CONFORMED
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended November 30, 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 number 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
No.)
10 Exchange Place Centre, Jersey City, New Jersey 07302
- -----------------------------------------------------------------
(Address of principal executive offices) (Zip code)
One Exchange Plaza, New York, New York 10006
- -----------------------------------------------------------------
(Former name, former address and former fiscal year, if changed
since last report)
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 the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
12,638,947 shares of Common Stock, par value $.01 per share, were
outstanding on December 31, 1995.
<PAGE>
<TABLE>
THE SHERWOOD GROUP, INC.
AND SUBSIDIARIES
INDEX
<CAPTION>
PAGE
----
<S> <C>
Part I - Financial Information
Item 1. - Financial Statements
Consolidated Statements of Financial Condition
(Unaudited) - November 30, 1995 and May 31, 1995 3 -4
Consolidated Statements of Operations (Unaudited) -
Three Months Ended November 30, 1995 and 1994 5 - 6
Consolidated Statements of Operations (Unaudited) -
Six Months Ended November 30, 1995 and 1994 7 - 8
Consolidated Statements of Cash Flows (Unaudited) -
Six Months Ended November 30, 1995 and 1994 9 - 10
Notes to Consolidated Financial Statements
(Unaudited) - November 30, 1995 11 - 12
Item 2. - Management's Discussion and Analysis of
Financial Condition and Results of
Operations 13 - 16
Part II - Other Information
Item 1. - Legal Proceedings 17
Item 4. - Submission of Matters to a Vote of
Security Holders 17 - 18
Item 6. - Exhibits and Reports on Form 8-K 18
Signatures 19
</TABLE>
<PAGE>
<TABLE>
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
THE SHERWOOD GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<CAPTION>
November 30, May 31,
1995 1995
ASSETS (Unaudited) (Unaudited)
<S> <C> <C>
Cash $ 444,085 $ 593,473
Receivables:
Brokers and dealers 55,892,563 47,802,429
Other 402,021 224,049
Marketable securities owned, at
market value 37,947,298 41,777,895
Investment securities not readily
marketable, at fair value 401,320 401,320
Investment in partnerships 265,792 252,180
Notes receivable 614,685 642,035
Furniture, fixtures and equipment, and
leasehold improvements - at cost, net of
accumulated depreciation and amortization
of $5,557,574 at November 30, 1995 and
$6,608,583 at May 31, 1995 12,658,717 3,861,992
Computer software, net of accumulated
amortization of $393,926 at November 30,
1995 and $322,048 at May 31, 1995 418,013 401,008
Identified intangible assets, net of
accumulated amortization of 1,023,282
at November 30, 1995 and $1,051,386 at
May 31, 1995 3,164,998 3,386,894
Exchange memberships (market value $1,969,500
at November 30, 1995 and $1,560,000 at
May 31, 1995) 1,166,496 1,166,496
Subordinated notes receivable 3,250,000 3,250,000
Other assets 8,695,751 9,271,091
----------- -----------
$ 125,321,739 $ 113,030,862
============ ============
</TABLE>
(Continued)
(3)
<PAGE>
<TABLE>
THE SHERWOOD GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Continued)
<CAPTION>
November 30, May 31,
1995 1995
LIABILITIES AND STOCKHOLDERS' EQUITY (Unaudited) (Unaudited)
<S> <C> <C>
Liabilities:
Securities sold, not yet purchased,
at market value $ 27,123,467 $ 24,624,955
Accounts payable and accrued expenses,
including compensation payable to
officers and employees of $8,368,699
at November 30, 1995 and $8,970,821
at May 31, 1995 16,369,744 14,471,330
Secured demand notes payable 3,250,000 3,250,000
Income taxes payable 1,136,580 1,365,856
Minority interest in Equitrade 3,955,745 3,341,220
------------ ----------
Total liabilities 51,835,536 47,053,361
------------ ----------
Commitments and Contingencies (Note 4)
Stockholders' equity (Note 5)
Preferred stock - $.01 par value;
authorized 1,000,000 shares, none issued - -
Class A common stock - par value $.01
per share; authorized 50,000,000 shares;
none issued - -
Common stock - $.01 par value; authorized
50,000,000 shares, issued 14,343,201
shares at November 30, 1995 and
May 31, 1995 143,432 143,432
Additional paid-in capital 56,500,593 58,134,052
Retained earnings 25,445,463 17,804,212
------------ ----------
82,089,488 76,081,696
Less: Treasury stock - at cost, 1,704,254
shares at November 30, 1995 and
2,033,490 shares at May 31, 1995 (8,603,285) (10,104,195)
------------ -----------
Total stockholders' equity 73,486,203 65,977,501
------------ -----------
$ 125,321,739 $ 113,030,862
============= =============
The accompanying notes are an integral part of these statements.
