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Securities And Exchange Commission
Washington, D.C. 20549
Form 10-K
[X] Annual Report Pursuant To Section 13 Or 15(d)
Of The Securities Exchange Act Of 1934
For the fiscal year ended May 31, 1995
Or
[ ] Transition Report Pursuant To Section 13 Or 15(d)
Of The Securities Exchange Act Of 1934
For the Transition Period from to
Commission File No. 1-9480
The Sherwood Group, Inc.
(Exact name of registrant as specified in its charter)
Delaware 22-2394480
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
One Exchange Plaza, New York, New York 10006
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 482-4000
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
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Common Stock, .01 par value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
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. [_]
As of July 31, 1995, 12,559,711 common shares were outstanding, and the
aggregate market value of the common shares of The Sherwood Group, Inc. held by
non-affiliates was approximately $53,798,680.
Documents Incorporated By Reference
Document Incorporated Part of Report
By Reference Into Which Incorporated
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Proxy Statement for Annual Meeting to be held Part III
October 24, 1995
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Item 1. Business
Introduction
The Sherwood Group, Inc. (the "Company") is a holding company whose principal
subsidiary is Sherwood Securities Corp. ("Sherwood Securities"), a wholly owned
Delaware corporation. Sherwood Securities is a broker-dealer engaged in the
securities business and in providing related financial services.
Sherwood Securities was formed in 1968 and specializes in the market making of
NASDAQ and Small-Cap securities on a wholesale basis. As a national trading
firm with offices in New York, New York; Chicago, Illinois; Minneapolis,
Minnesota; Denver, Colorado; Los Angeles, California; and Boston, Massachusetts,
Sherwood Securities trades approximately 4,500 NASDAQ and Small-Cap securities
as market maker and principal for its own account. Sherwood Securities also
acts as a Specialist in 22 equity securities on the American Stock Exchange
("AMEX") and provides limited retail brokerage services.
National Discount Brokers ("NDB"), another registered broker-dealer, is a
division of the Company's wholly-owned subsidiary, Triak Services Corp.
("Triak"). NDB is a deep discount brokerage firm specializing in trade
execution for individual investors.
The Company also holds a 60% limited partnership interest in Equitrade Partners,
a New York limited partnership ("Equitrade"). Equitrade is a registered
specialist in 82 equity securities on the New York Stock Exchange ("NYSE").
Stock Market Index, Inc. ("SMI"), a wholly owned subsidiary of the Company,
based in Boston, provides technical research to institutional investors, brokers
and fund managers. SMI's research is based on the technical analysis and
interpretation of money flows in and out of exchanges, sectors, stocks, bonds,
currencies or commodities being analyzed. SMI is also registered as an
investment advisor and provides investment advisory services to individuals and
institutions.
The Company also owns a 49% limited partnership interest in Anvil Institutional
Services Company ("Anvil Joint Venture") which, in turn, owns Anvil
Institutional Services, Inc. ("Anvil"), which is a qualified minority broker-
dealer registered in New York and California.
The Company was incorporated under the laws of Delaware in December 1981 under
the name The Sherwood Equity Group Ltd. It changed its name to The Sherwood
Capital Group, Inc. in 1983 and in 1987 adopted its present name. Effective
December 21, 1994, the Company began listing its common stock for trading on the
NYSE under the symbol "SHD." It was formerly listed on the AMEX.
The Company's principal executive offices are located at One Exchange Plaza, New
York, New York 10006 and its telephone number is (212) 482-4000.
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Recent Developments
Effective December 21, 1994, the Company began listing its common stock for
trading on the NYSE. The Company's common stock was formerly listed for trading
on the AMEX.
On February 21, 1995, Equitrade purchased certain security positions from a NYSE
specialist. Equitrade paid additional consideration for the right to specialize
in these securities. This intangible asset is being amortized over 15 years.
On May 1, 1995, Equitrade purchased certain security positions from a NYSE
specialist. Equitrade paid additional consideration for the right to specialize
in the securities and for a not to compete covenant. These intangible assets
are being amortized over 15 years.
In connection with the transactions discussed above, the Company funded
Equitrade an additional $10,000,000 in subordinated debt. This transaction, in
conjunction with previously issued subordinated debt of $2,000,000 and the 60%
special limited partnership interest, led to the determination that
consolidation was required. Prior to this determination, the Company accounted
for Equitrade on an equity basis.
On December 22, 1992, the Board of Directors approved a program to repurchase up
to 1,500,000 shares of the Company's common stock. The shares are to be
purchased from time to time in the open market or in privately negotiated
transactions. The shares will be held as treasury shares for general corporate
purposes. Through May 31, 1995, 781,418 shares had been repurchased as part of
this program. No additional shares were repurchased during the period from June
1, 1995 to July 31, 1995.
Revenue by Source
The following table sets forth sources of the Company's revenues on a
comparative basis for the periods indicated:
<TABLE>
<CAPTION>
Fiscal Year Ended May 31,
------------------------
1995 1994 1993
---- ---- ----
Amount % Amount % Amount %
------ -- ------ -- ------ --
<S> <C> <C> <C> <C> <C> <C>
Firm securities
transactions (net) $ 80,387,742 78.07 $80,587,586 89.93 $55,534,413 94.24
Commission income 14,412,331 14.00 3,562,099 3.97 1,101,938 1.87
Equity income in
partnerships 3,597,096 3.49 3,014,259 3.36 1,432,297 2.43
Investment securities
gain (loss) 76,375 .07 680,450 .76 (358) --
Interest and dividend
income 3,465,614 3.37 1,446,146 1.61 796,433 1.35
Fee income 395,417 .38 7,071 .01 -- --
Other income 640,804 .62 322,261 .36 68,305 .11
------------ ------ ----------- ------ ----------- ------
Total revenue $102,975,379 100.00 $89,619,872 100.00 $58,933,028 100.00
============ ====== =========== ====== =========== ======
</TABLE>
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Market Making and Specialist Activities of Sherwood Securities
General. A significant portion of the Company's revenues (see "Revenue by
Source") is directly related to the market making activities of Sherwood
Securities. As a national market maker in NASDAQ and Small-Cap securities,
Sherwood Securities acts as a wholesale dealer in the execution of transactions.
In "making a market" in approximately 4,500 NASDAQ and Small-Cap securities,
Sherwood Securities acts as a principal in transactions through buying, selling
and maintaining an inventory in the securities in which it makes a market.
Sherwood Securities is prepared to buy or sell any of the securities in which it
has elected to be a market maker. Approximately 3,900 of the securities in
which Sherwood Securities is a market maker, as of July 1995, were displayed in
the electronic quotation medium referred to by the acronym "NASDAQ" (National
Association of Securities Dealers Automated Quotation System). The firms which
have elected to make a market in a security quoted on NASDAQ display the price
at which they are willing to buy (bid) or sell (ask) these securities. The
market maker adjusts its bid and ask prices in response to supply, demand and
other factors affecting the market for each security. Approximately 3,100 of
the securities displayed on NASDAQ in which Sherwood Securities makes a market
are listed on the national market system list of NASDAQ. Approximately 800
securities in which Sherwood Securities makes a market are quoted on the
National Association of Securities Dealers, Inc. ("NASD") list of Small-Cap
Issues.
Special relations with brokers. A significant portion of Sherwood Securities'
trading volume is transacted over a dedicated communications network. Private
telephone lines connect Sherwood Securities' trading operations to the order
entry departments of approximately 200 brokerage firms and institutional
customers. This private communications network provides these parties with
immediate access to Sherwood Securities' trading operations and facilitates the
handling of their customer orders.
As part of this system, Sherwood Securities has direct communication lines with
30 regional brokerage firms across the country. In addition to providing these
firms with direct access to Sherwood Securities' trading operations, the
dedicated private lines allow these firms to offer this direct access to other
brokerage firms in their geographic regions. Firms that are interested in
dealing with Sherwood Securities in a particular security can utilize this
service to allow them quick access to the market place. Sherwood Securities
offers direct access through the dedicated private lines to those brokerage
firms acting as market makers in the geographic regions of Sherwood Securities'
branch offices.
Sherwood Securities has a correspondent department to handle order flow for the
NASDAQ and Small-Cap transactions of participating retail brokers and dealers.
Through its correspondent department, it executes the NASDAQ and Small-Cap
orders for these firms. These orders include orders electronically routed to
Sherwood Securities by these firms for certain of their clearing accounts.
Specialist activities. As of July 31, 1995, Sherwood Securities served as a
specialist in 22 equity securities on the AMEX. This activity is cleared
through Spear Leeds & Kellogg ("SLK"). The Company also holds a 60% limited
partnership interest in Equitrade whose activity is also cleared through SLK.
As of July 31, 1995, Equitrade served as a specialist in 82 equity securities on
the NYSE.
Securities positions. Sherwood Securities and Equitrade take both long and
short positions in securities in which they make a market. The following table
illustrates, for the fiscal years indicated, the highest, lowest and average
month-end inventory at market value (based on the aggregate of the net long and
net
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short position of trading securities). The following securities positions
include positions held by Equitrade subsequent to February 1995. See Note 3 of
Notes to Consolidated Financial Statements.
<TABLE>
<CAPTION>
Fiscal Year Highest Lowest Average
Ended May 31 Month End Month End Month End
------------ --------- --------- ---------
<S> <C> <C> <C>
1993* $42,413,927 $15,935,998 $25,867,685
1994** 46,519,207 26,555,472 34,610,403
1995*** 69,158,382 25,653,178 47,079,105
* Includes Highest Month End, Lowest Month End and Average Month
End for positions held as a specialist on AMEX of $1,850,848,
$908,312 and $1,268,181, respectively.
** Includes Highest Month End, Lowest Month End and Average Month
End for positions held as a specialist on AMEX of $2,146,366,
$1,099,039 and $1,438,548, respectively.
*** Includes Highest Month End, Lowest Month End and Average Month
End for positions held as a specialist on AMEX of $1,806,318,
$333,902 and $1,187,637, respectively. Includes Highest Month
End, Lowest Month End and Average Month End for positions held
as a specialist on NYSE of $18,846,852, $11,492,129 and
$14,109,605, respectively.
</TABLE>
The securities positions on any one day may not be representative of the
exposure on any other day because securities positions may vary substantially
with economic and market conditions, allocations and availability of capital,
and trading volume.
Investments
Venture capital investments. The Company and its subsidiaries, from time to
time, make and continue to hold investments in developing companies or
companies in need of additional financing. Some of these investments are in
restricted securities and, as such, may only be sold pursuant to a registration
statement under the federal Securities Exchange Act of 1933, as amended, or
pursuant to an exemption from registration thereunder.
The Company, for financial reporting purposes, generally carries venture capital
investments at fair value as determined by the Board of Directors. Although the
securities of certain of the companies in which the Company and its subsidiaries
invested may be publicly traded, the Company's valuation of such holdings may be
discounted significantly from the public market price due to restrictions on
transfer, the size of the holdings or other legal, contractual or practical
restrictions on disposition.
On August 31, 1992, Sherwood Securities invested $1,000,000 in the form of a
subordinated note with Initio, Inc. ("Initio"), a publicly traded company
(listed as INTO). The note had a stated interest rate of 8% and matured on
December 31, 1994. As additional consideration for this transaction, Sherwood
Securities received certain restricted securities of Initio which have been
determined by management to have a nominal fair value. On January 31, 1995,
Sherwood Securities received repayment in full from Initio on the subordinated
note. See Note 9 of Notes to Consolidated Financial Statements.
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On December 29, 1992, Sherwood Securities purchased 100,000 restricted shares of
Network Imaging Corp., a publicly traded company (IMGX), for $200,000, of which
88,400 shares were sold during the fiscal year ended May 31, 1994. During the
fiscal year ended May 31, 1995, the remaining 11,600 shares were sold, with
Sherwood Securities recognizing a profit of $76,375.
On October 4, 1993, the Company paid $400,000 for 8,000 shares of common stock
of Emmett A. Larkin Company, Inc., a minority owned broker-dealer. This holding
represents, as of May 31, 1995, approximately 14% of the outstanding common
shares of Emmett A. Larkin Company, Inc.
Investment in property. The Company, through its wholly owned subsidiary,
Sherwood Properties Corp., is an investor in a real estate limited partnership.
This investment is estimated to have a nominal value.
Other Business
Institutional business. Sherwood Securities primarily executes securities
transactions for institutional investors such as banks, mutual funds, money
managers and insurance companies. Such investors normally purchase and sell
securities in large quantities which require special marketing and trading
expertise provided by a staff of 34 institutional sales people. Most
transactions with institutional customers involve securities in which Sherwood
Securities is a market maker and are executed as principal transactions.
Additionally, SMI has approximately 40 major institutional clients.
Retail securities business. NDB is a deep discount brokerage firm specializing
in trade execution for individual investors. NDB's strategy is to provide low
cost transactions with quick execution and a higher level of service than that
provided by other discount brokers. In addition, NDB was created as part of a
plan to capture a greater share of NASDAQ activity. This vertical integration
allows NDB to receive fees from customers to execute orders and then pass the
orders to Sherwood Securities for market-making opportunities. As of July 31,
1995, NDB's activities were conducted through five offices located throughout
the United States and NDB had approximately 55,000 customers.
Interest Revenue
Sherwood Securities receives interest primarily from credit balances which may
exist from time to time in the clearance accounts maintained with its clearing
brokers. In addition, the Company received interest from short-term investments
in U.S. Treasury securities and on its subordinated notes receivable with
Equitrade, Anvil and Initio.
Clearing Arrangements
Sherwood Securities, NDB and Equitrade maintain relationships with clearing
brokers which effect clearance and settlement of their securities transactions.
The clearing brokers maintain custody of cash and securities and provide other
services. Sherwood Securities, NDB and Equitrade are dependent upon the
operational capacity and ability of their clearing brokers for the orderly
processing of their transactions.
