as well as vendors' front-ends and direct computer-to-computer
links to customers. Orders may be executed on or through (1) POSIT, (2) the New
York Stock Exchange, (3) certain regional exchanges, (4) market makers,
(5) electronic communications networks ("ECNs") and (6) alternative trading
systems ("ATSs").
POSIT
POSIT was introduced in 1987 as a technology-based solution to the trade
execution needs of quantitative and passive investment managers. It has since
grown to serve the active trading and broker-dealer community. There are 492
clients currently using POSIT, including corporate and government pension plans,
insurance companies, bank trust departments, investment advisors, broker-
dealers and mutual funds.
POSIT is an electronic stock crossing system through which clients enter buy
and sell orders to trade single stocks and portfolios of equity securities among
themselves in a confidential environment. Orders may be placed in the system
directly via QuantEX, ITG Platform or computer-to-computer links, or indirectly
via the Electronic Trading Desk, which then enters the orders in the central
computer. We also work in partnership with vendors of other popular trading
systems, allowing users the flexibility to route orders directly to POSIT from
trading products distributed by Bridge Information Systems, BRASS, Bloomberg and
others.
POSIT currently accepts orders for approximately 19,600 different equity
securities, but may be modified, as the need arises, to include additional
equity securities. An algorithm is run at scheduled times to find the maximum
possible number of buy and sell orders that match or "cross." Typically, there
is an imbalance between the number of shares available to be bought or sold in
the system.
1
When this occurs, shares are allocated pro rata across participants, resulting
in partial executions. In addition, clients may specify constraints on the
portion of a portfolio that trades, such as the requirement that net cash
resulting from buys and sells remain within specified constraints. A client may
also specify a minimum number of shares to be executed for a given order. POSIT
prices trades at the midpoint of the best bid and offer on the primary market
for each security at the time of the cross, based on information provided
directly to the system by a third-party data vendor. There are currently six
scheduled crosses every business day, scheduled hourly, on the hour, between
10:00 a.m. and 3:00 p.m. (Eastern time). Each scheduled cross is normally
executed within a five-minute window selected randomly by the system.
POSIT provides the following significant benefits to clients:
- Confidential matching of buy and sell orders eliminates market impact. In
contrast, participants in traditional or other open markets are constantly
subject to the risk that disclosure of an order will unfavorably affect
price conditions.
- Access to the substantial pool of liquidity represented by POSIT orders.
- Clients pay a low transaction fee on completed transactions relative to
the industry average of approximately 5 cents per share. POSIT generates
revenue from transaction fees charged on each share crossed through the
system.
- Immediately after each cross, the system electronically provides clients
with reports of matched and unmatched (residual) orders. Clients may then
submit the unexecuted portion of their orders to subsequent POSIT matches,
choose to execute residual orders through other means or take advantage of
the Electronic Trading Desk services (described below).
In December 1997, we introduced a new version of POSIT that gives users the
option of customizing their trading objectives and specifying additional
constraints, while preserving the functionality of the existing POSIT system.
This capability is referred to collectively as a "POSIT strategy." This
capability allows orders that might otherwise be ineligible for POSIT to
participate in the match. POSIT strategies include ResRisk, which allows users
to control the risk of the unexecuted "residual" portfolio, and Pairs, which
makes execution of one trade contingent on the execution of another, at or
better than a given relative valuation. Portfolio funding, liquidation,
restructuring and rebalancing are some of the types of transactions that are
appropriate for execution using ResRisk. Risk arbitrage, statistical arbitrage
and portfolio substitution trades are examples of transactions that can be
implemented using the Pairs strategy. We also implement custom applications upon
request. We have obtained a patent on the technology underlying such POSIT
strategies.
2
The following graph illustrates the average daily volume of shares crossed
on POSIT since 1994:
AVERAGE DAILY POSIT SHARE VOLUME
(IN MILLIONS)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
SHARE PER DAY
1994 7.6
1995 9
1996 13.1
1997 14.5
1998 23.2
1999 25.7
QUANTEX
QuantEX is our Unix-based trade management system, an advanced tool for
technologically sophisticated clients transacting large volumes of orders.
QuantEX helps clients manage efficiently every step in the trading process: from
decision-making to execution to tracking of trade list status. From a dedicated
workstation at their desks, users can access fully-integrated real-time and
historical data and analytics, route and execute orders electronically, and
perform trade management functions. QuantEx is an integrated system that
supports multiple trade-related activities that have traditionally required the
use of several unrelated systems.
QuantEX is a rule-based decision support system that allows traders to
quantify their trading processes to create automated strategies. It is designed
to implement each client's trading styles and strategies and to apply them to
hundreds of stocks, portfolios or industry groups at once. With QuantEX, clients
can flag precisely the same kinds of moment-to-moment opportunities they would
ordinarily want to pursue, but do so much more efficiently and scientifically.
Rule-based strategies can be based on a wide range of quantitative models.
Passive traders can use QuantEx strategies to help minimize slippage from
various benchmarks, reduce tracking errors and achieve desired sector balances.
Active traders can build models to match a wide variety of trading approaches,
from pair trading to market-neutral algorithms to index or risk arbitrage.
QuantEx strategies can involve the human trader in each order decision, or can
fully automate the trading process, depending on the client's preference.
QuantEX analyzes lists of securities based on the individual user's trading
strategy. QuantEX enables clients to have access to our proprietary research,
including pre-trade, post-trade and intra-day analytical tools. QuantEX has
access to the ITG Data Center, which is a comprehensive historical database that
provides a variety of derived analytics based upon raw historical data. Our
support specialists translate the trading criteria developed by the client into
a set of rules for trading securities, which are then loaded into QuantEX.
QuantEX applies the client's proprietary trading rules to a continuous flow of
current market information on the list of securities selected by the user to
generate real-time decision support. A user's rules can be based on a wide range
of quantitative models or strategies, such as liquidity measures, technical
indicators, price benchmarks, tracking to specific
3
industries and sectors, pairs or other long or short strategies, index
arbitrage, risk measurements and liquidity parameters for trade urgency, size or
timing. These rules typically serve as a guide in support of a client's trading
decisions. In addition, QuantEX supports the ability to implement these trading
decisions automatically via an auto-trading strategy.
As such, QuantEX can automate the complex trade management requirements
typical of investment strategies that trade large volumes of securities through
multiple sources of liquidity. Orders can be electronically routed to multiple
markets, including the New York Stock Exchange, the American Stock Exchange and
certain regional stock exchanges, the Nasdaq National Market, POSIT, the
Electronic Trading Desk, over-the-counter market-makers, and selected
broker-dealers, ECNs and ATSs. We intend to create links to additional ATSs and
other liquidity sources where appropriate. Trades routed through QuantEX are
automatically tracked and summarized. Each order can be monitored by source of
execution, by trade list, by portfolio or globally with all other orders placed.
QuantEX's built-in trade allocation features provide a facility for automated
back-office clearance and settlement. QuantEX supports the Financial Information
eXchange ("FIX") messaging protocol and can link to other FIX compliant systems.
QuantEX also allows our clients to access our ISIS facility, an equity pre-
and post-trade analysis system. Via the ISIS facility, QuantEX users can request
both aggregate and stock-by-stock liquidity reports for a trade portfolio prior
to and during execution. Clients can generate standard reports or use a report
writer to design custom reports. Certain elements of these reports can also be
displayed directly on the QuantEX execution page and referenced in QuantEX
strategies. These pre-trade analyses help QuantEX users make decisions about how
best to trade a portfolio, for example by helping identify the most difficult
trades for special handling. The ISIS post-trade reporting facility allows
QuantEX users to compare actual executed prices to user-selected benchmark
prices in order to help assess trade execution quality. Available benchmarks
include the volume-weighted average price, closing price and opening price.
Our support specialists install the system, train users and provide ongoing
support for the use of QuantEX's order routing and analysis capabilities. Our
specialists are knowledgeable about portfolio management and trading as well as
the system's hardware and software. Our support team works closely with each
client to develop trading strategies and rules, explore new trading approaches,
provide system integration services and implement system upgrades and
enhancements.
Revenues are generated through commissions and transaction fees charged to
each trade electronically routed through QuantEX to the many destinations
available from the application. We do not derive royalties from the sale or
licensing of the QuantEX software. As of December 31, 1999, there were 103
installations of QuantEX at 52 client sites.
SMARTSERVERS
SmartServers are automated trading destinations that accept orders from
client workstations and execute them using a computerized trading strategy.
Clients may send orders via the ITG Platform or QuantEX, via direct connections
or via our Electronic Trading Desk. Each SmartServer is an automated trading
agent pre-programmed with a particular trading style. By using these agents,
traders can focus their attention on a subset of their orders, letting the
SmartServer trade the rest of the list.
Our first strategy-based server is the VWAP SmartServer. The VWAP
SmartServer is designed to allow clients to direct their orders to us to be
executed in a manner designed to closely track a security's volume-weighted
average price, or VWAP, throughout the trading day. The VWAP SmartServer
analyzes liquidity and market conditions and determines the appropriate order
size and order price to approximate the VWAP. Clients may choose to execute
relative to the VWAP price for the entire trading day, or for some subset of
that trading day.
4
ELECTRONIC TRADING DESK
The Electronic Trading Desk is a full-service agency execution group that
specializes in the use of our proprietary products, including extensive use of
POSIT for trade execution. For clients that do not send orders electronically to
POSIT, our account executives receive orders for POSIT matches by telephone, fax
or e-mail. The desk accepts orders until a POSIT match begins and after
completion of the match execution reports are given to clients.
In addition to order management services for POSIT, the Electronic Trading
Desk provides agency execution services. QuantEX and ITG Platform clients
deliver lists of orders electronically to our desk and, as orders are executed
by the desk, reports are automatically delivered electronically to the client's
terminal. Trading desk personnel are thereby able to assist customers with
decision support analyses generated by ITG Platform or QuantEX and with the
execution of trades. Clients give our traders single stock orders or lists of
orders to work throughout the day as well as unfilled orders that remain due to
order imbalances in POSIT matches.
For order completion outside of POSIT match windows, the Electronic Trading
Desk utilizes numerous sources of liquidity to complete trades. The trading desk
will actively seek the contra side of client orders by soliciting interest among
other clients, use QuantEX to route the orders to multiple markets, including
primary exchanges, regional exchanges, over-the-counter market makers, ECNs and
ATSs, or use our active order traders to execute the trade with floor brokers or
over-the-counter brokers.
The Portfolio Trading Group of our desk focuses on agency-only list and
program trading. By employing a step-by-step process that leverages technology
and access to multiple sources of liquidity, the Portfolio Trading Group seeks
to systematically achieve high quality execution for the client. A client
program is evaluated with a pre-trade analysis to determine aggregate portfolio
characteristics, liquidity ranking and market impact, and to quantify risk. The
group implements a number of sophisticated trading strategies using QuantEX to
meet execution objectives on an agency basis. After the execution is completed,
we provide the client with comprehensive reports analyzing execution results
utilizing ITG Research products.
ITG PLATFORM
ITG Platform, introduced in the first quarter of 1996, provides clients with
seamless connectivity from their desktop to a variety of execution destinations,
such as POSIT, the Electronic Trading Desk, our SmartServers, the New York Stock
Exchange and American Stock Exchange via SuperDOT, the Nasdaq National Market,
other over-the-counter market makers and selected ECNs. We intend to create
links to additional liquidity sources where appropriate. Orders may be corrected
or canceled electronically, and all reports are delivered electronically back to
the ITG Platform. The ITG Platform also supports special trading interfaces as
needed by POSIT strategies and SmartServers. Allocation information can be
associated with executions in the ITG Platform and delivered to us
electronically. ITG Platform has access to historical data through the ITG Data
Center, including a wide array of analytics, such as average historical share
volumes, dollar volumes, volatility and historical spread statistics. We
recently released a new version of ITG Platform which provides our clients
enhanced list trading capabilities and access to ECN order types. The new
version of ITG Platform also provides certain clients with access to real time
Nasdaq Level II data as well as the ability to communicate with us via the
Internet as well as through private networks.
The ITG Platform was intended for broad distribution to institutional
clients, so it was designed to run in conventional PC environments alongside
other applications, and be inexpensive to install, maintain and support.
5
Many technical features support these goals:
- Other applications can link to the ITG Platform using the FIX data
messaging protocol or the "drag and drop" method.
- ITG Platform incorporates a spreadsheet package, so users can extend their
trade blotter with custom calculations.
- Custom execution reports can be created to fit each user's requirements.
- ITG Platform can access Bridge and ILX quote data if those systems are
used by the client. In addition, we provide the Primark Speed Feed to
selected clients.
- New versions of ITG Platform are distributed automatically to client sites
and are easily installed with little or no user intervention required.
As of December 31, 1999, there were 296 installations of ITG Platform at 188
client sites.
ACE PRE-TRADE AND TCA POST-TRADE TRANSACTION COST ANALYSIS
Accessed through the Internet, ACE and TCA are equity pre- and post-trade
analysis systems. ACE and TCA users can request both aggregate and
stock-by-stock liquidity reports for a trade portfolio prior to and during
execution. Clients can generate standard reports built into the browser-based
applications. Reports can be viewed, printed or saved to a file.
ACE pre-trade analyses help users make decisions about how best to trade a
portfolio, for example by helping identify the most difficult trades for special
handling and by providing a reference point for evaluating principal trade
pricing. The TCA post-trade reporting facility allows users to compare actual
executed prices to user-selected benchmark prices in order to help assess trade
execution quality. Available benchmarks include the volume-weighted average
price, closing price and opening price.
ITG/OPT
ITG/Opt is a computer-based equity portfolio selection system that employs
advanced optimization techniques to help investors construct portfolios that
meet their investment objectives. Special features of the system make it
particularly useful to "long/short" and taxable investors, as well as any
investor seeking to control transaction costs. ITG/Opt is usually delivered as a
"turnkey" system that includes software and, in some cases, hardware and data.
Included in the service is telephone and on-site support to assist in training
and integration of the system with the user's other investment systems and
databases. In addition to its core portfolio construction capabilities, ITG/Opt
has powerful backtesting and batch scheduling features that permit efficient
researching of new or refined investment strategies. The system, which is
targeted at highly sophisticated investment applications, is offered primarily
to our largest clients. Typically, portfolios that are constructed using ITG/Opt
are executed via ITG, using one or more execution services, such as QuantEX, the
Electronic Trading Desk and POSIT.
6
ITG RESEARCH
In addition to its role in the firm's overall research and development
effort, Research provides both sales and consulting services to our clients and
prospective clients. Taken together, these activities are a key component of our
overall relationship development and maintenance activities.
In its sales capacity, Research introduces our clients and prospective
clients to the full range of products and services offered by our company and
provides information about features, pricing and technical/functional
specifications. The sales process includes development of an in-depth
understanding of client practices and requirements and the design and
presentation of integrated solutions based on our products.
Consulting encompasses a set of value-added services for the benefit of our
clients. These services break down into three main categories: product support,
development of customized trading strategies and provision of quantitative
analysis. The products supported by Research are QuantEX, ACE, TCA, ITG
Platform, POSIT, and ITG/Opt. Support activities include trading strategy design
and implementation, system integration, training and coordination of technical
support. Strategy development involves building customized QuantEx strategies
that automate the trading styles of specific clients. Quantitative analysis
covers a broad range of activities such as transaction cost analysis, investment
strategy simulations and provision of historical time series of proprietary
analytics. As part of its analysis activities, Research publishes and
distributes studies on topics of interest to our clients. In the same way users
of fundamental research compensate the traditional brokerages that provide such
research (i.e., directing commissions to such brokerage house), our clients
reward the firm for these value-added research services.
ITG EUROPE
We are pursuing the international market in a variety of ways, through
joint-ventures with strategic partners and the development of specially-tailored
versions of our services. In the fourth quarter of 1998, we and Societe Generale
finalized a 50/50 joint venture through the creation of Investment Technology
Group (Europe) Limited. On November 18, 1998, ITG Europe launched a new agency
brokerage operation that includes the operation of a European version of the
POSIT system which currently runs four daily matches of U.K.-listed equities, at
9:30 a.m., 11:00 a.m., 12:00 noon and 3:00 p.m., London time. ITG Europe plans
to begin matching equity securities in seven additional European countries
during the first quarter of 2000.