</TABLE>
(4)
<PAGE>
<TABLE>
THE SHERWOOD GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<CAPTION>
Three Months Ended November 30,
1995 1994
<S> <C> <C>
Revenues:
Firm securities transactions - net $ 26,220,778 $ 17,339,282
Commission income 6,765,317 3,161,306
Equity income in partnerships 17,160 1,034,434
Investment securities gains realized - -
Interest income 1,613,412 710,883
Fee income 388,618 76,022
Other revenues 222,059 160,748
----------- ----------
35,227,344 22,482,675
----------- ----------
Expenses:
Compensation and benefits 10,646,501 6,518,693
Clearing and related charges 13,557,627 7,948,955
Communications 2,756,823 1,588,818
Other expenses 3,959,695 2,813,764
Interest expense 148,140 45
----------- ----------
31,068,786 18,870,275
----------- ----------
Income before minority interest and
income taxes 4,158,558 3,612,400
Income of Equitrade allocated to
minority partners (485,846) -
----------- ----------
Income before income taxes 3,672,712 3,612,400
----------- ----------
Income taxes:
Currently payable:
Federal 365,363 68,239
State and local 133,962 610,432
----------- ---------
499,325 678,671
----------- ---------
Net income $ 3,173,387 $ 2,933,729
============ ===========
(Continued)
</TABLE>
(5)
<PAGE>
<TABLE>
THE SHERWOOD GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Continued)
<CAPTION>
Three Months Ended November 30,
1995 1994
<S> <C> <C>
Income per common and common
equivalent share (a):<F1>
Net income $ 0.24 $ 0.21
=========== ==========
Weighted average common shares outstanding 13,425,900 13,745,987
=========== ==========
<FN>
<F1>(a) For presentation purposes, primary and fully diluted are
identical.
</FN>
</TABLE>
The accompanying notes are an integral part of these statements.
(6)
<PAGE>
<TABLE>
THE SHERWOOD GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Six Months Ended November 30,
1995 1994
<CAPTION>
<S> <C> <C>
Revenues:
Firm securities transactions - net $ 58,004,618 $ 35,631,209
Commission income 13,000,745 5,510,008
Equity income (loss) in partnerships 13,612 2,295,754
Investment securities gains realized - 76,375
Interest income 3,050,908 1,341,899
Fee income 619,605 110,094
Other revenues 400,562 299,487
------------- ----------
75,090,050 45,264,826
------------- ----------
Expenses:
Compensation and benefits 22,690,276 13,645,644
Clearing and related charges 27,509,223 15,273,171
Communications 5,067,978 2,986,688
Other expenses 7,389,011 6,174,164
Interest expense 299,664 9,435
----------- ----------
62,956,152 38,089,102
----------- ----------
Income before minority interest and
income taxes 12,133,898 7,175,724
Income of Equitrade allocated to
minority partners (1,287,392) -
----------- ----------
Income before income taxes 10,846,506 7,175,724
----------- ----------
Income taxes:
Currently payable:
Federal 2,161,476 136,841
State and local 1,043,779 1,046,951
---------- ---------
3,205,255 1,183,792
---------- ----------
Net income $ 7,641,251 $ 5,991,932
=========== ===========
</TABLE>
(Continued)
(7)
<PAGE>
<TABLE>
THE SHERWOOD GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Continued)
Six Months Ended November 30,
<CAPTION> 1995 1994
<S> <C> <C>
Income per common and common
equivalent share (a):<F1>
Net income $ 0.57 $ 0.44
=========== ==========
Weighted average common shares outstanding 13,325,472 13,753,025
=========== ==========
<FN>
<F1>(a) For presentation purposes, primary and fully diluted are identical.
</FN>
</TABLE>
The accompanying notes are an integral part of these statements.
(8)
<PAGE>
<TABLE>
THE SHERWOOD GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended November 30,
1995 1994
<CAPTION>
<S> <C> <C>
Cash flows from operating activities:
Net income $ 7,641,251 $ 5,991,932
------------ -----------
Non-cash items included in net income:
Equity income in partnerships (13,612) (2,295,754)
Depreciation and amortization 1,214,186 844,981
Gain on sales of investment
securities not readily marketable - (76,375)
Income of Equitrade allocated to minority
partners 1,287,392 -
----------- -----------
2,487,966 (1,527,148)
----------- -----------
(Increase) decrease in operating assets:
Receivables:
Brokers and dealers (8,090,134) 13,316,334
Other (177,972) (84,394)
Marketable securities owned, at
market value 3,830,597 (16,359,295)
Other assets 575,340 (112,635)
---------- -----------
(3,862,169) (3,239,990)
---------- -----------
Increase (decrease) in operating liabilities:
Securities sold, not yet purchased, at
market value 2,498,512 1,615,674
Accounts payable and accrued expenses 1,729,219 (2,553,185)
Income taxes payable (229,276) 436,355
---------- ----------
3,998,455 (501,156)
---------- ---------
Net cash provided by operating
activities 10,265,503 723,638
---------- ---------
</TABLE>
(Continued)
(9)
<PAGE>
<TABLE>
THE SHERWOOD GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Continued)
Six Months Ended November 30,
1995 1994
<CAPTION>
<S> <C> <C>
Cash flows from investing activities:
Proceeds from sales of investment
securities not readily marketable - 99,575
Loans made (18,275) (242,500)
Principal collected on notes receivable 45,625 134,232
Purchases of furniture, fixtures and
equipment, and leasehold improvements (9,717,137) (588,148)
Purchases of computer software (88,883) (1,818)
----------- ---------
Net cash used in investing activities (9,778,670) (598,659)
----------- ---------
Cash flows from financing activities:
Purchase of treasury stock (298,354) (346,441)
Proceeds from exercise of options 335,000 -
Capital withdrawals by minority interest (672,867) -
--------- ---------
Net cash provided by used in
financing activities (636,221) (346,441)
---------- ---------
Net increase (decrease) in cash (149,388) (221,462)
Cash at beginning of period 593,473 474,733
---------- ---------
Cash at end of period $ 444,085 $ 253,271
=========== ==========
</TABLE>
Supplemental disclosure of non-cash financing activities:
During November 1995, certain officers of the Company exercised an
aggregate of 60,000 options for the purchase of 60,000 shares of the
Company's common stock with an exercise price of $1 per share. In
order to pay for the exercise price and to reimburse the Company for
the income taxes ($169,195) on the gain related to the transaction, the
officers remitted to the Company 28,876 shares of the Company's common
stock with a market value of $229,195.
