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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, 2000 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 23, 2001: 23, 2001:
$1,521,299,878 31,667,358
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 2001 Annual Meeting of Stockholders
(incorporated, in part, in Form 10-K Part III).
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2000 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PAGE
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PART I
Item 1. Business.................................................... 1
Item 2. Properties.................................................. 12
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..................................... 13
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.................................. 48
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 48
Item 11. Executive Compensation...................................... 48
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................ 48
Item 13. Certain Relationships and Related Transactions.............. 48
PART IV
Item 14. Exhibits, Financial Statements, Schedules and Reports on
Form 8-K.................................................. 49
QUANTEX IS A REGISTERED TRADEMARK OF THE INVESTMENT TECHNOLOGY GROUP, INC.
COMPANIES
POSIT IS A REGISTERED SERVICE MARK OF THE POSIT JOINT VENTURE.
SMARTSERVER, ACE, TCA AND ITG ACCESS ARE TRADEMARKS OF THE INVESTMENT
TECHNOLOGY
GROUP, INC. COMPANIES
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 market conditions; and
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. ("Jefferies Group") on
July 22, 1983 and its principal subsidiaries include: (1) ITG Inc. and AlterNet
Securities, Inc., broker-dealers in equity securities, (2) Investment Technology
Group International Limited, which is a 50% partner in the ITG Europe joint
venture, (3) ITG Australia Limited, an institutional broker-dealer in Australia,
(4) ITG Canada Corp., an institutional broker-dealer in Canada, and
(5) Inference Group LLC, an internal asset management subsidiary. We provide
equity trading services and transaction research to institutional investors and
brokers in the United States ("U.S."), Canada, Australia and Europe.
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: 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
estimating and measuring transaction costs.
- ITG/Opt: a computer-based equity portfolio selection system.
- ITG Access: a browser-based order routing tool.
- 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, ITG
Platform and ITG Access, as well as other 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 ("NYSE"), (3) certain regional
exchanges, (4) market makers, (5) electronic communication networks
("ECNs")-systems which trade equity securities 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 also serve the active trading and broker-dealer communities. There are
521 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 submitted to the system
directly via QuantEX, ITG Platform, ITG Access or computer-to-computer links, or
indirectly via ITG Electronic Trading Desk personnel. 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.
1
POSIT currently accepts orders for a universe of approximately 18,000
different equity securities, but may be modified, as the need arises, to include
additional equity securities. At the end of the submission window the POSIT
algorithm is run. It optimizes the maximum possible number of buy and sell
orders that match or "cross". Clients may specify conditions on their orders
that must be satisfied, such as the requirement that the 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 eight scheduled crosses
every business day, at 9:40 a.m., 10:00 a.m., 10:30 a.m. and then hourly, on the
hour, between 11:00 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.
- The average execution size in POSIT is more than ten times larger than the
average execution size on ECNs.
- Access to the substantial pool of liquidity represented by aggregate POSIT
orders in each match.
- 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 match results. Clients may then submit the unexecuted
portion of their orders to subsequent POSIT matches, choose to execute
unmatched 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.
Clients can also access POSIT through our brokerage subsidiary, AlterNet
Securities, Inc. AlterNet Securities, Inc. enables clients to execute trades in
POSIT on a net basis, I.E. with the commission payable to us for the POSIT trade
included in the price at which the client executes their POSIT trade. This
feature is particularly attractive to our broker-dealer customers and AlterNet
Securities, Inc. was created in response to broker-dealers' desires to have net
pricing in POSIT.
2
The following graph illustrates the average daily volume of shares crossed
on POSIT since 1994:
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
1989 1990 1991 1992 1993 1994 1995
Shares Per Day 642,857 1,703,557 2,320,158 4,330,709 6,221,964 7,607,913 8,953,857
Shares Millions 162 431 587 1,100 1,574 1,917 2,256
Days 252 253 253 254 253 252 252
Growth (shares/days) 165% 36% 87% 44% 22% 18%
1994 1995
8 9
Shares
Macintosh HD:Desktop Folder:art1.dat
1996 1997 1998 1999 2000
Shares Per Day 13,062,016 14,525,499 23,151,105 25,723,698 31,137,479
Shares Millions 3,318 3,675 5,834 6,482 7,847
Days 254 253 252 252 252
Growth (shares/days) 46% 11% 59% 11% 21%
1996 1997 1998 1999 2000
13 15 23 26 31
Macintosh HD:Desktop Folder:art1.dat
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,
such as pair trading, market-neutral algorithms and 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 provides clients 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 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
3
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 NYSE, the American Stock Exchange and certain regional
stock exchanges, the Nasdaq National Market, POSIT, our SmartServers, 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 provides 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 portfolio trade 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 for
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, 2000, there were 118
installations of QuantEX at 55 client sites.
SMARTSERVERS
SmartServers are automated trading destinations that accept orders from
client workstations and execute them using a computerized trading strategy. All
SmartServers are physically located at ITG, and are accessed electronically by
clients 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.
Currently, we provide two strategy-based servers: the VWAP SmartServer and
the SPI 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
The SPI SmartServer is designed to improve trading performance of small- and
medium-size orders that are traditionally executed as market orders. The SPI
SmartServer analyzes momentum, volatility, and money flow indicators to decide
how and when to trade an order to improve upon the results expected from a
market order. Clients may choose a time horizon for each order, anywhere from 5
to 30 minutes, whereby the SPI SmartServer monitors the market and determines
the timing, pricing, and size of outgoing orders using real-time market data.
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, ITG Platform and ITG Access
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, QuantEX or ITG Access
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 executions 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 NYSE, the
American Stock Exchange and certain regional stock exchanges, 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. 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 that provides our clients
enhanced list trading capabilities and access to ECN order types. The new
version of ITG Platform also provides
5
certain clients with access to real time Nasdaq Level II data as well as the
ability to communicate with us via the Internet or through private networks.
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.
Many technical features support these goals:
- Other applications can link to 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, 2000, there were 362 installations of ITG Platform at 199
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, during and
following 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 integrate the system with the user's other investment systems and databases,
with the goal of tightly coupling ITG/Opt to the client's workflow. 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.
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ITG ACCESS
ITG Access is our latest trading tool allowing users to take advantage of
ITG's advanced trading services from anywhere through the Internet. ITG Access
is a browser-based order routing tool for sending orders to POSIT and the
Electronic Trading Desk.
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 brokerage houses that provide
such research (i.e., directing commissions to such brokerage houses), our
clients reward the firm for these value-added research services.
ITG EUROPE
In the fourth quarter of 1998, we entered into a 50/50 joint venture with
Societe Generale, and founded 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 six daily matches, at 9:00 a.m., 10:00 a.m., 11:00 a.m., 12:00 noon,
2:00 p.m. and 3:00 p.m., London time covering the equities of eight European
markets: the U.K., France, Germany, Switzerland, the Netherlands, Spain, Italy
and Belgium. On January 12, 2001 we signed an agreement with Societe Generale to
acquire their entire interest in ITG Europe for $18.5 million. Closing of the
transaction is expected to occur in the second quarter of 2001. We intend to
continue to pursue the international market in a variety of ways, including
through joint-ventures with strategic partners and the development of
specially-tailored versions of our services.
ITG AUSTRALIA
In 1997, we entered into a 50/50 joint venture with Burdett, Buckeridge &
Young and founded ITG Australia Limited, an international brokerage firm that
applies our cost-saving execution and transaction research technologies to
Australian equity trading. In November of 2000, we acquired the remaining
interest in ITG Australia (from Burdett and certain employees of ITG Australia)
that we did not already own, bringing our ownership interest up to 100%. Through
ITG Australia we are continuing to provide ITG products to local investors for
use in the local market, provide U.S. clients with access to the Australian
marketplace and pursue U.S. business from Australian investors.
7
ITG CANADA
In April 2000, we announced the formation of our Canadian subsidiary, ITG
Canada Corp., which functions as an institutional broker-dealer in Canada. ITG
Canada will provide Canadian institutions access to many of the ITG products
provided to our U.S. customer base including a version of QuantEX developed for
the Canadian markets. E*Trade Technologies Corporation is also a licensed
distributor of QuantEX in Canada.
In November 2000, the POSIT Joint Venture announced that it was in
discussions with the Toronto Stock Exchange ("TSE") to license POSIT to the TSE
to operate POSIT as a facility of the TSE for TSE listed securities. An official
launch date will be determinded once definitive documentation has been completed
by the parties.
REGULATION
The securities industry in the U.S. is subject to extensive regulation under
both federal and state laws. The Securities and Exchange Commission ("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
50 states and the District of Columbia. AlterNet Securities, Inc. is a
registered broker-dealer in 12 states.
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. and AlterNet Securities, Inc. are 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
From the formation of the POSIT Joint Venture until the adoption of
Regulation ATS, 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 additional legislation
applicable to alternative trading systems.