AUSTRALIAN POSIT
In 1997, we and Burdett, Buckeridge & Young finalized a 50/50 joint venture
through the creation of ITG Australia Limited, a new international brokerage
firm that applies our cost-saving execution and transaction research
technologies to Australian equity trading. ITG Australia is the culmination of
efforts commenced in 1995 when a license to POSIT was granted to Burdett, one of
Australia's leading brokerage firms. Through this joint venture we are pursuing
U.S. business from Australian investors and providing U.S. clients with access
to the Australian marketplace.
CANADIAN QUANTEX
We have developed a version of QuantEX for the Canadian markets. This
software is licensed on a perpetual, non-exclusive, royalty-free basis to VERSUS
Technologies, Inc., a Canadian technology-focused trade automation firm based in
Toronto. Pursuant to this license and a series of transactions with RBC Dominion
Securities, the predecessor owner of the VERSUS assets, we received an equity
interest in VERSUS. We and VERSUS have also entered into three agreements for
trade execution by us in POSIT and other United States markets: (a) a routing
agreement pursuant to which VERSUS routes orders of Canadian registered brokers
to us, (b) an introducing broker agreement pursuant to which VERSUS's registered
broker affiliate sends institutional orders to us and (c) an introducing broker
agreement pursuant to which VERSUS's registered broker affiliate sends retail
orders to us.
7
REGULATION
The securities industry in the United States is subject to extensive
regulation under both federal and state laws. The SEC is the federal agency
responsible for the administration of the federal securities laws. Regulation of
broker-dealers has been primarily delegated to self-regulatory organizations,
principally the National Association of Securities Dealers, Inc. and national
securities exchanges. The National Association of Securities Dealers has been
designated by the SEC as our self-regulatory organization. The self-regulatory
organizations conduct periodic examinations of member broker-dealers in
accordance with rules they have adopted and amended from time to time, subject
to approval by the SEC. Securities firms are also subject to regulation by state
securities administrators in those states in which they conduct business.
ITG Inc. is a registered broker-dealer in 49 states and the District of
Columbia.
Broker-dealers are subject to regulations covering all aspects of the
securities business, including sales methods, trade practices among
broker-dealers, use and safekeeping of clients' funds and securities, capital
structure of securities firms, record-keeping and conduct of directors, officers
and employees. Additional legislation, changes in the interpretation or
enforcement of existing laws and rules may directly affect the mode of operation
and profitability of broker-dealers. The SEC, self-regulatory organizations and
state securities commissions may conduct administrative proceedings, which can
result in censure, fine, the issuance of cease-and-desist orders or the
suspension or expulsion of a broker-dealer, its officers or employees. The
principal purpose of regulation and discipline of broker-dealers is the
protection of clients and the securities markets, rather than the protection of
creditors and stockholders of broker-dealers.
ITG Inc. is required by law to belong to the Securities Investor Protection
Corporation. In the event of a broker-dealer's insolvency, the Securities
Investor Protection Corporation fund provides protection for client accounts up
to $500,000 per customer, with a limitation of $100,000 on claims for cash
balances.
REGULATION ATS
Since the formation of the POSIT joint venture, POSIT had operated under a
"no-action" letter from the SEC staff that it would not recommend that the SEC
commence an enforcement action if POSIT were operated without registering as an
exchange. Since effectiveness of Regulation ATS on April 21, 1999, we have
operated POSIT as part of our broker-dealer operations in accordance with
Regulation ATS. Accordingly, POSIT is not registered with the SEC as an
exchange. There can be no assurance that the SEC will not in the future seek to
impose more stringent regulatory requirements on the operation of alternative
trading systems such as POSIT. In addition, certain of the securities exchanges
have actively sought to have more stringent regulatory requirements imposed upon
automated trade execution systems. There can be no assurance that Congress will
not enact legislation applicable to alternative trading systems.
NET CAPITAL REQUIREMENT
As a registered broker-dealer, ITG Inc. is subject to the SEC's uniform net
capital rule. The net capital rule is designed to measure the general integrity
and liquidity of a broker-dealer and requires that at least a minimum part of
its assets be kept in a relatively liquid form.
The net capital rule prohibits a broker-dealer doing business with the
public from allowing the aggregate amount of its indebtedness to exceed 15 times
its adjusted net capital or, alternatively, its adjusted net capital to be less
than 2% of its aggregate debit balances (primarily receivables from clients and
broker-dealers) computed in accordance with the net capital rule. We use the
latter method of calculation.
A change in the net capital rule, imposition of new rules or any unusually
large charge against capital could limit certain operations of ITG Inc., such as
trading activities that require the use of significant amounts of capital.
8
As of December 31, 1999, ITG Inc. had net capital of $39.3 million, which
exceeded minimum net capital requirements by $39.1 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 our business and
our results of operations.
CREDIT RISK
Although ITG Inc. is registered as a broker-dealer, we generally do not
perform traditional broker-dealer services. We do not act as a market-maker with
respect to any securities or otherwise act as a principal in any securities
transactions; we act only on an agency basis. Therefore, we do not have exposure
to credit risks in the way that traditional broker-dealers have such exposure.
The relatively low credit risk of our businesses is reflected in the minimal net
capital requirements imposed on ITG Inc. as a broker-dealer.
LICENSE AND RELATIONSHIP WITH BARRA
In 1987, Jefferies & Company, Inc. and BARRA Inc. formed a joint venture for
the purpose of developing and marketing POSIT. In 1993, Jefferies &
Company, Inc. assigned all of its rights relating to the joint venture and the
license agreement, discussed below, to us.
The technology used to operate POSIT is licensed to us pursuant to a
perpetual license agreement between us and the joint venture. The license
agreement grants us the exclusive right to use certain proprietary software
necessary to the continued operation of POSIT and a non-exclusive license to use
proprietary software that operates in conjunction with POSIT. We pay quarterly
royalties to the joint venture to use other proprietary software that operates
in conjunction with POSIT equal to specified percentages of the transaction fees
charged by us on each share crossed through POSIT. For the years ended
December 31, 1999, 1998 and 1997, BARRA received aggregate royalty payments from
the joint venture of $16.9 million, $15.2 million, and $9.8 million,
respectively, under the license agreement. Under the terms of the joint venture,
we and BARRA are prohibited from competing directly or indirectly with POSIT.
The license agreement permits BARRA on behalf of the joint venture to
terminate the agreement upon certain events of bankruptcy or insolvency or upon
an uncured breach by us of certain covenants, the performance of which are all
within our control. Although we do not believe that we will experience
difficulty in complying with our obligations under the license agreement, any
termination of the license agreement resulting from an uncured default would
have a material adverse effect on us.
Under the license agreement and the terms of the joint venture, BARRA
continues to provide certain support services to us in connection with the
operation of POSIT, including computer time, software updates and the
availability of experienced personnel. BARRA also provides support for the
development and maintenance of POSIT.
Under the terms of the joint venture, BARRA generally has the right to
approve any sale, transfer, assignment or encumbrance of our interest in the
joint venture. The POSIT joint venture may earn a royalty from licensing the
POSIT technology to other businesses. The joint venture licensed to us and
Burdett the right to use the POSIT technology for crossing equity securities in
Australia.
In the third quarter of 1997, BARRA finalized a joint venture with Prebon
Yamane to market POSIT-FRA, the first computer-based system for crossing forward
rate agreements. The POSIT joint venture licensed the POSIT software to Prebon.
POSIT-FRA provides a confidential electronic environment where major financial
institutions can match specific sets of forward rate agreements contracts to
offset interest rate risk, a condition that is pervasive in interest rate swap
portfolios.
In the fourth quarter of 1998, we finalized the formation of ITG Europe with
Societe Generale. The POSIT joint venture has licensed the POSIT software to ITG
Europe.
9
COMPETITION
The automated trade execution and analysis services offered by us compete
with services offered by leading brokerage firms and transaction processing
firms, and with providers of electronic trading and trade order management
systems and financial information services. POSIT also competes with various
national and regional securities exchanges and execution facilities, Nasdaq,
ATSs and ECNs such as Instinet, for trade execution services. Many of our
competitors have substantially greater financial, research and development and
other resources. We believe that our services compete on the basis of access to
liquidity, transaction cost and market impact cost reduction, timeliness of
execution and probability of trade completion. Although we believe that POSIT,
QuantEX, ITG Platform and the Electronic Trading Desk and Research services have
established certain competitive advantages, our ability to maintain these
advantages will require continued investment in the development of our services,
additional marketing activities and customer support services. There can be no
assurance that we will have sufficient resources to continue to make this
investment, that our competitors will not devote significantly more resources to
competing services or that we will otherwise be successful in maintaining our
current competitive advantages. In addition, we cannot predict the effect that
changes in regulation may have on the competitive environment. In particular,
the adoption of Regulation ATS may make it easier for securities exchanges,
Nasdaq or others to establish competing trading systems.
RESEARCH AND PRODUCT DEVELOPMENT
We believe that fundamental changes in the securities industry have
increased the demand for technology-based services. We devote a significant
portion of our resources to the development and improvement of these services.
Important aspects of our research and development effort include enhancements of
existing software, the ongoing development of new software and services and
investment in technology to enhance our efficiency. The software programs which
are incorporated into our services, are subject, in most cases, to copyright
protection. Research and development costs were $9.7 million, $8.6 million and
$5.3 million for 1999, 1998 and 1997, respectively.
In connection with such research and product development and capital
expenditures to improve other aspects of our business, we incur substantial
expenses that do not vary directly, at least in the short term, with
fluctuations in securities transaction volumes and revenues. In the event of a
material reduction in revenues, we may not reduce such expenses quickly and, as
a result, we could experience reduced profitability or losses. Conversely,
sudden surges in transaction volumes can result in increased profit and profit
margin. To ensure that we have the capacity to process projected increases in
transaction volumes, we have historically made substantial capital and operating
expenditures in advance of such projected increases, including during periods of
low transaction volumes. In the event that such growth in transaction volumes
does not occur, the expenses related to such investments could, as they have in
the past, cause reduced profitability or losses.
We work closely with BARRA on the development of POSIT enhancements. We
expect to continue this level of investment to improve existing services and
continue the development of new services.
DEPENDENCE ON PROPRIETARY INTELLECTUAL PROPERTY; RISKS OF INFRINGEMENT
Our success is dependent, in part, upon our proprietary intellectual
property. We generally rely upon patents, copyrights, trademarks and trade
secrets to establish and protect our rights in our proprietary technology,
methods and products. A third party may still try to challenge, invalidate or
circumvent the protective mechanisms that we select. We cannot assure that any
of the rights granted under any patent, copyright or trademark we may obtain
will protect our competitive advantages. In addition, the laws of some foreign
countries may not protect our proprietary rights to the same extent as the laws
of the United States.
In the past several years, there has been a proliferation of so-called
"business method patents" applicable to the computer and financial services
industries. News articles have also reported that there
10
has been a substantial increase in the number of such patent applications filed.
Under current law, U.S. patent applications remain secret for 18 months and may,
depending upon where else such applications are filed, remain secret until
issuance of a patent. In light of these factors, it is not economically
practicable to determine in advance whether our products or services may
infringe the present or future patent rights of others. We believe that factors
such as technological and creative skills of our personnel, new product
developments, frequent product enhancements, name recognition and reliable
product maintenance are essential to establishing and maintaining a
state-of-the-art technological system. There can be no assurance that we will be
able to protect our technology from disclosure or that others will not develop
technologies that are similar or superior to our technology. It is likely that
from time to time, we will receive notices from others of claims or potential
claims of intellectual property infringement or we may be called upon to defend
a joint venture partner, customer, vendee or licensee against such third party
claims. Responding to these kinds of claims, regardless of merit, could consume
valuable time, result in costly litigation or cause delays, all of which could
have a material adverse effect on us. Responding to these claims could also
require us to enter into royalty or licensing agreements with the third parties
claiming infringement. Such royalty or licensing agreements, if available, may
not be available on terms acceptable to us.
In February 1999, we became aware of patents purportedly owned by Belzberg
Financial Markets & News International Inc. and Sydney Belzberg, an officer of
that company (the "Belzberg Patents"). One or more of the Belzberg Patents may
relate to the devices, means and/or methods that we and/or our customers,
licensees or joint venture partners use in the conduct of business. On March 5,
1999, a Canadian licensee of some of our technology, received a letter asserting
that the licensee was infringing one of the Belzberg Patents. The licensee has
denied the claims of infringement and has asserted that the Belzberg Patent at
issue is invalid or unenforceable. Under certain conditions, we may have a duty
to defend or indemnify the licensee for any costs or damages arising out of an
infringing use of the technology we have licensed to them. We are monitoring the
matter and may participate in any challenge to the Belzberg Patent the licensee
may make.
We are unaware of any actual claims of patent infringement leveled against
us or any of our customers or joint venture partners by any of the title owners
of the Belzberg Patents. Based upon our review to date we believe that any such
claims arising out of the Belzberg Patents would be without merit and we would
vigorously defend any such claim, including, if warranted, initiating legal
proceedings. However, intellectual property disputes are subject to inherent
uncertainties and there can be no assurance that any potential claim would be
resolved favorably to us or that it would not have a material adverse affect on
us. We will monitor the Belzberg Patent situation and take action accordingly.
EMPLOYEES
As of December 31, 1999, we employed 318 personnel.
ITEM 2. PROPERTIES
Our principal offices are located at 380 Madison Avenue in New York City. We
currently lease the entire 4(th) floor and part of the 7(th) floor or
approximately 61,024 square feet of office space. In anticipation of future
expansion we have also leased a portion of the 5(th) floor (approximately 12,726
square feet of office space). This additional space on the 5(th) floor and a
portion of the 7(th) floor is currently being sublet. The lease payments as
compared to the rental income for the 5(th) and 7(th) floors, will have an
immaterial effect upon our operating results. The fifteen-year lease terms for
the 4(th) and 5(th) floors and the thirteen-year lease term for the 7(th) floor
expire in January 2013.
We also maintain a research, development and technical support services
facility in Culver City, California where we occupy approximately 48,202 square
feet of office space. We have leased an additional 23,520 square feet in this
facility, which we currently sublet. The lease payments as compared
11
to the rental income will have an immaterial effect upon our operating results.
We lease the California facility pursuant to lease agreements that expire
between December 2005 and April 2006.
Additionally, we also maintain a "hot" backup and regional office for
Financial Engineering Research and QuantEX support in Boston, Massachusetts
where we occupy approximately 10,588 square feet of office space. The ten-year
lease term for this space expires in April 2005.
During 1999, we opened a research facility in Herzelya, Israel where we
occupy approximately 5,712 square feet of office space. We lease the Israel
space pursuant to a four-year lease agreement that expires in November 2003.
ITEM 3. LEGAL PROCEEDINGS
In 1998, we received a "30-day letter" 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.
In February 1999, we became aware of patents purportedly owned by Belzberg
Financial Markets & News International Inc. and Sydney Belzberg, an officer of
that company (the "Belzberg Patents"). One or more of the Belzberg Patents may
relate to the devices, means and/or methods that we and/or customers, licensees
or joint venture partners use in the conduct of business. On March 5, 1999, a
Canadian licensee of some of our technology, received a letter asserting that
the licensee was infringing one of the Belzberg Patents. The licensee has denied
the claims of infringement and has asserted that the Belzberg Patent at issue is
invalid or unenforceable. Under certain conditions, we may have a duty to defend
or indemnify the licensee for any costs or damages arising out of an infringing
use of the technology we have licensed to them. We are monitoring the matter and
may participate in any challenge to the Belzberg Patent the licensee may make.
We are unaware of any actual claims of patent infringement leveled against
us or any of our customers or joint venture partners by any of the title owners
of the Belzberg Patents. Based upon our review to date we believe that any such
claims arising out of the Belzberg Patents would be without merit and we would
vigorously defend any such claim, including, if warranted, initiating legal
proceedings. However, intellectual property disputes are subject to inherent
uncertainties and there can be no assurance that any potential claim would be
resolved favorably to us or that it would not have a material adverse affect on
us. We will monitor the Belzberg Patent situation and take action accordingly.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the
fourth quarter ended December 31, 1999.
12
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
COMMON STOCK DATA
Our common stock was quoted on the Nasdaq National Market under the symbol
"ITGI" until April 26, 1999. Effective April 27, 1999, and in connection with
our spin-off from Jefferies Group, Inc., our common stock split based upon a
1.5955 to 1 exchange ratio and began trading on the New York Stock Exchange
under the symbol "ITG".
The following table sets forth, for the periods indicated, the range of the
high and low closing sales prices per share of our common stock as reported on
the Nasdaq National Market or the New York Stock Exchange, as applicable.