The accompanying notes are an integral part of these statements.
(10)
<PAGE>
THE SHERWOOD GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
November 30, 1995
Note 1 - Business and organization
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"). National
Discount Brokers ("NDB"), another registered broker-dealer, is a
division of the Company's wholly owned subsidiary, Triak Services
Corp. The Company has a 60% special limited partnership interest
in Equitrade Partners ("Equitrade"), which is a specialist for
securities listed on The New York Stock Exchange. In addition,
Sherwood Securities is a specialist for securities listed on the
American Stock Exchange.
Note 2 - Basis of presentation
The accompanying unaudited consolidated financial statements
do not include all of the information and notes required by
generally accepted accounting principles for complete
consolidated financial statements. In the opinion of management,
all adjustments considered necessary for a fair presentation of
consolidated financial condition and results of operations for
the periods presented have been included. All adjustments are of
a normal and recurring nature. It is suggested that these
consolidated financial statements be read in conjunction with the
consolidated financial statements and the related notes included
in the Company's 1995 Annual Report on Form 10-K. Certain prior
year amounts have been reclassified to conform with the six and
three months ended November 30, 1995 presentations.
Note 3 - Net income per common share
Net income per common share is computed using the weighted
average number of shares of common stock and common stock
equivalents outstanding. Common stock equivalents include stock
issuable under stock options. The treasury stock method of
accounting was used in computing the common stock equivalents for
the computation of earnings per common share.
Note 4 - Commitments and contingencies
The Company has been named as a defendant in lawsuits and as
a party to arbitrations that allege violations of Federal and state
securities and related laws. Management 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.
(11)
<PAGE>
THE SHERWOOD GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
November 30, 1995
Note 5 - Net capital requirements
As registered broker-dealers, Sherwood Securities, NDB and
Equitrade are subject to the Securities and Exchange Commission
Uniform Net Capital Rule 15c3-1 (the "Rule"). As of November 30,
1995, the net capital of Sherwood Securities, NDB and Equitrade
exceeded their required net capital by $24,636,000, $5,383,000
and $18,515,000, respectively.
The Rule also provides that the equity capital may not be
withdrawn or cash dividends be paid if the resulting net capital
of a broker-dealer would be less than the amount required under
the Rule. Accordingly, at November 30, 1995, the payment of
dividends and advances to the Company by Sherwood Securities, NDB
and Equitrade is limited to $24,436,000, $5,333,000 and
$18,465,000, respectively, under the most restrictive of these
requirements. The SEC may, by order, restrict the withdrawal of
equity capital on a net basis if the SEC determines that such
withdrawal would be detrimental to the financial integrity of the
broker-dealer or the financial community.
(12)
<PAGE>
Item - 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
- ---------------------
The results of the Sherwood Group, Inc. and subsidiaries
(the "Company") for the three months and six months ended
November 30, 1995 reflect primarily the activities of Sherwood
Securities Corp. ("Sherwood Securities"), National Discount
Brokers ("NDB"), a division of the Company's subsidiary, Triak
Services Corp. ("Triak") and Equitrade Partners ("Equitrade").
Sherwood Securities is primarily engaged in the securities
business as a wholesale market maker in NASDAQ/OTC securities.
NDB is a deep discount retail brokerage firm and Equitrade is a
registered specialist in equity securities on the New York Stock
Exchange. Prior to March 1995, the Company's investment in
Equitrade was accounted for on an equity basis with the Company's
share of Equitrade's net income included in equity income (loss)
in partnerships in the statement of operations. Subsequent to
March 1995, Equitrade's total revenue and expenses have been
consolidated with the share of Equitrade's net income
attributable to minority partners reflected in the statement of
operations as income of Equitrade allocated to minority partners.
The Company's consolidated net income for the three months
ended November 30, 1995 was $3,173,000 compared to $2,934,000 for
the three months ended November 30, 1994. For the quarter ended
November 30, 1995, the principal subsidiaries, Sherwood
Securities, Triak and Equitrade (which was not consolidated in
1994) had net income of $1,395,000, $472,000 and $1,344,000,
respectively, compared to net income of $3,729,000, $(716,000)
and $1,595,000 for the quarter ended November 30, 1994,
respectively. The Company's consolidated net income for the six
months ended November 30, 1995 was $7,641,000 compared to
$5,992,000 for the six months ended November 30, 1994. For the
six months ended November 30, 1995, Sherwood Securities, Triak
and Equitrade (not consolidated in 1994) had net income of
$4,366,000, $1,283,000 and $3,548,000, respectively, compared to
net income of $8,334,000, $(2,409,000) and $3,535,000,
respectively, for the six months ended November 30, 1994.
Total revenue for the Company increased by approximately
$12,745,000, or 57%, for the three months ended November 30, 1995
and $29,825,000, or 66%, for the six months ended November 30,
1995 as compared with the previous year's respective periods.
Revenue from firm securities transactions for Sherwood
Securities increased approximately $5,625,000, or 32%, and
$14,935,000, or 42%, for the three and six month periods ended
November 30, 1995, respectively, when compared to the prior year.
Sherwood Securities' overall trading volume increased approximately
66% and 80% for the same periods, respectively. Several factors
contributed to this decrease in trading profits per ticket.
Regulatory changes enacted by the Securities and Exchange Commission
("SEC") and the National Association of Securities Dealers have
caused an increase in the number of transactions executed on an
"even" basis. Tightened spreads between "bid" and "ask" prices,
(13)
<PAGE>
increased volatility in the marketplace, capacity constraints and
increased Small Order Execution Systems ("SOES") activity have also
been factors in the decrease in trading profits per ticket for both
the three and six month periods ended November 30, 1995. Equitrade's
revenues from firm transactions, included in total revenues for the
three and six months ended November 30, 1995, approximated $3,257,000
and $7,439,000, respectively.
