The Sherwood Group, Inc.
10 Exchange Place Centre
Jersey City, NJ 07302
August 8, 1997
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: The Sherwood Group, Inc.
Report on Form 10-K for the Year Ended May 31, 1997
Gentlemen:
Enclosed please find the following material submitted on behalf of The Sherwood
Group, Inc. ("Company"):
One complete copy of the Company's report on Form 10-K for the year
ended May 31, 1997 including financial statements and exhibits.
Thank you for your attention to this matter./
Very truly yours,
Denise Isaac
Denise Isaac
Chief Financial Officer
And Principal Accounting Officer
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Securities And Exchange Commission
Washington, D.C. 20549
Form 10-K
[X] Annual Report Pursuant To Section 13 Or 15(d)
Of The Securities Exchange Act Of 1934
For the fiscal year ended May 31, 1997
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 City, New Jersey 07302
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (201) 946-2200
Securities registered pursuant to Section 12(b)of the Act:
Name of each exchange
Title of each class 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, 1997, 12,694,665 common shares were outstanding, and the
aggregate market value of the common shares of The Sherwood Group, Inc. held by
non-affiliates was approximately $75,739,000.
Documents Incorporated By Reference
Document Incorporated Part of Report
By Reference Into Which Incorporated
Proxy Statement for Annual Meeting to be held October 21, 1997 Part III
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- 81 -
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 3,400 NASDAQ and Small-Cap securities
as market maker and principal for its own account. Sherwood Securities also acts
as a Specialist in 20 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 and its wholly owned subsidiary, SHD Corporation, formerly
Dresdner-NY Incorporated ("DNY"), also own limited partnership interests in
Equitrade Partners, a New York limited partnership ("Equitrade"). Such limited
partnership interests aggregate approximately 75% of Equitrade's capital as of
July 31, 1997. Equitrade is a registered specialist on the New York Stock
Exchange ("NYSE") and, as of July 31, 1997, was a specialist in 153 equity
securities.
MXNet Inc., a wholly owned subsidiary of the Company, delivers comprehensive
technical solutions to trading organizations.
On January 24, 1997, the Company acquired, from its joint venture partner, the
remaining 51% of Anvil Institutional Services Company (the "Anvil Joint
Venture") that it did not previously own. The Company, therefore, became the
100% owner of Anvil Institutional Services, Inc. ("Anvil"), a broker-dealer
previously owned by the Anvil Joint Venture. Anvil is registered in New York,
California and Ohio.
On May 2, 1997, the Company completed the acquisition of all the stock of DNY,
which was engaged in the specialist business on the NYSE. The shares were
acquired from Dresdner Bank AG for $15,261,493 in cash. Upon consummation of the
acquisition of DNY, DNY transferred the assets (except cash) and liabilities of
DNY to Equitrade. The name of DNY was subsequently changed to SHD Corporation.
On January 24, 1997, the Company acquired, from its joint venture partner, the
remaining 51% of Anvil Institutional Services Company (the "Anvil Joint
Venture") that it did not previously own. The Company, therefore, became the
100% owner of Anvil Institutional Services, Inc. ("Anvil"), a broker-dealer
previously owned by the Anvil Joint Venture.
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. Through May 31, 1997,
1,351,482 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, 1997 to July 31, 1997, no additional shares were repurchased under the
program.
On December 31, 1996, the Company divested itself of its investment in Stock
Market Index, Inc. ("SMI"), a wholly owned subsidiary.
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.
<TABLE>
Revenue by Source
The following table sets forth sources of the Company's revenues on a
comparative basis for the periods indicated:
<CAPTION>
Fiscal Year Ended May 31,
1997 1996 1995 (a)
Amount % Amount % Amount %
<S> <C> <C> <C> <C> <C>
Firm securities
transactions (net) $122,658,577 67.74 $129,788,217 72.03 $77,998,126 75.74
Commission income 32,638,949 18.03 30,723,379 17.05 14,412,331 14.00
Floor brokerage
income 14,588,057 8.06 11,419,504 6.34 2,389,616 2.33
Equity income (loss) in
partnerships (26,176) (0.01) 40,106 .02 3,597,096 3.49
Investment securities
gain - - - - 76,375 .07
Interest and dividend
income 7,774,806 4.29 5,907,779 3.28 3,465,614 3.37
Fee income 2,521,713 1.39 1,353,686 .75 395,417 .38
Other 913,051 0.50 952,537 .53 640,804 .62
------- ---------- -------- ------- ---------- -------- ------- ---------
income
Total revenue $181,068,977 100.00 $180,185,208 100.00 $102,975,379 100.00
============ ====== ============ ====== ============ ======
<FN>
(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 3,400 NASDAQ and Small-Cap securities, as
of July 31, 1997, Sherwood Securities acts as a principal, and on occasion as
agent, 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 1997, 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 2,100 of the
securities displayed on NASDAQ in which Sherwood Securities makes a market are
listed on the national market system list of NASDAQ. Approximately 500
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 300 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
40 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, 1997, Sherwood Securities served as a
specialist in 20 equity securities on the AMEX. This activity is cleared through
Spear Leeds & Kellogg ("SLK"). The Company and SHD also hold limited partnership
interests aggregating approximately 75% of the capital of Equitrade, whose
activity is also cleared through SLK. As of July 31, 1997, Equitrade served as a
specialist in 153 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 long and
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>
1995* $69,158,382 25,653,178 47,079,105
1996** $83,622,273 58,791,795 71,981,880
1997*** $99,440,731 60,363,793 76,123,209
<FN>
* 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>
** 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>
<FN>
***Includes Highest Month End, Lowest Month End and Average Month End for
positions held as a specialist on AMEX of $1,550,693, $486,011 and
$952,960, respectively. Includes Highest Month End, Lowest Month End
and Average Month End for positions held as a specialist on NYSE of
$38,349,683, $19,732,920 and
$26,225,460, 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 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, 1997, approximately 15% of the outstanding common
shares of Emmett A. Larkin Company, Inc.
On August 13, 1996, the Company purchased 100,000 restricted shares of Synxis
Corp. common stock from Intra Serve Corp. for $100,000.
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 55 institutional sales people. Most
transactions with institutional customers involve securities in which Sherwood
Securities is a market maker and are executed as principal transactions.
Retail securities business. NDB is a deep discount brokerage firm specializing
in trade execution for individual investors through IVR and internet
distribution channels. 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, 1997, NDB's
activities were conducted through five offices located throughout the United
States and NDB had over 102,000 customers.
Interest Revenue
Sherwood Securities, NDB and Equitrade receive interest primarily from credit
balances that 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.
Clearing Arrangements
Sherwood Securities, NDB and Equitrade maintain relationships with clearing
brokers who 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, through December 31, 1996, 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 ("Broadcort") 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 an indefinite period of time and may be
terminated upon 90 days prior written notice by either party.
Anvil's transactions are cleared through Pershing and Broadcort. Anvil's
clearing agreement with Pershing is for an indefinite period of time and may be
terminated upon 90 days prior written notice by either party. Anvil's clearing
agreement with Broadcort is for an indefinite period of time and may be
terminated upon 60 days prior written notice by either party.
Personnel
As of July 31, 1997, the Company had 564 full-time employees of which 365 are
salespeople, traders and trading assistants. Included in the preceding employee
counts are NDB's 236 full-time employees of which 134 are sales personnel and
Equitrade's 52 full-time employees of which 46 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, and certain members of management of such
activities 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 sales people). Sabbaticals may also be required for
each subsequent five or three year period of employment completed. In addition,
Sherwood Securities has usually assumed 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 and the
internalization and regionalization of trading activity in securities listed on
the NYSE.
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 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. The designated SRO for Sherwood Securities, NDB
and Anvil is the NASD, while the designated SRO for Equitrade is the NYSE. 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, 1997, Sherwood Securities was registered with the SEC, the NASD, AMEX
and in 20 states and Washington, D.C. As of July 31, 1997, NDB was registered
with the SEC, the NASD and in all 50 states and Washington, D.C. As of July 31,
1997, Equitrade was registered with the SEC and the NYSE. As of July 31, 1997,
Anvil was registered with the SEC, the NASD and in 3 states. As of July 31,
1997, SHD was registered with the SEC and in 1 state.
The legal and compliance departments of Sherwood Securities, NDB and Equitrade
are responsible for ensuring the Company's compliance with the applicable laws
and regulations. The legal and 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 legal and 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 legal and 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, recordkeeping, 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, along with several other broker-dealers, 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. On April 22, 1997, the
District Court approved the Stipulation and Order but a notice of appeal was
filed on May 21, 1997 by the Intervenors, plaintiffs in the multidistrict civil
antitrust action entitled In re NASDAQ Market-Makers Antitrust Litigation (MDL
1023). The case is pending before the United States Court of Appeals for the
Second Circuit. See Item 3, Legal Proceedings".
Changes in regulations pertaining to NASDAQ may have a material effect on
Sherwood Securities' over-the-counter trading activities. In August 1996, the
SEC adopted certain new rules known as the limit order handling rules which
alter the manner in which orders for NASDAQ and listed securities are handled.
These rules became effective on January 20, 1997, with respect to
exchange-listed stocks and certain NASDAQ securities, and have been phased in
for additional NASDAQ stocks during 1997. These rules, and other rules that have
been proposed, regulatory actions and changes in market practices may have an
adverse impact on Sherwood Securities' transaction revenues, profit margin and
on the manner in which it conducts its business.
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, NDB and
Anvil 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, $500,000 for
NDB and $60,000 for Anvil. 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.
To this end, Sherwood Securities employs an automated proprietary trading and
risk management system which provides real time, on-line risk management and
inventory control. Any trades that exceed pre-determined parameters can be
monitored by upper management as can individual and aggregate dollar position
totals and real time profits and losses.
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, Anvil and SHD 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 requirements
for NDB, Equitrade, Anvil and SHD, each of which has elected the basic method,
are $250,000, $250,000, $50,000 and $100,000, respectively.
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 the 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 that are more severe than those imposed on concerns in
other types of business.
From time to time, the Company has needed to borrow funds in connection with its
trading activities. The Company currently has no committed lines of credit and
such borrowings were done on an "as needed" basis.
Compliance with the Rule may limit the operations of Sherwood Securities, NDB,
Equitrade, Anvil and SHD 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,
Equitrade, Anvil and SHD 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.
Sherwood Securities, NDB, Anvil and SHD have been 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, 1996 through May 31, 1997, Sherwood Securities,
NDB, Anvil and SHD were in compliance with the condition of this exemption.
Item 2. Properties
Sherwood Securities' and the Company's office and trading facilities occupy
approximately 36,600 square feet of space at 10 Exchange Place Centre, Jersey
City, New Jersey 07302 under a lease signed in December 1994. This lease
commenced on January 1, 1995 and expires on January 31, 2007. Sherwood
Securities' obligation to pay base rent began 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.
In December 1996, NDB relocated its office and sales facilities from 50
Broadway, New York, New York 10004 to 7 Hanover Square, New York, New York 10004
under a lease signed in March 1996. This 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 began on April 1, 1997. The obligation for any real
estate tax and operating escalations, as defined in the lease agreement, was
effective as of April 1, 1996. Commencing April 1, 1997, base rent on the new
space is approximately $718,000 per annum. During fiscal 1996, in conjunction
with the terms of its leases at its former location, NDB paid a total of $60,000
in order to terminate those leases by October 31, 1996.
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's subsidiaries, and in some cases the Company, have been named as
defendants in lawsuits that allege, among other things, violations of Federal
and state securities and related laws. A substantial settlement or judgment in
any of these cases could have a material adverse effect on the Company. 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 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.
In May 1994, Sherwood Securities, together with many other market-makers on the
NASDAQ, was named as a defendant in a series of purported class action
complaints that have since been consolidated for pre-trial purposes in the
United States District Court for the Southern District of New York (the "Court")
under the caption In Re: NASDAQ Market-Maker Antitrust Litigation, 94 Civ. 3996
(RWS). An Amended Consolidated Complaint was then filed. The Amended
Consolidated Complaint alleged that the defendant firms engaged in activities as
market-makers on the NASDAQ over-the-counter market that violated the federal
antitrust laws. The plaintiffs sought declaratory and injunctive relief, damages
in an amount to be determined and subject to trebling and additional relief.
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 Consolidated 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 Consolidated Complaint denying liability and
asserting certain affirmative defenses. Plaintiffs' motion for class
certification was argued and a decision was issued on November 26, 1996 granting
in part plaintiffs' motion in this action for class certification pursuant to
Rules 23(b)(2) and 23(b)(3) of the Federal Rules of Civil Procedure. On April 9,
1997, Sherwood Securities entered into a Settlement Agreement with plaintiffs'
co-lead counsel on behalf of the class plaintiffs in this matter. The Settlement
Agreement provided for payment by Sherwood Securities of $4,375,000 per
percentage point of its market share of the "Defendants' Market" which was
defined as the 35 NASDAQ market-maker defendants' total number of shares traded
as market-makers in the Class Securities (a designated list of NASDAQ
securities) during the period May 1, 1989 to May 27, 1994. Sherwood Securities'
market share of the Defendants' Market was estimated in the Settlement Agreement
to be 2.10%, which estimate would result in a total principal payment of
$9,187,500. The market share estimate, however, was subject to a verification
procedure and adjustment set forth in the Settlement Agreement. The Settlement
Agreement was later replaced with an Amended Settlement Agreement, with the
effective date remaining April 19, 1997. The Amended Settlement Agreement fixed
Sherwood Securities' principal payment at $9,187,500, thereby eliminating the
need for any further proceedings concerning Sherwood Securities' estimated
market share. The Amended Settlement Agreement provides for the payment of the
$9,187,500 in two installments, 50% ten days after the date of the Amended
Settlement Agreement, and the other 50%, plus accrued interest, 365 days later.
The first such installment was, in fact, paid on April 23, 1997. There are also
non-monetary covenants in the Amended Settlement Agreement which do not become
effective unless and until 23 or more future settling defendants agree to the
entry of a stipulation and order containing the same covenants. In the
non-monetary covenants, Sherwood Securities has agreed to refrain from engaging
in certain types of activities in connection with its NASDAQ market making. One
or more of these non-monetary covenants are subject to being voided in
circumstances set forth in the Amended Settlement Agreement. The Amended
Settlement Agreement provides for a release by "Class Members" of "Released
Claims" against Sherwood Securities and certain related persons and affiliates
as such terms are defined in the Amended Settlement Agreement. The Amended
Settlement Agreement is subject to the approval of the Court. The Amended
Settlement Agreement was submitted to the Court for Preliminary Approval on June
30, 1997. If Preliminary Approval is granted, the Amended Settlement Agreement
will remain subject to Final Approval after notice to the Class. There can be no
assurance that the Court will approve the Amended Settlement Agreement as
submitted or that if the Court approves the Amended Settlement Agreement, the
final judgment of the Court will not be appealed. If appealed, there can be no
assurance that the final judgment of the Court will be affirmed. If the Amended
Settlement Agreement is not approved by the Court or, if appealed, if the
judgment of the Court is not affirmed on appeal, the Amended Settlement
Agreement will be terminated, except to the extent provided in the Amended
Settlement Agreement. The Amended Settlement Agreement also provides that
Sherwood Securities may terminate the Amended Settlement Agreement in certain
other circumstances. The foregoing description of the Amended Settlement
Agreement is a summary, is not complete, and is qualified by reference to the
Amended Settlement Agreement, a copy of which has been filed as Exhibit 10.23 to
this Form 10-K.
On July 16, 1996, Sherwood Securities entered into a Stipulation and Order
resolving a civil complaint filed in the United States District Court for the
Southern District of New York (the "Complaint") by the United States Department
of Justice ("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 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 Complaint 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 was approved by
the United States District Court of the Southern District of New York following
a public hearing, but the District Court's decision has been appealed to the
United States Court of Appeals for the Second Circuit. There can be no assurance
that that United States Court of Appeals will affirm the District Court's
decision or even if affirmed, whether the determination of the United States
Court of Appeals will be further appealed.
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, 1997.
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, 1997. As of such date, the closing sales price per
share for the Company's common stock was $15.25.
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:
<TABLE>
<CAPTION>
Sales Prices
Quarter Ended High Low
------------- ---- ---
<S> <C> <C>
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
August 31, 1996 12.0000 10.2500
November 30, 1996 11.0000 9.5000
February 28, 1997 10.7500 9.2500
May 31, 1997 12.3750 9.7500
</TABLE>
There were no cash dividends declared on the common stock of the Company in the
two-year period ended May 31, 1997. 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, 1997 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,
1997 1996 1995 (b) 1994 1993
---- ---- -------- ---- ----
Operating Data:
<S> <C> <C> <C> <C> <C>
Revenues $181,069 $180,185 $102,975 $89,620 $58,933
Income before income taxes
and extraordinary items 17,992 35,531 18,240 18,304 15,067
Income before
extraordinary items 9,280 20,132 14,615 16,597 8,939
Extraordinary Items:
Utilization of net operating
loss carryforward -- -- -- -- 5,024
Net income (a) 9,280 20,132 14,615 16,597 13,963
Per Share Data (c):
Income before
extraordinary item (a) .72 1.52 1.07 1.20 .64
Net income .72 1.52 1.07 1.20 1.00
Balance Sheet Data:
Total assets 160,161 143,255 113,031 77,616 60,027
Common stockholders' equity 92,274 86,570 65,978 53,311 38,191
Book value per share (c) 7.13 6.56 4.84 3.86 2.72
Dividends -- -- -- -- --
<FN>
(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>
(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. The results of operations for years beginning subsequent to
May 31, 1995 also account for the operations of Equitrade on a consolidated
basis.
</FN>
<FN>
(c) Earnings per share and book value per share are computed by dividing net
income and common stockholders' equity, respectively, 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 1997 Compared to Fiscal 1996
The results for the year ended May 31, 1997 reflect primarily the activities of
Sherwood Securities, NDB and Equitrade. Certain fiscal 1996 amounts have been
reclassified to conform with the fiscal 1997 presentation.
The Company had a net profit for the year ended May 31, 1997 of $9,280,000,
compared to a net profit of $20,132,000 for the year ended May 31, 1996.
Sherwood Securities had a net profit for the year ended May 31, 1997 of
$6,680,000, compared to a net profit for the year ended May 31, 1996 of
$15,318,000. Exclusive of a litigation settlement charge of $9,188,000 and
associated professional fees, net of reduced bonus and tax expenses, net profit
for the Company and Sherwood Securities would have been $13,155,000 and
$11,458,000, respectively, for the year ended May 31, 1997. Triak had a net loss
for the year ended May 31, 1997 of $300,000, compared to a net profit of
$3,089,000 for the year ended May 31, 1996. This decrease reflects significant
investments in technology and facilities, and an increase in personnel resulting
from the expansion of NDB's activities. Despite the negative financial impact
these investments and personnel expenses had on the current year's earnings,
NDB's investment in its infrastructure and personnel was necessary to service
and support NDB's future growth. Equitrade had a net profit for the year ended
May 31, 1997 of $10,587,000 (of which the Company's share was $6,190,000). For
the year ended May 31, 1996, Equitrade had a net profit of $9,136,000 (of which
the Company's share was $5,507,000).
Revenue increased by approximately $884,000, or 1%, from $180,185,000 in 1996 to
$181,069,000 in 1997.
Most of the Company's income arises from firm securities transactions. Sherwood
Securities' profits from firm securities transactions decreased $5,475,000, or
4%, from $123,302,000 in 1996 to $117,827,000 in 1997 although its overall
trading volume increased approximately 1% for the year ended May 31, 1997, when
compared with the year ended May 31, 1996 as 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, such as limit order protection, have
resulted in an increase in the number of transactions executed on an "even"
basis. Tightened spreads between "bid" and "ask" prices, the new limit order
display rules, increased volatility in the marketplace and increased Small Order
Execution Systems ("SOES") activity have also been factors in the decrease in
trading profits per ticket. As previously described in Item 1, "Regulation",
these changes may have an adverse impact on Sherwood Securities' trading
profits.
The Company's commission income increased by $1,916,000, or 6%, from $30,723,000
in 1996 to $32,639,000 in 1997. This modest increase is primarily due to
increases in trading volume and customer accounts. Offsetting some of these
increases is a shift in the way customers trade with NDB. Throughout the year
ended May 31, 1997, more customers traded through NDB's lower-priced, automated
systems, Power Broker(TM) and Webstation(TM), as opposed to live
representatives.
Floor brokerage income increased by $3,168,000, or 28%, from $11,420,000 in 1996
to $14,588,000 in 1997. This increase was the result of increases in both the
volume of Equitrade's transactions and an increase in the number of stocks in
which Equitrade is the specialist. The increase from 94 stocks at May 31, 1996
to 149 stocks at May 31, 1997 was due principally to the acquisition, on May 2,
1997, of SHD Corporation (formerly Dresdner-NY Incorporated) which added 54
stocks to Equitrade's specialist list.
For the years ended May 31, 1997 and May 31, 1996, the principal portion of
equity income in partnerships was equity income from the Anvil Joint Venture.
Interest and dividend income increased by $1,867,000 from $5,908,000 in 1996 to
$7,775,000 in 1997. 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 $1,168,000 from $1,354,000 in 1996 to $2,522,000 in
1997. The increase is due to larger 12b-1 fees received from money market funds
as NDB's customers' balances in those funds have increased since the prior year.
Total expenses increased $17,726,000, or 13%, from $141,025,000 in 1996 to
$158,751,000 in 1997. Exclusive of the litigation settlement charge of
$9,188,000 and associated professional fees, net of reduced bonus expense, total
expenses for the year ended May 31, 1997 would have been $151,300,000, an
increase of 7% from the prior year.
The reasons for the increase in expenses are set forth below.
Clearing and related charges increased by $1,651,000 from $55,631,000 in 1996 to
$57,282,000 in 1997. This increase is principally due to the operations of NDB
for which clearance charges rose by approximately $991,000 over the prior year
due to the increase in the volume of transactions. In addition, there was a net
increase of approximately $631,000 in clearance, correspondent and execution
charges on Sherwood Securities' OTC market making activities.
Compensation and benefits increased $1,863,000 from $57,536,000 in 1996 to
$59,399,000 in 1997. The increase was primarily due to higher salaries for
additional employees hired (principally due to the commencement of operations of
MXNet and the expansion of NDB) offset by decreases in both traders' commissions
and in executive and staff bonuses. The decrease in Sherwood Securities' trading
profits led to the reduction in commissions while the overall reduced
profitability of the Company accounted for the decrease in bonuses.
Communication expenses increased by $485,000 from $10,768,000 in 1996 to
$11,253,000 in 1997. The increase was mainly due to an increase in the
activities of NDB, primarily the expansion of its toll-free customer quotation
service and an increase in trading volume.
Advertising costs increased $1,078,000 from $1,724,000 in 1996 to $2,802,000 in
1997. During the second half of fiscal 1997, the Company incurred the costs of a
new ad campaign which was launched by NDB and which included various forms of
media advertising.
Occupancy costs and equipment rental decreased $485,000 from $3,166,000 in 1996
to $2,681,000 in 1997. The decrease is attributable to a decline for Sherwood
Securities which, last year, incurred rent concurrently on two main office
locations as it awaited its move from New York to New Jersey. Offsetting this
decrease was higher occupancy costs incurred as a result of the signing of a new
lease for the relocation of NDB's main offices.
Professional fees increased by $1,291,000 from $2,243,000 in 1996 to $3,534,000
in 1997. During the year ended May 31, 1997, the Company incurred approximately
$535,000 in legal, accounting and investment banker fees and expenses, financial
institution commitment fees and out-of-pocket expenses in connection with the
Company's review of a possible acquisition which was not consummated. The
Company also incurred additional legal fees in connection with the litigation
settlement negotiations and the entry into the settlement agreement in the case
entitled In Re: NASDAQ Market-Makers Antitrust Litigation, 94 Civ. 3996(RWS).
See Item 3, "Legal Proceedings".
Depreciation and amortization increased by $812,000 from $4,079,000 in 1996 to
$4,891,000 in 1997. The increase was primarily due to depreciation and
amortization incurred on fixed asset and leasehold improvement additions by the
Company aggregating approximately $11,000,000 during the year ended May 31,
1997.
Travel and entertainment expense increased $356,000 from $1,502,000 in 1996 to
$1,858,000 in 1997. The increase is primarily due to the sales effort related to
MXNet's operations and additional entertaining of customers by Sherwood
Securities' institutional sales force.
Repairs and maintenance expense increased by $400,000 from $554,000 in 1996 to
$954,000 in 1997. The increase is primarily due to maintenance service contract
fees paid in order to maintain Sherwood Securities' and NDB's infrastructures as
the original warranties on the various systems expire.
Interest expense increased $108,000 from $321,000 in 1996 to $429,000 in 1997
and primarily represents an increase in interest on capital paid by Equitrade to
its minority partners and interest paid by Equitrade on its subordinated debt.
Litigation settlement, for the year ended May 31, 1997, represents a charge in
connection with the settlement agreement.
Other expenses increased $979,000 from $3,501,000 in 1996 to $4,480,000 in 1997.
The increase is primarily attributable to increases in public relations expenses
and in the cost of research associated with soft dollar transactions. Also
contributing to the increase is the assumption of costs related to the advent of
a debit card program for preferred customers of NDB. 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 partners of Equitrade, other than the
Company and its subsidiary, SHD, during the years ended May 31, 1997 and May 31,
1996.
The Company's effective tax rate increased from approximately 43% for the year
May 31, 1996 to approximately 48% for the year ended May 31, 1997. The
difference in rates is due to several factors. During the year ended May 31,
1996, the Company recognized certain tax benefits primarily related to employee
compensation arrangements, which were not available during the year ended May
31, 1997. In addition, as a result of significant capital additions during the
year ended May 31, 1997 for NDB, the Company's consolidated state income tax
rate increased.
