<Page>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2002 Commission file number: 0 - 23644
INVESTMENT TECHNOLOGY GROUP, INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 95 - 2848406
- ----------------------------------------- ------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
380 MADISON AVENUE, NEW YORK, NEW YORK (212) 588 - 4000
- ----------------------------------------- -----------------------------------
(Address of Principal Executive Offices) (Registrant's Telephone Number,
Including Area Code)
10017
- -----------------------------------------
(Zip Code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes /X/ No / /
As of May 10, 2002, the Registrant had 49,212,740 shares of common stock, $0.01
par value, outstanding.
<Page>
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
PART I. - FINANCIAL INFORMATION
<Table>
<Caption>
Page
--------
Item 1. Financial Statements
Consolidated Statements of Financial Condition:
March 31, 2002 (unaudited) and December 31, 2001................................ 4
Consolidated Statements of Income (unaudited):
Three Months Ended March 31, 2002 and 2001...................................... 5
Consolidated Statement of Changes in Stockholders' Equity (unaudited):
Three Months Ended March 31, 2002............................................... 6
Consolidated Statements of Cash Flows (unaudited):
Three Months Ended March 31, 2002 and 2001...................................... 7
Notes to Consolidated Financial Statements (unaudited)............................. 8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations........................................................... 12
PART II. - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders................................ 17
Item 6. Exhibits and Reports on Form 8-K................................................... 18
Signature.......................................................................... 19
</Table>
QUANTEX IS A REGISTERED TRADEMARK OF THE INVESTMENT TECHNOLOGY GROUP, INC.
COMPANIES. POSIT IS A REGISTERED SERVICE MARK OF THE POSIT JOINT VENTURE.
SMARTSERVER, SPI, SPI SMARTSERVER, VWAP SMARTSERVER, ITG ACE, TCA, ITG
WEBACCESS, ITG/OPT, ITG PRIME, RESRISK, INFERENCE GROUP AND ALTERNET ARE
TRADEMARKS OF THE INVESTMENT TECHNOLOGY GROUP, INC. COMPANIES.
2
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FORWARD-LOOKING STATEMENTS
In addition to the historical information contained throughout this
Quarterly Report on Form 10-Q, there are forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended (the
"Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). All statements regarding our expected future
financial position, results of operations, cash flows, dividends, financing
plans, business strategies, competitive positions, plans and objectives of
management for future operations, and concerning securities markets and economic
trends are forward-looking statements. Although we believe our expectations
reflected in such forward-looking statements are based on reasonable
assumptions, there can be no assurance that such expectations will prove to have
been correct. Important factors that could cause actual results to differ
materially from the expectations reflected in the forward-looking statements
herein include, among others, the actions of both current and potential new
competitors, rapid changes in technology, fluctuations in market trading
volumes, financial market volatility, evolving industry regulations, risk of
errors or malfunctions in our systems or technology, cash flows into or
redemptions from equity funds, effects of inflation, customer trading patterns,
the success of our new products and services offerings as well as general
economic and business conditions, internationally or nationally, securities,
credit and financial market conditions, and adverse changes or volatility in
interest rates.
3
<Page>
PART I. - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INVESTMENT TECHNOLOGY GROUP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<Table>
<Caption>
MARCH 31, DECEMBER 31,
2002 2001
--------------- ---------------
(UNAUDITED)
ASSETS
Cash and cash equivalents................................. $ 268,871 $ 236,607
Securities owned, at fair value........................... 62,853 62,758
Receivables from brokers, dealers and other, net.......... 45,176 21,435
Investments in limited partnerships....................... 25,404 25,607
Premises and equipment.................................... 26,736 28,083
Capitalized software...................................... 5,005 4,097
Goodwill and other intangibles............................ 24,191 24,392
Deferred taxes............................................ 9,473 9,959
Other assets.............................................. 6,441 5,540
--------------- ---------------
Total assets.............................................. $ 474,150 $ 418,478
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued expenses..................... $ 56,447 $ 57,333
Payable to brokers, dealers and other..................... 30,664 7,893
Software royalties payable................................ 6,162 6,435
Securities sold, not yet purchased, at fair value......... 1,928 4,787
Income taxes payable...................................... 21,610 24,086
--------------- ---------------
Total liabilities....................................... 116,811 100,534
--------------- ---------------
Commitments and contingencies
STOCKHOLDERS' EQUITY:
Preferred stock, par value $0.01; shares authorized:
1,000,000; shares issued: none...................... - -
Common stock, par value $0.01; shares authorized:
100,000,000; shares issued: 51,204,528 and 51,184,489
at March 31, 2002 and
December 31, 2001, respectively....................... 512 512
Additional paid-in capital............................. 154,678 146,131
Retained earnings...................................... 240,383 218,215
Common stock held in treasury, at cost; shares: 2,037,192
and 2,543,312 at March 31, 2002 and
December 31, 2001, respectively....................... (36,795) (45,939)
Accumulated other comprehensive income loss:
Currency translation adjustment....................... (1,439) (975)
--------------- ---------------
Total stockholders' equity.............................. 357,339 317,944
--------------- ---------------
Total liabilities and stockholders' equity $ 474,150 $ 418,478
=============== ===============
</Table>
See accompanying unaudited notes to consolidated financial statements.