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Sherwood Securities clears its wholesale market-making transactions through
National Financial Services Corporation ("NFSC"). Broadcort Capital
Corporation, a wholly owned subsidiary of Merrill Lynch & Co., Inc., clears
Sherwood Securities' and SMI's customer transactions. Equitrade's NYSE and
Sherwood Securities' AMEX transactions are cleared through SLK. The Sherwood
Securities clearing agreement with NFSC is for a term of one year and may be
terminated by either party upon 180 days' prior written notice. Without such
prior written notice, the agreement automatically renews annually. The Sherwood
Securities clearing agreement and the Equitrade clearing agreement with Spear,
Leeds & Kellogg are for an indefinite period of time and may be terminated upon
35 days' prior written notice by either party. The Sherwood Securities clearing
agreement with Broadcort Capital Corporation is for an indefinite period of time
and may be terminated upon 180 days' prior written notice by either party.
NDB's transactions are cleared through the Pershing Division of Donaldson,
Lufkin & Jenrette Securities Corporation ("Pershing"). The NDB clearing
agreement with Pershing is for a three-year term and may be terminated upon 90
days' prior written notice by either party.
Personnel
As of July 31, 1995, the Company had 425 full-time employees of which 279 are
salespeople, traders and trading assistants. Included in the preceding employee
counts are NDB's 181 full-time employees of which 88 are sales personnel and
Equitrade's 40 full-time employees of which 35 are trading personnel. None of
the Company's personnel are covered by a collective bargaining agreement. The
Company considers its relations with its personnel to be satisfactory.
Sherwood Securities' sales and trading personnel, NDB's sales personnel and
Equitrade's trading personnel are required to take examinations given by the
NASD. In certain circumstances, additional examinations are required in order
for sales and trading personnel to be qualified to do business in various
states. Sherwood Securities' traders receive a percentage of trading profits as
compensation. They do not receive salaries. NDB's sales personnel work on a
salary basis. Except for Equitrade's general partners who are paid on a draw
basis, Equitrade's trading personnel work on a salary basis.
Effective April 6, 1993, the Executive Committee of the Board of Directors
mandated that in addition to whatever normal vacation time to which an employee
is entitled, all full-time employees (except Equitrade's) who have completed
five years of employment (three years for traders and institutional salespeople)
are required to take a one-month paid sabbatical. Such sabbatical must be taken
within one year after the employee's fifth anniversary (third anniversary for
traders and institutional salespeople). Sabbaticals will also be required for
each subsequent five or three year period of employment completed. In addition,
Sherwood Securities will assume any trading losses incurred in a trader's
account during one of the trader's sabbatical.
Competition
While Sherwood Securities is one of several broker-dealers whose principal
activity has been making markets in a broad range of NASDAQ and Small-Cap
securities for its own account, there are many other broker-dealers making
markets in these securities. Sherwood Securities generally has one or more
competing market makers for each security in which it makes a market. Sherwood
Securities competes primarily on the basis of price, its experience in market
making, its relationship with its customers, the
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availability of its dedicated private communications system and its ability to
effect large transactions in an orderly manner.
The deep discount retail brokerage business engaged in by NDB is highly
competitive. Many discount firms compete on price. NDB's ability to be
competitive will depend on its ability to deliver a low price product with a
higher level of service.
NYSE specialist firms, such as Equitrade, compete for new listings based upon
depth of the markets that the firms make, capital risk and the quality of the
firms' personnel. Based upon these three criteria, allocations of new issues
are awarded. Additional competition has arisen from third market activity,
internalization and regionalization.
Numerous mergers among firms in the securities industry have resulted in firms
with strengthened financial resources. In addition, companies not engaged in
the securities business, but having substantial financial resources, have
acquired securities firms. These developments have increased competition from
securities firms with substantially greater capital resources than those of
Sherwood Securities. Ultimately, these developments, as well as other
developments that could result in greater involvement by banks in the securities
industry, may lead to the creation of large integrated financial services firms
which may be able to compete more effectively than Sherwood Securities for
investment funds by offering a greater range of financial services.
Regulation
The securities industry in the United States is subject to extensive regulation
under federal and state laws. The Securities and Exchange Commission ("SEC") is
the federal agency charged with administration of the federal securities laws.
However, certain regulatory matters have been delegated to self-regulatory
organizations, such as the NASD. These self-regulatory organizations adopt
rules (which are subject to approval by the SEC) governing certain aspects of
the industry and conduct periodic examinations of member broker-dealers.
Securities firms are also subject to regulation by state securities commissions
in the states in which they are registered. As of July 31, 1995, Sherwood
Securities was registered with the SEC, the NASD, AMEX and in 19 states and
Washington, D.C. As of July 31, 1995, NDB was registered with the SEC, the NASD
and in all 50 states and Washington, D.C. As of July 31, 1995, Equitrade was
registered with the SEC and the NYSE.
The compliance officers and the compliance departments of Sherwood Securities,
NDB and Equitrade are responsible for ensuring the Company's compliance with the
applicable laws and regulations. The officers and the compliance departments
work with trading personnel in implementing new regulatory procedures,
maintaining the required trading records, maintaining appropriate files, and
monitoring trading activity, among other activities. The officers and the
compliance departments also handle all contacts with the various regulatory
agencies, on both state and federal levels. These duties are diverse and range
from giving comments on proposed legislation to responding to requests for
information regarding trading activity. Other areas in which the officers and
the compliance departments are active are the registration of associated persons
and responding to customer inquiries.
The regulations to which broker-dealers are subject cover all aspects of the
securities business, including sales methods, trade practices among broker-
dealers, capital structure of securities firms, record keeping, and the conduct
of directors, officers and employees. Additional legislation, changes in rules
promulgated
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by the SEC and self-regulatory authorities, or changes in the interpretation of
enforcement of existing laws and rules, may directly affect the mode of
operation and profitability of broker-dealers. The SEC, self-regulatory
organizations and state securities commissions may conduct administrative
proceedings which can result in censure, fines, suspension or expulsion of a
broker-dealer, its officers or employees. The principal purpose of regulation
and discipline of broker-dealers is the protection of customers and securities
markets rather than protection of creditors and stockholders of broker-dealers.
Customer Protection and Insurance
Sherwood Securities, NDB and Equitrade are members of the Securities Investor
Protection Corporation ("SIPC") which provides protection for customers in the
event of the liquidation of the firm. Customers' accounts are protected up to
$500,000 for each customer, as defined in the Securities Investor Protection Act
of 1970, as amended, with a limitation of $100,000 for claims for cash balances.
In addition, each of Sherwood Securities', NDB's and Equitrade's clearing agents
is a member of SIPC and carries private protection which provides, in the event
of the liquidation of such clearing agents, additional coverage (in some cases
up to $25,000,000) for securities positions for each of Sherwood Securities',
NDB's and Equitrade's customers.
The Company carries brokers' blanket bonds covering Sherwood Securities and NDB
for loss or theft of securities, forgery of checks and drafts, embezzlement,
certain employee misconduct and misplacement of securities. Such bonds each
provide total coverage of $500,000 and contain deductibles of $10,000.
Risk Assessments
Sherwood Securities' and Equitrade's trading, market making, specialist and
brokerage activities expose the Company's capital to significant risks. These
risks include absolute and relative price movements, price volatility and
changes in financial instrument liquidity or the markets in which they are
traded, over which Sherwood Securities and Equitrade have virtually no control.
Sherwood Securities and Equitrade monitor their risks by constant review of
their trading positions. The management of trading positions is enhanced by the
review of mark-to-market valuations and/or position summaries on a daily basis.
In addition, Equitrade, as a specialist on the NYSE, and Sherwood Securities, to
the extent it is a specialist on the AMEX, are subject to regulations pursuant
to which each of them may be required to stabilize, or participate in the
stabilization of certain securities on those exchanges. In the event either
Equitrade or Sherwood Securities is required to stabilize the price of
securities which are declining in value, whether as a result of a declining
market or otherwise, either or both of them could suffer substantial losses.
Net Capital and Customer Reserve Requirements
Every registered broker-dealer doing business with the public is subject to the
Uniform Net Capital Rule 15c3-1 (the "Rule") promulgated by the SEC. The Rule,
which is designed to measure the financial integrity and liquidity of broker-
dealers, specifies minimum net capital requirements. Sherwood Securities, NDB
and Equitrade are subject to the Rule.
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The Rule provides that a broker-dealer doing business with the public shall not
permit its net capital to be less than the greater of a stated minimum dollar
requirement or one-fifteenth of its aggregate indebtedness (the "basic method")
or, alternatively, that it not permit its net capital to be less than the
greater of a stated minimum dollar requirement or 2% of its aggregate debit
items computed in accordance with Rule 15c3-3 (the "alternative method").
The stated minimum dollar requirement for Sherwood Securities, which has elected
the alternative method, is $1,000,000. The stated minimum dollar requirement
for NDB and Equitrade, which have elected the basic method, is $250,000.
In computing net capital under the Rule, various adjustments are made with a
view to excluding assets not readily convertible into cash and to provide a
conservative statement of other assets, such as firm's inventory of securities.
To that end, a deduction is made against the market value of securities to
reflect the possibility of a market decline prior to their disposition. Thus,
net capital rules, impose financial restrictions upon the Company's businesses
which are more severe than those imposed on concerns in other types of business.
Compliance with the Rule may limit the operations of Sherwood Securities, NDB
and Equitrade that require the use of significant amounts of capital, such as
market making activities. Further, assets of the Company which are included in
the Company's minimum net capital are not available for distribution to the
shareholders of the Company in the form of dividends or otherwise. See Note 13
of Notes to Consolidated Financial Statements. Sherwood Securities, NDB and
Equitrade are presently in compliance with the net capital requirements.
Failure to maintain the required net capital may subject a broker-dealer to
suspension of business and may ultimately require its liquidation.
In May 1991 and in December 1993, Sherwood Securities and NDB, respectively,
were granted exemptions by the NASD from the computation for determination of
reserve requirements for broker-dealers. The exemptions were granted pursuant
to Rule 15c3-3(k)(2)(ii). During the period from June 1, 1994 through May 31,
1995, both Sherwood Securities and NDB were in compliance with the condition of
this exemption.
Item 2. Properties
Currently, Sherwood Securities occupies approximately 18,000 square feet located
at One Exchange Plaza, New York, New York 10006 where both it and the Company
maintain their offices and trading facilities under a lease which expires in
September 1996. The rental for each year during the period commencing October
1, 1992 is $738,000 until expiration. Sherwood Securities is also responsible
for the payment of a pro rata portion of tax and operating escalations. During
December 1994, Sherwood Securities signed a new lease agreement in Jersey City,
New Jersey for the purpose of relocating its and the Company's offices and
trading facilities. The lease, for approximately 36,600 square feet, commenced
on January 1, 1995 and expires on January 31, 2007. Sherwood Securities'
obligation to pay base rent begins on May 13, 1997. The obligation for any
operating escalations, as defined in the lease agreement, is effective as of
January 1, 1995. Commencing May 13, 1997, base rent on the new space is
approximately $1,025,000 per annum to July 31, 2000 and $1,172,000 from August
1, 2000 to January 31, 2007.
NDB's office and sales facilities occupy approximately 15,700 square feet
located at 50 Broadway, New York, New York 10004 under three leases which expire
in May 1997, April 1998 and December 1998,
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respectively. The aggregate rental for each year increases from a base of
approximately $243,000 in 1995 to approximately $262,000 in 1997. NDB is also
responsible for the payment of a pro-rata portion of tax and operating
escalations. The leases are each renewable for two successive five-year terms at
rents to be determined at the time of renewal.
See Note 14 to the Company's Consolidated Financial Statements for additional
information concerning other leases to which the Company, its subsidiaries or
its divisions are parties.
Item 3. Legal Proceedings
Many aspects of the business of the Company and its subsidiaries involve
substantial risks of potential liability. In recent years, there has been an
increasing incidence of litigation involving the securities industry, including
class action suits that generally seek substantial damages. Companies engaged
in the underwriting and distribution of securities are exposed to substantial
liability under federal and state securities laws. The Company and its
subsidiaries are, from time to time, involved in proceedings with, and
investigations by, governmental and self-regulatory agencies.
In April 1987, a class action was commenced in the Supreme Court of the State of
New York, County of New York by Robert Bowen against Sherwood Securities and
others. The action was brought on behalf of all purchasers of Zytrex
Corporation ("Zytrex") common stock in connection with a private placement of
Zytrex common stock. Class certification was denied with prejudice and the
complaint was dismissed with leave to replead. A motion to dismiss the amended
complaint was denied as to the Company, but granted as to certain other
defendants. Another amended complaint was filed, in response to which Sherwood
has filed an answer. The currently filed amended complaint is brought
individually by four plaintiffs. That complaint alleges various
misrepresentations, omissions and negligent acts in connection with the private
placement and seeks approximately $80,000 in compensatory damages as well as
punitive damages in the amount of $2,000,000, interest, costs and attorneys'
fees. In May 1995, the case was settled.
The Company and its subsidiaries are the subject of several actions arising out
of the normal course of their respective businesses. The Company and its
subsidiaries are contesting all such actions.
Class action complaints, Charles Kaye and Sulochana Desai, et als. v. Herzog,
----------------------------------------------------
Heine, Geduld, et al. (United States District Court for the Southern District of
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New York); Jerome Robinson v. Herzog, Heine, Geduld, et al. (United States
------------------------------------------------
District Court for the Southern District of New York); and Lawrence A. Abel, et
--------------------
al. v. Merrill Lynch Incorporated & Co., et al. (Superior Court of California,
- -------------------- --------------------------
County of San Diego), were filed on May 27, 1994 against Sherwood Securities and
several other market makers on the NASDAQ exchange. The Kaye and Robinson class
---- --------
action complaints were both filed allegedly on behalf of the named plaintiffs
and a class of persons and entities who purchased or sold certain NASDAQ traded
securities during the past four years. Both complaints allege that Sherwood
Securities and the other NASDAQ market makers violated the federal antitrust
laws by allegedly conspiring with one another to artificially inflate the
"spread", or difference, between the bid and ask price for NASDAQ securities.