In addition, the Company recorded for financial statement purposes, the unpaid
expense incurred in connection with the settlement agreement in the fiscal year
ended May 31, 1997. Such unpaid is deemed by the Company to be nondeductible for
income tax purposes in the fiscal year ended May 31, 1997, as the economic
performance rules have not been met. The Company has, therefore, recorded a
deferred tax benefit for the future tax consequences of events that have been
recognized in its financial statements but not yet included in its tax returns,
based upon enacted tax laws and rates, subject to management's judgment that
realization of the tax benefit is more likely than not. For the year ended May
31, 1997, deferred taxes principally relate to the future deductibility of the
expense for the settlement agreement that the Company has recorded and which is
expected to be paid. In conjunction with the deferred tax asset the Company has
recorded, the Company has booked a valuation allowance of approximately $155,000
due to management's judgment of the likelihood of realization.
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 1997 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.
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. The reasons for the increase in expenses are set forth
below.
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 $4,397,000 from $6,371,000 in 1995 to
$10,768,000 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 $1,595,000 from $1,906,000 in 1995 to $3,501,000 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 partners of Equitrade, other than the
Company, 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 1997 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. The reasons for the increase in expenses are set forth
below.
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 partners of Equitrade, other than the
Company, 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.
Liquidity and Capital Resources
The Company's tangible assets are highly liquid, but subject to market price
fluctuation, with more than 66% 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. In addition, at May 31, 1997, margin account borrowings of
approximately $122,000,000 were available to the Company from its clearing
brokers.
The Company's broker-dealer subsidiaries, Sherwood Securities, NDB, Equitrade,
Anvil and SHD 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, 1997, Sherwood Securities, NDB, Equitrade, Anvil and SHD
had approximately $18,041,000, $2,049,000, $28,130,000, $312,000 and $1,360,000
in excess of the minimum required net capital requirements, respectively,
representing decreases of $18,624,000 for Sherwood Securities, $3,576,000 for
NDB and $4,081,000 for SHD, and increases of $5,544,000 for Equitrade and
$180,000 for Anvil, from the prior year. The decrease for Sherwood Securities
resulted primarily from loans to the parent company for the purchase of SHD and
to affiliates for the upgrading of their technological infrastructures. The
decrease in NDB's excess net capital was principally the result of purchases in
connection with its technological upgrade. The decrease for SHD was primarily
due to the contribution of securities positions to Equitrade in exchange for a
limited partnership interest. Equitrade's excess net capital increase was
principally due to fiscal year 1997 net income offset by distributions made to
partners. The increase in Anvil's excess net capital was primarily due to an
additional capital infusion by the Company offset by losses incurred during the
year. The net capital rule imposes financial restrictions upon Sherwood
Securities', NDB's, Equitrade's, Anvil's and SHD'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, Equitrade, Anvil and SHD which directly affects the amount of
funds available for operating, investing and financing activities.
From time to time, the Company has needed to borrow funds in connection with its
trading activities. The Company currently has no committed lines of credit and
such borrowings were done on an "as needed" basis.
Fixed assets and computer software of approximately $9,762,000 were purchased
and placed into service by NDB during the year ended May 31, 1997 in connection
with the relocation of NDB's headquarters during December 1996. The Company also
made deposits of approximately $726,000 on various fixed assets and computer
software, accounting for the increase in other assets reflected on the statement
of financial condition as of May 31, 1997. The Company anticipates that it will
spend an additional $1,300,000 over the next 6 months for the ongoing upgrade of
NDB's technological infrastructure and intends to finance this upgrade out of
internally generated funds.
In connection with the commencement of operations of MXNet, the Company expended
approximately $2,900,000 for operating costs and purchases of fixed assets
during the year ended May 31, 1997. Such funds were provided from internally
generated sources. No further capital expenditures are planned at this time.
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, 1997, approximately 15% of the outstanding common
shares of Emmett A. Larkin Company, Inc.
During July 1996, Equitrade purchased an additional seat on the NYSE for
$1,450,000.
On August 13, 1996, the Company purchased 100,000 restricted shares of Synxis
Corp. common stock from Intra Serve Corp. for $100,000.
On November 21, 1996, Equitrade loaned RSF Partners, a NYSE specialist firm,
$500,000 under a subordination agreement with interest payable at 8% per annum
and a maturity date of November 30, 1997. As additional consideration for the
loan, RSF Partners granted to Equitrade the exclusive right of first refusal to
acquire RSF Partners' specialist unit, subject to NYSE approval. During April
1997, the loan was repaid in full.
On November 22, 1996, the Company loaned $100,000 to Eurotech Ltd. In addition
to a promissory note bearing interest at the rate of 12% per annum, the Company
received 75,000 shares of Eurotech Ltd. common stock.
As of December 31, 1996, the Company entered into an agreement with the
president of its subsidiary, SMI, pursuant to which the Company sold all the
shares of SMI to the president of SMI in exchange for a personal note of the
president in the amount of $132,187. The note is secured by the shares of SMI.
The Company recognized a loss, after taxes, of approximately $65,000 on this
sale.
On January 24, 1997, the Company purchased from its partner in the Anvil Joint
Venture the partner's 51% joint venture interest for $188,780. As part of the
agreement, the partner signed a covenant not to compete for a period of one
year.
During the year ended May 31, 1997, the Company made two loans of $3,000,000
each to NDB, in the form of subordination agreements and also made an additional
capital contribution to Anvil of $284,965. These funds were expended in order
for NDB and Anvil to maintain adequate regulatory capital levels. The Company
will make additional loans or contributions to its broker-dealer subsidiaries,
as necessary, to ensure regulatory compliance
On May 2, 1997, the Company purchased, from Dresdner Bank AG, 100% of the common
stock of Dresdner-NY, Incorporated ("DNY", subsequently renamed SHD
Corporation), for a purchase price of $15,261,493. DNY served as a specialist in
54 securities on the NYSE. The acquisition included four seats on the NYSE and
DNY's receivable for floor brokerage. The assets including four seats on the
NYSE (excluding cash) and liabilities of DNY were transferred by the Company to
Equitrade. Two employees of DNY retained a portion of the specialist book of DNY
and became limited partners if Equitrade. The balance of the specialist book
remained with Equitrade, and the Company is entitled to 38.4% of the net profits
and net losses from the specialist activities of this specialist book. The
transaction was approved by the NYSE and reviewed under the Hart-Scott-Rodino
Antitrust Improvement Act of 1976. The funding for this transaction was
internally generated.
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, 1997, 1,351,482 shares had
been repurchased, of which 340,907 were repurchased during fiscal 1997. The
source of funds for these purchases was internally generated.
Sherwood Securities', NDB's, Equitrade's, Anvil's and SHD'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 21, 1997
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 21, 1997 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 21, 1997 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 21, 1997 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, 1997 the
Company filed one report on Form 8-K dated May 2, 1997.
(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, 1997, 1996 and 1995
(With Independent Auditors' Report Thereon)
<PAGE>
THE SHERWOOD GROUP, INC.
AND SUBSIDIARIES
Index to Consolidated Financial Statements
<TABLE>
<CAPTION>
Page
<S> <C>
Independent Auditors' Report F-2
Consolidated Financial Statements and Notes:
Consolidated Statements of Financial Condition -
May 31, 1997 and 1996 F-3 to F-4
Consolidated Statements of Income -
Years ended May 31, 1997, 1996 and 1995 F-5
Consolidated Statements of Changes in Stockholders' Equity -
Years ended May 31, 1997, 1996 and 1995 F-6
Consolidated Statements of Cash Flows -
Years ended May 31, 1997, 1996 and 1995 F-7 to F-9
Notes to Consolidated Financial Statements F-10 to F-24
The following financial statement schedule is submitted herein on the pages
indicated below:
Schedule I - Condensed Financial Statements of the Registrant (Parent)
- May 31, 1997 and 1996
and Years ended May 31, 1997, 1996 and 1995 S-1 to S-6
</TABLE>
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, 1997 and 1996, 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,
1997. 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, 1997 and 1996, and the results of their
operations and their cash flows for each of the years in the three-year period
ended May 31, 1997 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 schedule listed
in answer to Item 14(d). This financial statement schedule is the responsibility
of the Company's management. Our responsibility is to express an opinion on this
financial statement schedule based on our audits.
In our opinion, such financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
KPMG Peat Marwick LLP
July 22, 1997
F-2
<PAGE>
THE SHERWOOD GROUP, INC.
<TABLE>
AND SUBSIDIARIES
Consolidated Statements of Financial Condition
May 31, 1997 and 1996
<CAPTION>
Assets 1997 1996
---- ----
<S> <C> <C>
Cash $ 3,033,818 470,313
Funds segregated for customers 29,203 -
Receivables:
Brokers and dealers 58,047,183 78,628,199
Other (note 11) 599,725 489,867
Securities owned, at market value (note 4) 45,696,436 32,181,980
Investment securities not readily marketable,
at fair value 501,320 401,320
Investment in partnerships (note 3) 12,984 261,286
Loans and notes receivable (note 11) 830,589 697,258
Furniture, fixtures, equipment, and leasehold
improvements - at cost, net of accumulated
depreciation and amortization (note 6) 20,263,511 12,955,614
Computer software - at cost, net of accumulated
amortization of $929,942 at May 31, 1997 and
$493,936 at May 31, 1996 1,853,693 766,256
Intangible assets, net of accumulated
amortization of $535,853 at May 31, 1997
and $1,245,176 at May 31, 1996 (note 3) 6,727,958 2,943,104
Exchange memberships (market value $7,957,750
at May 31, 1997 and $2,827,500 at May 31, 1996) (note 7) 7,416,496 1,166,496
Subordinated notes receivable (note 9) 3,000,000 3,250,000
U.S. Treasury obligations, held as collateral 7,815,254 7,782,514
Deferred tax asset, net of valuation allowance (note 8) 2,220,472 -
Other assets 2,112,083 1,260,822
-------------- ---------------
Total assets $ 160,160,725 143,255,029
============== ===============
</TABLE>
(Continued)
F-3
<PAGE>
THE SHERWOOD GROUP, INC.
AND SUBSIDIARIES
<TABLE>
Consolidated Statements of Financial Condition, Continued
<CAPTION>
Liabilities and Stockholders' Equity 1997 1996
---- ----
<S> <C> <C>
Liabilities:
Securities sold, not yet purchased, at market
value (note 4)$ 25,129,290 18,827,302
Accounts payable and accrued expenses,
including compensation payable to officers
and employees of $11,831,551 at May 31, 1997
and $15,553,291 at May 31, 1996 (note 14) 31,734,213 24,212,338
Secured demand notes payable (note 9) 3,000,000 3,250,000
Income taxes payable (note 8) 302,501 5,338,326
Minority interest in Equitrade 7,720,236 5,057,508
-------------- ---------------
Total liabilities 67,886,240 56,685,474
-------------- ---------------
Commitments and contingencies (notes 14 and 15)
Stockholders' equity (notes 10, 12 and 13):
Preferred stock - $.01 par value; 1,000,000 shares
authorized, none issued - -
Class A common stock - $.01 par value;
50,000,000 shares authorized, none issued - -
Common stock - $.01 par value; 50,000,000 shares
authorized, 14,343,201 shares issued at May 31,
1997 and 1996 143,432 143,432
Additional paid-in capital 57,189,985 56,958,790
Retained earnings 47,215,833 37,936,140
---------------------------------------------------------------------- --------------
104,549,250 95,038,362
Less: Treasury stock - at cost,
1,648,536 shares at May 31, 1997 and
1,313,469 shares at May 31, 1996 (12,274,765) (8,468,807)
--------------- ---------------
Total stockholders' equity 92,274,485 86,569,555
-------------- ---------------
Total liabilities and stockholders' equity $ 160,160,725 143,255,029
============== ===============
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
THE SHERWOOD GROUP, INC.
AND SUBSIDIARIES
<TABLE>
Consolidated Statements of Income
Years ended May 31, 1997, 1996 and 1995
<CAPTION>
1997 1996 1995
- --------------------------------------------------------------------------------------------------------------
Revenue:
<S> <C> <C> <C>
Firm securities transactions - net $ 122,658,577 129,788,217 77,998,126
Commission income 32,638,949 30,723,379 4,412,331
Floor brokerage income 14,588,057 11,419,504 2,389,616
Equity income (loss) in partnerships (note 3) (26,176) 40,106 3,597,096
Investment securities gains realized - - 76,375
Interest and dividends 7,774,806 5,907,779 3,465,614
Fee income 2,521,713 1,353,686 395,417
Other 913,051 952,537 640,804
----------------------------------------------------- --------- ----------------
Total Revenue 181,068,977 180,185,208 102,975,379
--------------- ------------ -----------
Expenses:
Clearing and related brokerage charges 57,282,285 55,631,233 34,765,052
Compensation and benefits
(notes 10, 12 and 14) 59,398,845 57,536,289 31,375,322
Communications 11,252,936 10,767,515 6,370,985
Depreciation and amortization 4,891,324 4,079,015 1,797,575
Advertising costs 2,801,700 1,724,117 2,605,167
Occupancy costs and equipment rental (note 14) 2,681,439 3,165,851 1,855,771
Professional fees 3,533,937 2,243,338 1,571,828
Travel and entertainment 1,858,191 1,502,228 1,228,287
Repairs and maintenance 954,072 553,521 438,262
Interest 429,378 320,812 50,984
Litigation settlement (note 15) 9,187,500 -
- -
Other 4,479,601 3,501,198 1,906,079
-------------------------------------------------- -------------- -------------
Total Expenses 158,751,208 141,025,117 83,965,312
--------------- --------------- ----------
Income before minority interest
and income taxes 22,317,769 39,160,091 19,010,067
Income of Equitrade allocated to minority partners (4,326,095) (3,628,986) (770,041)
--------------- -------------- ------------
Income before income taxes 17,991,674 35,531,105 18,240,026
Income taxes (note 8) 8,711,981 15,399,177 3,625,138
------------- -------------- -------------
Net income $ 9,279,693 20,131,928 14,614,888
========= ============== ==============
Net income per common share $ .72 1.52 1.07
=== ==== ====
Weighted average common shares outstanding: 12,941,287 13,200,867 13,624,603
============== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
THE SHERWOOD GROUP, INC.
AND SUBSIDIARIES
<TABLE>
Consolidated Statements of Changes in Stockholders' Equity
Years ended May 31, 1997, 1996 and 1995
<CAPTION>
Additional
Common Common paid-in Retained Treasury Treasury
shares stock capital earnings shares stock Total
------ ----- ------- -------- ------ ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
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
Issuance of treasury stock upon exercise
of options - - (1,175,262) - 1,346,000 7,184,518 6,009,256
Acquisition of treasury stock - - - - (625,979) (5,549,130) (5,549,130)
------------- ------------ -------------- ----------------------------------------- -------
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
Net income 9,279,693 9,279,693
Acquisition of treasury stock (429,094) (4,462,830) (4,462,830)
Issuance of treasury stock upon
exercise of options 231,195 94,027 656,872 888,067
-------------- ------------------------- -------------- --------------------------- ---------
Balance at May 31, 1997 14,343,201 $ 143,432 57,189,985 47,215,833 (1,648,536) (12,274,765)$ 92,274,485
============= ============= ======================== ============= ============== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
THE SHERWOOD GROUP, INC.
AND SUBSIDIARIES
<TABLE>
Consolidated Statements of Cash Flows
Years ended May 31, 1997, 1996 and 1995
<CAPTION>
1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 9,279,693 20,131,928 14,614,888
Non-cash items included in net income:
Equity (income) loss in partnerships 26,176 (40,106) (3,597,096)
Depreciation and amortization 4,891,324 4,079,015 1,797,575
Gain on sale of investment
securities not readily marketable - - (76,375)
Income of Equitrade allocated to
minority partners 4,326,095 3,628,986 770,041
Provision for deferred taxes (2,220,472) - -
Loss on sale of subsidiary 123,006 - -
Tax benefit related to employee compensation
arrangements - 4,490,000 -
(Increase) decrease in operating assets:
Funds segregated for customers (29,203) - -
Receivables:
Brokers and dealers 23,344,762 (30,825,770) 3,171,467
Other (78,693) (265,818) 154,406
U.S. Treasury obligations held as collateral (32,740) 89,337 (3,062,677)
Securities owned, at market value (9,733,796) 9,595,915 (23,974,582)
Other assets (net of deposits on furniture,
fixtures, equipment and leasehold
improvements) (457,385) 138,418 (3,317,430)
Increase (decrease) in operating liabilities:
Securities sold, not yet purchased, at
market value 4,790,211 (5,797,653) 13,550,853
Accounts payable and accrued expenses 6,814,638 7,138,010 1,215,495
Income taxes payable (4,987,878) 3,972,470 1,126,949
---------------- -------------- --------------
Net cash provided by operating
activities 36,055,738 16,334,732 2,373,514
--------------- -------------- --------------
</TABLE>
(Continued)
F-7
<PAGE>
THE SHERWOOD GROUP, INC.
AND SUBSIDIARIES
<TABLE>
Consolidated Statements of Cash Flows, Continued
<CAPTION>
1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from investing activities:
Distributions from partnerships $ 5,150 31,000 2,641,956
Proceeds from sales of investment securities
not readily marketable - - 99,575
Payment for purchase of investment securities
not readily marketable (100,000) - -
Loans made and notes issued to employees and
officers (237,652) (1,738,840) (242,500)
Principal collected on notes receivable 104,321 1,683,617 1,039,107
Purchases of furniture, fixtures and
equipment and leasehold improvements (11,429,602) (12,556,959) (1,887,179)
Purchases of computer software (1,413,233) (537,136) (28,019)
Acquisition of intangible asset (4,128,024) - (2,650,000)
Payment for purchase of non-compete
agreement (188,780) - (250,000)
Purchase of subsidiaries (net of cash,
intangibles and exchange memberships
acquired) (6,311,493) - -
Purchase of exchange memberships (6,250,000) - -
Issuance of subordinated note (500,000) - -
Principal collected on subordinated note 500,000 - 1,000,000
--------------- -------------- --------------
Net cash used in investing activities (29,949,313) (13,118,318) (277,060)
--------------- -------------- --------------
Cash flows from financing activities:
Purchase of treasury stock (3,569,937) (2,061,876) (1,948,126)
Proceeds from exercise of options - 635,000 -
Capital contribution by minority interest 185,658 29,575 500,000
Capital withdrawals by minority interest (1,849,025) (1,942,273) (647,143)
--------------- -------------- --------------
Net cash used in financing activities (5,233,304) (3,339,574) (2,095,269)
--------------- -------------- --------------
Net increase (decrease) in cash 873,121 (123,160) 1,185
Cash acquired due to consolidation of:
Equitrade as of March 1, 1995 - - 117,555
Anvil as of January 24, 1997 22,740 - -
SHD Corporation as of May 2, 1997 1,667,644 - -
Cash at beginning of year 470,313 593,473 474,733
--------------- -------------- --------------
Cash at end of year $ 3,033,818 470,313 593,473
=============== ============== ==============
</TABLE>
(Continued)
F-8
<PAGE>
THE SHERWOOD GROUP, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
Supplemental disclosures of cash flow information:
Income tax payments totaled $15,946,000, $6,948,770 and $2,842,399 during
the years ended May 31, 1997, 1996 and 1995, respectively.
Interest payments totaled $658,276, $890,495 and $50,984 for the years
ended May 31, 1997, 1996 and 1995, respectively.
Supplemental disclosures of non-cash investing and financing activities:
As a result of the sale of its subsidiary, Stock Market Index, Inc., during
December 1996, the Company wrote off the remaining book value of certain
computer software and intangible assets aggregating $255,193. In addition,
as part of the sale, the Company received a note in the face amount of
$132,187 from the buyer, resulting in a net loss of $123,006.
On January 24, 1997, the Company acquired, from its joint venture partner,
the remaining 51% of Anvil Institutional Services Company (the "Anvil Joint
Venture") that it did not previously own. The Company, therefore, became
the 100% owner of Anvil Institutional Services Inc. ("Anvil"), a
broker-dealer previously owned by the Anvil Joint Venture. Accordingly, the
assets, liabilities and stockholder's equity of Anvil have been
consolidated with those of the Company as of the acquisition date. The
increases or decreases in operating assets and liabilities reflected in the
consolidated statement of cash flows for the year ended May 31, 1997
exclude amounts for the assets and liabilities of Anvil which were assumed
as part of the acquisition.
During February 1997, an executive of the Company exercised an aggregate of
94,027 options for the purchase of 94,027 shares of the Company's common
stock with exercise prices ranging from $7.9375 per share to $9.1875 per
share. In order to pay for the exercise price ($838,324) and to reimburse
the Company for the personal income taxes ($54,569) on the gain related to
the transaction, the executive remitted to the Company 88,187 shares of the
Company's common stock with a market value of $892,893.
On May 2, 1997, the Company acquired 100% of the common stock of
Dresdner-NY Incorporated, subsequently renamed SHD Corporation ("SHD").
Accordingly, the assets, liabilities and stockholder's equity of SHD have
been consolidated with those of the Company as of the acquisition date. The
increases or decreases in operating assets and liabilities reflected in the
consolidated statement of cash flows for the year ended May 31, 1997
exclude amounts for the assets and liabilities of SHD which were assumed as
part of the acquisition.
See accompanying notes to consolidated financial statements.
F-9
<PAGE>
THE SHERWOOD GROUP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
May 31, 1997, 1996 and 1995
(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"). National Discount Brokers ("NDB"), another registered
broker-dealer, is a division of the Company's wholly owned subsidiary,
Triak Services Corp. The Company has a 60% special limited partnership
interest in Equitrade Partners ("Equitrade"), which is a specialist for
securities listed on The New York Stock Exchange ("NYSE"). The company
also acquired a further limited partnership interest in Equitrade on May
2, 1997 which is described below. Sherwood Securities is a also a
specialist for securities listed on the American Stock Exchange. During
May 1996, the Company commenced operations of a new wholly owned
subsidiary, MXNet Inc. ("MXNet"), formerly Market Distribution Concepts
Inc. MXNet delivers comprehensive technical solutions to trading
organizations. As of December 31, 1996, the Company divested itself of
its investment in Stock Market Index, Inc., a wholly owned subsidiary.
Finally, on January 24, 1997, the Company acquired, from its joint
venture partner the remaining 51% of Anvil Institutional Services Company
(the "Anvil Joint Venture") that it did not previously own. The Company,
therefore, became the 100% owner of Anvil Institutional Services Inc.
("Anvil"), a broker-dealer previously owned by the Anvil Joint Venture.
On May 2, 1997, the Company acquired all the stock of SHD Corporation
(formerly Dresdner-NY Incorporated), which is engaged in the specialist
business on the NYSE. The assets, including four seats on the NYSE,
except cash, and liabilities of SHD Corporation ("SHD") were then
contributed by SHD to Equitrade in exchange for a limited partner
interest. Two employees of SHD retained a portion of the specialist book
of SHD and also became limited partners of Equitrade. SHD is entitled to
38.4% of the net profits and net losses from the activities of this
specialist book.
(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 securities transactions - net in the consolidated
statements of income. U.S. Treasury obligations are carried at
market value.
F-10
<PAGE>
THE SHERWOOD GROUP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(2), Continued
(d) For all subsidiaries, except MXNet, 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 three 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.
MXNet depreciates all furniture, fixtures, equipment and computer
software over three years.
(e) 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 and year-end market prices, the "treasury-stock
method") during each of the years. The effect of common stock
equivalents is not material.
(f) Certain prior year amounts have been reclassified to conform with
the fiscal year ended May 31, 1997 presentation.
(g) 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.
(h) 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 the 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.
(i) In March 1995, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 121
"Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of" ("SFAS No. 121"), for
periods beginning after December 15, 1995. SFAS No. 121
requires that long lived assets and certain identifiable
intangibles to be held and used by an entity be reviewed for
impairment whenever events or changes in circumstances
would indicate that the carrying amount of an asset may not
be recoverable. Management of the Company believes that there
were no events or changes in circumstances that would indicate
that the carrying amounts as of May 31, 1997, of its
long-lived and intangible assets may not be recoverable.
F-11
<PAGE>
THE SHERWOOD GROUP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(2), Continued
(j) In October 1995, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 123 "Accounting
for Stock-Based Compensation" ("SFAS No. 123"), for periods beginning
after December 15, 1995. SFAS No. 123 replaces the current standard
used to calculate compensation expense in regard to stock-based
compensation, Accounting Principles Board Opinion No. 25 ("APB 25").
Under APB 25, compensation expense would be recorded on the date of an
option grant only if the current market price of the underlying stock
exceeded the exercise price. SFAS No. 123 permits an entity to
recognize as compensation expense over the vesting period the fair
value of all stock-based awards on the date of grant. Alternatively,
SFAS No. 123 also allows entities to continue to apply the provisions
of APB 25 and provide pro forma net income and pro forma earnings per
share disclosures for employee stock option grants made in 1995 and
future years as if the fair-value-based method defined in SFAS No. 123
had been applied. The Company has elected to continue to apply the
provisions of APB 25 and provide the pro forma disclosure provisions
of SFAS No. 123.
(k) In February 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 128, "Earnings
per Share" ("Statement 128"), for periods ending after December 15,
1997. Statement 128 replaces the current standard used to calculate
primary earnings per share, Accounting Principles Board Opinion No. 15
("APB 15"). Statement 128 requires a calculation of basic earnings per
share, as well as a dual presentation of basic and diluted earnings
per share on the face of the statement of income. Basic earnings per
share differs from primary earnings per share under APB 15 in that
dilution for common stock equivalents is excluded. Basic earnings per
share under Statement 128 for the three years ended May 31, 1997 would
not have been materially different than primary earnings per share
under APB 15.