8
NET CAPITAL REQUIREMENT
As registered broker-dealers, both ITG Inc. and AlterNet Securities, Inc.
are 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 requires a broker-dealer doing business with the public
to maintain certain minimum net capital standards. ITG Inc. is required to
maintain net capital equal to the greater of $250,000 or 2% of its aggregate
debit balances (primarily receivables from clients and broker-dealers). As of
December 31, 2000, ITG Inc. had net capital of $99.5 million, which exceeded
minimum net capital requirements by $99.2 million.
AlterNet Securities, Inc. is required to maintain net capital equal to the
greater of $100,000 or 6 2/3% of its aggregate indebtedness. As of December 31,
2000, AlterNet Securities, Inc. had net capital of $1.0 million, which was
$0.9 million in excess of required net capital.
Although we believe that the combination of our existing net regulatory
capital and operating cash flows will be sufficient to meet regulatory capital
requirements for each of ITG Inc. and AlterNet Securities, Inc., a shortfall in
net regulatory capital would have a material adverse effect on our business and
our results of operations.
A change in the net capital rules, imposition of new rules or any unusually
large charge against capital could limit certain operations of ITG Inc. or
AlterNet Securities, Inc., such as trading activities that require the use of
significant amounts of capital.
CREDIT RISK
Credit risk is the amount of accounting loss ITG Inc. and AlterNet
Securities, Inc. would incur if a counterparty failed to perform its obligations
under contractual terms. Substantially all of the clearing and depository
operations for ITG Inc. and AlterNet Securities, Inc. are performed by their
clearing broker pursuant to a clearing agreement. The clearing broker reviews,
as considered necessary, the credit risk associated with the nonperformance of
counterparties in securities transactions. Credit risk can be directly impacted
by volatile securities markets, credit markets and regulatory charges.
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 ITG Inc. and the POSIT joint venture. The
license agreement grants ITG Inc. 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.
Under the license agreement, ITG Inc. pays quarterly royalties to the POSIT
joint venture equal to specified percentages of the transaction fees we charge
on each share crossed through POSIT. For the years ended December 31, 2000, 1999
and 1998, BARRA earned aggregate royalty income in respect of U.S. POSIT of
$20.2 million, $16.9 million, and $15.2 million, respectively, under the license
agreement.
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 ITG Inc. 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.
9
Under the license agreement and the terms of the joint venture, BARRA
continues to provide certain support services to ITG Inc. 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 ITG
Australia Limited and ITG Europe the right to use the POSIT technology for
crossing equity securities in Australia and Europe.
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, 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.
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 intellectual
property protection. Research and development costs were $16.5 million,
$9.7 million and $8.6 million for 2000, 1999 and 1998, respectively.
In connection with such research, 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 be able to 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.
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
10
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 U.S.
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 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, 2000, we employed 443 personnel.
11
ITEM 2. PROPERTIES
Our principal offices are located at 380 Madison Avenue in New York City. We
currently lease the entire 4th floor and part of the 7th floor or approximately
70,728 square feet of office space. In anticipation of future expansion we have
also leased a portion of the 5th floor (approximately 12,726 square feet of
office space). This additional space on the 5th floor and a portion of the 7th
floor is currently being sublet. The lease payments as compared to the rental
income for the 5th and 7th floors, will have an immaterial effect upon our
operating results. The fifteen-year lease terms for the 4th and 5th floors and
the thirteen-year lease term for the 7th floor expire in January 2013.
We also maintain a research, development and technical support services
facility in Culver City, California where we occupy approximately 48,302 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 to the
rental income will have an immaterial effect upon our operating results. We
lease the California facility pursuant to lease agreements that expire in
December 2005.
Additionally, we also maintain a backup and regional office 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 2000, we opened an office for our internal asset management
subsidiary in Waltham, Massachusetts where we occupy approximately 2,847 square
feet of office space. The lease agreement expires in April 2003.
We have a research facility in Herzliya, 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.
In 2000, we opened a trading facility in Toronto, Canada where we occupy
approximately 5,607 square feet of office space. We lease the Canadian space
pursuant to a seven-year lease agreement that expires in December 2007.
We have trading facilities in Melbourne and Sydney, Australia where we
occupy approximately 4,753 and 1,148 square feet of office space, respectively.
We lease the Melbourne space pursuant to a three-year lease agreement that
expires in June 2003 and we lease the Sydney space pursuant to a five year lease
agreement that expires in July 2001. We intend to occupy new office space in
Sydney commensurate with the expiration of our existing lease agreement.
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. On September 18, 2000, we entered into a closing
agreement with the IRS with respect to the compensation plan deductions, whereby
the IRS agreed that the deductions taken were allowable deductions. This
agreement eliminates approximately $7.6 million of the $9.6 million potential
tax deficiency raised by the IRS in 1998. We are continuing to pursue the
resolution of the research and development tax credit issue and we believe that
the ultimate resolution will not be material to the financial position of our
company.
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, 2000.
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, 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
-------- -------- -------- --------
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
2000
First Quarter............................................. N/A N/A 40.56 27.44
Second Quarter............................................ N/A N/A 46.50 28.38
Third Quarter............................................. N/A N/A 50.69 38.88
Fourth Quarter............................................ N/A N/A 42.94 30.25
- ------------------------------
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 23, 2001, the closing sales price per share for our common stock as
reported on the New York Stock Exchange was $48.04. On March 23, 2001, we
believe that our common stock was held by approximately 4,600 stockholders of
record or through nominees in street name accounts with brokers.
In connection with our spin-off from Jefferies Group 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.
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, 2000, 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. See Note 1, ORGANIZATION AND BASIS OF PRESENTATION--SPIN-OFF FROM
JEFFERIES GROUP, in
13
the Notes to Consolidated Financial Statements on page 30. Such data should be
read in connection with the consolidated financial statements contained on
pages 30 through 48.
YEAR ENDED DECEMBER 31,
----------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
CONSOLIDATED STATEMENT OF OPERATIONS DATA
Total revenues............................ $310,405 $232,044 $212,205 $137,042 $111,556
Total expenses............................ 197,409 149,183 131,270 89,782 70,555
-------- -------- -------- -------- --------
Income before income taxes................ 112,996 82,861 80,935 47,260 41,001
Income tax expense........................ 49,403 37,435 37,541 20,343 17,666
-------- -------- -------- -------- --------
Net income................................ $ 63,593 $ 45,426 $ 43,394 $ 26,917 $ 23,335
======== ======== ======== ======== ========
Basic net earnings per share of common
stock................................... $ 2.05 $ 1.48 $ 1.48 $ 0.93 $ 0.80
======== ======== ======== ======== ========
Diluted net earnings per share of common
stock................................... $ 2.02 $ 1.42 $ 1.41 $ 0.89 $ 0.79
======== ======== ======== ======== ========
Basic weighted average shares outstanding
(in millions)........................... 31.0 30.7 29.3 29.0 29.2
Diluted weighted average shares and common
stock equivalents outstanding (in
millions)............................... 31.6 31.9 30.8 30.2 29.7
CONSOLIDATED STATEMENT OF FINANCIAL
CONDITION DATA:(1)
Total assets.............................. $281,712 $179,488 $180,706 $113,641 $ 82,798
Total stockholders' equity................ $210,416 $115,652 $143,709 $ 93,763 $ 67,093
OTHER SELECTED FINANCIAL DATA:
Revenues per trading day (in thousands)... $ 1,232 $ 921 $ 842 $ 542 $ 439
Shares executed per day (in millions)..... 65 46 43 27 22
Revenues per average number of employees
(in thousands).......................... $ 843 $ 793 $ 899 $ 741 $ 803
Average number of employees............... 368 293 236 185 139
Total number of customers(1,2)............ 613 572 535 452 417
POSIT(2)................................ 521 492 490 414 396
QuantEX(3).............................. 55 52 52 43 55
ITG Platform(3)......................... 199 188 140 48 36
Total number of customer
installations:(1,3)
QuantEX................................. 118 103 97 84 109
ITG Platform............................ 362 296 201 69 67
Return on average stockholders' equity.... 38.1% 34.4% 37.4% 33.9% 45.5%
Book value per share(4)................... $ 6.66 $ 3.86 $ 4.85 $ 3.23 $ 2.30
Tangible book value per share(4).......... $ 6.52 $ 3.83 $ 4.80 $ 3.16 $ 2.22
Price to earnings ratio using diluted net
earnings per share of common stock...... 20.7 19.9 27.6 19.7 15.3
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
1994 1995 1996 1997 1998 1999 2000
ITG as % of NYSE/NASD 1.70% 1.90% 2.26% 2.24% 2.94% 2.45% 2.52%
- ------------------------------
1 Numbers are as of December 31st of each year.
2 Total customers and POSIT customers include those U.S. customers who have
generated revenues in excess of $1,000 in such year.
3 For the years ended December 31, 2000, 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 such calendar year or (b) traded shares on at least 12 different days
during such quarter. For the year ended December 31, 1996, QuantEx and ITG
Platform customers and customer installations include those customers who
have generated revenues in excess of $1,000 in such year.
