<PAGE>
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, 1996
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)
10 Exchange Place Centre, Jersey 07302
City, New Jersey
(Address of principal executive (Zip Code)
offices)
Registrant's telephone number, including area code (201) 946-2200
Securities registered pursuant to Section 12(b) of the Act:
Name of each
Title of each class exchange
on which registered
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, 1996, 13,017,161 common shares were outstanding,
and the aggregate market value of the common shares of The
Sherwood Group, Inc. held by non-affiliates was approximately
$59,093,775.
Documents Incorporated By Reference
Document Incorporated Part of Report
By Reference Into Which Incorporated
Proxy Statement for Annual Meeting Part III
to be held October 22, 1996
Item 1. Business
Introduction
The Sherwood Group, Inc. (the "Company") is a holding company
whose principal wholly owned subsidiaries are Sherwood Securities
Corp. ("Sherwood Securities") and Triak Services Corp. ("Triak"),
whose primary operating division is National Discount Brokers
("NDB").
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 Jersey City,
New Jersey; Chicago, Illinois; Minneapolis, Minnesota; Denver,
Colorado; Los Angeles, California; and Boston, Massachusetts,
Sherwood Securities trades approximately 3,200 NASDAQ and Small-
Cap securities as market maker and principal for its own account.
Sherwood Securities also acts as a Specialist in 21 equity
securities on the American Stock Exchange ("AMEX") and provides
limited retail brokerage services.
NDB, another registered broker-dealer, 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 on the New York Stock
Exchange ("NYSE") and, as of July 31, 1996, was a specialist in
96 equity securities.
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,
California and Ohio.
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. The Company's common stock is
listed on the NYSE under the symbol "SHD".
The Company's principal executive offices are located at 10
Exchange Place Centre, Jersey City, New Jersey and its telephone
number is (201) 946-2200.
Recent Developments
During December 1995, the Board of Directors of the Company
appointed Mr. Stephen DiLascio as director of the Company. Mr.
DiLascio is currently the managing general partner of Equitrade.
During May 1996, the Company commenced operations of a new wholly
owned subsidiary, Market Distribution Concepts Inc. ("MDC"). MDC
delivers comprehensive technical solutions to trading firms and
individuals. Access to MDC's warehouse of market data,
applications and value-added services is available through a
single connection to MDC's network or via the Internet.
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, 1996, 1,012,700 shares had been repurchased as
part of this program excluding shares received by the Company as
consideration for the exercise of options to acquire common stock
of the Company or to pay withholding taxes related thereto. From
June 1, 1996 to July 31, 1996, 12,571 additional shares had been
repurchased under the program.
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,
1996 1995(a)<F1> 1994
Amount % Amount % Amount %
<S> <C> <C> <C> <C> <C> <C>
Firm
securities
transactions
(net) $129,788,217 72.03 $77,998,126 75.74 $79,828,510 89.07
Commission
income 30,723,379 17.05 14,412,331 14.00 3,562,099 3.97
Floor
brokerage
income 11,419,504 6.34 2,389,616 2.33 759,076 .86
Equity income
in
partnerships 40,106 .02 3,597,096 3.49 3,014,259 3.36
Investment
securities
gain (loss) - - 76,375 .07 680,450 .76
Interest and
dividend
income 5,907,779 3.28 3,465,614 3.37 1,446,146 1.61
Fee income 1,353,686 .75 395,417 .38 7,071 .01
Other income 952,537 .53 640,804 .62 322,261 .36
Total revenue $180,185,208 100.00 $102,975,379 100.00 $89,619,872 100.00
<FN>
<F1>(a) For the period June 1994 through February 1995, the results
of operations for Equitrade were accounted for
using the equity method and are included in equity income in
partnerships. Thereafter, the results of operations for
Equitrade were consolidated with those of the Company. See
"Results of Operations".
</FN>
</TABLE>
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 3,200 NASDAQ and Small-Cap securities,
as of July 31, 1996, 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 2,600 of the securities in which Sherwood
Securities is a market maker, as of July 1996, 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 1,950 of the securities displayed on
NASDAQ in which Sherwood Securities makes a market are listed on
the national market system list of NASDAQ. Approximately 650
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 225 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, 1996, Sherwood Securities
served as a specialist in 21 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, 1996, Equitrade served as a specialist in 96 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
short position of trading securities). The following securities
positions include positions held by Equitrade subsequent to
February 1995. See Note 4 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>
1994*<F1> 46,519,207 26,555,472 34,610,403
1995**<F2> 69,158,382 25,653,178 47,079,105
1996***<F3> 83,622,273 58,791,795 71,981,880
<FN>
<F1> * 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.
</FN>
<FN>
<F2> ** 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.
</FN>
<FN>
<F3> ***Includes Highest Month End, Lowest Month End
and Average Month End for positions held as a
specialist on AMEX of $1,239,808, $555,261 and
$890,693, respectively. Includes Highest Month
End, Lowest Month End and Average Month End for
positions held as a specialist on NYSE of
$33,016,783, $19,440,618 and $24,893,510, respectively.
</FN>
</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 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, 1996,
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 53 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, 1996, NDB's
activities were conducted through six offices located throughout
the United States and NDB had approximately 84,000 customers.
Interest Revenue
Sherwood Securities, NDB and Equitrade receive interest primarily
from credit balances which may exist from time to time in the
clearance accounts maintained with their clearing brokers. NDB
also receives interest based on debit balances maintained by its
customers in their accounts held by NDB's clearing broker. In
addition, the Company received interest from short-term
investments in U.S. Treasury securities and on its subordinated
note receivable with Anvil.
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.
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 SLK 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, 1996, the Company had 539 full-time employees of
which 387 are salespeople, traders and trading assistants.
Included in the preceding employee counts are NDB's 249 full-time
employees of which 176 are sales personnel and Equitrade's 37
full-time employees of which 31 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 a 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 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, 1996, Sherwood Securities was
registered with the SEC, the NASD, AMEX and in 20 states and
Washington, D.C. As of July 31, 1996, NDB was registered with
the SEC, the NASD and in all 50 states and Washington, D.C. As
of July 31, 1996, 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 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.
During 1994, the Department of Justice (the "DOJ"), the SEC and
the NASD embarked on investigations and regulatory initiatives
involving the activities of many market makers in securities
traded on NASDAQ. The DOJ and Sherwood Securities entered into a
Stipulation and Order on July 16, 1996 which resolved, subject to
approval by the United States District Court of the Southern
District of New York, a civil complaint filed by the DOJ as a
result of its investigation. See "Item 3. Legal Proceedings".
Changes in regulations pertaining to NASDAQ may have a material
effect on Sherwood Securities' over-the-counter trading
activities.
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 provide total coverage of
$750,000 for Sherwood Securities and $500,000 for NDB. The bonds
contain deductibles ranging from $4,500 to $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.
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, 1995 through
May 31, 1996, both Sherwood Securities and NDB were in
compliance with the condition of this exemption.
Item 2. Properties
In November 1995, Sherwood Securities and the Company relocated
their offices and trading facilities from One Exchange Plaza, New York,
New York 10006 to 10 Exchange Place Centre, Jersey City, New Jersey 07302
under a lease signed in December 1994. This 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, was 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. The lease for
the space in New York, covering approximately 18,000 square feet, 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.
NDB's office and sales facilities occupy approximately 15,700
square feet located at 50 Broadway, New York, New York 10004
under three leases with original expiration dates of May 1997,
April 1998 and December 1998, 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. During fiscal 1996, in conjunction with the terms
of these leases, NDB paid a total of $60,000 in order to
terminate the leases by October 31, 1996. During March 1996,
NDB signed a new lease agreement at 7 Hanover Square, New York,
New York 10004 for the purpose of relocating and consolidating
its New York offices and brokerage facilities. The lease, for
approximately 36,000 square feet, commenced on April 1, 1996 and
expires on September 29, 2008. NDB's obligation to pay base rent
begins on April 1, 1997. The obligation for any real estate tax
and operating escalations, as defined in the lease agreement, is
effective as of January 1, 1996. Commencing April 1, 1997, base
rent on the new space is approximately $718,000 per annum.
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.
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 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 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 joined in a motion to dismiss the Amended Consolidated
Complaint, which was granted by the Court. A Second Amended
Complaint was filed on August 22, 1995. The Second Amended
Consolidated Complaint repeated most of the allegations of the
Amended Consolidated Complaint, but plaintiffs 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. Plaintiffs' motion for class certification
has been argued and a decision is expected in or about September
1996. The Company intends to vigorously defend itself against
these allegations.