(3) Investment in Partnerships
On May 2, 1997, SHD contributed to Equitrade all its assets, except cash
and broker receivables, and liabilities to Equitrade for a 38.4% limited
partnership interest in the net profits and net losses from the
specialist activities associated with the contributed assets. Among the
assets contributed was an intangible asset for $4,150,000 paid by the
Company as additional purchase price for the right to specialize in these
securities. The intangible asset is being amortized on a straight line
basis over ten years.
The Company is a 60% special limited partner in Equitrade. 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
F-12
<PAGE>
THE SHERWOOD GROUP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(3), Continued
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 and $6,190,235 for the years ended May 31, 1996
and May 31, 1997, respectively. In accordance with the terms of the
amended and restated partnership agreement dated May 2, 1997, except for
certain specialist positions, the net profits and losses of Equitrade are
allocated to its partners prior to the amortization of restrictive
covenants and other partnership intangibles. The first $800,000 of net
profits, or the 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 the pro rata part thereof if less than a period of twelve
months, are allocated 60% to the Company. The Company is entitled to 30%
of the net profits and net losses from a portion of the Equitrade
portfolio acquired in May 1995 and 38.4% of the net profits and net
losses of the specialist activities of SHD which were contributed to
Equitrade.
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 on a straight line basis 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 on a
straight line basis over 15 years.
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 "Anvil
Joint Venture") for $490. The Anvil 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 Anvil
Joint Venture. On January 24, 1997, the Company acquired, from its joint
venture partner, the remaining 51% of the Anvil Joint Venture that it did
not previously own. The Company, therefore, became the 100% owner of
Anvil.
(4) Financial Instruments and Concentration of Credit Risk
The Financial Accounting Standards Board's 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.
F-13
<PAGE>
THE SHERWOOD GROUP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(4), Continued
<TABLE>
Marketable securities owned and sold, not yet purchased, consist of
securities as follows:
<CAPTION>
Securities owned 1997 1996
---------------- ---- ----
<S> <C> <C>
Corporate equities $ 40,183,144 32,181,980
U.S. Government obligations 5,513,292 -
------------- ------------
Total $ 45,696,436 32,181,980
============= =============
Securities sold, not yet purchased
Corporate equities 25,129,290 18,827,302
------------- -------------
Total $ 25,129,290 18,827,302
============= =============
</TABLE>
In the normal course of business, Sherwood Securities, NDB, Anvil 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, Anvil and Equitrade
to off-balance-sheet credit risk in the event the customer is unable to
fulfill its contractual obligations. Sherwood Securities, NDB, Anvil 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, 1997, 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, 1997 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
Sherwood Securities, NDB and Anvil have been 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
F-14
<PAGE>
THE SHERWOOD GROUP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(5), Continued
and Exchange Commission's ("SEC") Rule 15c3-3. Under the (k)(2)(ii)
exemption, Sherwood Securities, NDB and Anvil execute all customer
transactions through a clearing broker and do not maintain custody of
customer funds or securities. Sherwood Securities, NDB and Anvil were in
compliance with the conditions of this exemption during the years ended
May 31, 1997, 1996 and 1995.
(6) Furniture, Fixtures, Equipment and Leasehold Improvements
<TABLE>
Furniture, fixtures, equipment and leasehold improvements consisted of
the following:
<CAPTION>
May 31,
1997 1996
<S> <C> <C>
Furniture, fixtures and equipment $ 24,890,286 19,019,267
Leasehold improvements 3,047,594 2,068,512
-------------- ---------------
27,937,880 21,087,779
Less accumulated depreciation
and amortization 7,674,370 8,132,165
-------------- ---------------
$ 20,263,510 12,955,614
============== ===============
</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 SHD Corporation (Formerly Dresdner-NY Incorporation)
On May 2, 1997, the Company acquired 100% of the stock of Dresdner-NY
Incorporated (subsequently renamed SHD Corporation), a NYSE specialist
firm, from Dresdner Bank AG for the purchase price of $15,261,493 which
included four NYSE seats with a market value of $4,800,000. The purchase
price resulted in an intangible asset amounting to $4,150,000 which is
being amortized on a straight line basis over 10 years. The acquisition
was accounted for by the purchase method of accounting and, accordingly,
the results of operations of SHD Corporation are included in the
accompanying consolidated statement of income from the acquisition date.
Presented below are unaudited pro forma combined results of operations of
the Company and Dresdner-NY Incorporated. Amounts presented for the years
ended May 31, 1997 and 1996 give effect to the acquisition of Dresdner-NY
Incorporated as if the transaction was consummated at the beginning of
each of the periods presented.
F-15
<PAGE>
THE SHERWOOD GROUP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(7), Continued
<TABLE>
(In thousands, except share data)
<CAPTION>
Years ended May 31,
1997 1996
<S> <C> <C>
Revenues $ 182,891 187,071
Net income 8,406 20,512
Net income per common share $ 0.65 1.55
Shares used in computation 2,941,287 13,200,867
--------- ----------
</TABLE>
The unaudited pro forma combined results of operations is presented for
comparative purposes only and is not necessarily indicative of the actual
results that would have occurred if the acquisition had been consummated
at the beginning of the periods presented, or of future operations of the
combined companies under the ownership and management of the Company.
(8) Income Taxes
The Company will file its consolidated Federal and combined state and
local income tax returns (inclusive of all subsidiaries except Equitrade)
based on a May 31, 1997 year end.
The current Federal, state and local income tax provisions for the years
ended May 31, 1997, 1996 and 1995 have been provided based on the
appropriate tax computation for each jurisdiction.
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, 1997, the Company had net deferred tax assets which
are primarily due to differences in reserves and expenses, primarily
$4,593,750 of remaining payments due pursuant to the terms of the
Company's settlement agreement, as amended, in the case entitled In re
NASDAQ Market-Makers Antitrust Litigation, allowable for book and tax
purposes. Management of the Company established a valuation allowance of
$154,615, which represents 100% of the net deferred tax asset of MXNet,
because it concluded that it was more likely than not that a significant
portion of the benefit would not be realized.
<TABLE>
The provisions for income taxes included in the accompanying consolidated
statements of income are as follows:
<CAPTION>
Years ended May 31,
1997 1996 1995
<S> <C> <C> <C>
Federal:
Current $ 7,225,411 12,366,631 1,108,941
Deferred benefit (1,203,645) - -
------------ ------------ -----------
6,021,766 12,366,631 1,108,941
------------ ------------ ------------
F-16
<PAGE>
THE SHERWOOD GROUP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(8), Continued
State and local:
Current 3,707,042 3,032,546 2,516,197
Deferred benefit (1,016,827) - -
------------ ------------ -----------
2,690,215 3,032,546 2,516,197
------------ ------------ ------------
$ 8,711,981 15,399,177 3,625,138
============ ============ ============
</TABLE>
<TABLE>
A reconciliation of the differences between the income tax provisions and
the amounts computed by applying the statutory Federal income tax rate is
as follows:
<CAPTION>
Years ended May 31,
1997 1996 1995
<S> <C> <C> <C>
Statutory provision on pretax income $ 6,297,086 12,435,887 6,384,009
State and local taxes, net of Federal tax 1,748,640 1,971,155 1,635,528
Tax effect of meals and entertainment
and club dues 242,785 193,967 160,475
Tax effect of utilization of
net operating loss carryforwards - - (4,687,406)
Other - net 423,470 798,168 132,532
------------ ---------- ---------
Income tax provision $ 8,711,981 15,399,177 3,625,138
============ ========== ===========
</TABLE>
(9) Subordination Agreements
On March 23, 1992, Equitrade entered into three subordination agreements
in the aggregate amount of $3,000,000. Such notes are due on March 23,
1998 and contain a yearly automatic roll-over provision. In connection
with these agreements, the lenders pledged marketable securities with a
market value in excess of $3,000,000.
(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, 1993. 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 did not respond. Those shares were remitted to various state
agencies as unclaimed property. F-17
<PAGE>
THE SHERWOOD GROUP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(10), Continued
(b) The Company had an employee stock option plan (the "1983
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 to directors, officers and key employees. Options were
granted for terms of up to ten years. On August 5, 1993, the Board of
Directors voted to allow the 1983 Plan to expire as of August 9, 1993,
thereby canceling 8,509,001 unoptioned shares previously reserved for
the 1983 Plan. On October 24, 1995, the stockholders of the Company
approved The Sherwood Group, Inc. 1995 Stock Option ( the "1995 Plan")
allowing for the issuance of up to 767,200 shares of the Company's
common stock pursuant to stock options and permitting the issuance of
stock appreciation rights in connection with the issuance of stock
options. The Compensation Committee, pursuant to the 1995 Plan, has
issued to employees exercising options under the 1983 Plan new options
(reload options) in an amount equal to the number of shares of common
stock of the Company used to satisfy the exercise price and the
withholding taxes due upon exercise of the options. Generally, options
granted under the 1995 Plan have provided for vesting six months after
the date of grant. At May 31, 1997, 207,316 shares were available for
future grant under the 1995 Plan. The following table summarizes
transactions in stock options granted under the 1983 Plan and the 1995
Plan during the three years ended May 31, 1997:
<TABLE>
<CAPTION>
Optioned shares
Number of Exercise price
shares per share
<S> <C> <C>
Balance at May 31, 1994 1,379,333 $1.00 - $3.625
Options canceled (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 - reload 394,697 7.9375 - 9.1875
-------- ---------------
Balance at May 31, 1996 394,697 7.9375 - 9.1875
Options exercised (94,027) 7.9375 - 9.1875
Options granted - reload 88,187 10.125
Options granted - original 77,000 11.000 - 11.375
------ ---------------
Balance at May 31, 1997 465,857 $ 7.9375 - 11.375
========= ===============
</TABLE>
(c) The Company accounts for its stock option plan in accordance with
the provisions of APB 25, "Accounting for Stock Issued to
Employees", and related interpretations. As such, compensation
expense would be recorded on the date of grant only if the current
market price of the underlying stock exceeded the exercise price.
On June 1, 1996, the Company adopted SFAS No. 123, "Accounting for
Stock-Based Compensation", which permits entities to recognize as
expense over the vesting period the fair value of all stock-based
awards on the date of grant. Alternatively, SFAS No. 123 also
allows entities to continue to apply the provisions of APB 25 and
F-18
THE SHERWOOD GROUP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(10), Continued
provide pro forma net income and pro forma earnings per share
disclosures for employee stock option grants made in 1995 and
future years as if the fair-value-based method defined in SFAS No.
123 had been applied. The Company has elected to continue to apply
the provisions of APB 25 and provide the pro forma disclosure
provisions of SFAS No. 123
The fair value of each option grant is estimated on the date of
grant using the Black-Scholes option pricing model with the
following weighted-average assumptions used for grants under the
option plan in the years ended May 31, 1997 and 1996,
respectively: dividend yield of 0% and 0%, expected volatility of
34.49% and 37.28%, risk-free interest rate ranging from 4.92% to
6.50% and 4.92% to 5.54%, and expected lives of 3 years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option
valuation models require the input of highly subjective
assumptions including the expected stock price volatility. Because
the Company's stock options have characteristics significantly
different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value
estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of
its employee stock options.
<TABLE>
For purposes of pro forma disclosures the estimated fair value of
stock-based compensation plans and other options is amortized to
expense primarily over the vesting period. The Company's pro forma
net income and net income per share is as follows for the years
ended May 31, 1997 and 1996:
<CAPTION>
Years Ended May 31
1997 1996
<S> <C> <C>
Net income:
As reported $ 9,279,693 $ 20,131,928
Fair value of options on grant date as
compensation expense (346,631) (362,666)
------------ --------------
Pro forma $ 8,933,062 $ 19,769,262
========= ==============
Net income per common share:
As reported $ .72 $ 1.52
Fair value of options on grant date as
compensation expense (.03) (.02)
------------ --------------
Pro forma $ .69 $ 1.50
============ =============
</TABLE>
The effects of applying SFAS 123 for providing pro forma
disclosures during the initial phase-in period may not be
representative of the effects on reported net income for future
years.
F-19
<PAGE>
THE SHERWOOD GROUP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(10), Continued
The weighted-average fair value of options granted under the 1995 Plan
during the year ended May 31, 1997 was $10.69. The average remaining
contractual life of the options outstanding at May 31, 1997 was nine
years.
(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, 1997, SGI and the Chief Executive Officer of the
Company are the beneficial owners of approximately 32% and 22%,
respectively, of the Company's common shares. Such beneficial ownership
includes shares of common stock underlying currently exercisable options
in the case of the Chief Executive Officer.
Included in note receivable at May 31, 1997 and 1996 are notes due from
officers of the Company amounting to approximately $379,000 and $419,000,
respectively.
Included in other receivables at May 31, 1996 is an amount due from Anvil
and the Anvil Joint Venture aggregating approximately $338,000. As of
January 24, 1997, the Company acquired from the Anvil Joint Venture
partner the remaining 51% of the Anvil Joint Venture that it did not
previously own. Included in other receivables at May 31, 1997 and 1996 is
interest on the notes receivable from the Company's officers of
approximately $15,000 and $17,000, respectively.
The Company enters into short-term borrowing facilities with Spear Leeds
& Kellogg ("SLK") for the purpose of financing trading positions. Certain
officers and directors of SLK are also partners of SGI. As of May 31,
1997, no such borrowings are outstanding.
(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 of the Company (except Equitrade) 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 years ended May 31, 1997
and 1996, there were discretionary Company contributions to the Plan of
$63,699 and $48,029, respectively, which are included in compensation and
benefits in the accompanying consolidated statements of income. During
the year ended May 31, 1995, there was no discretionary Company
contribution to the Plan.
Equitrade sponsors, for its eligible employees, the Equitrade Partners
401(k) Savings Plan, wherein Equitrade contributes a matching
contribution equal to one-half of the first 4% of an employee's
contribution. For the years ended May 31, 1997 and 1996 and the period
from March 1, 1995 to May 31, 1995, Equitrade contributed $46,749,
$43,011, and $5,587, respectively.
F-20
<PAGE>
THE SHERWOOD GROUP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(13) Net Capital Requirements
Sherwood Securities, NDB, Equitrade, Anvil and SHD 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, 1997, Sherwood
Securities had regulatory net capital of approximately $19,041,000, or
approximately $18,041,000 in excess of required net capital, NDB had
regulatory net capital of approximately $2,429,000, or approximately
$2,049,000 in excess of required net capital, Equitrade had regulatory
net capital of approximately $28,380,000, or approximately $28,130,000 in
excess of required net capital, Anvil had regulatory net capital of
approximately $362,000, or approximately $312,000 in excess of regulatory
net capital, and SHD had regulatory net capital of approximately
$1,460,000, or approximately $1,360,000 in excess of regulatory 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.
From time to time, the Company has needed to borrow funds in connection
with its trading activities. The Company currently has no committed lines
of credit and such borrowings were done on an "as needed" basis.
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.
(14) Commitments
The Company has non-cancelable operating leases for rental of office
space at its various locations. All leases are subject to escalation for
increases in taxes, fuel and other costs.
<TABLE>
Commitments for minimum lease payments under non-cancelable operating
leases as of May 31, 1997 are as follows, exclusive of escalation
charges:
<CAPTION>
Fiscal year ending May 31,
<S> <C>
1998 $ 2,091,000
1999 2,030,000
2000 1,953,000
2001 2,013,000
2002 3,048,000
Thereafter 10,089,000
-------------
$ 21,224,000
</TABLE>
The Company has free rent periods which are being amortized over the lives
of the leases.
F-21
<PAGE>
THE SHERWOOD GROUP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(14), Continued
Included in occupancy costs and equipment rental expenses are office
rental expenses of approximately $2,535,000, $2,729,000 and $1,585,000
for the years ended May 31, 1997, 1996 and 1995, respectively.
The Company has had employment contracts with the Chief Executives
Officer ("CEO") commencing on January 1, 1993. During December 1995, the
CEO exercised his option to extend his then current contract until May
31, 1997. Remuneration under these contacts consisted of base salary and
a cash bonus based on the Company's Income ( defined as consolidated
income before taxes and the payment or accrual of the CEO's annual cash
bonus). The annual cash bonus is equal to 10% of the first $5 million of
Income, 15% on the next $8 million of Income, and 18% of Income in excess
of $13,000,000. During March 1996, the CEO agreed to amend his agreement
so that he would receive additional compensation at 15%, rather than 18%,
of Income 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 $1,251,000 and $3,897,000 due to the CEO at May 31, 1997
and 1996, respectively. In connection with these agreements,
approximately $3,061,000, $6,137,000 and $3,132,000 is reflected in
compensation and benefits for the years ended May 31, 1997, 1996 and
1995, respectively.
During the fiscal year ended May 31, 1997, the Company established The
Sherwood Group, Inc. 1996 Executive Incentive Award Plan (the "Executive
Plan"). The Executive Plan allows for the creation of a compensation pool
at an amount equal to 4.25% of Net Income which is defined as
consolidated pre-tax income of the Company subject to adjustment for
unusual, infrequent, or extraordinary items and not taking into account
payments or accruals under the Executive Plan. Included in accounts
payable and accrued liabilities is approximately $1,147,000 due to
participants in the Executive Plan for the fiscal year ended May 31,
1997. In the year ended May 31, 1997, the Compensation Committee
determined not to reduce Net Income for the expenses of a litigation
settlement, including associated professional fees paid, (net of the
reduction in the CEO bonus computation) in the case entitled In re NASDAQ
Market-Makers Antitrust Litigation.
(15) Contingencies and Legal Matters
The Company's subsidiaries, and in some cases the Company, have been
named as defendants in lawsuits that allege, among other things,
violations of Federal and state securities and related laws. A
substantial settlement or judgment in any of these cases could have a
material adverse effect on the Company. 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 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.
F-22
<PAGE>
THE SHERWOOD GROUP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(15), Continued
On April 9, 1997, Sherwood Securities entered into a settlement agreement
(the "Settlement Agreement") with Plaintiffs' Co-lead counsel on behalf
of the class plaintiffs in the case of In Re: NASDAQ Market-Makers
Antitrust Litigation, 94 Civ. 3996(RWS) currently pending in the United
States District Court for the Southern District of New York ("the
Court"). This case is described in the Company's Form 10-K under Item 3,
Legal Proceedings. The Settlement Agreement provides for payment by
Sherwood Securities of $4,375,000 per percentage point of its market
share of the "Defendants' Market" which is defined as the 35 NASDAQ
market-maker defendants' total number of shares traded as market-makers
in the Class Securities (a designated list of NASDAQ securities) during
the period May 1, 1989 to May 27, 1994. Sherwood Securities' market share
of the Defendants' Market is estimated in the Settlement Agreement to be
2.10% which estimate would result in a total principal payment of
$9,187,500. The market share estimate, however, is subject to a
verification procedure and adjustment set forth in the Settlement
Agreement. The Settlement Agreement provides for the payment of the
verified amount in two installments. On April 23, 1997, Sherwood
Securities made an installment payment in the amount of $4,593,750. The
remaining balance, plus accrued interest, will be paid 365 days later. As
a result of the Settlement Agreement, Sherwood Securities recognized
$9,187,500 during the year ended May 31, 1997, which is included in
litigation settlement in the accompanying consolidated statements of
income. The Settlement Agreement was later replaced with an Amended
Settlement Agreement, with the effective date remaining April 19, 1997.
The Amended Settlement Agreement fixed Sherwood Securities' principal
payment at $9,187,500, thereby eliminating the need for any further
proceedings concerning Sherwood Securities' estimated market share. The
Amended Settlement Agreement provides for the payment of the $9,187,500
in two installments, 50% ten days after the date of the Amended
Settlement Agreement, and the other 50%, plus accrued interest 365 days
later. There are also non-monetary covenants in the Amended Settlement
Agreement which do not become effective unless and until 23 or more
future settling defendants agree to the entry of a stipulation and order
containing the same covenants. In the non-monetary covenants, Sherwood
Securities has agreed to refrain from engaging in certain types of
activities in connection with its NASDAQ market making. One or more of
these non-monetary covenants are subject to being voided in circumstances
set forth in the Amended Settlement Agreement. The Amended Settlement
Agreement provides for a release by "Class Members" of "Released Claims"
against Sherwood Securities and certain related persons and affiliates as
such terms are defined in the Amended Settlement Agreement. The Amended
Settlement Agreement is subject to the approval of the Court. The Amended
Settlement Agreement was submitted to the Court for Preliminary Approval
on June 30, 1997. If Preliminary Approval is granted, the Amended
Settlement Agreement will remain subject to the Final Approval after
notice to the class. There can be no assurance that the Court will
approve the Amended Settlement Agreement as submitted or that if the
Court approves the Amended Settlement Agreement, the final judgment of
the Court will be affirmed. If the Amended Settlement Agreement is not
approved by the Court or, if appealed, if the judgment of the Court is
not affirmed on appeal, the Amended Settlement Agreement will be
terminated, except to the extent provided in the Amended Settlement
Agreement. The Amended Settlement Agreement also provides that Sherwood
Securities may terminate the Amended Settlement Agreement in certain
other circumstances. The foregoing description of the Amended Settlement
Agreement is a summary, is not complete, and is qualified by reference to
the Amended Settlement Agreement.
F-23
<PAGE>
THE SHERWOOD GROUP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
<TABLE>
(16) Quarterly Financial Information (Unaudited)
(In thousands, except per common share data)
<CAPTION>
1997 First Second Third Fourth
---- ----- ------ ----- ------
<S> <C> <C> <C> <C>
Revenues $ 42,990 41,055 52,015 45,009
Expenses 36,955 34,749 49,605 37,442
Minority interest (14) (739) (2,114) (1,459)
-------- --------- --------- --------
Income before taxes $ 6,021 5,567 296 6,108
======== ========= ========= ========
Net income$ 3,003 3,295 (242) 3,224
======== ============= =========== ==============
Net income per common
share $ .23 .25 (.02) .25
======= =========== =============== ==========
1996 First Second Third Fourth
---- ----- ------ ----- ------
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
======== ============= ============ ==============
Net income per common .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
======== ============= ============ =============
Net income per common
share $ .22 .21 .31 .33
=== === === ===
</TABLE>
F-24
<PAGE>
THE SHERWOOD GROUP, INC.
AND SUBSIDIARIES
Schedule I
<TABLE>
Condensed Financial Statements
of the Registrant (Parent)
Statements of Financial Condition
May 31, 1997 and 1996
<CAPTION>
Assets 1997 1996
---- ----
<S> <C> <C>
Cash $ 86,323 60,833
Receivables:
Brokers and dealers 332,043 4,675,000
Other 305,177 260,708
Notes receivable 511,230 418,545
Investment securities not readily marketable 401,320 401,320
Investment in, less net amounts due to,
subsidiaries and affiliates 67,000,227 69,460,503
Investment in partnerships 11,842,014 9,130,087
Equipment, furniture and leasehold
improvements - net - 9,709
Intangible asset - net 130,873 198,042
Exchange memberships 351,496 351,496
Subordinated notes receivable 16,250,000 10,250,000
U.S. Treasury Obligations, held as collateral 5,481,820 5,429,679
Other assets 272,689 14,260
-------------- ---------------
Total assets $ 102,965,212 100,660,182
============== ===============
Liabilities and
Stockholders' Equity
Accounts payable, accrued expenses and other
liabilities $ 5,113,478 8,840,627
Secured demand note payable 5,250,000 5,250,000
-------------- ---------------
10,363,478 14,090,627
Stockholders' equity:
Common stock 143,432 143,432
Retained earnings and other equity 92,458,302 86,426,123
-------------- ---------------
92,601,734 86,569,555
Total liabilities and stockholders' equity $ 102,965,212 100,660,182
============== ===============
</TABLE>
See accompanying notes to condensed financial statements.
S-1
<PAGE>
THE SHERWOOD GROUP, INC.
AND SUBSIDIARIES
Schedule I, Continued
<TABLE>
Condensed Financial Statements
of the Registrant (Parent)
Statements of Income
Years ended May 31, 1997, 1996 and 1995
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Revenue:
Equity income in partnerships $ 6,163,136 5,546,428 4,917,494
Interest 1,446,341 1,101,129 256,910
Service fees paid by subsidiaries eliminated
in consolidation 5,640,015 4,675,000 -
Income from lease of exchange membership 114,000 114,000 114,000
Other (119,346) 126 -
------------- -------------- ------------
13,244,146 11,436,683 5,288,404
------------- -------------- -------------
Expenses:
Compensation and benefits 4,675,853 7,408,107 4,307,077
Interest - - 1,292
Other - net 1,403,486 403,816 673,446
------------- -------------- -------------
6,079,339 7,811,923 4,981,815
------------- -------------- -------------
7,164,807 3,624,760 306,589
Equity in income of subsidiaries 5,650,335 18,471,286 13,739,245
------------- -------------- -------------
Income before income taxes 12,815,142 22,096,046 14,045,834
------------- -------------- -------------
Income taxes:
Currently payable (receivable):
Federal 2,730,836 2,108,345 (2,303,962)
State and local 477,363 (144,227) 1,734,908
------------- -------------- -------------
3,208,199 1,964,118 (569,054)
------------- -------------- -------------
Net income $ 9,606,943 20,131,928 14,614,888
============= ============== =============
</TABLE>
See accompanying notes to condensed financial statements.
S-2
<PAGE>
THE SHERWOOD GROUP, INC.