NASDAQ(1) NYSE
------------------- -------------------
HIGH LOW HIGH LOW
-------- -------- -------- --------
1998
First Quarter............................................. $23.50 $15.28 N/A N/A
Second Quarter............................................ 22.25 15.98 N/A N/A
Third Quarter............................................. 21.31 17.08 N/A N/A
Fourth Quarter............................................ 38.90 11.60 N/A N/A
1999
First Quarter............................................. 43.53 22.96 N/A N/A
Second Quarter (through April 26)......................... 43.28 31.91 N/A N/A
Second Quarter (from April 27)............................ N/A N/A $46.98 $29.24
Third Quarter............................................. N/A N/A 35.40 22.31
Fourth Quarter............................................ N/A N/A 28.55 19.27
- ------------------------
(1) High and low closing sales prices per share of our common stock as
reported on the Nasdaq National Market have been adjusted to reflect our
common stock split in connection with the spin-off at an exchange ratio of
1.5955 to 1.
On March 13, 2000, the closing sales price per share for our common stock as
reported on the New York Stock Exchange was $37.44. On March 13, 2000, we
believe that our common stock was held by approximately 4,700 stockholders of
record or through nominees in street name accounts with brokers.
In connection with our spin-off from Jefferies Group, Inc. we paid a special
cash dividend of $4.00 per share to each stockholder of record as of April 20,
1999. Our dividend policy is to retain earnings to finance the operations and
expansion of our businesses. We do not anticipate paying any cash dividends on
our common stock in the foreseeable future.
13
ITEM 6. SELECTED FINANCIAL DATA
The selected Consolidated Statement of Operations data and the Consolidated
Statement of Financial Condition data presented below as of and for each of the
years in the five-year period ended December 31, 1999, are derived from our
consolidated financial statements, which financial statements have been audited
by KPMG LLP, independent auditors. Earnings per share information prior to 1997
has been retroactively restated to conform with the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 128, EARNINGS PER SHARE, and earnings per share information prior
to 1999 has been retroactively restated to reflect our spin-off from Jefferies
Group, Inc. See Note 1, ORGANIZATION AND BASIS FOR PRESENTATION--SPIN-OFF FROM
JEFFERIES GROUP, in the Notes to Consolidated Financial Statements on page 31.
Such data should be read in connection with the consolidated financial
statements contained on pages 24 through 46.
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
CONSOLIDATED STATEMENT OF OPERATIONS DATA
Total revenues............................. $232,044 $212,205 $137,042 $111,556 $72,381
Total expenses............................. 149,183 131,270 89,782 70,555 47,493
-------- -------- -------- -------- -------
Income before income taxes................. 82,861 80,935 47,260 41,001 24,888
Income tax expense......................... 37,435 37,541 20,343 17,666 9,983
-------- -------- -------- -------- -------
Net income................................. $ 45,426 $ 43,394 $ 26,917 $ 23,335 $14,905
======== ======== ======== ======== =======
Basic net earnings per share of common
stock.................................... $ 1.48 $ 1.48 $ 0.93 $ 0.80 $ 0.51
======== ======== ======== ======== =======
Diluted net earnings per share of common
stock.................................... $ 1.42 $ 1.41 $ 0.89 $ 0.79 $ 0.51
======== ======== ======== ======== =======
Basic weighted average shares outstanding
(in millions)............................ 30.7 29.3 29.0 29.2 29.5
Diluted weighted average shares and common
stock equivalents outstanding (in
millions)................................ 31.9 30.8 30.2 29.7 29.5
CONSOLIDATED STATEMENT OF FINANCIAL
CONDITION DATA:(1)
Total assets............................... $179,488 $180,706 $113,641 $ 82,798 $55,318
Total stockholders' equity................. $115,652 $143,709 $ 93,763 $ 67,093 $45,479
OTHER SELECTED FINANCIAL DATA:
Revenues per trading day (in thousands).... $ 921 $ 842 $ 542 $ 439 $ 287
Shares executed per day (in millions)...... 46 43 27 22 15
Revenues per average number of employees
(in thousands)........................... $ 802 $ 888 $ 733 $ 814 $ 689
Average number of employees................ 290 239 187 137 105
Total number of customers(1,2)............. 572 535 452 417 354
POSIT(2)................................. 492 490 414 396 330
QuantEX(3)............................... 52 52 43 55 81
ITG Platform(3).......................... 188 140 48 36 N/A
Total number of customer
installations:(1,3)
QuantEX.................................. 103 97 84 109 97
ITG Platform............................. 296 201 69 67 N/A
Return on average stockholders' equity..... 34.4% 37.4% 33.9% 45.5% 39.3%
Book value per share(4).................... $ 3.86 $ 4.85 $ 3.23 $ 2.30 $ 1.46
Tangible book value per share(4)........... $ 3.83 $ 4.80 $ 3.16 $ 2.22 $ 1.36
Price to earnings ratio using diluted net
earnings per share of common stock....... 19.9 27.6 19.7 15.3 11.4
14
The following graph represents the number of shares ITG Inc. executed as a
percentage of the market volume in the U.S. market since 1994.(5)
ITG VOLUME AS PERCENTAGE OF MARKET VOLUME
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
SHARE PER DAY
1994 1.7
1995 1.9
1996 2.26
1997 2.24
1998 2.94
1999 2.45
- ------------------------
(1) Numbers are as of December 31(st) of each year.
(2) Total customers and POSIT customers include those customers who have
generated revenues in excess of $1,000 in each year.
(3) For the years ended December 31, 1999, 1998 and 1997, QuantEx and ITG
Platform customers and customer installations include those customers and
installations that have either (a) traded 100,000 shares in the last quarter
of each calendar year or (b) traded shares on at least 12 different days
during such quarter. For the years ended December 31, 1996 and 1995, QuantEx
and ITG Platform customers and customer installations include those
customers who have generated revenues in excess of $1,000 in each year
(4) The prior years have been restated to reflect the Company's spin-off from
Jefferies Group, Inc. See Note 1, ORGANIZATION AND BASIS FOR
PRESENTATION--SPIN-OFF FROM JEFFERIES GROUP, in the Notes to Consolidated
Financial Statements on page 31.
(5) The percentages on the graph are total ITG shares executed divided by the
"market" volume. Total ITG shares executed includes total POSIT shares,
QuantEX shares and shares executed by the Electronic Trading Desk. Market
volume includes shares executed by and as provided by the New York Stock
Exchange and Nasdaq. Market volume excludes ITG shares executed.
15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction with our
consolidated financial statements, including the notes thereto.
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.
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 gains on the sale of equity investments, as
offset by amortization of goodwill, equity gain/loss and initial start-up costs.
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.
16
RESULTS OF OPERATIONS
The table below sets forth certain items in the statement of income
expressed as a percentage of revenues for the periods indicated:
YEAR ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
Revenues:................................................... 100.0% 100.0% 100.0%
Commissions
POSIT................................................... 55.7 55.1 55.0
Electronic trading desk................................. 20.5 23.4 22.0
Client.................................................. 22.0 19.9 22.0
Other..................................................... 1.8 1.6 1.0
Expenses:
Compensation and employee benefits........................ 22.3 24.3 22.2
Transaction processing.................................... 13.9 12.7 15.6
Software royalties........................................ 7.3 7.2 7.2
Occupancy and equipment................................... 5.7 5.6 6.7
Telecommunications and data processing services........... 4.1 3.8 4.8
Net loss on long-term investments......................... 1.1 0.1 0.2
Spin-off costs............................................ 2.8 0.9 0.0
Other general and administrative.......................... 7.1 7.3 8.8
Total expenses.......................................... 64.3 61.9 65.5
Income before income tax expense............................ 35.7 38.1 34.5
Income tax expense.......................................... 16.1 17.7 14.8
Net income.................................................. 19.6 20.4 19.6
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
EARNINGS PER SHARE
Basic net earnings per share for both 1999 and 1998 were $1.48. Diluted net
earnings per share increased $0.01, or 1%, from $1.41 to $1.42. Diluted net
earnings per share for 1999 and 1998, excluding non-recurring charges (net of
tax benefits) of $3.9 million and $1.9 million, respectively, incurred in
connection with our spin-off from Jefferies Group, Inc. were $1.54 and $1.47,
respectively.
REVENUES
Total revenues increased $19.8 million, or 9%, from $212.2 million to
$232.0 million. There were 252 trading days in both 1998 and 1999. Revenues per
trading day increased by $79,000, or 9%, from $842,000 to $921,000. Revenues per
employee decreased $83,000, or 10%, from $813,000 to $730,000.
The increases in POSIT and Client revenues were attributable to an increase
in trading volume by existing customers and an increase in the number of
customers. The number of shares crossed on the POSIT system increased
0.7 billion, or 12%, from 5.8 billion to 6.5 billion. The number of shares
crossed on the POSIT system per day increased 2.5 million, or 11%, from
23.2 million to 25.7 million. In addition, on both June 24, and July 15, 1999, a
record breaking 49.7 and 59.9 million shares were crossed on the POSIT system,
respectively. Of Client revenues, ITG Platform revenue increased 169%
representing 55% of the increase in Client revenues. Electronic Trading Desk
revenues decreased due to a number of factors, including, our clients winning
fewer portfolio transitions, increased competition from principal bids and lower
turnover of portfolios for some of our clients. 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
17
offset by increased financing costs resulting from temporary positions in
securities assumed in the normal course of our agency trading business.
EXPENSES
Total expenses excluding income tax expense for 1999 increased
$17.9 million, or 14%, from $131.3 million to $149.2 million.
The following table itemizes expenses by category (in thousands):
YEAR ENDED
DECEMBER 31,
1999 1998 CHANGE % CHANGE
-------- -------- -------- --------
Compensation and employee benefits....................... $51,717 $51,462 255 0.5%
Transaction processing................................... 32,282 26,920 5,362 19.9
Software royalties....................................... 16,851 15,247 1,604 10.5
Occupancy and equipment.................................. 13,295 11,886 1,409 11.9
Telecommunications and data processing services.......... 9,428 8,138 1,290 15.9
Net loss on long-term investments........................ 2,674 204 2,470 1,210.8
Spin-off costs........................................... 6,516 1,936 4,580 236.6
Other general and administrative......................... 16,420 15,477 943 6.1
Income taxes............................................. 37,435 37,541 (106) (0.3)
COMPENSATION AND EMPLOYEE BENEFITS: Salaries, bonuses and related employee
benefits increased primarily due to growth in our employee base of 22% from 261
to 318, and additional compensation necessary to attract and retain quality
personnel. Approximately 70% 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 decreased $34,000, or 17%, from $197,000
to $163,000.
TRANSACTION PROCESSING: Transaction processing as a percentage of revenues
increased from 12.7% to 13.9% of revenues. Ticket charges increased 23%,
primarily as a result of customers allocating transactions to a larger number of
accounts. With only a 9% increase in execution volume, we did not realize
significant savings from volume-discounted clearing and execution costs.
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: The increase in headcount, infrastructure
enhancements and costs to address potential problems related to the Year 2000
issue resulted in increased equipment purchases and the associated depreciation
and maintenance expenses. In addition, the expansion of our research and
development facility in Culver City, California, in July 1998 resulted in an
increase in rent expense.
TELECOMMUNICATIONS AND DATA PROCESSING SERVICES: The $1.3 million increase
in telecommunications and data processing services stems primarily from fees to
upgrade client data feeds, including market data line connections, increase in
communication charges from linking clients to ITG in New York and Boston, and
increases in dial-up costs related to the increase in ITG Platform
installations. This increase was offset primarily by a decrease in spending on
contingency-related planning and implementation.
NET LOSS ON LONG-TERM INVESTMENTS: The increase in loss on long-term
investment in 1999 over 1998 primarily resulted from the recorded gain on sale
of our equity investment in the LongView Group,
18
Inc. in 1998 totaling $3.8 million. Excluding the effects of this gain on sale,
losses incurred by our investments in ITG Europe and ITG Australia were
$0.2 million less in 1999 than 1998. In 1999, we also recognized a $0.4 million
deferred gain on the sale of the LongView Group that was held in escrow for one
year.
SPIN-OFF COSTS: The spin-off expenses are attributable to our legal,
accounting, consulting and other expenses incurred for the spin-off
transactions, as discussed in Note 1, ORGANIZATION AND BASIS OF
PRESENTATION--SPIN-OFF FROM JEFFERIES GROUP, in the Notes to Consolidated
Financial Statements on page 31.
OTHER GENERAL AND ADMINISTRATIVE: The increase in other general and
administrative expenses reflects software amortization for certain products that
were released in late 1998 and increased spending on advertisement and
promotion, offset in part by a decline in consulting expenses for projects such
as network migration and strategic market studies.
Additionally, subsequent to our spin-off, specified administrative services
previously provided to us at a fixed monthly fee by Jefferies Group, Inc. were
performed by ITG. This change resulted in higher legal, audit and accounting
fees offset in part by reduced administrative service fees.
INCOME TAX EXPENSE
The decrease in the effective tax rate from 46.4% in 1998 to 45.2% in 1999
was due to decreases in certain non-deductible expenses and an increase in
dividends received deduction.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
EARNINGS PER SHARE
Basic net earnings per share increased $0.55, or 59%, from $0.93 in 1997 to
$1.48 in 1998. Diluted net earnings per share increased $0.52, or 58%, from
$0.89 to $1.41.
REVENUES
Total revenues increased $75.2 million, or 54.9%, from $137.0 million to
$212.2 million. The number of trading days were 252 in 1998 compared to 253 in
1997. Revenues per trading day increased by $300,000, or 55.5%, from $542,000 to
$842,000. Revenues per employee increased $182,000, or 28.8%, from $631,000 to
$813,000. The increases were attributable to increases in the number of our
customers and increases in trading volume by our existing customers. Revenues
from the Electronic Trading Desk increased $19.5 million, or 64.9%, from
$30.1 million to $49.6 million. The number of shares crossed on the POSIT system
increased 2.1 billion, or 56.8%, from 3.7 billion to 5.8 billion. POSIT revenues
in turn increased $41.6 million, or 55.2%, from $75.4 million to
$117.0 million. QuantEX revenues increased $12.0 million, or 39.9%, from
$30.1 million to $42.1 million.
EXPENSES
Total expenses increased $41.5 million, or 46.2%, from $89.8 million to
$131.3 million.
19
The following table itemizes expenses by category (in thousands):
YEAR ENDED
DECEMBER 31,
1998 1997 CHANGE % CHANGE
-------- -------- -------- --------
Compensation and employee benefits...................... $51,462 $30,479 $20,983 68.8%
Transaction processing.................................. 26,920 21,413 5,507 25.7
Software royalties...................................... 15,247 9,848 5,399 54.8
Occupancy and equipment................................. 11,886 9,204 2,682 29.1
Telecommunications and data processing services......... 8,138 6,605 1,533 23.2
Net loss on long-term investments....................... 204 297 (93) (31.3)
Spin-off costs.......................................... 1,936 -- 1,936 N/A
Other general and administrative........................ 15,477 11,936 3,541 29.7
Income taxes............................................ 37,541 20,343 17,198 84.5
COMPENSATION AND EMPLOYEE BENEFITS. Salaries, bonuses and related employee
benefits increased approximately $21.0 million over the prior year. Such
increases were primarily due to our profitability-based compensation plan,
growth in our employee base of 44 or 20.3%, from 217 to 261 and additional
compensation necessary to attract and retain quality personnel. Over 50% of the
increase in new employees were staffed in technology, product development and
production infrastructure. In addition, our board of directors voted to
accelerate the vesting of the options of our deceased President and Chief
Executive Officer, Scott P. Mason, resulting in a $2.8 million charge to
compensation expense, representing 13% of the increase.
TRANSACTION PROCESSING. The increase in transaction processing is primarily
due to an increase in ticket charges associated with a higher volume of
transactions in 1998. The increase in ticket charges of 28% was not
proportionate with the increase in revenues of 55% due to volume discounts
associated with clearing and execution services. A decrease in specialist fees
of 26% and floor broker fees of 3%, was offset by the volume increases in shares
executed by specialists of 49% and floor brokers of 51%, resulting in a net
increase in transaction processing expenses. Transaction processing as a
percentage of revenues decreased from 15.6% in 1997 to 12.7% in 1998.
SOFTWARE ROYALTIES. As software royalties are contractually fixed at 13% of
POSIT revenues, the increase is wholly attributable to an increase in POSIT
revenues.