The Kaye complaint also contains allegations that the same alleged conduct
violated Section 10(b) of the Securities Exchange Act of 1934, as amended, and
Rule 10b-5. The relief sought in both the Kaye and Robinson actions includes
---- --------
declaratory and injunctive relief under the antitrust laws, as well as
unspecified damages on behalf of the class, trebled in accordance with the
antitrust laws and an award of counsel fees and expenses. The California state
court action, Abel v. Merrill Lynch and Co., Inc., et al. is a class action
-------------------------------------------
brought on behalf of all persons who reside in the State of California and who
have purchased or sold securities listed on NASDAQ in the past four years. This
complaint alleges the same conspiracy as the
-10-
<PAGE>
Kaye and Robinson actions, but seeks relief pursuant to the California state
- ---- --------
antitrust statute, known as the Cartwright Act, and pursuant to the California
Unfair Competition Act. The relief sought in this action is also declaratory and
injunctive relief, as well as unspecified trebled damages on behalf of the
class, restitutionary payments for alleged unjust enrichment and an award of
costs and counsel fees. The Abel complaint has been dismissed without prejudice
----
by consent, pending the outcome of the federal court actions.
Subsequent to May 27, 1994, several additional class action complaints have been
filed which contain the same or similar allegations and requesting similar
relief. Namely, Dampf v. Herzog, Heine, Geduld, et al. (filed in the Federal
--------------------------------------
District Court for the Southern District of New York on June 6, 1994); Perlman
-------
v. Herzog, Heine, Geduld, et al. (filed in the Federal District Court for the
- --------------------------------
Southern District of California on June 28, 1994); Silverman v. Alex Brown &
-------------------------
Sons, Inc., et al. (filed in the Federal District Court for the District of
- ------------------
Columbia on July 6, 1994); Crum v. Alex Brown & Sons, Inc., et al. (filed in the
---------------------------------------
Federal District Court for the District of Columbia on July 8, 1994); Frangiosa
---------
v. Alex Brown & Sons, Inc., et al. (filed in the Federal District Court for the
- ----------------------------------
District of Columbia on July 8, 1994); Lutz v. Alex Brown & Sons, Inc., et al.
---------------------------------------
(filed in the Federal District Court for the District of Columbia on July 11,
1994); and Derdel v. Alex Brown & Sons, Inc., et al. (filed in the Federal
-----------------------------------------
District Court for the District of Columbia); Burnstein v. Herzog, Heine,
---------------------------
Geduld, et al. (filed in the Federal District Court for the District of
- --------------
Columbia); Fineberg v. Alex Brown & Sons, Inc., et al. (filed in the Federal
-------------------------------------------
District Court for the District of Columbia); Lorge v. Alex Brown & Sons, Inc.,
---------------------------------
et al. (filed in the Federal District Court for the District of Columbia); Clark
- ------ -----
v. Alex Brown & Sons, Inc., et al. (filed in the Federal District Court for the
- ----------------------------------
District of Columbia); Hennessey v. Alex Brown & Sons, Inc., et al. (filed in
--------------------------------------------
the Federal District Court for the District of Columbia); Bleznak v. Herzog,
------------------
Heine, Geduld, et al. (filed in the Federal District Court for the District of
- ---------------------
Columbia); Sachs v. Alex Brown & Sons, Inc., et al. (filed in the Federal
----------------------------------------
District Court for the District of Columbia); Tolchin v. Alex Brown & Sons,
-----------------------------
Inc., et al. (filed in the Federal District Court for the District of Columbia);
- ------------
Safina v. Alex Brown & Sons, Inc., et al. (filed in the Federal District Court
- -----------------------------------------
for the District of Columbia); Johnson v. Herzog, Heine, Geduld, Inc., et al.
----------------------------------------------
(filed in the Federal District Court for the District of Minnesota) and Dolinar
-------
v. Sherwood Securities et al. (filed in the Federal District Court for the
- -----------------------------
Northern District of Illinois). There are now a total of approximately 26
pending class action complaints which have been filed in several different
federal courts across the country, including the Southern District of New York,
the Northern District of Illinois, the District of Minnesota, the Southern
District of California, the District of Columbia and the District of New Jersey.
The plaintiffs in the various class actions have now sued a total of 27
different NASDAQ market-maker defendants, including Sherwood Securities.
By Order dated October 14, 1994, the Judicial Panel on Multidistrict Litigation
consolidated the above matters and any later-filed "tag along" cases for pre-
trial proceedings in the United States District Court for the Southern District
of New York, entitled In re NASDAQ Market-Makers Antitrust Litigation, 94 Civ.
-----------------------------------------------
3996 (RWS). An Amended Consolidated Complaint was then filed. The Amended
Consolidated Complaint repeated most of the allegations of the various earlier
filed complaints, except that plaintiffs are no longer alleging violations of
the Securities Exchange Act of 1934, as amended. Rather, their claims are
limited to those previously alleged under the Federal antitrust laws. Together
with the other defendant market makers, the Company has joined in a motion to
dismiss the Amended Consolidated Complaint, which was argued on April 25, 1995.
On August 4, 1995, the Honorable Robert Sweet of the United States District
Court for the Southern District of New York, before whom the consolidated class
action litigations are pending, issued an Opinion dismissing, without prejudice,
the Amended Consolidated Complaint. Pursuant to the terms of Judge Sweet's
Opinion and Order, the plaintiffs have been granted leave to redraft the Amended
Consolidated Complaint and to refile it within 45 days. The Company intends to
vigorously defend itself against these allegations.
-11-
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders.
There were no matters submitted to a vote of security holders during the fourth
quarter of the year ended May 31, 1995.
PART II
Item 5. Market for the Company's Common Stock and Related Security Holder
Matters.
The Company's common stock is traded on the New York Stock Exchange under the
symbol "SHD." There were approximately 4,000 holders of record of the
Company's common stock at July 31, 1995. As of such date, the closing sales
price per share for the Company's common stock was $10.00.
The following table sets forth the high and low sales price per share for the
Company's common stock for each quarterly period within the two most recent
fiscal years as reported by the New York Stock Exchange (the American Stock
Exchange prior to December 21, 1994):
<TABLE>
<CAPTION>
Sales Prices
------------
Quarter Ended High Low
- ------------- ---- ---
<S> <C> <C>
August 31, 1993 5.2500 3.7500
November 30, 1993 8.8750 4.7500
February 28, 1994 8.8750 7.1250
May 31, 1994 8.8750 6.0000
August 31, 1994 7.2500 5.6250
November 30, 1994 7.2500 5.8750
February 28, 1995 6.3750 5.1250
May 31, 1995 7.2500 5.6250
</TABLE>
There were no cash dividends declared on the common stock of the Company in the
two-year period ended May 31, 1995. Funds available for distribution to
shareholders of the Company in the form of dividends are limited to the extent
assets of the Company or its subsidiaries are utilized to meet the minimum net
capital requirements of Sherwood Securities, NDB and Equitrade under Rule 15c3-1
promulgated by the SEC. See Business - Net Capital and Customer Reserve
Requirements.
Item 6. Selected Consolidated Financial Data.
The following selected consolidated financial data for the Company for each of
the five years in the period ended May 31, 1995 should be read in conjunction
with the respective financial statements and related notes thereto, and the
discussion under Management's Discussion and Analysis of Financial Condition and
Results of Operations included in this report. All amounts are in thousands,
except per share amounts.
-12-
<PAGE>
<TABLE>
<CAPTION>
Year Ended May 31,
-----------------
1995 (b) 1994 1993 1992 1991
------- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Operating Data:
- --------------
Revenues $102,975 $89,620 $58,933 $45,007 $21,720
Income before
extraordinary items 14,615 16,597 8,939 6,288 117
Extraordinary Items:
- -------------------
Utilization of net
operating loss carryforward -- -- 5,024 4,248 940
Net income (a) 14,615 16,597 13,963 10,536 1,057
Per Share Data:
- --------------
Income before
extraordinary item (a) 1.07 1.20 .64 .45 .01
Net income 1.07 1.20 1.00 .76 .08
Balance Sheet Data:
- ------------------
Total assets 113,031 77,616 60,027 38,150 24,115
Common stockholders' equity 65,978 53,311 38,191 24,497 13,961
Long-term obligations and
redeemable stock -- -- -- -- --
Book value per common share 4.84 3.86 2.72 1.76 1.07
Dividends -- -- -- -- --
</TABLE>
(a) The results of operations for the years ended May 31, 1995 and 1994
include $4,687, or $.34 per share, and $6,034, or $.44 per share,
respectively, of benefit from net operating loss carryforward which
would have been shown as an extraordinary item prior to the adoption of
the Financial Accounting Standards Board issued Statement of Financial
Accounting Standard No. 109, Accounting for Income Taxes.
---------------------------
(b) The results of operations for the year ended May 31, 1995 include the
operations of Equitrade on a consolidated basis for the period March
through May 1995. For prior periods, Equitrade was accounted for on the
equity method.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Results of Operations
Fiscal 1995 Compared to Fiscal 1994
The results for the year ended May 31, 1995 reflect primarily the activities of
Sherwood Securities and NDB and the Company's interest in the profits of
Equitrade through February 1995 after which the results of Equitrade have been
consolidated with those of the Company. Certain fiscal 1994 amounts have been
reclassified to conform with the fiscal 1995 presentation.
-13-
<PAGE>
The Company had a net profit for the year ended May 31, 1995 of $14,615,000,
compared to a net profit of $16,597,000 for the year ended May 31, 1994.
Sherwood Securities had a net profit for the year ended May 31, 1995 of
$15,161,000, compared to a net profit for the year ended May 31, 1994 of
$23,558,000. Triak had a net profit for the year ended May 31, 1995 of $8,000,
compared to a net loss of $4,776,000 for the 11 month period ended May 31, 1994.
Revenue increased by approximately $13,355,000, or 15%, from $89,620,000 in 1994
to $102,975,000 in 1995.
Most of the Company's income arises from firm securities transactions. Sherwood
Securities' profits from firm securities transactions decreased $5,624,000, or
7%, from $82,622,000 in 1994 to $76,998,000 in 1995. Overall trading volume
increased approximately 11% for the year ended May 31, 1995, when compared with
the year ended May 31, 1994. Regulatory changes enacted by the SEC and the NASD
have caused a significant increase in the number of transactions executed on an
"even" basis. This was the primary reason for the decrease in trading profits
per ticket for the fiscal year ended May 31, 1995.
The Company's commission income increased by $10,850,000, or 305%, from
$3,562,000 in 1994 to $14,412,000 in 1995. A full year of operations by NDB,
which did not commence operations until January 1994, accounted for all of the
increase.
The principal portion of equity income in partnerships was equity income from
Equitrade. For the nine months ended February 28, 1995, after which the
operations of Equitrade have been consolidated with those of the Company, the
Company's share of Equitrade's investment income was $3,521,000 compared to
$3,092,000 for the year ended May 31, 1994. In addition, the Company absorbed
amortization of intangible assets of $349,000 for the year ended May 31, 1994.
Investment securities gains for the years ended May 31, 1995 and 1994 aggregated
$76,000 and $680,000, respectively. These gains resulted entirely from the sale
of 11,600 and 84,400 shares of Network Imaging Corp. (IMGX) for the years ended
May 31, 1995 and 1994, respectively.
There were no unrealized investment securities gains and losses in either the
year ended May 31, 1995 or May 31, 1994.
Interest and dividend income increased by $2,020,000 from $1,446,000 in 1994 to
$3,466,000 in 1995. The net increase is primarily due to the availability of
larger amounts of cash for investment, increasing market interest rates and the
investment of certain funds at above market rates.
Fee income increased by $388,000 from $7,000 in 1994 to $395,000 in 1995. The
increase is due to a full year of 12b-1 fees received by NDB during 1995.
Total expenses increased $12,649,000, or 18%, from $71,316,000 in 1994 to
$83,965,000 in 1995.
Clearing and related charges increased by $8,089,000 from $26,600,000 in 1994 to
$34,689,000 in 1995. A full year of activity for NDB accounted for a $6,797,000
increase in payments to our clearing brokers. Execution fees were $892,000
higher in 1995 due also to higher volume. Payments made to "$2 brokers" for
execution of the Company's listed securities orders decreased by $603,000.
Compensation and benefits increased $168,000 from $31,207,000 in 1994 to
$31,375,000 in 1995. The increase was primarily due to an increase in
administrative and office salaries and related benefits due
-14
<PAGE>
primarily to a full year of payroll for NDB and NDB's hiring of approximately 90
additional employees during the year ended May 31, 1995. Offsetting this
increase are lower commissions paid to traders due to decreased trading profits
and lower bonuses accrued as a result of lower overall profits of the Company as
compared to the prior year.
Communication expenses increased by $2,403,000 from $3,968,000 in 1994 to
$6,371,000 in 1995. The increase was mainly due to an increase in the
activities of NDB, namely telephone and quotations expense.
Advertising costs decreased $104,000 from $2,709,000 in 1994 to $2,605,000 in
1995. Corresponding to the commencement of operations of NDB, the Company ran
an extensive media campaign through September 1994 at which time the amount and
frequency of advertising lessened significantly.
Occupancy costs and equipment rental increased $620,000 from $1,236,000 in 1994
to $1,856,000 in 1995 primarily due to a full year of leases for NDB's offices
in New York, New York; Los Angeles, California; Chicago, Illinois; West Palm
Beach, Florida; and Dallas, Texas. In addition, the lease for Sherwood
Securities' new office in Jersey City, New Jersey commenced in January 1995.
Professional fees increased by $699,000 from $873,000 in 1994 to $1,572,000 in
1995. The increase in professional fees is primarily due to additional legal
services.
Depreciation and amortization increased by $382,000 from $1,416,000 in 1994 to
$1,798,000 in 1995. The increase was primarily due to a full year of
depreciation of furniture, fixtures and equipment purchased in connection with
the commencement, and subsequent expansion, of the operations of NDB.
Travel and entertainment expense increased $45,000 from $1,183,000 in 1994 to
$1,228,000 in 1995 and reflects primarily the entertaining of customers by the
institutional sales force.