4 The prior years have been restated to reflect the Company's 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 30.
5 The percentages on the graph are total ITG shares executed divided by the
"market" volume. Total ITG shares executed includes total POSIT shares,
shares executed by the Electronic Trading Desk and shares executed via
Client site products. 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 three
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;
- Client Site 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 in POSIT. We record as Electronic Trading Desk revenue any order
that is handled by our trading desk personnel and executed at any trade
execution destination other than POSIT. We record as Client site revenue any
order that is sent by our clients, through ITG's Client site systems but without
assistance from the Electronic Trading Desk, to any third party trade execution
destination. Other revenue includes (a) interest income/expense, (b) market
gains/losses and financing costs resulting from temporary positions in
securities assumed in the normal course of our agency trading business,
(c) fees for development and other services provided to our unconsolidated
international affiliates and (d) realized gains and losses in connection with
our cash management activities.
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, partially
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 equity gain/loss on
joint venture investments, offset by realization of deferred gains on the sale
of investments in 1998. 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,
------------------------------
2000 1999 1998
-------- -------- --------
Revenues:................................................... 100.0% 100.0% 100.0%
Commissions:
POSIT................................................... 49.8 55.7 55.1
Electronic trading desk................................. 21.6 20.5 23.4
Client site............................................. 24.5 22.0 19.9
Other..................................................... 4.1 1.8 1.6
Expenses:
Compensation and employee benefits........................ 24.9 22.3 24.3
Transaction processing.................................... 14.2 13.9 12.7
Software royalties........................................ 6.5 7.3 7.2
Occupancy and equipment................................... 5.5 5.7 5.6
Telecommunications and data processing services........... 4.0 4.1 3.8
Net loss on long-term investments......................... 1.6 1.1 0.1
Spin-off costs............................................ -- 2.8 0.9
Other general and administrative.......................... 6.9 7.1 7.3
Total expenses.......................................... 63.6 64.3 61.9
Income before income tax expense............................ 36.4 35.7 38.1
Income tax expense.......................................... 15.9 16.1 17.7
Net income.................................................. 20.5.. 19.6 20.4
YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999
EARNINGS PER SHARE
Basic net earnings per share for 2000 and 1999 were $2.05 and $1.48,
respectively. Diluted net earnings per share increased $0.60, or 42%, from $1.42
to $2.02. Diluted net earnings per share for 2000 and 1999, excluding
non-recurring charges (net of tax benefits) of $3.9 million, in 1999, incurred
in connection with our spin-off from Jefferies Group, were $2.02 and $1.54,
respectively.
REVENUES
Total revenues increased $78.4 million, or 34%, from $232.0 million to
$310.4 million. There were 252 trading days in both 1999 and 2000. Revenues per
trading day increased by $311,000, or 34%, from $921,000 to $1,232,000. Revenues
per average number of employees increased $50,000, or 6%, from $793,000 to
$843,000.
The number of shares crossed on the POSIT system increased 1.3 billion, or
21%, from 6.5 billion to 7.8 billion which drove the $25.2 million or 19% POSIT
revenue increase from $129.4 million in 1999 to $154.6 million in 2000. The
number of shares crossed on the POSIT system per day increased 5.4 million, or
21%, from 25.7 million to 31.1 million. Client site revenues increased 49%
reflecting an increase in share volume of 2.4 billion or 77%, from 3.1 billion
in 1999 to 5.5 billion in 2000. The increase in share volume was partially
offset by an 18% decrease in average client site revenue per share in 2000
attributable, in part, to growth in executions by our clients through ECNs.
Electronic Trading Desk revenues increased 41% primarily from an increase in
share volume of 1.0 billion or 50% from 2.0 billion in 1999 to 3.0 billion in
2000, partially offset by an 8% decrease in the average revenue per share in
2000 attributable, in part, to growth in executions by our clients through ECNs.
Other
17
revenues increased primarily due to (a) a one-time gain recorded on the sale of
our remaining investment in Versus Technologies, Inc., (b) increases in
investment income arising from larger average interest-earning balances and
improved rates of return and (c) international development fee income, which
were partially offset by interest costs incurred on accelerated settlement of
transactions in the normal course of business.
EXPENSES
Total expenses excluding income tax expense for 2000 increased
$48.2 million, or 32%, from $149.2 million to $197.4 million.
The following table itemizes expenses by category (in thousands):
YEAR ENDED
DECEMBER 31,
-------------------
2000 1999 CHANGE % CHANGE
-------- -------- -------- --------
Compensation and employee benefits....................... $77,177 $51,717 25,460 49.2
Transaction processing................................... 43,978 32,282 11,696 36.2
Software royalties....................................... 20,187 16,851 3,336 19.8
Occupancy and equipment.................................. 16,953 13,295 3,658 27.5
Telecommunications and data processing services.......... 12,319 9,428 2,891 30.7
Net loss on long-term investments........................ 5,263 2,674 2,589 96.8
Spin-off costs........................................... -- 6,516 (6,516) (100.0)
Other general and administrative......................... 21,532 16,420 5,112 31.1
Income taxes............................................. 49,403 37,435 11,968 32.0
COMPENSATION AND EMPLOYEE BENEFITS: Salaries, bonuses and related employee
benefits increased primarily due to growth in our employee base of 125 employees
or 39% from 318 to 443, payment of additional compensation necessary to attract
and retain quality personnel and increased bonus expense due to our
performance-based compensation plan. Approximately 44% of the increase in
employees were staffed in technology, product development and production
infrastructure and 38% of the increase in employees related to the addition of
Canada and Australia. Average compensation and employee benefits expenses per
(average) headcount increased $33,000, or 19%, from $177,000 to $210,000.
TRANSACTION PROCESSING: Transaction processing as a percentage of revenues
increased from 13.9% to 14.2% of revenues. ECN costs increased $8.4 million from
$1.4 million in 1999 to $9.8 million in 2000. Additionally, clearing costs
increased by $4.6 million in 2000 from $14.8 million in 1999 to $19.4 million in
2000 as a result of share volume increases and a decrease in the average ticket
size. Partially offsetting the increases were decreases in Super DOT costs,
primarily specialist charges, due to a pricing change which eliminated NYSE
specialist charges for trades executed within 5 minutes as compared to 2 minutes
in 1999.
SOFTWARE ROYALTIES: Because software royalties are contractually fixed at
13% of U.S. POSIT revenues, the increase is wholly attributable to an increase
in POSIT revenues.
OCCUPANCY AND EQUIPMENT: The increase in headcount and infrastructure
enhancements resulted in increased equipment purchases and the associated
depreciation and maintenance expenses. In addition, rent expense increased due
to the expansion of our research and development facility in Culver City,
California, and our New York headquarters, as well as the opening of additional
offices during 2000 in Toronto, Canada and Waltham, Massachusetts.
TELECOMMUNICATIONS AND DATA PROCESSING SERVICES: Increases in our client
base and employee base resulted in additional client data services, including
market data line connections, increased communication charges to link clients to
ITG in New York and Boston, and for infrastructure
18
improvements to accommodate volume growth and the expected move to
decimalization. Telecommunications and data processing services as a percentage
of revenues decreased slightly to 4.0% in 2000 from 4.1% in 1999.
NET LOSS ON LONG-TERM INVESTMENTS: The increase in loss on long-term
investments in 2000 over 1999 primarily resulted from the recorded losses
incurred by our European joint venture, a $944,000 loss from our Vostock joint
venture with Wit SoundView and the effect of the deferred gain on the sale of
the LongView Group, realized in 1999, after having been held in escrow for one
year.
OTHER GENERAL AND ADMINISTRATIVE: The increase in other general and
administrative expenses reflects an increase in legal, accounting and consulting
professional fees along with increased spending on business development. These
expenses were partially offset by lower software amortization for certain
products that were released in late 1998, which had increased the related
expense in 1999.
INCOME TAX EXPENSE
The decrease in the effective tax rate from 45.2% in 1999 to 43.7% in 2000
was due to decreases in state and local income taxes partially offset by higher
nondeductible foreign losses in 2000.
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 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
average number of employees decreased $106,000, or 12%, from $899,000 to
$793,000.
The increases in POSIT and Client site 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. Client site revenues increased 21% as a result of
an increase in share volume of 400 million or 15%, from 2.7 billion in 1998 to
3.1 billion in 1999 and an increase in rates of 6%. 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. As a result, share volumes
decreased by 104 million or 5% from 2.1 billion in 1998 to 2.0 billion in 1999.
Other revenues increased primarily due to incremental royalty income from
international versions of POSIT, larger average balances in our investment
portfolio and decreased errors and accommodations. These were partially offset
by increased financing costs resulting from temporary positions in securities
assumed in the normal course of 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.
19
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 payment of 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 (average) headcount decreased $41,000, or 19%,
from $218,000 to $177,000.