The Company's commission income, primarily generated by NDB,
increased by approximately $3,604,000, or 114%, and $7,491,000, or
136%, for the three and six months ended November 30, 1995,
respectively, when compared with the prior year. The increase is due
to the fact that NDB's volume of transactions increased by 148% and
193% for the three and six months ended November 30, 1995,
respectively, when compared with the previous year, which was NDB's
first full year of operations.
Prior to March 1995 when the Company began to account for
Equitrade on a consolidated basis, the primary portion of equity
income in partnerships was equity income from Equitrade. Of total
Equitrade net income of $1,595,000 and $3,535,000 for the three and
six months ended November 30, 1994, respectively, the Company's
share was $1,037,000 and $2,281,000, respectively.
There were no investment securities transactions for the three
or six months ended November 30, 1995 or for the three months ended
November 30, 1994. Gains on sales of investment securities
aggregated $76,000 for the six months ended November 30, 1994
resulting entirely from the sale of 11,600 shares of Network Imaging
Corp. (IMGX) during June 1994 and July 1994.
Interest income increased by approximately $903,000, or 127%,
and $1,709,000, or 127%, for the three and six months ended November
30, 1995, respectively, as compared to the previous year. The
increase is due to a significant rise in NDB's customer debit and
credit balances held with our clearing broker and an increase in the
agreed upon rate used to compute interest earned on such customer
balances. Also contributing to the increase were the availability of
larger amounts of cash for investment and higher market interest
rates than in the prior year.
Fee income increased by $313,000 and $510,000 for the three and
six months ended November 30, 1995, respectively, as compared to the
prior year. The increase is due to larger 12b-1 fees received from
mutual funds as NDB's customers' balances in those funds have
increased since the prior year.
Total expenses for the three months ended November 30, 1995
increased approximately $12,199,000, or 65%, from $18,870,000 in 1994
to $31,069,000 in 1995. Total expenses for the six months ended
November 30, 1995 increased approximately $24,867,000, or 65%, from
$38,089,000 in 1994 to $62,956,000 in 1995. The reasons for the
increase in expenses are set forth below.
Compensation and benefits increased $4,128,000, or 63%, and
$9,044,000, or 66%, for the three and six month periods ended
November 30, 1995, respectively, compared with the prior year. The
(14)
<PAGE>
increase is due primarily to higher commissions paid to traders and
salespeople because of higher trading profits and an increase in
office salaries and related benefits due principally to NDB's larger
staff size as of November 30, 1995 than in the prior year. Also,
higher bonuses were accrued as a result of higher overall profits of
the Company as compared to the prior year. Finally, compensation
and benefits of Equitrade included in the consolidated results for the
three and six months ended November 30, 1995 aggregated $975,000 and
$1,978,000, respectively.
Clearing and related charges increased by approximately
$5,609,000, or 71%, and $12,236,000, or 80%, for the three month and
six month periods ended November 30, 1995, as compared to the prior
year. The increase was principally due to the operations of NDB for
which clearance charges amounted to approximately $3,430,000 and
$6,584,000 for the three and six months ended November 30, 1995,
respectively, compared to $1,681,000 and $2,869,000 for the three and
six months ended November 30, 1994. In addition, the increased
volume of Sherwood Securities' trading activity led to increases in
both clearance charges and payments made to correspondents for order
flow.
Communications expense increased by $1,168,000, or 74%, and
$2,081,000, or 70%, for the three and six months ended November 30,
1995 as compared to the previous year. The increase was
mainly due to an increase in the activities of NDB, namely telephone
and quotations expense.
Other expenses increased by approximately $1,145,000, or 41%,
and $1,215,000, or 20%, for the three and six months ended November
30, 1995, respectively, as compared to the prior year. The increase
was due, specifically, to increases in professional fees, occupancy
costs, registration fees and depreciation and amortization expense
and, generally, to the overall increase in the volume of business and
an increase in staff size. Offsetting these increases was a large
reduction in advertising expenditures made in connection with NDB.
Corresponding to the commencement of NDB's operations, the Company
ran an extensive media campaign through September 1994 at which time
the amount and frequency of advertising lessened significantly.
Interest expense increased by approximately $148,000 and
$290,000 for the three and six months ended November 30, 1995 as
compared to the previous year due to the operations of Equitrade.
Liquidity
- ---------
The Company's tangible assets are highly liquid with more than
76% of these tangible assets consisting of cash or assets readily
convertible into cash. The Company's operations have generally been
financed by internally generated funds. In addition, margin account
borrowings are available to the Company from its clearing brokers.
The Company's broker-dealer entities, 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 broker-dealers. As of November 30, 1995, Sherwood
(15)
<PAGE>
Securities, NDB and Equitrade had approximately $24,636,000,
$5,383,000 and $18,515,000, respectively, in excess of the required
minimum net capital. 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 will vary on a daily basis as the
Company's portfolio of marketable securities changes. The Company's
ability to convert marketable securities owned into cash 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 operations of an American Stock Exchange Specialist book
continue to be funded by the income generated by the book.
Cash flows from the Company's investment activities are directly
related to market conditions.
During the six months ended November 30, 1995, the Company
repurchased 36,888 additional shares in connection with its December
1992 plan to 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. As of November 30, 1995, 818,306 shares had
been acquired. The source of funds for these purchases were
internally generated. In addition to the above purchases, during the
six months ended November 30, 1995, the Company acquired 28,876
shares of common stock which were tendered by officers of the Company
to exercise stock options and to pay related income taxes.