On July 16, 1996, Sherwood Securities entered into an Order
resolving a civil complaint (the "Complaint") filed by the DOJ
alleging that Sherwood Securities and 23 other NASDAQ market
makers violated Section 1 of the Sherman Act in connection with
certain market making practices. The Complaint alleges, among
other things, that the NASDAQ market makers reached a common
understanding to adhere to a "quoting convention" relating to the
manner in which bids and asks would be displayed on NASDAQ. The
relief sought in the Complain was a declaration that the
defendants have violated Section 1 of the Sherman Act, as well
as, injunctive relief and such other relief as the Court deemed
appropriate. In entering into the Stipulation and Order,
Sherwood Securities did not admit that the DOJ's allegations were
correct, but that it would not engage in certain types of
activities in connection with its NASDAQ market making and it
undertook specified steps to assure compliance with the
agreement. The Stipulation and Order are subject to approval by
the United States District Court of the Southern District of New
York following a public hearing, and if that Court approves the
Stipulation and Order, the Complaint will be dismissed with
prejudice. There can be no assurance that the Court will approve
the Stipulation and Order in its current form or at all.
Sherwood Securities has also received subpoenas from the SEC to
provide information, testimony and documents with respect to its
NASDAQ market making activities which appear to be part of the
SEC's investigation of the NASDAQ market and market makers.
Sherwood Securities has been cooperating with the SEC
investigation.
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, 1996.
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, 1996.
As of such date, the closing sales price per share for the
Company's common stock was $11.125.
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, 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
August 31, 1995 10.7500 6.8750
November 30, 1995 10.5000 7.7500
February 29, 1996 9.7500 8.2500
May 31, 1996 11.3750 9.0000
</TABLE>
There were no cash dividends declared on the common stock of the
Company in the two-year period ended May 31, 1996. 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,
1996 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.
<TABLE>
<CAPTION>
Year Ended May 31,
1996 1995(b)<F2> 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Operating Data:
Revenues $180,185 $102,975 $89,620 $58,933 $45,007
Income before
income taxes and
extraordinay
items 35,531 18,240 18,304 15,067 11,400
Income before
extraordinary
items 20,132 14,615 16,597 8,939 6,288
Extraordinary
Items:
Utilization of
net operating
loss
carryforward -- -- -- 5,024 4,248
Net income (a)<F1> 20,132 14,615 16,597 13,963 10,536
Per Share Data (c):<F3>
Income before
extraordinary
item (a)<F1> 1.52 1.07 1.20 .64 .45
Net income 1.52 1.07 1.20 1.00 .76
Balance Sheet Data:
Total assets 143,255 113,031 77,616 60,027 38,150
Common
stockholders'
equity 86,570 65,978 53,311 38,191 24,497
Long-term
obligations and
redeemable stock -- -- -- -- --
Book value per
share (c)<F3> 6.56 4.84 3.86 2.72 1.76
Dividends -- -- -- -- --
<FN>
<F1> (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.
</FN>
<FN>
<F2> (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.
</FN>
<FN>
<F3> (c) Earnings per share and book value per share are computed
by dividing the balances 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.
</FN>
</TABLE>
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
Results of Operations
Fiscal 1996 Compared to Fiscal 1995
The results for the year ended May 31, 1996 reflect primarily the
activities of Sherwood Securities, NDB and Equitrade. Certain
fiscal 1995 amounts have been reclassified to conform with the
fiscal 1996 presentation.
The Company had a net profit for the year ended May 31, 1996 of
$20,132,000, compared to a net profit of $14,615,000 for the year
ended May 31, 1995. Sherwood Securities had a net profit for the
year ended May 31, 1996 of $15,318,000, compared to a net profit
for the year ended May 31, 1995 of $15,161,000. Triak had a net
profit for the year ended May 31, 1996 of $3,089,000, compared to
a net profit of $8,000 for the year ended May 31, 1995.
Equitrade had a net profit for the year ended May 31, 1996 of
$9,136,000 (of which the Company's share was $5,507,000). For
the period from March 1995 through May 1995 for which the results
of Equitrade are consolidated with those of the Company,
Equitrade had a net profit of $2,092,000 (of which the Company's
share was $1,322,000). For the period June 1994 through February
1995, Equitrade had a net profit of $5,064,000 of which the
Company's share, $3,521,000, was accounted for using the equity
method and included in equity income in partnerships.
Revenue increased by approximately $77,210,000, or 75%, from
$102,975,000 in 1995 to $180,185,000 in 1996.
Most of the Company's income arises from firm securities
transactions. Sherwood Securities' profits from firm securities
transactions increased $46,941,000, or 61%, from $76,361,000 in
1995 to $123,302,000 in 1996 and its overall trading volume
increased approximately 69% for the year ended May 31, 1996, when
compared with the year ended May 31, 1995. However, trading
profits per ticket continued to decline. Several factors
contributed to this decrease. 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, 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. In addition, further
proposed regulatory initiatives, such as N'Aqcess, could impact
future profitability.
The Company's commission income increased by $16,311,000, or
113%, from $14,412,000 in 1995 to $30,723,000 in 1996. The
increase is principally due to the fact that NDB's volume of
transactions increased by 143% when compared with the previous
year.
Floor brokerage income increased by $9,030,000, or 378%, from
$2,390,000 in 1995 to $11,420,000 in 1996. This increase is due
to a full year of operations of Equitrade being consolidated into
the Company's operations. In addition, the number of stocks in
which Equitrade is the specialist has increased when compared to
the prior year.
For the year ended May 31, 1996, the principal portion of equity
income in partnerships was equity income from the Anvil Joint
Venture. 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.
Investment securities gains for the year ended May 31, 1995
aggregated $76,000. This gain resulted entirely from the sale of
11,600 shares of Network Imaging Corp. (IMGX) for the year ended
May 31, 1995. There were no investment securities gains for the
year ended May 31, 1996.
Interest and dividend income increased by $2,442,000 from
$3,466,000 in 1995 to $5,908,000 in 1996. The net increase is
primarily due to a significant rise in NDB's customer debit and
credit balances held with the Company's 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 average market interest rates than in the prior year.
Fee income increased by $959,000 from $395,000 in 1995 to
$1,354,000 in 1996. 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 increased $57,060,000, or 68%, from $83,965,000 in
1995 to $141,025,000 in 1996.
Clearing and related charges increased by $20,866,000 from
$34,765,000 in 1995 to $55,631,000 in 1996. This increase is
principally due to the increased volume of trades for both
Sherwood Securities and NDB. This caused clearance charges to
increase by $5,609,000 and $7,453,000 for Sherwood Securities and
NDB, respectively, over the prior year. Also, payments by
Sherwood Securities to correspondents for order flow increased by
$4,387,000 over the prior year.
Compensation and benefits increased $26,161,000 from $31,375,000
in 1995 to $57,536,000 in 1996. The increase was primarily due
to higher commissions paid to Sherwood Securities' traders due to
increased trading profits and higher bonuses accrued as a result
of greater overall profits of the Company as compared to the
prior year. Also, there was an increase in office salaries and
related benefits due primarily to NDB's larger staff size.
Communication expenses increased by $4,393,000 from $6,371,000 in
1995 to $10,764,000 in 1996. The increase was mainly due to an
increase in the activities of NDB, namely toll-free customer
telephone service and quotations expense.
Advertising costs decreased $881,000 from $2,605,000 in 1995 to
$1,724,000 in 1996. Subsequent to the initial, extensive media
campaign which accompanied the commencement of operations of NDB,
the frequency of advertising, especially television ads,
continued to lessen.
Occupancy costs and equipment rental increased $1,310,000 from
$1,856,000 in 1995 to $3,166,000 in 1996 primarily due to a full
year of expense related to the lease on Sherwood Securities' new
office in Jersey City, New Jersey. The results of operations
for the year ended May 31, 1995 only included five months expense
for this lease which commenced in January 1995.
Professional fees increased by $671,000 from $1,572,000 in 1995
to $2,243,000 in 1996. The increase in professional fees is
primarily due to additional legal services and technology
consulting projects.
Depreciation and amortization increased by $2,281,000 from
$1,798,000 in 1995 to $4,079,000 in 1996. The increase was
primarily due to depreciation and amortization incurred on fixed
asset and leasehold improvement additions of approximately
$10,000,000 and $3,000,000 for Sherwood Securities and NDB,
respectively, during the year ended May 31, 1996. In addition,
in connection with Sherwood Securities' abandonment of its former
New York City office, $641,000 of fixed assets and leasehold
improvements were written off.