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 U.S. 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
investments in 1999 over 1998 primarily resulted from the recorded gain on sale
of our equity investment in the LongView Group, 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
20
PRESENTATION--SPIN-OFF FROM JEFFERIES GROUP, in the Notes to Consolidated
Financial Statements on page 30.
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 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.
DEPENDENCE ON MAJOR CUSTOMERS
During 2000, revenue from our 10 largest customers accounted for
approximately 31.4% of our total revenue while revenue from each of our three
largest customers accounted for 6.4%, 5.1%, and 4.5%, respectively, of total
revenue. 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. 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 submitted to 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, common stock and convertible debt securities. At December 31,
2000, cash equivalents and securities owned at fair value amounted to
$187.3 million and net receivables from brokers, dealers and other, of
$22.8 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 30.
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, 2000, we had investments in limited
partnerships investing in marketable securities, a hedged convertible managed
account, and a venture capital fund amounting to $29.5 million in the aggregate.
The limited partnerships employ either a hedged convertible strategy or a
long/short strategy to capitalize on short
21
term price movements. Our managed account is employing a hedged convertible
strategy. We classify the securities under our managed account within securities
owned, at fair value and securities sold, not yet purchased, at fair value.
Historically, all regulatory capital needs of ITG Inc. and AlterNet
Securities, Inc. have been provided by cash from operations. We believe that
cash flows from operations will provide ITG Inc. and AlterNet Securities, Inc.
with sufficient regulatory capital. As of December 31, 2000, ITG Inc. and
AlterNet Securities, Inc., had net excess regulatory capital of $99.2 million
and $0.9 million, respectively. 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.
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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
MARKET PRICE RISK
As part of our company's 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 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. A
portion of the investments under our cash management strategy are managed by
Inference Group LLC, our internal asset management subsidiary, which conducts
its day-to-day trading activities in accordance with investment strategies
reviewed with senior management and is subject to oversight by our Chief
Financial Officer. At December 31, 2000 our cash and cash equivalents and
securities owned were approximately $187.3 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, 2000, investments in limited
22
partnerships investing in marketable securities, a hedged convertible managed
account and a venture capital fund were approximately $29.5 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 $156.3 million at December 31, 2000. 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 our
joint-venture in Europe and our operations in Canada and Australia and through
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 and development activities in these
countries expose us to currency exchange fluctuations between the U.S. Dollar
and the British Pound Sterling, Australian Dollar, Canadian Dollar, Euro 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
--------
Independent Auditors' Report................................ 25
Consolidated Statements of Financial Condition.............. 26
Consolidated Statements of Income........................... 27
Consolidated Statements of Changes in Stockholders'
Equity.................................................... 28
Consolidated Statements of Cash Flows....................... 29
Notes to Consolidated Financial Statements.................. 30
24
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, 2000 and 1999, 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, 2000. 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 auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall consolidated 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, 2000 and 1999, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 2000, in conformity with accounting
principles generally accepted in the United States of America.
KPMG LLP
New York, New York
January 17, 2001
25
INVESTMENT TECHNOLOGY GROUP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
DECEMBER 31,
-------------------
2000 1999
-------- --------
ASSETS
Cash and cash equivalents................................... $135,533 $ 53,081
Securities owned, at fair value............................. 51,761 43,612
Receivables from brokers, dealers and other, net............ 23,892 19,181
Investments in limited partnerships......................... 16,702 13,922
Securities, available-for-sale, at fair value............... -- 2,023
Premises and equipment...................................... 24,330 20,229
Capitalized software........................................ 4,544 5,629
Goodwill.................................................... 4,408 824
Deferred taxes.............................................. 4,499 13,324
Other assets................................................ 16,043 7,663
-------- --------
Total assets................................................ $281,712 $179,488
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued expenses....................... $ 39,510 $ 33,459
Payable to brokers, dealers and other....................... 7,303 3,932
Software royalties payable.................................. 4,151 4,874
Securities sold, not yet purchased, at fair value........... 11,402 5,861
Income taxes payable........................................ 8,930 15,710
-------- --------
Total liabilities......................................... 71,296 63,836
-------- --------
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: 34,096,514 in 2000 and
32,179,106 in 1999...................................... 341 322
Additional paid-in capital................................ 138,297 96,534
Retained earnings......................................... 139,320 75,727
Common stock held in treasury, at cost; shares: 2,479,568
in 2000 and 2,213,721 in 1999........................... (67,186) (58,052)
Accumulated other comprehensive income (loss):
Currency translation adjustment......................... (356) (7)
Unrealized gain on securities, available-for-sale, net
of tax.................................................. -- 1,128
-------- --------
Total stockholders' equity............................ 210,416 115,652
-------- --------
Total liabilities and stockholders' equity.................. $281,712 $179,488
======== ========
The accompanying Notes to these Consolidated Financial Statements
are integral parts of these statements.
26
INVESTMENT TECHNOLOGY GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31,
------------------------------
2000 1999 1998
-------- -------- --------
REVENUES:
Commissions
POSIT................................................... $154,578 $129,364 $116,950
Electronic trading desk................................. 66,911 47,577 49,613
Client site............................................. 76,186 51,019 42,151
Other..................................................... 12,730 4,084 3,491
-------- -------- --------
Total revenues........................................ 310,405 232,044 212,205
EXPENSES:
Compensation and employee benefits........................ 77,177 51,717 51,462
Transaction processing.................................... 43,978 32,282 26,920
Software royalties........................................ 20,187 16,851 15,247
Occupancy and equipment................................... 16,953 13,295 11,886
Telecommunications and data processing services........... 12,319 9,428 8,138
Net loss on long-term investments......................... 5,263 2,674 204
Spin-off costs............................................ -- 6,516 1,936
Other general and administrative.......................... 21,532 16,420 15,477
-------- -------- --------
Total expenses........................................ 197,409 149,183 131,270
-------- -------- --------
Income before income tax expense............................ 112,996 82,861 80,935
Income tax expense.......................................... 49,403 37,435 37,541
-------- -------- --------
NET INCOME.................................................. $ 63,593 $ 45,426 $ 43,394
======== ======== ========
Basic net earnings per share of common stock................ $ 2.05 $ 1.48 $ 1.48
======== ======== ========
Diluted net earnings per share of common stock.............. $ 2.02 $ 1.42 $ 1.41
======== ======== ========
Basic weighted average shares outstanding................... 30,993 30,691 29,302
======== ======== ========
Diluted weighted average shares and common stock equivalents
outstanding............................................... 31,552 31,947 30,775
======== ======== ========
The accompanying Notes to these Consolidated Financial Statements
are integral parts of these statements.
27
INVESTMENT TECHNOLOGY GROUP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
ADDITIONAL COMMON ACCUMULATED TOTAL
PREFERRED COMMON PAID-IN RETAINED STOCK HELD COMPREHENSIVE STOCKHOLDERS'
STOCK STOCK CAPITAL EARNINGS IN TREASURY INCOME (LOSS) EQUITY
--------- -------- ---------- -------- ----------- -------------- -------------
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
Issuance of common stock from
treasury for Australian subsidiary
purchase (19,353 shares).......... -- -- 177 -- 524 -- 701
Purchase of common stock for
treasury (285,200 shares)......... -- -- -- -- (9,658) -- (9,658)
Issuance of common stock in
connection with the employee stock
option plan (1,881,576 shares).... -- 19 40,474 -- -- -- 40,493
Issuance of common stock in
connection with the employee stock
purchase plan (35,832 shares) -- -- 1,112 -- -- -- 1,112
Comprehensive income:
Net income........................ -- -- -- 63,593 -- -- 63,593
Other comprehensive income:
Currency translation adjustment... -- -- -- -- -- (349) (349)
Unrealized holding gain on
securities available-for-sale,
net of tax ($895)............... -- -- -- -- -- (1,128) (1,128)
--------
Comprehensive income................ 62,116
------- ---- -------- -------- -------- ------ --------
Balance at December 31, 2000........ $ -- $341 $138,297 $139,320 $(67,186) $ (356) $210,416
======= ==== ======== ======== ======== ====== ========
The accompanying Notes to these Consolidated Financial Statements are integral
parts of these statements.