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 compensation, rent and communication, which may not be
readily recoverable from increased revenues. Because of 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 on which interest is paid
which, in the event there are higher interest rates which normally
result from inflation, would offset some of the costs.
(16)
<PAGE>
PART II - OTHER INFORMATION
Item 1 - LEGAL PROCEEDINGS
The Company reported in its Form 10-K for the year ended May
31, 1995 that certain class action complaints, Charles Kaye and
Sulochana Dessi, et al. v. Herzog, Heine, Geduld, et al. (United
States District Court for the Southern District of 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. Subsequent to May 27, 1994, several additional class
action complaints were filed which contained the same or similar
allegations and request similar relief.
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).
A Second Amended Complaint was filed on August 22, 1995. The Second
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. Plaintiffs have also now
limited their claims to approximately 1,659 stocks traded on NASDAQ.
On December 18, 1995, Sherwood Securities filed an answer to the
Second Amended Complaint denying liability and asserting certain
affirmative defenses. The Company intends to vigorously defend
itself against these allegations.
Item 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Company held an Annual Meeting of its Stockholders
on October 24, 1995.
(b) (i) The following persons were elected directors for a
term of three years:
<TABLE>
Votes Votes
<CAPTION> For Withheld
<S> <C> <C>
Arthur Kontos 12,022,059 29,550
Richard J. Marino 12,023,259 28,350
Ralph N. Del Deo 12,023,259 28,350
The following persons continued as directors:
James H. Lynch, Jr., Dennis Marino, Carl H.
Hewitt, John Duffy and Thomas Neumann.
</TABLE>
(ii) The shareholders ratified the adoption of the
Company's 1995 Stock Option Plan. The following
was the shareholder vote on this matter:
(17)
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
For: 7,970,516
Against: 526,610
Abstain: 105,830
Broker Non-Vote: 3,448,653
</TABLE>
(iii) The shareholders ratified the Employment Agreement
dated as of September 12, 1995 between the Company
and Arthur Kontos and the performance goals adopted
by the Employment Agreement Committee and the Board
of Directors with respect thereto. The following
was the shareholder vote on this matter:
<TABLE>
<CAPTION>
<S> <C>
For: 8,417,426
Against: 131,025
Abstain: 78,280
Broker Non-Vote: 3,424,877
</TABLE>
(iv) The shareholders ratified the appointment of KPMG
Peat Marwick LLP as the Company's independent
auditors for the fiscal year ending May 31, 1996.
The following was the shareholder vote on this
matter:
<TABLE>
<CAPTION>
<S> <C>
For: 12,026,978
Against: 16,351
Abstain: 8,280
Broker Non-Vote: 0
</TABLE>
Item 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit 10.1 - Employment Agreement dated as of
September 12, 1995 by and between Arthur Kontos
and the Company
Exhibit 10.2 - Letter of Arthur Kontos exercising his
option under Employment Agreement
Exhibit 11 - Computation of Earnings Per Share
(b) The Company filed one report on Form 8-K dated
September 18, 1995 during the quarter ended
November 30, 1995 respecting Item 5, Other Events
Regarding Certain Indemnification Agreements
(18)
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
The Sherwood Group, Inc.
------------------------
Date: January 10, 1996 By: Dennis Marino
---------------------- ------------------------
Dennis Marino
(Executive Vice President
and Chief Administrative
Officer)
Date: January 10, 1996 By: Denise Isaac
---------------------- ------------------------
Denise Isaac
Chief Financial Officer
(19)
Exhibit 10.1
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT, dated September 12, 1995, between THE
SHERWOOD GROUP, INC., a Delaware corporation (the "Company"), having its
principal office at One Exchange Plaza, New York, New York, and Arthur Kontos
(the "Executive"), residing at 715 Park Avenue, Apt. 18-B, New York,
New York 10021.
The Company desires to obtain the services of the Executive,
and the Executive desires to be employed by the Company, as Vice
Chairman of the Board, President and Chief Executive Officer of
the Company and certain of its subsidiaries.
In consideration of the premises and of the mutual covenants
and agreements herein contained, the parties hereto do hereby
agree as follows:
1. Term of Employment.
1.1. The Executive's "term of employment," as this
phrase is used throughout this Agreement, shall be for a period
beginning as of June 1, 1995 and ending on May 31, 1996.
1.2. The Executive shall have the option to extend the
term of employment under this Agreement for one additional year
from June 1, 1996 until May 31, 1997. The following conditions
shall apply to the Executive's right to extend the term of
employment pursuant to this Paragraph 1.2:
(i) the option to extend the terms of employment
may be exercised at any time prior to January 1, 1996 by
delivering to the Company a written notice which refers to this
Agreement and states that the Executive, by his delivery of such
notice, is exercising his right to extend the term of employment
under this Agreement. The delivery of such notice shall
<PAGE>
constitute an irrevocable exercise of this extension, which
exercise cannot be revoked without the prior written consent of
the Board of Directors of the Company.
(ii) In no event shall the Company be required to
extend the term of employment pursuant to this Paragraph 1.2
unless as of May 31, 1996, this Agreement shall be in full force
and effect and the Company shall not have the right to terminate
this Agreement in accordance with its terms.
(iii) In no event shall the Company be required to
extend the term of employment under this Agreement if as of May
31, 1996, the Executive shall have exercised any right he may
have to terminate this Agreement or the Executive shall have
received or be entitled to receive any payments as a result of a
Change in Control.