Travel and entertainment expense increased $274,000 from
$1,228,000 in 1995 to $1,502,000 in 1996 and reflects primarily
the entertaining of customers by the institutional sales force.
Repairs and maintenance expense increased by $115,000 from
$438,000 in 1995 to $553,000 in 1996. The increase is primarily
due to the inclusion of a full year of Equitrade's operations in
the results for the year ended May 31, 1996.
Interest expense increased $270,000 from $51,000 in 1995 to
$321,000 in 1996 and represents interest on capital paid by
Equitrade to its minority partners and interest paid by Equitrade
on its subordinated debt.
Other expenses increased $1,599,000 from $1,906,000 in 1995 to
$3,505,000 in 1996. The increase is primarily attributable to an
increase in the costs associated with registering the sales staff
of NDB with the various states and regulatory agencies. Also,
during the year ended May 31, 1996 the Company incurred increases
in public relations expenses and in the cost of research
associated with soft dollar deals. 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 year ended May 31, 1996 and the last quarter
of fiscal 1995.
The increase in income tax expense is primarily due to the
Company's utilization of the remainder of its net operating loss
carryforwards for Federal, state and local tax purposes during
the year ended May 31, 1995, in addition to the increase in
income before taxes as compared to the prior year.
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 1996 presentation.
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 $3,440,000, or 4%, from $79,801,000 in
1994 to $76,361,000 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.
Floor brokerage income increased by $1,631,000, or 215%, from
$759,000 in 1994 to $2,390,000 in 1995. This increase is due to
the consolidation of the results of Equitrade with those of the
Company from March 1995 through May 1995.
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.
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 the year ended May 31, 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 $8,100,000 from
$26,665,000 in 1994 to $34,765,000 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 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 were 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 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.
Repairs and maintenance expense decreased by $33,000 from
$471,000 in 1994 to $438,000 in 1995.
Interest expense increased $5,000 from $46,000 in 1994 to $51,000
in 1995.
Other expenses increased $364,000 from $1,542,000 in 1994 to
$1,906,000 in 1995. The increase is primarily attributable to
$128,000 in listing fees paid 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.
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 operations. Certain fiscal 1994 and fiscal 1993
amounts have been reclassified to conform with the fiscal 1996
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 $24,856,000, or 45%, from $54,945,000 in
1993 to $79,801,000 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.
Floor brokerage income increased by $245,000, or 48%, from
$514,000 in 1993 to $759,000 in 1994 primarily due to an increase
in the number of American Stock Exchange stocks in which Sherwood
Securities was the specialist over the prior year.
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.
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 $9,903,000 from
$16,762,000 in 1993 to $26,665,000 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 during the year ended May 31, 1994 due also
to higher trading volume. Payments made to "$2 brokers" for
execution of listed securities orders increased by $811,000.
Finally, payments made to correspondents that provide Sherwood
Securities 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 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 $163,000 from $308,000
in 1993 to $471,000 in 1994. The increase represents the cost of
maintaining and operating Sherwood Securities' trading rooms and
reassigning positions within the trading floor.
Other expenses increased $410,000 from $1,132,000 in 1993 to
$1,542,000 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.
Liquidity and Capital Resources
The Company's tangible assets are highly liquid, but subject to
market price fluctuation, with more than 77% 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.
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,
1996, Sherwood Securities, NDB and Equitrade had approximately
$36,665,000, $5,625,000 and $22,586,000 in excess of the minimum
required net capital requirements, respectively, representing
increases of $4,485,000 for Sherwood Securities, $1,699,000 for
NDB and $4,256,000 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.
Cash flows from the Company's investment activities are directly
related to market conditions.
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 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, 1996,
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, 1996, 1,012,700 shares had been repurchased, of
which 231,282 were repurchased during fiscal 1996. The source of
funds for these purchases was internally generated.
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 and 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(a) Beneficial Ownership Reporting Compliance" 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 22, 1996 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 22, 1996 is hereby
incorporated by reference.
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 22, 1996 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 22, 1996 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,
1996 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.
<PAGE>
THE SHERWOOD GROUP, INC.
AND SUBSIDIARIES
Consolidated Financial Statements
May 31, 1996, 1995 and 1994
(With Independent Auditors' Report Thereon)
<PAGE>
THE SHERWOOD GROUP, INC.
AND SUBSIDIARIES
Consolidated Financial Statements
May 31, 1996, 1995 and 1994
(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, 1996 and 1995 F-3 to F-4
Consolidated Statements of Income -
Years ended May 31, 1996, 1995 and 1994 F-5 to F-6
Consolidated Statements of Changes in Stockholders' Equity -
Years ended May 31, 1996, 1995 and 1994 F-7
Consolidated Statements of Cash Flows -
Years ended May 31, 1996, 1995 and 1994 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, 1996
Schedule III - Condensed Financial Statements
of the Registrant (Parent) - May 31, 1996 and 1995
and Years ended May 31, 1996, 1995 and 1994 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, 1996 and 1995, 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, 1996. 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, 1996 and 1995, and the results of their operations and
their cash flows for each of the years in the three-year period
ended May 31, 1996 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 22, 1996
F-2
<PAGE>
<TABLE>
THE SHERWOOD GROUP, INC.
AND SUBSIDIARIES
Consolidated Statements of Financial Condition
May 31, 1996 and 1995
<CAPTION>
Assets 1996 1995
<S> <C> <C>
Cash $ 470,313 593,473
Receivables:
Brokers and dealers 78,628,199 47,802,429
Other (note 11) 489,867 224,049
Securities owned, at market value (note 4) 32,181,980 41,777,895
Investment securities not readily marketable,
at fair value 401,320 401,320
Investment in partnerships (note 3) 261,286 252,180
Notes receivable (note 11) 697,258 642,035
Furniture, fixtures, equipment, and leasehold
improvements - at cost, net of accumulated
depreciation and amortization (note 6) 12,955,614 3,861,992
Computer software - at cost, net of accumulated
amortization of $493,936 at May 31, 1996 and
$322,048 at May 31, 1995 766,256 401,008
Intangible assets, net of accumulated
amortization of $1,245,176 at May 31, 1996
and $1,051,386 at May 31, 1995 (note 3) 2,943,104 3,386,894
Exchange memberships (market value $2,827,500
at May 31, 1996 and $1,560,000 at May 31, 1995) 1,166,496 1,166,496
Subordinated notes receivable (note 9) 3,250,000 3,250,000
Other assets 9,043,336 9,271,091
Total assets $143,255,029 113,030,862
(Continued)
</TABLE>
F-3
<PAGE>
<TABLE>
THE SHERWOOD GROUP, INC.
AND SUBSIDIARIES
Consolidated Statements of Financial Condition, Continued
<CAPTION>
Liabilities and Stockholders' Equity 1996 1995
<S> <C> <C>
Liabilities:
Securities sold, not yet purchased,
at market value (note 4) $18,827,302 24,624,955
Accounts payable and accrued expenses,
including compensation payable to
officers and employees of $15,553,291
at May 31, 1996 and $8,970,821
at May 31, 1995 (note 14) 24,212,338 14,471,330
Secured demand notes payable (note 9) 3,250,000 3,250,000
Income taxes payable (note 8) 5,338,326 1,365,856
Minority interest in Equitrade 5,057,508 3,341,220
Total liabilities 56,685,474 47,053,361
Commitments and contingencies
(notes 14 and 15)
Stockholders' equity (notes 10, 12 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, 1996 and 1995 143,432 143,432
Additional paid-in capital 56,958,790 58,134,052
Retained earnings 37,936,140 17,804,212
95,038,362 76,081,696
Less: Treasury stock - at cost,
1,313,469 shares at May 31, 1996 and
2,033,490 shares at May 31, 1995 (8,468,807)(10,104,195)
Total stockholders' equity 86,569,555 65,977,501
Total liabilities and stockholders' equity $143,255,029 113,030,862
See accompanying notes to consolidated financial statements.
</TABLE>
F-4
<PAGE>
<TABLE>
THE SHERWOOD GROUP, INC.