28
INVESTMENT TECHNOLOGY GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
YEAR ENDED DECEMBER 31,
------------------------------
2000 1999 1998
-------- -------- --------
Cash flows from operating activities:
Net income.................................................. $ 63,593 $45,426 $43,394
Adjustments to reconcile net income to net cash provided by
operating activities:
Deferred income tax expense (benefit)..................... 9,878 (11,435) (324)
Depreciation and amortization............................. 13,567 12,835 11,599
Undistributed loss of affiliates.......................... 6,009 2,985 3,535
Provision for doubtful receivables........................ 169 228 96
Loss on sale of premises and equipment.................... 5 -- --
Decrease (increase) in operating assets:
Securities owned, at fair value........................... (8,054) (3,997) (2,258)
Receivables from brokers, dealers and other, net.......... (2,274) 4,718 (14,092)
Investments in limited partnerships....................... (1,580) (422) 9,935
Other assets.............................................. (11,353) 325 (3,978)
Increase (decrease) in operating liabilities:
Accounts payable and accrued expenses..................... 4,968 7,788 11,086
Payable to brokers, dealers and other..................... 3,371 917 2,078
Software royalties payable................................ (723) 804 1,407
Securities sold, not yet purchased, at fair value......... 5,539 5,573 285
Income taxes payable...................................... (6,806) 15,710 --
Income taxes payable to affiliate......................... -- (3,853) 2,365
Securities available-for-sale gain.......................... (4,258) -- --
-------- ------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES............... 72,051 77,602 65,128
-------- ------- -------
Cash flows from investing activities:
Purchase of premises and equipment.......................... (13,500) (8,792) (7,658)
Proceeds from sales of securities, available for sale....... 4,258 -- --
Proceeds from sale of premises and equipment................ 5 -- --
Sale of equity investment................................... -- -- 8,049
Purchase of investments in limited partnerships............. (1,200) (12,500) --
Purchase of remaining Australian subsidiary investment, net
of cash acquired ($382)................................... (4,646) -- --
Investment in joint venture................................. (4,613) (2,897) (4,790)
Capitalization of software development costs................ (2,202) (3,239) (4,025)
-------- ------- -------
NET CASH USED IN INVESTING ACTIVITIES................... (21,898) (27,428) (8,424)
-------- ------- -------
Cash flows from financing activities:
Dividends paid.............................................. -- (74,624) --
Issuance of common stock for Australian subsidiary
investment................................................ 701 -- --
Purchase of common stock for treasury....................... (9,658) (58,052) (6,250)
Issuance of common stock in connection with employee stock
option plan, including related tax benefit................ 41,605 57,911 12,962
-------- ------- -------
NET CASH PROVIDED (USED IN) BY FINANCING ACTIVITIES..... 32,648 (74,765) 6,712
-------- ------- -------
Effect of foreign currency translation on cash and cash
equivalents............................................... (349) 154 (161)
Net increase (decrease) in cash and cash equivalents...... 82,452 (24,437) 63,255
Cash and cash equivalents -- beginning of year.............. 53,081 77,518 14,263
-------- ------- -------
Cash and cash equivalents -- end of year.................... $135,533 $53,081 $77,518
======== ======= =======
Supplemental cash flow information:
Interest paid............................................. $ 6,312 $ 2,449 $ 20
======== ======= =======
Income taxes paid to non-affiliate........................ $ 23,620 $ 248 $ --
======== ======= =======
Income taxes paid to affiliate............................ $ -- $ 6,538 $30,296
======== ======= =======
The accompanying Notes to these Consolidated Financial Statements are integral
parts of these statements.
29
INVESTMENT TECHNOLOGY GROUP, INC.
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. and AlterNet Securities, Inc., broker-dealers
in equity securities, (2) Investment Technology Group International Limited,
which is a 50% partner in the ITG Europe joint venture, (3) ITG Australia
Limited, an institutional broker-dealer in Australia, (4) ITG Canada Corp., an
institutional broker-dealer in Canada, and (5) Inference Group LLC, an internal
asset management subsidiary. We provide equity trading services and transaction
research to institutional investors and brokers in the U. S., Canada, Australia
and Europe.
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;
SmartServers, which offer server-based implementation of trading strategies;
ITG/OPT, a computer-based equity portfolio selection system; ITG Access, a
browser-based order routing tool; 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. 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.
30
INVESTMENT TECHNOLOGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(1) ORGANIZATION AND BASIS OF PRESENTATION (CONTINUED)
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.
(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 site 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 includes (a) a one-time gain recorded on the sale of our remaining
investment in Versus Technologies, Inc., (b) investment income arising from
larger average interest-bearing balances and improved rates of return and
(c) international development fee income, which were partially offset by
interest costs incurred on accelerated settlement of transactions in the normal
course of business.
Receivables 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, 2000 and 1999 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.
31
INVESTMENT TECHNOLOGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In 1999, securities, available-for-sale, at fair value consisted of a single
investment in Versus Technologies, Inc. as part of Investment Technology
Group, Inc.'s investing activities. Unrealized gains and losses resulting from
this investment were reported net of tax in other comprehensive income in the
consolidated statements of financial condition. This security was sold in 2000
and the realized gain is reflected in the accompanying consolidated statement of
income when the security was 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 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, 2000 and 1999, net goodwill amounted to $0.3 million and
$0.8 million, respectively, net of accumulated amortization of $5.0 million and
$4.5 million, respectively.
In November 2000, we acquired the remaining interest in ITG Australia, a
wholly owned subsidiary of ITG Pacific Holdings Pty Limited, that we did not
already own for $5.0 million, bringing our ownership interest up to 100%.
Goodwill resulting from the purchase was $3.7 million. See Note 3, ACQUISITIONS
on page 34.
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.
32
INVESTMENT TECHNOLOGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 6) 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 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 Vostock, ITG Europe, ITG Australia
(through the date of acquisition) 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 $16.5 million, $9.7 million and $8.6 million for 2000,
1999 and 1998, 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.
33
INVESTMENT TECHNOLOGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior years' amounts to
conform to the current year's presentation.
(3) ACQUISITIONS
In November 2000, we completed the purchase from Burdett, Buckeridge & Young
and certain employees of ITG Australia Limited of the remaining 50% interest in
ITG Australia Limited that we did not already own, bringing our ownership up to
100%. The $5.0 million cost (which included $0.7 million of common stock)
exceeded the estimated fair value of the net assets acquired (which included
cash of $0.4 million) by $3.7 million. The excess of the purchase price over the
estimated fair value of the net assets acquired has been allocated to goodwill
and is amortized on a straight-line basis over a twenty-year period. The
consolidated financial statements include the results of operations of ITG
Pacific Holdings Pty Limited, the parent of ITG Australia Limited, from the date
of acquisition.
(4) SECURITIES AVAILABLE FOR SALE
At December 31, 1999 we had securities available for sale representing a
single equity ownership in Versus Technologies, Inc. The fair value and total
unrealized 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 was
recorded as an item of accumulated other comprehensive income on that date.
During 2000, these securities were sold, resulting in a $4.3 million realized
gain.
34
INVESTMENT TECHNOLOGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(5) PREMISES AND EQUIPMENT
The following is a summary of premises and equipment at December 31:
2000 1999
-------- --------
(DOLLARS IN THOUSANDS)
Furniture, fixtures and equipment........................... $46,528 $36,109
Leasehold improvements...................................... 11,030 8,195
------- -------
57,558 44,304
Less: accumulated depreciation and amortization............. 33,228 24,075
------- -------
Total..................................................... $24,330 $20,229
======= =======
Capital expenditures in the schedule above are primarily for
computer-related equipment.
Depreciation and amortization expense amounted to $9,642,000, $8,226,000,
and $7,502,000 in 2000, 1999, and 1998, respectively.
(6) CAPITALIZED SOFTWARE COSTS
The following is a summary of capitalized software costs at December 31:
2000 1999
-------- --------
(DOLLARS IN THOUSANDS)
Capitalized software costs.................................. $7,056 $17,474
Less: accumulated amortization.............................. 2,512 11,845
------ -------
Total..................................................... $4,544 $ 5,629
====== =======
Approximately $2,202,000 and $3,239,000 of software costs were capitalized
in 2000 and 1999, respectively, primarily for the development of new versions of
QuantEX, ITG Platform, ITG Access and TCA. In addition, approximately $1,587,000
and $3,105,000 of total capitalized software costs were not subject to
amortization as of December 31, 2000 and 1999, respectively, 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 2000, 1999 and 1998, we
included $3,287,000, $4,060,000 and $3,548,000, respectively, of amortized
software costs in other general and administrative expenses.
35
INVESTMENT TECHNOLOGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(7) INCOME TAXES
Income tax expense (benefit) consists of the following components:
2000 1999 1998
-------- -------- --------
(DOLLARS IN THOUSANDS)
Current
Federal................................................ $29,769 $33,303 $26,624
State.................................................. 9,751 15,492 11,241
Foreign................................................ 163 75 --
------- ------- -------
39,683 48,870 37,865
Deferred
Federal................................................ 6,508 (7,154) (338)
State.................................................. 3,212 (4,281) 14
------- ------- -------
9,720 (11,435) (324)
------- ------- -------
Total.................................................... $49,403 $37,435 $37,541
======= ======= =======
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, 2000 and
1999 were as follows:
2000 1999
-------- --------
(DOLLARS IN THOUSANDS)
Deferred compensation....................................... $6,531 $ 5,140
Deduction for accrued state and local taxes................. -- 5,060
Depreciation................................................ (3,126) 3,920
Other....................................................... 1,094 (796)
------ -------
Total....................................................... $4,499 $13,324
====== =======
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, 2000 and 1999, 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.