2. Employment. The Company shall employ the Executive as
Vice Chairman of the Board, President and Chief Executive Officer
of the Company and certain of its subsidiaries as determined by
the Board of Directors of the Company. The Executive accepts
such employment and agrees that through his term of employment he
will devote substantially all his business time, attention,
knowledge, and skills to the business of the Company and its
subsidiaries. The services of the Executive shall in all
respects be subject to the reasonable direction of the Board of
Directors of the Company.
3. Base Salary During Full-Time Employment. From and after
the date hereof, the Company shall pay or cause to be paid to the
Executive during the term of employment a base salary at a rate
equal to $300,000 per year. Such salary shall be paid in
accordance with the Company's regular payroll practices
<PAGE>
4. Bonus
4.1. The Executive shall receive as additional
compensation a bonus (the "Bonus") based on the Company's
"Income" (as hereinafter defined) with respect to each May 31
fiscal year of the Company during the term of employment. The
Bonus shall be calculated as follows: ten percent of the
Company's first $5 million of Income during the fiscal year; 15
percent of the Company's next $8 million of Income during the
fiscal year; and 18 percent of the Company's Income over $13
million during the fiscal year. In the event that the
Executive's employment were to terminate prior to the end of a
fiscal year, the Bonus to the Executive for such partial fiscal
year shall be calculated on a pro rata basis as to the portion of
the fiscal year in which the Executive was employed hereunder;
such pro rata portion to be calculated on the basis of the
Company's Income during the portion of the fiscal year prior to
such termination with the dollar amounts of the Company's Income
to be adjusted on a pro rata basis. The Company's obligation as
to any unpaid Bonus shall survive termination of this Agreement.
4.2. As used in this Agreement, "Income" shall refer
to the Company's consolidated pre-tax net income during any
fiscal year in which this Agreement is in effect without any
deductions for amounts payable as Bonus hereunder or related
accruals.
4.3. On or prior to the 75th day after the end of a
fiscal year (or such other date a determination of Bonus is to be
made in the event of termination of this Agreement prior to the
end of a fiscal year), the Company's independent public
accountants shall deliver their written determination of the
amount of Income for such fiscal year to the Company. The public
accountants' determination of the foregoing shall be made in
accordance with generally accepted accounting principles
<PAGE>
consistently applied which, in the case of any subsidiary of the
Company engaged in the business as a broker-dealer shall be such
generally accepted accounting principles in common use in the
securities brokerage industry. The determination of the public
accountants shall be conclusive and shall be certified by the
Employment Agreement Committee of the Company's Board of
Directors.
4.4. The Company shall each month of a fiscal year pay
to the Executive as an advance against the Bonus for such fiscal
year an amount equal to one half of the aggregate Bonus accrued
for such fiscal year through the last day of the month
immediately preceding the month in which such payment is to be
made less all amounts previously paid as a Bonus advance to the
Executive for such fiscal year pursuant to this Paragraph 4.4;
provided that the Company shall not be obligated to pay a Bonus
advance during any month if the Company' s Income through the end
of the preceding month of the fiscal year has averaged less than
$250,000 per month. In determining the aggregate Bonus accrual,
the dollar amounts of the Company's Income shall be calculated on
a pro rata basis.
5. Expenses. The Company shall also reimburse the
Executive for all expenses incurred by the Executive in
connection with the performance of his duties and the discharge
of his responsibilities hereunder, including all legal fees and
other costs incurred by the Executive in enforcing (whether by
adjudication or settlement) his rights hereunder in the event of
a breach of this Agreement by the Company.
6. Termination.
6.1. Voluntary. Executive may terminate this
Agreement for any reason upon 30 days prior written notice to the
Company; provided, however, that such 30-day notice shall not be
<PAGE>
required for a voluntary termination by the Executive in
connection with, or within one year after, a Change in Control of
the Company, as defined in Paragraph 6.4 hereof.
6.2. Termination For Cause. The Company may terminate
this Agreement, and all of its obligations hereunder (other than
payment obligations that have accrued prior to such termination),
for cause if and only if during the term of employment (i) the
Executive has engaged in fraudulent or illegal conduct to the
material detriment of the Company or (ii) the Executive has
engaged in practices to the material detriment of the Company,
which constitute a substantial disregard for his responsibilities
as an employee of the Company. The Company shall have the burden
to establish by clear and preponderance of evidence that cause
exists. In the event the Company terminates this Agreement
without cause as described above, the Executive shall be entitled
to receive as liquidated damages an amount equal to the amount of
liquidated damages he would have been entitled to receive for a
termination of employment in connection with a Change in Control
as provided in Paragraph 6.4 hereof.
6.3. Termination by Death or Disability. If the
Executive dies during the term of employment or if, during the
term of employment, the Executive becomes disabled so that he is
unable substantially to perform his services hereunder (i) for a
period of six consecutive months, or (ii) for an aggregate of
nine months within any period of 18 consecutive months, this
Agreement and the Company's obligations hereunder shall
terminate. Prior to such termination, the Executive shall
continue to receive the compensation provided for in Paragraphs 3
and 4.
6.4. Termination by Reason of Change of Control.
In the event that a Change in Control of the Company occurs
during the term of this Agreement, and in connection with such
Change in Control or within one year thereafter, the Executive's
<PAGE>
employment with the Company is terminated either voluntarily or
involuntarily, the Executive shall be entitled to receive as
liquidated damages an amount equal to three times his average
compensation (including base salary, Bonus, and any other
compensation) from the Company and its subsidiaries, as reported
for federal income tax purposes by the Executive, for the five
calendar year period preceding such termination (or such shorter
period of time in the event such employment with the Company and
its subsidiaries has been less than five years), less $1.00. A
Change in Control shall be deemed to have occurred in the event
that any person (other than the Executive or persons under his
control) or group acting in concert acquires beneficial ownership
of more than 50 percent of the outstanding voting stock of the
Company or options or convertible or exchangeable securities or
other rights to acquire more than 50 percent of such voting
stock, if the control so acquired is exercised in any manner
(including, but not limited to, any change in the composition of
the Company' s Board of Directors or any attempt to influence or
change the policies of such Board). Notwithstanding the
foregoing, the liquidated damages to be paid to the Executive
shall be reduced to the extent necessary so as not to constitute
a parachute payment under Section 280G(b)(2) of the Internal
Revenue Code, as then in effect.