Interest expense increased $5,000 from $46,000 in 1994 to $51,000 in 1995.
Repairs and maintenance expense decreased by $33,000 from $471,000 in 1994 to
$438,000 in 1995.
Other expenses increased $376,000 from $1,607,000 in 1994 to $1,983,000 in 1995.
The increase is primarily attributable to $128,000 in listing fees in connection
with the Company's common stock becoming listed on the NYSE effective December
21, 1994. The remainder of the increase is due to the overall increase in the
volume of business and the increase in staff size.
Income of Equitrade allocated to minority partners represents the share of
Equitrade's net income allocated to the minority partners during the last
quarter of fiscal 1995.
During the year ended May 31, 1995, the Company utilized the remainder
(approximately $12,031,000) of its net operating loss carryforwards for Federal,
state and local tax purposes. See Note 8 of Notes to the Consolidated Financial
Statements.
Fiscal 1994 Compared to Fiscal 1993
The results for the year ended May 31, 1994 reflect primarily the activities of
Sherwood Securities and the Company's interest in the profits of Equitrade. In
addition, during January 1994, NDB commenced
-15
<PAGE>
operations. Certain fiscal 1994 and fiscal 1993 amounts have been reclassified
to conform with the fiscal 1995 presentation.
The Company had a net profit for the year ended May 31, 1994 of $16,597,000,
compared to a net profit of $13,963,000 for the year ended May 31, 1993.
Sherwood Securities had a net profit for the year ended May 31, 1994 of
$23,558,000, compared to a net profit for the year ended May 31, 1993 of
$16,655,000.
Revenue increased by approximately $30,687,000, or 52%, from $58,933,000 in 1993
to $89,620,000 in 1994.
Most of the Company's income arises from firm securities transactions. Sherwood
Securities' profits from firm securities transactions increased $25,804,000, or
47%, from $55,464,000 in 1993 to $81,268,000 in 1994. Overall trading volume
increased approximately 49% for the year ended May 31, 1994, when compared with
the year ended May 31, 1993. Increased order flow and more effective trading
accounted for the majority of the increased trading profits for the fiscal year
ended May 31, 1994.
The Company's commission income increased by $2,460,000, or 223%, from
$1,102,000 in 1993 to $3,562,000 in 1994. Commission income from NDB, which
commenced operations in January 1994, and a full year of operations of SMI,
which was acquired in December 1992, accounted for the increase.
The principal portion of equity income in partnerships is equity income from
Equitrade. For the fiscal year ended May 31, 1994, the Company's share of
Equitrade's investment income was $3,092,000 compared to $1,436,000 for the year
ended May 31, 1993. In addition, the Company absorbed amortization of
intangible assets of $349,000 and $419,000 for the years ended May 31, 1994 and
1993, respectively.
Investment securities gains for the year ended May 31, 1994 aggregated $680,000
resulting entirely from the sale of 84,400 shares of Network Imaging Corp.
(IMGX). There were no investment securities transactions for the year ended May
31, 1993.
There were no unrealized investment securities gains and losses in either the
year ended May 31, 1994 or May 31, 1993.
Interest and dividend income increased $650,000 from $796,000 in 1993 to
$1,446,000 in 1994. The net increase is primarily due to the generation of cash
through higher trading profits and the investment of certain funds at above
market rates in the form of subordinated loans.
Total expenses increased $27,450,000, or 63%, from $43,866,000 in 1993 to
$71,316,000 in 1994.
Clearing and related charges increased by $9,882,000 from $16,718,000 in 1993 to
$26,600,000 in 1994. Increased trading volume led to higher payments paid to
our clearing brokers of $3,423,000 including $693,000 incurred by NDB.
Execution fees were $664,000 higher in 1994 due also to higher volume. Payments
made to "$2 brokers" for execution of listed securities orders increased by
$811,000. Finally, the payments made to correspondents that provide us with
order flow reflected the largest increase of any of the clearing and related
components. The increase from 1993 amounted to $4,983,000.
Compensation and benefits increased $10,764,000 from $20,443,000 in 1993 to
$31,207,000 in 1994. The increase was primarily due to greater profitability
and the associated increase in commissions paid to traders. Payments to traders
increased by more than 54% from the previous year. The compensation paid to
institutional salespeople increased in 1994 by more than 55%. Officer and
administrative compensation
-16-
<PAGE>
increased by 26% and 32%, respectively. The higher payments to traders reflect
higher trading profits. The higher payments to salespeople represent increased
profitable institutional order flow. Finally, increased administrative staff
size and bonus payments made to all employees, including managers and officers,
accounted for the increase. In addition, the foregoing increases in compensation
caused payroll taxes to increase by 50%.
Communication expenses increased by $1,979,000 from $1,989,000 in 1993 to
$3,968,000 in 1994. The increase was mainly due to activities related to the
commencement of operations of NDB, namely the printing and mailing of
information kits and new account application forms, as well as the upgrade and
expansion of Sherwood Securities' trading floors in New York, Denver and Los
Angeles.
Advertising costs increased $2,653,000 from $56,000 in 1993 to $2,709,000 in
1994. Such increase was due to an extensive media campaign corresponding to the
commencement of operations of NDB.
Occupancy costs and equipment rental increased $283,000 from $953,000 in 1993 to
$1,236,000 in 1994 primarily due to operating and real estate escalation clauses
in the existing leases. Also contributing to the increase was the signing of
new leases for NDB's offices in New York, New York; Los Angeles, California;
Chicago, Illinois; West Palm Beach, Florida; and Dallas, Texas.
Professional fees increased by $602,000 from $271,000 in 1993 to $873,000 in
1994. The increase in professional fees is primarily due to legal services
regarding the settlement in 1994 of a claim filed against Sherwood Securities.
Depreciation and amortization increased by $212,000 from $1,204,000 in 1993 to
$1,416,000 in 1994. The increase was primarily due to a full year of
amortization of the computer software and customer list acquired upon the
purchase of SMI in December 1992 as well as the covenant not to compete paid for
as part of that acquisition.
Travel and entertainment expense increased $443,000 from $740,000 in 1993 to
$1,183,000 in 1994 reflecting more entertaining of customers by the
institutional sales force which continued to grow in size during the year.
Interest expense increased $39,000 from $7,000 in 1993 to $46,000 in 1994.
Repairs and maintenance expense increased by $163,000 from the fiscal year ended
May 31, 1993. The increase represents the cost of maintaining and operating
Sherwood Securities' trading rooms and reassigning positions within the trading
floor.
Other expenses increased $430,000 from $1,177,000 in 1993 to $1,607,000 in 1994.
The increase is primarily attributable to an increase of $157,000 in
registration fees due to the hiring of new sales personnel especially in
connection with the commencement of operations of NDB. The remainder of the
increase is due to the overall increase in the volume of business and the
increase in staff size.
During the year ended May 31, 1994, the Company utilized approximately
$15,704,000 of its net operating loss carryforwards for Federal, state and local
tax purposes.
-17-
<PAGE>
Fiscal 1993 Compared to Fiscal 1992
The results for the year ended May 31, 1993 reflect primarily the activities of
Sherwood Securities and the Company's interest in the profits of Equitrade.
Certain fiscal 1993 and fiscal 1992 amounts have been reclassified to conform
with the fiscal 1995 presentation.
The Company had a net profit for the year ended May 31, 1993 of $13,963,000,
compared to a net profit of $10,536,000 for the year ended May 31, 1992.
Sherwood Securities had a net profit for the year ended May 31, 1993 of
$16,655,000, compared to a net profit for the year ended May 31, 1992 of
$12,345,000.
Revenue increased by approximately $13,926,000 or 31% from $45,007,000 in 1992
to $58,933,000 in 1993.
Most of the Company's income arises from firm securities transactions. Sherwood
Securities' profits from firm securities transactions increased $12,506,000, or
29%, from $42,958,000 in 1992 to $55,464,000 in 1993. Overall trading volume
increased approximately 28% for the year ended May 31, 1993, when compared with
the year ended May 31, 1992. Increased order flow and more effective trading
accounted for the majority of the increased trading profits for the fiscal year
ended May 31, 1993.
The Company's commission income increased by $900,000, or 446%, from $202,000 in
1992 to $1,102,000 in 1993. Commission income from SMI, which was acquired in
December 1992, and an increased institutional sales effort accounted for the
increase.
The principal portion of equity income in partnerships is equity income from
Equitrade. For the fiscal year ended May 31, 1993, the Company's share of
Equitrade's investment income was $1,436,000 compared to $1,022,000 for the year
ended May 31, 1992. In addition, the Company absorbed amortization of
intangible assets of $419,000 and $502,000 for the years ended May 31, 1993 and
1992, respectively.
There were no investment securities transactions for the year ended May 31, 1993
compared to a gain of $330,000 for the year ended May 31, 1992.
Unrealized investment securities gains and losses decreased $43,000 from a gain
of $43,000 in 1992 to zero in 1993.
Interest and dividend income increased $482,000 from $314,000 in 1992 to
$796,000 in 1993. The net increase is primarily due to the generation of cash
through higher trading profits and the investment of certain funds at above
market rates in the form of subordinated loans.
Total expenses increased $10,260,000 or 31% from $33,606,000 in 1992 to
$43,866,000 in 1993.
Clearing and related charges increased by $4,797,000 from $11,921,000 in 1992 to
$16,718,000 in 1993. Increased trading volume led to higher payments paid to
our clearing brokers of $1,201,000. Execution fees were $620,000 higher in 1993
due also to higher volume. Finally, the payments made to correspondents that
provide us with order flow reflected the largest increase of any of the clearing
and related components. The increase from 1992 amounted to $2,784,000.
Compensation and benefits increased $4,730,000 from $15,713,000 in 1992 to
$20,443,000 in 1993. The increase was primarily due to greater profitability
and the associated increase in commissions paid to traders. Payments to traders
increased by more than 13% from the previous year. The compensation paid
-18-
<PAGE>
to institutional salespeople increased in 1993 by more than 24%. Officer and
administrative compensation increased by 37% and 51%, respectively. The higher
payments to traders reflect higher trading profits. The higher payments to
salesmen represent increased profitable institutional order flow. Finally,
increased administrative staff, bonus payments made to all employees, including
managers and officers, and a contract in force the entire fiscal year for Arthur
Kontos, the Company's Chief Executive Officer, accounted for the increase.
Communication expenses increased by $312,000 from $1,677,000 in 1992 to
$1,989,000 in 1993. The largest component of this increase was for the upgrade
and expansion of Sherwood Securities' trading floors in New York, Denver and Los
Angeles.
Advertising costs increased $14,000 from $42,000 in 1992 to $56,000 in 1993.
Occupancy costs and equipment rental increased by $149,000 from $804,000 in 1992
to $953,000 in 1993 due to operating and real estate escalation clauses in the
leases and increased electric usage.
Professional fees and related settlement expenses decreased by $476,000 from
$747,000 in 1992 to $271,000 in 1993. The decrease in the professional fees is
due to the settlement in 1992 of claims filed against the Company and its
subsidiaries which had been named as defendants in lawsuits and as parties to
several arbitrations.
Depreciation and amortization increased by $198,000 from $1,006,000 in 1992 to
$1,204,000 in 1993. The increase was due to commencing the amortization of the
computer software and customer list acquired upon the purchase of SMI as well as
the covenant not to compete paid for as part of that acquisition.
Travel and entertainment expenses increased by $72,000 from $668,000 in 1992 to
$740,000 in 1993 reflecting, in part, more entertaining of customers by the
institutional sales force.
Interest expense decreased $12,000 from $19,000 in 1992 to $7,000 in 1993.
Repairs and maintenance expense increased by $35,000 from the fiscal year ended
May 31, 1992. The increase represents the cost of maintaining and operating the
trading rooms and reassigning positions within the trading floor.
Other expenses increased $441,000 from $736,000 in 1992 to $1,177,000 in 1993.
This increase is due to the overall increase in the volume of business and the
increase in staff size.
During the fiscal year ended May 31, 1993, the Company used approximately
$14,000,000 in net operating loss carryforwards for Federal, state and local tax
purposes. This use of the net operating loss resulted in an extraordinary
income item of approximately $5,024,000.
Liquidity and Capital Resources
The Company's tangible assets are highly liquid, but subject to market price
fluctuation, with more than 79% consisting of cash or assets readily convertible
into cash (principally firm securities positions, receivables from brokers and
cash). The Company's operations have generally been financed by internally
generated funds and capital contributions. In addition, margin account
borrowings are available to the Company from its clearing brokers.
-19-
<PAGE>
The Company's broker-dealer subsidiaries, Sherwood Securities, NDB and
Equitrade, are subject to the minimum net capital requirement of the SEC which
is designed to measure the general financial soundness and liquidity of brokers.
As of May 31, 1995, Sherwood Securities, NDB and Equitrade had approximately
$32,180,000, $3,926,000 and $18,330,000 in excess of the minimum required net
capital requirements, respectively, representing an increase of $1,213,000 for
Sherwood Securities, a decrease of $566,000 for NDB and an increase of
$8,535,000 for Equitrade from the prior year. The net capital rule imposes
financial restrictions upon Sherwood Securities', NDB's and Equitrade's
businesses which are more severe than those imposed on most other businesses.
Cash flows from operations vary on a daily basis as the Company's portfolio of
marketable securities changes. The Company's ability to convert marketable
securities owned is determined by the depth of the market and the size of the
Company's security positions in relation to the market as a whole. The
portfolio mix also affects the regulatory capital requirements imposed on
Sherwood Securities, NDB and Equitrade which directly affects the amount of
funds available for operating, investing and financing activities. The amounts
received on distributions from Equitrade through February 1995 were committed to
operating activities during the year ended May 31, 1995.