Up until the date of the spin-off on April 27, 1999, our operations were
included in the consolidated Federal income tax return of Jefferies Group and
subsidiaries.
All income tax payments due to/from Jefferies for the period through the
spin-off date were made pursuant to a Tax Sharing Agreement between Jefferies
Group and ITG. The Tax Sharing 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.
36
INVESTMENT TECHNOLOGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(7) INCOME TAXES (CONTINUED)
The provision for income tax expense differs from the expected Federal
income tax rate of 35% for 2000, 1999 and 1998 for the following reasons:
2000 1999 1998
-------- -------- --------
(DOLLARS IN THOUSANDS)
Computed expected income tax expense..................... $39,549 $29,001 $28,327
Increase in income taxes resulting from:
State & local income tax expense, net of Federal income
taxes................................................ 8,425 7,287 7,316
Non-deductible foreign losses.......................... 1,564 854 860
Other.................................................. (136) 293 1,038
------- ------- -------
Total income tax expense................................. $49,403 $37,435 $37,541
======= ======= =======
(8) EMPLOYEE BENEFIT PLANS
ITG PLANS
Effective January 1, 1999, all employees 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
$170,000 for 2000. 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 costs for the Plans was $4,448,000 and $2,782,000 in
2000 and 1999, respectively, 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 $645,000, $405,000 and $477,000 in 2000, 1999
and 1998, respectively, which represents the 15% excess over the amount actually
deferred by the participants. During 2000, 1999 and 1998 we granted 127,971,
100,247 and 190,642 units, respectively, 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
37
INVESTMENT TECHNOLOGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(8) EMPLOYEE BENEFIT PLANS (CONTINUED)
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.
JEFFERIES GROUP PLANS
All our employees who were citizens or residents of the U.S., 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 became participants in
the Jefferies Pension Plan.
The net periodic pension cost allocated to us was $1,100,000 and $819,000 in
1999 and 1998, 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 and 1998, we expensed and contributed to these plans $164,000, and
$2,568,000, 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 such plan and all participants are 100% vested.
(9) RELATED PARTY TRANSACTIONS
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 $2.7 million, $1.7 million and $2.2 million in 2000,
1999 and 1998, respectively, for development services.
In 1999, ITG Inc. entered into service agreements with our related parties,
Investment Technology Group Limited and ITG Australia Ltd. under which ITG Inc.
provides introductory brokerage and related services. Investment Technology
Group Limited fees for these services are included in revenues
38
INVESTMENT TECHNOLOGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(9) RELATED PARTY TRANSACTIONS (CONTINUED)
and amounted to $1,152,000 and $846,000, in 2000 and 1999, respectively. ITG
Australia Ltd. (through the date of acquisition) fees for these introductory
brokerage and related services amounted to $81,000 and $134,000, in 2000 and
1999, respectively.
We received royalty revenue from our related parties, ITG Australia Ltd.
(through the date of acquisition) in the amount of $48,000 and $14,000, and ITG
SG in the amount of $562,000 and $389,000, in 2000 and 1999, respectively,
pursuant to software license agreements.
JEFFERIES GROUP
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, Inc. 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 and
1998 were $161,000 and $1,186,000, respectively.
We paid to Jefferies & Company, Inc. an aggregate of $47,000 and $250,000
prior to the spin-off in 1999 and 1998, 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, Inc. 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 and
$11.9 million prior to the spin-off in 1999 and 1998, 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 and $911,000 prior to the spin-off in 1999
and 1998, respectively, paid to Jefferies & Company, Inc.
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 and $13.6 million prior to the
spin-off in 1999 and 1998, respectively, and were primarily included in
transaction processing expense. Also, included in revenues, are licensing and
consulting fees paid by W&D Securities, Inc. amounting to $50,000 and $165,000
prior to the spin-off in 1999 and 1998, respectively.
Included in other general and administrative expenses are fees paid to
Jefferies International Limited of $35,000 and $767,000 prior to the spin-off in
1999 and 1998, respectively, for various broker and administrative services.
39
INVESTMENT TECHNOLOGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(9) RELATED PARTY TRANSACTIONS (CONTINUED)
Jefferies & Company, Inc. has executed trades in an agency capacity for
certain of its customers using our services. Commission fees of $0.8 million and
$4.8 million prior to the spin-off in 1999 and 1998, respectively, and are
included in our revenues.
(10) 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.
(11) NET CAPITAL REQUIREMENT
ITG Inc. and AlterNet Securities, Inc. are subject to the Uniform Net
Capital Rule (Rule 15c3-1) under the Securities Exchange Act of 1934, which
requires the maintenance of minimum net capital. ITG Inc. has elected to use the
alternative method permitted by Rule 15c3-1, which requires that ITG Inc.
maintain minimum net capital equal to the greater of $250,000 or 2% of aggregate
debit balances arising from customer transactions, as defined. AlterNet
Securities, Inc. has elected to use the basic method permitted by Rule 15c3-1,
which requires that we maintain minimum net capital, as defined, equal to the
greater of $100,000 or 6 2/3% of aggregate indebtedness.
At December 31, 2000, ITG Inc. and AlterNet Securities, Inc. had net capital
of $99.5 million and $1.0 million, respectively, of which $99.2 million and
$0.9 million, respectively, was in excess of required net capital.
40
INVESTMENT TECHNOLOGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(12) STOCK OPTIONS PLAN
At December 31, 2000, 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 5,993,000 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 January 2010. 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.
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):
2000 1999 1998
-------- -------- --------
Net income.................................. As reported $63,593 $45,426 $43,394
Pro forma $55,409 $43,482 $41,713
Basic net earnings per share of common As reported $ 2.05 $ 1.48 $ 1.48
stock.....................................
Pro forma $ 1.79 $ 1.42 $ 1.42
Diluted earnings per share common stock..... As reported $ 2.02 $ 1.42 $ 1.41
Pro forma $ 1.76 $ 1.36 $ 1.36
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 2000, 1999 and 1998, respectively: zero dividend
yield for all years; risk free interest rates of 6.3, 5.3, and 5.5 percent,
respectively; expected volatility of 50, 50, and 45 percent, respectively; and
expected lives of five, five, and seven years, respectively.
41
INVESTMENT TECHNOLOGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(12) STOCK OPTIONS PLAN (CONTINUED)
A summary of the status of our stock option plan as of December 31, 2000,
1999 and 1998 and changes during the years ended on those dates is presented
below:
2000 1999 1998
--------------------- --------------------- --------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
FIXED OPTIONS SHARES PRICE SHARES PRICE SHARES PRICE
- ------------- ---------- -------- ---------- -------- --------- --------
Outstanding at beginning of
year........................... 3,502,339 $19.01 4,729,565 $ 9.90 5,663,178 $ 9.54
Granted.......................... 870,485 37.31 1,264,977 36.13 36,846 18.04
Exercised........................ (1,881,576) 8.46 (2,486,909) 10.40 (930,669) 7.90
Forfeited........................ (115,618) 34.73 (5,294) 11.90 (39,790) 12.47
---------- ---------- ---------
Outstanding at end of year....... 2,375,630 33.32 3,502,339 19.01 4,729,565 9.90
========== ========== =========
Options exercisable at
year-end....................... 657,134 24.40 2,105,982 9.38 4,458,012 9.63
Weighted average fair value per
share of options granted during
the year....................... $ 19.14 $ 18.09 $ 9.57
The provision for income taxes excludes current tax benefits related to the
exercise of stock options, and such benefit is reflected as an increase to
Stockholders' Equity, of $24.6 million and $29.0 million for the years ended
December 31, 2000 and 1999, respectively.
The following table summarizes information about fixed stock options
outstanding at December 31, 2000:
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 2000 LIFE (YEARS) PRICE 2000 PRICE
- ------------------------ ------------ ------------ -------- ------------ --------
$ 8.40-$10.00........................... 12,282 0.5 $ 8.40 12,282 $ 8.40
10.01- 15.00........................... 199,703 1.5 12.17 199,703 12.17
15.01- 20.00........................... 140,123 6.3 17.03 94,719 16.95
20.01- 25.00........................... 141,500 4.0 23.84 46,833 23.84
25.01- 30.00........................... 19,575 4.0 28.74 19,575 28.74
30.01- 35.00........................... 265,782 4.7 32.98 154,094 33.24
35.01- 40.00........................... 1,500,289 3.9 38.31 54,552 35.84
40.01- 45.00........................... 91,376 4.3 41.80 75,376 41.61
45.01- 46.35........................... 5,000 4.7 46.29 -- --
--------- -------
$ 8.40-$46.35........................... 2,375,630 3.9 $33.31 657,134 $24.40
========= =======
During 2000, 1999 and 1998 we granted 127,971, 100,247 and 190,467 units,
respectively, representing restricted stock awards under our Stock Unit Award
deferred compensation plan. See Note 8--EMPLOYEE BENEFIT PLANS on pages 38. The
1994 Plan allows for the granting of performance-
42
INVESTMENT TECHNOLOGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(12) STOCK OPTIONS PLAN (CONTINUED)
based stock options. In 2000, 58,736 performance-based options were granted,
however no such options were granted during 1999 and 1998. At December 31, 2000,
all 58,736 options were outstanding.