AND SUBSIDIARIES
Schedule I, Continued
<TABLE>
Condensed Financial Statements
of the Registrant (Parent)
Statements of Cash Flows
Years ended May 31, 1997, 1996 and 1995
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 9,606,943 20,131,928 14,614,888
Non-cash items included in net income:
Net equity in gain of subsidiaries (5,650,335) (18,471,286) (13,739,245)
Equity income in partnerships (6,163,136) (5,546,428) (4,917,494)
Loss on sale of subsidiary 123,006 - -
Depreciation and amortization 265,658 207,877 207,877
Allocated tax benefit related to the
exercise of options - 4,490,000 -
Decrease (increase) in operating assets:
Receivables:
Brokers and dealers 4,342,957 (4,675,000) -
Other (44,469) (141,300) (98,024)
U.S. Treasury obligations, held as collateral (52,141) (5,154,471) -
Other assets (258,429) 4,879,003 (5,415,032)
(Decrease) increase in operating liabilities:
Accounts payable and accrued expenses (3,731,976) 1,344,002 1,231,947
--------------- --------------- --------------
Net cash used in
operating activities (1,561,922) (2,935,675) (8,115,083)
--------------- --------------- --------------
Cash flows from investing activities:
Investment in partnerships (320,437) (242,790) -
Distribution from partnerships 3,771,646 3,041,010 2,641,956
Loans made to employees and officers (137,652) (1,622,765) -
Principal collected on notes receivable 44,967 1,662,765 109,232
Purchase of subsidiaries, net of cash acquired (15,763,434) - -
Return of capital from subsidiary 2,409,659 - -
Payment for purchase of identified
intangible asset (188,780) - -
Additional capital contributed to subsidiaries - (25,100) (2,000,000)
Issuance of subordinated notes (6,000,000) - (5,000,000)
Net cash (used in) / provided by
investing activities (16,184,031) 2,813,120 (4,248,812)
--------------- --------------- ----------------
(Continued)
</TABLE>
S-3
<PAGE>
THE SHERWOOD GROUP, INC.
AND SUBSIDIARIES
<TABLE>
Schedule I, Continued
Condensed Financial Statements
of the Registrant (Parent)
Statements of Cash Flows, Continued
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Cash flows from financing activities:
Purchase of treasury stock $ (3,569,937) (2,061,876) (1,948,126)
Proceeds from exercise of options - 635,000 -
Net receipts on intercompany
borrowings 21,341,380 1,587,445 14,306,850
-------------- ------------- --------------
Net cash provided by financing
activities 17,771,443 160,569 12,358,724
------------- ------------- ----------
Net increase (decrease) in cash 25,490 38,014 (5,171)
Cash at beginning of year 60,833 22,819 27,990
------------- ------------- -------------
Cash at end of year $ 86,323 60,833 22,819
========== =========== ============
</TABLE>
Supplemental disclosures of cash flow information:
Income tax payments aggregated $14,077,485, $5,732,131 and $1,882,724 for
the years ended May 31, 1997, 1996 and 1995, respectively.
Interest payments aggregated $52,991, $0 and $1,292 for the years ended May
31, 1997, 1996 and 1995, respectively.
During July 1995, the Company contributed an additional $250,000, in the
form of U.S. Treasury securities with a face value of $246,562, which were
included in other assets at May 31, 1997 and 1996, to Anvil Institutional
Services Company (the "Anvil Joint Venture").
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.
S-4
<PAGE>
THE SHERWOOD GROUP, INC.
AND SUBSIDIARIES
Schedule I, Continued
Condensed Financial Statements
of the Registrant (Parent)
Statements of Cash Flows, Continued
As a result of the sale of its subsidiary, Stock Market Index, Inc., during
December 1996, the Company wrote off the remaining book value of certain
computer software and intangible assets aggregating $225,193. In addition, as
part of the sale, the Company received a note in the face amount of $132,187
from the buyer, resulting in a net loss of $123,006.
On January 24, 1997, the Company acquired, from its joint venture partner, the
remaining 51% of the Anvil Joint Venture that it did not previously own. The
Company, therefore, became the 100% owner of Anvil Institutional Services Inc.
("Anvil"), a broker-dealer previously owned by the Anvil Joint Venture.
Accordingly, the assets, liabilities and stockholder's equity of Anvil have been
consolidated with those of the Company as of the acquisition date. The increases
or decreases in operating assets and liabilities reflected in the consolidated
statement of cash flows for the year ended May 31, 1997 exclude amounts for the
assets and liabilities of Anvil which were assumed as part of the acquisition.
During February 1997, an executive of the Company exercised an aggregate of
94,027 options for the purchase of 94,027 shares of the Company's common stock
with exercise prices ranging from $7.9375 per share to $9.1875 per share. In
order to pay for the exercise price ($838,324) and to reimburse the Company for
the personal income taxes ($54,569) on the gain related to the transaction, the
executive remitted to the Company 88,187 shares of the Company's common stock
with a market value of $892,893.
See accompanying notes to condensed financial statements.
S-5
<PAGE>
THE SHERWOOD GROUP, INC.
AND SUBSIDIARIES
Schedule I, Continued
Condensed Financial Statements
of the Registrant (Parent)
Notes to Condensed Financial Statements
May 31, 1997, 1996 and 1995
(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. 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.
During the year ended May 31, 1997, the Company entered into two
subordination agreements with NDB. The first note has a stated interest
rate of "broker call" and matures on December 31, 1999. The second note
also has a stated interest rate of "broker call" and matures on March
31, 2000. The broker call rate ranged between 7%-7.25% for the period
from December 31, 1996 to May 31, 1997. In connection with each of
these subordination agreements, the Company loaned NDB $3,000,000.
(4) No dividends were paid to the Company by its wholly owned subsidiaries
during the years ended May 31, 1997, 1996 and 1995.
S-6
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 7, 1997 THE SHERWOOD GROUP, INC.
By: /s/ Arthur Kontos
------------------
Arthur Kontos
Chief Executive Officer
By: /s/ Denise Isaac
-----------------
Denise Isaac
Chief Financial Officer
and Principal Accounting 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 7, 1997
- -----------------------
James H. Lynch, Jr.
/s/ Arthur Kontos Director and Chief August 7, 1997
- -----------------
Arthur Kontos Executive Officer
/s/ Richard J. Marino Director August 7, 1997
- ---------------------
Richard J. Marino
/s/ Dennis V. Marino Director August 7, 1997
- --------------------
Dennis V. Marino
/s/ Carl H. Hewitt Director August 7, 1997
- ------------------
Carl H. Hewitt
/s/ Thomas Neumann Director August 7, 1997
- ------------------
Thomas Neumann
/s/ John P. Duffy Director August 7, 1997
- -----------------
John P. Duffy
/s/ Ralph Del Deo Director August 7, 1997
- -----------------
Ralph Del Deo
/s/ Stephen DiLascio Director August 7, 1997
- --------------------
Stephen DiLascio
</TABLE>
<TABLE>
EXHIBIT INDEX
<CAPTION>
Description of Document SEC Exhibit Document
<S> <C> <C>
3.1 Restated Certificate of Incorporation of Incorporated by reference to Exhibit No. 3.1 to
the Company. the Company's Registration Statement No.
33-12904 on Form S-1, effective May 29, 1987(the
"Initial Registration Statement").
3.2 By-Laws of the Company, as amended. Incorporated by reference to Exhibit No. 3.2 to
the Initial Registration Statement
10.1 Clearing Agreement dated February 16, 1983 Incorporated by reference to Exhibit 10.7 to
between Spear Leeds & Kellogg and Sherwood the Initial Registration Statement.
Securities.
10.2 Agreement of Lease dated December, 1985 between Incorporated by reference to Exhibit 10.8 to
Aetna Life Insurance Company and Sherwood the Initial Registration Statement.
Securities Corp.
10.3 The Company's Employee Stock Ownership Plan as Incorporated by reference to Exhibit 10.9 to
amended. the Initial Registration Statement.
10.4 The Company's 1983 Stock Option Plan. Incorporated by reference to Exhibit 10.10 to
the Initial Registration Statement.
10.5 Amendment to 1983 Stock Option Plan. Filed herewith.
10.6 The Company's 1995 Stock Option Plan. Incorporated by reference to Appendix A to the
Company's Proxy Statement dated September 18,
1995.
10.7 Form of Option Agreement under the Company's 1995 Filed herewith.
Stock Option Plan.
<PAGE>
10.8 Employment Agreement dated September 12, 1995 by Incorporated by reference to Exhibit 10.1 of
and between Arthur Kontos and the Company. Form 10-Q for the quarter ended November 30,
1995.
10.9 Employment Agreement dated as of May 31, 1997 by Filed herewith.
and between Arthur Kontos and the Company.
10.10 Letter of Arthur Kontos exercising his option Incorporated by reference to Exhibit 10.2 to
under the Employment Agreement dated September Form 10-Q for the quarter ended November 30,
12, 1995. 1995.
10.11 Waiver of Bonus by Arthur Kontos. Incorporated by reference to Exhibit 10.1 of
Form 10-Q for the quarter ended February 29,
1996.
10.12 Mortgage Loan Agreements dated March 24, 1993 Incorporated by reference to Exhibit 10.6 to
among the Company, Thomas Neumann and Geralyn the Form 10-K for Fiscal Year ended May 31,
Neumann. 1993.
10.13 Secured Note and Pledge Agreement dated July 23, Filed herewith.
1997 among the Company, Thomas Neumann and
Geralyn Neumann.
10.14 Voting Trust Agreement between Arthur Kontos and Incorporated by reference to Exhibit 10.7 to
Vicki Kontos dated May 11, 1993. Form 10-K for Fiscal Year ended May 31, 1994.
10.15 Lease Agreement dated December 20, 1993 between Incorporated by reference to Exhibit 10.9 to
Connecticut General Life Insurance Form 10-K for Fiscal Year ended May 31, 1994.
Company and Triak Services, Corp., Guaranty by
The Sherwood Group, Inc. dated December 6, 1993,
Modification of Lease dated March 30, 1994 and
Modification of Lease dated July 11, 1994.
<PAGE>
10.16 Exhibit 10.13 Sublease Agreement between Johnson Incorporated by reference to Exhibit 10.2 of
& Higgins and Triak Services Corp. Form 10-Q for the quarter ended February 29,
1996.
10.17 Guaranty dated as of March 1, 1996 by and between Incorporated by reference to Exhibit 10.14 to
Johnson & Higgins and NY Broad Form 10-K for Fiscal Year ended May 31, 1996.
Holdings, Inc.
10.18 Stock Purchase Agreement dated as of April 11, Incorporated by reference to Exhibit (b) to
1997 between Dresdner Bank A.G. and the Company. Form 10-Q for the quarter ended February 28,
1997.
10.19 Lease Agreement dated as of November 30, 1994 Incorporated by reference to Exhibit 10.2 to
between S.P.N.W. Management Associates Limited Form 10-Q for the quarter ended November 30,
Partnership and Sherwood Securities Corp. 1994.
10.20 The Sherwood Group, Inc. 1996 Executive Incentive Incorporated by reference to Exhibit B to The
Award Plan. Sherwood Group, Inc. Proxy Statement dated
September 10, 1996.
10.21 The Sherwood Group, Inc. 1996 CEO Bonus Plan. Incorporated by reference to Exhibit A to The
Sherwood Group, Inc. Proxy Statement dated
September 10, 1996.
10.22 Settlement Agreement. Incorporated by reference to Exhibit 10(a) of
Form 10-Q for the quarter ended February 28,
1997.
10.23 Amended Settlement Agreement. Filed herewith.
10.24 Equitrade Partners Amended and Restated Filed herewith.
Partnership Agreement Dated as of May 2, 1997.
11. Statement re: computation of per share earnings. Filed herewith.
21. Subsidiaries of the Company. Filed herewith.
23. Consent of Independent Public Accountant. Filed herewith.
27. Financial Data Schedule. Filed herewith.
<PAGE>
99.1 Secured Demand Note Collateral Agreement and Incorporated by reference to Exhibit 99.1 to
Amendment to Secured Demand Note Collateral Form 8-K dated February 28, 1995.
Agreement.
99.2 Secured Demand in the principal amount of Incorporated by reference to Exhibit 99.2 to
$5,000,000. Form 8-K dated February 28, 1995.
99.3 Roll-Over Equity Investment dated February 15, Incorporated by reference to Exhibit 99.3 to
1995 in the principal amount of $5,000,000 Form 8-K dated February 28, 1995.
related to the Secured Demand Note.
99.4 Cash Subordination Agreement dated as of February Incorporated by reference to Exhibit 99.4 to
15, 1995 and Amendment to Cash Subordination Form 8-K dated February 28, 1995.
Agreement.
99.5 Roll-Over for Equity Investment dated February Incorporated by reference to Exhibit 99.5 to
15, 1995 in the principal amount of $5,000,000 Form 8-K dated February 28, 1995.
related to the Cash Subordination Agreement.
99.6 Form of Indemnification Agreement to be entered Incorporated by reference to Exhibit 99.1 to
into between the Company and each of certain of Form 8-K dated September 18, 1995.
its executive officers and directors.
</TABLE>
EXHIBIT 10.5
EXHIBIT D
AMENDMENT TO
THE SHERWOOD CAPITAL GROUP, INC.
1983 INCENTIVE STOCK OPTION PLAN
The 1983 Incentive Stock Option Plan of The Sherwood Capital
Group, Inc., as amended (the "Plan"), is hereby further amended as
follows:
1. Paragraph (l) of Section 7 of the Plan is amended in its
entirety to read as follows:
(l) Witholding Taxes.Whenever shares of
Common Stock are to be issued in satisfaction of options granted under
the Plan, the Company shall have the right to require the recipient to
remit to the Company an amount sufficient to satisfy all applicable
withholding tax requirements prior to the delivery of any certificate
or certificates for such shares. Recipients are permitted to satisfy
all such applicable withholding tax requirements by transferring and
delivering to the Company that number of shares of the Company's
common stock in an amount sufficient to pay any required taxes.
2. Except as amended hereby, the plan shall remain in full
force and effect.
THE SHERWOOD GROUP, INC. 1995 STOCK OPTION PLAN EXHIBIT 10.7
Nonstatutory Stock Option Terms And Conditions
1. Plan Incorporated by Reference. This Option is issued pursuant to
the terms of the Plan and may be amended as provided in the Plan. Capitalized
terms used and not otherwise defined in this Agreement have the meanings given
to them in the Plan. This Agreement does not set forth all of the terms and
conditions of the Plan, which are incorporated herein by reference. The
Committee administers the Plan and its determinations regarding the operation of
the Plan are final and binding. Copies of the Plan may be obtained upon written
request without charge from the President of the Corporation.
2. Option Price. The price to be paid for each share of Common Stock
issued upon exercise of the whole or any part of this Option is the Option
Price set forth on the first page of this Agreement.
3. Exercisability Schedule. This Option may be exercised at any time
and from time to time for the number of shares and in accordance with the
exercisability schedule set forth on the face of this certificate, but only for
the purchase of whole shares; provided that, in no event, shall any option be
exercisable prior to six (6) months from the Date of Grant. This Option may not
be exercised as to any shares after the Expiration Date.
4. Method of Exercise. To exercise this Option, the Optionee shall
deliver written notice of exercise to the Corporation specifying the number of
shares with respect to which the Option is being exercised accompanied by
payment of the Option Price for such shares in cash, by certified check or
shares of Common Stock of the Corporation valued at 100% of their Fair Market
Value on the Date of Exercise or a combination thereof. Promptly following such
notice, the Corporation will deliver to the Optionee a certificate representing
the number of shares with respect to which the Option is being exercised.
5. Rights as a Stockholder or Employee. The Optionee shall not have any
rights in respect of shares as to which the Option shall not have been exercised
and payment made as provided above. The Optionee shall not have any rights to
continued employment by the Corporation or any Subsidiary by virtue of the grant
of this Option.
6. Recapitalization, Mergers, Etc. As provided in the Plan, in the
event of corporate transactions affecting the Corporation's outstanding Common
Stock, the Committee shall equitably adjust the number and kind of shares
subject to this Option and the exercise price hereunder. If such transaction
involves a consolidation or merger of the Corporation with another entity, the
sale or exchange of all or substantially all of the assets of the Corporation or
a reorganization or liquidation of the Corporation, then in lieu of the
foregoing, the Committee may upon written notice, to the Optionee provide that
this Option shall terminate on a date not less than 20 days after the date of
such notice unless theretofore exercised. In connection with such notice, the
Committee may in its discretion accelerate or waive any deferred exercise
period.
7. Option Not Transferable. This Option is not transferable by the
Optionee otherwise than by will or the laws of descent and distribution, and is
exercisable, during the Optionee's lifetime, only by the Optionee. This Option
may not be assigned, transferred (except as provided above), pledged or
hypothecated in any way, shall not be assignable by operation of law, and shall
not be subject to execution, attachment, or similar process. Any attempted
assignment, transfer, pledge, hypothecation, or other disposition of this Option
contrary to the provisions hereof, and the levy of any execution, attachment, or
similar process upon the Option, shall be null and void and without effect.
8. Exercise of Option After Termination of Employment. If the
Optionee's status as an employee or officer of (a) the Corporation or (b) a
Subsidiary is terminated then, depending upon the reason for such termination,
this Option may be cancelled or the time in which the Optionee has to exercise
the Option may be limited. The terms of the Plan should be reviewed for a
complete description of the consequences of the termination of the Optionee's
employment.
9. Compliance with Securities Laws. It shall be a condition to the
Optionee's right to purchase shares of Common Stock hereunder that the
Corporation may, in its discretion, require (a) that the shares of Common Stock
reserved for issue upon the exercise of this Option shall have been duly listed,
upon official notice of issuance, upon any national securities exchange or
automated quotation system on which the Corporation's Common Stock may then be
listed or quoted, (b) that either (i) a registration statement under the
Securities Act of 1933, as amended (the "Act") with respect to the shares shall
be in effect, or (ii) in the opinion of counsel for the Corporation, the
proposed purchase shall be exempt from registration under that Act and the
Optionee shall have made such undertakings and agreements with the Corporation
as the Corporation may reasonably require, and (c) that such other steps, if
any, as counsel for the Corporation shall consider necessary to comply with any
law applicable to the issue of such shares by the Corporation shall have been
taken by the Corporation or the Optionee, or both. The certificates representing
the shares purchased under this Option may contain such legends as counsel for
the Corporation shall consider necessary to comply with any applicable law.
10. Payment of Taxes. The Optionee shall pay to the Corporation, or
make provision satisfactory to the Corporation for payment of, any taxes
required by law to be withheld with respect to the exercise of this Option. The
Committee may, in its discretion, require any other Federal or state taxes
imposed on the sale of the shares to be paid by the Optionee. In the Committee's
discretion, such tax obligations may be paid in whole or in part in shares of
Common Stock, including shares retained from the exercise of this Option, valued
at their Fair Market Value on the date of exercise. The Corporation and its
Subsidiaries may, to the extent permitted by law, deduct any such tax
obligations from any payment of any kind otherwise due to the Optionee.
<PAGE>
EXHIBIT B
NSO _______ Shares
THE SHERWOOD GROUP, INC.
1995 Stock Option Plan
Nonstatutory Stock Option Agreement
The Sherwood Group, Inc. a Delaware corporation (the "Corporation"),
hereby grants to the person named below an option to purchase shares of Common
Stock, $.01 par value per share, of the Corporation (the "Option") under and
subject to the Corporation's 1995 Stock Option Plan (the "Plan") exercisable on
the following terms and conditions and those set forth on the attached terms and
conditions (the "Agreement") and the Plan:
Name of Optionee: __________________________________
Address: __________________________________
----------------------------------
Social Security No. __________________________________
Number of Shares: ____________________
--------------------
Option Price: ____________________
--------------------
Date of Grant: ____________________
--------------------
Exercisability Schedule: After , 19 , as to all shares,
Expiration Date: ____________________
The Option shall not be treated as an Incentive Stock Option under
section 422 of the Internal Revenue Code of 1986, as amended (the "Code").
By acceptance of this Option, the Optionee agrees to the terms and
conditions hereof.
THE SHERWOOD GROUP, INC.
By:____________________________
ACCEPTED:
- ---------------------------
[Optionee]
16
EMPLOYMENT AGREEMENT EXHIBIT 10.9
EMPLOYMENT AGREEMENT, dated as of May 31, 1997, between THE
SHERWOOD GROUP, INC., a Delaware corporation (the "Company"), having
its principal office at Ten Exchange Place Centre, Jersey City, New
Jersey, New Jersey, and Arthur Kontos (the "Executive"), care of The
Sherwood Group, Inc., Ten Exchange Place Centre, Jersey City, New
Jersey 07302. The Company desires to continue the services of the
Executive, and the Executive desires to be employed by the Company, as
Vice Chairman of the Board, President and Chief Executive Officer of
the Company and chief executive officer of certain of its
subsidiaries. In consideration of the premises and of the mutual
covenants and agreements herein contained, the parties hereto do
hereby agree as follows:
1. Term of Employment.
1.1 The term
"Employment Year" shall mean the twelve consecutive month period
commencing June 1st until the following May 31st. The Executive's
"Term of Employment," as this term is used throughout this Agreement,
shall be for a period beginning as of June 1, 1997 and ending on May
31, 2000 (the "Initial Term"), as the same may be extended pursuant to
Section 1.2.
1.2 The Company shall have the option to extend the Term
of Employment under this Agreement for one additional year from June
1, 2000 until May 31, 2001 (the "Second Term"). If the Company elects
to extend the Term of Employment for the Second Term, the Executive
shall have the option to extend the Term of Employment for one
additional year from June 1, 2001 to May 31, 2002 (the "Third Term")
(each of the Second Term and the Third Term being referred to as a
"New Term"). The following conditions shall apply to the Company's or
the Executive's right to extend the Term of Employment pursuant to
this Section 1.
(i) The Company's option to extend Term of Employment
for the Second Term must be exercised on or prior to December 31, 1999
and the Executive's option to extend the Term of Employment for the
Third Term must be exercised after May 31, 2000 and on or prior to
December 31, 2000. The party hereto entitled to exercise the option to
extend the Employment Term (the "Sending Party") shall deliver to the
other party hereto (the "Receiving Party") a written notice on or
prior to the applicable date set forth immediately above stating that
the Sending Party has elected to exercise its right to extend the Term
of Employment. The delivery of such notice shall constitute an
irrevocable exercise of this extension, which exercise cannot be
revoked without the prior written consent of the Receiving Party,
which if the Receiving Party is the Company, must be by action of its
Board of Directors.
(ii) In no event shall the Term of Employment be
extended by a New Term pursuant to this Section 1.2, unless as of May
31 immediately preceding the commencement of the New Term, this
Agreement shall be in full force and effect and either (A) the Company
shall not have the present ability to terminate this Agreement in
accordance with its terms under Section 6.2 or 6.4 or (B) the Company
shall have determined to terminate this Agreement pursuant to Section
6.3 and communicated this determination to the Executive prior to the
commencement of the New Term in the event only if the Executive has
the authority to extend the Term of Employment.
(iii) In no event
shall a New Term extend the Term of Employment if as of May 31
immediately prior to the commencement of such New Term, the Executive
shall have exercised any right he may have to terminate this Agreement
or the Executive shall have received or the Executive shall have
notified the Company that he is claiming a right to receive any
payments as a result of a Change in Control of the Company (as defined
below).
2. Employment. The Company shall employ the Executive as Vice
Chairman of the Board, President and Chief Executive Officer of the
Company and chief executive officer of certain of its subsidiaries as
determined by the Board of Directors of the Company. The Executive
accepts such employment and agrees that during the Term of Employment
he will devote substantially all his business time, attention,
knowledge, and skills to the business of the Company and its
subsidiaries. The services of the Executive shall in all respects be
subject to the reasonable direction of the Board of Directors of the
Company.
3. Base Salary During Employment Term. From and after the
date hereof, the Company shall pay or cause to be paid to the
Executive during the Term of Employment a base salary at a rate equal
to $300,000 for each Employment Year (the "Base Salary"). The Base
Salary shall be paid in accordance with the Company's regular payroll
practices.
4. Bonus
4.1 With respect to each Employment Year during
the Term of Employment, the Executive shall receive as additional
compensation a cash bonus (the "Bonus") in accordance with The
Sherwood Group, Inc. 1996 CEO Bonus Plan, as the same is in effect on
the date hereof and as the same may be amended from time to time with
the prior written approval of the Executive (the "Bonus Plan"). The
Bonus shall be paid to the Executive as provided in the Bonus Plan.
5.Expenses. The Company shall also reimburse the Executive
for all
expenses incurred by the Executive in connection with the performance
of his duties and the discharge of his responsibilities hereunder,
including all legal fees and other costs incurred by the Executive in
enforcing (whether by adjudication or settlement) his rights under
this Agreement in the event of a breach of this Agreement by the
Company except as provided in Section 8.7.
6. Termination.
6.1 Voluntary. The Executive may terminate this Agreement
for any reason
upon 30 days' prior written notice to the Company stating that the
Executive has determined to terminate this Agreement and providing a
Date of Termination (as defined below); provided, however, that such
30-day notice shall not be required for a voluntary termination by the
Executive in connection with, or within one year after, a Change in
Control of the Company, as defined in Section 6.5 hereof.
6.2 Termination by the Company for Cause. The Company
may terminate this
Agreement, and all of its obligations hereunder (other than
obligations of the Company that have accrued or benefits vested under
any plan of the Company prior to such termination and other than
rights to indemnification from the Company under law, the applicable
governing instruments of the Company, contract or pursuant to any
applicable insurance policy), for Cause (as defined below). Cause
shall mean that if and only if while employed by the Company (i) the
Executive has engaged in fraudulent or illegal conduct to the material
detriment of the Company or (ii) the Executive has engaged in
practices to the material detriment of the Company, which constitute a
substantial disregard for his responsibilities as an employee of the
Company. The Company shall have the burden to establish by clear and
convincing evidence that Cause exists. Determination of Cause on
behalf of the Company can only be made by the Board of Directors after
the Executive has been given the opportunity to rebut allegations made
against him as the basis for his termination for Cause.
6.3 Termination by the Company Without Cause.
In the event the Company
terminates this Agreement without Cause and other than as a result of
the death or Disability of the Executive under Section 6.4, the
Executive shall be paid as provided in Section 6.5 as liquidated
damages an amount in cash equal to the amount of liquidated damages he
would have been entitled to receive for a termination of employment in
connection with a Change in Control of the Company as provided in
Section 6.5 hereof.