Cash flows from the Company's investment activities are directly related to
market conditions. The Company's investment in Equitrade generated cash
proceeds to the Company in excess of $2,641,000 for the fiscal year ended May
31, 1995. No assurance can be given that this cash flow will occur in the
future. As of May 31, 1995, the partnership was profitable. On February 28,
1995, the Company loaned the aggregate amount of $10,000,000 in cash and
collateral to Equitrade. The $10,000,000 was advanced in two $5,000,000
transactions, one of which was advanced in the form of U.S. Treasury obligations
and is evidenced by a Secured Demand Note which does not bear interest and has a
maturity date of February 28, 1998. To date, no funds have been drawn under this
agreement. The second $5,000,000 was advanced in cash to Equitrade pursuant to
the terms of a cash subordination agreement which bears interest at a rate of 8%
per annum and matures on February 28, 1998.
The Company anticipates that it will be able to generate sufficient cash flow to
meet the future demands of its specialist activities on the AMEX.
On December 29, 1992, Sherwood Securities purchased 100,000 restricted shares of
Network Imaging Corp., a publicly traded company (IMGX), for $200,000. During
fiscal year ended May 31, 1995, the remaining holding of 11,600 shares was sold,
with Sherwood Securities recognizing a profit of approximately $76,000.
On October 4, 1993, the Company paid $400,000 for 8,000 shares of common stock
of Emmett A. Larkin Company, Inc., a minority owned broker-dealer. This holding
represents, as of May 31, 1995, approximately 14% of the outstanding common
shares of Emmett A. Larkin Company, Inc.
In December 1992, the Company announced it would buy back up to 1,500,000 shares
of the Company's common stock from time to time in the open market or through
privately negotiated transactions. Through May 31, 1995, 781,418 shares had
been repurchased, of which 338,700 were repurchased during fiscal 1995. The
source of funds for these purchases was internally generated.
On July 29, 1994, the Company contributed an additional $246,562, in the form of
treasury securities with a face value of $250,000, to the Anvil Joint Venture.
-20-
<PAGE>
Sherwood Securities', NDB's and Equitrade's excess net capital are deemed
adequate by management for their present operations and currently anticipated
future expansion.
Effects of Inflation
The Company's assets are not significantly affected by inflation because they
are primarily monetary in nature. Management believes that replacement costs of
furniture, equipment and leasehold improvements will not materially affect
operations. However, the rate of inflation affects the Company's principal
expenses such as employee benefits and compensation, rent and communication,
which may not be readily recoverable from increased revenues. Due to market
forces and competitive conditions in the securities industry, a broker-dealer
may be unable to unilaterally increase spreads and commissions in order to
recover increased costs related to inflation. Consequently, the Company must
rely on increased volume for this purpose. However, the Company has significant
cash balances on deposit with its principal clearing broker which, in the event
there are higher interest rates, would offset some of the costs.
Item 8. Financial Statements and Supplementary Data.
The response to this item is submitted in a separate section of this report
commencing on Page F-1.
Item 9. Changes in the Disagreements with Accountants on Accounting and
Financial Disclosure.
No change in accountants or disagreement requiring disclosure pursuant to
applicable regulations took place within the Company's two most recent fiscal
years or in any subsequent interim period.
PART III
Item 10. Directors and Executive Officers of the Company.
The material contained in "Election of Directors" and in "Section 16 Filings" of
the Company's definitive proxy statement (to be filed pursuant to the Securities
Exchange Act of 1934, as amended) for the annual meeting of stockholders to be
held on October 24, 1995 is hereby incorporated by reference.
Item 11. Executive Compensation.
The material contained in "Compensation of Directors and Executive Officers",
"Compensation Committee Report on Executive Compensation" and "Company
Performance" of the Company's definitive proxy statement (to be filed pursuant
to the Securities Exchange Act of 1934, as amended) for the annual meeting of
stockholders to be held on October 24, 1995 is hereby incorporated by reference.
-21-
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The material contained in "Voting Securities and Principal Holders Thereof" of
the Company's definitive proxy statement (to be filed pursuant to the Securities
Exchange Act of 1934, as amended) for the annual meeting of stockholders to be
held on October 24, 1995 is hereby incorporated by reference.
Item 13. Certain Relationships and Related Transactions.
The material contained in "Certain Relationships and Related Transactions" of
the Company's definitive proxy statement (to be filed pursuant to the Securities
Exchange Act of 1934, as amended) for the annual meeting of stockholders to be
held on October 24, 1995 is hereby incorporated by reference. See also, "Recent
Developments."
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) Financial Statements
Reference is made to page F-1 for a list of all financial
statements and schedules filed as part of this report.
(b) During the last quarter of the year ended May 31, 1995 the
Company filed no reports on Form 8-K.
(c) Exhibits
The exhibits that are filed with this report, or that are
incorporated herein by reference, are set forth in the Exhibit
Index beginning on page E-1.
-22-
<PAGE>
THE SHERWOOD GROUP, INC.
AND SUBSIDIARIES
Consolidated Financial Statements
May 31, 1995, 1994 and 1993
(With Independent Auditors' Report Thereon)
<PAGE>
THE SHERWOOD GROUP, INC.
AND SUBSIDIARIES
Index to Consolidated Financial Statements
Page
----
Independent Auditors' Report F-2
Consolidated Financial Statements and Notes:
Consolidated Statements of Financial Condition -
May 31, 1995 and 1994 F-3 to F-4
Consolidated Statements of Income -
Years ended May 31, 1995, 1994 and 1993 F-5 to F-6
Consolidated Statements of Changes in Stockholders' Equity -
Years ended May 31, 1995, 1994 and 1993 F-7
Consolidated Statements of Cash Flows -
Years ended May 31, 1995, 1994 and 1993 F-8 to F-10
Notes to Consolidated Financial Statements F-11 to F-21
The following financial statement schedules are
submitted herein on the pages indicated below:
Schedule I - Marketable Securities - S-1
May 31, 1995
Schedule III - Condensed Financial Statements
of the Registrant (Parent) - May 31, 1995 and 1994
and Years ended May 31, 1995, 1994 and 1993 S-2 to S-6
All other financial statement schedules and supplementary data are omitted
because they are not applicable, not required or because the required
information is included in the consolidated financial statements or the notes
thereto.
F-1
<PAGE>
Independent Auditors' Report
The Board of Directors and Stockholders of
The Sherwood Group, Inc.:
We have audited the accompanying consolidated statements of financial condition
of The Sherwood Group, Inc. and Subsidiaries as of May 31, 1995 and 1994, and
the related consolidated statements of income, changes in stockholders' equity
and cash flows for each of the years in the three-year period ended May 31,
1995. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of The Sherwood Group,
Inc. and Subsidiaries as of May 31, 1995 and 1994, and the results of their
operations and their cash flows for each of the years in the three-year period
ended May 31, 1995 in conformity with generally accepted accounting principles.
In connection with our audits of the aforementioned consolidated financial
statements, we also have audited the related financial statement schedules
listed in answer to Items 14(a)(2) and 14(d). These financial statement
schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statement schedules
based on our audits.
In our opinion, such financial statement schedules, when considered in relation
to the basic consolidated financial statements taken as a whole, present fairly,
in all material respects, the information set forth therein.
New York, New York
July 31, 1995
F-2
<PAGE>
THE SHERWOOD GROUP, INC.
AND SUBSIDIARIES
Consolidated Statements of Financial Condition
May 31, 1995 and 1994
<TABLE>
<CAPTION>
Assets 1995 1994
---- ----
<S> <C> <C>
Cash $ 593,473 474,733
Receivables:
Brokers and dealers 47,802,429 43,987,208
Other (note 11) 224,049 378,455
Securities owned (note 4) 41,777,895 15,441,598
Investment securities not readily marketable,
at fair value 401,320 424,520
Investment in partnerships (note 3) 252,180 3,869,779
Notes receivable (note 11) 642,035 1,438,642
Furniture, fixtures and equipment, and leasehold
improvements - at cost, net of accumulated
depreciation and amortization (note 6) 3,861,992 3,239,562
Computer software - at cost, net of accumulated
amortization of $322,048 at May 31, 1995 and
$172,873 at May 31, 1994 401,008 522,164
Intangible assets, net of accumulated
amortization of $1,051,386 at May 31, 1995
and $667,735 at May 31, 1994 (note 3) 3,386,894 870,545
Exchange memberships (market value $1,560,000
at May 31, 1995 and $700,000 at May 31, 1994) 1,166,496 351,496
Subordinated notes receivable (note 9) 3,250,000 3,500,000
Other assets 9,271,091 3,117,758
----------- -----------
Total assets $ 113,030,862 77,616,460
=========== ==========
</TABLE>
(Continued)
F-3
<PAGE>
THE SHERWOOD GROUP, INC.
AND SUBSIDIARIES
Consolidated Statements of Financial Condition, Continued
<TABLE>
<CAPTION>
Liabilities and Stockholders' Equity 1995 1994
---- ----
<S> <C> <C>
Liabilities:
Securities sold, not yet purchased (note 4) $ 24,624,955 8,407,023
Accounts payable and accrued expenses,
including compensation payable to
officers and employees of $8,970,821
at May 31, 1995 and $9,450,030
at May 31, 1994 (note 14) 14,471,330 13,182,843
Secured demand notes payable (note 9) 3,250,000 2,500,000
Income taxes payable (note 8) 1,365,856 215,855
Minority interest in Equitrade 3,341,220 --
------------- -------------
Total liabilities 47,053,361 24,305,721
------------- -------------
Commitments and contingencies
(notes 14 and 15)
Stockholders' equity (notes 10, 11 and 13):
Preferred stock - $.01 par value;
authorized 1,000,000 shares, none issued -- --
Class A common stock - $.01 par value;
authorized 50,000,000 shares, none issued -- --
Common stock - $.01 par value; authorized
50,000,000 shares, issued 14,343,201 shares
at May 31, 1995 and 1994 143,432 143,432
Additional paid-in capital 58,134,052 58,134,052
Retained earnings 17,804,212 3,189,324
------------- -------------
76,081,696 61,466,808
Less: Treasury stock - at cost,
2,033,490 shares at May 31, 1995 and
1,694,790 shares at May 31, 1994 (10,104,195) (8,156,069)
------------- -------------
Total stockholders' equity 65,977,501 53,310,739
------------- -------------
Total liabilities and stockholders' equity $ 113,030,862 77,616,460
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
THE SHERWOOD GROUP, INC.
AND SUBSIDIARIES
Consolidated Statements of Income
Years ended May 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Revenue:
Firm securities transactions - net $ 80,387,742 80,587,586 55,534,413
Commission income 14,412,331 3,562,099 1,101,938
Equity income in partnerships (note 3) 3,597,096 3,014,259 1,432,297
Investment securities gains (losses) realized 76,375 680,450 (358)
Interest and dividends 3,465,614 1,446,146 796,433
Fee income 395,417 7,071 --
Other 640,804 322,261 68,305
----------- ---------- ----------
102,975,379 89,619,872 58,933,028
----------- ---------- ----------
Expenses:
Clearing and related brokerage charges 34,688,552 26,599,840 16,718,101
Compensation and benefits
(notes 10, 11 and 14) 31,375,322 31,207,349 20,442,692
Communications 6,370,985 3,967,793 1,989,324
Advertising costs 2,605,167 2,708,787 56,251
Occupancy costs and equipment rental (note 14) 1,855,771 1,236,219 953,189
Professional fees 1,571,828 872,990 270,849
Depreciation and amortization 1,797,575 1,415,781 1,203,634
Travel and entertainment 1,228,287 1,182,583 739,959
Repairs and maintenance 438,262 471,256 308,095
Interest 50,984 46,316 7,300
Other 1,982,579 1,607,230 1,176,598
----------- ---------- ----------
83,965,312 71,316,144 43,865,992
----------- ---------- ----------
Income before minority interest,
income taxes and extraordinary
item 19,010,067 18,303,728 15,067,036
Income of Equitrade allocated to minority partners (770,041) -- --
----------- ---------- ----------
Income before income taxes and
extraordinary item 18,240,026 18,303,728 15,067,036
----------- ---------- ----------
Income taxes (note 8):
Federal 1,108,941 342,330 358,000
State and local 2,516,197 1,364,465 746,434
Tax effect of loss carryforward -- -- 5,024,000
----------- ---------- ----------
3,625,138 1,706,795 6,128,434
----------- ---------- ----------
Income before
extraordinary item 14,614,888 16,596,933 8,938,602
Extraordinary item (note 8):
Reduction of income taxes arising
from carryforward of prior
years' operating losses -- -- 5,024,000
----------- ---------- ----------
Net income (a) $ 14,614,888 16,596,933 13,962,602
=========== ========== ==========
</TABLE>
(Continued)
F-5
<PAGE>
THE SHERWOOD GROUP, INC.
AND SUBSIDIARIES
Consolidated Statements of Income, Continued
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Income per common share:
Primary:
Income before
extraordinary item (a) $ 1.07 1.20 .64
Extraordinary item -- -- .36
---- ---- ----
Net income per common share $ 1.07 1.20 1.00
==== ==== ====
Fully diluted:
Income before extraordinary item (a) 1.07 1.20 .63
Extraordinary item -- -- .36
---- ---- ----
Net income per common share $ 1.07 1.20 .99
==== ==== ====
Weighted average common shares outstanding:
Primary 13,624,603 13,803,459 14,022,917
========== ========== ==========
Fully diluted 13,652,084 13,821,483 14,061,386
========== ========== ==========
</TABLE>
(a) The results of operations for the years ended May 31, 1995 and 1994
include $4,687,406, or $.34 per share, and $6,033,876, or $.44 per share,
respectively, of benefit from net operating loss carryforward which would
have been shown as an extraordinary item prior to the adoption of the
Financial Accounting Standards Board issued Statement of Financial
Accounting Standard No. 109, Accounting for Income Taxes.
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
THE SHERWOOD GROUP, INC.
AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity
Years ended May 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
Retained
Additional earnings
Common Common paid-in (accumulated Treasury Treasury
shares stock capital deficit) shares stock Total
------ ----- ------- ------- ------ ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at May 31, 1992 14,343,201 $ 143,432 58,493,364 (27,370,211) (1,347,072) $ (6,769,364) 24,497,221
Net income -- -- -- 13,962,602 -- -- 13,962,602
Acquisition of treasury stock -- -- -- -- (67,425) (269,010) (269,010)
---------- ------- ---------- ---------- --------- ---------- ----------
Balance at May 31, 1993 14,343,201 143,432 58,493,364 (13,407,609) (1,414,497) (7,038,374) 38,190,813
Net income -- -- -- 16,596,933 -- -- 16,596,933
Acquisition of treasury stock -- -- -- -- (375,293) (1,572,007) (1,572,007)
Options exercised -- -- (359,312) -- 95,000 454,312 95,000
---------- ------- ---------- ---------- --------- ---------- ----------
Balance at May 31, 1994 14,343,201 143,432 58,134,052 3,189,324 (1,694,790) (8,156,069) 53,310,739
Net income -- -- -- 14,614,888 -- -- 14,614,888
Acquisition of treasury stock -- -- -- -- (338,700) (1,948,126) (1,948,126)
---------- ------- ---------- ---------- --------- ---------- ----------
Balance at May 31, 1995 14,343,201 $ 143,432 58,134,052 17,804,212 (2,033,490) $ (10,104,195) 65,977,501
========== ======= ========== ========== ========= ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
THE SHERWOOD GROUP, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended May 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 14,614,888 16,596,933 13,962,602
----------- ----------- -----------
Non-cash items included in net income:
Equity income in partnerships (3,597,096) (3,014,259) (1,432,297)
Depreciation and amortization 1,797,575 1,415,781 1,203,634
Write-down of notes and other receivables -- -- 42,000
(Gain) loss, on sales of investment
securities not readily marketable (76,375) (680,450) 358
Income of Equitrade allocated to
minority partners 770,041 -- --
----------- ----------- -----------
(1,105,855) (2,278,928) (186,305)
(Increase) decrease in operating assets:
Receivables:
Brokers and dealers 3,171,467 (12,883,231) (14,308,862)
Other 154,406 (334,060) (25,934)
Marketable securities owned (23,974,582) (586,990) (4,001,611)
Other assets (6,380,107) (24,206) (659,715)
----------- ----------- -----------
(27,028,816) (13,828,487) (18,996,122)
----------- ----------- -----------
Increase (decrease) in operating liabilities:
Securities sold, not yet purchased 13,550,853 16,606 5,242,142
Payable to brokers and dealers -- -- (41,078)
Accounts payable and accrued expenses 1,215,495 2,521,640 2,987,544
Income taxes payable 1,126,949 (68,668) (505,477)
----------- ----------- -----------
15,893,297 2,469,578 7,683,131
----------- ----------- -----------
Net cash provided by
operating activities 2,373,514 2,959,096 2,463,306
----------- ----------- -----------
</TABLE>
(Continued)
F-8
<PAGE>
THE SHERWOOD GROUP, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Cash flows from investing activities:
Investment in partnership $ -- -- (490)
Distributions from partnerships 2,641,956 1,602,243 1,105,432
Proceeds from sales of investment securities
not readily marketable 99,575 857,250 --
Payment for purchase of investment securities
not readily marketable -- (410,000) (200,000)
Loans made to employees and officers (242,500) (1,072,690) (330,540)
Principal collected on notes receivable 1,039,107 72,588 --
Purchases of furniture, fixtures and
equipment, and leasehold improvements (1,887,179) (1,988,613) (409,817)
Purchases of computer software (28,019) (123,987) (20,000)
Purchase of identified intangible assets (2,650,000) (25,030) --
Payment for purchase of non-compete
agreement (250,000) -- (613,250)
Purchase of subsidiary, net of cash acquired -- (664) (714,850)
Principal collected on subordinated note 1,000,000 -- --
Issuance of subordinated note -- -- (1,000,000)
----------- ----------- -----------
Net cash used in investing activities (277,060) (1,088,903) (2,183,515)
----------- ----------- -----------
Cash flows from financing activities:
Purchase of treasury stock (1,948,126) (1,572,007) (269,010)
Proceeds from exercise of options -- 95,000 --
Capital contribution by minority interest 500,000 -- --
Capital withdrawals by minority interest (647,143) -- --
----------- ----------- -----------
Net cash used in financing activities (2,095,269) (1,477,007) (269,010)
----------- ----------- -----------
Net increase in cash 1,185 393,186 10,781
Cash acquired due to consolidation of
Equitrade at beginning of fourth quarter 117,555 -- --
Cash at beginning of year 474,733 81,547 70,766
----------- ----------- -----------
Cash at end of year $ 593,473 474,733 81,547
----------- ----------- -----------
</TABLE>
(Continued)
F-9
<PAGE>
THE SHERWOOD GROUP, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
Supplemental disclosures of cash flow information:
Income tax payments totaled $2,842,399, $1,781,897 and $1,943,141 for the
years ended May 31, 1995, 1994 and 1993, respectively.
Interest payments totaled $50,984, $46,316 and $7,300 for the years ended
May 31, 1995, 1994 and 1993, respectively.
Supplemental disclosures of non-cash investing and financing activities:
During May 1993, Sherwood Securities Corp. entered into a $500,000
subordination agreement. During July 1994, Sherwood Securities' commitment
under this subordination agreement was amended to $250,000. Concurrently, the
Company contributed an additional $246,562, in the form of treasury
securities, which were included in other assets at May 31, 1994, to Anvil
Institutional Services Company (see notes 3 and 9).
See accompanying notes to consolidated financial statements.
F-10
<PAGE>
THE SHERWOOD GROUP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
May 31, 1995, 1994 and 1993
(1) Organization and Business
The Sherwood Group, Inc. and its subsidiaries (the "Company") are primarily
engaged in the securities business and in providing related financial
services. The Company has a principal registered broker-dealer wholly owned
subsidiary, Sherwood Securities Corp. ("Sherwood Securities") and
subsidiaries. In addition, during January 1994, National Discount Brokers
("NDB"), a division of the Company's subsidiary, Triak Services Corp.
("Triak"), commenced operations.
(2) Summary of Significant Accounting Policies
(a) The consolidated financial statements include the accounts of the
Company and its subsidiaries. Intercompany accounts and
transactions have been eliminated in consolidation.
(b) Firm securities transactions and related revenues and expenses are
recorded on a trade-date basis.
(c) Securities owned and securities sold, not yet purchased, are carried
at the last quoted "bid" and "ask" prices, respectively. The resulting
difference between cost and market value is included in firm trading
and investment transactions in the consolidated statements of income.
U.S. Treasury obligations are carried at amortized cost, which
approximates fair market value.
(d) Investment securities, which are not readily marketable because of
certain investment restrictions, are carried at fair value as
determined by the Board of Directors. The resulting difference between
cost and fair value is included in investment securities gains
(losses) unrealized in the accompanying consolidated statements of
income.
(e) Furniture, fixtures and equipment are depreciated using the
straight-line method over their estimated useful lives of five to ten
years. Computer software is amortized using the straight-line method
over its estimated useful life of five years. Leasehold improvements
are amortized using the straight-line method over the terms of the
leases or the useful lives of the improvements, whichever is less.
(f) Primary earnings per share are computed by dividing net income by
the weighted average number of common shares outstanding (adjusted for
the assumed conversion of outstanding common stock options at average
month-end market price) during each of the years.
Fully diluted earnings per share are computed by dividing net income
by the weighted average number of common shares outstanding (adjusted
for the assumed conversion of outstanding common stock options at the
year-end market price) from the date of issuance.
(Continued)
F-11
<PAGE>
THE SHERWOOD GROUP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(2), Continued
(g) For purposes of the consolidated statements of cash flows, the
Company considers short-term, highly liquid investments purchased,
included in other assets, with a maturity of three months or less, to
be cash equivalents.
(h) Certain prior year amounts have been reclassified to conform with the
fiscal year ended May 31, 1995 presentation.
(3) Investment in Partnerships
The Company is a 60% special limited partner in Equitrade Partners
("Equitrade"), a specialist for securities listed on The New York Stock
Exchange ("NYSE"). In connection with certain transactions discussed
below, the Company issued Equitrade an additional $10,000,000 in
subordinated debt. This transaction, in conjunction with previously
issued subordinated debt of $2,000,000 and the 60% special limited
partnership interest, led to the determination that consolidation was
required. Prior to this determination, the Company accounted for
Equitrade on an equity basis. The Company's share of Equitrade's profits
subsequent to consolidation was approximately $1,320,000. In accordance
with the terms of the amended and restated partnership agreement dated
October 30, 1990, the net profits and losses of Equitrade are allocated
prior to the amortization of restrictive covenants and other partnership
intangibles. The first $800,000 of net profits, or pro rata part thereof
if less than a period of twelve months, is allocated 100% to the Company.
Net profits in excess of $800,000, or pro rata part thereof if less than
a period of twelve months, are allocated 60% to the Company. Net losses
for each fiscal year of the partnership are allocated 60% to the Company.
Distributions are restricted by the specific terms of the partnership
agreement.
On February 21, 1995, Equitrade purchased certain security positions from a
NYSE specialist. Equitrade paid additional consideration of $1,400,000 for
the right to specialize in these securities. This intangible asset is
being amortized over 15 years.
On May 1, 1995, Equitrade purchased certain security positions from a NYSE
specialist. Equitrade paid additional consideration of $1,250,000 for the
right to specialize in the securities and $250,000 for a not to compete
covenant. These intangible assets are being amortized over 15 years.
During the fourth quarter of fiscal year ended May 31, 1995, Equitrade
admitted a new minority interest partner who contributed $500,000 to the
partnership. Also, withdrawals totaling $647,143 were made by the minority
interest general partners of Equitrade.
(Continued)
F-12
<PAGE>
THE SHERWOOD GROUP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(3), Continued
On April 1, 1993, the Company entered into a joint venture agreement with
a minority broker-dealer wherein the Company acquired a 49% limited
partnership interest in Anvil Institutional Services Company (the "Joint
Venture") for $490. The Joint Venture, in turn, purchased 100% of the
capital stock of Chouteau, Gilmore & Sherriff, Inc. ("CGS"), a broker-
dealer registered in New York and California. Subsequently, CGS was
renamed Anvil Institutional Services Inc. ("Anvil"). On July 29, 1994,
the Company made an additional contribution of $246,562, in the form of
treasury securities with a face value of $250,000, to the Joint Venture.
See also note 9.
(4) Financial Instruments
Substantially all of the Company's financial instruments, as defined in the
Financial Accounting Standards Board issued Statement of Financial
Accounting Standard No. 107, Disclosures About Fair Value of Financial
Instruments, are carried at fair value.
Marketable securities owned and sold, not yet purchased consist of
securities, as follows:
<TABLE>
<CAPTION>
Securities owned 1995 1994
---------------- ---- ----
<S> <C> <C>
Corporate equities $ 24,958,189 13,453,298
U.S. Government obligations 16,819,706 1,988,300
---------- ----------
Total $ 41,777,895 15,441,598
========== ==========
Securities sold, not yet purchased
----------------------------------
Corporate equities $ 24,624,955 8,407,023
---------- ---------
Total $ 24,624,955 8,407,023
========== ==========
</TABLE>
In the normal course of business, Sherwood Securities, NDB and Equitrade
execute securities transactions on behalf of customers through a clearing
broker. In connection with these activities, a customer's unsettled trades
may expose Sherwood Securities, NDB and Equitrade to off-balance-sheet credit
risk in the event the customer is unable to fulfill its contractual
obligations. Sherwood Securities, NDB and Equitrade seek to control the risk
associated with their customer activities by making credit inquiries when
establishing customer relationships.
Sherwood Securities and Equitrade conduct substantially all their principal
trading activities through broker-dealers based in the New York Metropolitan
area. At May 31, 1995, all principal security positions were in the
possession or control of their clearing brokers. Credit exposure may result
in the event that Sherwood Securities' or Equitrade's clearing brokers are
unable to fulfill their contractual obligations. The subsequent settlement
of open positions at May 31, 1995 had no material adverse effect on the
financial position of Sherwood Securities or Equitrade.
(Continued)
F-13
<PAGE>
THE SHERWOOD GROUP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(4), Continued
To the extent that the market value of securities sold, not yet purchased
increases, Sherwood Securities and Equitrade are exposed to the risk of
loss. Neither Sherwood Securities nor Equitrade engage in any derivative
trading activities.
(5) Cash and Securities Segregated Under Federal and Other Regulations
In May 1991 and in December 1993, Sherwood Securities and NDB, respectively,
were granted exemptions by the National Association of Securities Dealers,
Inc. ("NASD") from the computation for determination of reserve requirements
for broker-dealers under subparagraph (k)(2)(ii) of the Securities and
Exchange Commission ("SEC") Rule 15c3-3. Under the (k)(2)(ii) exemption,
Sherwood Securities and NDB execute all customer transactions through a
clearing broker and do not maintain custody of customer funds or securities.
Both Sherwood Securities and NDB were in compliance with the conditions of
this exemption during the years ended May 31, 1995, 1994 and 1993.
(6) Furniture, Fixtures and Equipment, and Leasehold Improvements
Furniture, fixtures and equipment, and leasehold improvements consisted of
the following:
<TABLE>
<CAPTION>
May 31,
------------------
1995 1994
---- ----
<S> <C> <C>
Furniture, fixtures and equipment $ 8,842,245 7,354,170
Leasehold improvements 1,628,330 1,232,337
---------- ----------
10,470,575 8,586,507
Less accumulated depreciation
and amortization (6,608,583) (5,346,945)
---------- ----------
$ 3,861,992 3,239,562
========== ===========
</TABLE>
(7) Acquistion of Triak Services Corp.
On June 1, 1993, the Company acquired 100% of the capital stock of Triak
from the Chief Executive Officer of the Company for $165,016 which
included certain intangible assets amounting to $25,030. The acquisition
was accounted for by the purchase method of accounting and, accordingly,
the results of operations include the results of Triak from the
acquisition date.