4
<Page>
INVESTMENT TECHNOLOGY GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<Table>
<Caption>
THREE MONTHS ENDED MARCH 31,
--------------------------------------
2002 2001
--------------------------------------
REVENUES:
Commissions:
POSIT............................................... $ 46,586 $ 43,209
Electronic Trading Desk............................. 23,036 20,987
Client Site Direct Access........................... 26,012 23,235
Other................................................. 2,104 4,308
--------------- ---------------
Total revenues.................................... 97,738 91,739
--------------- ---------------
EXPENSES:
Compensation and employee benefits.................... 26,161 23,833
Transaction processing................................ 11,908 12,955
Software royalties.................................... 5,921 5,619
Occupancy and equipment............................... 6,281 4,680
Telecommunications and data processing services....... 4,246 3,775
Net gain on long-term investments .................... - (1,028)
Other general and administrative...................... 5,437 6,593
--------------- ---------------
Total expenses.................................... 59,954 56,427
--------------- ---------------
Income before income tax expense.......................... 37,784 35,312
Income tax expense........................................ 15,616 14,263
--------------- ---------------
Net income................................................ $ 22,168 $ 21,049
=============== ===============
Earnings per share(1):
Basic..................................................... $ 0.45 $ 0.44
=============== ===============
Diluted................................................... $ 0.45 $ 0.44
=============== ===============
Basic weighted average number of common shares outstanding 48,893 47,476
=============== ===============
Diluted weighted average number of common shares outstanding 49,723 48,218
=============== ===============
</Table>
- ----------
(1) Earnings per share have been retroactively restated to reflect a
three-for-two stock split in December 2001.
See accompanying unaudited notes to consolidated financial statements.
5
<Page>
INVESTMENT TECHNOLOGY GROUP, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2002
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<Table>
<Caption>
Additional
Preferred Common Paid-in Retained
Stock Stock Capital Earnings
---------------------------------------------------------------
Balance at January 1, 2002................. $ - $ 512 $ 146,131 $ 218,215
Issuance of common stock in connection
with the employee stock option plan
(474,922 shares) and the employee stock
unit award plan (31,198 shares).......... - - 7,913 -
Issuance of common stock in connection
with the employee stock purchase plan
(20,039 shares).......................... - - 634 -
Comprehensive income:
Net income............................... - - - 22,168
Other comprehensive loss:
Currency translation adjustment.......... - - - -
Comprehensive income.......................
---------- ------- -------------- ------------
Balance at March 31, 2002.................. $ - $ 512 $ 154,678 $ 240,383
========== ======= ============== ============
<Caption>
Common Accumulated
Stock Other Total
Held in Comprehensive Stockholders'
Treasury Loss Equity
--------------------------------------------------
Balance at January 1, 2002................. $ (45,939) $ (975) $ 317,944
Issuance of common stock in connection
with the employee stock option plan
(474,922 shares) and the employee stock
unit award plan (31,198 shares)......... 9,144 - 17,057
Issuance of common stock in connection
with the employee stock purchase plan
(20,039 shares).......................... - - 634
Comprehensive income:
Net income............................... - - 22,168
Other comprehensive loss:
Currency translation adjustment.......... - (464) (464)
-------------
Comprehensive income....................... 21,704
---------- ------------- -------------
Balance at March 31, 2002.................. $ (36,795) $ (1,439) $ 357,339
========== ============= =============
</Table>
See accompanying unaudited notes to consolidated financial statements.
6
<Page>
INVESTMENT TECHNOLOGY GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(DOLLARS IN THOUSANDS)
<Table>
<Caption>
THREE MONTHS ENDED MARCH 31,
-----------------------------------
2002 2001
-----------------------------------
Cash flows from operating activities:
Net income.......................................................................... $ 22,168 $ 21,049
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization..................................................... 3,965 3,735
Tax benefit from employee stock options........................................... 4,788 657
Deferred income tax expense (benefit)............................................. 486 (104)
Undistributed gain of affiliates.................................................. -- (1,028)
Provision for doubtful receivables................................................ (599) 310
Stock-based compensation.......................................................... 207 229
Changes in operating assets and liabilities:
Securities owned, at fair value................................................... (95) (17,265)
Receivables from brokers, dealers and other, net.................................. (23,142) (3,633)
Accounts payable and accrued expenses............................................. (1,093) 11,895
Payable to brokers, dealers and other............................................. 22,771 1,953
Securities sold, not yet purchased, at fair value................................. (2,859) 8,189
Income taxes payable.............................................................. (2,476) 10,189
Other, net........................................................................ (928) (250)
------------- -------------
NET CASH PROVIDED BY OPERATING ACTIVITIES........................................ 23,193 35,926
------------- -------------
Cash flows from investing activities:
Purchase of premises and equipment................................................ (2,019) (2,986)
Capitalization of software development costs...................................... (1,560) (804)
------------- -------------
NET CASH USED IN INVESTING ACTIVITIES............................................ (3,579) (3,790)
------------- -------------
Cash flows from financing activities:
Common stock issued............................................................... 12,902 1,472
------------- -------------
NET CASH PROVIDED BY FINANCING ACTIVITIES........................................ 12,902 1,472
------------- -------------
Effect of foreign currency translation on cash and cash equivalents............... (252) (636)
Net increase in cash and cash equivalents........................................ 32,264 32,972
Cash and cash equivalents - beginning of period..................................... 236,607 135,533
------------- -------------
Cash and cash equivalents - end of period........................................... $ 268,871 $ 168,505
============= =============
Supplemental cash flow information:
Interest paid..................................................................... $ 211 $ 1,176
============= =============
Income taxes paid ................................................................ $ 12,750 $ 3,400
============= =============
</Table>
See accompanying unaudited notes to consolidated financial statements.
