Back to GetFilings.com
1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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, 1996 Commission File Number 0 - 23644
INVESTMENT TECHNOLOGY GROUP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 13-3757717
- -------------------------------------------- --------------------------------------------
(State of incorporation) (IRS Employer Identification No.)
900 Third Avenue, New York, New York (212) 755-6800
- -------------------------------------------- --------------------------------------------
(Registrant's telephone number, including
(Address of principal executive offices) area code)
10022
- --------------------------------------------
(Zip Code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
National Association of Securities Dealers
Common Stock, $0.01 par value Automated Quotation System
- -------------------------------------------- --------------------------------------------
(Title of class) (Name of exchange on which registered)
Aggregate market value of the voting stock Number of shares outstanding of the
held by nonaffiliates of the Registrant at Registrant's class of common stock at March
March 7, 1997: 7, 1997:
$65,030,000 18,251,500
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 1997 Annual Meeting of Stockholders
(incorporated, in part, in 10-K Part III).
2
1995 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PAGE
-----
PART I
Item 1. Business................................................................... 3
Item 2. Properties................................................................. 10
Item 3. Legal Proceedings.......................................................... 10
Item 4. Submission of Matters to a Vote of Security Holders........................ 10
PART II
Item 5. Market for the Registrant's Common Stock and Related Shareholder Matters... 10
Item 6. Selected Financial Data.................................................... 12
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations................................................................. 13
Item 8. Financial Statements and Supplementary Data................................ 18
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure................................................................. 40
PART III
Item 10. Directors and Executive Officers of the Registrant......................... 40
Item 11. Executive Compensation..................................................... 40
Item 12. Security Ownership of Certain Beneficial Owners and Management............. 40
Item 13. Certain Relationships and Related Transactions............................. 40
PART IV
Item 14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K.......... 40
FORWARD-LOOKING STATEMENTS
In addition to the historical information contained throughout this Annual
Report on Form 10-K, there are forward-looking statements that reflect
management's expectations for the future. A variety of important factors could
cause results to differ materially from such statements. These factors are noted
throughout this Annual Report on Form 10-K and include: the actions of both
current and potential new competitors, rapid changes in technology, financial
market volatility, evolving industry regulation, cash flows into or redemptions
from equity funds, effects of inflation, customer trading patterns, and new
products and services.
Investment Technology Group, Inc.
2
3
PART I
ITEM 1. BUSINESS
Investment Technology Group, Inc., through its wholly-owned broker dealer
subsidiary ITG Inc. (ITG), provides automated equity trading services and
transaction research to institutional investors and brokers. A full service
execution firm, ITG utilizes transaction processing technology to increase the
effectiveness and lower the cost of institutional and other trading. With an
emphasis on ongoing research, ITG offers the following services:
- ITG POSIT. An electronic stock crossing system
- ITG QuantEX. A decision-support and execution system
- Electronic Trading Desk Services. Offers customers trading capabilities
through the ITG trading desk which utilizes multiple sources of liquidity
- ITG Platform. A PC based execution system
- ITG ISIS. A set of analytical tools for systematically lowering
transaction costs
The Company generates substantially all of its revenue from its POSIT,
QuantEX, and Electronic Trading Desk Services.
POSIT(R)(1)
POSIT was introduced in 1987 as a technology-based solution to the trade
execution needs of quantitative and passive investment managers. POSIT is an
electronic stock crossing system through which customers enter buy and sell
orders to trade single stocks and portfolios of equity securities confidentially
among themselves. Orders may be placed on the system either through direct
computer links to the Company's central computer or indirectly by communicating
with the Company's trading desk, which then enters the orders in the central
computer. ITG also entered into strategic alliances, which enable users of other
popular trading systems, to route orders directly to POSIT. Links with ESI
Securities, Bridge Information Systems and BRASS were established in 1994. The
system, which currently accepts orders for approximately 10,000 different equity
securities, may be modified, as the need arises, to include additional equity
securities registered pursuant to Section 12 of the Securities Exchange Act of
1934. Using an algorithm, which establishes the maximum possible matching of buy
and sell orders at scheduled times, the system matches or "crosses" these
orders. Unless otherwise specified by customers, POSIT will match orders
(including multiple orders) which do not contain equal numbers of shares,
resulting in partial order execution. POSIT has been designed to allow customers
trade execution flexibility. Customers may specify constraints on the portion of
a portfolio that trades, such as a requirement that the execution of a buy order
be conditioned upon the concurrent execution of a sell order. Trades are priced
at the midpoint of the best bid and offer on the primary market for each
security at the time of the cross. Price information is provided directly to the
system from a third-party data vendor. There are five scheduled crosses every
business day at approximately 10:00 a.m., 11:30 a.m., 12:30 p.m., 1:30 p.m., and
3:00 p.m. Each scheduled cross is executed within a seven minute window selected
randomly by the system.
Significant attributes of POSIT:
- POSIT's midpoint pricing saves each party an amount equivalent to half
the bid/offer spread.
- POSIT's confidentiality virtually eliminates market impact. In contrast,
participants in traditional or other open markets constantly face the
risk that disclosure of an order will unfavorably affect price
conditions.
- ---------------
(1)POSIT(R) is a registered service mark of the POSIT Joint Venture.
Investment Technology Group, Inc.
3
4
- Clients pay a low transaction fee on completed transactions, relative to
the industry average of 5 to 6 cents per share. The Company's revenue
from the operation of POSIT is derived from transaction fees charged on
each share crossed through the system.
- Immediately after each cross, customers are electronically provided with
comprehensive reports of matched and unmatched (residual) orders.
Customers can then execute residual orders by traditional means or take
advantage of the Company's Electronic Trading Desk services (described
below).
- Electronic application on client instructions for allocating trades to
specific customer accounts utilizes average prices and average
commissions.
Average daily share volume on POSIT has grown from approximately 288,000
shares in 1988 to approximately 13.1 million shares in 1996. In addition to its
traditional customer base of quantitative and passive investors, POSIT has begun
to serve fundamental institutional investors, broker-dealers and international
institutional investors. The POSIT system is currently used by approximately 450
customers, including corporate and government pension plans, insurance
companies, bank trust departments, investment advisors and mutual funds.
QUANTEX(R)(2)
ITG QuantEX is the Company's portfolio management trading system, an
advanced tool for technologically sophisticated clients conducting a
medium-to-large volume of trading. QuantEX is what is known on Wall Street as an
"Expert System". QuantEX equips clients to manage every step in the trading
process more efficiently, from decision-making to execution to tracking of trade
list status. From a Sun workstation at their desks, users can access
fully-integrated market information and analytics, execute electronic order
routing and perform trade management functions. To date, trading systems have
generally addressed just one or two of these functions -- a situation which has
left many users with the inefficiency of multiple unrelated systems.
QuantEX is a customized, rule-based expert system that allows traders to
quantify their thought processes. It is designed to embody each clients' trading
style and strategies, and apply them to data on 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 it much more efficiently and rapidly.
QuantEX 3.0, introduced in 1995, is an upgrade of the Company's software,
which provides, among other new features, the following:
- access to sophisticated ISIS pre- and post-trade analytical tools,
- "instant" analytics built on widely-used measures,
- a direct line to the ITG Data Center. The ITG Data Center is an expanded
historical database that provides closing volume and canned analytics
based on the raw historical data.
QuantEX analyzes portfolios of securities based on the individual user's
trading strategy. The Company's support specialists translate the trading
criteria developed by the user into a set of proprietary rules for the trading
of securities, which are then encoded into QuantEX. QuantEX applies the
customer'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. QuantEX has sorting capabilities which
highlight the most important trade
- ---------------
(2) QuantEX(R) is a registered trademark of the Company.
Investment Technology Group, Inc.
4
5
decisions according to the user's rules. Charting features provide analysis of
the results of the application of the user's trading strategy.
Trades which are routed through QuantEX to POSIT are charged transaction
fees through POSIT and are not charged separate QuantEX transaction fees. The
Company derives revenue from QuantEX by collecting a transaction fee on each
share which is routed for trading through QuantEX to destinations other than
POSIT but does not derive revenue from either the sale or licensing of the
QuantEX software.
QuantEX also automates 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 -- not just the New York, American, and regional Stock Exchanges, but
also POSIT, ITG Trading Desk, OTC market-makers, the AZX, and selected
broker/dealers. 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. Trading decisions are
enhanced by applying any combination of criteria to real-time and historical
data on a user-selected universe of stocks and alerting clients to opportunities
that fit their strategies. QuantEX's built-in trade allocation features allow
for automated back-office clearance and settlement.
The Company's product specialists install the system, train users and
provide ongoing support for use of QuantEX's trade execution and analysis
capabilities. Specialists are knowledgeable about portfolio management and
trading as well as the system's hardware and software. The Company's support
team works closely with each customer to develop trading strategies and rules,
explore new approaches and implement system upgrades and enhancements.
ELECTRONIC TRADING DESK
To supplement the automated trade execution and analysis services offered
by POSIT and QuantEX, the Company also offers customers trading capabilities
through the Company's trading desk, which is staffed by 22 traders. QuantEX
clients can electronically deliver lists of orders to the ITG Trading Desk. As
orders are executed by ITG, reports are automatically delivered to the client's
terminal. Trading desk personnel are, thereby, able to assist customers with
decision support analyses, generated by QuantEX, and with the execution of
trades. The Trading Desk is a full-service agency execution group that
specialize in the Company's proprietary products. Clients give traders orders to
work throughout the day as well as finish residual orders after POSIT matches.
If a customer fails to submit a portfolio in time for a scheduled POSIT
cross, at the customer's request, the Company will communicate with and seek
interest from other potentially interested customers and conduct an unscheduled
cross. Unmatched or residual orders may be filled by (i) keeping orders in POSIT
for future crosses which will offer different liquidity profiles, (ii) routing
trades electronically through QuantEX to multiple markets, including primary
exchanges, regional exchanges and OTC market-makers or (iii) using the Company's
trading desk to complete trades on an agency basis. The Company has also
developed pricing mechanisms that allow customers to enter orders to cross
shares before the market opens subject to prices determined by specified
formulas, such as weighted average prices throughout the trading day, or the
day's closing prices.
ITG PLATFORM
ITG Platform, introduced in the first quarter of 1996, is designed to
provide seamless connectivity to a variety of execution destinations, such as
POSIT, ITG's Electronic Trading Desk and SuperDOT. The Platform is designed to
run on any 486 or Pentium PC in almost any Windows environment, which allows
access to a wide range of execution capabilities, without requiring a dedicated
terminal. It accesses ITG through a standard modem.
Investment Technology Group, Inc.
5
6
To execute an order, a ticker symbol (or multiple tickers) is typed in with
buy/sell side and size. A list can be loaded in by using a diskette, or from a
network. Once orders have been loaded, execution instructions can be inputted.
The execution sources range from POSIT, ITG Electronic Trading Desk, SuperDOT,
to OTC market makers. The Platform also allows automatic rerouting of any
residual POSIT trades. For instance, a trader may designate that any listed
residual orders under a certain size be rerouted to the New York Stock Exchange
via SuperDOT. The trader may also choose to reroute the orders back to POSIT for
the rest of the day's matches, or to ITG's Electronic Trading Desk. As the
orders are executed, reports are automatically delivered back to the Platform
giving the users constant feedback on their orders. The orders are displayed in
realtime and the Platform also provides a running average price for each order.
Order status is color-coded to indicate whether the order has been filled,
partially executed, or is awaiting action.
Platform users can access historical data through a direct link with the
ITG Data Center, including a wide array of analytics such as average historical
share volumes, dollar volumes, volatility, and historical spread statistics. The
Platform also allows custom tailored execution reports to fit each user's
requirements.
As of December 31, 1996, there were 36 Platform client sites, with 53
software installations.
ISIS RESEARCH
Accessed through ITG QuantEX, ISIS encompasses an equity transaction
database, pre-and post-trade analytics, a proprietary transaction-cost model, a
framework for development of trading strategies and a set of model strategies.
Together, these tools assist clients in making the most cost-effective trading
decisions by measuring the cost impacts of alternative courses of action. With
ISIS, clients can also:
- Increase the cost-effectiveness of trading strategies,
- Construct portfolios to minimize the cost of execution,
- Minimize transaction costs of trading lists by targeting positions that
are especially illiquid, difficult, or costly to trade,
- Focus resources on the most consequential transactions,
- Estimate the cost of trading on a principal versus agency basis, and
- Measure the cost-effectiveness of completed trades against any
benchmark.
With the release of QuantEX 3.0 in 1995, users can define, store and run
custom pre- and post-trade reports, selecting from a wide variety of analytics.
Analytics can also be viewed directly on the execution page and incorporated
into trading strategies. Among the available analytics are measures of momentum,
price volatility and liquidity, including an explicit estimate of market impact.
GLOBAL POSIT
The Company is pursuing the international market in a variety of ways,
joint-venturing with strategic partners and developing specially-tailored
versions of ITG services. The Company has also developed a global version of
POSIT, which provides U.S. and global clients with electronic trade-matching
capabilities for international equities. Besides housing the operation of Global
POSIT, the Company's new Boston office offers services to foreign investors
trading in the U.S. and worldwide clientele trading non-U.S. securities. Total
Global POSIT revenues for 1996 amounted to approximately $513,000.
Investment Technology Group, Inc.
6
7
AUSTRALIAN POSIT
The Company has licensed POSIT to Burdett, Buckeridge & Young, one of
Australia's leading brokerage firms, for development and marketing of an
Australian POSIT cross, which began operating in the first quarter of 1995.
Through this relationship the Company is also pursuing U.S. business from
Australian investors and providing U.S. clients with access to the Australian
marketplace. Total Australian POSIT revenues for 1996 amounted to approximately
$279,000.
CANADIAN QUANTEX
The Company was party to a license agreement with RBC Dominion Securities
("RBC"), under which the Company was entitled to receive royalties for licensing
the rights to the Company's QuantEX product to RBC beginning in 1991. RBC used
the QuantEX license to develop a version of QuantEX for the Canadian markets. In
conjunction with the spin-off of VERSUS Technologies, Inc. ("VERSUS") from RBC
in 1995, the Company exchanged its licensing agreement asset with RBC for a 9%
equity interest in VERSUS. VERSUS is a Canadian technologyfocused trade
automation firm based in Toronto. Currently, Canadian QuantEX is the only direct
electronic access to the Canadian exchanges for U.S. and Canadian institutions.
The Company is also providing Canadian investors with access to POSIT and other
ITG services.