OCCUPANCY AND EQUIPMENT. The increase in occupancy and equipment is
primarily attributable to additional depreciation and amortization of leasehold
improvements (representing 65% of the increase) and rent expense (representing
33% of the increase) related to the relocation and expansion of our corporate
headquarters (occupied in June 1997), combined with increases in headcount and
purchases of additional technologically advanced software.
TELECOMMUNICATIONS AND DATA PROCESSING SERVICES. The increase in
technological and data communications processing expenses stems primarily from
the data feed upgrades for clients, primarily market data line connections, and
expenses relating to a telecommunication network conversion and contingency
planning.
NET LOSS ON LONG-TERM INVESTMENTS. The decrease in net loss on long-term
investments is due to income of $3.8 million recognized from the sale of our
37.4% equity ownership interest in the LongView Group, Inc., offset by initial
start-up costs for ITG Europe of $1.3 million and the combined costs of equity
loss pick-up and amortization of goodwill on ITG Australia of $0.2 million and
the LongView Group, Inc, of $0.8 million.
SPIN-OFF COSTS. The spin-off expenses are attributable to our legal,
accounting, consulting and other expenses incurred for the spin-off
transactions.
20
OTHER GENERAL AND ADMINISTRATIVE. The increase in other general and
administrative expenses was the result of a write-off of a net receivable from
the former Global POSIT joint venture of approximately $1.0 million, accelerated
software amortization for specific products, increases in business development
costs, such as advertising and active sales efforts, and additional
administrative costs, associated with ITG Europe. Additionally, we had an
increase in consulting expense primarily due to accounting and financial
research of international joint venture opportunities and a major
telecommunication system conversion.
INCOME TAX EXPENSE
The increase in income tax expense is the result of an increase in pretax
income and an increase in the effective tax rate from 43.0% in 1997 to 46.4% in
1998. The increase in the effective rate was due to certain non-deductible
expenses, such as goodwill amortization and spin-off costs and the inability to
offset international losses with United States profits in calculating income tax
expense, that were not present in 1997.
DEPENDENCE ON MAJOR CUSTOMERS
During 1999, revenue from our 10 largest customers accounted for
approximately 33.0% of our total revenue while revenue from each of our three
largest customers accounted for 5.8%, 4.7%, and 4.7%, respectively, of total
revenue. During 1998, revenue from our 10 largest customers accounted for
approximately 30.7% of our total revenue while revenue from each of our three
largest customers accounted for 7.9%, 4.5% and 3.2%, respectively, of total
revenue. During 1997, revenue from our 10 largest customers accounted for
approximately 34.5% of our total revenue while revenue from each of our three
largest customers accounted for 8.8%, 5.9% and 3.4%, respectively, of total
revenue. Customers may discontinue use of our services at any time. The loss of
any significant customers could have a material adverse effect on our results of
operations. In addition, the loss of significant POSIT customers could result in
lower share volumes of securities offered through POSIT, which may adversely
affect the liquidity of the system.
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 December 31, 1999, cash equivalents and
securities owned at fair value amounted to $96.7 million and net receivables
from brokers, dealers and other, of $16.6 million were due within 30 days. A
special cash dividend of $74.6 million was paid on April 21, 1999 in connection
with the spin-off from Jefferies Group. See Note 1, ORGANIZATION AND BASIS OF
PRESENTATION--SPIN-OFF FROM JEFFERIES GROUP, in the Notes to Consolidated
Financial Statements on page 31.
We also invest a portion of our excess cash balances in cash enhanced
strategies, which we believe should yield higher returns without any significant
effect on risk. As of December 31, 1999, we had investments in limited
partnerships investing in marketable securities, a hedged convertible managed
account, and a venture capital fund amounting to $21.4 million in the aggregate.
The limited partnerships employ either a hedged convertible strategy or a
long/short strategy to capitalize on short term price movements. Our managed
account is employing a hedged convertible strategy. We classify
21
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 December 31, 1999, we had net
excess regulatory capital of $39.1 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.
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 December 31, 1999, no amounts were outstanding under this bank
credit line and no amounts were owed to us by ITG Australia.
EFFECTS OF INFLATION
We do not believe that the relatively moderate levels of inflation which
have been experienced in North America in recent years have had a significant
effect on our revenue or profitability. However, high inflation may lead to
higher interest rates which might cause investment funds to move from equity
securities to debt securities or cash equivalents.
THE YEAR 2000 ISSUE
We spent an aggregate of $2.8 million, of which we spent $1.3 million in
1999, to upgrade or replace computer and software systems in order to address
potential problems related to the Year 2000 issue.
RECENT ACCOUNTING PRONOUNCEMENTS
In March 1998, the Accounting Standards Executive Committee issued Statement
of Position 98-1 ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE DEVELOPED OR
OBTAINED FOR INTERNAL USE ("SOP 98-1"). SOP 98-1 provides guidance on accounting
for the costs of computer software developed or obtained for internal use. It
identifies the characteristics of internal-use software and provides examples to
assist in determining when the computer software is for internal use. The
Company has adopted this SOP effective January 1, 1999 which has had no material
effect on the financial statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
MARKET PRICE RISK
As part of our full service equity trade execution business we do not engage
in proprietary trading; however, at times we do hold positions overnight due to
client or Company errors. Accordingly, we maintain policies and procedures
regarding the management of our errors and accommodations proprietary trading
accounts. It is our policy to attempt to trade out of all positions arising from
errors and accommodations immediately while balancing our exposure to market
risk which can arise from liquidating such positions. Accordingly, certain
positions may be liquidated over a period of time in an effort to minimize
market impact.
We have established approval policies that include review by the President
(or his designee) and our compliance department of any proprietary trading
activity. Our operations department reviews all open trades intraday in an
effort to ensure that any open issues are addressed and resolved by the
22
close of the trading day. Additionally, our clearing broker notifies us of all
known trade discrepancies on the day following the trade date.
We employ a cash management strategy which seeks to optimize excess liquid
assets by preserving principal, maintaining liquidity to satisfy capital
requirements, minimizing risk and maximizing our after tax rate of return. For
working capital purposes, we invest only in money market instruments. Cash which
is not needed for normal operations is invested in a tax efficient manner in
instruments with appropriate maturities and levels of risk to correspond to
expected liquidity needs. We currently have investments in municipal bonds,
auction rate preferred bonds, common stock and convertible bonds. To the extent
that we invest in marketable equity securities, we ensure portfolio liquidity by
investing in marketable securities with active secondary or resale markets. We
do not use derivative financial instruments in our investment portfolio. At
December 31, 1999 our cash and cash equivalents and securities owned were
approximately $96.7 million.
We will from time to time, make investments that are considered strategic.
These investments require approval of executive management and/or the board of
directors. This component of our cash management strategy is reevaluated
periodically. At December 31, 1999, investments in limited partnerships, venture
capital investments and securities available for sale were approximately
$15.9 million.
INTEREST RATE RISK
Our exposure to interest rate risk relates primarily to the interest-bearing
portions of our investment portfolio. Our policy is to invest in high quality
credit issuers, limit the amount of credit exposure to any one issuer and invest
in tax efficient strategies. Our first priority is to reduce the risk of
principal loss. We seek to preserve our invested funds by limiting default risk,
market risk, and re-investment risk. We attempt to mitigate default risk by
investing in high quality credit securities that we believe to be low risk and
by positioning our portfolio to respond appropriately to reductions in the
credit rating of any investment issuer or guarantor that we believe is adverse
to our investment strategy.
Our interest-bearing investment portfolio primarily consists of short-term,
high-credit quality money market funds, highly liquid variable rate municipal
securities, convertible bonds and preferred stock. These investments totaled
approximately $92.6 million at December 31, 1999. Our interest-bearing
investments are not insured and because of the short-term high quality nature of
the investments are not likely to fluctuate significantly in market value.
FOREIGN CURRENCY RISK
We are pursuing the international market in a variety of ways, including
joint-ventures in Europe and Australia and the development of specially tailored
versions of our services. Additionally, we maintain development facilities in
Israel which focus on developing services for the European market. Our
investments in these joint-ventures and development activities expose us to
currency exchange fluctuations between the U.S. Dollar and the British Pound
Sterling, Australian Dollar, Canadian Dollar and Israeli New Shekel. To the
extent that our international activities recorded in local currencies increase
in the future, our exposure to fluctuations in currency exchange rates will
correspondingly increase. We have not engaged in foreign currency hedging
activities. However, non-U.S. dollar cash balances held overseas are generally
kept at levels necessary to meet current operating and capitalization needs.
23
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
FINANCIAL REPORTS SECTION
PAGES
--------
Management's Responsibility for Compliance and Financial
Reporting................................................. 25
Independent Auditors' Report................................ 26
Consolidated Statements of Financial Condition.............. 27
Consolidated Statements of Income........................... 28
Consolidated Statements of Changes in Stockholders'
Equity.................................................... 29
Consolidated Statements of Cash Flows....................... 30
Notes to Consolidated Financial Statements.................. 31
24
MANAGEMENT'S RESPONSIBILITY FOR COMPLIANCE AND FINANCIAL REPORTING
TO THE SHAREHOLDERS:
The management of Investment Technology Group, Inc. is responsible for the
integrity and objectivity of the financial information presented in this Annual
Report. Financial information appearing throughout the Annual Report is
consistent with that in the accompanying financial statements. The financial
statements have been prepared by management of our company in conformity with
generally accepted accounting principles in the United States. The financial
statements reflect, where applicable, management's best judgments and estimates.
The management of our company has established and maintains an internal
control structure and monitors that structure for compliance with established
policies and procedures. The objectives of an internal control structure are to
provide reasonable, but not absolute, assurance as to the integrity and
reliability of the financial statements, the protection of assets from
unauthorized use or disposition, and that transactions are executed in
accordance with management's authorization.
Management also recognizes its responsibility to foster and maintain a
strong ethical environment within our company to ensure that its business
affairs are conducted with integrity and in accordance with high standards of
personal and corporate conduct. This responsibility is characterized and
reflected in our company's Statement of Policy on Standards of Employee Conduct,
which is distributed to all of our employees. As part of the monitoring system,
we maintain Corporate Compliance Personnel, who have oversight responsibilities
for administering and coordinating the application of these standards of
conduct. Senior legal and compliance personnel have been directed to report
compliance concerns directly to the President of our company. Ongoing oversight
of compliance activities is the responsibility of our President.
Our board of directors appoints an audit committee composed solely of
outside directors. The function of the audit committee is to oversee the
accounting, reporting, audit and internal control policies and procedures
established by our management. The committee meets regularly with management and
the internal and independent auditors. The auditors have free access to the
audit committee without the presence of management. The audit committee reports
regularly to our board of directors on its activities, and such other matters as
it deems necessary.
Our company's annual consolidated financial statements have been audited by
KPMG LLP, independent auditors, who were appointed by the board of directors.
Management has made available to KPMG LLP all of our company's financial records
and related data, as well as the minutes of directors' meetings.
Furthermore, management believes that all its representations to KPMG LLP
are valid and appropriate. In addition, KPMG LLP, in determining the nature and
extent of their auditing procedures, considered our company's accounting
procedures and policies and the effectiveness of the related internal control
structure.
Management believes that, as of December 31, 1999, our company's internal
control structure was adequate to accomplish the objectives discussed herein.
Raymond L. Killian, Jr. Howard C. Naphtali Angelo Bulone
Chairman, Chief Executive Managing Director Vice President
Officer and President and Chief Financial Officer and Controller
25
INDEPENDENT AUDITORS' REPORT
Board of Directors
Investment Technology Group, Inc. and Subsidiaries:
We have audited the accompanying consolidated statements of financial
condition of Investment Technology Group, Inc. and subsidiaries (the "Company")
as of December 31, 1999 and 1998, and the related consolidated statements of
income, changes in stockholders' equity, and cash flows for each of the years in
the three-year period ended December 31, 1999. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Investment
Technology Group, Inc. and subsidiaries as of December 31, 1999 and 1998, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 1999, in conformity with generally
accepted accounting principles.
KPMG LLP
New York, New York
January 19, 2000
26
INVESTMENT TECHNOLOGY GROUP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
DECEMBER 31,
-------------------
1999 1998
-------- --------
ASSETS
Cash and cash equivalents................................... $ 53,081 $ 77,518
Securities owned, at fair value............................. 43,612 39,615
Receivables from brokers, dealers and other, net............ 19,181 24,127
Due from affiliates......................................... -- 722
Investments in limited partnerships......................... 13,922 1,000
Securities, available-for-sale, at fair value............... 2,023 --
Premises and equipment...................................... 20,229 19,662
Capitalized software........................................ 5,629 6,450
Goodwill.................................................... 824 1,373
Deferred taxes.............................................. 13,324 2,784
Other assets................................................ 7,663 7,455
-------- --------
Total assets................................................ $179,488 $180,706
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued expenses....................... 33,459 24,349
Payable to brokers, dealers and other....................... 3,932 3,015
Software royalties payable.................................. 4,874 4,070
Securities sold, not yet purchased, at fair value........... 5,861 288
Due to affiliates........................................... -- 1,422
Income taxes payable........................................ 15,710 --
Income taxes payable to affiliate........................... -- 3,853
-------- --------
Total liabilities......................................... 63,836 36,997
-------- --------
Commitments and Contingencies (Notes 14 and 16)
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: 32,179,106 in 1999 and
30,961,253 in 1998...................................... 322 310
Additional paid-in capital................................ 96,534 51,395
Retained earnings......................................... 75,727 104,925
Common stock held in treasury, at cost; shares: 2,213,721
in 1999 and 1,300,333 in 1998........................... (58,052) (12,760)
Accumulated other comprehensive income (loss):
Currency translation adjustment......................... (7) (161)
Unrealized gain on securities, available-for-sale, net
of tax................................................ 1,128 --
-------- --------
Total stockholders' equity............................ 115,652 143,709
-------- --------
Total liabilities and stockholders' equity.................. $179,488 $180,706
======== ========
The accompanying Notes to Consolidated Financial Statements are integral parts
of this statement.
27
INVESTMENT TECHNOLOGY GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
REVENUES:
Commissions
POSIT................................................... $129,364 $116,950 $ 75,362
Electronic trading desk................................. 47,577 49,613 30,084
Client.................................................. 51,019 42,151 30,136
Other..................................................... 4,084 3,491 1,460
-------- -------- --------
Total revenues........................................ 232,044 212,205 137,042
EXPENSES:
Compensation and employee benefits........................ 51,717 51,462 30,479
Transaction processing.................................... 32,282 26,920 21,413
Software royalties........................................ 16,851 15,247 9,848
Occupancy and equipment................................... 13,295 11,886 9,204
Telecommunications and data processing services........... 9,428 8,138 6,605
Net loss on long-term investments......................... 2,674 204 297
Spin-off costs............................................ 6,516 1,936 --
Other general and administrative.......................... 16,420 15,477 11,936
-------- -------- --------
Total expenses........................................ 149,183 131,270 89,782
-------- -------- --------
Income before income tax expense............................ 82,861 80,935 47,260
Income tax expense.......................................... 37,435 37,541 20,343
-------- -------- --------
NET INCOME.................................................. $ 45,426 $ 43,394 $ 26,917
======== ======== ========
Basic net earnings per share of common stock................ $ 1.48 $ 1.48 $ 0.93
======== ======== ========
Diluted net earnings per share of common stock.............. $ 1.42 $ 1.41 $ 0.89
======== ======== ========
Basic weighted average shares outstanding................... 30,691 29,302 29,004
======== ======== ========
Diluted weighted average shares and common stock equivalents
outstanding............................................... 31,947 30,775 30,219
======== ======== ========
The accompanying Notes to Consolidated Financial Statements are integral parts
of this statement.