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. These
options were exercised in their entirety by September 2000.
(13) ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses at December 31, 2000 and 1999
consisted of the following:
2000 1999
---------- ----------
(DOLLARS IN THOUSANDS)
Accounts payable and accrued expenses.................. $11,514 $12,334
Deferred compensation.................................. 14,733 9,424
Deferred options....................................... -- 2,280
Accrued soft dollar expenses........................... 10,283 6,688
Accrued rent expense................................... 2,980 2,733
------- -------
Total.............................................. $39,510 $33,459
======= =======
(14) LEASE COMMITMENTS
We entered into lease and sublease agreements with third parties for certain
offices and equipment, which expire at various dates through 2018. Rent expense
for the years ended December 31, 2000, 1999, and 1998 was $4.6 million,
$3.5 million, and $3.2 million, respectively. Minimum future rentals under
non-cancelable operating leases follow (dollars in thousands):
YEAR ENDING DECEMBER 31,
- ------------------------
2001........................................................ $ 5,453
2002........................................................ 5,474
2003........................................................ 5,681
2004........................................................ 5,564
2005........................................................ 5,398
2006 and thereafter......................................... 26,008
-------
Total................................................... $53,578
=======
43
INVESTMENT TECHNOLOGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(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, 2000, 1999, and 1998 were 31.0 million, 30.7 million,
and 29.3 million, respectively.
The following is a reconciliation of the basic and diluted earnings per
share computations for the years ended December 31, 2000, 1999, and 1998.
2000 1999 1998
--------- --------- ---------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
Net income for basic and diluted earnings per share......... $63,593 $45,426 $43,394
======= ======= =======
Shares of common stock and common stock equivalents:
Average number of common shares........................... 30,993 30,691 29,302
------- ------- -------
Average shares used in basic computation.................. 30,993 30,691 29,302
Effect of dilutive securities-options..................... 559 1,256 1,473
------- ------- -------
Average shares used in diluted computation................ 31,552 31,947 30,775
======= ======= =======
Earnings per share:
Basic..................................................... $ 2.05 $ 1.48 $ 1.48
======= ======= =======
Diluted................................................... $ 2.02 $ 1.42 $ 1.41
======= ======= =======
(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. On September 18, 2000, we entered into a closing
agreement with the IRS with respect to the compensation plan deductions, whereby
the IRS agreed that the deductions taken were allowable deductions. This
agreement eliminates approximately $7.6 million of the $9.6 million potential
tax deficiency raised by the IRS in 1998. We are continuing to pursue the
resolution of the research and development tax credit issue and we believe that
the ultimate resolution will not be material to the financial position of the
Company.
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, 2000, we had outstanding capital contribution commitments to
a limited partnership in the amount of $300,000.
44
INVESTMENT TECHNOLOGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(16) COMMITMENTS AND CONTINGENCIES (CONTINUED)
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 charged us
interest at the Federal Funds rate plus 1%. Prior to November 2000, we lent
amounts borrowed to ITG Australia and charged interest at the Federal Funds rate
plus 2%. At December 31, 2000 and 1999, no amounts were outstanding under this
bank credit line which was discontinued in 2000.
(17) SUPPLEMENTARY FINANCIAL INFORMATION
The following tables set forth certain unaudited financial data for our
quarterly operations in 2000, 1999, and 1998. 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.
45
INVESTMENT TECHNOLOGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
UNAUDITED UNAUDITED
YEAR ENDED DECEMBER 31, 2000 YEAR ENDED DECEMBER 31, 1999
----------------------------------------- -----------------------------------------
FOURTH THIRD SECOND FIRST FOURTH THIRD SECOND FIRST
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Total Revenue............................. $76,153 $75,679 $82,961 $75,612 $68,540 $54,564 $56,312 $52,628
Expenses:
Compensation and employee benefits...... 19,030 19,388 20,319 18,440 14,400 11,402 13,667 12,248
Transaction processing.................. 11,828 10,496 10,945 10,709 9,248 7,677 7,821 7,536
Software royalties...................... 4,475 4,914 5,810 4,988 4,742 4,083 4,274 3,752
Occupancy and equipment................. 4,433 4,317 4,307 3,896 3,685 3,201 3,296 3,113
Telecommunications and data processing
services.............................. 3,267 2,754 3,265 3,033 2,423 2,701 2,384 1,920
Net (gain) loss on long-term
investments........................... 1,437 1,233 1,811 782 1,184 275 329 886
Spin-off costs.......................... -- -- -- -- (158) (85) 4,505 2,254
Other general and administrative........ 6,134 5,058 5,182 5,158 4,834 4,170 3,734 3,682
------- ------- ------- ------- ------- ------- ------- -------
Total expenses............................ 50,604 48,160 51,639 47,006 40,358 33,424 40,010 35,391
------- ------- ------- ------- ------- ------- ------- -------
Income before income tax expense.......... 25,549 27,519 31,322 28,606 28,182 21,140 16,302 17,237
Income tax expense........................ 10,984 12,075 13,642 12,702 10,610 10,039 7,908 8,878
------- ------- ------- ------- ------- ------- ------- -------
Net income................................ $14,565 $15,444 $17,680 $15,904 $17,572 $11,101 $ 8,394 $ 8,359
======= ======= ======= ======= ======= ======= ======= =======
Basic net earnings per share of common
stock................................... $ 0.46 $ 0.50 $ 0.57 $ 0.52 $ 0.57 $ 0.35 $ 0.27 $ 0.28
======= ======= ======= ======= ======= ======= ======= =======
Diluted net earnings per share of common
stock................................... $ 0.46 $ 0.49 $ 0.56 $ 0.51 $ 0.56 $ 0.34 $ 0.26 $ 0.26
======= ======= ======= ======= ======= ======= ======= =======
Basic weighed average shares
outstanding............................. 31,483 31,057 30,930 30,495 30,681 31,685 30,670 29,707
======= ======= ======= ======= ======= ======= ======= =======
Diluted weighted average shares and common
stock equivalents outstanding........... 31,751 31,729 31,526 31,244 31,528 32,665 32,040 31,563
======= ======= ======= ======= ======= ======= ======= =======
UNAUDITED
YEAR ENDED DECEMBER 31, 1998
-----------------------------------------
FOURTH THIRD SECOND FIRST
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Total Revenue............................. $62,216 $57,697 $50,905 $41,387
Expenses:
Compensation and employee benefits...... 14,500 14,152 12,225 10,585
Transaction processing.................. 7,639 6,917 6,710 5,654
Software royalties...................... 4,072 4,416 3,774 2,985
Occupancy and equipment................. 3,195 3,071 2,823 2,797
Telecommunications and data processing
services.............................. 1,853 2,179 2,325 1,781
Net (gain) loss on long-term
investments........................... 1,749 (3,632) 1,085 1,002
Spin-off costs.......................... 832 479 374 251
Other general and administrative........ 4,889 4,384 2,922 3,282
------- ------- ------- -------
Total expenses............................ 38,729 31,966 32,238 28,337
------- ------- ------- -------
Income before income tax expense.......... 23,487 25,731 18,667 13,050
Income tax expense........................ 11,267 11,847 8,739 5,688
------- ------- ------- -------
Net income................................ $12,220 $13,884 $ 9,928 $ 7,362
======= ======= ======= =======
Basic net earnings per share of common
stock................................... $ 0.41 $ 0.47 $ 0.34 $ 0.25
======= ======= ======= =======
Diluted net earnings per share of common
stock................................... $ 0.39 $ 0.45 $ 0.32 $ 0.24
======= ======= ======= =======
Basic weighed average shares
outstanding............................. 29,491 29,389 29,246 29,091
======= ======= ======= =======
Diluted weighted average shares and common
stock equivalents outstanding........... 31,061 30,688 30,647 30,560
======= ======= ======= =======
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.