(Continued)
F-14
<PAGE>
THE SHERWOOD GROUP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(7), Continued
Pro forma information with respect to this acquisition has not been
presented in the accompanying consolidated financial statements as it would
not differ materially from historical information.
(8) Income Taxes
The Company files its consolidated Federal and combined state and local
income tax returns (inclusive of all subsidiaries except Equitrade) based
on an April 30 year end.
The current Federal, state and local income tax provisions for the years
ended May 31, 1995, 1994 and 1993 have been provided based on the
appropriate tax computation for each jurisdiction, and for the years ended
May 31, 1994 and 1993 are generally based on alternative calculations other
than income.
Deferred taxes are principally due to the differences between reserves and
expenses allowable for book and tax purposes. Deferred taxes at May 31,
1995, included in other assets, were $369,378. A 100% valuation allowance
was established with respect to the asset because management had concluded
that it was uncertain that the benefit would be realized.
The provision for income taxes is as follows:
<TABLE>
<CAPTION>
Years ended May 31,
--------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Federal:
Current $ 1,108,941 342,330 358,000
Tax effect of loss carryforward -- -- 3,767,000
--------- --------- ---------
1,108,941 342,330 4,125,000
--------- --------- ---------
State and local:
Current 2,516,197 1,364,465 746,434
Tax effect of loss carryforward -- -- 1,257,000
--------- --------- ---------
2,516,197 1,364,465 2,003,434
--------- --------- ---------
$ 3,625,138 1,706,795 6,128,434
========= ========= =========
</TABLE>
Continued)
F-15
<PAGE>
THE SHERWOOD GROUP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(8), Continued
A reconciliation of the difference between the income tax provision and
the amount computed by applying the statutory Federal income tax rate is
as follows:
<TABLE>
<CAPTION>
Years ended May 31,
-----------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Statutory provision on pretax income
before extraordinary item $ 6,384,009 6,406,305 5,122,792
State and local taxes, net of Federal tax 1,635,528 886,902 492,646
Tax effect of disallowance of net
operating loss for computation
of minimum federal taxes -- 549,632 458,292
Tax effect of travel and entertainment
and club dues 160,475 145,962 --
Tax effect of amortization of goodwill
reflected in Equitrade's earnings -- 122,073 142,460
Tax effect of utilization of
net operating loss carryforwards (4,687,406) (6,033,876) --
Tax effect of compensation expense
recognized for tax purposes
upon exercise of options -- (187,031) --
Tax effect of straight-lined lease 131,822 -- --
Other - net 710 (183,172) (87,756)
---------- ---------- ----------
Income tax provision $ 3,625,138 1,706,795 6,128,434
========= ========= =========
</TABLE>
(9) Subordination Agreements
Effective May 31, 1993, Sherwood Securities entered into a subordination
agreement with Anvil. The note has a stated interest rate of 2% and matures
on May 31, 1996. In connection with this agreement, Sherwood Securities
pledged U.S. Treasury securities with a market value in excess of $500,000.
Such securities are included in other assets at May 31, 1995. On July 29,
1994, Sherwood Securities' commitment under the agreement was amended to
$250,000.
On March 23, 1992, Equitrade entered into subordination agreements in the
amount of $3,000,000. Such notes are due on March 23, 1996 and contain a
yearly automatic roll-over provision.
(Continued)
F-16
<PAGE>
THE SHERWOOD GROUP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(9), Continued
On August 31, 1992, Sherwood Securities invested $1,000,000 in the form
of a subordinated note with Initio, Inc. ("Initio"). The note, which had
a stated interest rate of 8%, matured on December 31, 1994 and was repaid
in full on January 31, 1995. As additional consideration for this
transaction, the Company received certain restricted securities which
have been determined by management to have a nominal fair value.
(10) Common Stock and Stock Options
(a) The Company maintained an Employee Stock Ownership Plan ("ESOP")
which was discontinued by a resolution of the Board of Directors on
July 15, 1992. On July 12, 1993, prior to the final distribution of
shares from the ESOP, the Company offered to buy those shares from the
ESOP participants at $3.875 per share. 192,795 shares out of 567,819
of such shares held by ESOP participants were accepted for payment and
372,625 shares were distributed to the participants, of which 297,377
shares were rolled over to the Sherwood Securities Corp. 401(k) Plan
(see note 12). Participants representing 2,399 shares have not yet
responded.
(b) The Company has an employee stock option plan which was amended and
restated in January 1987 to provide for the issuance of up to a
maximum of 10,000,000 shares of the Company's common stock. Options
were granted for terms of up to ten years. The following table
summarizes transactions during the three years ended May 31, 1995:
<TABLE>
<CAPTION>
Optioned shares
-----------------------
Number of Price
shares per share
------ ---------
<S> <C> <C>
Balance at May 31, 1992 1,475,000 $1.00
Options granted 66,000 $3.625
Options cancelled (50,001) $1.00
--------- --------------
Balance at May 31, 1993 1,490,999 $1.00 - $3.625
Options cancelled (16,666) $1.00
Options exercised (95,000) $1.00
--------- --------------
Balance at May 31, 1994 1,379,333 $1.00 - $3.625
Options cancelled (33,333) $1.00
--------- --------------
Balance at May 31, 1995 1,346,000 $1.00 - $3.625
========= ==============
</TABLE>
On August 5, 1993, the Board of Directors voted to allow the employee
stock option plan to expire as of August 9, 1993, thereby cancelling
8,509,001 unoptioned shares previously reserved for the plan.
(Continued)
F-17
<PAGE>
THE SHERWOOD GROUP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(11) Related Party Transactions and Principal Stockholders
S.G.I. Partners, L.P. ("SGI"), whose general partner is controlled by a
director of the Company, is a partnership formed to hold the stock of the
Company. As of May 31, 1995, SGI and the Chief Executive Officer of the
Company are the beneficial owners of approximately 22% and 32%,
respectively, of the Company's common shares. Such beneficial ownership
includes shares of common stock underlying currently exercisable options.
Included in notes receivable at May 31, 1995 and 1994 are notes due from
officers of the Company amounting to approximately $459,000 and $1,336,000,
respectively.
Included in other receivables at May 31, 1995 and 1994 are amounts due from
Anvil and the Joint Venture aggregating approximately $166,000 and
$280,000, respectively, and interest on the notes receivable from the
Company's officers of approximately $17,000 and $42,000, respectively.
(12) Employee Benefit Plans
On April 20, 1992, the Board of Directors voted to form a 401(k) profit-
sharing plan (the "Plan"). Under the provisions of the Plan, employees
are eligible to participate if they were employed on February 1, 1992;
otherwise, employees must complete six months of service and attain age
21. Annual contributions to the Plan total the amount of salary
reduction employees elect and a discretionary matching contribution
determined by the Board of Directors of The Sherwood Group, Inc. During
the years ended May 31, 1995, 1994 and 1993, there were no discretionary
contributions to the Plan.
(13) Net Capital Requirements
Sherwood Securities, NDB and Equitrade are subject to the SEC Uniform Net
Capital Rule 15c3-1 (the "Rule") which requires the maintenance of
minimum net capital. As of May 31, 1995, Sherwood Securities had
regulatory net capital of approximately $33,380,000, or approximately
$32,180,000 in excess of required net capital, NDB had regulatory net
capital of approximately $4,176,000, or approximately $3,926,000 in
excess of required net capital and Equitrade had regulatory net capital
of approximately $18,580,000, or approximately $18,330,000 in excess of
required net capital.
The Rule also provides that equity capital may not be withdrawn or cash
dividends paid if the resulting net capital of a broker-dealer would be
less than the amount required under the Rule.
The SEC may by order restrict, for a period of up to 20 business days, any
withdrawal by a broker-dealer of equity capital, as defined, if such
withdrawal, when aggregated with all other withdrawals of equity capital on
a net basis during a thirty calendar day period, exceeds 30% of the broker-
dealer's net capital or if the SEC determines that such withdrawal would be
detrimental to the financial integrity of the broker-dealer or the
financial community.
(Continued)
F-18
<PAGE>
THE SHERWOOD GROUP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(14) Commitments
The Company has operating leases for rental of office space at its
various locations. All leases are subject to escalations for increases
in taxes, fuel and other costs.
Commitments for minimum lease payments under operating leases as of May 31,
1995 are as follows, exclusive of escalation charges:
<TABLE>
<CAPTION>
Fiscal year ending
May 31,
-------
<S> <C>
1996 $ 1,235,000
1997 757,000
1998 1,275,000
1999 1,119,000
2000 1,025,000
Thereafter 7,789,000
----------
$ 13,200,000
==========
</TABLE>
Included in occupancy costs and equipment rental expenses are office
rental expenses of approximately $1,585,000, $999,000 and $744,000 for
the years ended May 31, 1995, 1994 and 1993, respectively.
The Company's Board of Directors authorized a compensation contract for
the Chief Executive Officer which commenced on January 1, 1992. During
December 1994, the Chief Executive Officer exercised his option to
extend the contract until May 31, 1996. The remuneration is based on the
Company's pre-tax profitability. The percentage will range from a low of
10% to a high of 15% on the first $13,000,000 of pre-tax profits as
defined (income before taxes and bonus). Any additional compensation,
based on pre-tax profits of the Company in excess of $13,000,000, will
be at a rate of 18%. Included in accounts payable and accrued
liabilities is approximately $2,130,000 and $1,588,000 due the Chief
Executive Officer at May 31, 1995 and 1994, respectively. In connection
with this agreement, approximately $3,132,000, $2,836,000 and $2,526,000
is reflected in employee compensation and benefits for the years ended
May 31, 1995, 1994 and 1993, respectively.
(15) Contingencies and Legal Matters
The Company's subsidiaries and in some cases the Company have been named
as defendants in lawsuits that allege violations of Federal and state
securities and related laws. Management of the Company believes that the
resolution of these lawsuits is not likely to result in any material,
adverse effect on the Company's consolidated financial position and
results of operations.
(Continued)
F-19
<PAGE>
THE SHERWOOD GROUP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(16) Subsequent Event
On July 28, 1995, the Company's Chief Executive Officer exercised 250,000
options to purchase shares of the Company's common stock in connection
with the Company's employee stock option plan. See also note 10.
(17) Quarterly Financial Information (Unaudited)
(In thousands, except per common share data)
<TABLE>
<CAPTION>
1995 First Second Third Fourth
---- ----- ------ ----- ------
<S> <C> <C> <C> <C>
Revenues $ 22,782 22,483 25,351 32,359
Expenses 19,219 18,870 20,239 25,637
Minority interest -- -- -- (770)
------ ------ ------ ------
Income before taxes $ 3,563 3,613 5,112 5,952
====== ======= ====== ======
Net income $ 3,058 2,934 4,269 4,353
====== ====== ====== ======
Earnings per share:
Primary:
Net income per common
share $ .22 .21 .31 .33
=== === === ===
Fully diluted:
Net income per common
share $ .22 .21 .31 .33
=== === === ===
<CAPTION>
1994 First Second Third Fourth
---- ----- ------ ----- ------
<S> <C> <C> <C> <C>
Revenues $18,803 23,046 24,476 23,295
Expenses 14,136 16,962 20,126 20,092
------ ------ ------ ------
Income before taxes $ 4,667 6,084 4,350 3,203
====== ====== ====== ======
Net income $ 4,180 5,455 3,842 3,120
====== ====== ====== ======
Earnings per share:
Primary:
Net income per common
share $ .30 .39 .28 .23
=== === === ===
Fully diluted:
Net income per common
share $ .30 .39 .28 .23
=== === === ===
</TABLE>
(Continued)
F-20
<PAGE>
THE SHERWOOD GROUP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
(17), Continued
1993 First Second Third Fourth
---- ----- ------ ----- ------
<S> <C> <C> <C> <C>
Revenues $ 9,186 12,487 18,436 18,824
Expenses 7,458 9,623 13,180 13,605
----- ------ ------ ------
Income before extraordinary
item and taxes $ 1,728 2,864 5,256 5,219
===== ====== ====== ======
Income before extraordinary
item 895 1,514 3,417 3,113
Extraordinary item 682 1,162 1,419 1,761
----- ------ ------ ------
Net income $ 1,577 2,676 4,836 4,874
===== ====== ====== ======
Earnings per share:
Primary:
Income before extraordinary
item .06 .11 .24 .23
Extraordinary item .05 .08 .10 .13
------- ----- ------ ------
Net income per common
share $ .11 .19 .34 .36
===== ====== ====== ======
Fully diluted:
Income before extraordinary
item .06 .11 .24 .22
Extraordinary item .05 .08 .10 .13
------- ----- ------ ------
Net income per common
share $ .11 .19 .34 .35
===== ====== ====== ======
</TABLE>
F-21
<PAGE>
THE SHERWOOD GROUP, INC.
AND SUBSIDIARIES
Schedule I
Marketable Securities
May 31, 1995
<TABLE>
<CAPTION>
Securities
Securities sold, not
owned, yet pur-
at market chased, at
value market value
--------- ------------
<S> <C> <C>
Corporate stocks $ 24,572,074 $ 24,442,012
Warrants and other securities 386,115 182,943
U.S. Government obligations 16,819,706 --
----------- ----------
Total $ 41,777,895 $ 24,624,955
========== ==========
</TABLE>
S-1
<PAGE>
THE SHERWOOD GROUP, INC.
AND SUBSIDIARIES
Schedule III
Condensed Financial Statements
of the Registrant (Parent)
Statements of Financial Condition
May 31, 1995 and 1994
<TABLE>
<CAPTION>
Assets 1995 1994
---- ----
<S> <C> <C>
Cash $ 22,819 27,990
Other receivables 119,408 21,385
Notes receivable 458,545 567,777
Investment securities not readily marketable 401,320 401,320
Investment in, less net amounts due to,
subsidiaries and affiliates 52,551,562 51,119,167
Investment in partnerships 6,381,879 3,859,779
Equipment, furniture and leasehold
improvements - net 87,378 165,048
Identified intangible asset - net 328,250 458,457
Exchange membership 351,496 351,496
Subordinated notes receivable 10,000,000 --
Other assets 5,168,471 --
----------- ----------
Total assets $75,871,128 56,972,419
========== ==========
Liabilities and
Stockholders' Equity
Accounts payable, accrued expenses and other
liabilities $ 4,893,627 3,661,680
Secured demand note payable 5,000,000 --
----------- ----------
9,893,627 3,661,680
----------- ----------
Stockholders' equity:
Common stock 143,432 143,432
Retained earnings and other equity 65,834,069 53,167,307
----------- ----------
65,977,501 53,310,739
---------- ----------
Total liabilities and stockholders'
equity $ 75,871,128 56,972,419
========== ==========
</TABLE>
See accompanying notes to condensed financial statements.