28
INVESTMENT TECHNOLOGY GROUP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(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, 1996.......... $ -- $298 $35,944 $34,614 $(3,763) $ -- $ 67,093
Net income............................ -- -- -- 26,917 -- -- 26,917
Issuance of restricted stock (38,641
shares)............................. -- -- 630 -- -- -- 630
Issuance of common stock in connection
with the employee stock option plan
(150,327 shares).................... -- 2 1,868 -- -- -- 1,870
Purchase of common stock for treasury
(242,995 shares).................... -- -- -- -- (2,747) -- (2,747)
---- ---- ------- ------- -------- ------ --------
Balance at December 31, 1997.......... -- 300 38,442 61,531 (6,510) -- 93,763
Issuance of common stock in connection
with the employee stock option plan
(917,377 shares).................... -- 10 12,648 -- -- -- 12,658
Issuance of common stock in connection
with the employee stock purchase
plan (19,010 shares)................ -- -- 305 -- -- -- 305
Purchase of common stock for treasury
(347,021 shares).................... -- -- -- -- (6,250) -- (6,250)
Comprehensive income/(loss):
Net income.......................... -- -- -- 43,394 -- -- 43,394
Other comprehensive loss,
net of tax ($0.00):
Currency translation adjustment... -- -- -- -- -- (161) (161)
--------
Comprehensive income.................. 43,233
---- ---- ------- ------- -------- ------ --------
Balance at December 31, 1998.......... -- 310 51,395 104,925 (12,760) (161) 143,709
Retirement of common stock held in
treasury (1,300,333 shares)......... -- (13) (12,747) -- 12,760 -- --
Purchase of common stock for treasury
(2,213,721 shares).................. -- -- -- -- (58,052) -- (58,052)
Payment of special cash dividend...... -- -- -- (74,624) -- -- (74,624)
Issuance of common stock in connection
with the employee stock option plan
(2,484,665 shares).................. -- 25 57,023 -- -- -- 57,048
Issuance of common stock in connection
with the employee stock purchase
plan (34,206 shares)................ -- -- 863 -- -- -- 863
Comprehensive income:
Net income.......................... -- -- -- 45,426 -- -- 45,426
Other comprehensive income:
Currency translation adjustment... -- -- -- -- -- 154 154
Unrealized holding gain on
securities available-for-sale,
net of tax ($895)............... -- -- -- -- -- 1,128 1,128
--------
Comprehensive income.................. 46,708
---- ---- ------- ------- -------- ------ --------
Balance at December 31, 1999.......... $ -- $322 $96,534 $75,727 $(58,052) $1,121 $115,652
==== ==== ======= ======= ======== ====== ========
The accompanying Notes to Consolidated Financial Statements are integral parts
of this statement.
29
INVESTMENT TECHNOLOGY GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
YEAR ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
Cash flows from operating activities:
Net income.................................................. $45,426 $43,394 $26,917
Adjustments to reconcile net income to net cash provided by
operating activities:
Deferred income tax benefit............................... (11,435) (324) (103)
Depreciation and amortization............................. 12,835 11,599 6,642
Undistributed loss of affiliates.......................... 2,985 3,535 441
Provision for doubtful receivables........................ 228 96 84
Decrease (increase) in operating assets:
Securities owned, at fair value........................... (3,997) (2,258) (12,199)
Receivables from brokers, dealers and other, net.......... 4,718 (14,092) (2,468)
Due from affiliates....................................... 722 643 94
Investments in limited partnerships....................... (422) 9,935 (5,742)
Other assets.............................................. (397) (4,620) (6,930)
Increase (decrease) in operating liabilities:
Accounts payable and accrued expenses..................... 9,210 11,786 4,118
Payable to brokers, dealers and other..................... 917 2,078 933
Software royalties payable................................ 804 1,407 389
Securities sold, not yet purchased, at fair value......... 5,573 285 (1,223)
Due to affiliates......................................... (1,422) (701) 200
Income taxes payable...................................... 15,710 -- --
Income taxes payable to affiliate......................... (3,853) 2,365 (147)
------- ------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES............... 77,602 65,128 11,006
------- ------- -------
Cash flows from investing activities:
Purchase of premises and equipment.......................... (8,792) (7,658) (15,679)
Sale of equity investment................................... -- 8,049 --
Purchase of investments in limited partnerships............. (12,500) -- --
Investment in joint venture................................. (2,897) (4,790) --
Capitalization of software development costs................ (3,239) (4,025) (4,422)
------- ------- -------
NET CASH USED IN INVESTING ACTIVITIES................... (27,428) (8,424) (20,101)
------- ------- -------
Cash flows from financing activities:
Dividends paid.............................................. (74,624) -- --
Purchase of common stock for treasury....................... (58,052) (6,250) (2,747)
Issuance of common stock in connection with employee stock
option plan............................................... 57,911 12,962 2,500
------- ------- -------
NET CASH (USED IN)/PROVIDED BY FINANCING ACTIVITIES..... (74,765) 6,712 (247)
------- ------- -------
Effect of foreign currency translation on cash and cash
equivalents............................................. 154 (161) --
Net (decrease) increase in cash and cash equivalents.... (24,437) 63,255 (9,342)
Cash and cash equivalents -- beginning of year.............. 77,518 14,263 23,605
------- ------- -------
Cash and cash equivalents -- end of year.................... $53,081 $77,518 $14,263
======= ======= =======
Supplemental cash flow information:
Interest paid............................................. $ 39 $ 20 $ 146
======= ======= =======
Income taxes paid to non-affiliate........................ $ 248 $ -- $ --
======= ======= =======
Income taxes paid to affiliate............................ $ 6,538 $30,296 $19,947
======= ======= =======
The accompanying Notes to Consolidated Financial Statements are integral parts
of this statement.
30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) 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, and (3) ITG Australia Holdings Pty Limited, which
is a 50% partner in ITG Pacific Holdings Pty Limited. 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 include: POSIT, the world's largest
electronic equity matching system; QuantEX, a Unix-based decision-support, trade
management and order routing system; 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 the costs of trading; SmartServers, which
offer server based implementation of trading strategies; ITG/OPT, a
computer-based equity portfolio selection system; and research, development,
sales and consulting services to 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).
In connection with these transactions, on April 21, 1999, we paid a special
cash dividend of $4.00 per share, payable pro rata to all of our stockholders of
record as of April 20, 1999, including Jefferies Group. The aggregate amount of
the special cash dividend was $74.6 million, of which we paid $60.0 million to
Jefferies Group. As a result of the merger and based upon the number of shares
of Jefferies Group common stock outstanding on the date of the merger
(23,931,814) and the number of shares of the ITG common stock held by Jefferies
Group (15,000,000), ITG's stockholders, other than Jefferies Group, received
1.5955 shares of common stock of New ITG for each share of ITG common stock held
by them. Through December 31, 1999, ITG had incurred spin-off costs of
approximately $8.4 million, consisting of approximately $1.9 million in 1998 and
approximately $6.5 million in 1999. 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.
All material intercompany balances and transactions have been eliminated in
consolidation. The consolidated financial statements reflect all adjustments,
which are in the opinion of management, necessary for the fair statement of
results.
31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
We have defined cash and cash equivalents as highly liquid investments, with
original maturities of less than ninety days, which are part of our cash
management activities.
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.
SECURITIES TRANSACTIONS
Revenues primarily consist of commissions from customers' use of our trade
execution and analytical 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. We collect 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 our front-end systems but without assistance from the Electronic Trading
Desk, to any third party trade execution destination. Other revenue primarily
consists of interest income earned on our portfolio of investments, interest
income/expense and market gains/losses resulting from temporary positions in
securities assumed in the normal course of our agency trading business, and fees
earned in developing specially tailored versions of our services for the
international market and the related royalties earned from the usage of these
services.
Receivable from brokers, dealers and other, net consists of commissions
receivable and amounts receivable for securities transactions that have not yet
reached their contractual settlement date, net of an allowance for doubtful
accounts. Transactions in securities, commission revenues and related expenses
are recorded on a trade-date basis.
Securities owned, at fair value as of December 31, 1999 and 1998 consisted
primarily of highly liquid, variable rate municipal securities and auction rate
preferred stock, common stock and convertible bonds.
Investments in limited partnerships consisted of investments in hedge funds
investing in marketable securities and a venture capital fund. The investments
in hedge funds are carried at the market value of the underlying securities.
Gains and losses are recognized in the consolidated statements of income for
changes in market values. The investment in a venture capital fund is carried at
market value.
Securities, available-for-sale, at fair value consisted of a single
investment in marketable equity securities as part of Investment Technology
Group, Inc.'s investing activities. Unrealized gains and losses resulting from
this investment are reported net of tax in other comprehensive income in the
consolidated statements of financial condition. Realized gains or losses are
reflected in the statements of income when the security is ultimately sold.
CAPITALIZED SOFTWARE
We capitalize software development expenses where technological feasibility
of the product has been established. Technological feasibility is established
when we have completed all planning, designing, coding and testing activities
that are necessary to establish that the product can be produced
32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
to meet design specifications. The assessment of recoverability of capitalized
software development costs requires considerable judgment by management with
respect to certain external factors, including, but not limited to, anticipated
future gross revenues, estimated economic life and changes in software and
hardware technologies. We are amortizing capitalized software costs using the
straight-line method over the estimated economic useful life, the life of which
is generally under two years. Amortization begins when the product is available
for release to customers.
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 our 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. We assess 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
December 31, 1999 and 1998, net goodwill amounted to $0.8 million and
$1.4 million, respectively, net of accumulated amortization of $4.5 million and
$3.9 million, respectively.
INCOME TAXES
Until April 27, 1999, we were a member of Jefferies Group's affiliated tax
group ("Group") for purposes of filing a Federal income tax return (i.e.,
Jefferies Group owned more than 80% of ITG). With respect to tax periods ending
prior to April 28, 1999, our tax liability was determined on a "separate return"
basis. That is, we were required to pay to Jefferies Group our proportionate
share of the Group's consolidated tax liability plus any excess of our
"separate" tax liability (assuming a separate tax return were to be filed by us)
over our proportionate amount of the consolidated Group tax liability.
Alternatively, Jefferies Group was required to pay us an "additional amount" for
the amount by which the consolidated tax liability of the Group was decreased by
reason of our inclusion in the Group.
Income taxes are accounted for on the asset and liability method. Deferred
tax assets and liabilities are recognized for 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
be recovered or settled. 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.
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.
EXPENSES
COMPENSATION AND EMPLOYEE BENEFITS include base salaries, bonuses,
employment agency fees, part-time employee compensation, capitalized software
(Note 5) 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 and connection fees for
use of certain third
33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
party execution services. SOFTWARE ROYALTIES are payments to BARRA, Inc., our
joint venture partner in POSIT. Royalty payments are calculated at an effective
rate of 13% of adjusted POSIT revenues. OCCUPANCY AND EQUIPMENT includes 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 goodwill
amortization, equity (gain) loss, and initial start up costs associated with ITG
Europe and ITG Australia and the net gain on the sale of the investment in the
LongView Group, Inc. SPIN-OFF COSTS include legal, accounting, consulting and
various other expenses related to our spin-off and upstream merger discussed in
Note 1. OTHER GENERAL AND ADMINISTRATIVE includes goodwill and software
amortization, legal, audit, tax, consulting, travel and promotional expenses.
RESEARCH AND DEVELOPMENT
All research and development costs are expensed as incurred. Research and
development costs were $9.7 million, $8.6 million and $5.3 million for 1999,
1998 and 1997, respectively.
USE OF ESTIMATES
The preparation of the financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses and the disclosure of contingent assets, liabilities, revenues and
expenses. 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.
EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128, EARNINGS PER
SHARE, which is effective for financial statements for both interim and annual
periods ending after December 15, 1997. As of December 31, 1997 we were required
to change the method then used to compute earnings per share and to restate all
prior periods presented. Under the new SFAS, we are required to report both
basic and diluted earnings per share. Basic earnings per share is determined by
dividing earnings by the average number of shares of common stock outstanding,
while diluted earnings per share is determined by dividing earnings by the
average number of shares of common stock adjusted for the dilutive effect of
common stock equivalents.
Net earnings per share of common stock, is based upon an adjusted weighted
average number of shares of common stock outstanding to reflect our spin-off
from Jefferies Group.
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.
34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(3) SECURITIES AVAILABLE FOR SALE
At December 31, 1999, we had securities available for sale representing a
single equity ownership in one issuer. The fair value and total gain was
$2.0 million as we originally had a basis of zero in the investment. The net
unrealized holding gain, net of tax, of $1.1 million is recorded as an item of
accumulated other comprehensive income. There were no securities classified as
available for sale in 1998.
(4) PREMISES AND EQUIPMENT
The following is a summary of premises and equipment at December 31,:
1999 1998
-------- --------
(DOLLARS IN THOUSANDS)
Furniture, fixtures and equipment........................... $36,109 $29,007
Leasehold improvements...................................... 8,195 6,505
------- -------
44,304 35,512
Less: accumulated depreciation and amortization............. 24,075 15,850
------- -------
Total..................................................... $20,229 $19,662
======= =======
Capital expenditures in the schedule above are primarily for
computer-related equipment.
Depreciation and amortization expense amounted to $8,226,000, $7,502,000,
and $4,614,000 in 1999, 1998, and 1997, respectively.
(5) CAPITALIZED SOFTWARE COSTS
The following is a summary of capitalized software costs at December 31,:
1999 1998
-------- --------
(DOLLARS IN THOUSANDS)
Capitalized software costs.................................. $17,474 $14,235
Less: accumulated amortization.............................. 11,845 7,785
------- -------
Total..................................................... $ 5,629 $ 6,450
======= =======
Approximately $3,239,000 of software costs were capitalized in 1999
primarily for the development of new versions of QuantEX, ITG Platform and TCA.
In addition, approximately $3,105,000 of total capitalized software costs were
not subject to amortization as of December 31, 1999, as certain products have
reached technological feasibility but were not yet available for release to
customers.
Capitalized software costs are being amortized over one to two years, the
life of which is generally less than two years. In 1999, 1998 and 1997, we
included $4,060,000, $3,548,000 and $1,478,000, respectively, of amortized
software costs in other general and administrative expenses.
(6) INCOME TAXES
We account for income taxes on a separate-return basis. During 1999, our
operations were included in the consolidated Federal income tax return of
Jefferies Group and subsidiaries through the spin-off date of April 27, 1999.
All income tax payments due to/from Jefferies for the period through the
spin-off date were made pursuant to a Tax Sharing Agreement (the "Agreement")
between Jefferies Group and ITG. The
35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(6) INCOME TAXES (CONTINUED)
Agreement provided the method by which the Federal, state and local income or
franchise tax liabilities of subsidiaries of Jefferies were allocated and the
manner in which allocated liabilities were paid.
Income tax expense (benefit) consists of the following components:
1999 1998 1997
-------- -------- --------
(DOLLARS IN THOUSANDS)
Current
Federal................................................ $33,303 $26,624 $14,220
State.................................................. 15,492 11,241 6,226
Foreign................................................ 75 -- --
------- ------- -------
48,870 37,865 20,446
------- ------- -------
Deferred
Federal................................................ (7,154) (338) (62)
State.................................................. (4,281) 14 (41)
------- ------- -------
(11,435) (324) (103)
------- ------- -------
Total.................................................... $37,435 $37,541 $20,343
======= ======= =======
Deferred income taxes are provided for temporary differences in reporting
certain items, principally deferred compensation. The tax effects of temporary
differences that gave rise to the deferred tax asset at December 31, 1999 and
1998 were as follows:
1999 1998
-------- --------
(DOLLARS IN THOUSANDS)
Deferred compensation....................................... $ 5,140 $1,745
Deduction for accrued state and local taxes................. 5,060 1,345
Depreciation................................................ 3,920 (916)
Other....................................................... (796) 610
------- ------
Total....................................................... $13,324 $2,784
======= ======
Management believes that it is more likely than not that the taxable income
from carryback years, future reversals of existing taxable temporary differences
and anticipated future taxable income will be sufficient to realize the deferred
tax benefit. As a result, at December 31, 1999 and 1998, valuation allowances
have not been recorded against deferred tax assets. Although realization is not
assured, management believes it is more likely than not that the deferred tax
assets will be realized. However, if estimates of future taxable income during
the carryforward period are reduced, the amount of deferred tax asset considered
realizable will also be reduced.
At December 31, 1999 and 1998, we had income taxes payable to Jefferies
Group and state and local agencies of $15,710,000 and $3,853,000, respectively.
36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(6) INCOME TAXES (CONTINUED)
The provision for income tax expense differs from the expected Federal
income tax rate of 35% for 1999, 1998 and 1997 for the following reasons:
1999 1998 1997
-------- -------- --------
(DOLLARS IN THOUSANDS)
Computed expected income tax expense..................... $29,001 $28,327 $16,541
Increase in income taxes resulting from:
State & local income tax expense, net of Federal
income taxes....................................... 7,287 7,316 4,020
Non-deductible foreign losses........................ 854 860 --
Other................................................ 293 1,038 (218)
------- ------- -------
Total income tax expense................................. $37,435 $37,541 $20,343
======= ======= =======
(7) EMPLOYEE BENEFIT PLANS
ITG PLANS
Effective January 1, 1999, all employees employed as of that date were
immediately eligible to participate in the Investment Technology Group, Inc.