AZX
AZX Inc., the operators of the Arizona Stock Exchange3 ("AZX") and the
Company announced in February 1995 the formation of a new alliance between the
two organizations. The Company's wholly-owned broker-dealer subsidiary, ITG, has
been named as the executing broker for all transactions executed on AZX. AZX is
the only open screen call market for equity trading, which conducts two daily
auctions at 5:00 PM and 5:30 PM Eastern time. The auctions are designed to allow
institutional investors and broker/dealer participants to trade anonymously and
at true market prices with low transaction costs. In February 1995, ITG, at
customers' request, began placing the unmatched portion of client portfolios
from POSIT into AZX's daily auction. Since ITG is the executing broker for all
AZX trades, ITG clients have the option of obtaining one combined average price
for orders crossed on both systems (i.e., the POSIT cross is combined with the
previous night's AZX auction). The Company performs this function as a courtesy
to its clients. The Company charges its direct incremental costs to AZX. Total
net revenues for 1996 amounted to approximately $412,000.
REGULATION
The Company is subject to extensive Federal and state regulation by various
regulatory organizations which are charged with protecting the interests of the
investing public and the integrity of the securities markets. In addition, the
National Association of Securities Dealers, Inc. (the "NASD") requires strict
compliance with its rules and regulations. Failure to comply with any applicable
laws, rules or regulations could result in fines or penalties, suspensions or
revocations of licenses or expulsion from membership, any one of which could
have a material adverse effect on the Company.
NO ACTION LETTER
In connection with the development of POSIT, Jefferies and Company, Inc.
("Jefferies & Co.") obtained a no action letter in which the staff of the
Securities and Exchange Commission (the "Commission") indicated that it would
take no action with respect to the fact that POSIT would be operated without
registration as an exchange. As a result, POSIT has not been registered with the
Commission as an exchange,
- ---------------
(3)The Arizona Stock Exchange, (the "Exchange") operated by AZX, Inc., is not
registered with the US Securities and Exchange Commission ("SEC", or the
"Commission") nor is it a self-regulatory organization. Due to the low volume of
trading on the Exchange, the SEC granted it an exemption from exchange
registration. The Exchange is subject to limited oversight by the SEC.
Investment Technology Group, Inc.
7
8
although ITG is registered as a broker-dealer and is subject to regulation as
such. Material changes to POSIT will require prior notice to the Commission. One
of the stated purposes of Rule 17a-23 is to provide the Commission with
information necessary to monitor and evaluate automated trade execution systems.
There can be no assurance that the Commission will not in the future seek to
impose more stringent regulatory requirements on the operation of automated
trade execution systems such as POSIT. In addition, certain of the securities
exchanges have actively sought to have more stringent regulatory requirements
imposed upon automated trade execution systems. There can be no assurance that
Congress will not enact legislation applicable to automated trade execution
systems.
LICENSE AND RELATIONSHIP WITH BARRA
In 1987, Jefferies & Co. and BARRA Inc. ("BARRA") formed a joint venture
for the purpose of developing and marketing POSIT. In 1993, Jefferies & Co.
assigned all of its rights relating to the joint venture and the license
agreement to ITG.
The technology used to operate POSIT is licensed to the Company pursuant to
a perpetual license agreement between the Company and the joint venture. The
license agreement grants ITG 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. The
Company pays quarterly royalties to the joint venture to use other proprietary
software that operates in conjunction with POSIT equal to specified percentages
of the transaction fees charged by the Company on each share crossed through
POSIT. For the years ended December 31, 1996, 1995 and 1994, BARRa received
aggregate royalty payments from the joint venture of $8.8 million, $6.0 million,
and $5.0 million, respectively, under the license agreement. Under the terms of
the joint venture, the Company and BARRa are prohibited from competing directly
or indirectly with POSIT.
The license agreement permits BARRA on behalf of the joint venture to
terminate the agreement upon certain events of bankruptcy or insolvency or upon
an uncured breach by the Company of certain covenants, the performance of which
are all within the control of the Company. Although the Company does not believe
that it will experience difficulty in complying with its obligations under the
license agreement, any termination of the license agreement resulting from an
uncured default would have a material adverse effect on the Company's results of
operations.
Under the license agreement and the terms of the joint venture, BARRA
continues to provide certain support services to the Company 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 the Company's 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 and
BBY the right to use the POSIT technology for crossing equity securities in
Australia.
In the first quarter of 1997, BARRA announced a joint venture with Prebon
Yamane to market POSIT-FRA, the first computer-based system for crossing forward
rate agreements (FRAs). The Company cannot estimate what the effect will be on
future earnings or profitability as the Joint Venture has not approved
definitive documentation for POSIT-FRA.
In May 1990, ITG Global Trading, Inc. ("Global Trading") and BARRA
International, Ltd., an affiliate of BARRA, formed a joint venture for the
purposes of developing Global POSIT. The joint venture granted to Global Trading
the exclusive rights to use Global POSIT. In connection with the May 1994
initial public offering (the "Offering"), Jefferies Group, Inc. ("Jefferies
Group") contributed Global Trading and its respective rights in Global POSIT to
the Company. Any net earnings will be divided equally between the
Investment Technology Group, Inc.
8
9
Company and BARRA International, Ltd. Under the terms of the joint venture, the
Company and BARRA International, Ltd. are prohibited from competing directly or
indirectly with Global POSIT.
COMPETITION
The automated trade execution and analysis services offered by the Company
compete with services offered by leading brokerage firms and other information
services and transaction processing firms. Many of the Company's competitors
have substantially greater financial, research and development and other
resources than the Company. The Company believes that its services compete on
the basis of cost, timeliness of execution and probability of trade completion.
The probability of trade execution through POSIT depends on a number of factors,
including, primarily, the security for which an order is placed on the system.
In general, orders placed on the system for securities which trade in high
volumes tend to have high rates of trade execution through POSIT, while orders
for securities which trade in low volumes have low rates of trade execution
through POSIT. Although the Company believes that POSIT, QuantEX, and the
Electronic Trading Desk services have established certain competitive
advantages, the Company's ability to maintain these advantages will require
continued investment in the development of the Company's services, additional
marketing activities and customer support services. There can be no assurance
that the Company will have sufficient resources to continue to make this
investment, that the Company's competitors will not devote significantly more
resources to competing services or that the Company will otherwise be successful
in maintaining its current competitive advantages.
The Company also competes with various national and regional securities
exchanges for trade execution services. Some of these exchanges have made
efforts to regain transaction volume lost to POSIT and other automated trade
execution services. The New York Stock Exchange now offers members the
opportunity to participate in two daily after-hours stock crosses. The Arizona
Stock Exchange also operates two after-hours auctions (see discussion above
under AZX). The Company believes that POSIT customers who participate in
afterhours stock crossing systems do so primarily to seek completion of trades
which have not been executed during trading hours. There can be no assurance
that these or other exchanges will not take further steps to regain transaction
volume from POSIT or to limit its future growth.
RESEARCH AND PRODUCT DEVELOPMENT
The Company believes that fundamental changes in the securities industry
have increased the demand for technology-based services. The Company devotes a
significant portion of its resources to the development and improvement of these
services. Important aspects of the Company's research and development effort
include enhancements of existing software, the ongoing development of new
software and services and investment in technology to enhance the Company's
efficiency. The software programs, which are incorporated into the Company's
services, are subject, in most cases, to copyright protection. Research and
development costs were $6.0 million, $4.9 million and $3.2 million for 1996,
1995 and 1994, respectively.
In connection with such research and product development and capital
expenditures to improve other aspects of its business, the Company incurs
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, the Company may not reduce such expenses quickly
and, as a result, the Company could experience reduced profitability or losses.
Conversely, sudden surges in transaction volumes can result in increased profit
and profit margin. To ensure that it has the capacity to process projected
increases in transaction volumes, the Company has 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. Additionally, during recent periods of high transaction volumes and
increased revenues, the Company has also made substantial capital and operating
expenditures to enhance future growth prospects.
Investment Technology Group, Inc.
9
10
The Company currently employs 68 personnel in software development,
management and implementation. The Company also works closely with BARRA on the
development of POSIT enhancements. The Company expects to continue this level of
investment to develop improved services and continue the development of new
services.
NUMBER OF PERSONS EMPLOYED
As of December 31, 1996, the Company employed 157 personnel.
ITEM 2. PROPERTIES
The Company's principal offices are located at 900 Third Avenue in New York
City where the Company occupies approximately 16,000 square feet of office space
under a sublease with Jefferies Group that expires in December 2004. The Company
believes that the terms of such sublease are no less favorable to the Company
than could have been obtained from an unaffiliated party. In February 1996, the
Company leased approximately 2,500 square feet of additional office space in the
900 Third Avenue location to supplement the existing office space. The
additional space is leased for eighteen months. In May of 1997, the Company
plans to move its principal offices to 380 Madison Avenue in New York City. The
spaces in 900 Third Avenue will be subleased to a third party. The Company also
maintains a search, development and technical support services facility in
Culver City, California. The California facility is leased by the Company
pursuant to a lease agreement which expires in December 2005. In April 1995, the
Company completed the build-out and occupancy of a 10,500 square feet office in
Boston, Massachusetts. The site is a "hot" backup facility for the Company's
operations. The site is currently used as a regional office for Financial
Engineering Research, QuantEX support and the Global POSIT operations.
ITEM 3. LEGAL PROCEEDINGS
The Company is not party to any legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER
MATTERS
COMMON STOCK DATA
The Company's common stock is quoted on The Nasdaq Stock Market National
Market System under the symbol: ITGI. At March 7, 1997, the Company believed
that its Common Stock was held by approximately 800 stockholders of record or
through nominee or street name accounts with brokers.
Investment Technology Group, Inc.
10
11
The range of the high and low representative bid prices for the Common
Stock as reported by Nasdaq and cash dividends paid on common stock for each
full quarterly period since the Company's Initial Public Offering on May 4, 1994
were as follows:
MARKET PRICE
------------------------- DIVIDENDS
THREE MONTHS ENDED HIGH LOW END PER SHARE
- ---------------------------------------------------- ----- ----- ----- ----------
June 30, 1994(4).................................... 9.50 5.50 7.50 $ 0.00(5)
September 30, 1994.................................. 13.75 9.25 13.25 $ 0.00
December 31, 1994................................... 13.50 4.75 6.75 $ 0.00
March 31, 1995...................................... 8.75 6.38 7.88 $ 0.00
June 30, 1995....................................... 9.50 5.50 7.50 $ 0.00
September 30, 1995.................................. 9.25 5.75 9.00 $ 0.00
December 31, 1995................................... 10.00 7.75 9.25 $ 0.00
March 31, 1996...................................... 16.00 9.25 15.00 $ 0.00
June 30, 1996....................................... 18.50 13.00 13.50 $ 0.00
September 30, 1996.................................. 18.00 12.75 17.75 $ 0.00
December 31, 1996................................... 21.75 16.75 19.25 $ 0.00
There are no restrictions on the Company's present ability to pay dividends
on Common Stock, other than applicable provisions of the Delaware General
Corporation Law.
- ---------------
(4) Includes only the period from the Company's Initial Public Offering on May 4, 1994 through
the end of the quarter.
(5) Immediately prior to the consummation of the Company's Initial Public Offering, the Company
declared a dividend payable to the Jefferies Group, Inc. in the amount of $17.0 million.
Investment Technology Group, Inc.
11
12
ITEM 6. SELECTED FINANCIAL DATA
The selected data presented below as of and for each of the years in the
five-year period ended December 31, 1996, are derived from the consolidated
financial statements of Investment Technology Group, Inc., which financial
statements have been audited by KPMG Peat Marwick LLP, independent auditors.
Such data should be read in connection with the consolidated financial
statements contained on pages 18 through 40.
YEAR ENDED DECEMBER 31,
-------------------------------------------------
1996 1995 1994* 1993 1992
-------- ------- -------- ------- -------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Total revenues............................... $111,556 $72,381 $ 56,716 $49,370 $31,413
Total expenses............................... 70,555 47,493 69,106 42,944 30,065
-------- ------- ------- ------- ------
Earnings (loss) before income taxes.......... 41,001 24,888 (12,390) 6,426 1,348
Income tax expense (benefit)................. 17,666 9,983 (4,529) 3,099 873
-------- ------- ------- ------- ------
Net earnings (loss).......................... $ 23,335 $14,905 $ (7,861) $ 3,327 $ 475
======== ======= ======= ======= ======
*1994 results were affected by events described in Note 7, Termination of Plans
Expense, of consolidated financial statements contained on page 32.
Primary net earnings (loss) per share of
common stock............................... $ 1.26 $ 0.81 $ (0.45)
-------- ------- --------
Fully diluted net earnings (loss) per share
of common stock............................ $ 1.24 $ 0.81 $ (0.45)
-------- ------- --------
Primary weighted average shares and common
stock equivalents outstanding (in
millions).................................. 18.6 18.5 17.5
-------- ------- --------
Fully diluted weighted average shares and
common stock equivalents outstanding (in
millions).................................. 18.8 18.5 17.5
-------- ------- --------
Revenues per trading day..................... $ 439 $ 287 $ 225 $ 191 $ 124
-------- ------- -------- ------- -------
Shares executed per day (in millions)........ 22 15 10 9 6
-------- ------- -------- ------- -------
Revenue per average number of employees...... $ 814 $ 689 $ 675 $ 837 $ 628
-------- ------- -------- ------- -------
Average number of employees.................. 137 105 84 59 50
-------- ------- -------- ------- -------
Number of customers:
POSIT...................................... 445 393 303 205 140
QuantEX and other.......................... 91 81 58 43 26
-------- ------- -------- ------- -------
536 474 361 248 166
======== ======= ======== ======= =======
Gain (loss) on average stockholders'
equity..................................... 45.5% 39.3% (35.0)%
-------- ------- --------
Book value per share......................... $ 3.68 $ 2.47 $ 1.72
-------- ------- --------
Tangible book value per share................ $ 3.54 $ 2.27 $ 1.52
-------- ------- --------
Price to earnings ratio using fully
diluted net earnings per share of
common stock............................... 15.5 11.4 N/A
-------- ------- --------
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION DATA:
DECEMBER 31,
-------------------------------------------------
1996 1995 1994 1993 1992
-------- ------- -------- ------- -------
Total assets................................. $ 82,798 $55,318 $ 38,354 $23,496 $17,444
Short-term debt.............................. -- -- -- -- 500
Total stockholders' equity................... 67,093 45,479 31,893 13,844 10,517
Investment Technology Group, Inc.
12
13
The following graph represents the number of shares ITG executed as a
percentage of the composite volume in the U.S. market.(6)
Market Share
1989 0.21
1990 0.44
1991 0.52
1992 0.87
1993 0.90
1994 1.04
1995 1.23
1996 1.44
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
1996 1995 CHANGE % CHANGE
------- ------- ------- --------
(DOLLARS IN MILLIONS, EXCEPT AS NOTED)
Total Assets.................................... $82,798 $55,318 $27,480 49.7%
Total Liabilities............................... $15,705 $ 9,839 $ 5,866 59.6%
The increase in total assets is primarily due to an increase in cash and
cash equivalents. Current assets made up approximately 76.3% of total assets.