AND SUBSIDIARIES
Consolidated Statements of Income
Years ended May 31, 1996, 1995 and 1994
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Revenue:
Firm securities transactions - net $129,788,217 77,998,126 79,828,510
Commission income 30,723,379 14,412,331 3,562,099
Floor brokerage income 11,419,504 2,389,616 759,076
Equity income in partnerships (note 3) 40,106 3,597,096 3,014,259
Investment securities gains realized - 76,375 680,450
Interest and dividends 5,907,779 3,465,614 1,446,146
Fee income 1,353,686 395,417 7,071
Other 952,537 640,804 322,261
180,185,208 102,975,379 89,619,872
Expenses:
Clearing and related brokerage charges 55,631,233 34,765,052 26,664,740
Compensation and benefits
(notes 10, 12 and 14) 57,536,289 31,375,322 31,207,349
Communications 10,763,590 6,370,985 3,967,793
Advertising costs 1,724,117 2,605,167 2,708,787
Occupancy costs and equipment rental (note 14)3,165,851 1,855,771 1,236,219
Professional fees 2,243,338 1,571,828 872,990
Depreciation and amortization 4,079,015 1,797,575 1,415,781
Travel and entertainment 1,502,228 1,228,287 1,182,583
Repairs and maintenance 553,521 438,262 471,256
Interest 320,812 50,984 46,316
Other 3,505,123 1,906,079 1,542,330
141,025,117 83,965,312 71,316,144
Income before minority interest
and income taxes 39,160,091 19,010,067 18,303,728
Income of Equitrade allocated to minority
partners (3,628,986) (770,041) -
Income before income taxes 35,531,105 18,240,026 18,303,728
Income taxes (note 8):
Federal 12,366,631 1,108,941 342,330
State and local 3,032,546 2,516,197 1,364,465
15,399,177 3,625,138 1,706,795
Net income $ 20,131,928 14,614,888 16,596,933
(Continued)
</TABLE>
F-5
<PAGE>
<TABLE>
THE SHERWOOD GROUP, INC.
AND SUBSIDIARIES
Consolidated Statements of Income, Continued
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Income per common share:
Primary:
Net income per common share $ 1.52 1.07 1.20
Fully diluted:
Net income per common share $ 1.52 1.07 1.20
Weighted average common shares outstanding:
Primary 13,200,867 13,624,603 13,803,459
Fully diluted 13,201,412 13,652,084 13,821,483
See accompanying notes to consolidated financial statements.
</TABLE>
F-6
<PAGE>
<TABLE>
THE SHERWOOD GROUP, INC.
AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity
Years ended May 31, 1996, 1995 and 1994
<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, 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
Net income - - - 20,131,928 - - 20,131,928
Acquisition of treasury stock - - - - (625,979) (5,549,130) (5,549,130)
Issuance of treasury stock upon
exercise of options - - (1,175,262) - 1,346,000 7,184,518 6,009,256
Balance at May 31, 1996 14,343,201 $ 143,432 56,958,790 37,936,140 (1,313,469)$(8,468,807) 86,569,555
See accompanying notes to consolidated financial statements.
</TABLE>
F-7
<PAGE>
<TABLE>
THE SHERWOOD GROUP, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended May 31, 1996, 1995 and 1994
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $20,131,928 14,614,888 16,596,933
Non-cash items included in net income:
Equity income in partnerships (40,106) (3,597,096) (3,014,259)
Depreciation and amortization 4,079,015 1,797,575 1,415,781
Gain on sale of investment
securities not readily marketable - (76,375) (680,450)
Income of Equitrade allocated to
minority partners 3,628,986 770,041 -
Tax benefit related to the
exercise of options 4,490,000 - -
12,157,895 (1,105,855) (2,278,928)
(Increase) decrease in operating assets:
Receivables:
Brokers and dealers (30,825,770) 3,171,467 (12,883,231)
Other (265,818) 154,406 (334,060)
Securities owned, at market value 9,595,915 (23,974,582) (586,990)
Other assets 227,755 (6,380,107) (24,206)
(21,267,918) (27,028,816)(13,828,487)
Increase (decrease) in operating liabilities:
Securities sold, not yet purchased, at
market value (5,797,653) 13,550,853 16,606
Accounts payable and accrued expenses 7,138,010 1,215,495 2,521,640
Income taxes payable 3,972,470 1,126,949 (68,668)
5,312,827 15,893,297 2,469,578
Net cash provided by
operating activities 16,334,732 2,373,514 2,959,096
</TABLE>
(Continued)
F-8
<PAGE>
<TABLE>
THE SHERWOOD GROUP, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
1996 1995 1994
<S> <C> <C> <C>
Cash flows from investing activities:
Distributions from partnerships $ 31,000 2,641,956 1,602,243
Proceeds from sales of investment securities
not readily marketable - 99,575 857,250
Payment for purchase of investment securities
not readily marketable - - (410,000)
Loans made to employees and officers (1,738,840) (242,500) (1,072,690)
Principal collected on notes receivable 1,683,617 1,039,107 72,588
Purchases of furniture, fixtures and
equipment, and leasehold improvements (12,556,959) (1,887,179) (1,988,613)
Purchases of computer software (537,136) (28,019) (123,987)
Purchase of identified intangible assets - (2,650,000) (25,030)
Payment for purchase of non-compete
agreement - (250,000) -
Purchase of subsidiary, net of cash acquired - - (664)
Principal collected on subordinated note - 1,000,000 -
Net cash used in investing activities (13,118,318) (277,060) (1,088,903)
Cash flows from financing activities:
Purchase of treasury stock (2,061,876) (1,948,126) (1,572,007)
Proceeds from exercise of options 635,000 - 95,000
Capital contribution by minority interest 29,575 500,000 -
Capital withdrawals by minority interest (1,942,273) (647,143) -
Net cash used in financing activities (3,339,574) (2,095,269) (1,477,007)
Net increase (decrease) in cash (123,160) 1,185 393,186
Cash acquired due to consolidation of
Equitrade at beginning of fourth quarter - 117,555 -
Cash at beginning of year 593,473 474,733 81,547
Cash at end of year $ 470,313 593,473 474,733
(Continued)
</TABLE>
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 $6,948,770, $2,842,399 and
$1,781,897 for the years ended May 31, 1996, 1995 and 1994,
respectively.
Interest payments totaled $890,495, $50,984 and $46,316 for
the years ended May 31, 1996, 1995 and 1994, respectively.
Supplemental disclosures of non-cash investing and financing activities:
During July 1994, the Company's commitment under its
subordination agreement with Anvil Institutional Services Inc.
was amended from $500,000 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, 1996 and 1995, to Anvil Institutional Services Company
(see notes 3 and 9).
During the period from November 1995 through February 1996,
certain executives of the Company exercised an aggregate of
670,000 options for the purchase of 670,000 shares of the
Company's common stock with an exercise price of $1 per share
and 66,000 options for the purchase of 66,000 shares with an
exercise price of $3.625 per share. In order to pay for the
exercise price and to reimburse the Company for the income
taxes ($2,602,997) on the gain related to the transaction, the
executives remitted to the Company 394,697 shares of the
Company's common stock with a market value of $3,487,247.
See accompanying notes to consolidated financial statements.
F-10
<PAGE>
THE SHERWOOD GROUP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
May 31, 1996, 1995 and 1994
(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. During January 1994, National Discount Brokers
("NDB"), a division of the Company's subsidiary, Triak
Services Corp. ("Triak"), commenced operations. In addition,
during May 1996, Market Distribution Concepts Inc. was
formed.
(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 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 was
$0 at May 31, 1996, 1995 and 1994.
(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, 1996
presentation.
(i)Deferred income taxes are recognized for the future tax
consequences attributable to differences between the
financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred
tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in
which those temporary differences are expected to be
recovered or settled. The effect on deferred taxes of a
change in tax rates is recognized in income in the period
that includes the enactment date.
(j) The preparation of financial statements in
conformity with generally accepted accounting principles
requires management to make estimates and assumptions
that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from
those estimates.
(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 which took place in 1995 and are
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
commencing March 1995. 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 $1,322,000 for the period
March 1995 to May 1995 and $5,507,000 for the year ended May
31, 1996. 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.
(Continued)
F-12
<PAGE>
THE SHERWOOD GROUP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(3), Continued
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
these 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.
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 and Concentration of Credit Risk
Financial Accounting Standards Board Statement No. 107,
"Disclosures About Fair Value of Financial Instruments"
requires that all entities disclose the fair value of
financial instruments, as defined, for both assets and
liabilities recognized and not recognized in the consolidated
statement of financial condition. The Company's financial
instruments, as defined, are carried at or approximate fair
value.