7. Additional Benefits. During the term of employment, the
Executive, in addition to the compensation provided in Paragraphs
3 and 4 hereof, will be entitled to participate in any insurance
(other than key man insurance), health plans, pension, profit-
sharing, stock purchase, or other benefit plans of the Company
now existing or hereafter adopted for the benefit of its
employees generally or of the executives of the Company;
provided, that where the participation and the extent of
participation by an employee or executive of the Company in any
such plans are dependent upon the discretion of the Company, then
the participation, if any, and the extent of such participation
<PAGE>
of the Executive shall be subject in all respects to the
reasonable determination of the Board of Directors of the
Company. Furthermore, the Executive shall be entitled to such
additional benefits as may be granted to him from time to time by
the Board of Directors of the Company. The Executive shall also
be entitled to reasonable vacations.
8. Restrictions.
8.1. The following provisions shall be applicable
during the term of this Agreement, irrespective of whether
Executive is an employee of the Company, except as provided in
Paragraph 8.1.4. hereof:
8.1.1. Non-Competition. Executive will not, in
any geographic area within a 30-mile radius of any sales
office operated by the Company at the time of termination or
within 24 months prior thereto, directly or indirectly, in any
capacity whatever, compete with the activities of the Company's
sales offices or otherwise engage in the retail brokerage
industry as owner, financier, five percent stockholder, partner,
sole proprietor, joint venturer, or otherwise manage, operate,
control, assist, participate in, be connected with, or render any
consultation or business advice with respect to, any businesses
engaged in the wholesale market-making of securities or any
businesses that compete with activities conducted by the sales
offices of the Company, except with the approval of the Company's
Board of Directors. The parties agree that the foregoing
territorial and time limitations are reasonable, and that in the
event that any such territorial or time limitation is deemed to
be unreasonable by a court of competent jurisdiction, Executive
agrees and submits to the reduction of either said territorial or
time limitation, or both, to such an area or a period of time as
said court shall deem reasonable.
<PAGE>
8.1.2. Cconfidentiality. Except as may be required by
applicable law or pursuant to a subpoena issued pursuant to a
governmental investigation or other legal process, Executive
shall not divulge to any person who is not an officer, director,
shareholder, employee, or agent of the Company or any subsidiary
any information of a privileged or confidential nature not
otherwise disclosed which shall have come to his attention by
virtue of his employment by or association with the Company or
any subsidiary.
8.1.3. No Solicitation. Except with the prior consent
of the Company, Executive will not, either for his own account or
any other person directly or in conjunction with or through any
person, hire, solicit, or entice away from the Company or any
subsidiary any officer, manager, employee, consultant, or
registered account executive who is employed or rendering
services to the Company or any subsidiary or had been employed or
rendered services within six months prior to such solicitation,
whether or not such person would thereby commit a breach of his
contract of employment of services with the Company or any
subsidiary.
8.1.4. Inapplicability Restrictions. Paragraphs 8.1.1
and 8.1.3 hereof shall not apply in the event that the employment
of the Executive is terminated without cause as set forth in
Section 6.2 hereof or is terminated voluntarily or involuntarily
in connection with or within one year after a Change in Control
of the Company, as defined in Section 6.4 hereof.
8.1.5. Injunctive Relief. The parties do hereby
acknowledge that money damages alone would not adequately
compensate the Company in the event of a breach by the Executive
of the foregoing provisions and, therefore, Executive does hereby
covenant and agree that, in addition to all other remedies
available to the Company at law or in equity, the Company shall
<PAGE>
be entitled to injunctive relief for the enforcement thereof
without the necessity of proving actual damages.
8.1.6. NASD Arbitration. The parties agree to submit
any dispute concerning the terms of this Agreement, or the
performance of their obligations hereunder, to binding
arbitration by the National Association of Securities Dealers,
Inc. The cost of such arbitration shall be paid equally by the
Company and the Executive unless otherwise allocated in the
arbitration.
9. Notices. All notices, requests, consents, demands, and
other communications, required or permitted to be given
hereunder, shall be in writing and shall be deemed to have been
duly given on the date of personal delivery thereof, or, if sent
by prepaid, registered, overnight courier service, or certified
mail, on the date of deposit in the United States mail or
delivery to the courier service addressed to the parties hereto
at the addresses set forth at the beginning of this Agreement (or
to such other or additional address or to the attention of
additional parties which any party shall designate by notice in
writing to the other in accordance herewith).
10. General
10.1. Governing Law. This Agreement shall be governed
by and construed and enforced in accordance with the laws of the
State of New York applicable to agreements made and to be
performed entirely in New York.
10.2. Captions. The paragraph headings contained
herein are for reference purposes only and shall not in any way
affect the meaning or interpretation of this Agreement.
10.3. Entire Agreement. This Agreement sets forth the entire
agreement and understanding of the parties relating to the
subject matter hereof, and supersedes all prior agreements,
arrangements, and understandings, written or oral, between the
parties.