Securities owned are valued at market. Securities owned consisted of municipal
securities as of December 31, 1996, and are part of cash management activities
of the Company, along with Investment in Limited Partnership. These municipal
securities generally mature within one to one and a half years.
The increase in total liabilities is mostly due to an increase in accounts
payable and accrued expenses, which consisted primarily of soft dollar
liabilities of $2.1 million and bonus accruals of $2.5 million. Software
royalties payable, which is the accrual for the fourth quarter POSIT royalties,
increased $480,000. This was a result of higher POSIT volume in the fourth
quarter of 1996.
RESULTS OF OPERATIONS
COMPARISON OF 1996 WITH 1995
1996 1995 CHANGE % CHANGE
------ ------ ------ --------
Revenues............................................ $ 111.6 $ 72.4 $ 39.2 54.1%
Number of Trading Days.............................. 254 252 2 0.8%
Revenues per Trading Day (Dollars in thousands)..... $ 439 $ 287 $ 152 53.0%
- ---------------
(6) The percentages on the graph are total ITG shares executed divided by
the composite volume. Total ITG shares executed includes total POSIT shares
divided by two, QuantEX shares and shares executed by the Electronic Trading
Desk. Composite volume includes shares executed by and as provided by the
following exchanges: New York, American, Chicago, Pacific, Cincinnati, Boston,
and Philadelphia stock exchanges, as well as the National Association of
Securities Dealers Automated Quotation System. Composite volume excludes ITG
shares executed and "program trading" shares of the New York Stock Exchange.
Investment Technology Group, Inc.
13
14
Increased revenues is due to a growing use of POSIT, QuantEX and the
Company's other electronic trading desk services. For the year ended December
31, 1996, POSIT revenues were approximately 49% or $22.1 million above the
comparable period for 1995, while QuantEX revenues were approximately 57% or
$9.0 million above the comparable period for 1995. For the year ended December
31, 1996, other electronic trading desk services were 83% or $8.1 million above
the comparable period for 1995.
The Company currently reports revenues net of soft dollars collected. The
Company previously reported soft dollars on a "gross" basis. Soft dollars
collected were reported as revenues and, in an equal and offsetting amount, as
soft dollar expense. The historical financial statements have been reclassified
to reflect revenue net of soft dollars collected. Soft dollars are those
incremental amounts of commission dollars collected in addition to the Company's
charge for executions. These incremental amounts are used to satisfy customers'
third-party research services.
1996 1995 CHANGE % CHANGE
------ ------ ------ --------
Compensation and employee benefits expense.......... $ 25.0 $ 16.4 $ 8.6 52.4%
Number of employees at period end................... 157 118 39 33.1%
Revenue per employee at period end (Dollars in
thousands)........................................ $ 711 $ 614 $ 97 15.8%
Compensation and employee benefits expense per
employee (Dollars in thousands)................... $ 159 $ 139 $ 20 14.4%
The increase in compensation and employee benefits expense is due primarily
to an increase in the number of employees and an increase in profitability based
compensation.
1996 1995 CHANGE % CHANGE
----- ----- ------ --------
Transaction processing expense......................... $15.7 $10.9 $ 4.8 44.0%
Transaction processing expense as a percentage of
revenues............................................. 14.1% 15.1% (1.0)% (6.6)%
The increase is primarily due to the expense associated with a higher
volume of transactions in 1996. In addition, QuantEX is a larger portion of
total volume, causing higher execution charges. The Company received a $621,000
adjustment in the fourth quarter of 1996 against charges incurred in the first
three quarters of 1996 for exchange-related execution fees.
1996 1995 CHANGE % CHANGE
----- ----- ------ --------
Software royalties expense............................. $ 8.8 $ 6.0 $ 2.8 46.7%
Software royalties expense as a percentage of POSIT
revenues............................................. 13.1% 13.3% (0.2)% (1.5)%
The increase is due to higher revenue associated with POSIT.
1996 1995 CHANGE % CHANGE
---- ---- ------ --------
Occupancy and equipment expense.......................... $6.1 $3.6 $2.5 69.4%
The increase is due primarily to depreciation of premises and equipment
acquired since the beginning of 1996 and accelerated depreciation of leasehold
improvements and furniture related to the relocation of the New York office
scheduled to occur in the second quarter of 1997.
Investment Technology Group, Inc.
14
15
1996 1995 CHANGE % CHANGE
---- ---- ------ --------
Consulting expense....................................... $2.5 $1.7 $0.8 47.1%
Consulting is primarily for functions which the Company currently believes
are advantageous to out-source. The increase is due primarily to the Company
undertaking special projects related to contingency planning and systems'
security.
1996 1995 CHANGE % CHANGE
---- ---- ------ --------
Telecommunications and data processing services
expense................................................ $4.8 $2.9 $1.9 65.5%
The increase is due primarily to an increase in quotation services and
communications charges associated with the increased number of QuantEX
installations. In addition, an increased level of activity in the existing
QuantEX business raised the semi-variable component of the quotation services
and communications charges.
1996 1995 CHANGE % CHANGE
---- ---- ------ --------
Other general and administrative expense................. $7.6 $6.1 $1.5 24.6%
The increase is largely due to an increase in amortization of capitalized
software and allowances for general legal and bad debt expenses.
1996 1995 CHANGE % CHANGE
----- ----- ------ --------
Income tax expense..................................... $17.7 $10.0 $7.7 77.0%
The increase is primarily due to an increase in pretax earnings. The
effective tax rate in 1996 and 1995 was 43%. However, 1995 was favorably
impacted by a lower tax rate resulting from the recognition of research and
development tax credits attributable to prior periods.
COMPARISON OF 1995 WITH 1994
1995 1994 CHANGE % CHANGE
------ ------ ------ --------
Revenues............................................. $ 72.4 $ 56.7 $ 15.7 27.7%
Number of Trading Days............................... 252 252 0 0%
Revenues per Trading Day (Dollars in thousands)...... $ 287 $ 225 $ 62 27.6%
Increased revenues were attributed to a growing use of the POSIT and
QuantEX products and an expansion of the Company's other electronic trading desk
services. POSIT and QuantEX revenues increased by 19% and 21%, respectively, or
a combined total of approximately $10.0 million above 1994. Other revenue and
revenues for other electronic trading desk services were $5.7 million above
1994.
The Company currently reports revenues net of soft dollars collected. The
Company previously reported soft dollars on a "gross" basis. Soft dollars
collected were reported as revenues and, in an equal and offsetting amount, as
soft dollar expense. The historical financial statements have been reclassified
to reflect revenue net of soft dollars collected. Soft dollars are those
incremental amounts of commission dollars collected in addition to the Company's
charge for executions. These incremental amounts are used to satisfy customers'
third-party research services.
1995 1994 CHANGE % CHANGE
------ ------ ------ --------
Compensation and employee benefits expense........... $ 16.4 $ 13.5 $ 2.9 21.5%
Number of employees at period end.................... 118 93 25 26.9%
Revenue per employee at period end (Dollars in
thousands)......................................... $ 614 $ 610 $ 4 0.7%
Compensation and employee benefits expense per
employee (Dollars in thousands).................... $ 139 $ 145 $ (6) (4.1)%
Investment Technology Group, Inc.
15
16
The increase in compensation and employee benefits expense is due primarily
to an increase in the number of employees and an increase in profitability based
compensation.
1995 1994 CHANGE % CHANGE
----- ----- ------ --------
Transaction processing expense......................... $10.9 $ 8.2 $ 2.7 32.9%
Transaction processing expense as a percentage of
revenues............................................. 15.1% 14.5% 0.6 % 4.1%
The increase was primarily due to the expense associated with a higher
volume of transactions in 1995, partially resulting from a decrease in the
number of shares per transaction. This was partially offset by a decrease in the
charge per ticket paid to Jefferies & Co. for clearing trades.
1995 1994 CHANGE % CHANGE
----- ----- ------ --------
Software royalties expense............................. $ 6.0 $ 5.0 $1.0 20.0%
Software royalties expense as a percentage of POSIT
revenues............................................. 13.3% 13.2% 0.1% 0.8%
The increase is due to higher revenue associated with POSIT.
1995 1994 CHANGE % CHANGE
---- ---- ------ --------
Occupancy and equipment expense.......................... $3.6 $2.9 $0.7 24.1%
The increase is due primarily to the depreciation of approximately $5.0
million of capital expenditures undertaken since the beginning of 1995 and
increased rent expense, both of which are primarily related to the opening of
the new Boston office.
1995 1994 CHANGE % CHANGE
---- ---- ------ --------
Consulting expense....................................... $1.7 $1.4 $0.3 21.4%
The increase is due primarily to an increase in testing of a new "ITG
Platform" system currently in development, and the use of a consultant for the
automation of a management reporting system. Consulting is for equity research
and product development functions which the Company believes it is advantageous
to out-source.
1995 1994 CHANGE % CHANGE
---- ---- ------ --------
Telecommunications and data processing services
expense................................................ $2.9 $2.3 $0.6 26.1%
The increase resulted from an increase in quotation and communication
expenses associated with additional QuantEX installations.
1995 1994 CHANGE % CHANGE
---- ---- ------ --------
Other general and administrative expense................. $6.1 $4.0 $2.1 52.5%
The increase is largely due to an increase in advertising and promotional
costs and amortization for increased levels of capitalized software.
1995 1994 CHANGE % CHANGE
---- ---- ------ --------
Performance share plans expense.......................... $0 $1.5 $(1.5) 100%
Performance Share Plans expense was related to the termination of the plans
as of the beginning of May 1994.
1995 1994 CHANGE % CHANGE
---- ----- ------ --------
Termination of plans expense............................ $0 $30.2 $(30.2) 100%
Investment Technology Group, Inc.
16
17
Termination of plans expense was related to the termination of certain
management agreements, the compensatory Performance Share Plans and
non-compensatory ITG stock options in conjunction with the Company's initial
public offering in May 1994. This represented a one-time charge.
1995 1994 CHANGE % CHANGE
----- ----- ------ --------
Income tax expense (benefit)........................... $10.0 $(4.5) $14.5 322%
The effective tax rate for 1995 was favorably impacted by research and
development tax credits attributable to prior periods in the amount of $645,000.
DEPENDENCE ON MAJOR CUSTOMERS
During 1996, revenue received by the Company from its 10 largest customers
accounted for approximately 39.6% of the Company's total revenue while revenue
received from the three largest customers accounted for 9.3%, 6.8% and 5.6% of
total revenue. During 1995, revenue received by the Company from its 10 largest
customers accounted for approximately 43.6% of the company's total revenue while
revenue received from the three largest customers accounted for 8.3%, 7.3%, and
7.1% of total revenue. Customers may discontinue use of the Company's services
at any time. During 1994, revenue received by the Company from its 10 largest
customers accounted for approximately 45.4% of the company's total revenue while
revenue received from the three largest customers accounted for 7.6%, 6.7%, and
6.3% of total revenue. The loss of any significant customers could have a
material adverse effect on the Company's results of operations. In addition, the
loss of significant POSIT customers could result in lower share volumes of
securities offered through POSIT which may adversely affect the liquidity of the
system.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically financed its business through cash flow from
operations, equity investments made by Jefferies Group and, to a lesser extent,
through operating lease agreements with Jefferies Group for premises and
equipment. Since November 1994, the Company has purchased its own equipment. The
Company's liquidity and capital resource requirements are the result of the
funding of working capital needs, primarily consisting of compensation, benefits
and transaction processing fees and software royalty fees. Historically, all
working capital requirements have been met by cash from operations and
subordinated loans and equity investments made by Jefferies Group.
Immediately prior to the Offering, the Company and Jefferies Group entered
into an Intercompany Borrowing Agreement which provides for aggregate borrowings
under the facility of up to $15.0 million. Amounts borrowed under the facility
are not restricted as to their use by the Company. The facility bears interest
at a floating rate equal to 1.75% above the average one month London Interbank
Offered Rate. Jefferies Group is not committed to advance funds, and the Company
is not obligated to borrow funds, under the facility. The Company may borrow
funds from other parties. The facility may be terminated by Jefferies Group in
the event of an uncured default by the Company.
The Company's principal financial commitments consist of obligations under
lease and sublease agreements with third parties, Jefferies Group and Jefferies
& Co., and for certain offices and equipment.
The Company believes that its cash flow from operations and its existing
cash balances will be sufficient to meet its cash requirements. The Company
generally invests its excess cash in money market funds, municipal securities
and other short-term investments. At December 31, 1996 and 1995, such cash
equivalents amounted to $43.7 million and $17.8 million, respectively. Cash
equivalents are part of the cash management activities of the Company and
generally mature within 90 days. Additionally, the trade receivable from
affiliate of $2.8 million is due within 30 days.
EFFECTS OF INFLATION
The Company does 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 its revenue or its profitability. However, high
inflation may lead to higher interest rates which might cause money to move from
equity funds to bond funds or money market funds.
Investment Technology Group, Inc.
17
18
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
FINANCIAL REPORTS SECTION
PAGES
-----
Management's Responsibility For Compliance And Financial Reporting 19
Independent Auditors' Report 20
Consolidated Statement of Operations 21
Consolidated Statement of Financial Condition 22
Consolidated Statement of Changes in Stockholders' Equity 23
Consolidated Statement of Cash Flows 24
Notes to Consolidated Financial Statements 25
Investment Technology Group, Inc.
18
19
MANAGEMENT'S RESPONSIBILITY FOR COMPLIANCE AND FINANCIAL REPORTING
TO THE SHAREHOLDERS:
The management of Investment Technology Group, Inc. (the "Company") is
responsible for the integrity and objectivity of the financial information
presented in this Annual Report. Financial information appearing throughout the
Annual Report is consistent with that in the accompanying financial statements.
The financial statements have been prepared by management of the Company in
conformity with generally accepted accounting principles in the United States
and comply, in all material respects, with guidelines of the International
Accounting Standards Committee. The financial statements reflect, where
applicable, management's best judgments and estimates.
The management of the Company has established and maintains an internal
control structure and monitors that structure for compliance with established
policies and procedures. The objectives of an internal control structure are to
provide reasonable, but not absolute, assurance as to the integrity and
reliability of the financial statements, the protection of assets from
unauthorized use or disposition, and that transactions are executed in
accordance with management's authorization.
Management also recognizes its responsibility to foster and maintain a
strong ethical environment within the Company to ensure that its business
affairs are conducted with integrity and in accordance with high standards of
personal and corporate conduct. This responsibility is characterized and
reflected in the Company's Statement of Policy on Standards of Employee Conduct,
which is distributed to all employees of the Company. As part of the monitoring
system, the Company maintains Corporate Compliance Personnel, who have oversight
responsibilities for administering and coordinating the application of these
standards of conduct. Senior legal and compliance personnel have been directed
to report compliance concerns directly to the President of the Company. Ongoing
oversight of compliance activities is the responsibility of the Company's
President.