Retirement Savings Plan and the Investment Technology Group, Inc. Money Purchase
Pension Plan (the "Plans"). These Plans include all eligible compensation (base
salary, bonus, commissions, options and overtime) up to the Internal Revenue
Service annual maximum, or $160,000 for 1999. The Plans' features include a
guaranteed Company contribution of 3% of eligible pay to be made to all eligible
employees regardless of participation in the Plans, a discretionary Company
contribution based on total consolidated Company profits between 0% and 8% of
eligible compensation regardless of participation in the Plans and a Company
matching contribution of 66 2/3% of voluntary employee contributions up to a
maximum of 6% of eligible compensation per year. The 1999 cost for the Plans was
$2,782,000 and is included in the consolidated statements of income.
Effective January 1, 1998, selected members of senior management and key
employees participated in the Stock Unit Award Program ("SUA"), a mandatory
tax-deferred compensation program established under the Amended and Restated
1994 Stock Option and Long-term Incentive Plan. Under the SUA, selected
participants of the Company are required to defer receipt of (and thus defer
taxation on) a graduated portion of their total cash compensation for units
representing common stock equal in value to 115% of the compensation deferred.
Each participant is automatically granted units, as of the last day of each
calendar quarter based on participant's actual or assigned compensation
reduction. The units are at all times fully vested and non-forfeitable. The
units are to be settled on or after the third anniversary of the date of grant.
We included the participants' deferral in compensation expense and recognized
additional compensation expense of $405,000 and $477,000 in 1999 and 1998,
respectively, which represents the 15% excess over the amount actually deferred
by the participants. At December 31, 1999 and 1998, we had 106,329 and 190,642
units, respectively, issued to the employees in the SUA. Such units are included
in the calculation of diluted weighted average shares outstanding in order to
determine diluted earnings per share.
In November 1997, our Board of Directors approved the ITG Employee Stock
Purchase Plan ("ESPP"). The ESPP became effective February 1, 1998 and allows
all full-time employees to purchase our Common Stock at a 15% discount through
automatic payroll deductions. The ESPP is qualified as an employee stock
purchase plan under Section 423 of the Internal Revenue Code.
37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(7) EMPLOYEE BENEFIT PLANS (CONTINUED)
JEFFERIES GROUP PLANS
All our employees who were citizens or residents of the United States, who
were 21 years of age by December 31, 1997, whose initial date of service was
before January 1, 1998 and who had completed one year of service with us were
covered by the Jefferies Group Employees' Pension Plan (the "Jefferies Pension
Plan"), a defined benefit plan. The plan was subject to the provisions of the
Employee Retirement Income Security Act of 1974. Benefit accruals for our
employees ceased as of February 15, 1999, and the entire benefit of each
employee who was employed on December 31, 1998 vested at that time.
Additionally, participants who had attained age 45 and were credited with at
least 5 years of vesting service as of February 15, 1999 received enhanced
benefits under the Jefferies Pension Plan, and our employees whose initial date
of service was on or after April 1, 1997 and prior to January 1, 1998
retroactively become participants in the Jefferies Pension Plan.
The net periodic pension cost allocated to us was $1,100,000, $819,000 and
$208,000 in 1999, 1998 and 1997, respectively and is included in the
consolidated statements of income.
Jefferies Group incurred expenses related to various benefit plans covering
substantially all ITG employees, including an Employee Stock Purchase Plan
("Jefferies ESPP") and a profit sharing plan, which includes a salary reduction
feature designed to qualify under Section 401(k) of the Internal Revenue Code.
As of February 1, 1998, our employees were no longer eligible to participate in
the Jefferies ESPP and as of December 31, 1998 were no longer eligible to
participate in the profit sharing plan.
Jefferies Group also incurred expenses related to a Capital Accumulation
Plan for certain officers and key employees of Jefferies Group and ITG.
Participation in the plan was optional, with those who elected to participate
agreeing to defer graduated percentages of their compensation. As of January 1,
1998 employees were no longer eligible to defer compensation in Jefferies
Group's Capital Accumulation Plan which was replaced with our SUA as described
above.
For 1999, 1998 and 1997, we expensed and contributed to these plans
$164,000, $2,568,000, and $2,096,000, respectively and these amounts are
included in the consolidated statements of income.
In May 1999, assets of the Jefferies Employee Stock Ownership Plan were
transferred into an ITG Employee Stock Ownership Plan. No new contributions will
be made to the plan and all participants are 100% vested.
38
(8) RELATED PARTY TRANSACTIONS
Jefferies Group and its affiliates provided various services to us during
1999 as described below. Prior to the spin-off from Jefferies Group on
April 27, 1999, these were related party transactions.
Pursuant to the Agreement and Plan of Merger (the "Merger Agreement") dated
as of March 17, 1999 between Jefferies Group and the Company, transaction
expenses, as defined in the Merger Agreement, related to the spin-off were
allocated and shared. Amounts paid to Jefferies Group in 1999 and 1998, were
$4,600,000 and $2,000,000, respectively.
Pursuant to a service agreement, Jefferies & Company provided us specified
administrative services, at fixed monthly costs. Administrative services
included accounting, payroll, compliance services, personnel services, legal
services, data processing and telecommunications. All services were terminated
on December 31, 1998, except for certain personnel and accounting services that
were terminated as of May 31, 1999 and June 30, 1999, respectively. The costs of
such services to us prior to the spin-off in 1999, 1998 and 1997 were $161,000,
$1,186,000 and $1,162,000, respectively.
We paid to Jefferies & Company an aggregate of $47,000, $250,000 and
$247,000 prior to the spin-off in 1999, 1998 and 1997, respectively, as
compensation to Jefferies & Company's account executives for introducing
customers to POSIT pursuant to a revenue sharing agreement. This agreement
terminated according to its terms on March 15, 1999. Such termination did not
affect fees payable in accordance with the above revenue sharing agreement with
respect to customers introduced prior to January 1, 1999.
Jefferies & Company provided substantially all of our clearing services,
pursuant to a Fully Disclosed Clearing Agreement ("Clearing Agreement").
Aggregate costs of such services to us were $4.9 million, $11.9 million and
$9.3 million prior to the spin-off in 1999, 1998 and 1997, respectively, and
included in transaction processing expenses. In addition, included in revenues
are financing costs resulting from temporary positions in securities assumed in
the normal course of business of $665,000, $911,000 and $415,000 prior to the
spin-off in 1999, 1998 and 1997, respectively, paid to Jefferies & Company.
ITG Inc. and Jefferies & Company entered into a new Clearing Agreement on
substantially similar terms as the initial Clearing Agreement with an initial
term of January 2, 1999 to June 30, 2000. The Clearing Agreement renews
automatically for one-year terms and is subject to termination at any time by
either party on 180 days' written notice or upon default by the other party.
W&D Securities, Inc., a subsidiary of Jefferies, performed certain execution
services for us on the New York Stock Exchange and other exchanges. The costs of
these execution services were $5.0 million, $13.6 million and $10.8 million
prior to the spin-off in 1999, 1998 and 1997, respectively, and were primarily
included in transaction processing expense. W&D Securities, Inc. and ITG Inc.
entered into a new execution agreement with an initial term of January 1, 1999
to June 30, 2000. Also, included in revenues, are licensing and consulting fees
paid by W&D Securities, Inc. amounting to $50,000, $165,000 and $150,000 prior
to the spin-off in 1999, 1998 and 1997, respectively.
Included in other general and administrative expenses are fees paid to
Jefferies International Limited of $35,000, $767,000 and $330,000 prior to the
spin-off in 1999, 1998 and 1997, respectively, for various broker and
administrative services.
Jefferies & Company has executed trades in an agency capacity for certain of
its customers using our services. Commission fees of $0.8 million, $4.8 million
and $3.1 million prior to the spin-off in 1999, 1998 and 1997, respectively, and
are included in our revenues.
39
(8) RELATED PARTY TRANSACTIONS (CONTINUED)
Pursuant to a software license agreement between Investment Technology Group
International Limited ("ITGIL") and Investment Technology Group SG Limited ("ITG
SG"), ITGIL invoiced ITG SG $1.7 million and $2.2 million in 1999 and 1998,
respectively, for development services.
In 1999, ITG Inc. entered into a service agreement with our affiliates,
Investment Technology Group Limited and ITG Australia Ltd., under which
ITG Inc. provides introductory brokerage and related services. Fees for these
services are included in revenues and amounted to $846,000 and $134,000,
respectively.
In 1999, we received royalty revenue from our affiliates, ITG
Australia Ltd. and ITG SG in the amount of $14,000 and $389,000, respectively,
pursuant to software license agreements.
Transactions with affiliates are provided at arms length and are settled in
the normal course of business by ITG Inc. Throughout the Notes to Consolidated
Financial Statements there are other related party transactions (see Notes 7 and
16).
(9) OFF BALANCE SHEET RISK AND CONCENTRATIONS OF CREDIT RISK
In the normal course of business, we are involved in the execution of
various customer securities transactions. Securities transactions are subject to
the credit risk of counter party or customer nonperformance. However,
transactions are collateralized by the underlying security, thereby reducing the
associated risk to changes in the market value of the security through
settlement date. Therefore, the settlement of these transactions is not expected
to have a material effect upon our financial statements. It is also our policy
to review, as necessary, the credit worthiness of each counter party and
customer.
(10) 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, as
defined, equal to the greater of $250,000 or 2% of aggregate debit balances
arising from customer transactions, as defined.
At December 31, 1999, ITG Inc. had net capital of $39.3 million, which was
$39.1 million in excess of required net capital.
(11) STOCK OPTIONS PLAN
At December 31, 1999, we had a non-compensatory stock option plan. All
reported amounts prior to April 27, 1999 have been retroactively restated to
reflect our spin-off from Jefferies Group.
Under the Amended and Restated 1994 Stock Option and Long-term Incentive
Plan (the "1994 Plan"), non-compensatory options to purchase 5,932,000 shares of
our Common Stock are reserved for issuance under the plan. Shares of Common
Stock which are attributable to awards which have expired, terminated or been
canceled or forfeited during any calendar year are generally available for
issuance or use in connection with future awards during such calendar year.
Options that have been granted under the 1994 Plan are exercisable on dates
ranging from May 1997 to June 2009. The 1994 Plan will remain in effect until
March 31, 2007, unless sooner terminated by the Board of Directors. After this
date, no further stock options shall be granted but previously granted stock
options shall remain outstanding in accordance with their applicable terms and
conditions, as stated in the 1994 Plan.
40
(11) STOCK OPTIONS PLAN (CONTINUED)
In June 1995, the Board of Directors adopted, subject to stockholder
approval, the Non-Employee Directors' Plan. The Non-Employee Directors' Plan
generally provides for an annual grant to each non-employee director of an
option to purchase 4,094 shares of Common Stock. In addition, the Non-Employee
Directors' Plan provides for the automatic grant to a non-employee director, at
the time he or she is initially elected, of a stock option to purchase 16,376
shares of Common Stock. Stock options granted under the Non-Employee Directors'
Plan are non-qualified stock options having an exercise price equal to the fair
market value of the Common Stock at the date of grant. All stock options become
exercisable three months after the date of grant. Stock options granted under
the Non-Employee Directors' Plan expire five years after the date of grant. A
total of 204,700 shares of Common Stock are reserved and available for issuance
under the Non-Employee Directors' Plan.
We apply APB Opinion No. 25 and related Interpretations in accounting for
our non-compensatory stock option plans. Accordingly, no compensation costs have
been recognized for our stock option plan. Had compensation cost for our stock
option plans been determined consistent with SFAS No. 123, our net income and
earnings per share would have been reduced to the pro forma amounts indicated
below (dollars in thousands, except per share data):
1999 1998 1997
-------- -------- --------
Net income.................................. As reported $45,426 $43,394 $26,917
Pro forma $43,482 $41,713 $23,375
Basic net earnings per share of common
stock..................................... As reported $ 1.48 $ 1.48 $ 0.93
Pro forma $ 1.42 $ 1.42 $ 0.81
Diluted earnings per share common stock..... As reported $ 1.42 $ 1.41 $ 0.89
Pro forma $ 1.36 $ 1.36 $ 0.77
The fair value of each option grant is estimated on the date of grant using
the Black Scholes option valuation model with the following weighted average
assumptions used for grants in 1999, 1998 and 1997, respectively: zero dividend
yield for all years; risk free interest rates of 5.3, 5.5, and 6.6 percent,
respectively; expected volatility of 50, 45, and 54 percent, respectively; and
expected lives of five, seven, and five years, respectively.
A summary of the status of our stock option plan as of December 31, 1999,
1998, and 1997 and changes during the years ended on those dates is presented
below:
1999 1998 1997
--------------------- -------------------- --------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
FIXED OPTIONS SHARES PRICE SHARES PRICE SHARES PRICE
- ------------- ---------- -------- --------- -------- --------- --------
Outstanding at beginning of year......... 4,729,565 $ 9.90 5,663,178 $ 9.54 3,784,593 $ 7.30
Granted.................................. 1,264,977 36.13 36,846 18.04 2,033,743 13.61
Exercised................................ (2,486,909) 10.40 (930,669) 7.90 (154,342) 7.94
Forfeited................................ (5,294) 11.90 (39,790) 12.47 (816) 7.94
---------- --------- ---------
Outstanding at end of year............... 3,502,339 19.01 4,729,565 9.90 5,663,178 9.54
========== ========= =========
Options exercisable at year-end.......... 2,105,982 9.38 4,458,012 9.63 2,846,025 9.31
Weighted average fair value per share of
options granted during the year........ $ 18.09 $ 9.57 $ 6.57
41
(11) STOCK OPTIONS PLAN (CONTINUED)
The following table summarizes information about fixed stock options
outstanding at December 31, 1999:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------- -----------------------
NUMBER WEIGHTED NUMBER
OUTSTANDING AVERAGE WEIGHTED EXERCISABLE WEIGHTED
AT REMAINING AVERAGE AT AVERAGE
DECEMBER 31, CONTRACTUAL EXERCISE DECEMBER 31, EXERCISE
RANGE OF EXERCISE PRICES 1999 LIFE (YEARS) PRICE 1999 PRICE
- ------------------------ ------------ ------------ -------- ------------ --------
$ 4.58 9.00.................................. 1,308,717 0.9 $ 6.20 1,308,717 $ 6.20
9.01 15.00................................. 776,458 2.3 13.11 696,389 13.19
15.01 20.00................................. 152,187 7.2 17.07 68,124 16.99
20.01 31.00................................. 174,725 5.3 24.37 -- --
31.01 42.13................................. 1,090,252 4.4 38.01 32,752 39.32
--------- ---------
$ 4.58 42.13................................. 3,502,339 2.8 19.01 2,105,982 9.38
========= =========
During 1999, we granted 100,247 units representing restricted stock awards
under our Stock Unit Award deferred compensation plan. During 1998, we granted
190,467 units representing restricted stock awards under our Stock Unit Award
deferred compensation plan. See Note 7--EMPLOYEE BENEFIT PLANS. Although the
1994 Plan allows for the granting of performance-based stock options, no such
options were granted during 1999, 1998 and 1997 and no such options were
outstanding at December 31, 1999, 1998 and 1997.
Restricted stock of 38,641 shares was granted in 1997 as part of the
settlement of our equity investment in The LongView Group. The restriction
period was for one year.
In 1997, we granted to Scott P. Mason, our then President and CEO, a
non-qualified stock option to acquire 1,637,601 shares of Common Stock, having
an exercise price of $13.54. During 1997, 655,040 of these options became
exercisable. Upon Mr. Mason's death in 1998, the remaining 982,561 options were
deemed by the board to be exercisable. The effects of such decision resulted in
additional compensation expense of $2.8 million at December 31, 1998. The
options expire in September 2000.
(12) INTEREST EXPENSE
Included in other general and administrative expenses is interest expense of
$58,000, $20,000 and $146,000 for 1999, 1998 and 1997, respectively.