7
<Page>
INVESTMENT TECHNOLOGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
ORGANIZATION AND BASIS OF PRESENTATION
The Consolidated Financial Statements include the accounts of Investment
Technology Group, Inc. and its wholly-owned subsidiaries ("ITG" or the
"Company"), which principally include: (1) ITG Inc. and AlterNet Securities,
Inc. ("AlterNet"), United States ("U.S.") broker-dealers in equity securities,
(2) Investment Technology Group Limited ("ITG Europe"), an institutional
broker-dealer in Europe, which was 50% owned prior to our May 2, 2001 purchase
of the 50% ownership interest in the ITG Europe joint venture we did not already
own, (3) ITG Australia Limited ("ITG Australia"), an institutional broker-dealer
in Australia, (4) ITG Canada Corp. ("ITG Canada"), an institutional
broker-dealer in Canada, (5) KTG Technologies Corporation ("KTG"), a direct
access provider in Canada, (6) ITG Hong Kong Ltd., our start-up brokerage
operation in Hong Kong, (7) ITG Software, Inc., our intangible property
management subsidiary in California, (8) ITG Software Solutions, Inc., our
software development and maintenance subsidiary in California and (9) Inference
Group LLC, an asset management subsidiary. We provide equity trading services
and transaction research to institutional investors and brokers in the United
States of America, Canada, Australia and Europe.
We are a financial technology firm that provides electronic equity analysis
and trade execution tools. We provide services that help our clients optimize
their portfolio construction and trading strategies, access liquidity in
multiple markets and achieve low-cost trade execution. Our clients are major
institutional investors and broker-dealers. Our products include: POSIT, an
electronic equity matching system; QuantEX, a Unix-based decision-support, trade
management and order routing system; ITG Platform, a PC-based order routing and
trade management system; ITG ACE and TCA, a set of pre- and post-trade tools for
systematically estimating and measuring transaction costs; SmartServers, which
offer server-based implementation of trading strategies; ITG/Opt, a
computer-based equity portfolio selection system; ITG WebAccess, a browser-based
order routing tool; and ITG PRIME, a web-based portfolio risk analysis and
management platform. In addition, we provide research, development, sales and
consulting services to clients.
The quarterly financial statements and accompanying notes are prepared in
accordance with accounting principles generally accepted in the United States of
America. All material intercompany balances and transactions have been
eliminated in consolidation. The consolidated financial statements reflect all
adjustments, which are in the opinion of management, necessary for the fair
presentation of results. Certain reclassifications and format changes have been
made to prior period amounts to conform to the current period presentation.
The preparation of the financial statements in accordance with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets, liabilities, revenues and expenses and the disclosure of contingent
assets, liabilities, revenues and expenses. Actual results could differ from
those estimates.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America have been condensed or omitted pursuant to such
rules and regulations; however, management believes that the disclosures are
adequate to make the information presented not misleading. This report should be
read in conjunction with our consolidated financial statements and footnotes
therein included in our audited annual report on Form 10-K for the year ended
December 31, 2001.
8
<Page>
ACQUISITIONS
In the fourth quarter of 1998, we entered into a 50/50 joint venture with
Societe Generale, and founded ITG Europe. On November 18, 1998, ITG Europe
launched a new agency brokerage operation that included the operation of a
European version of the POSIT system. On May 2, 2001, we purchased Societe
Generale's entire interest in ITG Europe for $18.5 million. The acquisition was
recorded under the purchase method of accounting. The purchase price has been
allocated to assets acquired and liabilities assumed based upon estimated fair
market values at the date of acquisition. The $16.7 million excess of the
purchase price over the estimated fair value of the net assets acquired has been
allocated to goodwill.
On September 28, 2001, we acquired the KastenNet business of Kasten Chase
Applied Research Limited for $7.4 million Canadian dollars (approximately $4.7
million U.S. dollars). KastenNet is a direct access provider that employs
proprietary technology to connect its clients, Canadian broker-dealers, to the
Toronto Stock Exchange. We acquired the assets of KastenNet via KTG, a new
wholly-owned subsidiary of ITG. The purchase price has been allocated to assets
acquired and liabilities assumed based upon estimated fair market values at the
date of acquisition. A software license we acquired amounting to $4.2 million
U.S. dollars is being amortized on a straight-line basis over its estimated
useful life. This transaction was accounted for in accordance with Statement of
Financial Accounting Standard ("SFAS") No. 141, "Business Combinations" and SFAS
No. 142, "Goodwill and Other Intangible Assets".