The Company's Board of Directors appoints an Audit Committee composed
solely of outside directors. The function of the Audit Committee is to oversee
the accounting, reporting, audit and internal control policies and procedures
established by the Company's management. The Committee meets regularly with
management and the internal and independent auditors. The auditors have free
access to the Audit Committee without the presence of management. The Committee
reports regularly to the Board of Directors on its activities, and such other
matters as it deems necessary. Ernst & Young LLP, independent auditors, performs
an internal audit program for the Company and reports directly to the Audit
Committee on matters of internal control.
The Company's annual consolidated financial statements have been audited by
KPMG Peat Marwick LLP, independent auditors, who were appointed by the Board of
Directors. Management has made available to KPMG Peat Marwick LLP all of the
Company's financial records and related data, as well as the minutes of
directors' meetings.
Furthermore, management believes that all its representations to KPMG Peat
Marwick LLP are valid and appropriate. In addition, KPMG Peat Marwick LLP, in
determining the nature and extent of their auditing procedures, considered the
Company's accounting procedures and policies and the effectiveness of the
related internal control structure.
Management believes that, as of December 31, 1996, the Company's internal
control structure was adequate to accomplish the objectives discussed herein.
Raymond L. Killian Jr. Scott P. Mason John R. MacDonald
Chairman President and Senior Vice President
Chief Executive Officer and Chief Financial Officer
Investment Technology Group, Inc.
19
20
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Investment Technology Group, Inc.:
We have audited the accompanying consolidated statement of financial
condition of Investment Technology Group, Inc. and subsidiaries as of December
31, 1996 and 1995 and the related consolidated statements of operations, changes
in stockholders' equity and cash flows for each of the years in the three-year
period ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Investment
Technology Group, Inc. and subsidiaries as of December 31, 1996 and 1995 and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1996 in conformity with generally accepted
accounting principles in the United States and International Accounting
Standards.
KPMG Peat Marwick LLP
Los Angeles, California
January 24, 1997 except as to
note 11 to the consolidated
financial statements, which
is as of March 26, 1997.
Investment Technology Group, Inc.
20
21
CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31,
----------------------------------
1996 1995 1994
-------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
Revenues................................................. $111,556 $ 72,381 $ 56,716
Expenses:
Compensation and employee benefits..................... 25,047 16,404 13,517
Transaction processing................................. 15,737 10,861 8,234
Software royalties..................................... 8,798 5,985 4,973
Occupancy and equipment................................ 6,111 3,606 2,872
Consulting............................................. 2,492 1,699 1,432
Telecommunications and data processing services........ 4,789 2,879 2,341
Other general and administrative....................... 7,581 6,059 4,046
Performance share plans................................ -- -- 1,528
Termination of plans expense (note 7).................. -- -- 30,163
-------- -------- --------
70,555 47,493 69,106
Earnings (loss) before income tax expense (benefit).... 41,001 24,888 (12,390)
Income tax expense (benefit)............................. 17,666 9,983 (4,529)
-------- -------- --------
Net earnings (loss)...................................... $ 23,335 $ 14,905 $ (7,861)
======== ======== ========
Primary net earnings (loss) per share of common stock.... $ 1.26 $ 0.81 $ (0.45)
======== ======== ========
Fully diluted net earnings (loss) per share of common
stock.................................................. $ 1.24 $ 0.81 $ (0.45)
======== ======== ========
Primary weighted average shares and common stock
equivalents outstanding................................ 18,578 18,465 17,456
======== ======== ========
Fully diluted weighted average shares and common stock
equivalents outstanding................................ 18,781 18,465 17,456
======== ======== ========
The accompanying Notes to Consolidated Financial Statements are integral parts
of this statement.
Investment Technology Group, Inc.
21
22
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
DECEMBER 31,
--------------------
1996 1995
------- --------
(DOLLARS IN
THOUSANDS, EXCEPT
PER SHARE DATA)
ASSETS
Cash and cash equivalents............................................... $43,955 $17,960
Securities owned........................................................ 4,808 8,509
Investment in limited partnership (at market; cost $5,000).............. 5,193 --
Trade receivables....................................................... 4,806 2,482
Trade receivable from affiliate......................................... 2,812 7,766
Due from affiliates..................................................... 1,459 5,001
Premises and equipment.................................................. 8,442 4,852
Capitalized software.................................................... 3,028 2,757
Other assets............................................................ 3,467 2,640
Goodwill................................................................ 2,471 3,021
Deferred tax asset...................................................... 2,357 330
------- -------
$82,798 $55,318
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued expenses................................... $ 8,648 $ 5,112
Software royalties payable.............................................. 2,274 1,794
Securities sold, not yet purchased...................................... 1,226 --
Due to affiliates....................................................... 1,922 2,243
Income taxes payable to affiliate....................................... 1,635 690
------- -------
15,705 9,839
------- -------
Lease commitments (note 14)
STOCKHOLDERS' EQUITY:
Preferred stock, par value $0.01; shares authorized:
5,000,000; shares issued: none..................................... -- --
Common stock, par value $0.01; shares authorized:
30,000,000; shares issued: 18,700,000 in 1996 and 1995............. 187 187
Additional paid-in capital............................................ 36,055 36,055
Retained earnings..................................................... 34,614 11,279
Common stock held in treasury, at cost; shares:
445,200 in 1996 and 310,200 in 1995................................... (3,763) (2,042)
------- -------
Total stockholders' equity.................................... 67,093 45,479
------- -------
$82,798 $55,318
======= =======
The accompanying Notes to Consolidated Financial Statements are integral parts
of this statement.
Investment Technology Group, Inc.
22
23
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
RETAINED COMMON TOTAL
ADDITIONAL EARNINGS STOCK STOCK-
PREFERRED COMMON PAID-IN (ACCUMULATED HELD IN HOLDER
STOCK STOCK CAPITAL DEFICIT) TREASURY EQUITY
--------- -------- ---------- ------------- -------- --------
Balance at December 31, 1993.... $ -- $ -- $ 9,609 $ 4,235 $ -- $ 13,844
Stock for stock exchange of
ownership interests under
common control (15,000,000
shares)....................... 150 (150)
Dividend to Jefferies Group..... (17,000) (17,000)
Proceeds from public common
stock offering of $48.1
million, less underwriting
discounts, commissions and
offering expenses of $4.5
million (3,700,000 shares).... 37 43,596 43,633
Purchase of common stock for
treasury (125,700 shares)..... (723) (723)
Net loss........................ (7,861) (7,861)
-------- -------- -------- -------- -------- --------
Balance at December 31, 1994.... -- 187 36,055 (3,626) (723) 31,893
Net earnings.................... 14,905 14,905
Purchase of common stock for
treasury (184,500 shares)..... (1,319) (1,319)
-------- -------- -------- -------- -------- --------
Balance at December 31, 1995.... -- 187 36,055 11,279 (2,042) 45,479
Net earnings.................... 23,335 23,335
Purchase of common stock for
treasury (135,000 shares)..... (1,721) (1,721)
-------- -------- -------- -------- -------- --------
Balance at December 31, 1996.... $ -- $ 187 $ 36,055 $ 34,614 $ (3,763) $ 67,093
======== ======== ======== ======== ======== ========
The accompanying Notes to Consolidated Financial Statements are integral parts
of this statement.
Investment Technology Group, Inc.
23
24
CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31,
----------------------------------
1996 1995 1994
-------- -------- --------
(IN THOUSANDS)
Cash flows from operating activities:
Net earnings (loss).................................... $ 23,335 $ 14,905 $ (7,861)
Adjustments to reconcile net earnings (loss) to net
cash provided (used) by operating activities:
Deferred income tax (benefit) expense............... (2,027) 2,663 1,663
Depreciation and amortization....................... 3,957 2,363 1,222
Unearned (loss) income related to investments....... (267) 70
Other............................................... -- -- 37
Decrease (increase) in operating assets:
Securities owned.................................... 3,701 (8,509) --
Trade receivables................................... (2,324) (1,647) (202)
Trade receivable from affiliate..................... 4,953 (2,832) 1,172
Due from affiliates................................. 3,541 (4,501) 197
Income taxes receivable from affiliate.............. -- 1,511 (3,086)
Other assets........................................ (1,977) (724) (524)
Increase (decrease) in operating liabilities:
Accounts payable and accrued expenses............... 4,956 191 359
Software royalties payable.......................... 480 723 (442)
Termination of plans expense payable................ -- (758) 758
Performance share plans payable..................... -- -- (212)
Due to affiliates................................... (321) 813 (2,047)
Securities sold, not yet purchased.................. 1,226
Income taxes payable to affiliate................... 945 690 --
-------- -------- --------
Net cash provided (used) by operating activities....... 40,178 4,958 (8,966)
-------- -------- --------
Cash flows from financing activities:
Net proceeds from initial public offering.............. -- -- 43,633
Dividend paid to Jefferies Group....................... -- -- (17,000)
Purchase of common stock for treasury.................. (1,721) (1,319) (723)
-------- -------- --------
Net cash (used) provided by financing activities....... (1,721) (1,319) 25,910
-------- -------- --------
Cash flows from investing activities:
Purchase of premises and equipment..................... (5,624) (5,003) (224)
Investment in limited partnership...................... (5,193) -- --
Capitalization of software development costs........... (1,645) (2,122) (1,284)
-------- -------- --------
Net cash used by investing activities.................. (12,462) (7,125) (1,508)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents... 25,995 (3,486) 15,436
Cash and cash equivalents -- beginning of year........... 17,960 21,446 6,010
-------- -------- --------
Cash and cash equivalents -- end of year................. $ 43,955 $ 17,960 $ 21,446
======== ======== ========
Supplemental cash flow information:
Interest paid.......................................... $ 223 $ 53 $ 10
======== ======== ========
Income taxes paid to (received from) affiliate......... $ 18,798 $ 5,072 $ (3,075)
======== ======== ========
The accompanying Notes to Consolidated Financial Statements are integral parts
of this statement.
Investment Technology Group, Inc.
24
25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The Consolidated Financial Statements include the accounts of Investment
Technology Group, Inc. and its wholly-owned subsidiaries (collectively, the
"Company" or "ITGI"), principally ITG Inc. ("ITG"), a Delaware corporation, and
a registered broker-dealer in securities under the Securities Exchange Act of
1934, and ITG Global Trading, Inc. ("Global Trading") which is a 50% partner in
the Global POSIT joint venture. Jefferies Group, Inc. ("Jefferies Group") owned
over 80% of the Company's common stock at December 31, 1996.
In March 1994, ITGI was formed for the purpose of holding 100% of the stock
of ITG, which was a wholly-owned subsidiary of Jefferies Group. After its
formation, ITGI had a capital structure of preferred stock (5.0 million shares
authorized, par value $.01 per share, no shares issued or outstanding) and
common stock (30.0 million shares authorized, par value $.01 per share, no
shares issued or outstanding).
Immediately prior to the consummation of an initial public offering (the
"Offering") in May 1994, ITGI issued 15.0 million shares of its common stock in
exchange for all of the issued and outstanding shares of common stock of ITG
(10.0 million shares) held by Jefferies Group. In addition, Jefferies Group
contributed Global Trading to ITGI and its royalty interest in Canadian QuantEX
to ITG. This transaction was accounted for as an exchange of ownership interests
under common control, and therefore, the assets and liabilities of these
entities were not revalued.
In May 1994, the Company consummated the Offering and issued 3.7 million
shares of common stock for $48.1 million ($13 per share), less underwriting
discounts and commissions of $3.4 million and offering expenses of $1.1 million.
Immediately following the Offering, Jefferies Group owned 80.2% of the
outstanding common stock of the Company.
COMBINED FINANCIAL STATEMENT PRESENTATION
Prior to May 1994, the accompanying consolidated financial statements,
presented on an historical basis, include the accounts of ITG, Global Trading
and the royalty interest in Canadian QuantEX on a combined basis. ITG was
incorporated in the State of Delaware as a wholly-owned subsidiary of Jefferies
Group in 1991 with operations beginning in March 1992. From 1987 to February
1992, ITG was operated as the investment technology division of Jefferies &
Company, Inc. ("Jefferies & Co."), a wholly-owned subsidiary of Jefferies Group.
These combined statements are presented as if the Company had existed as a
corporation separate from Jefferies Group prior to May 1994 and include the
historical assets, liabilities, revenues and expenses that are directly related
to the Company's operations. The retained earnings (accumulated deficit)
reflected in the accompanying combined financial statements have been recorded
as a result of net earnings (loss) from the combined operations of the Company,
on a historical basis.
The financial information included herein may not necessarily reflect what
the financial position, results of operations or cash flows of the Company would
have been if it were not related to Jefferies Group.
All material intercompany balances and transactions have been eliminated in
consolidation and combination. Certain prior period amounts have been
reclassified to conform to the 1996 financial statement presentation. The
Company previously reported soft dollars on a "gross" basis. Soft dollars
collected were reported as revenues and, as an equal and offsetting amount, soft
dollar expense. The accompanying historical financial statements have been
reclassified to reflect revenue net of soft dollars collected. Soft dollars are
those incremental amounts of commission dollars collected in addition to the
Company's charge for executions. These incremental amounts are used to satisfy
customers' third-party research services.
Investment Technology Group, Inc.
25
26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
BUSINESS SEGMENT
Through its wholly-owned, broker/dealer subsidiary, ITG, the Company, is a
leading provider of technology-based equity trading services and transaction
research to institutional investors and brokers. ITG services help clients to
access liquidity, execute trades more efficiently and make better trading
decisions.
GOODWILL
In May 1991, Jefferies Group acquired Integrated Analytics Corporation
("IAC") and contributed its business to ITG in 1992. IAC's principal product,
MarketMind, was used to develop the Company's QuantEX product. Goodwill, which
represents the excess of purchase price for IAC over the fair value of the IAC
net assets acquired, is amortized on a straight-line basis over ten years. The
Company assesses the recoverability of this intangible asset by determining
whether the amortization of the goodwill balance over its remaining life can be
recovered through undiscounted future operating cash flows of the acquired
operation. At December 31, 1996 and 1995, goodwill amounted to $2.5 million and
$3.0 million, net of accumulated amortization of $2.8 million and $2.3 million,
respectively.
PREMISES AND EQUIPMENT
Premises and equipment are carried at cost and are depreciated using the
straight-line method over the estimated useful lives of the assets (generally
three to five years). Leasehold improvements are amortized using the
straight-line method over the lesser of the estimated useful lives of the
related assets or the noncancelable lease term.
REVENUES
Revenues primarily consist of commission revenues. Trade receivable from
affiliate consists of commissions receivable.
Transactions in securities, commission revenues and related expenses are
recorded on a trade-date basis.