(13) ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses at December 31, 1999 and 1998
consisted of the following;
1999 1998
-------- --------
(DOLLARS IN THOUSANDS)
Accounts payable and accrued expenses....................... $12,334 $ 8,633
Deferred compensation....................................... 9,424 3,801
Deferred options............................................ 2,280 2,778
Accrued soft dollar expenses................................ 6,688 6,692
Accrued rent expense........................................ 2,733 2,445
------- -------
Total..................................................... $33,459 $24,349
======= =======
42
(14) LEASE COMMITMENTS
We entered into lease and sublease agreements with third parties for certain
offices and equipment, which expire at various dates through 2013. Rent expense
for the years ended December 31, 1999, 1998 and 1997 was $3.5 million,
$3.2 million and $2.6 million, respectively. Minimum future rentals under
non-cancelable operating leases follow (dollars in thousands):
YEAR ENDING DECEMBER 31,
- ------------------------
2000........................................................ $ 4,279
2001........................................................ 4,384
2002........................................................ 4,608
2003........................................................ 4,685
2004........................................................ 4,582
Thereafter.................................................. 30,343
-------
Total..................................................... $52,881
=======
(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 adjusted to reflect our
spin-off from Jefferies Group. The average number of outstanding shares for the
years ended December 31, 1999, 1998 and 1997 were 30.7 million, 29.3 million and
29.0 million, respectively.
The following is a reconciliation of the basic and diluted earnings per
share computations for the years ended December 31, 1999, 1998 and 1997.
1999 1998 1997
-------- -------- --------
(AMOUNTS IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
Net income for basic and diluted earnings per share...... $45,426 $43,394 $26,917
======= ======= =======
Shares of common stock and common stock equivalents:
Average number of common shares........................ 30,691 29,302 29,004
------- ------- -------
Average shares used in basic computation............... 30,691 29,302 29,004
Effect of dilutive securities--options................. 1,256 1,473 1,215
------- ------- -------
Average shares used in diluted computation............. 31,947 30,775 30,219
======= ======= =======
Earnings per share:
Basic.................................................. $ 1.48 $ 1.48 $ 0.93
======= ======= =======
Diluted................................................ $ 1.42 $ 1.41 $ 0.89
======= ======= =======
(16) COMMITMENTS AND CONTINGENCIES
In 1998, we received a "30-day letter" 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.
43
(16) COMMITMENTS AND CONTINGENCIES (CONTINUED)
In February 1999, we became aware of patents purportedly owned by Belzberg
Financial Markets & News International Inc. and Sydney Belzberg, an officer of
that company (the "Belzberg Patents"). One or more of the Belzberg Patents may
relate to the devices, means and/or methods that we and/or customers, licensees
or joint venture partners use in the conduct of business. On March 5, 1999, a
Canadian licensee of some of our technology, received a letter asserting that
the licensee was infringing one of the Belzberg Patents. The licensee has denied
the claims of infringement and has asserted that the Belzberg Patent at issue is
invalid or unenforceable. Under certain conditions, we may have a duty to defend
or indemnify the licensee for any costs or damages arising out of an infringing
use of the technology we have licensed to them. We are monitoring the matter and
may participate in any challenge to the Belzberg Patent the licensee may make.
We are unaware of any actual claims of patent infringement leveled against
us or any of our customers or joint venture partners by any of the title owners
of the Belzberg Patents. Based upon our review to date we believe that any such
claims arising out of the Belzberg Patents would be without merit and we would
vigorously defend any such claim, including, if warranted, initiating legal
proceedings. However, intellectual property disputes are subject to inherent
uncertainties and there can be no assurance that any potential claim would be
resolved favorably to us or that it would not have a material adverse affect on
us. We will monitor the Belzberg Patent situation and take action accordingly.
We 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 us for liabilities related to our former parent and its
subsidiaries, but not for our liabilities. Under those agreements, we will be
obligated to indemnify New Jefferies for liabilities related to our Company. Our
ability to recover any costs under such indemnity will depend upon the future
financial strength of New Jefferies.
At December 31, 1999, we had outstanding capital contribution commitments to
a limited partnership in the amount of $1,500,000.
Until March 31, 1999, we had an intercompany borrowing agreement with
Jefferies Group permitting the Company to borrow up to $15.0 million. No amounts
have ever been borrowed under that agreement. 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
December 31, 1999 and 1998, no amounts were outstanding under this bank credit
line.
(17) SUPPLEMENTARY FINANCIAL INFORMATION (UNAUDITED)
The following tables set forth certain unaudited financial data for our
quarterly operations in 1999, 1998 and 1997. The following information has been
prepared on the same basis as the annual information presented elsewhere in this
report and, in the opinion of management, includes all adjustments, consisting
only of normal recurring adjustments, necessary for a fair presentation of the
information for the quarterly periods presented. The operating results for any
quarter are not necessarily indicative of results for any future period.
44
INVESTMENT TECHNOLOGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1999 YEAR ENDED DECEMBER 31, 1998
----------------------------------------- -----------------------------------------
FOURTH THIRD SECOND FIRST FOURTH THIRD SECOND FIRST
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Total Revenue...................... $68,540 $54,564 $56,312 $52,628 $62,216 $57,697 $50,905 $41,387
Expenses:
Compensation and employee
benefits....................... 14,400 11,402 13,667 12,248 14,500 14,152 12,225 10,585
Transaction processing........... 9,248 7,677 7,821 7,536 7,639 6,917 6,710 5,654
Software royalties............... 4,742 4,083 4,274 3,752 4,072 4,416 3,774 2,985
Occupancy and equipment.......... 3,685 3,201 3,296 3,113 3,195 3,071 2,823 2,797
Telecommunications and data
processing services............ 2,423 2,701 2,384 1,920 1,853 2,179 2,325 1,781
Net (gain) loss on long-term
investments.................... 1,184 275 329 886 1,749 (3,632) 1,085 1,002
Spin-off costs................... (158) (85) 4,505 2,254 832 479 374 251
Other general and
administrative................. 4,834 4,170 3,734 3,682 4,889 4,384 2,922 3,282
------- ------- ------- ------- ------- ------- ------- -------
Total expenses..................... 40,358 33,424 40,010 35,391 38,729 31,966 32,238 28,337
------- ------- ------- ------- ------- ------- ------- -------
Income before income tax expense... 28,182 21,140 16,302 17,237 23,487 25,731 18,667 13,050
Income tax expense................. 10,610 10,039 7,908 8,878 11,267 11,847 8,739 5,688
------- ------- ------- ------- ------- ------- ------- -------
Net income......................... $17,572 $11,101 $ 8,394 $ 8,359 $12,220 $13,884 $ 9,928 $ 7,362
======= ======= ======= ======= ======= ======= ======= =======
Basic net earnings per share of
common stock..................... $ 0.57 $ 0.35 $ 0.27 $ 0.28 $ 0.41 $ 0.47 $ 0.34 $ 0.25
======= ======= ======= ======= ======= ======= ======= =======
Diluted net earnings per share of
common stock..................... $ 0.56 $ 0.34 $ 0.26 $ 0.26 $ 0.39 $ 0.45 $ 0.32 $ 0.24
======= ======= ======= ======= ======= ======= ======= =======
Basic weighed average shares
outstanding...................... 30,681 31,685 30,670 29,707 29,491 29,389 29,246 29,091
======= ======= ======= ======= ======= ======= ======= =======
Diluted weighted average shares and
common stock equivalents
outstanding...................... 31,528 32,665 32,040 31,563 31,061 30,688 30,647 30,560
======= ======= ======= ======= ======= ======= ======= =======
YEAR ENDED DECEMBER 31, 1997
-----------------------------------------
FOURTH THIRD SECOND FIRST
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Total Revenue...................... $36,272 $33,437 $36,679 $30,654
Expenses:
Compensation and employee
benefits....................... 8,999 7,599 7,007 6,874
Transaction processing........... 5,718 5,110 5,682 4,903
Software royalties............... 2,579 2,306 2,581 2,382
Occupancy and equipment.......... 2,814 2,521 2,010 1,859
Telecommunications and data
processing services............ 1,988 1,504 2,156 957
Net (gain) loss on long-term
investments.................... 297 -- -- --
Spin-off costs................... -- -- -- --
Other general and
administrative................. 3,229 3,071 3,318 2,318
------- ------- ------- -------
Total expenses..................... 25,624 22,111 22,754 19,293
------- ------- ------- -------
Income before income tax expense... 10,648 11,326 13,925 11,361
Income tax expense................. 4,739 4,857 5,917 4,830
------- ------- ------- -------
Net income......................... $ 5,909 $ 6,469 $ 8,008 $ 6,531
======= ======= ======= =======
Basic net earnings per share of
common stock..................... $ 0.20 $ 0.22 $ 0.28 $ 0.22
======= ======= ======= =======
Diluted net earnings per share of
common stock..................... $ 0.19 $ 0.21 $ 0.27 $ 0.22
======= ======= ======= =======
Basic weighed average shares
outstanding...................... 29,019 28,949 28,923 29,124
======= ======= ======= =======
Diluted weighted average shares and
common stock equivalents
outstanding...................... 30,485 30,481 29,839 30,009
======= ======= ======= =======
Earnings per share for quarterly periods are based on average common shares
outstanding in individual quarters; thus, the sum of earnings per share of the
quarters may not equal the amounts reported for the full year. Earnings per
share information prior to the second quarter of 1999 has been retroactively
restated to reflect our spin-off from Jefferies Group, Inc., and earnings per
share information prior to the fourth quarter of 1997 has been retroactively
restated to conform with Statement of Financial Accounting Standards No. 128,
Earnings per Share.
45
INVESTMENT TECHNOLOGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1999 YEAR ENDED DECEMBER 31, 1998
----------------------------------------- -----------------------------------------
FOURTH THIRD SECOND FIRST FOURTH THIRD SECOND FIRST
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- -------- -------- -------- -------- --------
(AS A PERCENTAGE OF TOTAL REVENUES)
Total Revenue...................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Expenses:
Compensation and employee
benefits....................... 21.0 20.9 24.3 23.3 23.3 24.5 24.0 25.6
Transaction processing........... 13.5 14.1 13.9 14.3 12.3 12.0 13.2 13.7
Software royalties............... 6.9 7.5 7.6 7.1 6.5 7.7 7.4 7.2
Occupancy and equipment.......... 5.4 5.9 5.9 5.9 5.1 5.3 5.5 6.8
Telecommunications and data
processing services............ 3.5 5.0 4.2 3.6 3.0 3.8 4.6 4.3
Net (gain) loss on investments... 1.7 0.5 0.6 1.7 2.8 (6.3) 2.1 2.4
Spin-off costs................... (0.2) (0.2) 8.0 4.3 1.3 0.8 0.7 0.6
Other general and
administrative................. 7.1 7.6 6.6 7.0 7.9 7.6 5.8 7.9
----- ----- ----- ----- ----- ----- ----- -----
Total expenses................. 58.9 61.3 71.1 67.2 62.2 55.4 63.3 68.5
----- ----- ----- ----- ----- ----- ----- -----
Income before income tax expense... 41.1 38.7 28.9 32.8 37.8 44.6 36.7 31.5
Income tax expense................. 15.5 18.4 14.0 16.9 18.1 20.5 17.2 13.7
----- ----- ----- ----- ----- ----- ----- -----
Net income......................... 25.6% 20.3% 14.9% 15.9% 19.7% 24.1% 19.5% 17.8%
===== ===== ===== ===== ===== ===== ===== =====
YEAR ENDED DECEMBER 31, 1997
-----------------------------------------
FOURTH THIRD SECOND FIRST
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------
(AS A PERCENTAGE OF TOTAL REVENUES)
Total Revenue...................... 100.0% 100.0% 100.0% 100.0%
Expenses:
Compensation and employee
benefits....................... 24.8 22.7 19.1 22.4
Transaction processing........... 15.8 15.3 15.5 16.0
Software royalties............... 7.1 6.9 7.0 7.8
Occupancy and equipment.......... 7.8 7.5 5.5 6.1
Telecommunications and data
processing services............ 5.5 4.5 5.9 3.1
Net (gain) loss on investments... 0.8 0.0 0.0 0.0
Spin-off costs................... 0.0 0.0 0.0 0.0
Other general and
administrative................. 8.9 9.2 9.1 7.6
----- ----- ----- -----
Total expenses................. 70.7 66.1 62.1 63.0
----- ----- ----- -----
Income before income tax expense... 29.3 33.9 37.9 37.0
Income tax expense................. 13.0 14.5 16.1 15.7
----- ----- ----- -----
Net income......................... 16.3% 19.4% 21.8% 21.3%
===== ===== ===== =====
46
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There were no changes in or disagreements with accountants reportable
herein.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information with respect to this item will be contained in the Proxy
Statement for the 2000 Annual Meeting of Stockholders, which is incorporated
herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information with respect to this item will be contained in the Proxy
Statement for the 2000 Annual Meeting of Stockholders, which is incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information with respect to this item will be contained in the Proxy
Statement for the 2000 Annual Meeting of Stockholders, which is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information with respect to this item will be contained in the Proxy
Statement for the 2000 Annual Meeting of Stockholders, which is incorporated
herein by reference.
47
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(a)(1)Financial Statements
Included in Part II of this report:
PAGE
--------
Independent Auditors' Report................................ 26
Consolidated Statements of Financial Condition.............. 27
Consolidated Statements of Income........................... 28
Consolidated Statements of Changes in Stockholders'
Equity.................................................... 29
Consolidated Statements of Cash Flows....................... 30
Notes to Consolidated Financial Statements.................. 31
- ------------------------
(a)(2)Schedules
Schedules are omitted because the required information either is not
applicable or is included in the financial statements or the notes thereto.
(a)(3)Exhibits
EXHIBITS
NUMBER DESCRIPTION
- --------------------- -----------
2.1 Agreement and Plan of Merger, dated as of March 17, 1999, by
and between Jefferies Group, Inc. and the Company
(incorporated by reference to Exhibit 2.1 to the Annual
Report on Form 10-K for the year ended December 31, 1998).
2.2 Distribution Agreement, dated as of March 17, 1999, by and
among Jefferies Group, Inc. and JEF Holding Company, Inc.
(incorporated by reference to Exhibit 2.2 to the Annual
Report on Form 10-K for the year ended December 31, 1998).
3.1* Certificate of Incorporation of the Company.
3.2* By-laws of the Company.
4.1* Form of Certificate for Common Stock of the Company.
10.1 Joint Venture Agreement, dated October 1, 1987, between
Jefferies & Company, Inc. and BARRA, Inc. (formerly Barr
Rosenberg Associates, Inc.) (incorporated by reference to
Exhibit 10.1.1 to Registration Statement Number 33-76474 on
Form S-1 as declared effective by the Securities and
Exchange Commission on May 4, 1994 (the "Registration
Statement")).
10.1.1 Exclusive Software License Agreement, dated October 1, 1987,
between the POSIT Joint Venture and Jefferies & Company,
Inc. (incorporated by reference to Exhibit 10.1.2 to
Registration Statement).
10.1.2 Amendment No. 1 to Exclusive Software License Agreement,
dated August 1, 1990, between the POSIT Joint Venture and
Jefferies & Company, Inc. (incorporated by reference to
Exhibit 10.1.3 to Registration Statement).
10.1.3 Consent of BARRA, Inc. to the assignment to the Company of
the interests of Jefferies & Company, Inc. in the Posit
Joint Venture referenced in item 10.1.1 and rights in the
Software License Agreement referenced in item 10.1.2
(incorporated by reference to Exhibit 10.1.4 to Registration
Statement).
48
EXHIBITS
NUMBER DESCRIPTION
- --------------------- -----------
10.1.4 Joint Venture Agreement, dated as of November 17, 1998, by
and among Investment Technology Group International Limited,
Societe Generale, Investment Technology Group SG Limited,
Investment Technology Group Limited and Investment
Technology Group Europe Limited (incorporated by reference
to Exhibit 10.1.4 to the Annual Report on Form 10-K for the
year ended December 31, 1998).
10.2 Service Agreement, dated March 15, 1994, by and between
Jefferies & Company, Inc. and ITG Inc. (incorporated by
reference to Exhibit 10.2.2 to Registration Statement).
10.2.1 Amendment No. 1 to Service Agreement, dated as of January 1,
1999, by and between Jefferies & Company, Inc. and ITG Inc.
(incorporated by reference to Exhibit 10.2.1 to the Annual
Report on Form 10-K for the year ended December 31, 1998).
10.2.2 Execution Agreement, dated as of January 1, 1999, by and
between W & D Securities, Inc. and ITG Inc. (incorporated by
reference to Exhibit 10.2.2 to the Annual Report on Form
10-K for the year ended December 31, 1998).