GOODWILL AND OTHER INTANGIBLES
In accordance with SFAS No. 142, which became effective January 1, 2002, we
discontinued the amortization of goodwill as goodwill will be assessed annually
for impairment. We expect to complete the required tests in the second quarter
of 2002, as of January 1, 2002. We do not anticipate that these tests will have
a material effect on our consolidated financial statements. Other intangibles
with definite lives will continue to be amortized over their useful lives.
For the quarter ended March 31, 2002, the impact of discontinuing goodwill
amortization on net income was approximately $225,000 or less than $0.01 per
share.
During the three months ended March 31, 2002, no goodwill was acquired,
impaired or written off. As of March 31, 2002, recorded goodwill in relation to
our international operations totaled $20.2 million.
During the three months ended March 31, 2002, no other intangibles were
acquired. As of March 31, 2002, other intangibles consisted of an acquired
software license with a carrying value of $4.0 million. We recorded amortization
expense in relation to other intangibles of approximately $140,000 for the
three-month period ended March 31, 2002. Estimated amortization expense for
existing other intangibles is approximately $1.4 million in total for the
five-year period ending December 31, 2006.
9
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SECURITIES OWNED AND SOLD, NOT YET PURCHASED
The following is a summary of securities owned and sold, not yet purchased:
<Table>
<Caption>
SECURITIES SOLD, NOT YET
SECURITIES OWNED PURCHASED
------------------------- ------------------------
MARCH 31, DECEMBER 31, MARCH 31, DECEMBER 31,
2002 2001 2002 2001
-----------------------------------------------------
(DOLLARS IN THOUSANDS)
Auction rate preferred stock............ $ 37,050 $ 43,850 $ - $ -
State and municipal obligations......... 19,700 11,200 - -
Corporate stocks........................ 1,867 3,871 1,928 4,787
Other................................... 4,236 3,837 - -
--------- ------------ --------- ------------
Total................................... $ 62,853 $ 62,758 $ 1,928 $ 4,787
========= ============ ========= ============
</Table>
ACCOUNTS PAYABLE AND ACCRUED EXPENSES
The following is a summary of accounts payable and accrued expenses:
<Table>
<Caption>
MARCH 31, DECEMBER 31,
2002 2001
-------------------------------
(DOLLARS IN THOUSANDS)
Trade payables and accrued expenses....................... $ 14,948 $ 23,966
Deferred compensation .................................... 18,003 18,406
Accrued compensation ..................................... 10,357 1,315
Accrued soft dollar liabilities........................... 10,716 11,108
Accrued rent expense...................................... 2,423 2,538
------------ ------------
Total .................................................... $ 56,447 $ 57,333
============ ============
</Table>
EARNINGS PER SHARE
Net earnings per share of common stock is based upon the weighted average
number of shares of common stock outstanding adjusted to reflect our
three-for-two stock split in December 2001.
The following is a reconciliation of the basic and diluted earnings per
share computations for the three months ended March 31:
<Table>
<Caption>
2002 2001
------------ ------------
(AMOUNTS IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
Net income for basic and diluted earnings per share................ $ 22,168 $ 21,049
============ ============
Shares of common stock and common stock equivalents:
Average shares used in basic computation....................... 48,893 47,476
Effect of dilutive securities.................................. 830 742
------------ ------------
Average shares used in diluted computation. 49,723 48,218
============ ============
Earnings per share:
Basic.......................................................... $ 0.45 $ 0.44
============ ============
Diluted........................................................ $ 0.45 $ 0.44
============ ============
</Table>
10
<Page>
NET CAPITAL REQUIREMENT
ITG Inc. and AlterNet are subject to the Uniform Net Capital Rule (Rule
15c3-1) under the Securities Exchange Act of 1934, which requires the
maintenance of minimum net capital. ITG Inc. has elected to use the alternative
method permitted by Rule 15c3-1, which requires that ITG Inc. maintain minimum
net capital equal to the greater of $250,000 or 2% of aggregate debit balances
arising from customer transactions, as defined. AlterNet has elected to use the
basic method permitted by Rule 15c3-1, which requires that we maintain minimum
net capital, as defined, equal to the greater of $100,000 or 6 2/3 % of
aggregate indebtedness.
At March 31, 2002, ITG Inc. and AlterNet had net capital of $193.7 million
and $1.2 million, respectively, of which $193.4 million and $1.1 million,
respectively, was in excess of required net capital.
In addition, ITG Canada, ITG Australia and ITG Europe had regulatory
capital in excess of the minimum requirements applicable to each company of
approximately $6.2 million, $2.2 million and $12.0 million, respectively.
SEGMENT REPORTING
Segment information is presented in accordance with SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information".
The Company has two reportable segments: U.S. operations and international
operations. The U.S. operations segment provides equity trading and research
services to institutional investors and brokers in the United States of America.
The international operations segment includes our brokerage businesses in
Australia, Canada and Europe, our start-up brokerage operations in Asia, as well
as a research facility in Israel. The services provided in each segment are
deemed to have similar economic characteristics.
A summary of the segment financial information is as follows (dollars in
thousands):
<Table>
<Caption>
U.S. International
Three Months Ended March 31 Operations Operations Consolidated
- --------------------------- ---------- ------------- ------------
Total revenues
2002 $ 90,687 $ 7,051 $ 97,738
2001 88,832 2,907 91,739
Income (loss) before income tax expense
2002 41,147 (3,363) 37,784
2001 35,494 (182) 35,312
</Table>
PROPOSED ACQUISITION OF HOENIG GROUP INC.