<TABLE>
Marketable securities owned and sold, not yet purchased
consist of securities, as follows:
<CAPTION>
1996 1995
<S> <C> <C>
Securities owned
Corporate equities $ 32,181,980 24,958,189
U.S. Government obligations - 16,819,706
Total $ 32,181,980 41,777,895
Securities sold, not yet purchased
Corporate equities $ 18,827,302 24,624,955
Total $ 18,827,302 24,624,955
</TABLE>
(Continued)
F-13
<PAGE>
THE SHERWOOD GROUP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(4), Continued
In the normal course of business, Sherwood Securities, NDB
and Equitrade execute securities transactions on behalf of
customers through clearing brokers. 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 and by monitoring
customer trading activity.
Sherwood Securities and Equitrade conduct substantially all
their principal trading activities through broker-dealers
based in the New York Metropolitan area. At May 31, 1996,
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, 1996 had no material adverse effect on the financial
position of Sherwood Securities or Equitrade.
During the normal course of business Sherwood Securities and
Equitrade may sell securities which have not yet been
purchased, which represent obligations of Sherwood Securities
and Equitrade to deliver the specified security at a later
date, thereby creating a liability to purchase the security
in the market at prevailing prices. Such transactions result
in off-balance-sheet market risk as Sherwood Securities and
Equitrade's ultimate obligation to satisfy the sale of
securities sold, but not yet purchased may exceed the amount
recorded in the consolidated statement of financial
condition. Sherwood Securities and Equitrade seek to control
such market risk through the use of internal monitoring
guidelines. Neither Sherwood Securities nor Equitrade engage
in any derivative 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,
1996, 1995 and 1994.
(Continued)
F-14
<PAGE>
THE SHERWOOD GROUP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(6)Furniture, Fixtures, Equipment, and Leasehold Improvements
<TABLE>
Furniture, fixtures, equipment, and leasehold improvements
consisted of the following:
<CAPTION>
May 31,
1996 1995
<S> <C> <C>
Furniture, fixtures and equipment $ 19,019,267 8,842,245
Leasehold improvements 2,068,512 1,628,330
21,087,779 10,470,575
Less accumulated depreciation
and amortization 8,132,165 6,608,583
$ 12,955,614 3,861,992
</TABLE>
During the fiscal year ended May 31, 1996, the Company
abandoned its headquarters in New York City and relocated to
Jersey City, New Jersey. Consequently, the Company
accelerated the depreciation and amortization of all assets
abandoned. Such excess depreciation and amortization
aggregated $592,480 for furniture, fixtures and equipment and
$48,638 for leasehold improvements.
(7)Acquisition 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.
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 has filed its consolidated Federal and combined
state and local income tax returns (inclusive of all
subsidiaries except Equitrade) based on an April 30, 1996
year end.
Effective May 1, 1996, the Company changed its tax year end
to May 31 and returns will be filed, as required, for the one
month period ended May 31, 1996.
The current Federal, state and local income tax provisions
for the years ended May 31, 1996, 1995 and 1994 have been
provided based on the appropriate tax computation for each
jurisdiction.
(Continued)
F-15
<PAGE>
THE SHERWOOD GROUP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(8), Continued
Deferred income taxes reflect the net tax effects of
temporary differences between the carrying amounts of assets
and liabilities for financial reporting purposes and the
amounts used for income tax purposes. At May 31, 1996, the
Company had net deferred tax assets which are primarily due
to differences in reserves and expenses allowable for book
and tax purposes. Management of the Company has established
a 100% valuation allowance with respect to the net deferred
tax asset because it concluded that it was more likely than
not that the benefit would not be realized.
<TABLE>
The provision for income taxes is as follows:
<CAPTION>
Years ended May 31,
1996 1995 1994
<S> <C> <C> <C>
Federal:
Current $ 12,366,631 1,108,941 342,330
Deferred - - -
12,366,631 1,108,941 342,330
State and local:
Current 3,032,546 2,516,197 1,364,465
Deferred - - -
3,032,546 2,516,197 1,364,465
$ 15,399,177 3,625,138 1,706,795
</TABLE>
<TABLE>
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:
<CAPTION>
Years ended May 31,
1996 1995 1994
<S> <C> <C> <C>
Statutory provision on pretax income $12,435,887 6,384,009 6,406,305
State and local taxes, net of Federal tax 1,971,155 1,635,528 886,902
Tax effect of disallowance of net
operating loss for computation of
minimum federal taxes - - 549,632
Tax effect of meals and entertainment
and club dues 193,967 160,475 145,962
Tax effect of utilization of
net operating loss carryforwards - (4,687,406) (6,033,876)
Other - net 798,168 132,532 (248,130)
Income tax provision $15,399,177 3,625,138 1,706,795
</TABLE>
(Continued)
F-16
<PAGE>
THE SHERWOOD GROUP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(9)Subordination Agreements
During July 1994, the Company's commitment under its
subordination agreement with Anvil Institutional Services
Inc. was amended from $500,000 to $250,000. The note has a
stated interest rate of 2% and matures on May 31, 1997. In
connection with this agreement, the Company pledged U.S.
Treasury securities with a market value in excess of
$250,000. Such securities are included in other assets at
May 31, 1996.
On March 23, 1992, Equitrade entered into subordination
agreements in the amount of $3,000,000. Such notes are due
on March 23, 1997 and contain a yearly automatic roll-over
provision.
(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 373,501 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 1,523 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, 1996:
<TABLE>
<CAPTION>
Optioned shares
Number of Price
shares per share
<S> <C> <C>
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
Options exercised (1,346,000) $1.00 - $3.625
Options granted 394,697 $7.9375 - $9.1875
Balance at May 31, 1996 394,697 $7.9375 - $9.1875
</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, 1996,
SGI and the Chief Executive Officer of the Company are the
beneficial owners of approximately 31% and 22%, 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, 1996 and 1995 are
notes due from officers of the Company amounting to
approximately $419,000 and $459,000, respectively.
Included in other receivables at May 31, 1996 and 1995 are
amounts due from Anvil and the Joint Venture aggregating
approximately $338,000 and $166,000, respectively, and
interest on the notes receivable from the Company's officers
of approximately $17,000 and $17,000, 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
Company contribution determined by the Board of Directors of
The Sherwood Group, Inc. For the year ended May 31, 1996,
there was a discretionary Company contribution to the Plan of
$48,029 which is included in compensation and benefits in the
accompanying consolidated statement of income. During the
years ended May 31, 1995 and 1994, there were no
discretionary Company 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, 1996,
Sherwood Securities had regulatory net capital of
approximately $37,665,000, or approximately $36,665,000 in
excess of required net capital, NDB had regulatory net
capital of approximately $5,898,000, or approximately
$5,625,000 in excess of required net capital and Equitrade
had regulatory net capital of approximately $22,836,000, or
approximately $22,586,000 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.
F-18 (Continued)
<PAGE>
THE SHERWOOD GROUP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(14) Commitments
The Company has non-cancelable 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.
<TABLE>
Commitments for minimum lease payments under non-cancelable
operating leases as of May 31, 1996 are as follows, exclusive
of escalation charges:
<CAPTION>
Fiscal year ending
May 31,
<S> <C>
1997 $ 685,000
1998 1,850,000
1999 1,799,000
2000 1,744,000
2001 1,866,000
Thereafter 11,908,000
$ 19,852,000
</TABLE>
The Company has free rent periods which are being amortized
over the lives of the leases.
Included in occupancy costs and equipment rental expenses are
office rental expenses of approximately $2,729,000,
$1,585,000 and $999,000 for the years ended May 31, 1996,
1995 and 1994, respectively.
The Company's Board of Directors authorized a compensation
contract for the Chief Executive Officer ("CEO") which
commenced on January 1, 1992. During December 1995, the CEO
exercised his option to extend the contract until May 31,
1997. 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%. During
March 1996, the CEO agreed to amend his agreement so that he
would receive additional compensation at 15%, rather than
18%, of pre-tax profits of the Company on amounts in excess
of $19,746,019 for the fiscal year ended May 31, 1996.
Included in accounts payable and accrued liabilities is
approximately $3,897,000, $2,130,000 and $1,588,000 due to
the CEO at May 31, 1996, 1995 and 1994, respectively. In
connection with this agreement, approximately $6,137,000,
$3,132,000 and $2,836,000 is reflected in compensation and
benefits for the years ended May 31, 1996, 1995 and 1994,
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. Although
there can be no assurance that such lawsuits and
investigations involving the Company are not likely to have a
material adverse effect on the results of operations of the
Company in any future period, depending in part on the
results for such period, based on
(Continued)
F-19
<PAGE>
THE SHERWOOD GROUP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(15), Continued
information currently available, management of the Company
believes that any such lawsuits and investigations are not
likely to have a material adverse effect on the consolidated
financial condition and results of operations or liquidity of
the Company.