EXPENSES
Compensation and employee benefits include base salaries, bonuses,
employment agency fees, part-time employees, commissions paid to Jefferies & Co.
employees (note 8) and fringe benefits, including employer contributions for
medical insurance, life insurance, retirement plans and payroll taxes.
Transaction processing consists of floor brokerage and clearing fees. Software
royalties are payments to BARRA, Inc., the Company's joint venture partner in
POSIT. Royalty payments are calculated at an effective rate of 13% of adjusted
POSIT revenues. The royalty payments related to Global Trading are calculated at
an effective rate of 50%. Occupancy and equipment includes rent, depreciation,
amortization of leasehold improvements, maintenance, utilities, occupancy taxes
and property insurance. Consulting is for equity research and product
development activities which the Company believes it is advantageous to
out-source. Telecommunications and data processing services include costs for
computer hardware, office automation and workstations, data center equipment,
market data services and voice, data, telex and network communications. Other
general and administrative includes goodwill amortization, legal, audit, tax and
promotional expenses. Performance share plans are described in note 7.
INCOME TAXES
The Company is a member of the Jefferies affiliated group ("Group") for
purposes of filing a Federal income tax return (i.e., Jefferies Group owns more
than 80% of the Company). The Company's tax liability is determined on a
"separate return" basis. That is, the Company is required to pay to Jefferies
Group its
Investment Technology Group, Inc.
26
27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
proportionate share of the consolidated tax liability plus any excess of its
"separate" tax liability (assuming a separate tax return were to be filed by the
Company) over its proportionate amount of the consolidated Group tax liability.
Alternatively, Jefferies Group is required to pay the Company an "additional
amount" for the amount by which the consolidated tax liability of the Group is
decreased by reason of inclusion of the Company in the Group.
Consistent with the tax-sharing agreement above, the consolidated financial
statements reflect an allocation of income tax expense (benefit) for the Company
as if it had been a legal entity for the periods prior to May 1994. The
consolidated tax provisions are shown in note 4 to the notes to consolidated
financial statements. On a separate company basis, the consolidated tax
provisions, including the recognition of the deferred tax asset discussed in
note 4, would not be materially different from those presented.
Deferred tax assets and liabilities reflect the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
reverse. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
Past effects of such changes in the rates were not material to the combined
financial statements.
CAPITALIZED SOFTWARE
The Company capitalizes software development costs where technological
feasibility of the product has been established. The establishment of
technological feasibility and the ongoing assessment of recoverability of
capitalized software development costs requires considerable judgment by
management with respect to certain external factors, including, but not limited
to, technological feasibility, anticipated future gross revenues, estimated
economic life and changes in software and hardware technologies. The Company is
amortizing capitalized software costs using the straight-line method over the
estimated economic useful life, the average life of which is two years.
Amortization begins when the product is available for release to the customers.
RESEARCH AND DEVELOPMENT
Research and development costs were $6.0 million, $4.9 million and $3.2
million for 1996, 1995 and 1994, respectively. In 1996, 1995 and 1994, $1.6
million, $2.1 million and $1.3 million, respectively, were capitalized (note 3).
CASH AND CASH EQUIVALENTS
The Company generally invests its excess cash in money market funds and
other short-term investments that generally mature within 90 days. At December
31, 1996 and 1995, such cash equivalents amounted to $43.7 million and $17.8
million, respectively.
INVESTMENT IN LIMITED PARTNERSHIP
Investment in limited partnership consists of an investment in TQA
Arbitrage Fund L.P. ( the "Fund"), a Delaware limited partnership. The Fund
invests primarily in convertible securities, and seeks capital appreciation from
its convertible securities portfolio through a combination of convertible
securities purchases and short sales of related stocks focusing on the current
income and capital appreciation available from such strategies with
convertibles. The Company may withdraw any or all of its investment from the
Fund upon at least a thirty days notice. Investment in limited partnership is
valued at market, and unrealized gains or losses are reflected in revenues.
Investment Technology Group, Inc.
27
28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
Substantially all of the Company's financial instruments are carried at
fair value or amounts approximating fair value.
SECURITIES OWNED
Securities owned are valued at market, and unrealized gains or losses are
reflected in revenues. Securities owned consisted of municipal securities as of
December 31, 1996 and 1995.
USE OF ESTIMATES
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets, liabilities, revenues and expenses and the
disclosure of contingent assets, liabilities, revenues and expenses to prepare
these financial statements in conformity with generally accepted accounting
principles. Actual results could differ from those estimates.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior years' amounts to
conform to the current year's presentation.
IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF
The Company adopted the provisions of SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of, on
January 1, 1996. This Statement requires that long-lived assets and certain
identifiable intangibles be reviewed for impairment whenever events or changes
in circumstance indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceed the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount or fair value less costs to
sell. Adoption of the Statement did not have a material impact on the Company's
consolidated financial position, results of operations, or liquidity.
TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS OF LIABILITIES
In June 1996, the Financial Accounting Standards Board issued SFAS No. 125,
Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities. SFAS No. 125 is effective for transfers and servicing of
financial assets and extinguishments of liabilities occurring after December 31,
1996 and is to be applied prospectively. This Statement provides accounting and
reporting standards for transfers and servicing of financial assets and
extinguishments of liabilities based on consistent application of a financial-
components approach that focuses on control. It distinguishes transfers of
financial assets that are sales from transfers that are secured borrowings.
Management of the Company does not expect that adoption of SFAS No. 125 will
have a material impact on the Company's consolidated financial position, results
of operations, or liquidity.
DIVIDENDS
Any future payments of dividends will be at the discretion of the Company's
Board of Directors and will depend on the Company's financial condition, results
of operations, capital requirements and other factors deemed relevant. However,
the Company anticipates that, for the foreseeable future, all earnings will be
Investment Technology Group, Inc.
28
29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
retained by the Company for working capital and that the Company will not pay
any dividends to its stockholders. Immediately prior to the Offering, the
Company declared a dividend payable to its sole stockholder, Jefferies Group, in
the amount of $17.0 million. Such dividend liability was paid after the
consummation of the Offering.
(2) PREMISES AND EQUIPMENT
The following is a summary of premises and equipment as of December 31,
1996 and 1995:
1996 1995
---------- ---------
Furniture, fixtures and equipment............................ $11,051,000 $5,778,000
Leasehold improvements....................................... 1,647,000 1,296,000
---------- ----------
Total...................................................... 12,698,000 7,074,000
Less accumulated depreciation and amortization............... 4,256,000 2,222,000
---------- ----------
$8,442,000 $4,852,000
========== ==========
JEFFERIES GROUP PREMISES AND EQUIPMENT
Prior to November 1994, premises and equipment for the Company were
purchased by Jefferies Group. Jefferies Group owns and recorded such assets.
Jefferies Group charges the Company depreciation and amortization on such
premises and equipment on a monthly basis. The following is a summary of such of
premises and equipment as of December 31, 1996 and 1995 as recorded by Jefferies
Group:
1996 1995
---------- ---------
Furniture, fixtures and equipment............................ $6,154,000 $6,154,000
Leasehold improvements....................................... 942,000 942,000
---------- ----------
Total...................................................... 7,096,000 7,096,000
Less accumulated depreciation and amortization............... 5,481,000 3,510,000
---------- ----------
$1,615,000 $3,586,000
========== ==========
Most of the capital expenditures in the two schedules above are for
computer-related equipment.
Depreciation and amortization expense amounted to $2,034,000, $788,000 and
$478,000 in 1996, 1995 and 1994, respectively.
(3) CAPITALIZED SOFTWARE COSTS
The following is a summary of capitalized software costs for years ended
December 31, 1996 and 1995:
1996 1995
---------- ---------
Capitalized software costs................................... $5,787,000 $4,142,000
Less accumulated amortization................................ 2,759,000 1,385,000
---------- ----------
Total........................................................ $3,028,000 $2,757,000
========== ==========
Approximately $1,645,000 of software costs were capitalized in 1996
primarily for the development of new versions of POSIT and QuantEX. In addition,
approximately $1,649,000 of total capitalized software costs were not subject to
amortization as of December 31, 1996, as the ITG Platform and certain versions
of POSIT and QuantEX have not yet been released.
Investment Technology Group, Inc.
29
30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Capitalized software costs are being amortized over one to two years, with
an average remaining life of under two years. In 1996, 1995 and 1994, the
Company included $1,374,000, $894,000 and $173,000, respectively, of amortized
software costs in other expenses.
(4) INCOME TAXES
The Company's operations are included in the consolidated Federal income
tax return of Jefferies Group. All income tax liabilities/assets are due to/from
Jefferies Group.
Income tax expense (benefit) consists of the following components:
1996 1995 1994
---------- --------- ----------
Current
Federal...................................... $13,722,000 $5,224,000 $(5,135,000)
State........................................ 5,971,000 2,096,000 (1,057,000)
----------- ---------- -----------
Total.......................................... 19,693,000 7,320,000 (6,192,000)
----------- ---------- -----------
Deferred
Federal...................................... (1,408,000) 1,430,000 1,471,000
State........................................ (619,000) 1,233,000 192,000
----------- ---------- -----------
(2,027,000) 2,663,000 1,663,000
----------- ---------- -----------
Total.......................................... $17,666,000 $9,983,000 $(4,529,000)
=========== ========== ===========
Deferred income taxes are provided for temporary differences in reporting
certain items, principally deferred compensation and net operating losses
arising from termination of plans expense (note 7). The tax effects of temporary
differences that gave rise to the deferred tax asset at December 31, 1996 and
1995 were as follows:
1996 1995
--------- ---------
Deferred compensation......................................... $1,560,000 $1,045,000
State income tax.............................................. 860,000 --
Premises and equipment........................................ (139,000) (255,000)
Other......................................................... 76,000 (460,000)
---------- ---------
$2,357,000 $ 330,000
========== =========
At December 31, 1996, $1,635,000 is currently payable to Jefferies Group
for income taxes.
Investment Technology Group, Inc.
30
31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The provision for income tax expense (benefit) differs from the expected
Federal income tax rate of 35% for 1996, 1995 and 1994 for the following
reasons:
1996 1995 1994
---------- --------- ----------
Computed expected income tax expense
(benefit).................................... $14,350,000 $8,711,000 $(4,337,000)
Increase in income taxes resulting from:
Amortization of goodwill..................... 192,000 198,000 200,000
State income tax expense (benefit), net of
Federal income taxes...................... 3,479,000 2,163,000 (562,000)
Research and development tax credits......... (159,000) (863,000) --
Non-taxable interest income.................. (473,000) (308,000) (88,000)
Other........................................ 277,000 82,000 258,000
---------- --------- ----------
Total income tax expense (benefit)............. $17,666,000 $9,983,000 $(4,529,000)
========== ========== ===========
The Company believes that it is more likely than not that the deferred tax
asset will be realized pursuant to the Company's Tax Sharing Agreement with
Jefferies Group which entitles the Company to a compensating tax payment from
Jefferies Group.
(5) DEBT
The Company had no term debt as of December 31, 1996 and 1995. Immediately
prior to the Offering, the Company entered into an intercompany borrowing
agreement with Jefferies Group permitting the Company to borrow up to $15.0
million. Any outstanding balance will be due March 31, 1999 and will accrue
interest at 1.75% above the one month London Interbank Offering Rate.
(6) EMPLOYEE BENEFIT PLANS
Substantially all employees of the Company are covered by a defined benefit
pension plan sponsored by Jefferies Group. The defined benefit pension plan is
subject to the provisions of the Employee Retirement Income Security Act of
1974. The Jefferies Group funding policy is to contribute to the defined benefit
pension plan at least the minimum amount that can be deducted for Federal Income
Tax purposes. The plan assets consist of approximately 60% equities and 40%
fixed income securities.
The net periodic pension cost allocated to the Company was $151,000,
$101,000 and $137,000 in 1996, 1995 and 1994, respectively.
Jefferies Group incurs expenses related to various benefit plans covering
substantially all employees, including an Employee Stock Purchase Plan and a
profit sharing plan, which includes a salary reduction feature designed to
qualify under Section 401(k) of the Internal Revenue Code. Employee
contributions under the ESPP are voluntary and are made via payroll deduction.
The employee contribution are used to purchase the Jefferies Group common stock
which is then held in an outside trust account. The Company matches employee
contributions at a rate of 15% (more, if profits exceed targets set by the
Company's Board of Directors). The Company's match vests after two years.
Jefferies Group has a Capital Accumulation Plan (CAP) for certain officers
and key employees of Jefferies Group and ITG. Participation in the CAP is
optional, with those who elect to participate agreeing to defer graduated
percentages of their compensation. The plan allows selected employees to acquire
the Jefferies Group common stock at a 15% discount with 50% of the amount
deferred. The remaining 50% of the amount deferred is placed in a Profit-Based
Deferred Compensation Account that earns interest at a rate based on the
performance of the Company. Jefferies Group will from time to time repurchase
shares of its common stock in
Investment Technology Group, Inc.
31
32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
the open market for use in this plan. The Company recognizes compensation cost
related to the 15% discount and interest on Profit-Based Deferred Compensation
Accounts.
For 1996, 1995 and 1994, the Company expensed and contributed to these
plans $1,590,000, $567,000, and $534,000, respectively.
(7) TERMINATION OF PLANS EXPENSE
In connection with the Offering, certain management employment agreements,
the Performance Share Plans (consisting of a 12.7% phantom equity interest in
ITG and an annual profits bonus component) and non-compensatory ITG stock
options (on 10% of the outstanding shares of ITG common stock) were terminated
as of May 1, 1994 in exchange for $31.1 million in cash, a portion of which was
used to purchase Jefferies Group common stock. The Company, prior to December
31, 1993, had expensed and paid to Jefferies Group an additional $9.4 million
related to the above-mentioned Performance Share Plans. Immediately prior to the
consummation of the Offering, Jefferies Group transferred its $9.4 million
liability and an equivalent amount of cash to the Company to be applied by the
Company as part of the termination of the Performance Share Plans. The total
liability in connection with the above-mentioned plans was $40.5 million. Of the
non-recurring expense of $31.1 million, approximately $900,000 was recorded in
Performance Share Plans expense in the first two quarters of 1994 under the
terms of the prior agreement. The total Performance Share Plans expense recorded
for the first two quarters of 1994 was $1.5 million. The remaining $600,000 of
such expense was for the annual profits bonus component of the Performance Share
Plans for January 1, 1994 through May 1, 1994 (the termination date of the
above-mentioned plans). Only the future annual profits bonus component (post
Offering) of the above-mentioned plans was determined to be a component of the
$40.5 million liability. The annual profits bonus component was earned during
the period January 1, 1994 through May 1, 1994 by the payees regardless of the
Offering. The remaining liability of $30.2 million was recorded as Termination
of plans expense in the second quarter of 1994.