S-2
<PAGE>
THE SHERWOOD GROUP, INC.
AND SUBSIDIARIES
Schedule III, Continued
Condensed Financial Statements
of the Registrant (Parent)
Statements of Income
Years ended May 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Revenue:
Equity income in partnerships $ 4,917,494 3,014,259 1,432,297
Interest 256,910 63,494 14,649
Service fees paid by subsidiaries eliminated
in consolidation -- 100,000 100,000
Income from lease of exchange membership 114,000 88,645 70,419
----------- ---------- ----------
5,288,404 3,266,398 1,617,365
----------- ----------- ----------
Expenses:
Compensation and benefits 4,307,077 4,069,428 3,031,812
Service fees paid by parent eliminated
in consolidation -- 930,000 1,030,000
Interest 1,292 1,254 7,300
Other - net 673,446 112,265 318,866
---------- ---------- ----------
4,981,815 5,112,947 4,387,978
---------- ---------- ----------
306,589 (1,846,549) (2,770,613)
Equity in income of subsidiaries 13,739,245 17,854,635 16,468,286
----------- ---------- ----------
Income before income taxes
and extraordinary item 14,045,834 16,008,086 13,697,673
----------- ---------- ----------
Income taxes:
Currently payable (receivable):
Federal (2,303,962) (83,000) --
State and local 1,734,908 (505,847) (264,929)
Tax effect of loss carryforward -- -- 5,024,000
----------- ---------- ----------
(569,054) (588,847) 4,759,071
----------- ---------- ----------
Income before extraordinary item 14,614,888 16,596,933 8,938,602
Extraordinary item:
Reduction of income taxes arising from
carryforward of prior years' operating losses -- -- 5,024,000
----------- ---------- ----------
Net income $ 14,614,888 16,596,933 13,962,602
=========== ========== ==========
</TABLE>
See accompanying notes to condensed financial statements.
S-3
<PAGE>
THE SHERWOOD GROUP, INC.
AND SUBSIDIARIES
Schedule III, Continued
Condensed Financial Statements
of the Registrant (Parent)
Statements of Cash Flows
Years ended May 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 14,614,888 16,596,933 13,962,602
----------- ----------- -----------
Non-cash items included in net income:
Net equity in gain of subsidiaries (13,739,245) (17,854,635) (16,468,286)
Equity income in partnerships (4,917,494) (3,014,259) (1,432,297)
Depreciation and amortization 207,877 206,390 128,771
----------- ----------- -----------
(18,448,862) (20,662,504) (17,771,812)
----------- ----------- -----------
Decrease (increase) in operating assets:
Other receivables (98,024) (21,384) --
Other assets (5,415,032) -- --
----------- ----------- -----------
(5,513,056) (21,384) --
----------- ----------- -----------
(Decrease) increase in operating liabilities:
Accounts payable and accrued expenses 1,231,947 200,576 (935,963)
----------- ----------- -----------
Net cash used in
operating activities (8,115,083) (3,886,379) (4,745,173)
----------- ----------- -----------
Cash flows from investing activities:
Investment in partnerships -- -- (490)
Distribution from partnerships 2,641,956 1,602,243 1,105,432
Payment for purchase of securities not
readily marketable -- (400,000) (330,540)
Loans made to employees and officers -- (309,824) --
Principal collected on notes receivable 109,232 72,588 --
Purchase of subsidiary, net of cash acquired -- (139,986) (714,850)
Payment for purchase of non-compete
agreement -- -- (613,250)
Payment for purchase of identified
intangible asset -- (25,030) --
Additional capital contributed to subsidiaries (2,000,000) (10,425,000) --
Issuance of subordinated note (5,000,000) -- --
----------- ----------- -----------
Net cash used in
investing activities (4,248,812) (9,625,009) (553,698)
----------- ----------- -----------
</TABLE>
(Continued)
S-4
<PAGE>
THE SHERWOOD GROUP, INC.
AND SUBSIDIARIES
Schedule III, Continued
Condensed Financial Statements
of the Registrant (Parent)
Statements of Cash Flows, Continued
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Cash flows from financing activities:
Purchase of treasury stock $ (1,948,126) (1,572,007) (269,010)
Proceeds from exercise of options -- 95,000 --
Net receipts on intercompany
borrowings 14,306,850 15,003,912 5,563,125
---------- ---------- -----------
Net cas provided by
financing activities 12,358,724 13,526,905 5,294,115
---------- ---------- -----------
Net increase (decrease) in cash (5,171) 15,517 (4,756)
Cash at beginning of year 27,990 12,473 17,229
---------- ---------- -----------
Cash at end of year $ 22,819 27,990 12,473
========== ========== ===========
</TABLE>
Supplemental disclosures of cash flow information:
Income tax payments aggregated $1,882,724, $761,011 and $951,086 for the
years ended May 31, 1995, 1994 and 1993, respectively.
Interest payments aggregated $1,292, $1,254 and $7,300 for the years ended
May 31, 1995, 1994 and 1993, respectively.
During July 1994, the Company contributed an additional $246,562, in the
form of U.S. Treasury securities with a face value of $250,000, which were
included in other assets at May 31, 1994, to Anvil Institutional Services
Company.
During February 1995, the Company entered into a collateralized $5,000,000
subordinated agreement with Equitrade (see note 3).
See accompanying notes to condensed financial statements.
S-5
<PAGE>
THE SHERWOOD GROUP, INC.
AND SUBSIDIARIES
Schedule III, Continued
Condensed Financial Statements
of the Registrant (Parent)
Notes to Condensed Financial Statements
May 31, 1995, 1994 and 1993
(1) The condensed financial information of the registrant should be read in
conjunction with the consolidated financial statements and notes to
consolidated financial statements which are included elsewhere herein.
(2) Investment in, less net amounts due to subsidiaries, represents the
Company's investment in its subsidiary companies after deducting net
amounts owed to several subsidiaries primarily related to the funding of
the Company's cash flow needs by its operating subsidiaries.
(3) During the year ended March 1, 1995, the Company entered into two
subordination agreements with Equitrade. The first note has a stated
interest rate of 0% and matures on February 28, 1998. In connection with
this agreement, the Company has pledged U.S. Treasury securities with a
market value in excess of $5,000,000. Such securities are included in other
assets at May 31, 1995. The second note has a stated interest rate of 8%
and matures on February 28, 1998. In connection with this agreement, the
Company loaned Equitrade $5,000,000.
(4) No dividends were paid to the Company by its wholly owned subsidiaries
during the years ended May 31, 1995, 1994 and 1993.
S-6
<PAGE>
EXHIBIT INDEX
-------------
Description of Document SEC Exhibit Document
- ----------------------- --------------------
3.1 Restated Certificate of Incorporated by reference to Exhibit
Incorporation of the No. 3.1 to the Company's Registration
Company Statement No. 33-12904 on Form S-1,
effective May 29, 1987 (the "Initial
Registration Statement")
3.2 By-Laws of the Company, as Incorporated by reference to Exhibit
amended No. 3.2 to the Initial Registration
Statement
10.1 Clearing Agreement dated February Incorporated by reference to Exhibit
16, 1983 between Spear Leeds & 10.7 to the Initial Registration
Kellogg and Sherwood Securities Statement
10.2 Agreement of Lease dated December, Incorporated by reference to Exhibit
1985 between Aetna Life Insurance 10.8 to the Initial Registration
Company and Sherwood Securities Statement
Corp.
10.3 The Company's Employee Stock Incorporated by reference to Exhibit
Ownership Plan as amended 10.9 to the Initial Registration
Statement
10.4 The Company's Stock Option Plan Incorporated by reference to Exhibit
10.10 to the Initial Registration
Statement
10.5 Employment Agreement dated as of Incorporated by reference to Exhibit
January 1, 1992 by and between 10.5 to the Form 10-K for Fiscal Year
Arthur Kontos and the Company ended May 31, 1993
10.6 Mortgage Loan Agreements dated Incorporated by reference to Exhibit
March 24, 1993 among the 10.6 to the Form 10-K for Fiscal Year
Company, Thomas Neumann and ended May 31, 1993
Geralyn Neumann
10.7 Voting Trust Agreement between Incorporated by reference to Exhibit
Arthur Kontos and Vicki Kontos 10.7 to the Form 10-K for Fiscal Year
dated May 11, 1993 ended May 31, 1994
<PAGE>
10.8 Authorization to lend up to Incorporated by reference to Exhibit
$1,000,000 to Mr. Richard Marino 10.8 to the Form 10-K for Fiscal Year
dated December 14, 1993 and ended May 31, 1994
related documentation
10.9 Lease Agreement dated December Incorporated by reference to Exhibit
20, 1993 between Connecticut 10.9 to the Form 10-K for Fiscal Year
General Life Insurance Company ended May 31, 1994
and Triak Services, Corp.,
Guaranty by The Sherwood Group,
Inc. dated December 6, 1993,
Modification of Lease dated
March 30, 1994 and Modification
of Lease dated July 11, 1994
11. Statement re: computation of Filed herewith
per share earnings
21. Subsidiaries of the Company Incorporated by reference to
Exhibit 22 to the Company's Report
on Form 10-K for the year ended
May 31, 1988
23. Consent of Auditor Company Filed herewith
27. Financial Data Schedule Filed herewith
99.1 Secured Demand Note Collateral Incorporated by reference to Exhibit
Agreement and Amendment to 99.1 to the Form 8-K dated February
Secured Demand Note Collateral 28, 1995
Agreement
99.2 Secured Demand in the principal Incorporated by reference to Exhibit
amount of $5,000,000 99.2 to the Form 8-K dated February
28, 1995
99.3 Roll-Over Equity Investment dated Incorporated by reference to Exhibit
February 15, 1995 in the 99.3 to the Form 8-K dated February
principal amount of $5,000,000 28, 1995
related to the Secured Demand
Note
99.4 Cash Subordination Agreement Incorporated by reference to Exhibit
dated as of February 15, 1995 99.4 to the Form 8-K dated February
and Amendment to Cash 28, 1995
Subordination Agreement
<PAGE>
99.5 Roll-Over for Equity Investment Incorporated by reference to Exhibit
dated February 15, 1995 in the 99.5 to the Form 8-K dated February
principal amount of $5,000,000 28, 1995
related to the Cash Subordination
Agreement
<PAGE>
EXHIBIT 11
THE SHERWOOD GROUP, INC.
AND SUBSIDIARIES
Computation of Earnings Per Common Share
Years ended May 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Income before extraordinary item $ 14,614,888 16,596,933 8,938,602
Extraordinary item -- -- 5,024,000
------------- ------------- -------------
Net income (a) $ 14,614,888 16,596,933 13,962,602
============= ============= =============
Primary:
Income before extraordinary item
per common share (a) $ 1.07 1.20 .64
Extraordinary item -- -- .36
------ ------ ------
Net income per common share $ 1.07 1.20 1.00
====== ====== ======
Fully diluted:
Income before extraordinary item
per common share (a) 1.07 1.20 .63
Extraordinary item -- -- .36
------ ------ ------
Net income per common share $ 1.07 1.20 .99
====== ====== ======
Historical:
Weighted average number of
common stock and common stock
equivalents outstanding:
Primary 13,624,603 13,803,459 14,022,917
============= ============= =============
Fully diluted 13,652,084 13,821,483 14,061,386
============= ============= =============
</TABLE>
(a) The results of operations for the year ended May 31, 1995 and 1994 include
$4,687,406, or $.34 per share, and $6,033,876, or $.44 per share of benefit
from net operating loss carryforwards which would have been shown as an
extraordinary item prior to the adoption of FAS 109.
<PAGE>
Independent Auditors' Consent
The Board of Directors and Stockholders of
The Sherwood Group, Inc.:
We consent to the use of our report dated July 31, 1995 incorporated by
reference in Registration Statement No. 33-72790 on Form S-8 filed with the
Securities and Exchange Commission on December 13, 1993.
KPMG Peat Marwick LLP
August 17, 1995
<TABLE> <S> <C>
<PAGE>
<ARTICLE> BD
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS FOR YEAR ENDED MAY 31, 1995 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAY-31-1995
<PERIOD-START> JUN-01-1994
<PERIOD-END> MAY-31-1995
<CASH> 593,473
<RECEIVABLES> 51,918,513
<SECURITIES-RESALE> 0
<SECURITIES-BORROWED> 0
<INSTRUMENTS-OWNED> 41,777,895
<PP&E> 3,861,992
<TOTAL-ASSETS> 113,030,862
<SHORT-TERM> 0
<PAYABLES> 0
<REPOS-SOLD> 0
<SECURITIES-LOANED> 0
<INSTRUMENTS-SOLD> 24,624,955
<LONG-TERM> 0
<COMMON> 143,432
0
0
<OTHER-SE> 65,834,069
<TOTAL-LIABILITY-AND-EQUITY> 113,030,862
<TRADING-REVENUE> 80,387,742
<INTEREST-DIVIDENDS> 3,465,614
<COMMISSIONS> 14,412,331
<INVESTMENT-BANKING-REVENUES> 0
<FEE-REVENUE> 0
<INTEREST-EXPENSE> 50,984
<COMPENSATION> 31,375,322
<INCOME-PRETAX> 18,240,026
<INCOME-PRE-EXTRAORDINARY> 14,614,888
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 14,614,888
<EPS-PRIMARY> 1.07
<EPS-DILUTED> 1.07
</TABLE>