On February 28, 2002, we announced that we had entered into an agreement to
acquire all of the outstanding common stock of Hoenig Group Inc. ("Hoenig") for
cash consideration of approximately $115.0 million. Hoenig is an agency
broker-dealer that provides trade execution, independent research and consulting
services to alternative investment funds and money managers globally. The
proposed acquisition is subject to certain closing conditions, including Hoenig
shareholder approval and certain regulatory approvals.
On May 9, 2002, Hoenig announced that a former employee of its London
subsidiary, Hoenig & Company Limited ("Hoenig Limited"), had engaged in
unauthorized equity securities trading while employed by Hoenig Limited, in
violation of Hoenig Limited's policies and procedures. Hoenig has advised ITG
that Hoenig Limited incurred a loss of approximately $7.1 million from the
unauthorized trading.
Hoenig has reported the matter to the authorities and is in the process of
conducting an internal investigation. Hoenig is also exploring various options
to mitigate the loss. We are in the process of gathering additional information
to assess what impact, if any, these activities and the related loss may have on
Hoenig and the transaction to acquire Hoenig.
11
<Page>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
The Company has two reportable segments: U.S. operations and international
operations. The U.S. operations segment provides agency equity trading services
and transaction research to institutional investors and brokers in the United
States of America. The international operations segment includes our agency
brokerage businesses in Australia, Canada and Europe and our start-up brokerage
operations in Asia, as well as a research facility in Israel.
REVENUES:
We generate substantially all of our revenues from the following three
products and services ("Product Revenues"):
- POSIT: a confidential electronic stock crossing system;
- Electronic Trading Desk: an agency-only trading desk;
- Client Site Direct Access;
- QuantEX: a Unix-based front-end software system providing
market analysis, trade management and electronic
connectivity to POSIT and multiple trade execution
destinations;
- ITG Platform: a PC-based front-end software system
providing market analysis, trade management and
electronic connectivity to POSIT and multiple trade
execution destinations.
Revenues primarily consist of commissions from customers' use of our trade
execution and analytical services. Because these commissions are paid on a
per-transaction basis, revenues fluctuate from period to period depending on (i)
the volume of securities traded through our services in the U.S. and Canada, and
(ii) the contract value of securities traded in Europe and Australia. We record
as POSIT revenue any order that is executed on the POSIT system regardless of
the manner in which the order was submitted to POSIT. ITG collects a commission
from each side of a trade matched in POSIT. We record as Electronic Trading Desk
revenue any order that is handled by our trading desk personnel and executed at
any trade execution destination other than POSIT. We record as Client Site
Direct Access revenue any order that is sent by our clients, through ITG's
Client Site Direct Access systems but without assistance from the Electronic
Trading Desk, to any third party trade execution destination. Other revenues
include (a) interest income/expense, (b) market gains/losses and financing costs
resulting from temporary positions in securities assumed in the normal course of
our agency trading business, (c) fees for development and other services
provided to our unconsolidated international affiliates prior to our acquisition
of the remaining interest in ITG Europe in May 2001, (d) realized gains and
losses in connection with our cash management and strategic investment
activities, (e) revenues from KTG following the September 28, 2001 acquisition
of the KastenNet business of Kasten Chase, and (f) income from positions taken
by ITG Canada as customer facilitations which are a customary practice in the
Canadian marketplace.
EXPENSES:
Expenses consist of compensation and employee benefits, transaction
processing, software royalties, occupancy and equipment, telecommunications and
data processing services, net gain on long-term investments, and other general
and administrative expenses. Compensation and employee benefits expenses include
base
12
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salaries, bonuses, employment agency fees, part-time employee compensation,
fringe benefits, including employer contributions for medical insurance, life
insurance, retirement plans and payroll taxes, less the portion of salaries that
is capitalized as part of our software development activities. Transaction
processing expenses consist of floor brokerage and clearing fees as well as
connection fees for use of certain third party execution services. Software
royalties are payments to Barra, Inc., our POSIT joint venture partner.
Occupancy and equipment expenses include rent, depreciation, amortization of
leasehold improvements, maintenance, utilities and occupancy taxes.
Telecommunications and data processing services include costs for computer
hardware, infrastructure enhancements, data center equipment, market data
services and voice, data, telex and network communications. Net gain on
long-term investments includes equity gain on our joint venture investment prior
to our acquisition of the remaining interest in ITG Europe in May 2001. Other
general and administrative expenses include amortization of capitalized software
costs, amortization of other intangibles as well as legal, audit, tax,
consulting and promotional expenses.