(16) Quarterly Financial Information (Unaudited)
<TABLE>
(In thousands, except per common share data)
<CAPTION>
1996 First Second Third Fourth
<S> <C> <C> <C> <C>
Revenues $ 39,748 35,119 47,196 58,122
Expenses 31,773 30,960 37,999 40,293
Minority interest (801) (486) (995) (1,347)
Income before taxes $ 7,174 3,673 8,202 16,482
Net income $ 4,468 3,173 5,141 7,350
Earnings per share:
Primary:
Net income per common
share $ .33 .24 .39 .56
Fully diluted:
Net income per common
share $ .33 .24 .39 .56
1995 First Second Third Fourth
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
</TABLE>
(Continued)
F-20
<PAGE>
THE SHERWOOD GROUP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(16), Continued
<TABLE>
<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>
F-21
<PAGE>
THE SHERWOOD GROUP, INC.
AND SUBSIDIARIES
<TABLE>
Schedule I
Marketable Securities
May 31, 1996
<CAPTION>
Securities
Securities sold, not
owned, yet pur-
at market chased, at
value market value
<S> <C> <C>
Corporate stocks $ 31,662,874 $ 18,783,268
Warrants and other securities 519,106 44,034
Total $ 32,181,980 $ 18,827,302
</TABLE>
S-1
<PAGE>
<TABLE>
THE SHERWOOD GROUP, INC.
AND SUBSIDIARIES
Schedule III
Condensed Financial Statements
of the Registrant (Parent)
Statements of Financial Condition
May 31, 1996 and 1995
<CAPTION>
Assets 1996 1995
<S> <C> <C>
Cash $ 60,833 22,819
Receivables:
Brokers and dealers 4,675,000 -
Other 260,708 119,408
Notes receivable 418,545 458,545
Investment securities not readily marketable 401,320 401,320
Investment in, less net amounts due to,
subsidiaries and affiliates 69,460,503 52,551,562
Investment in partnerships 9,130,087 6,381,879
Equipment, furniture and leasehold
improvements - net 9,709 87,378
Identified intangible asset - net 198,042 328,250
Exchange membership 351,496 351,496
Subordinated notes receivable 10,250,000 10,250,000
Other assets 5,443,939 5,168,471
Total assets $ 100,660,182 76,121,128
Liabilities and
Stockholders' Equity
Accounts payable, accrued expenses and other
liabilities $ 8,840,627 4,893,627
Secured demand note payable 5,250,000 5,250,000
14,090,627 10,143,627
Stockholders' equity:
Common stock 143,432 143,432
Retained earnings and other equity 86,426,123 65,834,069
86,569,555 65,977,501
Total liabilities and stockholders' equity $ 100,660,182 76,121,128
See accompanying notes to condensed financial statements.
</TABLE>
S-2
<PAGE>
<TABLE>
THE SHERWOOD GROUP, INC.
AND SUBSIDIARIES
Schedule III, Continued
Condensed Financial Statements
of the Registrant (Parent)
Statements of Income
Years ended May 31, 1996, 1995 and 1994
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Revenue:
Equity income in partnerships $ 5,546,428 4,917,494 3,014,259
Interest 1,101,129 256,910 63,494
Service fees paid by subsidiaries eliminated
in consolidation 4,675,000 - 100,000
Income from lease of exchange membership 114,000 114,000 88,645
Other 126 - -
11,436,683 5,288,404 3,266,398
Expenses:
Compensation and benefits 7,408,107 4,307,077 4,069,428
Service fees paid by parent eliminated
in consolidation - - 930,000
Interest - 1,292 1,254
Other - net 403,816 673,446 112,265
7,811,923 4,981,815 5,112,947
3,624,760 306,589 (1,846,549)
Equity in income of subsidiaries 18,471,286 13,739,245 17,854,635
Income before income taxes 22,096,046 14,045,834 16,008,086
Income taxes:
Currently payable (receivable):
Federal 2,108,345 (2,303,962) (83,000)
State and local (144,227) 1,734,908 (505,847)
1,964,118 (569,054) (588,847)
Net income $ 20,131,928 14,614,888 16,596,933
See accompanying notes to condensed financial statements.
</TABLE>
S-3
<PAGE>
<TABLE>
THE SHERWOOD GROUP, INC.
AND SUBSIDIARIES
Schedule III, Continued
Condensed Financial Statements
of the Registrant (Parent)
Statements of Cash Flows
Years ended May 31, 1996, 1995 and 1994
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 20,131,928 14,614,888 16,596,933
Non-cash items included in net income:
Net equity in gain of subsidiaries (18,471,286) (13,739,245)(17,854,635)
Equity income in partnerships (5,546,428) (4,917,494) (3,014,259)
Depreciation and amortization 207,877 207,877 206,390
Allocated tax benefit related to the
exercise of options 4,490,000 - -
(19,319,837) (18,448,862)(20,662,504)
Decrease (increase) in operating assets:
Receivables:
Brokers and dealers (4,675,000) - -
Other (141,300) (98,024) (21,384)
Other assets (275,468) (5,415,032) -
(5,091,768) (5,513,056) (21,384)
(Decrease) increase in operating liabilities:
Accounts payable and accrued expenses 1,344,002 1,231,947 200,576
Net cash used in
operating activities (2,935,675) (8,115,083) (3,886,379)
Cash flows from investing activities:
Investment in partnerships (242,790) - -
Distribution from partnerships 3,041,010 2,641,956 1,602,243
Payment for purchase of securities not
readily marketable - - (400,000)
Loans made to employees and officers (1,622,765) - (309,824)
Principal collected on notes receivable 1,662,765 109,232 72,588
Purchase of subsidiary, net of cash acquired - - (139,986)
Payment for purchase of identified
intangible asset - - (25,030)
Additional capital contributed to subsidiaries (25,100) (2,000,000)(10,425,000)
Issuance of subordinated note - (5,000,000) -
Net cash provided by (used in)
investing activities 2,813,120 (4,248,812) (9,625,009)
(Continued)
</TABLE>
S-4
<PAGE>
<TABLE>
THE SHERWOOD GROUP, INC.
AND SUBSIDIARIES
Schedule III, Continued
Condensed Financial Statements
of the Registrant (Parent)
Statements of Cash Flows, Continued
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Cash flows from financing activities:
Purchase of treasury stock $ (2,061,876) (1,948,126) (1,572,007)
Proceeds from exercise of options 635,000 - 95,000
Net receipts on intercompany
borrowings 1,587,445 14,306,850 15,003,912
Net cash provided by financing
activities 160,569 12,358,724 13,526,905
Net increase (decrease) in cash 38,014 (5,171) 15,517
Cash at beginning of year 22,819 27,990 12,473
Cash at end of year $ 60,833 22,819 27,990
</TABLE>
Supplemental disclosures of cash flow information:
Income tax payments aggregated $5,732,131, $1,882,724 and
$761,011 for the years ended May 31, 1996, 1995 and 1994,
respectively.
Interest payments aggregated $0, $1,292 and $1,254 for the
years ended May 31, 1996, 1995 and 1996 and 1995, 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, 1996 and 1995, to Anvil Institutional Services Company.
During February 1995, the Company entered into a collateralized
$5,000,000 subordinated agreement with Equitrade (see note 3).
During the period from November 1995 through February 1996,
certain executives of the Company exercised an aggregate of
670,000 options for the purchase of 670,000 shares of the
Company's common stock with an exercise price of $1 per share
and 66,000 options for the purchase of 66,000 shares with an
exercise price of $3.625 per share. In order to pay for the
exercise price and to reimburse the Company for the income
taxes ($2,602,997) on the gain related to the transaction, the
executives remitted to the Company 394,697 shares of the
Company's common stock with a market value of $3,487,247.
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, 1996, 1995 and 1994
(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 and
affiliates 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 May 31, 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, 1996 and 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, 1996, 1995 and
1994.
S-6
<PAGE>
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: August 16, 1996 THE SHERWOOD GROUP, INC.
By: /s/ Arthur Kontos
Arthur Kontos
Chief Executive Officer
By: /s/ Denise Isaac
Denise Isaac
Chief Financial Officer
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and
on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ James H. Lynch, Jr. Chairman of the Board August 16, 1996
James H. Lynch, Jr.