46
INVESTMENT TECHNOLOGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
UNAUDITED UNAUDITED
YEAR ENDED DECEMBER 31, 2000 YEAR ENDED DECEMBER 31, 1999
----------------------------------------- -----------------------------------------
(AS A PERCENTAGE OF TOTAL REVENUES)
FOURTH THIRD SECOND FIRST FOURTH THIRD SECOND FIRST
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- -------- -------- -------- -------- --------
Total Revenue........................ 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Expenses:
Compensation and employee benefits... 25.0 25.6 24.5 24.4 21.0 20.9 24.3 23.3
Transaction processing............... 15.5 13.9 13.2 14.2 13.5 14.1 13.9 14.3
Software royalties................... 5.9 6.5 7.0 6.6 6.9 7.5 7.6 7.1
Occupancy and equipment.............. 5.8 5.7 5.2 5.2 5.4 5.9 5.9 5.9
Telecommunications and data
processing services................ 4.3 3.6 3.9 4.0 3.5 5.0 4.2 3.6
Net (gain) loss on investments....... 1.9 1.6 2.2 1.0 1.7 0.5 0.6 1.7
Spin-off costs....................... 0.0 0.0 0.0 0.0 (0.2) (0.2) 8.0 4.3
Other general and administrative..... 8.1 6.7 6.2 6.8 7.1 7.6 6.6 7.0
----- ----- ----- ----- ----- ----- ----- -----
Total expenses....................... 66.5 63.6 62.2 62.2 58.9 61.3 71.1 67.2
----- ----- ----- ----- ----- ----- ----- -----
Income before income tax expense..... 33.5 36.4 37.8 37.8 41.1 38.7 28.9 32.8
Income tax expense................... 14.4 16.0 16.4 16.8 15.5 18.4 14.0 16.9
----- ----- ----- ----- ----- ----- ----- -----
Net income........................... 19.1% 20.4% 21.4% 21.0% 25.6% 20.3% 14.9% 15.9%
===== ===== ===== ===== ===== ===== ===== =====
UNAUDITED
YEAR ENDED DECEMBER 31, 1998
-----------------------------------------
(AS A PERCENTAGE OF TOTAL REVENUES)
FOURTH THIRD SECOND FIRST
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------
Total Revenue........................ 100.0% 100.0% 100.0% 100.0%
Expenses:
Compensation and employee benefits... 23.3 24.5 24.0 25.6
Transaction processing............... 12.3 12.0 13.2 13.7
Software royalties................... 6.5 7.7 7.4 7.2
Occupancy and equipment.............. 5.1 5.3 5.5 6.8
Telecommunications and data
processing services................ 3.0 3.8 4.6 4.3
Net (gain) loss on investments....... 2.8 (6.3) 2.1 2.4
Spin-off costs....................... 1.3 0.8 0.7 0.6
Other general and administrative..... 7.9 7.6 5.8 7.9
----- ----- ----- -----
Total expenses....................... 62.2 55.4 63.3 68.5
----- ----- ----- -----
Income before income tax expense..... 37.8 44.6 36.7 31.5
Income tax expense................... 18.1 20.5 17.2 13.7
----- ----- ----- -----
Net income........................... 19.7% 24.1% 19.5% 17.8%
===== ===== ===== =====
47
(18) SUBSEQUENT EVENTS
ITG EUROPE
In the fourth quarter of 1998, we entered into a 50/50 joint venture with
Societe Generale, and founded Investment Technology Group (Europe) Limited. On
November 18, 1998, ITG Europe launched a new agency brokerage operation that
included the operation of a European version of the POSIT system. On
January 12, 2001 we signed an agreement with Societe Generale to acquire their
entire interest in ITG Europe for $18.5 million. Closing of the transaction is
expected to occur in the second quarter of 2001.
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 is contained in the Proxy Statement
for the 2001 Annual Meeting of Stockholders, which is incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION
Information with respect to this item is contained in the Proxy Statement
for the 2001 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 is contained in the Proxy Statement
for the 2001 Annual Meeting of Stockholders, which is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information with respect to this item is contained in the Proxy Statement
for the 2001 Annual Meeting of Stockholders, which is incorporated herein by
reference.
48
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................................ 25
Consolidated Statements of Financial Condition.............. 26
Consolidated Statements of Income........................... 27
Consolidated Statements of Changes in Stockholders'
Equity.................................................... 28
Consolidated Statements of Cash Flows....................... 29
Notes to Consolidated Financial Statements.................. 30
- ------------------------
(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. Company (incorporated by
reference to Exhibit 2.1 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 Inc.
(incorporated by reference to Exhibit 2.2 to the Annual
Report on Form 10-K for the year Company, ended December 31,
1998).
3.1 Certificate of Incorporation of the Company (incorporated by
reference to Exhibit 3.1 to the Annual Report on Form 10-K
for the year ended December 31, 1999).
3.2 By-laws of the Company (incorporated by reference to Exhibit
3.2 to the Annual Report on Form 10-K for the year ended
December 31, 1999).
4.1 Form of Certificate for Common Stock of the Company
(incorporated by reference to Exhibit 4.1 to the Annual
Report on Form 10-K for the year ended December 31, 1999).
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).
49
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).
10.4.3 Amended Form of Stock Option Agreement between the Company
and certain employees of the Company (incorporated by
reference to Exhibit 10.4.3 to the Annual Report on
Form 10-K for the year ended December 31, 1999).
50
EXHIBITS
NUMBER DESCRIPTION
- --------------------- -----------
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 (incorporated by reference
to Exhibit 10.4.7 to the Annual Report on Form 10-K for the
year ended December 31, 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
(incorporated by reference to Exhibit 10.5.3 to the Annual
Report on Form 10-K for the year ended December 31, 1999).
10.5.4 Fourth Amendment to Lease, dated as of February 29, 2000
between Arden Realty Finance Partnership, L.P. 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,
1999).
10.5.5 Lease, dated as of February 29, 2000 between Arden Realty
Finance IV, L.L.C. 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, 1999).
10.5.6* First Amendment to lease, dated as of April 1, 2000, between
Arden Realty Finance IV, L.L.C. and the Company.
10.5.7 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).
10.5.8 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).
10.5.9 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).
51
EXHIBITS
NUMBER DESCRIPTION
- --------------------- -----------
10.5.10 Third Supplemental Agreement dated as of September 29, 1999
between Spartan Madison Corp. and the Company (incorporated
by reference to Exhibit 10.5.9 to the Annual Report on Form
10-K for the year ended December 31, 1999).
10.5.11 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
(incorporated by reference to Exhibit 10.6 to the Annual
Report on Form 10-K for the year ended December 31, 1999).
21* Subsidiaries of Company.
23* Consent of KPMG LLP.
- ------------------------
* 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.
52
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 29, 2001
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 March 29, 2001
Raymond L. Killian, Jr. President and Director
Managing Director and Chief
/s/ HOWARD C. NAPHTALI Financial Officer
------------------------------------------- (Principal Financial March 29, 2001
Howard C. Naphtali Officer)
/s/ ANGELO BULONE Vice President and Controller
------------------------------------------- (Principal Accounting March 29, 2001
Angelo Bulone Officer)
/s/ FRANK E. BAXTER
------------------------------------------- Director March 29, 2001
Frank E. Baxter
/s/ NEAL S. GARONZIK
------------------------------------------- Director March 29, 2001
Neal S. Garonzik
/s/ WILLIAM I JACOBS
------------------------------------------- Director March 29, 2001
William I Jacobs
/s/ ROBERT L. KING
------------------------------------------- Director March 29, 2001
Robert L. King
/s/ MARK A. WOLFSON
------------------------------------------- Director March 29, 2001
Mark A. Wolfson
53
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 (incorporated by
reference to Exhibit 3.1 to the Annual Report on Form 10-K
for the year ended December 31, 1999).
3.2 By-laws of the Company (incorporated by reference to Exhibit
3.2 to the Annual Report on Form 10-K for the year ended
December 31, 1999).
4.1 Form of Certificate for Common Stock of the Company
(incorporated by reference to Exhibit 4.1 to the Annual
Report on Form 10-K for the year ended December 31, 1999).
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).
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).
54
SEQUENTIALLY
EXHIBITS NUMBERED
NUMBER DESCRIPTION PAGE
- --------------------- ----------- ------------
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 (incorporated by
reference to Exhibit 10.4.3 to the Annual Report on Form
10-K for the year ended December 31, 1999).
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 (incorporated by reference
to Exhibit 10.4.7 to the Annual Report on Form 10-K for the
year ended December 31, 1999).
55
SEQUENTIALLY
EXHIBITS NUMBERED
NUMBER DESCRIPTION PAGE
- --------------------- ----------- ------------
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
(incorporated by reference to Exhibit 10.5.3 to the Annual
Report on Form 10-K for the year ended December 31, 1999).
10.5.4 Fourth Amendment to Lease, dated as of February 29, 2000
between Arden Realty Finance Partnership, L.P. 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,
1999).
10.5.5 Lease, dated as of February 29, 2000 between Arden Realty
Finance IV, L.L.C. 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, 1999).
10.5.6* First Amendment to Lease, dated as of April 1, 2000, between
Realty Finance IV, L.L.C. and the Company.
10.5.7 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).
10.5.8 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).
10.5.9 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).
10.5.10 Third Supplemental Agreement dated as of September 29, 1999
between Spartan Madison Corp. and the Company (incorporated
by reference to Exhibit 10.5.9 to the Annual Report on Form
10-K for the year ended December 31, 1999).
10.5.11 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
(incorporated by reference to Exhibit 10.6 to the Annual
Report on Form 10-K for the year ended December 31, 1999).
21* Subsidiaries of Company.
23* Consent of KPMG LLP.
- ------------------------
* Filed herewith
56