RESULTS OF OPERATIONS - THREE MONTHS ENDED MARCH 31, 2002 COMPARED TO THREE
MONTHS ENDED MARCH 31, 2001
The table below sets forth certain items in the statements of income
expressed as a percentage of revenues for the periods indicated:
<Table>
<Caption>
THREE MONTHS ENDED
MARCH 31,
---------------------
2002 2001
-------- --------
Revenues:
Commissions
POSIT............................................ 47.7 47.1
Electronic Trading Desk.......................... 23.6 22.9
Client Site Direct Access........................ 26.6 25.3
Other................................................ 2.1 4.7
-------- --------
Total revenues................................... 100.0% 100.0%
-------- --------
Expenses:
Compensation and employee benefits................... 26.8 26.0
Transaction processing............................... 12.2 14.1
Software royalties................................... 6.1 6.1
Occupancy and equipment.............................. 6.4 5.1
Telecommunications and data processing services...... 4.3 4.1
Net gain on long-term investments ................... 0.0 (1.1)
Other general and administrative..................... 5.5 7.2
-------- --------
Total expenses................................... 61.3 61.5
-------- --------
Income before income tax expense.......................... 38.7 38.5
Income tax expense........................................ 16.0 15.5
-------- --------
Net income................................................ 22.7 23.0
======== ========
</Table>
EARNINGS PER SHARE:
Basic and diluted net earnings per share for the three months ended
March 31, 2002 ("First Quarter 2002") increased $0.01, or 2%, to $0.45 from
$0.44 for the three months ended March 31, 2001 ("First Quarter 2001"). In 2001,
these results included the effect of a gain, which approximated $0.04 per
diluted share, relating to
13
<Page>
the sale of 100,000 shares of stock that ITG Europe held in the London Stock
Exchange ("LSE"). Excluding this non-recurring gain, diluted net earnings per
share increased $0.05, or 13%.
REVENUES:
Consolidated revenues increased $6.0 million, or 7%, from $91.7
million to $97.7 million. Revenues from U.S. operations increased $1.9 million,
or 2%, from $88.8 million to $90.7 million. Revenues from international
operations increased $4.1 million, or 141%, from $2.9 million to $7.0 million.
There were 60 trading days in the U.S. markets in First Quarter 2002
compared to 62 trading days in First Quarter 2001. Product Revenues per trading
day from our U.S. operations increased by $117,000, or 8%, from $1,381,000 to
$1,498,000 resulting from a 19% increase in average daily trading volume
partially offset by a slight change in our revenue mix where Client Site Direct
Access revenues, which are priced at a lower rate per share than our other
products, realized the strongest growth in share volume. The total trading
volume in the U.S. reached 6.0 billion shares (averaging 99.8 million per
trading day) in First Quarter 2002 as compared to 5.2 billion shares (averaging
83.9 million per trading day) for the same period a year earlier. U.S. Product
Revenues per average number of employees decreased $15,000, or 7%, from $221,000
to $206,000. The increase in U.S. headcount outpaced the increase in domestic
revenues as we continued to increase staff in research and development to
achieve our technology goals and in sales and trading to support our revenue
growth targets.
In First Quarter 2002, international Product Revenues included $3.0
million from our European business, which was 50% owned prior to our May 2001
purchase of the remaining 50% ownership interest. Product Revenues from our
Canadian operations increased by $1.2 million, or 171%, from $0.7 million to
$1.9 million showing continued growth despite weak market conditions. In
Australia, we reported revenues of $0.9 million in First Quarter 2002 as
compared to $1.2 million a year earlier, a $0.3 million or 25% decrease,
reflecting weak market conditions.
Consolidated POSIT revenues increased $3.4 million, or 8%, reflecting
higher share volume and the consolidation of ITG Europe. POSIT revenues per
trading day increased by $79,000, or 11%, from $697,000 in First Quarter 2001 to
$776,000 in First Quarter 2002. The number of shares crossed on the U.S. POSIT
system increased approximately 50 million, or 2%, from 2.25 billion in First
Quarter 2001 to 2.30 billion in First Quarter 2002. The average number of shares
crossed on the U.S. POSIT system per trading day increased 2.0 million, or 5%,
from 36.4 million in First Quarter 2001 to 38.4 million in First Quarter 2002.
ITG Europe contributed $2.4 million to consolidated POSIT revenues in the 2002
period.
Electronic Trading Desk revenues increased $2.0 million, or 10%, due
to a $1.7 million additional contribution from international operations,
including $0.6 million from ITG Europe, as well as a 12% increase in U.S. share
volume, partially offset by a change in business mix. Electronic Trading Desk
revenues per trading day increased by $45,000, or 13%, from $339,000 in First
Quarter 2001 to $384,000 in First Quarter 2002.
Client Site Direct Access revenues increased $2.8 million, or 12%, as
a result of a 31% increase in U.S. share volume partially offset by
comparatively stronger growth in lower priced routing only services, where we do
not incur transaction processing costs. Client Site Direct Access revenues per
trading day increased by $59,000, or 16%, from $375,000 in First Quarter 2001 to
$434,000 in First Quarter 2002.
Other revenues decreased $2.2 million, or 51%, from $4.3 million to
$2.1 million. First Quarter 2001 included a $1.5 million return on funds
invested with our asset management subsidiary, and $0.6 million in development
and service fee income from the European joint venture prior to its
consolidation in May 2001.