(8) RELATED PARTY TRANSACTIONS
In connection with the Offering, the Company entered into certain
agreements (e.g., tax sharing agreement, service agreements, clearing agreement,
development rights agreement, revenue sharing agreement and lease agreements) as
described below:
Jefferies & Co. has provided specified administrative services to the
Company at fixed monthly costs. Services performed outside the scope of the
service agreements have been provided at jointly negotiated costs.
Administrative services include human resources, telecommunications and data
processing, legal, accounting and compliance. The costs of such services to the
Company during 1996, 1995 and 1994 were $690,000, $584,000 and $569,000,
respectively.
Employees of the Company have also been provided with certain employee
benefits, including medical, dental, life and disability insurance under plans
maintained by Jefferies & Co., which have been charged to the Company based on
Jefferies & Co.'s actual costs. In addition, third party expenses including
telecommunication and quotation costs, floor brokerage, legal and accounting
fees, exchange fees and other insurance costs, including fidelity bond coverage
and directors and officers liability coverage, have been provided at cost.
The Company paid to Jefferies & Co. an aggregate of $502,000, $432,000 and
$446,000 for 1996, 1995 and 1994, respectively, as compensation to Jefferies &
Co.'s account executives for introducing customers to POSIT.
In addition, Jefferies & Co. has provided substantially all clearing
services to the Company. Aggregate costs of such services to the Company were
$7.3 million, $4.6 million and $4.4 million during 1996, 1995 and 1994,
respectively, included in transaction processing expenses.
Investment Technology Group, Inc.
32
33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Occupancy and equipment rental expense has been partially provided to the
Company at cost by Jefferies Group.
W & D Securities, Inc. performs certain execution services at the New York
Stock Exchange and other exchanges for the Company. In order to comply with
regulatory requirements of the NYSE that generally prohibit NYSE members and
their affiliates from executing, as principal and, in certain cases, as agent,
transactions in NYSE-listed securities off the NYSE, Jefferies Group gave up its
formal legal control of W & D, effective January 1, 1983, by exchanging all of
the W & D common stock owned by it for non-voting preferred stock of W & D. In
the event that Jefferies Group were to regain ownership of such common stock,
Jefferies Group believes that the NYSE would assert that W & D would be in
violation of the NYSE's rules unless similar arrangements satisfactory to the
NYSE were made with respect to the ownership of the common stock. While the NYSE
has generally approved the above arrangements, there can be no assurance that it
will not raise objections in the future. The Company believes that it can make
satisfactory alternative arrangements for executing transactions in listed
securities on the NYSE if it were precluded from doing so through W & D. The
cost of these execution services was $6.5 million, $5.4 million and $3.5 million
in 1996, 1995 and 1994, respectively, and is included in transaction processing
expenses. Included in other general and administrative expenses are fees paid to
Jefferies International Limited of $248,000 for various broker and
administrative services, of which $248,000 was reimbursed to the Company by its
affiliate Global Trading.
Jefferies & Co. executes trades in an agency capacity for certain of its
customers. Transaction fees from such trades were $1.7 million, $1.1 million and
$897,000 in 1996, 1995 and 1994, respectively, and are included in the Company's
revenues.
Prior to May 1994, allocations of costs from Jefferies & Co. and Jefferies
Group were done on a proportional cost basis using several methods, including
usage, headcount and square footage. Costs were allocated using the method
deemed most reasonable and appropriate.
During 1994, the Company paid Jefferies & Co. a consulting fee of $56,000
for investment advisory services. The Company also earned interest income and a
commitment fee in connection with a borrowing by Jefferies Group.
The Company believes all the foregoing post-Offering transactions were on
terms substantially no less favorable to the Company than could have been
obtained from unaffiliated parties and that all costs of doing business have
been included. Amounts due from affiliates and amounts due to affiliates are
generally settled on a monthly basis.
(9) MARKET RISK AND CONCENTRATIONS OF CREDIT RISK
In the normal course of business, the Company is involved in the execution
of various customer securities transactions. Securities transactions are subject
to the risk of counterparty 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.
The settlement of these transactions is not expected to have a material
effect upon the Company's financial statements.
(10) NET CAPITAL REQUIREMENT
ITG is subject to the Securities and Exchange Commission Uniform Net
Capital Rule (Rule 15c3-1), which requires the maintenance of minimum net
capital. ITG has elected to use the alternative method permitted by Rule 15c3-1,
which requires that ITG maintain minimum net capital, as defined, equal to
$250,000 or 2% of aggregate debit balances arising from customer transactions,
as defined.
Investment Technology Group, Inc.
33
34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
At December 31, 1996, ITG had net capital of $29.8 million which was $29.6
million in excess of required net capital.
(11) ITGI STOCK OPTIONS
At December 31, 1996, the Company had a non-compensatory stock option plan.
Under the 1994 Stock Ownership and Long-term Incentive Plan, non-compensatory
options to purchase 3,650,000 shares of the Company's Common Stock are reserved
for issuance under the plan. Except for certain options granted in conjunction
with the Offering, 20,000 options which vest over two years and 12,377 options
which vest immediately, one third of the options granted vest on the first,
second, and third anniversaries of the date the options were priced. 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 Stock Ownership and Long-Term
Incentive Plan are exercisable on dates ranging from May 1997 to May 1999. The
Plan will remain in effect until March 31, 2004, unless sooner terminated by the
Board of Directors.
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 2,500 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 10,000
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 beginning at the latter of three months after the date of grant, or
May 4, 1997. Stock options granted under the Non-Employee Directors' Plan expire
five years after the date of grant. A total of 125,000 shares of Common Stock
are reserved and available for issuance under the Non-Employee Directors' Plan.
At the time of the Company's initial public offering in May 1994, stock
options to acquire an aggregate of 2,728,000 shares of Common Stock were granted
to officers and other employees of the Company. Of these options granted,
2,442,000 shares were 100% vested on May 4, 1994. In 1995, the Compensation
Committee of the Board of Directors determined that a repricing of such options
would serve to provide enhanced incentives to officers and employees of the
Company. Accordingly, on the recommendation of the Compensation Committee, the
Company offered a stock option repricing program pursuant to which all holders
(options granted under the Non-Employee Directors' Plan were not eligible for
repricing) of outstanding stock options with an exercise price of $13.00 per
share were permitted to elect to exchange all or a portion of such stock options
for a smaller number of stock options to acquire shares of Common Stock at
exercise price of $13.00, $11.06 and $9.13 per share. The repricing program was
offered to option holders on a value neutral basis using the Black Scholes
option valuation model. In all, approximately 66% of the outstanding stock
options eligible for repricing were repriced at the election of the holders of
such options.
Investment Technology Group, Inc.
34
35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company applies APB Opinion No. 25 and related Interpretations in
accounting for its non-compensatory stock option plans. Accordingly, no
compensation costs have been recognized for its stock option plan. Had
compensation cost for the Company's stock option plans been determined
consistent with FASB Statement No. 123, the Company's net earnings and earnings
per share would have been reduced to the pro forma amounts indicated below:
1996 1995
------- -------
Net earnings......................................... As reported $23,335 $14,905
Pro forma $20,279 $11,899
Primary net earnings per share of common stock....... As reported $ 1.26 $ 0.81
Pro forma $ 1.09 $ 0.64
Fully diluted earnings per share of common stock..... As reported $ 1.24 $ 0.81
Pro forma $ 1.08 $ 0.64
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 1996 and 1995, respectively: zero dividend yield
for all years; risk free interest rates of 6.1 and 6.3 percent; expected
volatility of 49 and 51 percent; and expected lives of four and four years.
A summary of the status of the Company's stock option plan as of December
31, 1996 and 1995 and changes during the years ended on those dates is presented
below:
1996 1995 1994
------------------- ------------------- -------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
FIXED OPTIONS SHARES PRICE SHARES PRICE SHARES PRICE
- ---------------------------------- -------- -------- -------- -------- -------- --------
Outstanding at beginning of
year............................ 2,271,351 $11.82 2,731,678 $13.00
Granted........................... 49,877 16.96 27,500 7.71 2,737,628 $13.00
Exercised......................... -- -- -- -- -- --
Conversion:
Surrendered upon conversion..... -- -- (478,646) 13.00 -- --
Converted from.................. -- -- (870,976) 13.00 -- --
Converted to.................... -- -- 435,493 9.13 -- --
Converted to.................... -- -- 435,483 11.06 -- --
Forfeited......................... (10,169) 13.00 (9,181) 13.00 (5,950) 13.00
Outstanding at end of year........ 2,311,059 11.96 2,271,351 11.82 2,731,678 13.00
Options exercisable at year-end... None None None
Weighted average fair value per
share of options granted during
the year........................ $ 7.93 $ 3.48 $ 5.87
Investment Technology Group, Inc.
35
36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table summarizes information about fixed stock options
outstanding at December 31, 1996:
OPTIONS OUTSTANDING
-----------------------------
WEIGHTED AVG. OPTIONS EXERCISABLE
REMAINING ------------------------------
NUMBER CONTRACTUAL NUMBER WEIGHTED AVG.
EXERCISE PRICES OUTSTANDING LIFE (YEARS) EXERCISABLE EXERCISE PRICE
--------------- ----------- ------------- ----------- --------------
$7.33 3,334 1.8 -- $ 7.33
7.50 7,500 3.5 -- 7.50
8.25 10,000 3.3 -- 8.25
9.13 434,769 3.9 -- 9.13
11.06 434,760 3.9 -- 11.06
13.00 1,370,819 2.3 -- 13.00
13.75 7,500 4.5 -- 13.75
14.00 10,000 4.2 -- 14.00
18.20 20,000 4.8 -- 18.20
18.43 12,377 4.9 -- 18.43
Although the 1994 Plan allows for the granting of performance-based stock
options and restricted stock awards, no such options were granted during 1996
and 1995 and no such options were outstanding at December 31, 1996 and 1995.
In January of 1997, the Company granted to Scott P. Mason a non-qualified
stock option to acquire 1,000,000 shares of Common Stock of the Company, having
an exercise price of $22.175. The option becomes exercisable as to 200,000
shares on May 4, 1997, and thereafter as to an additional 200,000 shares on each
one year anniversary of the date of Scott P. Mason's employment contract
execution. Such options granted were approved by the Compensation Committee of
the Board of Directors in March 1997. The option expires in January 2002.
(12) INTEREST
Included in revenues is interest income of $571,000, $46,000 and $616,000
for 1996, 1995 and 1994, respectively.
Included in other general and administrative expenses is interest expense
of $223,000, $53,000 and $10,000 for 1996, 1995 and 1994, respectively.
(13) ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Included in accounts payable and accrued expenses at December 31, 1996 and
1995 are accrued soft dollar expenses of $2,104,000 and $933,000 and deferred
revenues of $300,000 and $1,719,000, respectively.
Investment Technology Group, Inc.
36
37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(14) LEASE COMMITMENTS
In March 1994, the Company entered into lease and sublease agreements with
Jefferies Group, Jefferies & Co. and third parties for certain offices and
equipment, which expire at various dates through 2005. Rent expense for the
years ended December 31, 1996, 1995 and 1994 was $1.9 million, $1.2 million and
$1.0 million, respectively. Minimum future rentals under noncancellable
operating leases follow:
YEAR ENDING DECEMBER 31
--------------------------------------------------------------------
1997.................................................. $1,030,000
1998.................................................. 2,651,000
1999.................................................. 2,659,000
2000.................................................. 2,674,000
2001.................................................. 2,730,000
Thereafter............................................ 24,069,000
----------
Total................................................. 35,813,000
==========
(15) EARNINGS (LOSS) PER SHARE
Net earnings (loss) per share of common stock is based upon an adjusted
weighted average number of shares of common stock outstanding during 1996, 1995
and 1994. Although the Company actually issued 15.0 million shares to Jefferies
immediately prior to the Offering (See Basis of Presentation in Summary of
Accounting Policies) those shares have been treated in the earnings (loss) per
share calculation as if they had been outstanding during all of 1994. The
average number of outstanding shares for the years ended December 31, 1996, 1995
and 1994 were 18.3 million, 18.5 million and 17.5 million, respectively.
(16) UNAUDITED SUPPLEMENTARY FINANCIAL INFORMATION
The following tables set forth certain unaudited financial data for the
Company's quarterly operations in 1996, 1995 and 1994. 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.
Investment Technology Group, Inc.
37
38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEAR
ENDED
DECEMBER
YEAR ENDED DECEMBER 31, 1996 YEAR ENDED DECEMBER 31, 1995 31, 1994
------------------------------------- ------------------------------------- -------
FOURTH THIRD SECOND FIRST FOURTH THIRD SECOND FIRST FOURTH
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
------- ------- ------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Total Revenue........................ $29,892 $28,684 $26,313 $26,667 $19,933 $19,405 $16,700 $16,343 $12,898
Expenses:
Compensation and benefits............ 6,947 6,225 6,006 5,869 4,579 4,754 3,529 3,542 2,582
Transaction processing............... 3,922 4,340 3,776 3,699 3,221 2,707 2,727 2,206 2,145
Software royalties................... 2,283 2,272 2,022 2,221 1,775 1,565 1,264 1,381 1,096
Occupancy and equipment.............. 1,928 1,899 1,257 1,027 992 913 883 818 711
Consulting........................... 494 452 692 854 442 298 396 563 500
Telecommunications and data
processing services................ 1,396 1,217 925 1,251 853 864 676 486 709
Other general and administrative..... 1,614 2,072 1,783 2,112 1,729 1,432 1,332 1,566 1,340
Performance share plan............. -- -- -- -- -- -- -- -- --
Termination of plans expense....... -- -- -- -- -- -- -- -- --
Total expenses................... 18,584 18,477 16,461 17,033 13,591 12,533 10,807 10,562 9,083
Earnings (loss) before income tax
expense (benefit).................. 11,308 10,207 9,852 9,634 6,342 6,872 5,893 5,781 3,815
Income tax expense (benefit)......... 4,813 4,330 4,285 4,238 2,844 1,990 2,543 2,606 1,870
Net earnings (loss).............. $ 6,495 $ 5,877 $ 5,567 $ 5,396 $ 3,498 $ 4,882 $ 3,350 $ 3,175 $ 1,945
Primary net earnings (loss) per share
of common stock.................... $ 0.35 $ 0.32 $ 0.30 $ 0.29 $ 0.19 $ 0.27 $ 0.18 $ 0.17 $ 0.10
Fully diluted net earnings (loss) per
share of common stock.............. $ 0.35 $ 0.31 $ 0.30 $ 0.29 $ 0.19 $ 0.27 $ 0.18 $ 0.17 $ 0.10
THIRD SECOND FIRST
QUARTER QUARTER QUARTER
------- ------- -------
Total Revenue........................ $15,537 $14,072 $14,209
Expenses:
Compensation and benefits............ 3,455 3,310 4,170
Transaction processing............... 2,008 1,967 2,114
Software royalties................... 1,357 1,257 1,263
Occupancy and equipment.............. 801 735 625
Consulting........................... 368 315 249
Telecommunications and data
processing services................ 612 540 480
Other general and administrative..... 1,025 897 784
Performance share plan............. -- 770 758
Termination of plans expense....... -- 30,163 --
Total expenses................... 9,626 39,954 10,443
Earnings (loss) before income tax
expense (benefit).................. 5,911 (25,882) 3,766
Income tax expense (benefit)......... 2,664 (10,850) 1,787
Net earnings (loss).............. $ 3,247 $(15,032) $ 1,979
Primary net earnings (loss) per share
of common stock.................... $ 0.17 $ (0.90) $ 0.13
Fully diluted net earnings (loss) per
share of common stock.............. $ 0.17 $ (0.90) $ 0.13
Earnings (loss) 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.