/s/ Arthur Kontos Director and Chief August 16, 1996
Arthur Kontos Executive Officer
/s/ Richard J. Marino Director August 16, 1996
Richard J. Marino
/s/ Dennis V. Marino Director August 16, 1996
Dennis V. Marino
/s/ Carl H. Hewitt Director August 16, 1996
Carl H. Hewitt
/s/ Thomas Neumann Director August 16, 1996
Thomas Neumann
/s/ John P. Duffy Director August 16, 1996
John P. Duffy
/s/ Ralph Del Deo Director August 16, 1996
Ralph Del Deo
/s/ Stephen DiLascio Director August 16, 1996
Stephen DiLascio
</TABLE>
EXHIBIT 10.14
FINAL EXECUTION COPY
GUARANTY
GUARANTY (this "Guaranty"), dated as of March 1, 1996,
made by THE SHERWOOD GROUP, INC., as Guarantor, a Delaware
corporation having offices at 10 Exchange Place Centre, 15th
Floor, Jersey City, NJ 07302 (together with its successors
and assigns, "Guarantor") to JOHNSON & HIGGINS, as
Sublandlord ("Sublandlord") and NY BROAD HOLDINGS, INC., as
Sublandlords Designee ("Sublandlord's Designee").
W I T N E S S E T H:
WHEREAS, Sublandlord, as Sublandlord, and Triak
Services Corp., doing business as National Discount Brokers,
as Subtenant, have entered into that certain Sublease
Agreement (the "Sublease"), dated as of March 1, 1996,
relating to the entire fourth floor of that certain building
and premises located at 7 Hanover Square, New York, New
York;
WHEREAS, the Sublease shall not become effective until
Guarantor executes and delivers this Guaranty to Sublandlord
(and Sublandlord's Designee); and
WHEREAS, certain capitalized terms used herein but not
otherwise defined herein are defined by reference to the
Sublease.
NOW, THEREFORE, Guarantor hereby agrees with
Sublandlord (and Sublandlord's Designee) as follows:
1. In consideration of, and as an inducement for, the
granting, execution and delivery of the above-captioned
Sublease (a copy of which is attached hereto as Exhibit A)
and in further consideration of the sum of One Dollar
($1.00) and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged,
Guarantor hereby absolutely, unconditionally and irrevocably
guarantees to Sublandlord (and Sublandlord's Designee) the
full and prompt performance and observance of all of
Subtenant's obligations under the Sublease, including
without limitation, the full and prompt payment of all fixed
rent, additional rent, Article 19 Rent, Electric Charges,
and any other charges or amounts (including, without
limitation, the reasonable attorneys' fees of Sublandlord
and Sublandlord's Designee) (collectively, "Guaranteed
Amount") payable by Subtenant under the Sublease, all
irrespective of the validity, binding effect, legality or
enforceability of the Sublease or whether the Sublease shall
have been duly executed by Subtenant, or any other
circumstance which might now or hereafter or otherwise
constitute a legal or equitable discharge or defense of a
guarantor. Guarantor hereby covenants and agrees with
Sublandlord (and Sublandlord's Designee) that if a default
shall at any time occur in the payment of any Guaranteed
<PAGE>
Amount, Guarantor shall and will forthwith upon demand to
Guarantor pay the Guaranteed Amount and any arrears thereof
to Sublandlord (or Sublandlord's Designee) in legal currency
of the United States of America for payment of public and
private debts.
2. This Guaranty is an absolute, unconditional and
irrevocable guaranty of payment and performance (and not
merely of collection). The liability of Guarantor, as set
forth above, is co-extensive with that of Subtenant and this
Guaranty shall be enforceable against Guarantor without the
necessity of any suit or proceedings on the part of
Sublandlord (or Sublandlord's Designee) of any kind or
nature whatsoever against Subtenant and without the
necessity of any notice of non-payment, nonperformance or
non-observance, or any notice of acceptance of this
Guaranty, or any other notice or demand to which Guarantor
might otherwise be entitled, all of which Guarantor hereby
expressly waives.
3. Guarantor hereby expressly agrees that this
Guaranty shall be a continuing guaranty and that the
validity of this Guaranty and the obligations and liability
of Guarantor hereunder shall in no way be terminated,
affected, diminished or impaired by reason of (a) the
assertion of or the failure by Sublandlord (or Sublandlord's
Designee) to assert against Subtenant any of the rights or
remedies reserved to Sublandlord (and/or Sublandlord's
Designee) pursuant to the terms, covenants and conditions of
the Sublease, or (b) any assignment of the Sublease, or (c)
any renewal or extension of the Sublease or any modification
thereof, whether pursuant to the Sublease or by subsequent
agreement of Sublandlord (and/or Sublandlord's Designee) and
Subtenant, or (d) any extension of time that may be granted
by Sublandlord (and/or Sublandlord's Designee) to Subtenant,
or (e) any consent, indulgence or other action, inaction or
omission under or in respect of the Sublease, or (f) any
dealing or transactions or matter or thing occurring between
Sublandlord (and/or Sublandlord's Designee) and Subtenant,
or (g) any bankruptcy, insolvency, reorganization,
arrangement, assignment for the benefit of creditors,
receivership or trusteeship affecting Subtenant or
Subtenant's successors or assigns whether or not notice
thereof is given to Guarantor, or (h) any matter or thing
whatsoever, whether or not specifically mentioned herein,
other than full payment and performance of all Subtenant's
obligations under the Sublease.
4. No failure or delay on the part of Sublandlord
(and/or Sublandlord's Designee) in exercising any right,
power or privilege under this Guaranty shall operate as a
waiver of or otherwise affect any such right, power or
privilege, nor shall any single or partial exercise thereof
preclude any other or further exercise thereof or the
exercise of any other right, power or privilege.
<PAGE>
5. Guarantor agrees that whenever at any time or from
time to time Guarantor shall make any payment to Sublandlord
(and/or Sublandlord's Designee) on account of the liability
of Guarantor hereunder, Guarantor will notify Sublandlord
(and Sublandlord's Designee) in writing that such payment is
for such purpose. No such payment by Guarantor pursuant to
any provision hereof shall entitle Guarantor, by subrogation
or otherwise, to the rights of Sublandlord (and
Sublandlord's Designee) to any payment by Subtenant or out
of the property of Subtenant, except after payment in full
of all sums owing by Subtenant under the Sublease. -
6. Guarantor agrees that it will, at any time and
from time to time, within ten (10) business days following
written request by Sublandlord (and/or Sublandlord's
Designee), execute, acknowledge and deliver to Sublandlord
(and Sublandlord's Designee), a statement certifying that
this Guaranty is unmodified and in full force and effect (or
if there have been modifications, that the same is in full
force and effect as modified and stating such
modifications). Guarantor agrees that such certificates may
be relied on by anyone holding or proposing to acquire any
interest in the Building from or through Sublandlord (and
Sublandlord's Designee) or by any mortgagee or ground
lessor.
7. The Guarantor represents and warrants to
Sublandlord (and Sublandlord's Designee) as follows:
7.1 The execution, delivery and performance by
Guarantor of this Guaranty have been duly authorized by all
necessary corporate action.
7.2 Guarantor has the full power, authority and
legal right to execute and deliver, and to perform and
observe the provisions of, this Guaranty including the
payment of all moneys hereunder. This Guaranty constitutes
the legal, valid and binding obligation of Guarantor
enforceable in accordance with its terms, except as
enforcement thereof may be limited by (a) bankruptcy,
insolvency, moratorium, reorganization or other similar laws
affecting creditors' rights generally or (b) the
non-availability of equitable remedies which are
discretionary with the courts.
<PAGE>
7.3 No authorization, approval, consent or
permission (governmental or otherwise) of any court, agency,
commission or other authority or entity is required for the
due execution, delivery, performance or observance by the
Guarantor of this Guaranty or for the payment of any sums
hereunder. Guarantor agrees that if any such authorization,
approval, consent, filing or permission shall be required in
the future in order to permit or effect performance of the
obligations of Guarantor under this Guaranty, Guarantor
shall promptly inform Sublandlord (and Sublandlord's
Designee) or any of its successors or assigns and shall use
its best efforts to obtain such authorization, approval,
consent, filing or permission.
7.4 Neither the execution or delivery of this
Guaranty, nor the consummation of the transactions herein
contemplated, nor the compliance with the terms and
provisions hereof, conflict or will conflict with or result
in a breach of any of the terms, conditions or provisions of
the Certificate of Incorporation, By-Laws or similar
documents of Guarantor, or of any law, order, writ,
injunction or decree of any court or government authority,
or of any agreement or instrument to which Guarantor is a
party or by which it is bound, or constitutes or will
constitute a default thereunder.
7.5 Subtenant is a wholly owned subsidiary of
Guarantor.