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EXPENSES:
The table below sets forth certain items in the statements of income and
their variance over the periods indicated:
<Table>
<Caption>
THREE MONTHS ENDED
MARCH 31,
---------
(DOLLARS IN THOUSANDS)
----------------------
2002 2001 CHANGE % CHANGE
-------- -------- -------- --------
Compensation and employee benefits.................... $ 26,161 $ 23,833 $ 2,328 9.8
Transaction processing................................ 11,908 12,955 (1,047) (8.1)
Software royalties.................................... 5,921 5,619 302 5.4
Occupancy and equipment............................... 6,281 4,680 1,601 34.2
Telecommunications and data processing services....... 4,246 3,775 471 12.5
Net gain on long-term investments .................... - (1,028) 1,028 100.0
Other general and administrative...................... 5,437 6,593 (1,156) (17.5)
Income tax expense.................................... 15,616 14,263 1,353 9.5
</Table>
COMPENSATION AND EMPLOYEE BENEFITS: Salaries, bonuses and related
employee benefits increased primarily due to the growth in our employee base of
131 employees, or 27%, from 482 as of March 31, 2001 to 613 as of March 31,
2002. A total of 68 employees, or 52% of the increase related to the
consolidation of ITG Europe, the addition of employees arising from the
KastenNet acquisition and the start-up of our operation in Hong Kong. The
remaining increase of 63 employees, or 48%, primarily related to new staff in
technology, product development, sales and trading and production
infrastructure. Average compensation and employee benefits per (average)
headcount decreased $7,100, or 14%, from $51,500 in First Quarter 2001 to
$44,400 in First Quarter 2002.
TRANSACTION PROCESSING: Transaction processing as a percentage of
revenues decreased from 14.1% in First Quarter 2001 to 12.2% of revenues in
First Quarter 2002. First Quarter 2002 includes $0.8 million of transaction
processing costs incurred by ITG Europe, an operation that was not consolidated
in First Quarter 2001. U.S. transaction costs as a percentage of total U.S.
revenues decreased from 14.1% in First Quarter 2001 to 11.4% in First Quarter
2002. Despite our share volume growth, U.S. clearing and execution costs
declined primarily from rate reductions negotiated with our clearing vendor.
This was partially offset by ECN costs which, in the U.S., increased $0.3
million, or 8%, from $3.8 million in First Quarter 2001 to $4.1 million in First
Quarter 2002 reflecting higher ECN volume, which increased 70% compared to First
Quarter 2001. The impact of higher ECN volume was partially offset by a higher
share of executions being made through lower unit cost ECN providers.
SOFTWARE ROYALTIES: Because software royalties are contractually fixed
as a percentage of POSIT revenues, the increase is entirely attributable to an
increase in POSIT revenues.
OCCUPANCY AND EQUIPMENT: Depreciation and amortization of furniture,
fixtures and equipment, and office rent were the main contributors to the $1.6
million increase in First Quarter 2002 compared to First Quarter 2001.
International operations accounted for $0.8 million, or 50% of the increase,
following the consolidation of ITG Europe. The U.S. operations represented the
remainder of the increase, or $0.8 million, primarily as a result of (i)
incremental depreciation and amortization related to upgrades of infrastructure,
and (ii) additional space requirements due to U.S. headcount growth.
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<Page>
TELECOMMUNICATIONS AND DATA PROCESSING SERVICES: Telecommunications
and data processing services as a percentage of revenues increased slightly from
4.1% in First Quarter 2001 to 4.3% in First Quarter 2002 principally due to the
inclusion of costs incurred by ITG Europe.
NET GAIN ON LONG-TERM INVESTMENTS: In First Quarter 2001, we
recognized a one-time gain of $1.9 million relating to the sale of 100,000
shares of stock that ITG Europe held in the LSE, which were received at the time
of the LSE demutualization in the year 2000. The reported gain of $1.0 million
was net of our $0.9 million share of ITG Europe's operating loss for First
Quarter 2001. There were no such gains in First Quarter 2002.
OTHER GENERAL AND ADMINISTRATIVE: The $1.2 million decrease in other
general and administrative expenses primarily reflects (i) a $0.6 million
reversal of bad debt provisions, principally related to the tragic events of
September 11th, 2001, as the related accounts have been fully collected, (ii) a
$0.3 million decrease in amortization of capitalized software costs due to
timing of new product launches, and (iii) controls on discretionary spending,
offset by costs incurred by ITG Europe, which were not present in First Quarter
2001.
INCOME TAX EXPENSE
The increase in the effective tax rate from 40.4% in First Quarter
2001 to 41.3% in First Quarter 2002 was primarily due to higher non deductible
foreign losses in First Quarter 2002 following the consolidation of ITG Europe.
LIQUIDITY AND CAPITAL RESOURCES
Our liquidity and capital resource requirements result from our working
capital needs, primarily consisting of compensation and benefits, transaction
processing fees and software royalty fees. Historically, cash from operations
has met all working capital requirements. A substantial portion of our assets
are liquid, consisting of cash and cash equivalents or assets readily
convertible into cash.
We believe that our cash flow from operations and existing cash balances
will be sufficient to meet our cash requirements. We generally invest our excess
cash in money market funds and other short-term investments that generally
mature within 90 days or less. Additionally, securities owned at fair value
include highly liquid, state and municipal obligations, auction rate preferred
stock and common stock. At March 31, 2002, cash equivalents and securities owned
at fair value amounted to $331.7 million and net receivables from brokers,
dealers and other, of $40.4 million were due within 30 days. At March 31, 2002,
cash and cash equivalents included deposits at clearing firms totaling $8.1
million.