6.4 Termination by Death or Disability. If the
Executive dies during the Term of Employment or if, during the Term of
Employment, the Executive becomes Disabled as defined below, this
Agreement and the Company's obligations under this Agreement shall
terminate upon the Date of Termination. Disability for purposes of
this Agreement shall mean that the Executive is either mentally or
physically disabled such that he is unable substantially to perform
his duties under this Agreement (i) for a period of six consecutive
months, or (ii) for an aggregate of nine months within any period of
eighteen (18) consecutive months. Determination of whether a
Disability has occurred shall be made by an appropriately qualified
physician selected by the Board of Directors. The Executive agrees to
make his medical records and himself available for examination by such
physician.
6.5 Termination by Reason of Change in Control.
(a) In the
event that a Change in Control of the Company (as defined below)
occurs during the Term of Employment, and in connection with such
Change in Control of the Company or within one year thereafter, the
Executive's employment with the Company is terminated pursuant to
Section 6.3 or the Executive terminates his employment for Good Reason
(as defined below), the Executive shall be paid as liquidated damages
on the Termination Date an amount equal to three times his average
compensation (including Base Salary, Bonus, and any other
compensation) from the Company and its subsidiaries, as reported for
federal income tax purposes by the Executive, for the five calendar
year period preceding the Date of Termination, less $1.00, subject to
the limitations in Sections 6.5(b) and 6.5(c) below. The term Change
in Control of the Company shall mean (i) any "person" (as such term is
used in Sections 13(d) and 14(d) of the Securities Exchange Act of
1934, as amended (the "Exchange Act")), other than a trustee or other
fiduciary holding securities under an employee benefit plan of the
Company or a subsidiary of the Company or the Executive or persons
under his control, or a person engaging in a transaction of the type
described in clause (iii) of this subsection but which does not
constitute a change in control under such clause, is or becomes the
"beneficial owner" (as defined in Rule 13d-3 under the Exchange Act),
directly or indirectly, of securities of the Company representing 50%
or more of the combined voting power of the Company's then outstanding
securities; or (ii) during any period of two consecutive years during
the term of this Agreement, individuals who at the beginning of such
period constitute the Board of Directors of the Company and any new
director (other than a director designated by a person who has entered
into an agreement with the Company to effect a transaction described
in clauses (i) or (iii) of this Subsection) whose election by the
Board of Directors of the Company or nomination for election by the
Company shareholders was approved by a vote of at least two-thirds
(2/3) of the directors then still in office who either were directors
at the beginning of the period or whose election or nomination for
election was previously so approved, cease for any reason to
constitute a majority thereof; or (iii) the shareholders of the
Company approve or, if no shareholder approval is required or
obtained, the Company or a subsidiary of the Company completes a
merger, consolidation or similar transaction of the Company or a
subsidiary of the Company with or into any other corporation, or a
binding share exchange involving the Company's securities, other than
any such transaction which would result in the voting securities of
the Company outstanding immediately prior thereto continuing to
represent (either by remaining outstanding or by being converted into
voting securities of the surviving entity) at least 75% of the
combined voting power of the voting securities of the Company or such
surviving entity outstanding immediately after such transaction, or
the shareholders of the Company approve a plan of complete liquidation
of the Company or an agreement for the sale or disposition by the
Company of all or substantially all the Company's assets. For purposes
of this Agreement the term Good Reason means that (i) the Company has
breached this Agreement in some material respect, or (ii) there is a
change in the duties of the Executive not consistent with the
Executive's service as President and Chief Executive Officer of the
Company, and in either event after written notice to the Board of
Directors by the Executive specifying the nature of such breach or
change in duties, the Company has failed to correct such breach or
change in duties; within thirty days of the date of such notice.
(b)
In the event that any payment or benefit received or to be received by
the Executive in connection with the termination of the Executive's
employment pursuant to this Section or Section 6.3 (whether pursuant
to the terms of this Agreement or any other plan, arrangement or
agreement with the Company or any subsidiary of the Company, any
person whose actions result in a Change in Control of the Company, or
any person affiliated with the Company or such subsidiary)
(collectively with the payments and benefits hereunder, "Total
Payments") would not be deductible (in whole or part) as a result of
Section 280G of the Internal Revenue Code of 1986, as amended, and the
rules and regulations thereunder (the "Code") by the Company, an
affiliate or other person making such payment or providing such
benefit, the payments and benefits hereunder shall be reduced until
none or the entire portion of the Total Payments is not subject to
disallowance pursuant to Code Section 280G. At the Company's sole
discretion, such reduction may be effected by extending the date the
payment would otherwise be due by not more than one year and
thereafter by decreasing the amount of the payment or benefit
otherwise due and payable. For purposes of this limitation (i) no
portion of the Total Payments the receipt or enjoyment of which the
Executive shall have effectively waived (within the meaning of Code
Section 280G) in writing prior to the date of payment shall be taken
into account, (ii) no portion of the Total Payments shall be taken
into account which, in the opinion of tax counsel selected by the
Executive and reasonably acceptable to the Company's independent
auditors, under a more likely than not standard does not constitute a
"parachute payment" within the meaning of section 280G(b)(2) of the
Code, (iii) the payments and benefits hereunder shall be reduced only
to the extent necessary so that, in the opinion of the tax counsel
referred to in clause (ii) above, the Total Payments (other than those
referred to in clauses (i) or (ii) above) in their entirety are likely
to constitute reasonable compensation for services actually rendered
within the meaning of Code Section 280G(b)(4) or are otherwise under a
more likely than not standard not subject to disallowance as
deductions; and (iv) the value of any non-cash benefit or any deferred
payment or benefit included in the Total Payments shall be determined
by the Company's independent auditors in accordance with the
principles of Code Sections 280G(d)(3) and (4).
6.6 Notice of Termination. Any purported termination of
employment of the Executive
by the Company by reason of Employee's Disability or for Cause or not
for Cause, or by the Executive for Good Reason or voluntarily shall be
communicated by written Notice of Termination to the other party
hereto. For purposes of this Agreement, a "Notice of Termination"
shall mean a notice given by the Executive or the Company, as the case
may be, which shall state the specific basis for termination and shall
set forth in reasonable detail the facts and circumstances claimed to
provide a basis for determination of any payments under this
Agreement.
6.7 Date of Termination. For purposes of this Agreement,
"Date of Termination" shall mean the date of termination of employment
specified in the Notice of Termination, which shall not be more than
ninety (90) days after such Notice of Termination is given, as such
date may be modified pursuant to the following two sentences. If
within thirty (30) days after any Notice of Termination is given, the
party who receives such Notice of Termination notifies the other party
that a Dispute exists (a "Notice of Dispute"), the Date of Termination
shall be the date on which the Dispute is finally determined, either
by mutual written agreement of the parties, or by a final judgment,
order or decree of a court of competent jurisdiction (the time for
appeal therefrom having expired and no appeal having been perfected)
or by arbitration as provided in Section 8.6; provided that the Date
of Termination shall be extended by a Notice of Dispute only if such
notice is given in good faith and the party giving such notice pursues
the resolution of such Dispute with reasonable diligence and provided
further that pending the resolution of any such Dispute, the Company
shall continue to pay the Executive the same Base Salary and to
provide the Executive with the same or substantially comparable
welfare benefits and perquisites, including participation in the
Company's retirement plans, profit sharing plans, to the extent then
so available at the date of such determination, stock option plans and
stock award plans that the Executive was paid and provided to the
extent that such continued participation is possible under the general
terms and provisions of such plans, programs and benefits. Should a
Dispute ultimately be determined in favor of the Company, then all
sums (net of tax withholdings by the Company from such sums) paid by
the Company to the Executive from the Date of Termination specified in
the Notice of Termination until final resolution of the Dispute
pursuant to this subsection shall be repaid promptly by the Executive
to the Company, all options, rights and stock awards granted to the
Executive during such period shall be canceled or returned to the
Company, and no service as an employee shall be credited to the
Executive for such period for retirement and deferred compensation
purposes. The Executive shall not be obligated to repay to the Company
the cost of providing the Executive with welfare benefits and
perquisites for such period unless the final judgment, order or decree
of a court or other body resolving the Dispute determines that the
Executive acted in bad faith in giving a Notice of Dispute. Should a
Dispute ultimately be determined in favor of the Executive, then the
Executive shall be entitled to retain all sums paid to the Executive
under this subsection pending resolution of the Dispute and shall be
entitled to receive, in addition, the payments and other benefits
provided for in Section 6.5 to the extent not previously paid
hereunder and the payment of the Executive's reasonable legal fees
incurred as a result of such Dispute upon submission to the Company of
a detailed statement of fees from the Executive's attorneys. The term
Dispute shall mean (i) in the case of termination of employment of the
Executive with the Company for Disability or Cause, that the Executive
challenges the existence of Disability or Cause, (ii) in the case of
termination of employment of the Executive with the Company by the
Executive for Good Reason, that the Company contests the existence of
Good Reason, or (iii) either party hereto contests whether a Change in
Control of the Company has occurred.
7. Additional Benefits. During
the Term of Employment, the Executive, in addition to the compensation
provided in Sections 3, 4 and 5 hereof, will be entitled to
participate in any insurance (other than key man insurance), health
plans, pension, profit-sharing, stock purchase, or other benefit plans
of the Company now existing or hereafter adopted for the benefit of
its employees generally or of the executives of the Company; provided,
that where the participation and the extent of participation by an
employee or executive of the Company in any such plans are dependent
upon the discretion of the Company, then the participation, if any,
and the extent of such participation of the Executive shall be subject
in all respects to the reasonable determination of the Board of
Directors of the Company. Furthermore, the Executive shall be entitled
to such additional benefits as may be granted to him from time to time
by the Board of Directors of the Company. The Executive shall also be
entitled to reasonable vacations.
8. Restrictions.
8.1 The provisions
in this Section 8 shall be applicable during the Initial Term, the
Second Term or the Third Term, as applicable, irrespective of whether
the Executive is an employee of the Company, except as provided in
Section 8.4 hereof.
8.2 Non-Competition. The Executive will not, in
any geographic area within a 30-mile radius of any sales office
operated by the Company at the Date of Termination of this Agreement
or within 24 months prior thereto, directly or indirectly, in any
capacity whatever, compete with the activities of the Company's sales
offices or otherwise engage in the retail brokerage industry as owner,
financier, five percent stockholder, member, partner, sole proprietor,
joint venturer, or otherwise manage, operate, control, assist,
participate in, be connected with, or render any consultation or
business advice with respect to, any businesses engaged in the
wholesale market-making of securities or any businesses that compete
with activities conducted by the sales offices of the Company, except
with the approval of the Company's Board of Directors. The parties
agree that the foregoing territorial and time limitations are
reasonable, and that in the event that any such territorial or time
limitation is deemed to be unreasonable by a court of competent
jurisdiction, the Executive agrees and submits to the reduction of
either said territorial or time limitation, or both, to such an area
or a period of time as said court shall deem reasonable.
8.3 Confidentiality. Except as may be required by
applicable law or
pursuant to a subpoena issued pursuant to a governmental investigation
or other legal process, the Executive shall not divulge to any person
who is not an officer, director, shareholder, employee, or agent of
the Company or any subsidiary of the Company any information of a
privileged or confidential nature not otherwise disclosed which shall
have come to his attention by virtue of his employment by or
association with the Company or any such subsidiary.
8.4 No Solicitation. Except with the prior written consent
of the Company,
the Executive will not, either for his own account or any other person
directly or in conjunction with or through any person, hire, solicit,
or entice away from the Company or any subsidiary of the Company, any
officer, manager, employee, consultant, or registered account
executive who is employed or rendering services to the Company or any
such subsidiary or had been employed or rendered services within six
months prior to such solicitation, whether or not such person would
thereby commit a breach of his contract of employment of services with
the Company or any such subsidiary.
8.5 Inapplicability Restrictions.
Sections 8.2 and 8.4 hereof shall not apply in the event that the
employment of the Executive is terminated without Cause or the
Executive's employment is terminated by the Company or the Executive
in connection with or within one year after a Change in Control of the
Company.
8.6 Injunctive Relief. The parties do hereby acknowledge that
money damages alone would not adequately compensate the Company in the
event of a breach by the Executive of the foregoing provisions and,
therefore, the Executive does hereby covenant and agree that, in
addition to all other remedies available to the Company at law or in
equity, the Company shall be entitled to injunctive relief for the
enforcement thereof without the necessity of proving actual damages.
8.7 NASD Arbitration. Except as provided in Section 8.6
the parties
agree to submit any dispute concerning the terms of this Agreement, or
the performance of their obligations hereunder, to binding arbitration
by the National Association of Securities Dealers, Inc. The cost of
such arbitration shall be paid equally by the Company and the
Executive, unless otherwise allocated in the arbitration.
9. Notices.
All notices, requests, consents, demands, and other communications,
required or permitted to be given hereunder, shall be in writing and
shall be deemed to have been duly given on the date of personal
delivery thereof, or, if sent by prepaid, registered, overnight
courier service, or certified mail, on the date of deposit in the
United States mail or delivery to the courier service addressed to the
parties hereto at the addresses set forth at the beginning of this
Agreement (or to such other or additional address or to the attention
of additional parties which any party shall designate by notice in
writing to the other in accordance herewith).
10. General
10.1 Governing Law.
This Agreement shall be governed by and construed and
enforced in accordance with the laws of the State of New Jersey
applicable to agreements made and to be performed entirely in New
Jersey.
10.2 Captions. The paragraph headings contained herein are for
reference purposes only and shall not in any way affect the meaning or
interpretation of this Agreement.
10.3 Entire Agreement.
This Agreement sets forth the entire agreement and understanding
of the parties relating to the subject matter hereof, and
supersedes all prior agreements, arrangements, and understandings,
written or oral, between the parties.
10.4 No Other Representations. No representation,
promise or inducement has been made by either party that is not
embodied in this Agreement, and neither party shall be bound by or
liable for any alleged representation, promise, or inducement not so
set forth.
10.5 Amendments/Waivers. This Agreement may be amended,
modified, superseded, canceled, renewed, or extended and the terms of
covenants hereof may be waived, only by a written instrument executed
by both of the parties hereto or in the case of a waiver, by the party
waiving compliance. The failure of either party at any time or times
to require performance of any provision hereto shall in no manner
affect the right at a later time to enforce the same. No waiver by
either party of the breach of any term of covenant contained in this
Agreement, whether by conduct or otherwise, in any one or more
instances, shall be deemed to be, or construed as, a further or
continuing waiver of any such breach, or a waiver of a breach of any
other term or covenant contained in this Agreement.
10.6 Effective Date.
This Agreement shall be deemed to be in effect on June 1, 1997
for all purposes.
10.7 Severability. The invalidity or
unenforceability of any provision of this Agreement shall in no way
affect the validity or enforceability of any other provisions hereof.
10.8 Assignment and Successors.
Neither this Agreement nor any of his
rights or duties hereunder may be assigned or delegated by the
Executive. This Agreement is not assignable by the Company except to
any successor in interest which takes over all or substantially all of
the business of the Company, as it is conducted at the time of such
assignment. Any corporation into or with which the Company is merged
or consolidated or which takes over all or substantially all of the
business of the Company shall be deemed to be a successor of the
Company for purposes hereof. This Agreement shall be binding upon and,
except as aforesaid, shall inure to the benefit of the parties and
their respective successors and permitted assigns. Any assignment by
the Company shall be without prejudice to the Executive's rights in
connection with a Change in Control. The Company will require any
successor (whether direct or indirect, by purchase, merger,
consolidation or otherwise) to all or substantially all of the
business and/or assets of the Company, by written agreement in form
and substance satisfactory to the Executive, to expressly assume and
agree to perform this Agreement in the same manner and to the same
extent that the Company would be required to perform it if no such
succession had taken place.
10.9 Integration. Except as provided in
this Agreement, this Agreement contains the entire agreement of the
parties hereto on its subject matter and supersedes all previous
agreements between the parties hereto, written or oral, express or
implied, covering the subject matter hereof. This Agreement may not be
supplemented or rescinded except by instrument in writing signed by
all of the parties hereto after the date hereof. Neither this
Agreement nor any of the rights of any of the parties hereunder may be
terminated except as provided herein.
10.10 Obligations of the Company.
The Company's obligation to pay the Executive the
compensation and to make the arrangements provided herein shall be
absolute and unconditional and shall not be affected by any
circumstance, including, without limitation, any setoff, counterclaim,
recoupment, defense or other right which the Company may have against
the Executive or anyone else. All amounts payable by the Company
hereunder shall be paid without notice or demand. Except as expressly
provided herein, the Company waives all rights which it may now have
or may hereafter have conferred upon it, by statute or otherwise, to
terminate, cancel or rescind this Agreement in whole or in part.
Except as provided in Section 6.7 herein, each and every payment made
hereunder by the Company shall be final and the Company will not seek
to recover for any reason all or any part of such payment from the
Executive or any person entitled thereto. The Executive shall not be
required to mitigate the amount of any payment or other benefit
provided for in this Agreement by seeking other employment or
otherwise.
10.11 Rights of Beneficiaries of the Executive. This
Agreement shall inure to the benefit of, and be enforceable by, the
Executive's personal or legal representatives, executors,
administrators, successors, heirs, distributees, devisees and
legatees. IN WITNESS WHEREOF, THE SHERWOOD GROUP, INC. and the
Executive have duly executed this Agreement as of the date first above
written. THE SHERWOOD GROUP, INC.
By:
Arthur Kontos Chairman of the Board
15
SECURED NOTE EXHIBIT 10.13
$378,544.00 July 23, 1997
FOR VALUE RECEIVED, THOMAS NEUMANN and GERALYN NEUMANN,
husband and wife (hereinafter referred to as the "Borrower"), jointly and
severally, promise to pay to the order of THE SHERWOOD GROUP, INC., (hereinafter
referred to as the "Lender") the sum of THREE HUNDRED SEVENTY-EIGHT THOUSAND
FIVE HUNDRED FORTY-FOUR DOLLARS ($378,544) with interest on the unpaid balance
of such amount from the date of the first disbursement of the loan evidenced
hereby at the rate of interest specified herein. This Secured Note evidences a
loan made or to be made by the Lender to the Borrower in the principal amount
hereof and is secured by a Pledge Agreement (the "Pledge Agreement") of even
date herewith which creates a security interest in certain Collateral owned by
the Borrower and more particularly described in the Pledge Agreement
(hereinafter sometimes referred to as the "Collateral").
Interest on the outstanding principal balance of this Secured Note
shall accrue from the date hereof at the rate per annum equal to five percent
(5%) and shall be due and payable on or before August 15th of each year. On or
before each August 15th during the term of this Secured Note, the Borrower shall
make a payment in the sum of Forty Thousand Dollars ($40,000), which sum
represents the annual installment of principal, including accrued interest
thereon. Interest shall be computed on the basis of a fraction, the denominator
of which is 360 and the numerator of which is the actual number of days elapsed
from the date of the preceding August 15th payment to the next August 15th date.
Unless previously paid, all unpaid principal and interest shall be due and
payable on the 13th day of August, 2007.
This Secured Note replaces the Secured Note from Borrower to Lender in
the original principal amount of $600,000, dated March 24, 1993, (the "Prior
Note") the principal of which has been paid down to the principal amount of this
Secured Note, and is intended to continue as evidence of the indebtedness
evidenced thereby, but not as a novation or as additional debt. Interest accrued
but not yet paid under the Prior Note shall be payable under this Secured Note,
without duplication. The Mortgage Collateral described in the Prior Note has
been or will be released by Lender in conjunction with sale of the subject
mortgaged property by Borrower, on condition that Collateral under the Pledge
Agreement be substituted therefor, with a fair market value no less than twice
the principal amount of this Secured Note plus accrued interest, and no less
than the amount of collateral as may be required to be held by Lender under any
applicable law or regulation, including without limitation, Regulation G of the
Board of Governors of the Federal Reserve System, as may be applicable.
All payments on this Secured Note are payable at the Lender's office at
10 Exchange Place Centre, 15th Floor, Jersey City, New Jersey 07302-3913 , or at
such other place as the Lender or other holder hereof shall notify the Borrower
in writing.
All payments received by the Lender on this Secured Note shall be
applied by the Lender as follows: first, to accrued and unpaid interest due and
owing; second, to the reduction of principal; and third, to the payment of Late
Charges, if any or any other amounts owing by Borrower to Lender hereunder or
under the Pledge Agreement.
At any time that the Lender shall render a statement of the amount due
hereunder, such statement shall be deemed to be an account stated and correct
and acceptable to and binding on the Borrower unless the Lender shall receive a
corrected statement of exceptions from the Borrower within thirty (30) days
thereof.
In the event the Borrower fails to pay any installment of interest on
this Secured Note for fifteen (15) days after such payment becomes due, whether
by acceleration or otherwise, the Lender may, at its option, impose a Late
Charge (the "Late Charge") equal to five percent (5%) per annum in excess of the
interest rate on this Secured Note computed from the original due date of such
payment to the date of receipt of such payment by the Lender in good funds;
provided, however, that if any such Late Charge is in excess of the amount
permitted to be charged to the Borrower under applicable federal or state law,
the Lender shall be entitled only to collect a Late Charge at the highest rate
permitted by such law. Until any and all Late Charges are paid in full, the
amount thereof shall be secured by the security interest in the Collateral held
by the Lender to secure such indebtedness. The Borrower agrees that any such
Late Charges shall not be deemed to be additional interest or a penalty but
shall be deemed to be liquidated damages because of the difficulty in computing
the actual amount of damages in advance.
The Borrower may make prepayments of the amount due hereunder at any
time and from time to time from and after the date hereof without penalty or
premium.
In the event the Borrower fails to pay any installment of principal
and/or interest on this Secured Note for five (5) days after receipt by the
Borrower of notice that such payment is due or past due; or if the Borrower
shall fail to duly observe or perform any covenant, condition, or agreement with
respect to the payment of monies on the part of the Borrower other than the
payment of principal and/or interest required to be performed by the Borrower
under this Secured Note or the Pledge Agreement for fifteen (15) days after
notice; or if the Borrower shall fail to duly observe or perform any covenant,
condition, or agreement to be observed or performed pursuant to this Secured
Note or the Pledge Agreement other than the payment of monies for a period of
thirty (30) days after notice; or if any representation or warranty made by the
Borrower in any statement or certificate furnished by or on behalf of the
Borrower in connection with this Secured Note of the Pledge Agreement shall have
been incorrect, in any material respect, when made; or if the Collateral is
sold, transferred, or otherwise disposed of without the prior written consent of
the Lender; or if any material default by the Borrower in any payment of
principal of interest due or owing on any other obligation for borrowed money
beyond any period of grace provided with respect thereto, or in the performance
or observance of the terms of the Pledge Agreement or of any other agreement,
term, or condition contained in any agreement under which such obligation is
created, and such default permits the holder of such indebtedness to accelerate
the maturity of such indebtedness; or upon the dissolution, termination of
existence, insolvency, business failure, appointment of a trustee, receiver, or
custodian of all or any part of the properties or assets of the Borrower, upon
an assignment for the benefit of creditors by, calling of a meeting of creditors
of, or the commencement of any proceeding under any bankruptcy or insolvency
laws of any state or of the United States by the Borrower or the commencement of
any proceeding under any bankruptcy or insolvency laws of any state or of the
United States against the Borrower, which in the case of any insolvency action
is not dismissed within thirty (30) days of commencement; then and in any such
event the Lender may, at its option, declare the entire unpaid principal balance
of this Secured Note, together with all interest due hereunder, any Late
Charges, and other sums whatsoever accrued or to accrue thereon to be
immediately due and payable; and the Lender may proceed to exercise any rights
or remedies that it may have in the Collateral held by the Lender as security
for the payment of the indebtedness evidenced hereby or such other rights and
remedies which the Lender may have at law, in equity, or otherwise.
The Lender may proceed against the Borrower under this Secured Note
irrespective of and unaffected by (1) the genuineness, validity, irregularity,
or enforceability of its security interest in the Collateral; (2) the loss,
destruction, or unavailability of the Collateral; or (3) the existence, value,
or condition of the Collateral.
In the event this Secured Note is turned over to an attorney-at-law for
collection after default, in addition to principal, interest, Late Charges, and
other amounts provided for hereunder, the Lender shall be entitled to collect
all costs of collection, including, but not limited to, reasonable attorneys'
fees, incurred in connection with the protection of or realization of the
Collateral or in connection with any of the Lender's collection efforts whether
or not suit on this Secured Note is filed; and all such costs and expenses shall
be payable on demand and until paid shall also be secured by the Collateral at
any time held by the Lender as security for the Borrower's obligations to the
Lender.
No failure on the part of the Lender or other holder hereof to exercise
any right or remedy hereunder, whether before or after the happening of a
default, shall constitute a waiver thereof; and no waiver of any past default
shall constitute waiver of any future default or of any other default. No
failure to accelerate the debt evidenced hereby by reason of default hereunder,
or acceptance of a past-due installment, or indulgence granted from time-to-time
shall be construed as a waiver of the right to insist upon prompt payment
thereafter or to impose Late Charges retroactively or prospectively or to be
deemed to be a novation of this Secured Note or as a reinstatement of the debt
evidenced hereby or as a waiver of such right of acceleration or any other
right, or to be construed so as to preclude the exercise of any right which the
Lender may have, whether by the laws of the state governing this Secured Note,
by agreement, or otherwise. This Secured Note may not be amended orally, but
only by an agreement in writing signed by the party against whom such amendment
is sought to be enforced.
The Borrower, for itself, and its successors and assigns, and each
endorser of this Secured Note, for its heirs, successors, and assigns, hereby
waives presentment, protest, demand, diligence, notice of dishonor, and of
non-payment.