10.2.3 Fully Disclosed Clearing Agreement, dated as of January 1,
1999, by and between Jefferies & Company, Inc. and ITG Inc.
(incorporated by reference to Exhibit 10.2.3 to the Annual
Report on Form 10-K for the year ended December 31, 1998).
10.2.4 Benefits Agreement, dated as of March 17, 1999, by and
between Jefferies Group, Inc. and JEF Holding Company, Inc.
(incorporated by reference to Exhibit 10.2.4 to the Annual
Report on Form 10-K for the year ended December 31, 1998).
10.2.5 Amended and Restated Tax Sharing Agreement, dated as of
March 17, 1999, by and among Jefferies Group, Inc., JEF
Holding Company, Inc. and the Company (incorporated by
reference to Exhibit 10.2.5 to the Annual Report on Form
10-K for the year ended December 31, 1998).
10.2.6 Tax Sharing and Indemnification Agreement, dated as of March
17, 1999, by and among Jefferies Group, Inc., JEF Holding
Company, Inc. and the Company (incorporated by reference to
Exhibit 10.2.6 to the Annual Report on Form 10-K for the
year ended December 31, 1998).
10.3 Employment Agreement between the Company, ITG Inc. and
Raymond L. Killian, Jr. (incorporated by reference to
Exhibit 10.3.2 to Registration Statement).
10.3.1 Amendment No. 2 to Employment Agreement between Raymond L.
Killian, Jr., the Company and ITG Inc. (incorporated by
reference to Exhibit 10.3.2A to the Annual Report on Form
10-K for the year ended December 31, 1996.)
10.3.2 Amendment to Form of Employment Agreement between the
Company, ITG Inc. and Senior Vice Presidents Electing to
Reprice Stock Options (incorporated by reference to Exhibit
10.3.4A to the Annual Report on Form 10-K for the year ended
December 31, 1996).
10.4 Amended and Restated 1994 Stock Option and Long-Term
Incentive Plan (incorporated by reference to Exhibit A to
the 1997 Annual Meeting Proxy Statement).
10.4.1 Non-Employee Directors' Stock Option Plan (incorporated by
reference to Appendix A to the 1996 Annual Meeting Proxy
Statement).
10.4.2 Form of Stock Option Agreement between the Company and
certain employees of the Company (incorporated by reference
to Exhibit 10.3.3 to Registration Statement).
49
EXHIBITS
NUMBER DESCRIPTION
- --------------------- -----------
10.4.3* Amended Form of Stock Option Agreement between the Company
and certain employees of the Company.
10.4.4 Pay-For-Performance Incentive Plan (incorporated by
reference to Exhibit B to the 1997 Annual Meeting Proxy
Statement).
10.4.5 Employee Stock Purchase Plan (incorporated by reference to
Exhibit 10.3.1A to the Annual Report on Form 10-K for the
year ended December 31, 1997).
10.4.6 1998 Amended and Restated Stock Unit Award Program
(incorporated by reference to Exhibit 10.4.6 to the Annual
Report on Form 10-K for the year ended December 31, 1998).
10.4.7* Investment Technology Group, Inc. Deferred Compensation
Plan, dated as of January 1, 1999.
10.5 Lease, dated July 11, 1990, between AEW/LBA Acquisition Co.
LLC (as successor to 400 Corporate Pointe, Ltd.) and
Integrated Analytics Corporation, as assigned by Integrated
Analytics Corporation to the Company (incorporated by
reference to Exhibit 10.3.3 to Registration Statement).
10.5.1 First Amendment to Lease, dated as of June 1, 1995, between
AEW/LBA Acquisition Co. LLC (as successor to 400 Corporate
Pointe, Ltd.) and the Company (incorporated by reference to
Exhibit 10.5.7 to Annual Report of Form 10-K for the year
ended December 31, 1996).
10.5.2 Second Amendment to Lease, dated as of December 5, 1996,
between Arden Realty Limited Partnership and the Company
(incorporated by reference to Exhibit 10.5.2 to the Annual
Report on Form 10-K for the year ended December 31, 1997).
10.5.3* Third Amendment to Lease, dated as of March 13, 1998 between
Arden Realty Finance Partnership, L.P. and the Company.
10.5.4* Fourth Amendment to Lease, dated as of February 29, 2000
between Arden Realty Finance Partnership, L.P. and the
Company.
10.5.5* Lease, dated as of February 29, 2000 between Arden Realty
Finance IV, L.L.C. and the Company.
10.5.6 Lease, dated October 4, 1996, between Spartan Madison Corp.
and the Company (incorporated by reference to Exhibit 10.5.3
to the Annual Report on Form 10-K for the year ended
December 31, 1997).
10.5.7 First Supplemental Agreement, dated as of January 29, 1997,
between Spartan Madison Corp. and the Company (incorporated
by reference to Exhibit 10.5.4 to the Annual Report on Form
10-K for the year ended December 31, 1997).
10.5.8 Second Supplemental Agreement, dated as of November 25,
1997, between Spartan Madison Corp. and the Company
(incorporated by reference to Exhibit 10.5.5 to the Annual
Report on Form 10-K for the year ended December 31, 1997).
10.5.9* Third Supplemental Agreement dated as of September 29, 1999
between Spartan Madison Corp. and the Company.
10.5.10 Lease dated March 10, 1995, between Boston Wharf Co. and the
Company. (incorporated by reference to Exhibit 10.5.6 to the
Annual Report on Form 10-K for the year ended December 31,
1997).
50
EXHIBITS
NUMBER DESCRIPTION
- --------------------- -----------
10.6* Form of QuantEX Software and Hardware License Agreement.
21* Subsidiaries of Company.
23* Consent of KPMG LLP
27.1* Financial Data Schedule.
27.2* Restated Financial Data Schedule
27.3* Restated Financial Data Schedule
27.4* Restated Financial Data Schedule
27.5* Restated Financial Data Schedule
27.6* Restated Financial Data Schedule
- ------------------------
* Filed herewith
(b) Reports on Form 8-K.
None.
(c) Index to Exhibits
See list of exhibits at Item 14(a)(3) above and exhibits following.
51
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
BY: /S/ RAYMOND L. KILLIAN, JR.
-----------------------------------------
Raymond L. Killian, Jr.
CHAIRMAN OF THE BOARD,
CHIEF EXECUTIVE OFFICER AND PRESIDENT
Dated: March 28, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons and on behalf of the
Registrant in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ RAYMOND L. KILLIAN, JR. Chairman of the Board, Chief
------------------------------------------- Executive Officer President March 28, 2000
Raymond L. Killian, Jr. and Director
/s/ HOWARD C. NAPHTALI Managing Director and Chief
------------------------------------------- Financial Officer (Principal March 28, 2000
Howard C. Naphtali Financial Officer)
/s/ ANGELO BULONE Vice President and Controller
------------------------------------------- (Principal Accounting March 28, 2000
Angelo Bulone Officer)
/s/ FRANK E. BAXTER Director
------------------------------------------- March 28, 2000
Frank E. Baxter
/s/ NEAL S. GARONZIK Director
------------------------------------------- March 28, 2000
Neal S. Garonzik
/s/ WILLIAM I JACOBS Director
------------------------------------------- March 28, 2000
William I Jacobs
/s/ ROBERT L. KING Director
------------------------------------------- March 28, 2000
Robert L. King
/s/ MARK A. WOLFSON Director
------------------------------------------- March 28, 2000
Mark A. Wolfson
52
EXHIBIT INDEX
SEQUENTIALLY
EXHIBITS NUMBERED
NUMBER DESCRIPTION PAGE
- --------------------- ----------- ------------
2.1 Agreement and Plan of Merger, dated as of March 17, 1999, by
and between Jefferies Group, Inc. and the Company
(incorporated by reference to Exhibit 2.1 to the Annual
Report on Form 10-K for the year ended December 31, 1998).
2.2 Distribution Agreement, dated as of March 17, 1999, by and
among Jefferies Group, Inc. and JEF Holding Company, Inc.
(incorporated by reference to Exhibit 2.2 to the Annual
Report on Form 10-K for the year ended
December 31, 1998).
3.1* Certificate of Incorporation of the Company.
3.2* By-laws of the Company.
4.1* Form of Certificate for Common Stock of the Company.
10.1 Joint Venture Agreement, dated October 1, 1987, between
Jefferies & Company, Inc. and BARRA, Inc. (formerly Barr
Rosenberg Associates, Inc.) (incorporated by reference to
Exhibit 10.1.1 to Registration Statement Number 33-76474 on
Form S-1 as declared effective by the Securities and
Exchange Commission on May 4, 1994 (the "Registration
Statement")).
10.1.1 Exclusive Software License Agreement, dated October 1, 1987,
between the POSIT Joint Venture and Jefferies & Company,
Inc. (incorporated by reference to Exhibit 10.1.2 to
Registration Statement).
10.1.2 Amendment No. 1 to Exclusive Software License Agreement,
dated August 1, 1990, between the POSIT Joint Venture and
Jefferies & Company, Inc. (incorporated by reference to
Exhibit 10.1.3 to Registration Statement).
10.1.3 Consent of BARRA, Inc. to the assignment to the Company of
the interests of Jefferies & Company, Inc. in the Posit
Joint Venture referenced in item 10.1.1 and rights in the
Software License Agreement referenced in item 10.1.2
(incorporated by reference to Exhibit 10.1.4 to Registration
Statement).
10.1.4 Joint Venture Agreement, dated as of November 17, 1998, by
and among Investment Technology Group International Limited,
Societe Generale, Investment Technology Group SG Limited,
Investment Technology Group Limited and Investment
Technology Group Europe Limited (incorporated by reference
to Exhibit 10.1.4 to the Annual Report on Form 10-K for the
year ended December 31, 1998).
10.2 Service Agreement, dated March 15, 1994, by and between
Jefferies & Company, Inc. and ITG Inc. (incorporated by
reference to Exhibit 10.2.2 to Registration Statement).
10.2.1 Amendment No. 1 to Service Agreement, dated as of January 1,
1999, by and between Jefferies & Company, Inc. and ITG Inc.
(incorporated by reference to Exhibit 10.2.1 to the Annual
Report on Form 10-K for the year ended
December 31, 1998).
53
SEQUENTIALLY
EXHIBITS NUMBERED
NUMBER DESCRIPTION PAGE
- --------------------- ----------- ------------
10.2.2 Execution Agreement, dated as of January 1, 1999, by and
between W & D Securities, Inc. and ITG Inc. (incorporated by
reference to Exhibit 10.2.2 to the Annual Report on Form
10-K for the year ended December 31, 1998).
10.2.3 Fully Disclosed Clearing Agreement, dated as of January 1,
1999, by and between Jefferies & Company, Inc. and ITG Inc.
(incorporated by reference to Exhibit 10.2.3 to the Annual
Report on Form 10-K for the year ended December 31, 1998).
10.2.4 Benefits Agreement, dated as of March 17, 1999, by and
between Jefferies Group, Inc. and JEF Holding Company, Inc.
(incorporated by reference to Exhibit 10.2.4 to the Annual
Report on Form 10-K for the year ended
December 31, 1998).
10.2.5 Amended and Restated Tax Sharing Agreement, dated as of
March 17, 1999, by and among Jefferies Group, Inc., JEF
Holding Company, Inc. and the Company (incorporated by
reference to Exhibit 10.2.5 to the Annual Report on Form
10-K for the year ended December 31, 1998).
10.2.6 Tax Sharing and Indemnification Agreement, dated as of March
17, 1999, by and among Jefferies Group, Inc., JEF Holding
Company, Inc. and the Company (incorporated by reference to
Exhibit 10.2.6 to the Annual Report on Form 10-K for the
year ended December 31, 1998).
10.3 Employment Agreement between the Company, ITG Inc. and
Raymond L. Killian, Jr. (incorporated by reference to
Exhibit 10.3.2 to Registration Statement).
10.3.1 Amendment No. 2 to Employment Agreement between Raymond L.
Killian, Jr., the Company and ITG Inc. (incorporated by
reference to Exhibit 10.3.2A to the Annual Report on Form
10-K for the year ended December 31, 1996.)
10.3.2 Amendment to Form of Employment Agreement between the
Company, ITG Inc. and Senior Vice Presidents Electing to
Reprice Stock Options (incorporated by reference to Exhibit
10.3.4A to the Annual Report on Form 10-K for the year ended
December 31, 1996).
10.4 Amended and Restated 1994 Stock Option and Long-Term
Incentive Plan (incorporated by reference to Exhibit A to
the 1997 Annual Meeting Proxy Statement).
10.4.1 Non-Employee Directors' Stock Option Plan (incorporated by
reference to Appendix A to the 1996 Annual Meeting Proxy
Statement).
10.4.2 Form of Stock Option Agreement between the Company and
certain employees of the Company (incorporated by reference
to Exhibit 10.3.3 to Registration Statement).
10.4.3* Amended Form of Stock Option Agreement between the Company
and certain employees of the Company.
10.4.4 Pay-For-Performance Incentive Plan (incorporated by
reference to Exhibit B to the 1997 Annual Meeting Proxy
Statement).
54
SEQUENTIALLY
EXHIBITS NUMBERED
NUMBER DESCRIPTION PAGE
- --------------------- ----------- ------------
10.4.5 Employee Stock Purchase Plan (incorporated by reference to
Exhibit 10.3.1A to the Annual Report on Form 10-K for the
year ended December 31, 1997).
10.4.6 1998 Amended and Restated Stock Unit Award Program
(incorporated by reference to Exhibit 10.4.6 to the Annual
Report on Form 10-K for the year ended December 31, 1998).
10.4.7* Investment Technology Group, Inc. Deferred Compensation
Plan, dated as of January 1, 1999.
10.5 Lease, dated July 11, 1990, between AEW/LBA Acquisition Co.
LLC (as successor to 400 Corporate Pointe, Ltd.) and
Integrated Analytics Corporation, as assigned by Integrated
Analytics Corporation to the Company (incorporated by
reference to Exhibit 10.3.3 to Registration Statement).
10.5.1 First Amendment to Lease, dated as of June 1, 1995, between
AEW/LBA Acquisition Co. LLC (as successor to 400 Corporate
Pointe, Ltd.) and the Company (incorporated by reference to
Exhibit 10.5.7 to Annual Report of Form 10-K for the year
ended December 31, 1996).
10.5.2 Second Amendment to Lease, dated as of December 5, 1996,
between Arden Realty Limited Partnership and the Company
(incorporated by reference to Exhibit 10.5.2 to the Annual
Report on Form 10-K for the year ended
December 31, 1997).
10.5.3* Third Amendment to Lease, dated as of March 13, 1998 between
Arden Realty Finance Partnership, L.P. and the Company.
10.5.4* Fourth Amendment to Lease, dated as of February 29, 2000
between Arden Realty Finance Partnership, L.P. and the
Company.
10.5.5* Lease, dated as of February 29, 2000 between Arden Realty
Finance IV, L.L.C. and the Company.
10.5.6 Lease, dated October 4, 1996, between Spartan Madison Corp.
and the Company (incorporated by reference to Exhibit 10.5.3
to the Annual Report on Form 10-K for the year ended
December 31, 1997).
10.5.7 First Supplemental Agreement, dated as of January 29, 1997,
between Spartan Madison Corp. and the Company (incorporated
by reference to Exhibit 10.5.4 to the Annual Report on Form
10-K for the year ended December 31, 1997).
10.5.8 Second Supplemental Agreement, dated as of November 25,
1997, between Spartan Madison Corp. and the Company
(incorporated by reference to Exhibit 10.5.5 to the Annual
Report on Form 10-K for the year ended December 31, 1997).
10.5.9* Third Supplemental Agreement dated as of September 29, 1999
between Spartan Madison Corp. and the Company.
10.5.10 Lease dated March 10, 1995, between Boston Wharf Co. and the
Company. (incorporated by reference to Exhibit 10.5.6 to the
Annual Report on Form 10-K for the year ended December 31,
1997).
10.6* Form of QuantEX Software and Hardware License Agreement.
55
SEQUENTIALLY
EXHIBITS NUMBERED
NUMBER DESCRIPTION PAGE
- --------------------- ----------- ------------
21* Subsidiaries of Company.
23* Consent of KPMG LLP.
27.1* Financial Data Schedule.
27.2* Restated Financial Data Schedule.
27.3* Restated Financial Data Schedule.
27.4* Restated Financial Data Schedule.
27.5* Restated Financial Data Schedule.
27.6* Restated Financial Data Schedule.
- ------------------------
* Filed herewith
56