Investment Technology Group, Inc.
38
39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEAR
ENDED
DECEMBER
YEAR ENDED DECEMBER 31, 1996 YEAR ENDED DECEMBER 31, 1995 31, 1994
------------------------------------- ------------------------------------- -------
FOURTH THIRD SECOND FIRST FOURTH THIRD SECOND FIRST FOURTH
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
------- ------- ------- ------- ------- ------- ------- ------- -------
(AS A PERCENTAGE OF TOTAL REVENUE)
Total Revenue.......................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Expenses:
Compensation and benefits............ 23.2 21.7 22.8 22.0 23.0 24.5 21.1 21.7 20.0
Transaction processing............... 13.1 15.1 14.4 13.9 16.2 14.0 16.3 13.5 16.6
Software royalties................... 7.6 7.9 7.7 8.3 8.9 8.1 7.6 8.5 8.5
Occupancy and equipment.............. 6.4 6.6 4.8 3.9 5.0 4.7 5.3 5.0 5.5
Consulting........................... 1.7 1.6 2.6 3.2 2.2 1.5 2.4 3.4 3.9
Telecommunications and data
processing services................ 4.7 4.2 3.5 4.7 4.3 4.5 4.1 3.0 5.5
Other general and administrative..... 5.4 7.2 6.8 7.9 8.7 7.4 8.0 9.6 10.4
Performance share plan............... -- -- -- -- -- -- -- -- --
Termination of plans expense......... -- -- -- -- -- -- -- -- --
Total expenses..................... 62.2 64.4 62.6 63.9 68.2 64.6 64.7 64.6 70.4
Earnings (loss)before income tax
expense (benefit).................... 37.8 35.6 37.4 36.1 31.8 35.4 35.3 35.4 29.6
Income tax expense (benefit)........... 16.1 15.1 16.3 15.9 14.3 10.3 15.2 16.0 14.5
Net earnings (loss)................ 21.7% 20.5% 21.2% 20.2% 17.5% 25.2% 20.1% 19.4% 15.1%
THIRD SECOND FIRST
QUARTER QUARTER QUARTER
------- ------- -------
Total Revenue.......................... 100.0% 100.0 % 100.0%
Expenses:
Compensation and benefits............ 22.2 23.5 29.4
Transaction processing............... 12.9 14.0 14.9
Software royalties................... 8.7 8.9 8.9
Occupancy and equipment.............. 5.2 5.2 4.4
Consulting........................... 2.4 2.2 1.8
Telecommunications and data
processing services................ 3.9 3.8 3.4
Other general and administrative..... 6.6 6.4 5.5
Performance share plan............... -- 5.5 5.3
Termination of plans expense......... -- 214.4 --
Total expenses..................... 62.0 283.9 73.5
Earnings (loss)before income tax
expense (benefit).................... 38.0 (183.9) 26.5
Income tax expense (benefit)........... 17.2 (77.1) 12.6
Net earnings (loss)................ 20.9% 106.8 % 13.9%
Investment Technology Group, Inc.
39
40
The Company's results of operations are dependent upon trading volumes in
the equity securities markets and variations in transaction volume may cause the
Company's operating results to fluctuate on a quarterly basis. To a lesser
extent, the Company has periodically experienced higher revenue in quarters in
which investment managers seek to adjust their portfolios as a result of changes
in the composition of various broad-based stock market indices.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There were no changes in or disagreements with accountants reportable
herein.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information with respect to this item will be contained in the Proxy
Statement for the 1997 Annual Meeting of Stockholders, which is incorporated
herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information with respect to this item will be contained in the Proxy
Statement for the 1997 Annual Meeting of Stockholders, which is incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information with respect to this item will be contained in the Proxy
Statement for the 1997 Annual Meeting of Stockholders, which is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information with respect to this item will be contained in the Proxy
Statement for the 1997 Annual Meeting of Stockholders, which is incorporated
herein by reference.
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:
PAGES
-----
Independent Auditor's Report................................................. 20
Consolidated Statement of Operations......................................... 21
Consolidated Statement of Financial Condition................................ 22
Consolidated Statement of Changes in Stockholders' Equity.................... 23
Consolidated Statement of Cash Flows......................................... 24
Notes to Consolidated Financial Statements................................... 25
(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.
Investment Technology Group, Inc.
40
41
(a)(3) Exhibits
3.1 Certificate of Incorporation of the Company (incorporated by
reference to Exhibit 3.1 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")).
3.2 By-laws of the Company (incorporated by reference to Exhibit
3.2 to Registration Statement).
4.1 Form of Certificate for Common Stock of the Company
(incorporated by reference to Exhibit 4.1 to Registration
Statement).
10.1 Agreement to Terminate Employment Agreement and Stock Options
between the Company, Raymond L. Killian, Jr. and Jefferies Group,
Inc. (incorporated by reference to Exhibit 10.1 to the Quarterly
Report on Form 10-Q for the quarter ended June 24, 1994).
10.1.1 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).
10.1.2 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).
10.1.3 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).
10.1.4 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).
10.1.5 Joint Venture Agreement, dated May 31, 1990, between BARRA
International (U.K.), Ltd. and Jefferies Global Trading
Incorporated (incorporated by reference to Exhibit 10.1.5 to
Registration Statement).
10.1.6 Exclusive Software License Agreement, dated May 31, 1990,
between the Global POSIT Joint Venture and Jefferies International
Limited (incorporated by reference to Exhibit 10.1.6 to
Registration Statement).
10.1.7 Consent of BARRA International (U.K.), Ltd. to the assignment
to the Company of the interests of Jefferies Global Trading
Incorporated in the Global POSIT Joint Venture referenced in item
10.1.5 (incorporated by reference to Exhibit 10.1.7 to
Registration Statement).
10.2 Agreement to Terminate Employment Agreement, Phantom Equity
Rights and Profits Bonus Rights between the Company, Jefferies
Group, Inc., Jefferies & Company, Inc. and Dale A. Prouty
(incorporated by reference to Exhibit 10.2 to the Quarterly Report
on Form 10-Q for the quarter ended June 24, 1994).
10.2.1 Tax Sharing Agreement, dated January 1, Jefferies between
Jefferies Group, Inc. and the Company (incorporated by reference
to Exhibit 10.2.1 to Registration Statement).
10.2.2 Service Agreement, dated March 15, 1994, between Jefferies &
Company, Inc. and the Company (incorporated by reference to
Exhibit 10.2.2 to Registration Statement).
Investment Technology Group, Inc.
41
42
10.2.3 Service Agreement, dated March 15, 1994, between W & D
Securities, Inc. and the Company (incorporated by reference to
Exhibit 10.2.3 to Registration Statement).
10.2.4 Fully Disclosed Clearing Agreement, dated March 15, 1994,
between Jefferies & Company, Inc. and the Company (incorporated by
reference to Exhibit 10.2.4 to Registration Statement).
10.2.5 Intercompany Borrowing Agreement between Jefferies Group, Inc.
and the Company (incorporated by reference to Exhibit 10.2.5 to
Registration Statement).
10.2.6 Development Rights Agreement, dated March 15, 1994, between
Jefferies Group, Inc. and the Company (incorporated by reference
to Exhibit 10.2.6 to Registration Statement).
10.2.7 Revenue sharing Agreement, dated March 15, 1994, between the
Company and Jefferies & Company, Inc. (incorporated by reference
to Exhibit 10.2.7 to Registration Statement).
10.2.8 Equipment Lease Agreement, dated March 15, 1994, between the
Company, Jefferies & Company, Inc. and Jefferies Group, Inc.
(incorporated by reference to Exhibit 10.2.8 to Registration
Statement).
10.2.9 Form of Promissory Note between the Company and Jefferies
Group, Inc. (incorporated by reference to Exhibit 10.2.9 to
Registration Statement).
10.3 Agreement to Terminate Phantom Equity Rights and Profits Bonus
Rights between the Company, Jefferies Group, Inc., Jefferies &
Company, Inc. and Savyona Abel (incorporated by reference to
Exhibit 10.3 to the Quarterly Report on Form 10-Q for the quarter
ended June 24, 1994).
10.3.1 1994 Stock Option and Long-Term Incentive Plan of the Company
(incorporated by reference to Exhibit 10.3.1 to Registration
Statement).
10.3.1A Amended Non-Employee Directors' Stock Option Plan.
10.3.1B Amended 1994 Stock Option and Long-Term Incentive Plan.
10.3.2 Employment Agreement between the Company, ITG Inc. and Raymond
L. Killian, Jr. (incorporated by reference to Exhibit 10.3.2 to
Registration Statement).
10.3.2A Amendment No. 2 to Employment Agreement between Raymond L.
Killian, Jr., the Company and ITG Inc.
10.3.3 Employment Agreement between the Company, ITG Inc. and Dale A.
Prouty (incorporated by reference to Exhibit 10.3.3 to
Registration Statement).
10.3.3A* Amendment No. 2 to Employment Agreement between the Company, ITG
Inc. and Dale A Prouty.
10.3.4 Form of Employment Agreement between the Company and Joshua D.
Rose (incorporated by reference to Exhibit 10.3.4 to Registration
Statement).
10.3.4A Amendment to Form of Employment Agreement between the Company,
ITG Inc. and Senior Vice Presidents Electing to Reprice Stock
Options.
10.3.5 Employment Agreement between the Company, ITG Inc. and Robert
K. Laible (incorporated by reference to Exhibit 10.3.5 to
Registration Statement Number 33-76474 on Amendment Number 3 to
Form S-1 as filed with the Securities and Exchange Commission on
May 2, 1994).
10.3.6 Employment Agreement between the Company, ITG Inc. and Yossef
A. Beinart (incorporated by reference to Exhibit 10.3.6 to
Registration Statement Number 33-76474 on Amendment Number 3 to
Form S-1 as filed with the Securities and Exchange Commission on
May 2, 1994).
Investment Technology Group, Inc.
42
43
10.3.7 Capital Accumulation Plan for key employees of Jefferies Group,
Inc. (incorporated by reference to Exhibit 10.3.7 to Registration
Statement).
10.3.11 Form of Agreement to Terminate Stock Option between the Company,
Scott P. Mason and Jefferies Group, Inc. (incorporated by
reference to Exhibit 10.3.3 to Registration Statement).
10.3.12 Agreement to Modify Bonus Share between the Company and Robert
K. Laible (incorporated by reference to Exhibit 10.3.12 to
Registration Statement Number 33-76474 on Amendment Number 3 to
Form S-1 as filed with the Securities and Exchange Commission on
April 21, 1994
10.3.13 Agreement to Modify Bonus Share between the Company and Joshua
D. Rose (incorporated by reference to Exhibit 10.3.13 to
Registration Statement Number 33-76474 on Amendment Number 3 to
Form S-1 as filed with the Securities and Exchange Commission on
April 21, 1994
10.3.14 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).
10.3.15 Stock Option Agreement between the Company and Scott P. Mason
(incorporated by reference to Exhibit 10.3.3 to Registration
Statement).
10.3.16 ITG Incentive Compensation Plan (incorporated by reference to
Exhibit 10.3.16 to Registration Statement Number 33-76474 on
Amendment Number 3 to Form S-1 as filed with the Securities and
Exchange Commission on April 21, 1994
10.3.17 Phantom Equity Agreement and Profits Bonus Rights Plan
(incorporated by reference to Exhibit 10.3.17 to Registration
Statement Number 33-76474 on Amendment Number 3 to Form S-1 as
filed with the Securities and Exchange Commission on April 21,
1994
10.3.18* Employment Agreement between the Company and Scott P. Mason.
10.4 Agreement to Terminate Phantom Equity Rights and Profits Bonus
Rights between the Company, Jefferies Group, Inc., Jefferies &
Company, Inc. and Mark Auburn (incorporated by reference to
Exhibit 10.4 to the Quarterly Report on Form 10-Q for the quarter
ended June 24, 1994).
10.4.1 Form of QuantEX Software and Hardware License Agreement
(incorporated by reference to Exhibit 10.3.3 to Registration
Statement).
10.5 Agreement to Terminate Phantom Equity Rights and Profits Bonus
Rights between the Company, Jefferies Group, Inc., Jefferies &
Company, Inc. and Yossef Beinart (incorporated by reference to
Exhibit 10.5 to the Quarterly Report on Form 10-Q for the quarter
ended June 24, 1994).
10.5.1 Lease, dated September 30, 1992, between Jefferies Group, Inc.
and Progress Partners. (incorporated by reference to Exhibit
10.3.3 to Registration Statement).
10.5.2 Amendment of Lease Agreement, dated November 23, 1992, between
Jefferies Group, Inc. and Progress Partners (incorporated by
reference to Exhibit 10.3.3 to Registration Statement).
10.5.3 Sublease Agreement, dated March 15, 1994, between Jefferies
Group, Inc. and the Company (incorporated by reference to Exhibit
10.3.3 to Registration Statement).
Investment Technology Group, Inc.
43
44
10.5.4 Lease, dated July 11, 1990, between 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).
10.5.7 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
10.6 Agreement to Terminate Phantom Equity Rights and Profits Bonus
Rights between the Company, Jefferies Group, Inc., Jefferies &
Company, Inc. and Mike Earlywine (incorporated by reference to
Exhibit 10.6 to the Quarterly Report on Form 10-Q for the quarter
ended June 24, 1994).
10.7 Agreement to Terminate Phantom Equity Rights and Profits Bonus
Rights between the Company, Jefferies Group, Inc., Jefferies &
Company, Inc. and Joseph Heled (incorporated by reference to
Exhibit 10.7 to the Quarterly Report on Form 10-Q for the quarter
ended June 24, 1994 and).
10.8 Agreement to Terminate Phantom Equity Rights and Profits Bonus
Rights between the Company, Jefferies Group, Inc., Jefferies &
Company, Inc. and Demetri Silas (incorporated by reference to
Exhibit 10.8 to the Quarterly Report on Form 10-Q for the quarter
ended June 24, 1994).