All notices, requests, and demands to be made hereunder to the parties
hereto shall be in writing and deemed to have been given or made three (3) days
after being deposited in the United States mails to the addresses set forth
below or at such other addresses which the parties may provide to one another in
accordance herewith. Such notices, requests, and demands shall be sent by
registered or certified mail, return receipt requested; provided, however, that
any quarterly statements sent by the Lender to the Borrower shall constitute
notice for all purposes of this Secured Note, notwithstanding the fact that the
same may not be sent by registered or certified mail, return receipt requested.
To the Borrower: Thomas and Geralyn Neumann
823 Creek Court
Fair Lawn, New Jersey 07410
To the Lender: The Sherwood Group, Inc.
10 Exchange Place Centre, 15th Floor
Jersey City, New Jersey 07302-3913
This Secured Note shall be governed by and construed under the laws of
the State of New Jersey without regard to principles of conflicts of laws.
IN WITNESS WHEREOF, the Borrower has executed this Secured Note this 23
day of July, 1997.
WITNESS:
- ----------------------- ----------------------------
THOMAS NEUMANN
- ----------------------- ----------------------------
GERALYN NEUMANN
PLEDGE AGREEMENT
This PLEDGE AGREEMENT is made as of July 23, 1997, between
THOMAS NEUMANN and GERALYN NEUMANN (together, "Pledgor") individuals with
residence at 823 Creek Court, Fair Lawn, New Jersey 07410 and THE SHERWOOD
GROUP, INC., with offices at 10 Exchange Place Centre, 15th Floor, Jersey City,
New Jersey 07302-3913 ("Secured Party"). Capitalized terms used herein without
definition shall have the respective meanings given such terms in the Secured
Note (the "Secured Note") dated as of the date hereof from Pledgor to the order
of Secured Party.
1. In order to induce Secured Party to make or continue a loan
or other financial accommodation to Pledgor, and in consideration thereof,
Pledgor hereby jointly and severally grants a security interest and pledges to
Secured Party as security for the prompt payment and satisfaction of all
obligations (the " Obligations") of Pledgor under the Secured Note, all of
Pledgor's right, title and interest in and to the 60,000 shares of common stock
of Secured Party (the "Stock") described on Schedule A attached hereto (as it
may be amended or supplemented from time to time). Such Stock, together with all
income, dividends, distributions, additional shares, warrants, rights, proceeds
and other property at any time and from time to time receivable or otherwise
distributable in respect of, in exchange for or in substitution of, such Stock
is hereinafter collectively referred to as the "Collateral". Concurrently with
delivery of this Pledge Agreement, Pledgor is delivering to Secured Party
certificates for all such Stock, together with stock powers executed in blank.
2.Pledgor represents, warrants and covenants to Secured Party that:
(i) the Collateral is owned by Pledgor free and clear of any
prior liens and encumbrances;
(ii) there are no restrictions upon the transfer of the
Collateral;
(iii) the security interest hereunder in the
Collateral is a first, prior and perfected security
interest and lien upon all right, title and interest of
Pledgor in the Collateral;
(iv) Pledgor has the right to pledge and to grant the
security interest in the Collateral free of any encumbrances,
and without the consent of the creditors of Pledgor or any
other person or any governmental authority whatsoever;
(v) there is no material pending legal or
governmental proceeding to which Pledgor is a party or to
which any of its properties is subject, which proceeding will
materially affect Pledgor's ability to perform its obligations
hereunder or the Collateral;
(vi) the execution, delivery and performance of this
Pledge Agreement and the pledge to Secured Party and the grant
to Secured Party of a security interest in the Collateral (a)
will not violate, or involve Secured Party in a violation of,
any provision of any law or regulation or any order of any
governmental authority or any judgment of any court applicable
to Pledgor or its properties and assets, (b) will not violate
any indenture, any agreement for borrowed money, any bond,
note or other similar instrument or any other agreement to
which Pledgor is a party or by which Pledgor or any of its
property is bound, (d) will not be in conflict with, result in
a breach of or constitute (with due notice or lapse of time or
both) a default under any such indenture, agreement for
borrowed money, bond, note, instrument or other material
agreement and (e) will not result in the creation or
imposition of any lien, charge or encumbrance of any nature
whatsoever upon any property or assets of Pledgor other than
pursuant to this Pledge Agreement;
(vii)Pledgor will at all times maintain the
Collateral at an amount no less in fair market value than
twice the amount of the Obligations, or such other amount as
may be required by law, and shall deliver to Secured Party
additional Collateral, or pay down the Obligations, as may be
necessary to maintain such ratio of value to the Obligations;
(viii)Pledgor has not, is not and will not apply any
portion of the loan or any related credit or amounts in the
Obligations to the purchase or carrying of the Stock or any
margin securities, as contemplated by Regulation G of the
Board of Governors of the Federal Reserve System, and will
execute a purpose statement to such effect for filing
therewith. ["carrying credit" is defined in Regulation G as
"credit that enables a customer to maintain, reduce, or retire
indebtedness originally incurred to purchase a stock [e.g. the
Stock] that is currently a margin stock."]; and
(ix)this Pledge Agreement constitutes the legal,
valid and binding obligation of Pledgor, enforceable in
accordance with its terms.
3. Pledgor covenants that, until all Obligations secured
hereby have been fully and finally paid, it will keep the Collateral free from
any lien, security interest or encumbrance, and will not sell or transfer the
Stock or any interest in Collateral, except for the interest granted hereby.
4. So long as there is no Event of Default, Pledgor shall have
the right to (i) receive all cash dividends payable upon the Stock and (ii) vote
all shares of Stock.
5. Upon the occurrence and during the continuation of an Event
of Default all the rights of Pledgor to receive dividends and to exercise the
voting rights to which it is entitled pursuant to Section 4 shall cease and all
such rights shall thereupon become vested in Secured Party, which shall have the
sole and exclusive right and authority to receive such dividends and to exercise
such voting rights upon the demand of Secured Party.
6. (a) Occurrence of any of the following shall constitute an
"Event of Default" under this Pledge Agreement: (i) any default in payment of
principal or interest or any other default shall occur under the Obligations,
(ii) Pledgor shall fail to pay or perform any of its covenants or undertakings
hereunder or any documents related to the Obligations or to this Pledge
Agreement or (iii) any representation or warranty of Pledgor under this Pledge
Agreement or any such document shall prove to be inaccurate in any material
respect.
(b) If an Event of Default shall have occurred and be
continuing, subject to clause (c) below, Secured Party may sell the Collateral,
or any part thereof, at public
or private sale or at any broker's board or on any securities exchange, for
cash, upon credit or for future delivery as Secured Party shall deem appropriate
subject to the terms hereof or as otherwise provided in the New Jersey Uniform
Commercial Code. Any purchaser at any such sale shall hold the property sold
absolutely, free from any claim or right on the part of Pledgor; provided,
however, that prior to the consummation of such sale Pledgor shall be entitled
to redeem this pledge of Collateral by paying (i) all the Obligations and (ii)
any additional costs or expenses incurred by Secured Party in connection with
the proposed sale of the Collateral.
(c) Secured Party shall give Pledgor 10 days' written notice of
its intention to
make any such public or private sale, or sale at any broker's board or on any
such securities exchange, or of any other disposition of the Collateral. Such
notice, in the case of public sale, shall state the time and place for such sale
and, in the case of sale at a broker's board or on a securities exchange, shall
state the board or exchange at which such sale is to be made and the day on
which the Collateral, or portion thereof, will first be offered for sale at such
board or exchange. Any such public sale shall be held at such time or times
within ordinary business hours and at such place or places as Secured Party may
fix and shall state in the notice of such sale. At any such sale, the
Collateral, or portion thereof, to be sold may be sold in one lot as an entirety
or in separate parcels, as Secured Party may (in its sole and absolute
discretion) determine. Secured Party shall not be obligated to make any sale of
the Collateral if it shall determine not to do so, regardless of the fact that
notice of sale of the Collateral may have been given. Secured Party may, without
notice or publication, adjourn any public or private sale or cause the same to
be adjourned from time to time by announcement at the time and place fixed for
sale, and such sale may, without further notice, be made at the time and place
to which the
<PAGE>
same was so adjourned. In case the sale of all or any part of the Collateral is
made on credit or for future delivery, the Collateral so sold shall be retained
by Secured Party until the sale price is paid by the purchaser or purchasers
thereof, but Secured Party shall not incur any liability in case any such
purchaser or purchasers shall fail to take up and pay for the Collateral so sold
and, in case of any such failure, such Collateral may be sold again upon like
notice. At any sale or sales made pursuant to this Section 6, Secured Party may
bid for or purchase, free from any claim or right of whatever kind, including
any equity of redemption, of Pledgor, any such demand, notice, claim, right or
equity being hereby expressly waived and released, any or all of the Collateral
offered for sale, and may make any payment on the account thereof by using any
claim for moneys then due and payable to Secured Party by Pledgor as a credit
against the purchase price; and Secured Party, upon compliance with the terms of
sale, may hold, retain and dispose of the Collateral without further
accountability therefor to Pledgor or any third party. Secured Party shall in
any such sale make no representations or warranties with respect to the
Collateral or any part thereof, and shall not be chargeable with any of the
obligations or liabilities of Pledgor with respect thereto. As an alternative to
exercising the power of sale herein conferred upon it, Secured Party may proceed
by a suit or suits at law or in equity to foreclose upon the Collateral under
this Pledge Agreement and to sell the Collateral, or any portion thereof,
pursuant to a judgment or decree of a court or courts having competent
jurisdiction.
(d) Also, upon an Event of Default, Secured Party shall have any
and all rights
afforded to secured parties under the Uniform Commercial Code or otherwise,
without limitation. Secured Party may at its option retain the Collateral and
apply it to the Obligations at its fair market value. In case of any sale,
retention, or other disposition of any of the Collateral, Pledgor shall remain
liable for any deficiency regarding the Obligations.
7. The proceeds of sale of the Collateral sold or disposed of
pursuant to Section 6 hereof shall be applied by Secured Party (after deduction
of costs incurred by Secured Party while enforcing its rights pursuant to this
Pledge Agreement) to the Obligations in accordance with the Secured Note as
shall be applicable or as Secured Party, in its discretion, may determine.
8. So long as the Obligations are outstanding and the security
interest hereunder shall not have terminated in accordance with Section 9
hereof, Pledgor agrees to execute and deliver to Secured Party such documents or
instruments and to give such notices as Secured Party may reasonably deem
necessary or desirable to perfect the lien of Secured Party on the Collateral.
If Pledgor does not execute and deliver to Secured Party any such amendment or
other document or instrument or give such notice within 5 days after requested
by Secured Party, then Secured Party is hereby authorized by Pledgor to file
such items or give such notice, without the signature of Pledgor or to execute
such items as attorney-in-fact for Pledgor.
<PAGE>
9. So long as no Event of Default shall have occurred and be
continuing, this Pledge Agreement and the pledge and grant of the security
interest hereunder shall terminate upon the earlier of (i) payment in full of
the Obligations under the Secured Note or (ii) payment in full of the
Obligations.
10. Notices and other communications provided for herein shall
be given in accordance with the provisions of the Secured Note or as agreed in
writing by Secured Party.
11. This Pledge Agreement, the Secured Note and documents
referred to therein are the only documents or agreements relative to the subject
matter of this Pledge Agreement. All covenants, agreements, representations and
warranties made herein and in any documents delivered pursuant hereto shall
survive the making available or continuation by Secured Party of the subject
loan or financial accommodation, but shall continue in full force and effect
only so long as the pledge and security interest hereunder shall not have been
terminated pursuant to the provisions of Section 9 hereof. No provisions of this
Pledge Agreement may be changed or waived except in writing signed by all
parties.
12. Whenever in this Pledge Agreement any of the parties
hereto is referred to such reference shall be deemed to include the successors
and assigns of such party, and all covenants, promises and agreements by or on
behalf of the parties which are contained in this Pledge Agreement shall bind
and inure to the benefit of the successors and assigns of all other parties.
13. PLEDGOR (A) HEREBY IRREVOCABLY SUBMITS TO THE JURISDICTION
OF THE STATE COURTS OF THE STATE OF NEW JERSEY AND TO THE JURISDICTION OF THE
UNITED STATES DISTRICT COURT FOR THE DISTRICT OF NEW JERSEY, FOR THE PURPOSE OF
ANY SUIT, ACTION OR OTHER PROCEEDING ARISING OUT OF OR BASED UPON THE
OBLIGATIONS OR THIS PLEDGE AGREEMENT OR THE SUBJECT MATTER HEREOF BROUGHT BY
SECURED PARTY OR ITS SUCCESSORS OR ASSIGNS AND (B) HEREBY WAIVES, AND AGREES NOT
TO ASSERT, BY WAY OF MOTION, AS A DEFENSE, OR OTHERWISE, IN ANY SUCH SUIT,
ACTION OR PROCEEDING, ANY CLAIM THAT IT IS NOT SUBJECT PERSONALLY TO THE
JURISDICTION OF THE ABOVE-NAMED COURTS, THAT ITS PROPERTY IS EXEMPT OR IMMUNE
FROM ATTACHMENT OR EXECUTION, THAT THE SUIT, ACTION OR PROCEEDING IS BROUGHT IN
AN INCONVENIENT FORUM, THAT THE VENUE OF THE SUIT, ACTION OR PROCEEDING IS
IMPROPER OR THAT THIS PLEDGE AGREEMENT OR THE SUBJECT MATTER HEREOF MAY NOT BE
ENFORCED IN OR BY SUCH COURT, AND (C) HEREBY WAIVES ANY OFFSETS OF COUNTERCLAIMS
IN ANY SUCH ACTION, SUIT OR PROCEEDING (OTHER THAN COMPULSORY COUNTERCLAIMS).
PLEDGOR HEREBY CONSENTS TO SERVICE OF PROCESS BY REGISTERED MAIL AT THE ADDRESS
TO WHICH NOTICES ARE TO BE
<PAGE>
GIVEN, WITH MAIL AND FAX COPY TO COUNSEL AT CRUMMY, DEL DEO, DOLAN, GRIFFINGER
AND VECCHIONE, P.C., ONE RIVERFRONT PLAZA, NEWARK, NEW JERSEY 07102, ATTN: FRANK
E. LAWATSCH, JR. FAX: (201) 596-0545. PLEDGOR AGREES THAT ITS SUBMISSION TO
JURISDICTION AND ITS CONSENT TO SERVICE OF PROCESS BY MAIL IS MADE FOR THE
EXPRESS BENEFIT OF SECURED PARTY. FINAL JUDGMENT AGAINST PLEDGOR IN ANY SUCH
ACTION, SUIT OR PROCEEDING SHALL BE CONCLUSIVE, AND MAY BE ENFORCED IN OTHER
JURISDICTIONS (A) BY SUIT, ACTION OR PROCEEDING ON THE JUDGMENT, A CERTIFIED OR
TRUE COPY OF WHICH SHALL BE CONCLUSIVE EVIDENCE OF THE FACT AND OF THE AMOUNT OF
ANY INDEBTEDNESS OR LIABILITY OF PLEDGOR THEREIN DESCRIBED OR (B) IN ANY OTHER
MANNER PROVIDED BY OR PURSUANT TO THE LAWS OF SUCH OTHER JURISDICTION; PROVIDED,
HOWEVER, THAT SECURED PARTY MAY AT ITS OPTION BRING SUIT, OR INSTITUTE OTHER
JUDICIAL PROCEEDINGS AGAINST PLEDGOR OR ANY OF ITS ASSETS IN ANY STATE OR
FEDERAL COURT OF THE UNITED STATES OR OF ANY COUNTRY OR PLACE WHERE PLEDGOR OR
SUCH ASSETS MAY BE FOUND.
14. In the case any one or more of the provisions contained in
this Pledge Agreement should be invalid, illegal or unenforceable in any
respect, the validity, legality and enforceability of the remaining provisions
contained herein shall not in any way be affected or impaired thereby.
15. TO THE EXTENT NOT PROHIBITED BY APPLICABLE LAW WHICH
CANNOT BE WAIVED, PLEDGOR HEREBY WAIVES, AND COVENANTS THAT IT WILL NOT ASSERT
(WHETHER AS PLAINTIFF, DEFENDANT OR OTHERWISE), ANY RIGHT TO TRIAL BY JURY IN
ANY FORUM IN RESPECT OF ANY ISSUE, CLAIM, DEMAND, ACTION, OR CAUSE OF ACTION
ARISING OUT OF OR BASED UPON THE OBLIGATIONS, THIS PLEDGE AGREEMENT OR THE
SUBJECT MATTER HEREOF, IN EACH CASE WHETHER NOW EXISTING OR HEREAFTER ARISING OR
WHETHER IN CONTRACT OR TORT OR OTHERWISE. PLEDGOR ACKNOWLEDGES THAT IT HAS BEEN
INFORMED BY SECURED PARTY THAT THE PROVISIONS OF THIS SECTION 15 CONSTITUTE A
MATERIAL INDUCEMENT UPON WHICH SECURED PARTY HAS RELIED, IS RELYING AND WILL
RELY IN ENTERING INTO THE LETTER OF CREDIT AGREEMENT. SECURED PARTY MAY FILE AN
ORIGINAL COUNTERPART OR A COPY OF THIS SECTION 15 WITH ANY COURT AS WRITTEN
EVIDENCE OF THE CONSENT OF PLEDGOR TO THE WAIVER OF ITS RIGHTS TO TRIAL BY JURY.
16. Upon the occurrence and during the continuance of an Event
of Default, Pledgor hereby appoints Secured Party its attorney-in-fact for the
purpose of carrying out the provisions of this Pledge Agreement and the pledge
of, and the grant of a security interest in, the Collateral hereunder and taking
any action and executing any instrument which Secured Party may deem necessary
or advisable to accomplish the purposes hereof, which appointment is irrevocable
and coupled with an interest. Without limiting the generality of the foregoing,
Secured Party shall have the right and power to receive, endorse and collect all
checks and other orders for the payment of money made payable to Pledgor
representing any interest, dividend or other distribution payable in respect of
the Collateral or any part thereof and to give full discharge for the same.
17. Pledgor further covenants and agrees that it will, upon
the request of Secured Party at any time and from time to time, execute and
deliver such further documents and do such other acts and things as Secured
Party may reasonably require in order to effect the purposes hereof.
18. Each and every right granted to Secured Party hereunder or
under any other document delivered hereunder or in connection herewith, or
allowed it by law or equity, shall be cumulative and may be exercised from time
to time. No failure on the part of Secured Party to exercise, and no delay in
exercising, any right shall operate as a waiver thereof, nor shall any single or
partial exercise by Secured Party of any right preclude any other or future
exercise thereof of the exercise of any other right.
19. This Pledge Agreement shall be governed and construed in
accordance with the laws of the State of New Jersey.
20. Pledgor agrees to pay all reasonable attorney's fees and
costs incurred by Secured Party in enforcing and protecting its rights under
this Agreement.
* * *
<PAGE>
IN WITNESS WHEREOF, this Pledge Agreement has been executed
and delivered as of the date first above written.
---------------------------
Thomas Neumann
Pledgor
---------------------------
Geralyn Neumann
Pledgor
THE SHERWOOD GROUP, INC.
Secured Party
By:
Name:
Title:
EXHIBIT 10.23
UNITED STATES DISTRICT COURT
FOR THE SOUTHERN DISTRICT OF NEW YORK
- -----------------------------------------------------------
94 Civ. 3996 (RWS)
IN RE:
M.D.L. No. 1023
NASDAQ MARKET-MAKERS
ANTITRUST LITIGATION
This Document Relates To:
All Actions
- -----------------------------------------------------------
AMENDED SETTLEMENT AGREEMENT
THIS AMENDED SETTLEMENT AGREEMENT ("Settlement Agreement") is made
effective the 9th day of April, 1997, by defendant Sherwood Securities Corp.
(the "Settling Defendant") and plaintiffs, through Plaintiffs' Co-Lead
Counsel in the In Re: Nasdaq Market-Makers Antitrust Litigation, 94 Civ.
3996 (RWS), M.D.L. No. 1023, a multidistrict consolidated class action, acting
on behalf of the Class defined herein (collectively, the "Class" or "class
plaintiffs").
WHEREAS, Settling Defendant and Plaintiffs' Co-Lead Counsel previously
executed a Settlement Agreement on April 9, 1997 (the "Original Agreement");
WHEREAS, Settling Defendant and Plaintiffs' Co-Lead Counsel mutually
believe that certain modifications of the Original Agreement are in the best
interests of Settling Defendant and the Class;
WHEREAS, plaintiffs have alleged, among other things, that the Settling
Defendant has acted unlawfully by, among other things, engaging in a conspiracy
to inflate the bid-ask spread of certain Nasdaq securities in violation of the
Sherman Act, 15 U.S.C. ss.1, and plaintiffs contend that they have suffered
damages, including damages measured by the difference between the spreads
charged and the spreads that would have prevailed in a competitive market,
absent violations of the antitrust laws;
WHEREAS, the Settling Defendant vigorously denies each and every one of
plaintiffs' allegations of unlawful conduct and has alleged a number of defenses
to plaintiffs' claims and disclaims any wrongdoing or liability whatsoever;
WHEREAS, plaintiffs and Settling Defendant agree that this Settlement
Agreement shall not be deemed or construed to be an admission or evidence of any
violation of any statute or law or of any liability or wrongdoing by Settling
Defendant or of the truth of any of the claims or allegations alleged in the
Class Action;
WHEREAS, arm's length settlement negotiations have taken place between
Plaintiffs' Co-Lead Counsel and Settling Defendant, and this Settlement
Agreement has been reached, subject to the final approval of the Court;
WHEREAS, Plaintiffs' Co-Lead Counsel have concluded, after substantial
discovery and investigation of the facts and after carefully considering the
circumstances of the Class Action and the applicable law, that it would be in
the best interests of the Class to enter into this Settlement Agreement in order
to avoid the uncertainties of litigation, particularly complex litigation such
as this, and to assure a benefit to the Class, and further, that Plaintiff's
Co-Lead Counsel consider the settlement set forth herein to be fair, reasonable,
and adequate and in the best interests of plaintiffs, including all members of
the Class;
WHEREAS, in determining the amount of monetary compensation to be paid
by this Settling Defendant, Plaintiffs' Co-Lead Counsel have taken into account,
inter alia, (a) the Settling Defendant's position as the first Settling
Defendant, (b) the Settling Defendant's net worth relative to the net worth of
Other Defendants; (c) the fact that Plaintiffs' motion to include institutional
investors in the class was undecided at the time of the entry into the Original
Agreement; and (d) Settling Defendant's estimated market share.
WHEREAS, Settling Defendant has concluded, despite the belief of
Settling Defendant that it is not liable for the claims asserted and has good
defenses thereto, that it will enter into this Settlement Agreement to avoid the
further expense, inconvenience and burden of this protracted litigation, and the
distraction and diversion of its personnel and resources, and to put to rest
this controversy with valued business customers, and to avoid the risks inherent
in uncertain complex litigation, and to avoid the expense and risks inherent in
any possible future litigation raising similar claims;
NOW THEREFORE, it is agreed by the undersigned, on behalf of the
Settling Defendant and the Class, that the Class Action and all claims of the
class plaintiffs be settled, compromised and dismissed on the merits and with
prejudice as to the Settling Defendant, and, except as hereinafter provided,
without costs as to plaintiffs or Settling Defendant, subject to the approval of
the Court, on the following terms and conditions:
1. Terms Used In This Agreement.
The words and terms used in this Settlement Agreement which are
expressly defined in Section 36 ("Definitions.") of this Agreement shall have
the meaning ascribed to them in the said Section.
2. Class Definition.
The Class is defined for settlement purposes ("Settlement Class"
or "Class") as follows: All persons, firms, corporations, and
other entities (excluding Defendants and other Nasdaq
market-makers, and their respective affiliates) who purchased
or sold Class Securities on the Nasdaq National Market,
trading directly (or through agents) with the Defendants or
their co-conspirators, or with their respective affiliates,
during the period May 1, 1989 to May 27, 1994 ("Class
Period"); and
A subclass consisting of those members of the class defined in
the immediately preceding clause, who at the time Class Notice
(as defined in the Refiled Consolidated Complaint) are current
brokerage customers of defendants (or their affiliates), or
whose brokerage accounts are cleared by defendants (or their
affiliates), and to whom defendants (or their affiliates) send
periodic mailings.
For purposes of this settlement, all brokers are deemed agents and,
therefore, the Class includes, but is not limited to, all persons, firms,
corporations and other entities, as described above, who traded through brokers.
For purposes of this settlement, institutional investors (including but not
limited to banks, savings and loan associations, insurance companies, registered
investment companies, investment advisors and all private and public mutual,
retirement, pension, profit sharing or other types of funds) are "firms,
corporations and other entities" included in the Class to the extent that they
purchased or sold Class Securities in the manner and during the period described
in the Class definition. The inclusion of all such persons, firms, corporations
and other entities who traded through brokers and all such institutional
investors in the Court approved Settlement Class is a condition precedent to
this Settlement Agreement becoming final. The term "affiliates" as used in the
Class definition includes parents, subsidiaries and other commonly owned or
commonly controlled affiliates. If the definition of the Class or the list of
Class Securities is expanded, by order of the Court for litigation purposes, or
in connection with any Future Settlement (the "Class Redefinition"), the
definition of the Class or list of Class Securities shall be identically
expanded for purposes of this settlement, without the need for additional
consideration, as more specifically set forth as follows:
a. If Class Redefinition occurs prior to the mailing of
the Class Notice and Notice of Settlement for this
settlement ("Sherwood Settlement Notice"), then the
corresponding redefinition of the class for purposes
of this settlement shall occur at the time of Class
Redefinition, and the Class Notice and Sherwood
Settlement Notice shall be given to the redefined
class, and the Sherwood Settlement Notice shall
specifically reflect settlement with the redefined
class.
b. If the Class Redefinition occurs (i) subsequent to
mailing of Class Notice and Sherwood Settlement
Notice, but (ii) prior to the time that this
settlement becomes final in accordance with Section
7(a)-(c), then the corresponding redefinition of the
class for purposes of this settlement shall occur at
the time of Class Redefinition, and if any subsequent
notice to the Class occurs, that notice shall include
notice of the redefinition of the Class for purposes
of this settlement, without any additional cost to
Sherwood.
c. If Class Redefinition occurs subsequent to the time
that this settlement becomes final in accordance with
Section 7, then the parties agree that said Class
Redefinition shall constitute a reason justifying
relief to Sherwood from the operation of the
judgment within the meaning of Fed. R. Civ. P. 60(b)
(6) to the extent necessary to effectuate the
corresponding redefinition of the class for purposes
of this settlement. The parties further agree that
they shall jointly ask the Court for such relief for
Sherwood and for such further relief as is necessary
to redefine the class for purposes of this settlement
and for the provision of such notice to the redefined
class, without additional cost to Sherwood, as the
Court deems necessary in light of the Class
Redefinition. This subsection 2(c) shall be
severable and subject to separate Court approval.