We also invest a portion of our excess cash balances in cash enhanced
strategies, which we believe should yield higher returns without any significant
effect on risk. As of March 31, 2002, we had investments in limited partnerships
investing in marketable securities and a venture capital fund amounting to $25.4
million in the aggregate. The limited partnerships employ either a hedged
convertible strategy or a long/short strategy to capitalize on short term price
movements.
Cash flows from operating activities reached $23.2 million in First Quarter
2002, a $12.7 million decrease compared to First Quarter 2001. The decrease is
primarily attributable to our September 15, 2001 estimated Federal income tax
payment, which was not paid until January 2002 in accordance with the tax relief
provided by the U.S. government to counties affected by the tragic events of
September 11th, 2001. Net cash used in investing activities was $3.6 million in
First Quarter 2002, a $0.2 million decrease from the same period a year earlier
as a result of lower capital expenditures partially offset by increased
capitalized software costs in
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<Page>
relation to new products approaching their launch date. Net cash provided by
financing activities was $12.9 million in First Quarter 2002, an increase of
$11.4 million compared to the same period a year earlier following stock option
exercises by employees in First Quarter 2002.
On February 28, 2002, we announced that we had entered into an agreement
to acquire all of the outstanding common stock of Hoenig Group Inc.
("Hoenig") for cash consideration of approximately $115.0 million. The
proposed acquisition is subject to certain closing conditions, including
Hoenig shareholder approval and certain regulatory approvals. See PROPOSED
ACQUISITION OF HOENIG GROUP INC. in the Unaudited Notes to the Consolidated
Financial Statements.
As of March 31, 2002, the Company's other contractual obligations and
commercial commitments consisted principally of minimum future rentals under
non-cancelable operating leases.
Historically, all regulatory capital needs of ITG Inc. and AlterNet have
been provided by cash from operations. We believe that cash flows from
operations will provide ITG Inc. and AlterNet with sufficient regulatory
capital. As of March 31, 2002, ITG Inc. and AlterNet had net excess regulatory
capital of $193.4 million and $1.1 million, respectively. In addition, ITG
Canada, ITG Australia and ITG Europe had regulatory capital in excess of the
minimum requirements applicable to each company as of March 31, 2002 of
approximately $6.2 million, $2.2 million and $12.0 million, respectively.
Although we believe that the combination of our existing net regulatory capital
and operating cash flows will be sufficient to meet regulatory capital
requirements, a shortfall in net regulatory capital would have a material
adverse effect on us.
PART II. - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Date of the Meeting - May 9, 2002
Type of Meeting - Annual Meeting of Stockholders
At the meeting, the following directors were elected by the stockholders to
hold office until the next annual meeting of stockholders or until their
successors have been duly elected and qualified:
Frank E. Baxter
J. William Burdett
Neal S. Garonzik
William I Jacobs
Raymond L. Killian, Jr.
Robert L. King
Mark A. Wolfson
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<Page>
At the meeting, with respect to the election of the directors and
ratification of the appointment of KPMG LLP as our independent auditors for the
2002 fiscal year, the votes were cast in the following manner:
Election of Directors:
<Table>
<Caption>
NAME FOR WITHHELD
(Number of Shares)
------------------
Frank E. Baxter 42,303,139 158,088
J. William Burdett 42,302,160 159,067
Neal S. Garonzik 42,008,531 452,696
William I Jacobs 42,004,966 456,261
Raymond L. Killian, Jr. 40,863,380 1,597,847
Robert L. King 42,008,551 452,676
Mark A. Wolfson 42,008,481 452,746
</Table>
Ratification of the appointment of KPMG LLP as our independent auditors for
the 2002 fiscal year:
<Table>
<Caption>
Number of Shares
----------------
For 41,013,266
Against 1,433,891
Abstain 14,070
</Table>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
6(a) EXHIBITS
3.1 Certificate of Incorporation of the Company (incorporated by reference to
Exhibit 3.1 to the Annual Report on Form 10-K for the year ended December
31, 1999)
3.2 By-Laws of the Company (incorporated by reference to Exhibit 3.2 to the
Annual Report on Form 10-K for the year ended December 31, 1999)
10.1 Agreement and Plan of Merger, dated as of February 28, 2002, among the
Company, Hoenig Group, Inc. and Indigo Acquisition Corp. (incorporated by
reference to Exhibit 2.1 to the Company's Current Report of Form 8-K,
filed March 4, 2002)
10.2 Voting Agreement, dated as of February 28, 2002, between the Company and
the stockholders of Hoenig Group, Inc. named therein (incorporated by
reference to Exhibit 2.2 to the Company's Current Report on Form 8-K,
filed March 4, 2002).
6(b) REPORTS ON FORM 8-K
The Company filed a Current Report on Form 8-K dated March 4, 2002,
relating to the signing of an agreement and plan of merger with Hoenig Group
Inc., which will survive the merger as a wholly owned subsidiary of ITG.
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<Page>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INVESTMENT TECHNOLOGY GROUP, INC.
---------------------------------
(Registrant)
Date: MAY 15, 2002 By: /s/ Howard C. Naphtali
----------------------
Howard C. Naphtali
Chief Financial Officer and
Duly Authorized Signatory of Registrant
19