7.6 There has been no material adverse change in
the business or condition, financial or otherwise, results
of operation or prospects of Guarantor since the date of the
10-K, dated November 1995, copies of which have been
delivered to Sublandlord (and/or Sublandlord's Designee).
8. Guarantor covenants and agrees that it will
maintain its corporate existence, rights and franchise in
full force and effect so long as the Guaranty is
outstanding, and will promptly notify Sublandlord (and
Sublandlord's Designee) of any material adverse change in
its financial condition.
9. It is a condition of the granting, execution and
delivery of the Sublease that Guarantor execute and deliver
this Guaranty and Guarantor deemed the granting, execution
and delivery of the Sublease to be in Guarantor's best
interests and, as the parent company of Subtenant, Guarantor
expects to derive benefit therefrom.
10. Guarantor acknowledges and agrees that all
disputes arising, directly or indirectly, out of or relating
to this Guaranty may be dealt with and adjudicated in the
state courts of New York or the Federal courts sitting in
New York; and hereby expressly and irrevocably submits the
person or Guarantor to the jurisdiction of such courts in
any suit, action or proceeding arising, directly or
indirectly, out of or relating to this Guaranty. So far as
is permitted under the applicable law, this consent to
personal justification shall be self-operative and no
further instrument or action, other than service of process
in one of the manners specified in this Guaranty, or as
otherwise permitted by law, shall be necessary in order to
confer jurisdiction upon the person of Guarantor in any such
court.
<PAGE>
11. Provided that service of process is effected upon
Guarantor in one of the manners hereafter specified in this
Guaranty or as otherwise permitted by law, Guarantor
irrevocably submits itself to the jurisdiction of the courts
mentioned in the previous paragraph for the purposes of any
suit, action or other proceeding arising out of this
Guaranty, and waives, to the fullest extent permitted law,
and agrees not to assert, by way of motion, as a defense or
otherwise, (a) any objection which it may have or may
hereafter have to the laying of the venue of any such suit,
action or proceeding brought in such a court as is mentioned
in the previous paragraph, (b) any claim that any such suit,
action or proceeding brought in such a court has been
brought in an inconvenient forum, (c) any claim that it is
not personally subject to the jurisdiction of the
above-named courts, (d) that its property is exempt or
immune from execution, or (e) that this Guaranty may not be
enforced in or by such court. The undersigned hereby
consents to service of process at its address as stated
above. Provided that service of process is effected upon
Guarantor in one of the manners hereafter specified in this
Guaranty or as otherwise permitted by law, Guarantor agrees
that final judgment from which Guarantor has not or may not
appeal or further appeal in any such suit, action or
proceeding brought in such a court of competent jurisdiction
shall be conclusive and binding upon Guarantor and, may so
far as is permitted under the applicable law, be enforced in
the courts of any state or any Federal court and in any
other courts to the jurisdiction of which Guarantor is
subject, including, without intending any limitation, as to
the Guarantor, the courts of the state of New York, by a
suit upon such judgment and that Guarantor will not assert
any defense, counterclaim, or set off in any such suit upon
such judgment.
12. [Intentionally Deleted.]
13. [Intentionally Deleted.]
14. [intentionally Deleted.]
15. Nothing in this Guaranty shall affect the right of
Sublandlord (and Sublandlord's Designee) to serve process in
any manner permitted by law or limit the right of
Sublandlord (and Sublandlord's Designee) or any of its
successors or assigns, to bring proceedings against
Guarantor in the courts of any jurisdiction or
jurisdictions.
16. Should Sublandlord (and/or Sublandlord's Designee)
be obligated by any bankruptcy or other law to repay
Subtenant or Guarantor or to any trustee, receiver or other
representative of either of them, any amounts previously
paid, then this Guaranty shall be reinstated in the amount
of such repayments. Sublandlord (and Sublandlord's Designee)
shall not be required to litigate or otherwise dispute its
obligation to make such repayment if it in good faith and on
the advice of counsel believes that such obligation exists.
<PAGE>
17. In the event that this Guaranty shall be held
ineffective or unenforceable by any court of competent
jurisdiction, Guarantor shall be deemed to be a subtenant
under the Sublease with the same force and effect as if
Guarantor were expressly named as a joint subtenant therein
with joint and several liability.
18. All remedies afforded to Sublandlord (and
Sublandlord's Designee) by reason of this Guaranty are
separate and cumulative remedies and it is agreed that no
one of such remedies, whether exercised by Sublandlord (and
Sublandlord's Designee) or not, shall be deemed to be in
exclusion of any other remedy available to Sublandlord (and
Sublandlord's Designee) and shall not limit or prejudice any
other legal or equitable remedy which Sublandlord (and/or
Sublandlord's Designee) may have.
19. All defined terms used in this Guaranty which are
defined in the Sublease shall have the meanings ascribed to
such terms in the Sublease.
20. If any provision of this Guaranty or the
application thereof to any person or circumstance shall to
any extent be held void, unenforceable or invalid, then the
remainder of this Guaranty or the application of such
provision to persons or circumstances other than those as to
which it is held void, unenforceable or invalid shall not be
affected thereby and each provision of this Guaranty shall
be valid and enforced to the fullest extent permitted by
law.
21. As a further inducement to Sublandlord (and
Sublandlord's Designee) to make and enter into the Sublease
and in consideration thereof, Guarantor hereby waives trial
by jury and the right thereto in any action or proceeding of
any kind or nature, arising on, under or by reason of or
relating to, this Guaranty or any agreement collateral
hereto.
22. No waiver or modification of any provision of this
Guaranty nor any termination of this Guaranty shall be
effective unless in writing and signed by Sublandlord (and
Sublandlord's Designee), nor shall any waiver be applicable,
except in the specific instance for which it is given.
23. The laws of the State of New York applicable to
contracts made and to be performed wholly within the State
of New York shall govern and control the validity,
interpretation, performance and enforcement of this
Guaranty.
24. This Guaranty shall be binding upon Guarantor and
its successors and assigns and inure to the benefit of
Sublandlord (and Sublandlord's Designee) and their
successors and assigns.
<PAGE>
IN WITNESS WHEREOF, Guarantor has duly executed this
Guaranty as of the day and year first above written.
ATTEST THE SHERWOOD GROUP, INC.,
Guarantor
/s/John Holman By:/s/William Karsh
Name: William Karsh
Title: Treasurer
EXHIBIT 11
<TABLE>
THE SHERWOOD GROUP, INC.
AND SUBSIDIARIES
Computation of Earnings Per Common Share
Years ended May 31, 1996, 1995 and 1994
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Net income $ 20,131,928 14,614,888 16,596,933
Primary:
Net income per common share $ 1.52 1.07 1.20
Fully diluted:
Net income per common share $ 1.52 1.07 1.20
Historical:
Weighted average number of
common stock and common stock
equivalents outstanding:
Primary 13,200,867 13,624,603 13,803,459
Fully diluted 13,201,412 13,652,084 13,821,483
</TABLE>
EXHIBIT 23
Independent Auditors' Consent
The Board of Directors and Stockholders of
The Sherwood Group, Inc.:
We consent to the use of our report dated July 22, 1996
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 16, 1996
<TABLE> <S> <C>
<ARTICLE> BD
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE FINACIAL STATEMENTS FOR THE YEAR ENDED MAY 31, 1996 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAY-31-1996
<PERIOD-END> MAY-31-1996
<CASH> 470313
<RECEIVABLES> 83065324
<SECURITIES-RESALE> 0
<SECURITIES-BORROWED> 0
<INSTRUMENTS-OWNED> 32181980
<PP&E> 12955614
<TOTAL-ASSETS> 143255029
<SHORT-TERM> 0
<PAYABLES> 29550664
<REPOS-SOLD> 0
<SECURITIES-LOANED> 0
<INSTRUMENTS-SOLD> 18827302
<LONG-TERM> 3250000
0
0
<COMMON> 143432
<OTHER-SE> 86426123
<TOTAL-LIABILITY-AND-EQUITY> 143255029
<TRADING-REVENUE> 129788217
<INTEREST-DIVIDENDS> 5907779
<COMMISSIONS> 42142883
<INVESTMENT-BANKING-REVENUES> 0
<FEE-REVENUE> 1353686
<INTEREST-EXPENSE> 320812
<COMPENSATION> 57536289
<INCOME-PRETAX> 35531105
<INCOME-PRE-EXTRAORDINARY> 20131928
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 20131928
<EPS-PRIMARY> 1.52
<EPS-DILUTED> 1.52
</TABLE>