3. Best Efforts to Effectuate This Settlement.
Counsel for the Settling Defendant and Plaintiffs' Co-Lead Counsel
agree to recommend approval of this Settlement Agreement by the Court and to
undertake their best efforts, including all steps and efforts contemplated by
this Settlement Agreement and any other steps and efforts that may be necessary
or appropriate, by order of the Court or otherwise, to carry out the terms of
this Settlement Agreement.
<PAGE>
4. Motion for Preliminary Approval.
No later than July 3, 1997, Plaintiffs' Co-Lead Counsel shall submit to
the Court a motion for preliminary approval of the settlement and this
Settlement Agreement. A proposed form of order is attached hereto as Exhibit A.
Plaintiffs' Co-Lead Counsel and counsel for the Settling Defendant shall request
that a decision be made promptly on the papers, or that a hearing on the motion
for preliminary approval of the settlement be held within 30 days of the date of
such motion.
5. Combination of Class Notice and Settlement Notice.
Counsel for the Settling Defendant and Plaintiffs' Co-Lead Counsel will
ask the Court to combine the notice of this settlement with the class notice to
be given generally, pursuant to Rule 23(c), (d) and (e) of the Federal Rules of
Civil Procedure. Plaintiffs' Co-Lead Counsel shall recommend to the Court, and
Settling Defendant shall not oppose, a program and form of notice to the
Settlement Class consistent with the goals of providing economical, efficacious
and expeditious notice consistent with the requirements of Rule 23 and due
process. After the Court approves a program and form of notice and finds that
the program and form of notice satisfy the requirements of Rule 23 and due
process, up to one-half of the Settlement Fund (as adjusted and including
accrued interest) may be used to pay the costs of class notice. However, if
prior to class notice Plaintiffs' Co-Lead Counsel enter into Future Settlements
with one or more Future Settling Defendants, which are preliminarily approved by
the Court, the amount of the Settlement Fund that may be used to pay the costs
of class notice shall not exceed the lesser of (a) one-half of the Settlement
Fund or (b) 100% of the costs of class notice divided by the number of
defendants, including the Settling Defendant, who have settled, regardless of
whether or not the Future Settling Defendants are required by the Future
Settlements to contribute to the cost of class notice. (For example, if a
settlement with one Other Defendant is preliminarily approved, the amount of the
Settlement Fund that may be used to pay the costs of class notice shall be the
lesser of one-half of the Settlement Fund or 50% of the class notice costs, and
if settlements with two Other Defendants are preliminarily approved, the amount
of the Settlement Fund that may be used to pay the costs of class notice shall
be the lesser of one-half of the Settlement Fund or one-third of the total costs
of giving notice.) For purposes of this Settlement Agreement, the costs of
giving notice include all costs and expenses associated with notice to the
class, including but not limited to the costs and expenses associated with
identifying class members, providing mailed notice and published notice, and
providing any notice by means of the Internet, toll-free telephone service or
otherwise. The Settling Defendant shall provide all information, within its
possession, custody or control, relating to the identity of class members to the
same extent agreed to by nineteen (19) or more defendants or, in the absence of
an agreement, ordered by the Court. The Settling Defendant will not object to
the inclusion of notice in its periodic mailings to class members, if any, to
the extent agreed to by nineteen (19) or more defendants or, in the absence of
an agreement, ordered by the Court.
6. Motion for Entry of Final Judgment. If, after notice to the Class,
the Court approves this Settlement Agreement, then the parties hereto shall
jointly seek entry of an order and final judgment, in substantially the
form attached hereto as Exhibit B,
a. finally approving this settlement and its terms as being a
fair, reasonable and adequate settlement as to the
Class within the meaning of Rule 23 of the Federal
Rules of Civil Procedure, and directing its consummation
pursuant to its terms;
b. directing that, as to the Settling Defendant, the Class
Action be dismissed with prejudice and, except as provided
for herein, without costs in favor of the Settling
Defendant and against the members of the Class who did not
timely request exclusion from the Class;
c. permanently barring and enjoining all members of the
Class (other than those members of the Class who have
filed a valid request for exclusion from the Class)
from the institution, maintenance, prosecution or
enforcement, either directly or indirectly, of any
Released Claim against any Released Party;
d. discharging and releasing each Released Party from the
institution, maintenance, prosecution or enforcement,
either directly or indirectly, of any Released Claim;
e. determining pursuant to Fed.R.Civ.P. 54(b) that there is no
just reason for delay and directing that the judgment of
dismissal shall be final and appealable;
f. reserving continuing and exclusive jurisdiction over the
settlement and this settlement agreement, including the
administration and consummation of the settlement; and
g. directing that Plaintiffs' Co-Lead Counsel shall file
with the Clerk of the Court a list of those members
of the Class who have timely excluded themselves from
the Class and a copy of all requests for exclusion
from the Class.
7. Finality.
This Settlement Agreement shall become final upon the occurrence of all
of the following three events:
(a) approval in all respects by the Court as
required by Rule 23(e) of the Federal
Rules of Civil Procedure;
(b) entry, as provided for in Section 6 herein,
is made of the final judgment (Exhibit B
hereto) of dismissal with prejudice as to
the Settling Defendant against all
plaintiffs and members of the Class who have
not timely excluded themselves from the
Class; and
(c) expiration of the time for appeal or the
time to seek permission to appeal from the
Court's approval of this Settlement
Agreement as described in (a) hereof and
entry of a final judgment as described in
(b) hereof or, if appealed, approval of this
Settlement Agreement and the final judgment
have been affirmed in their entirety by the
court of last resort to which such appeal
has been taken and such affirmance has
become no longer subject to further appeal
or review.
It is agreed that the provisions of Rule 60 of the Federal Rules of Civil
Procedure shall not be taken into account in determining the above-stated times.
Notwithstanding the foregoing, nothing in this Section shall prejudice the
ability of the parties to make the joint application contemplated by Section
2(c) above nor relieve the parties of their obligation to do so.
8. Monetary Terms.
Subject to the provisions hereof, and in full, complete and final
settlement of the Class Action, the Settling Defendant agrees that it shall pay
and Plaintiffs agree to accept the total sum of $9,187,500.00. Settling
Defendant and Plaintiffs mutually agree that a reasonable estimate of Settling
Defendant's market share is 2.1%. (For this purpose, "Defendants' Market" is
defined as the 35 defendants' total number of shares traded as market makers in
the class securities currently set forth in, and within the time periods set
forth in, Exhibit A to the Refiled Consolidated Complaint, excluding trades
outside the Nasdaq National Market (e.g., Instinet or Posit), excluding trades
between market makers, and excluding trades by non-defendant market makers.)
Using this estimate, the parties have agreed to the total settlement payment of
$9,187,500.00 set forth above, which represents $4,375,000.00 per percentage
point for Settling Defendant's estimated market share of the Defendants' Market.
It is the mutual understanding of the parties, however, that this estimate of
market share is but one of the factors considered in arriving at the
consideration to be paid by Settling Defendant. Plaintiffs' Co-Lead counsel also
took into account, among other things, Settling Defendant's position as the
first Defendant agreeing to settle, the relative net worth of Settling
Defendant, and the fact that Plaintiffs' motion for inclusion of institutional
investors in the class was undecided as of the date of the Original Agreement.
Moreover, the parties mutually understand that the calculation of any
defendant's market share with precision is difficult given the available data
and alternative available methods and approaches to calculation. Settling
Defendant's estimated market share is just that--a reasonable estimate. Neither
party believes that the fairness or adequacy of this Settlement Agreement is
dependent upon the precision of that estimate. Rather, it is the joint belief of
the parties that the sum of $9,187,500.00 is fair, reasonable and adequate based
on the totality of the circumstances surrounding this settlement.
The Settling Defendant has agreed to pay this consideration with the
specific contemplation that it is adequate not only to compensate the current
Class but also to compensate potential future additions to the Class by reason
of any Class Redefinition. Plaintiffs' Co-Lead Counsel also consider the amount
of the Settlement Fund together with the other terms of this Settlement
Agreement, fair, reasonable and adequate to accommodate the interests of any
such potential future additions to the Class. Nonetheless, the Class shall
retain the entire Settlement Fund, with no reversion to the Settling Defendant,
even if no expansion of the Class ever occurs.
The Settling Defendant agreed to pay and did, in fact, pay the first
half of its principal obligation, within ten (10) business days after the
Original Agreement, into an escrow account to be invested in instruments secured
by the full faith and credit of the United States. The escrow account shall be
established and administered pursuant to an escrow agreement in a form
satisfactory to the parties, and held and administered by an escrow agent
satisfactory to the parties. Plaintiffs' Co-Lead Counsel and Counsel for the
Settling Defendant shall be joint trustees of this escrow account. It is
intended that any taxes due as a result of income earned by the Settlement Fund
will be paid from the Settlement Fund. In the event federal income tax liability
is final, assessed against and paid by the Settling Defendant as a result of
income earned by the Settlement Fund, Settling Defendant shall be entitled to
reimbursement of such payment from the Settlement Fund. Settling Defendant will
notify Plaintiffs' Co-Lead Counsel of any notice of assessment or payment and
will use its best efforts to resist any such assessment or payment.
The Settling Defendant shall pay the second half of its principal
obligation 365 days after signing the Original Agreement into the same escrow
account set forth above, to be invested in like manner (or, if applicable, the
escrow account established under Section 11 of this Settlement Agreement).
Simple interest shall be earned over the 365 day period at the Broker's Call
Rate ("Call Money") as published in the Wall Street Journal as of the date of
the signing of the Original Agreement, which was 7.25%.
Nothing contained in this Settlement Agreement shall limit the Settling
Defendant's right to prepay the second half of its principal obligation with
interest through the date of actual payment, and without prepayment penalty,
which right, if exercised, will fulfill the Settling Defendant's payment
obligation hereunder in full.
If the Settling Defendant fails to pay in full the second half of its
principal obligation (as adjusted above) with interest (as computed above) 365
days after the date of signing of the Original Agreement, then Plaintiffs'
Co-Lead Counsel, on 10 days written notice to Settling Defendant's counsel,
during which 10-day period Settling Defendant shall have the opportunity to cure
the default without penalty, may withdraw from this Settlement Agreement or
elect to enforce it, with the full expenses of any enforcement effort, including
legal fees, to be taxed against Settling Defendant. The Settling Defendant's
obligation to pay may be enforced by motion in this multidistrict litigation.
9. All Claims Satisfied by Settlement Fund.
Plaintiffs and other members of the Class who have not timely excluded
themselves from the Class shall look solely to the Settlement Fund for
settlement and satisfaction against the Settling Defendant of all claims that
are released hereunder. Except as provided herein, or by subsequent order of the
Court, no class member shall have any interest in the Settlement Fund or any
portion thereof.
10. Expenses Paid From Settlement Fund.
The Settling Defendant shall not be liable for any costs, or fees or
expenses of any of plaintiffs' respective attorneys, experts, consultants,
agents and representatives, but all such costs, fees and expenses as approved by
the Court may be paid out of the Settlement Fund.
11. Establishment of Escrow Account.
Ten days after final settlement approval, the Settlement Fund
(including the principal obligation and interest) shall be paid into a further
escrow account with Plaintiffs' Co-Lead Counsel as sole trustees. Except as
provided in Sections 5 and 12A herein, no distribution of the Settlement Fund
shall be made until the conditions contained in Section 7 shall have been
fulfilled.
12. Plan of Distribution.
Plaintiffs' Co-Lead Counsel shall propose a plan of distribution to the
Court, either before or after final settlement approval. The Settling Defendant
shall not directly or indirectly take any position with respect to any plan of
distribution or amount of distribution to any plaintiff or class member,
counsel, expert or consultant, or any other person whatsoever, except as set
forth in Section 27 hereof. In no event shall any portion of the Settlement Fund
(including principal or interest) be distributed or revert to the Settling
Defendant, under any circumstances, after this Settlement Agreement becomes
final pursuant to Section 7 herein. After this Settlement Agreement becomes
final pursuant to the provisions of Section 7 herein, the Settlement Fund shall
be distributed as ordered by the Court.
To facilitate processing of claims and distribution of the Settlement
Fund, upon written request by the Plaintiffs' Co-Lead Counsel, the Settling
Defendant will, to the extent reasonably available, provide those computerized
records which reflect trades by class members and which are within its
possession, custody or control to the Plaintiffs for the purposes of settlement
administration.
Following final approval, disbursements for the costs and expenses of
administration and distribution of the Settlement Fund, or expenses of
litigation, may be made from the Settlement Fund from time to time with approval
of the Court. In no event shall the Settling Defendant have any liability or
responsibility with respect to the distribution and administration of the
Settlement Fund, including, but not limited to, the costs and expenses of such
distribution and administration.
12A. Attorneys' Fees and Expenses.
Nothing in this Settlement Agreement shall prohibit such attorneys'
fees and expenses as are awarded by the Court from the Settlement Fund from
being paid to Plaintiffs' Co-Lead Counsel (if consistent with the Court's award)
immediately upon such award, notwithstanding the existence of any timely filed
objections thereto, or potential for appeal therefrom, or collateral attack on
the settlement or any part thereof, subject to Plaintiffs' Co-Lead Counsel's
(and other recipient counsel's) obligation to make appropriate refunds or
repayments to the Settlement Fund plus accrued interest, if and when, as a
result of any appeal and/or further proceedings on remand, or successful
collateral attack, the fee or cost award is reduced or reversed.
13. Non-Monetary Relief.
The Settling Defendant, as a further term of this Settlement Agreement,
conditionally agrees to the following non-monetary relief. The parties shall
jointly move for entry of the Stipulation and Order, appended hereto as Exhibit
C, at the same time that they move for final approval of this Settlement
Agreement. However, the Stipulation and Order appended hereto as Exhibit C shall
not become final and shall not become effective unless and until, and only to
the same extent that, 23 or more Future Settling Defendants (other than Kidder
Peabody which is no longer in business) agree to the entry of a Stipulation and
Order, of the same or longer duration, containing the same Negative Covenants
contained in Exhibit C, which Stipulations and Orders have become final and
effective. In addition, effective upon final approval of this Settlement and of
Future Settlements by at least 23 Future Settling Defendants (other than Kidder
Peabody which is no longer in business) containing a like provision, Settling
Defendant agrees that if the United States Department of Justice requests that
some or all of the resources Settling Defendant is required, by the terms of any
finally approved resolution of United States of America v. Alex. Brown, et al.,
96 Civ. 5313(RWS), in the United States District Court for the Southern District
of New York (the "DOJ Action"), to dedicate to the monitoring and recording of
telephone conversations be diverted instead to the recording and monitoring of
other media of trader communications (such as, for example, Instinet or
SelectNet), Settling Defendant shall comply with that request. In no event,
however, shall Settling Defendant be required by operation of this Section to
agree to any such request that would increase the aggregate time or expense
dedicated to monitoring trader communications. Nothing in this Section shall be
construed to require Settling Defendant to enter into any settlement at all of
the DOJ Action or to agree to any monitoring of trader communications as part of
such a settlement.
No provision of the Stipulation and Order appended hereto as Exhibit C
or of this Section 13 shall be enforceable against the Settling Defendant if a
State orFederal government agency or authority commences an action or proceeding
in which it formally asserts that such provision, alone or in combination with
other provisions, is a Statutory Disqualifier, in which case such provision or
provisions shall be deemed null and void ab initio. Moreover, nothing in this
Settlement Agreement is intended by the Parties to waive any rights the Settling
Defendant may have in connection with the DOJ Action or in connection with any
settlement of the DOJ Action; nor is it intended to waive any objections
Plaintiffs' Co-Lead Counsel may have to any current or future proposed
settlement of the DOJ Action. In particular, and without limitations, in the
event, as contemplated by this Section, Settling Defendant agrees at the request
of the DOJ to the recording or monitoring of forms of trader communications
other than telephone calls, any such recordings or other evidentiary by-product
of such monitoring shall not be discoverable by persons other than the DOJ or
admissible in judicial or administrative proceedings unless, and only to the
extent that, tape recordings made pursuant to the terms of any finally approved
settlement by Settling Defendant of the DOJ Action are discoverable or
admissible. Nothing in this Section shall be asserted by the parties to be
additional grounds for either approval or disapproval by the Court of the
currently proposed settlement of the DOJ Action, nor shall this Section operate
as assent by the Class to be bound by the judgment in the DOJ Action to any
greater extent than the Class would otherwise be bound.
It is agreed and understood that if the Non-Monetary Relief set forth
herein and in Exhibit C hereto does not become effective by its terms or becomes
effective but is later rendered void by its terms, then this Settlement
Agreement shall still be enforceable and effective in all other respects and the
parties agree that the monetary consideration is itself fair and adequate
consideration for the settlement embodied in this Settlement Agreement.
14. Release.
As set forth in the final judgment to be entered in accordance with
this Settlement Agreement, upon this Settlement Agreement becoming final, the
Released Parties shall be released and forever discharged from all manner of
claims, demands, actions, suits, and causes of action relating to all Nasdaq
Securities (including securities that are not Class Securities), whether class,
individual, or otherwise in nature, damages, whenever incurred, liabilities of
any nature whatsoever, including costs, expenses, penalties and attorneys' fees,
known or unknown, suspected or unsuspected, in law or equity, that any class
plaintiff or members of the Class who have not timely excluded themselves from
the Class Action (whether or not they make a claim upon or participate in the
Settlement Fund), ever had, now has or hereafter can, shall or may have, arising
from or relating in any way to (a) any conduct complained of in the Refiled
Consolidated Complaint or the constituent actions consolidated therein, (b) any
conduct involving any express or implied or tacit joint or coordinated activity
between Settling Defendant (including any employee of Settling Defendant) and
any other Nasdaq Market maker (including any employee thereof) with respect to
quotes, quote increments, movements of quotes, prices, dealer spreads or inside
spreads of any Nasdaq Security, (c) any conduct relating in any way to the
fixing, stabilizing, maintaining or widening of bid-ask spreads (either dealer
spreads or inside spreads or both) for any Nasdaq Security, (d) any conduct
relating in any way to the fixing of or movement (or increments of movement) of
bid or ask quotations for any Nasdaq Security (including without limitation
movements of quotes at the request of or pursuant to agreement with another
Market maker), (e) any conduct relating in any way to the minimum or maximum
number of shares that Nasdaq Market makers, or any of them, were willing to
trade at their quoted bid or quoted ask, (f) any conduct relating in any way to
the subject matter of any of the negative covenants set forth in the proposed
Stipulation and Order annexed hereto as Exhibit C (regardless of whether said
Stipulation and Order is ever entered or ever becomes effective or is rendered
void ab initio), (g) any conduct relating in any way to any boycott, harassment,
refusal to deal or other behavior toward any person or entity relating in any
way to the conduct described in (a) through (f); including, without limitation,
any such claims which have been asserted or could have been asserted in this
litigation against the Released Parties or any one of them, or which arise under
or relate to any federal or state antitrust, unfair competition, unfair
practices, price discrimination, unitary pricing or trade practice law,
securities law, or other law or regulation, or common law, including without
limitation, the Sherman Antitrust Act, 15 U.S.C. ss.1 et seq. (hereinafter and
as further defined in Section 14, the "Released Claims"); provided, however,
that this release does not include a release of any claims (i) for alleged
churning of securities, (ii) for alleged fraud relating to undisclosed payment
for order flow, (iii) for alleged fraud relating to material misstatements or
omissions bearing on the underlying value of specific securities (and unrelated
to market-making activities, such as, but not limited to, movement of quotes,
quote increments, dealer spreads, inside spreads and agreements or arrangements
between market makers relating to such market-making activities), or (iv)
enumerated in any Complaint which was filed and served upon Settling Defendant
prior to the date of the Original Agreement (April 9, 1997) except for this
Class Action and except for any similar State or Federal action which was
voluntarily dismissed prior to the date of this Settlement Agreement. Nothing
herein shall be construed as indicating in any way that any such claims
enumerated in (i) through (iv) have any validity or could be or have been
validly asserted against the Settling Defendant or any Other Defendant.
The scope of this release to the Settling Defendant shall be expanded
commensurately to the extent that a broader or more protective release is given
to any Other Defendant in any Future Settlement. Nothing in this Settlement
Agreement is intended to release any claims against any Other Defendants.
15. Waiver of Rights.
Upon this Settlement Agreement becoming final pursuant to Section 7
hereof, each Settlement Class Member does hereby and by operation of the Final
Judgment shall, expressly waive and relinquish, to the fullest extent permitted
by law, the provisions, rights, and benefits of Section 1542 of the California
Civil Code, which provides:
A general release does not extend to claims which the creditor
does not know or suspect to exist in his favor at the time of
executing the release, which if known by him must have
materially affected his settlement with the debtor.
and any and all provisions, rights and benefits of any similar state or federal
law, rule or regulation or the common law. Each member of the Class may
hereafter discover facts other than or different from those which he, she or it
knows or believes to be true with respect to the claims which are the subject
matter of the provisions of Section 14, but each member of the Class hereby
expressly waives and fully, finally and forever settles and releases, upon this
Agreement becoming final, any known or unknown, suspected or unsuspected,
contingent or noncontingent claim with respect to the subject matter of the
provisions of Section 14, whether or not concealed or hidden, without regard to
the subsequent discovery or existence of such different or additional facts.
16. Joint and Several Liability.
This Settlement Agreement shall not settle, limit or discharge any
liability or financial responsibility of any Other Defendants, or of alleged
co-conspirators, except to the minimum extent required by law. It is the mutual
understanding of class plaintiffs and the Settling Defendant that this
Settlement Agreement therefore will not reduce the alleged joint and several
treble damage liability of the other 34 defendants by any more than the amount
of the settlement itself. The Settling Defendant hereby represents that it has
not, and covenants that it will not, enter into any agreement that would entitle
any Other Defendant (or any other market maker) to reduce its own alleged joint
and several liability by any greater amount, including but not limited to any
Settlement Agreement requiring a reduction of liability or financial
responsibility related to the Settling Defendant's market share. The Settling
Defendant hereby releases any and all possible claims for contribution or
indemnity arising out of any Released Claim against any Future Settling
Defendant whose Future Settlement contains a reciprocal provision similarly
releasing this Settling Defendant.
17. Discovery Limitation.
Neither Plaintiffs' Co-Lead Counsel, nor the Class, nor counsel for any
named Plaintiff or for any Class Member who has not timely requested exclusion
from the Class shall be entitled to any further discovery of any kind from this
Settling Defendant or any Released Party hereunder, except as specifically set
forth in this Settlement Agreement.
18. Confidentiality Protection.
All discovery materials provided by the Settling Defendant or any
Released Party hereunder either before or after the date of this Settlement
Agreement including Documents, Answers to Interrogatories, Deposition Testimony
and Audio-Tape Recordings shall be governed by all Confidentiality/Protective
Orders in force as of the date of this Settlement Agreement and by such
additional Confidentiality/Protective Orders as may be in effect on the date the
discovery takes place.
19. Document Production.
The Parties agree that beginning on the date of the Original Agreement
there shall be a six (6) month moratorium of document discovery by plaintiffs
directed to the Settling Defendant or any Released Party hereunder, except that
the Settling Defendant will provide to Plaintiffs the limited category of
documents necessary to effectuate class certification notice, to the same extent
agreed to by nineteen (19) or more Other Defendants, or, in the absence of an
agreement, ordered by the Court, and except that Settling Defendant shall
promptly after the date of this Settlement Agreement produce any transcripts
(and exhibits) in its possession, custody or control of testimony given by
Settling Defendant's current or former employees to the Department of Justice
("DOJ"), as well as Settling Defendant's Answers to Interrogatories previously
posed by the DOJ.
Furthermore:
a. After the expiration of the six (6) month moratorium,
the Settling Defendant shall produce to Plaintiffs
those categories of documents (but not including tape
recordings) which the Court has directed the Other
Defendants to produce or that at least nineteen (19)
of the Other Defendants have consented to produce,
except that in no event shall the Settling Defendant
be required to produce any document not currently
requested in the Plaintiffs' outstanding document
requests.
b. After the expiration of the six (6) month moratorium,
the Settling Defendant shall produce all testimony
transcripts within its possession, custody or
control and exhibits thereto within its possession,
custody or control as of the date of this Settlement
Agreement from those depositions of Settling
Defendant's current or former employees which were
conducted by the Securities and Exchange Commission
("SEC") in connection with the investigation
captioned In the Matter of Certain Market Making
--------------------------------------
Activities on Nasdaq (the "SEC Investigation").
--------------------
If the Settling Defendant gains possession, custody
or control of additional transcripts of testimony
(or exhibits thereto) conducted in connection with
the SEC Investigation after the date of this
Settlement Agreement, said transcripts (and exhibits
thereto) shall be produced sixty (60) days after
receipt of the transcripts (and exhibits thereto) by
the Settling Defendant's counsel. The Settling
Defendant further agrees that after the six (6)
month moratorium, it shall produce all documents
(other than audiotape) provided to the SEC in
connection with the SEC Investigation. Nothing
herein shall be construed as indicating that the
Settling Defendant has any SEC exhibits in its
possession, custody or control.
c. Nothing contained herein shall be construed as
affecting any right of reimbursement Settling
Defendant may have for the reasonable costs of any
such document production, nor as conceding that any
such right exists.