<PAGE>
10.4. No Other Representations. No representation,
promise or inducement has been made by either party that is not
embodied in this Agreement, and neither party shall be bound by
or liable for any alleged representation, promise, or inducement
not so set forth.
10.5. Amendments/Waivers. This Agreement may be
amended, modified, superseded, cancelled, renewed, or extended
and the terms of covenants hereof may be waived, only by a
written instrument executed by both of the parties hereto or in
the case of a waiver, by the party waiving compliance. The
failure of either party at any time or times to require
performance of any provision hereto shall in no manner affect the
right at a later time to enforce the same. No waiver by either
party of the breach of any term of covenant contained in this
Agreement, whether by conduct or otherwise, in any one or more
instances, shall be deemed to be, or construed as, a further or
continuing waiver of any such breach, or a waiver of a breach of
any other term or covenant contained in this Agreement.
10.6. Effective Date; Condition to Effectiveness.
This Agreement shall not be effective and binding on the Company
or the Executive unless it shall be approved by the shareholders
of the Company. The Company agrees to submit this Agreement to
the shareholders of the Company promptly after execution thereof.
If the shareholders do not approve this Agreement it shall be
null and void. If this Agreement is approved by shareholders
this Agreement shall be deemed to be in effect on June 1, 1995
for all purposes. By execution of this Agreement, the Executive
and the Company hereby terminate as of the date of the meeting of
shareholders to consider this Agreement, the First Employment
Agreement as such term is defined in that certain Letter
Agreement between the Company and the Executive dated September
15, 1993 and such Letter Agreement. In no event shall the
<PAGE>
Executive be entitled to payments with respect to the period June
1, 1995 until the date of said meeting of shareholder's under
both this Agreement and the First Employment Agreement.
IN WITNESS WHEREOF, THE SHERWOOD GROUP, INC. and the
Executive have duly executed this Agreement as of the date first
above written.
EXECUTIVE THE SHERWOOD GROUP, INC.
By: By:
Arthur Kontos Chairman
Exhibit10.2
The Sherwood Group, Inc.
10 Exchange Place Centre
Jersey City, NJ 07302
December 19, 1995
The Sherwood Group, Inc.
Attention: Mr. James H. Lynch, Jr.
Chairman of the Board of Directors
10 Exchange Place Centre
Jersey City, NJ 07302-3913
Dear Mr. Lynch:
This letter shall serve to confirm in writing that I
hereby choose to exercise The Second Option of the First
Employment Agreement between The Sherwood Group, Inc.
and myself. Kindly acknowledge your receipt and acceptance.
Very truly yours,
Arthur Kontos
THE SHERWOOD GROUP, INC EXHIBIT 11
AND SUBSIDIARIES
COMPUTATION OF NET INCOME PER COMMON SHARE
<TABLE>
Three Months Ended November 30,
1995 1994
<CAPTION>
<S> <C> <C>
Common stock and common stock equivalents:
Average common stock outstanding 12,602,174 12,616,433
Average common stock equivalents
issuable under stock options 823,726 1,129,554
---------- ----------
Total average common stock and common
stock equivalents used for earnings per
share computation 13,425,900 13,745,987
========== ==========
Income:
Net income $ 3,173,387 $ 2,933,729
============ ============
Income per common and common
equivalent share (a):<F1>
Net income $ 0.24 $ 0.21
============ ===========
<FN>
<F1>(a) For presentation purposes, primary and fully diluted are identical.
</FN>
<PAGE>
THE SHERWOOD GROUP, INC. EXHIBIT 11
AND SUBSIDIARIES
COMPUTATION OF NET INCOME PER COMMON SHARE
</TABLE>
<TABLE>
Six Months Ended November 30,
1995 1994
<CAPTION>
<S> <C> <C>
Common stock and common stock equivalents:
Average common stock outstanding 12,502,958 12,625,854
Average common stock equivalents
issuable under stock options 822,514 1,127,171
---------- -----------
Total average common stock and common
stock equivalents used for earnings per
share computation 13,325,472 13,753,025
========== ==========
Income:
Net income $ 7,641,251 $ 5,991,932
============ ============
Income per common and common
equivalent share (a):<F1>
Net income $ 0.57 $ 0.44
=========== ===========
<FN>
<F1>(a) For presentation purposes, primary and fully diluted are identical.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> BD
<CIK> 0000811917
<NAME> THE SHERWOOD GROUP, INC.
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAY-31-1996
<PERIOD-END> NOV-30-1995
<CASH> 444,085
<RECEIVABLES> 60,159,269
<SECURITIES-RESALE> 0
<SECURITIES-BORROWED> 0
<INSTRUMENTS-OWNED> 37,947,298
<PP&E> 12,658,717
<TOTAL-ASSETS> 125,321,739
<SHORT-TERM> 0
<PAYABLES> 20,756,324
<REPOS-SOLD> 0
<SECURITIES-LOANED> 0
<INSTRUMENTS-SOLD> 27,123,467
<LONG-TERM> 0
<COMMON> 143,432
0
0
<OTHER-SE> 73,342,771
<TOTAL-LIABILITY-AND-EQUITY> 125,321,739
<TRADING-REVENUE> 58,004,618
<INTEREST-DIVIDENDS> 3,050,908
<COMMISSIONS> 13,000,745
<INVESTMENT-BANKING-REVENUES> 0
<FEE-REVENUE> 619,605
<INTEREST-EXPENSE> 299,664
<COMPENSATION> 22,690,276
<INCOME-PRETAX> 10,846,506
<INCOME-PRE-EXTRAORDINARY> 10,846,506
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,641,251
<EPS-PRIMARY> 0.57
<EPS-DILUTED> 0.57
</TABLE>