10.9 Agreement to Terminate Phantom Equity Rights and Profits Bonus
Rights between the Company, Jefferies Group, Inc., Jefferies &
Company, Inc. and Stuart Sperling (incorporated by reference to
Exhibit 10.9 to the Quarterly Report on Form 10-Q for the quarter
ended June 24, 1994).
10.10 Agreement to Terminate Phantom Equity Rights and Profits Bonus
Rights between the Company, Jefferies Group, Inc., Jefferies &
Company, Inc. and Tuval Chomut (incorporated by reference to
Exhibit 10.10 to the Quarterly Report on Form 10-Q for the quarter
ended June 24, 1994).
10.1 Agreement to Terminate Phantom Equity Rights and Profits Bonus
Rights between the Company, Jefferies Group, Inc., Jefferies &
Company, Inc. and Andrew Winner (incorporated by reference to
Exhibit 10.11 to the Quarterly Report on Form 10-Q for the quarter
ended June 24, 1994).
10.12 Agreement to Terminate Phantom Equity Rights and Profits Bonus
Rights between the Company, Jefferies Group, Inc., Jefferies &
Company, Inc. and Mark Wright (incorporated by reference to
Exhibit 10.12 to the Quarterly Report on Form 10-Q for the quarter
ended June 24, 1994).
10.13 Agreement to Terminate Stock Option between the Company, Scott
P. Mason and Jefferies Group, Inc. (incorporated by reference to
Exhibit 10.13 to the Quarterly Report on Form 10-Q for the quarter
ended June 24, 1994).
23* Consent of KPMG Peat Marwick LLP.
27* Financial Data Schedule.
* Filed herewith
(b) REPORTS ON FORM 8-K.
There were no reports filed on Form 8-K for the quarter ended December 31,
1996.
(c) INDEX TO EXHIBITS
See list of exhibits at Item 14(a)(3) above and exhibits following.
Investment Technology Group, Inc.
44
45
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
Dated: March 31, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons in the capacities and on
the dates indicated.
SIGNATURE TITLE DATE
- ------------------------------------- ------------------------------------ -------------------
/S/ RAYMOND L. KILLIAN, JR. Chairman of the Board and Director March 31, 1997
- -------------------------------------
Raymond L. Killian, Jr.
/S/ SCOTT P. MASON President, Chief Executive Officer March 31, 1997
- ------------------------------------- and Director
Scott P. Mason
/S/ JOHN R. MACDONALD Senior Vice President and Chief March 31, 1997
- ------------------------------------- Financial Officer
John R. MacDonald
/S/ FRANK E. BAXTER Director March 31, 1997
- -------------------------------------
Frank E. Baxter
/S/ RICHARD G. DOOLEY Director March 31, 1997
- -------------------------------------
Richard G. Dooley
/S/ WILLIAM I. JACOBS Director March 31, 1997
- -------------------------------------
William I. Jacobs
/S/ ROBERT L. KING Director March 31, 1997
- -------------------------------------
Robert L. King
/S/ MICHAEL L. KLOWDEN Director March 31, 1997
- -------------------------------------
Michael L. Klowden
/S/ DALE A. PROUTY Director March 31, 1997
- -------------------------------------
Dale A. Prouty
/S/ MARK A. WOLFSON Director March 31, 1997
- -------------------------------------
Mark A Wolfson
Investment Technology Group, Inc.
45
46
EXHIBIT INDEX
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- -------- --------------------------------------------------------------------- -------------
3.1 Certificate of Incorporation of the Company (incorporated by
reference to Exhibit 3.1 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")).
3.2 By-laws of the Company (incorporated by reference to Exhibit 3.2 to
Registration Statement).
4.1 Form of Certificate for Common Stock of the Company (incorporated by
reference to Exhibit 4.1 to Registration Statement).
10.1 Agreement to Terminate Employment Agreement and Stock Options between
the Company, Raymond L. Killian, Jr. and Jefferies Group, Inc.
(incorporated by reference to Exhibit 10.1 to the Quarterly Report on
Form 10-Q for the quarter ended June 24, 1994).
10.1.1 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).
10.1.2 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).
10.1.3 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).
10.1.4 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).
10.1.5 Joint Venture Agreement, dated May 31, 1990, between BARRA
International (U.K.), Ltd. and Jefferies Global Trading Incorporated
(incorporated by reference to Exhibit 10.1.5 to Registration
Statement).
10.1.6 Exclusive Software License Agreement, dated May 31, 1990, between the
Global POSIT Joint Venture and Jefferies International Limited
(incorporated by reference to Exhibit 10.1.6 to Registration
Statement).
10.1.7 Consent of BARRA International (U.K.), Ltd. to the assignment to the
Company of the interests of Jefferies Global Trading Incorporated in
the Global POSIT Joint Venture referenced in item 10.1.5
(incorporated by reference to Exhibit 10.1.7 to Registration
Statement).
10.2 Agreement to Terminate Employment Agreement, Phantom Equity Rights
and Profits Bonus Rights between the Company, Jefferies Group, Inc.,
Jefferies & Company, Inc. and Dale A. Prouty (incorporated by
reference to Exhibit 10.2 to the Quarterly Report on Form 10-Q for
the quarter ended June 24, 1994).
10.2.1 Tax Sharing Agreement, dated January 1, Jefferies between Jefferies
Group, Inc. and the Company (incorporated by reference to Exhibit
10.2.1 to Registration Statement).
10.2.2 Service Agreement, dated March 15, 1994, between Jefferies & Company,
Inc. and the Company (incorporated by reference to Exhibit 10.2.2 to
Registration Statement).
47
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- -------- --------------------------------------------------------------------- -------------
10.2.3 Service Agreement, dated March 15, 1994, between W & D Securities,
Inc. and the Company (incorporated by reference to Exhibit 10.2.3 to
Registration Statement).
10.2.4 Fully Disclosed Clearing Agreement, dated March 15, 1994, between
Jefferies & Company, Inc. and the Company (incorporated by reference
to Exhibit 10.2.4 to Registration Statement).
10.2.5 Intercompany Borrowing Agreement between Jefferies Group, Inc. and
the Company (incorporated by reference to Exhibit 10.2.5 to
Registration Statement).
10.2.6 Development Rights Agreement, dated March 15, 1994, between Jefferies
Group, Inc. and the Company (incorporated by reference to Exhibit
10.2.6 to Registration Statement).
10.2.7 Revenue sharing Agreement, dated March 15, 1994, between the Company
and Jefferies & Company, Inc. (incorporated by reference to Exhibit
10.2.7 to Registration Statement).
10.2.8 Equipment Lease Agreement, dated March 15, 1994, between the Company,
Jefferies & Company, Inc. and Jefferies Group, Inc. (incorporated by
reference to Exhibit 10.2.8 to Registration Statement).
10.2.9 Form of Promissory Note between the Company and Jefferies Group, Inc.
(incorporated by reference to Exhibit 10.2.9 to Registration
Statement).
10.3 Agreement to Terminate Phantom Equity Rights and Profits Bonus Rights
between the Company, Jefferies Group, Inc., Jefferies & Company, Inc.
and Savyona Abel (incorporated by reference to Exhibit 10.3 to the
Quarterly Report on Form 10-Q for the quarter ended June 24, 1994).
10.3.1 1994 Stock Option and Long-Term Incentive Plan of the Company
(incorporated by reference to Exhibit 10.3.1 to Registration
Statement).
10.3.1A Amended Non-Employee Directors' Stock Option Plan.
10.3.1B Amended 1994 Stock Option and Long-Term Incentive Plan.
10.3.2 Employment Agreement between the Company, ITG Inc. and Raymond L.
Killian, Jr. (incorporated by reference to Exhibit 10.3.2 to
Registration Statement).
10.3.2A Amendment No. 2 to Employment Agreement between Raymond L. Killian,
Jr., the Company and ITG Inc.
10.3.3 Employment Agreement between the Company, ITG Inc. and Dale A. Prouty
(incorporated by reference to Exhibit 10.3.3 to Registration
Statement).
10.3.3A* Amendment No. 2 to Employment Agreement between the Company, ITG Inc.
and Dale A Prouty.
10.3.4 Form of Employment Agreement between the Company and Joshua D. Rose
(incorporated by reference to Exhibit 10.3.4 to Registration
Statement).
10.3.4A Amendment to Form of Employment Agreement between the Company, ITG
Inc. and Senior Vice Presidents Electing to Reprice Stock Options.
10.3.5 Employment Agreement between the Company, ITG Inc. and Robert K.
Laible (incorporated by reference to Exhibit 10.3.5 to Registration
Statement Number 33-76474 on Amendment Number 3 to Form S-1 as filed
with the Securities and Exchange Commission on May 2, 1994).
10.3.6 Employment Agreement between the Company, ITG Inc. and Yossef A.
Beinart (incorporated by reference to Exhibit 10.3.6 to Registration
Statement Number 33-76474 on Amendment Number 3 to Form S-1 as filed
with the Securities and Exchange Commission on May 2, 1994).
48
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- -------- --------------------------------------------------------------------- -------------
10.3.7 Capital Accumulation Plan for key employees of Jefferies Group, Inc.
(incorporated by reference to Exhibit 10.3.7 to Registration
Statement).
Form of Agreement to Terminate Stock Option between the Company,
10.3.11 Scott P. Mason and Jefferies Group, Inc. (incorporated by reference
to Exhibit 10.3.3 to Registration Statement).
Agreement to Modify Bonus Share between the Company and Robert K.
10.3.12 Laible (incorporated by reference to Exhibit 10.3.12 to Registration
Statement Number 33-76474 on Amendment Number 3 to Form S-1 as filed
with the Securities and Exchange Commission on April 21, 1994
Agreement to Modify Bonus Share between the Company and Joshua D.
10.3.13 Rose (incorporated by reference to Exhibit 10.3.13 to Registration
Statement Number 33-76474 on Amendment Number 3 to Form S-1 as filed
with the Securities and Exchange Commission on April 21, 1994
Form of Stock Option Agreement between the Company and certain
10.3.14 employees of the Company (incorporated by reference to Exhibit 10.3.3
to Registration Statement).
Stock Option Agreement between the Company and Scott P. Mason
10.3.15 (incorporated by reference to Exhibit 10.3.3 to Registration
Statement).
ITG Incentive Compensation Plan (incorporated by reference to Exhibit
10.3.16 10.3.16 to Registration Statement Number 33-76474 on Amendment Number
3 to Form S-1 as filed with the Securities and Exchange Commission on
April 21, 1994
Phantom Equity Agreement and Profits Bonus Rights Plan (incorporated
10.3.17 by reference to Exhibit 10.3.17 to Registration Statement Number
33-76474 on Amendment Number 3 to Form S-1 as filed with the
Securities and Exchange Commission on April 21, 1994
10.3.18* Employment Agreement between the Company and Scott P. Mason.
10.4 Agreement to Terminate Phantom Equity Rights and Profits Bonus Rights
between the Company, Jefferies Group, Inc., Jefferies & Company, Inc.
and Mark Auburn (incorporated by reference to Exhibit 10.4 to the
Quarterly Report on Form 10-Q for the quarter ended June 24, 1994).
10.4.1 Form of QuantEX Software and Hardware License Agreement (incorporated
by reference to Exhibit 10.3.3 to Registration Statement).
10.5 Agreement to Terminate Phantom Equity Rights and Profits Bonus Rights
between the Company, Jefferies Group, Inc., Jefferies & Company, Inc.
and Yossef Beinart (incorporated by reference to Exhibit 10.5 to the
Quarterly Report on Form 10-Q for the quarter ended June 24, 1994).
10.5.1 Lease, dated September 30, 1992, between Jefferies Group, Inc. and
Progress Partners. (incorporated by reference to Exhibit 10.3.3 to
Registration Statement).
10.5.2 Amendment of Lease Agreement, dated November 23, 1992, between
Jefferies Group, Inc. and Progress Partners (incorporated by
reference to Exhibit 10.3.3 to Registration Statement).
10.5.3 Sublease Agreement, dated March 15, 1994, between Jefferies Group,
Inc. and the Company (incorporated by reference to Exhibit 10.3.3 to
Registration Statement).
10.5.4 Lease, dated July 11, 1990, between 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).
49
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- -------- --------------------------------------------------------------------- -------------
10.5.7 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
10.6 Agreement to Terminate Phantom Equity Rights and Profits Bonus Rights
between the Company, Jefferies Group, Inc., Jefferies & Company, Inc.
and Mike Earlywine (incorporated by reference to Exhibit 10.6 to the
Quarterly Report on Form 10-Q for the quarter ended June 24, 1994).
10.7 Agreement to Terminate Phantom Equity Rights and Profits Bonus Rights
between the Company, Jefferies Group, Inc., Jefferies & Company, Inc.
and Joseph Heled (incorporated by reference to Exhibit 10.7 to the
Quarterly Report on Form 10-Q for the quarter ended June 24, 1994
and).
10.8 Agreement to Terminate Phantom Equity Rights and Profits Bonus Rights
between the Company, Jefferies Group, Inc., Jefferies & Company, Inc.
and Demetri Silas (incorporated by reference to Exhibit 10.8 to the
Quarterly Report on Form 10-Q for the quarter ended June 24, 1994).
10.9 Agreement to Terminate Phantom Equity Rights and Profits Bonus Rights
between the Company, Jefferies Group, Inc., Jefferies & Company, Inc.
and Stuart Sperling (incorporated by reference to Exhibit 10.9 to the
Quarterly Report on Form 10-Q for the quarter ended June 24, 1994).
10.10 Agreement to Terminate Phantom Equity Rights and Profits Bonus Rights
between the Company, Jefferies Group, Inc., Jefferies & Company, Inc.
and Tuval Chomut (incorporated by reference to Exhibit 10.10 to the
Quarterly Report on Form 10-Q for the quarter ended June 24, 1994).
10.1 Agreement to Terminate Phantom Equity Rights and Profits Bonus Rights
between the Company, Jefferies Group, Inc., Jefferies & Company, Inc.
and Andrew Winner (incorporated by reference to Exhibit 10.11 to the
Quarterly Report on Form 10-Q for the quarter ended June 24, 1994).
10.12 Agreement to Terminate Phantom Equity Rights and Profits Bonus Rights
between the Company, Jefferies Group, Inc., Jefferies & Company, Inc.
and Mark Wright (incorporated by reference to Exhibit 10.12 to the
Quarterly Report on Form 10-Q for the quarter ended June 24, 1994).
10.13 Agreement to Terminate Stock Option between the Company, Scott P.
Mason and Jefferies Group, Inc. (incorporated by reference to Exhibit
10.13 to the Quarterly Report on Form 10-Q for the quarter ended June
24, 1994).
23* Consent of KPMG Peat Marwick LLP.
27* Financial Data Schedule.
- ---------------
* Filed herewith