20. Answers to Interrogatories.
The Parties agree that beginning on the date of the Original Agreement
there shall be a six (6) month moratorium on any requirement that the Settling
Defendant provide answers to the plaintiffs' interrogatories. The Parties agree
that after the expiration of the six (6) month moratorium, the Settling
Defendant shall produce to plaintiffs answers to the following three (3) types
of questions only:
(a) Identification of the Settling Defendant's Personnel
during the Class Period and their positions.
(b) Identification of those employees and, to the extent
known, former employees who have provided testimony
to the Department of Justice.
(c) Identification of those employees and, to the extent
known, former employees who have provided testimony
to the SEC in connection with the SEC Investigation.
21. Deposition Discovery.
The Parties agree that beginning on the date of the Original Agreement
there shall be a nine (9) month moratorium on deposition discovery directed to
the Settling Defendant or any Released Party hereunder.
a. The Parties agree that after the expiration of the
nine (9) month moratorium, plaintiffs shall use their
good faith, best efforts to defer deposition
discovery directed at the Settling Defendant until
after completion of deposition discovery directed at
the Other Defendants.
b. The Parties agree that after the expiration of the
nine (9) month moratorium the Settling Defendant's
officers and employees shall remain subject to
deposition by notice; provided, however, that nothing
herein shall be construed as a limitation on the
Settling Defendant's right to seek (or Plaintiffs
right to oppose) any appropriate protective order
limiting or preventing such deposition in accordance
with the Federal Rules of Civil Procedure or its
ability to advance all arguments available
thereunder.
22. Audiotape Production.
Except as provided in subsection (a) and (b) below, the Parties agree
that beginning on the date of the Original Agreement there shall be a nine (9)
month moratorium on any requirement that the Settling Defendant provide
audiotape recordings of telephone conversations.
a. The Settling Defendant agrees that thirty (30) days
after preliminary approval of this Settlement it
shall make available for Plaintiffs' review copies of
all audiotape, which was not previously provided to
the Plaintiffs, that was provided, prior to the date
of this Settlement Agreement, to the Department of
Justice in connection with its Nasdaq investigation
or to the SEC in connection with the SEC
Investigation, the total of which Settling Defendant
estimates to be approximately 30 Trader Days (240
hours).
b. The Parties agree that the Settling Defendant shall
make available to Plaintiffs for review any
additional audiotape provided to the SEC in
connection with the SEC Investigation after the date
of this Settlement Agreement; provided, however, that
the Settling Defendant is not required to make any
audiotape referred to in this subsection available to
Plaintiffs until sixty (60) days after the date that
it is made available to the SEC.
c. The Parties agree that after the expiration of the
nine (9) month moratorium, the Settling Defendant
shall make available for Plaintiffs' review no more
than twenty-five (25) additional Trader Days (a total
of approximately 200 hours) of audiotape to be
selected by the Plaintiffs by way of an appropriate
letter demand. For purposes of this provision, a
"Trader Day" shall mean one complete eight-hour day
of one trader's phone line. Such trader days may be
selected by Plaintiffs' Co-Lead Counsel by
identification of the trader's name or by
identification of the name of a security. In the
event that the identification is made by the name of
a security, the burden will be on the Settling
Defendant to identify the trader for the given
security to the extent reasonably ascertainable.
d. The procedure by which the Settling Defendant will
copy and make audiotape available to Plaintiffs shall
be governed by the procedure that has been in effect
to date in this Class Action and which is
incorporated in the Stipulation executed
simultaneously herewith between the Settling
Defendant and the Plaintiffs' Co-Lead Counsel (a copy
of which is attached as Exhibit D).
23. Return of Discovery Materials.
The plaintiffs and the Settling Defendant acknowledge and agree that
within sixty (60) days after entry of a final judgment terminating this
litigation in its entirety, all materials (including but not limited to
confidential, non-confidential and highly confidential documents, answers to
interrogatories, testimony transcripts, privilege logs, audiotape recordings)
produced by or discovered of the Settling Defendant or its current or former
employees shall be returned to the Settling Defendant upon its request at its
expense or destroyed. However, Plaintiffs' Co-Lead Counsel may retain, subject
to the Stipulated Confidentiality Order, the file copies of any pleadings,
motions, briefs or affidavits that have been filed with the Court.
24. Reservation of Rights and Privileges.
Nothing in this Settlement Agreement is intended to waive Settling
Defendant's right to assert that any material is protected from discovery by
reason of any individual or joint defense privilege or work product protection
or intended to waive plaintiffs' right to contest any claim of privilege or
work-product protection.
25. Effect of Disapproval.
If the Court refuses to approve this Settlement Agreement or any part
hereof, or if such approval is modified or set aside on appeal, or if the Court
for any reason does not enter the Final Judgment provided for in Section 6, or
if the Court enters the Final Judgment and appellate review is sought, and on
such review, such Final Judgment is not affirmed, then this Settlement Agreement
shall be terminated, and shall become null and void, except for those provisions
that are expressly and specifically identified herein as being severable and
susceptible to later, separate approval. In that event, any release or covenant
not to sue shall be of no force or effect.
26. This Settlement is Not an Admission.
In the event that the settlement does not become final in accordance
with the terms hereof, then this Settlement Agreement, and the release set forth
herein, shall be of no force or effect. The parties hereto agree that this
Settlement Agreement, including its exhibits, whether or not it shall become
final, and any and all negotiations, documents and discussions associated with
it, shall be without prejudice to the rights of any party, shall not be deemed
or construed to be an admission or evidence of any violation of any statute or
law or of any liability or wrongdoing by the Settling Defendant, or of the truth
of any of the claims or allegations, nor of the truth of any alleged defense, or
of any absence of wrongdoing or of limitation of damage or injury, and evidence
thereof shall not be discoverable or used directly or indirectly, in any way,
whether in the Class Action or in any other action or proceeding. The Settling
Defendant and plaintiffs expressly reserve all of their rights if the settlement
does not become final in accordance with the terms of this Settlement Agreement.
27. Return of Settlement Fund.
If the Settlement does not become final, then within 30 days after the
last date on which it could become final (including expiration of all appeals
from any decision denying approval) the Settlement Fund, including the principal
amount paid and accrued interest, shall be returned to the Settling Defendant,
less all funds expended pursuant to Section 5 of this Settlement Agreement with
respect to Class notice. If the Settlement does not become final, the funds
actually expended pursuant to Section 5 with respect to Class notice (the "Class
Notice Funds") shall not be refunded, under any circumstances, except that: (a)
if the Class subsequently obtains by settlement or final judgment an aggregate,
gross recovery against the Other Defendants totaling at least $100 million,
Plaintiffs' Co-Lead Counsel shall apply in good faith to the Court to have the
Class Notice Funds refunded to the Settling Defendant as part of plaintiffs'
costs of litigation; and (b) regardless of the size of the Class' aggregate,
gross recovery, if the Class subsequently obtains a final judgment against or
settlement with the Settling Defendant in this litigation, any Class Notice
Funds not refunded to Settling Defendant pursuant to (a) shall be credited, with
simple interest at the rate described in Section 8, against the judgment after
trebling or against the settlement. To the extent required, plaintiffs' Co-Lead
Counsel agree in good faith to move the Court for such appropriate orders as may
be necessary to effectuate the credit against any judgment. The provisions of
this Section relating to the refunding of the Class Notice Funds to the Settling
Defendant shall, in the event this Settlement Agreement does not become final,
be severable and subject to separate approval.
28. Binding Effect.
This Settlement Agreement shall be binding upon, and inure to the
benefit of, the successors and assigns of the Settling Defendant, the Released
Parties, class plaintiffs and class members who do not exclude themselves from
the Class.
29. Integrated Agreement.
This Settlement Agreement contains an entire, complete, and integrated
statement of each and every term and provision agreed to by and among the
parties and is not subject to any condition not provided for herein. This
Settlement Agreement shall not be modified in any respect except by a writing
executed by all the parties hereto.
30. No Conflict Intended.
Any inconsistency between this Settlement Agreement and the exhibits
attached hereto shall be resolved in favor of this Settlement Agreement. Any
inconsistency between the headings used in this Settlement Agreement and the
text of the Sections of this Settlement Agreement shall be resolved in favor of
the text.
31. Neither Party is the Drafter.
None of the parties hereto shall be considered to be the drafter of
this Settlement Agreement or any provision hereof for the purpose of any
statute, case law or rule of interpretation or construction that might cause any
provision to be construed against the drafter hereof.
32. Choice of Law.
All terms of this Settlement Agreement and the exhibits hereto shall be
governed by and interpreted according to the substantive laws of the State of
New York without regard to its choice of law or conflict of laws principles.
33. Submission to and Retention of Jurisdiction.
The Settling Defendant and the Class to the fullest extent permitted by
law hereby irrevocably submit to the exclusive jurisdiction of the United States
District Court for the Southern District of New York, for any suit, action,
proceeding or dispute arising out of or relating to this Settlement Agreement,
or to the applicability of this Settlement Agreement and exhibits hereto.
34. Opt-Out Provision.
The Settling Defendant, in its sole and absolute discretion, shall have
the option to terminate this Settlement Agreement and thus prevent it from
becoming final, in accordance with the procedures set forth in a separate
"Supplemental Agreement," if Non-Individual Class Members, whose market shares
(as determined in accordance with the Supplemental Agreement) of the volume of
Class Securities traded from May 1, 1989 through May 31, 1994 (inclusive of all
dates in between) exceed in the aggregate the threshold specified in the
Supplemental Agreement, file with the Court timely requests for exclusion from
the Class in accordance with the provisions of the Class Notice procedures
approved by the Court.
The Supplemental Agreement will not be filed with the Court unless and
until either (a) a dispute among the parties concerning its interpretation or
application arises, and in that event it shall be filed and maintained with the
Court under seal, or (b) the Court otherwise orders the Supplemental Agreement
disclosed on motion by any person with standing to so move.
35. Execution in Counterparts.
This Settlement Agreement may be executed in counterparts. Facsimile
signatures shall be considered as valid signatures as of the date hereof,
although the original signature pages shall thereafter be appended to this
Settlement Agreement. By signing this Settlement Agreement, Plaintiffs' Co-Lead
Counsel represent that they are authorized to enter into this Settlement
Agreement by Pretrial Order Number 1 on behalf of counsel for all named
plaintiffs in the Class Action.
36. Definitions.
A. "Any" means one or more.
B. "Ask" or "offer" means the price quoted on Nasdaq at which a
market maker offers to sell a specific quantity of a particular Nasdaq Security.
C. "Bid" means the price quoted on Nasdaq at which a market maker
offers to buy a specific quantity of a particular Nasdaq Security.
D. The "Class Action" means In Re: Nasdaq Market-Makers Antitrust
Litigation, 94 Civ. 3996 (RWS), M.D.L. No. 1023, including each and every
individual action that has been consolidated as part of this multidistrict class
action.
E. "Class Securities" means the list of Nasdaq securities
appended as Exhibit A to the Refiled Consolidated Complaint, or as expanded
pursuant to Section 2 of this Settlement Agreement.
F. "Dealer spread" means the difference between a market maker's
bid and ask on Nasdaq for a particular Nasdaq Security at any given time.
G. "Defendants" means the 35 companies that are now defendants
in the above-captioned multidistrict litigation (or its constituent cases).
H. "Future Settlement(s)" means settlement(s) entered into between
Plaintiffs' Co-Lead Counsel and any Other Defendant in the Class Action. This
expressly includes, without limitation, any settlements that may have been
executed after the date of the Original Agreement, but before the date of this
Settlement Agreement.
I. "Future Settling Defendant(s)" means any Other Defendant(s)
who enters into a Future Settlement.
J. "Inside spread" means the difference between the highest bid
and the lowest ask on Nasdaq of all market makers for a particular Nasdaq
Security at any given time.
K. "Market maker" means an NASD member firm that qualifies as a
market maker under Section 3(a)(38) of the Securities Exchange Act of 1934, as
amended.
L. "Nasdaq" means the computerized stock quotation system
operated by the Nasdaq Stock Market, Inc. that displays the quotes of market
makers in Nasdaq Securities.
M. "Nasdaq Security" means any Nasdaq National Market System
stock or any Nasdaq Small Cap Security stock quoted on Nasdaq, or, should these
terms be changed or amended, any successor group of stocks quoted on Nasdaq.
N. "Non-Individual Class Members" shall mean all Class Members
who are not natural persons.
O. "Or" means and/or.
P. "Other Defendants" means the 34 defendants other than the
Settling Defendant.
Q. "Price" means the price at which a Nasdaq Security is bought
or sold.
R. "Quote increment" means the difference between a market
maker's bid or ask on Nasdaq and that
market maker's immediately preceding or immediately subsequent bid or ask on
Nasdaq for a particular Nasdaq Security.
S. "Quote" means a bid or an ask on Nasdaq.
T. "Released Claims" shall mean those claims identified in
Section 14 of this Settlement Agreement.
U. "Released Parties" shall mean Settling Defendant Sherwood
Securities Corp. and its predecessors
or successors and, in their respective capacity related to Sherwood, but not in
any capacity related to any Other Defendant, any of its present or former
members, principals, officers, directors, employees, agents, attorneys,
shareholders, advisors, parents, subsidiaries or affiliates (including but not
limited to National Discount Brokers, Equitrade, Triak Services Corp. and MXNet,
Inc. and The Sherwood Group) and associates (as defined in SEC Rule 12b-2
promulgated pursuant to the Securities Exchange Act of 1934) and each of their
assigns, representatives, heirs, executors and administrators (and present or
former members, principals, officers, directors, employees, agents, attorneys,
shareholders or advisors of all such parents, subsidiaries, affiliates or
associates in any capacity related to Sherwood but not in any capacity related
to any Other Defendant).
V. "Settlement Fund" means the principal amount of the settlement
paid, or to be paid, by the Settling Defendant as set forth in Section 8 hereof,
plus any accrued interest as provided for herein.
W. "Settling Defendant" means Defendant Sherwood Securities Corp.
X. "Statutory Disqualifier" means any Court Order, or portion
thereof, that would constitute a disqualifying event or grounds for suspension
or revocation of registration, or membership disqualification, under any
provisions of federal or state securities laws or regulations or any rule of
any national securities association or of any securities exchange.
Dated Effective: April 9, 1997
By
Arthur M. Kaplan, Esq.
FINE, KAPLAN AND BLACK
23rd Floor, 1845 Walnut Street
Philadelphia, PA 19103
(215) 567-6565
By
Christopher Lovell, Esq.
63 Wall Street
New York, New York 10005
(212) 480-1600
By
Leonard B. Simon, Esq.
David J. Bershad, Esq.
MILBERG WEISS BERSHAD HYNES & LERACH
600 West Broadway
1800 One America Plaza
San Diego, CA 92101-5050
(619) 231-1058
-and-
One Pennsylvania Plaza
New York, New York
(212) 594-5300
By
Robert A. Skirnick, Esq.
MEREDITH, COHEN, GREENFOGEL & SKIRNICK, PC.
63 Wall Street - 32nd Floor
New York, New York 10005
(212) 480-1600
Plaintiffs' Co-Lead Counsel with authority to sign
pursuant to Pre-Trial Order No. 1 on behalf of
plaintiffs
By
Brian J. McMahon, Esq.
Guy V. Amoresano, Esq.
CRUMMY, DEL DEO, DOLAN,
GRIFFINGER & VECCHIONE
One Riverfront Plaza
Newark, New Jersey 07102-5497
(201) 596-4500
Counsel for Sherwood Securities Corp.
~;;;~;;
EXHIBIT 10.24
EQUITRADE PARTNERS
AMENDED AND RESTATED
PARTNERSHIP AGREEMENT
Dated as of May 2, 1997
<TABLE>
TABLE OF CONTENTS
<CAPTION>
<S> <C> <C>
Section Subject Page
- ------- ------- ----
1 Name and Principal Office....................................... 1
2 Purposes............................................................. 1
3 Office................................................................2
4 Partners..............................................................2
5 Conduct of Business............................................... 2
6 Term..................................................................4
7 Compliance with Applicable Law and Rules.................. 4
8 Books of Account.................................................. 5
9 Availability of Books of Account............................... 5
10 Audit of Books...................................................... 5
11 Annual Reports and Statements.................................. 5
12 Capital Contribution of the Partners............................ 5
13 Mandatory Additional Cash Contribution...................... 5
14 Subordinated Loans................................................ 5
15 Return of Capital Contribution.................................. 6
16 Capital Accounts................................................... 6
17 Allocation of Net Profits and Net Losses...................... 7
18 Allocations for Income Tax Purposes........................... 12
19 Valuation of Partnership Securities............................. 12
<PAGE>
TABLE OF CONTENTS (cont'd)
Section Subject Page
- ------- ------- ----
20 Distribution and Additional Capital Contributions........... 12
21 Salaries of the Partners............................................ 12
22 Assignment of Interest............................................ 13
23 Withdrawal, Death, Incompetency and Removal............. 13
24 Dissolution and Termination..................................... 20
25 Liability and Indemnification..................................... 21
26 Outside Activities.................................................. 22
27 Goodwill and Use of Partnership Name....................... 22
28 Fiscal Year and Partnership Books............................. 22
29 Use of Partnership Facsimile Signature........................ 22
30 Power of Attorney................................................. 23
31 Arbitration of Disputes............................................ 23
32 Notice................................................................23
33 Binding Effect, Amendment...................................... 23
34 Sale of the Assets of the Partnership........................... 24
35 Effective Date....................................................... 24
36 Applicable Law..................................................... 24
37 Entire Agreement.................................................. 24
38 Counterparts......................................................... 25
39 Headings............................................................. 25
EXHIBITS
1. Exhibit A Names, Capital Contribution of Partners
2. Exhibit B Equitrade B Securities, Partners and Employees
3. Exhibit C Equitrade C Securities, Partners and Employees
4. Exhibit D Net Profit and Loss Allocation Between and Among General Partners
5. Exhibit E A-B-C Agreements
</TABLE>
<PAGE>
AMENDED AND RESTATED PARTNERSHIP AGREEMENT (the "Agreement"), dated as
of May 2, 1997, among Stephen DiLascio, John F. Nicolosi, Gerard J. Dreyer, and
Philip J. Kopp, III, each individually a "General Partner" and collectively the
"General Partners", The Sherwood Group, Inc., a Delaware corporation ("Sherwood"
or the "Special Limited Partner"), Cynthia K. Kellogg, Harvey Silverman, James
C. Emrich ("Emrich"), John W. Nick, Jr. ("Nick"), David Green ("Green"), and
Dresdner-NY Incorporated, a Delaware corporation ("DNY"), each individual or
entity a "Limited Partner" and collectively the "Limited Partners". The General
Partners, Special Limited Partner, and Limited Partners are sometimes
hereinafter referred to individually as a "Partner" and collectively as the
"Partners".
WHEREAS, the Partnership has been conducting business as a New York
limited partnership organized under Article 8 of the New York Partnership Law
(the "Partnership") pursuant to an Amended and Restated Partnership Agreement
dated as of July 1, 1991, which was amended as of April 11, 1995;
WHEREAS, the Partners wish to further amend said Partnership
Agreement to reflect: (i) the admission of Nick, Green, and DNY as Limited
Partners;
WHEREAS, the Partners wish to restate in its entirety the Partnership
Agreement, as so amended;
NOW, THEREFORE, in consideration of the foregoing, of the mutual
promises of the parties hereto and of other good and valuable consideration, the
receipt and sufficiency of which is hereby acknowledged, the parties hereto,
intending to be legally bound, hereby agree that the Partnership Agreement be,
and the same hereby is, amended and restated to read in its entirety as follows:
A. Name and Principal Office.The parties hereto hereby continue the
Partnership as a limited partnership which has been formed heretofore and which
shall continue to conduct business under the firm name of Equitrade Partners.
The principal office of the Partnership shall continue to be in the County, City
and State of New York. The Partnership may transact business at such other place
or places within or without the State of New York or the United States as it may
determine from time to time.
<PAGE>
2. Purposes. The purposes of the Partnership are to act as a trader,
dealer, specialist and market maker in securities, options and commodities,
including, without limitation, buying, selling, holding, trading, investing and
dealing in such securities, options and commodities and in general conducting
all such businesses as are usually conducted by market makers and dealers in
securities, options and commodities including without limitation, acting as a
specialist on the New York Stock Exchange, Inc. (the "Exchange" or the "NYSE")
and all such activities as are related or incidental to the foregoing. Subject
to applicable provisions of the Securities and Exchange Act of 1934, as amended,
and the regulations thereunder (the "Exchange Act") and to the Constitution and
rules of the Exchange and such other exchanges on which the Partnership may
trade, the Partnership may engage in any transactions necessary or appropriate
to the accomplishment of its purposes, including, without limitation, borrowing
money and engaging in margin or short sale transactions.
3. Office. The principal office of the Partnership shall be
located at 50 Broadway, 17th Floor, New York, New York 10004 or at such other
place as the Partners may determine.
4. Partners. The names of the Partners in the
Partnership are as set forth on Exhibit A attached hereto.
5. Conduct of Business.
(a) Except as otherwise hereinafter provided, Stephen DiLascio
("DiLascio") and the Sherwood Managing Partner, as hereinafter defined, shall be
the Managing Partners of the Partnership.
(b) DiLascio, as Managing Partner, shall have primary
responsibility for all decisions regarding the day-to-day management of the
trading operations of the Partnership (including all interaction between the
NYSE and the Partnership relating to the business of the Partnership, the
activities of employees of the Partnership and specialist issues). The Sherwood
Managing Partner shall be solely responsible for making all decisions concerning
the management and business of the partnership with respect to matters upon
which DiLascio and a majority in interest of the other Partners shall not agree,
including without limitation, all matters within the primary responsibility of
DiLascio set forth above. Notwithstanding the preceding portions of this Section
5(b), (i) neither the Sherwood Managing Partner nor the Special Limited Partner
shall be restricted from communicating or dealing with the NYSE with respect to
its own businesses or the business of the Partnership, and (ii) no increase
shall be made in the salary of any General Partner other than in the normal and
usual course of the Partnership's business, no debt shall be incurred by the
Partnership other than in the normal and usual course of the Partnership's
business, and no sale of all or part of the business or assets of the
Partnership shall be made without the consent of the Special Limited Partner.
(c) Emrich shall act as a specialist in the securities
identified in Exhibit B which is annexed hereto and made a part hereof
(hereinafter referred to as the "Equitrade B Securities") and to perform such
services and duties related thereto, as shall from time to time be reasonably
assigned to Emrich by DiLascio.
(d) Nick and Green shall act as specialists in the securities
identified in Exhibit C which is annexed hereto and made a part hereof
(hereinafter referred to as the "Equitrade C Securities") and perform such
services and duties related thereto, as shall from time to time be reasonably
assigned to Nick and Green by DiLascio.
(e) In each and every event that (i) the Partnership shall
incur Net Losses for 5 consecutive calendar quarters, or (ii) the annual Net
Profits of the Partnership shall be less than $250,000, or pro rata part thereof
in the case of a period of less than twelve months, then the Sherwood Managing
Partner shall, for a period of time which commences on the date that the
Sherwood Managing Partner receives actual notice of the occurrence of an event
described in the preceding notice of the occurrence of an event described in the
preceding 5(c)(i) or (ii) (collectively, a "Trigger Event") and terminates as of
midnight on the forty-fifth day thereafter, have the right to become the
"Substitute Managing Partner" by the giving of notice to the Partnership and to
the NYSE of his intention to become the Substitute Managing Partner. Any such
exercise shall be permanent and the Sherwood Managing Partner shall thereafter
remain the Substitute Managing Partner for the term of the Partnership. The
failure of the Sherwood Managing Partner to exercise the rights set forth in
this Section 5(e) upon the occurrence of any Trigger Event shall not constitute
a waiver of his rights under this Section 5(e) with respect to any past, future
or contemporaneous Trigger Event.
(f) The term "Sherwood Managing Partner" shall mean James H.
Lynch, Jr. (or a corporation wholly-owned by him) ("Lynch") unless and until
Lynch shall cease to be an officer, director or employee of Sherwood or Lynch
shall resign as Sherwood Managing Partner. Thereafter, upon the thirtieth day
following notice to the NYSE (but in no event less than fifteen days following
delivery to the NYSE of all documents reasonably requested by the NYSE in
connection with approval of such person or entity) unless disapproved by the
NYSE, each of Arthur Kontos and Dennis V. Marino (or a corporation wholly-owned
by such person) shall become Sherwood Managing Partner in the consecutive order
set forth in this sentence, until such person shall cease to be an officer,
director or employee of Sherwood or such person shall resign as Sherwood
Managing Partner. In the event that each of Lynch, Arthur Kontos or Dennis V.
Marino shall cease to be an officer, director or employee of Sherwood or shall
resign as Sherwood Managing Partner, the Sherwood Managing Partner shall
thereafter be such successive persons or entities as Sherwood shall determine,
in its sole and absolute discretion, subject only to the rules and regulations
of the NYSE.
(g) The Special Limited Partner is hereby granted the right,
at any time or from time to time, to convert part or all of the Special Limited
Partnership Interest held by it into one or more General Partnership Interests.
Upon each such conversion, which shall be made upon delivery of written notice
to the Partnership or any of the Managing Partners, (i) that portion of the
Special Limited Partnership interest so converted shall cease to exist and there
shall arise and exist a General Partnership Interest which bears to the
aggregate of all Partnership Interests the same ratio which the Special Limited
Partnership Interest bore to the aggregate of all Partnership Interests
immediately prior to such conversion, and (ii) the Special Limited Partner's
Capital Account, in its capacity as Special Limited Partner, shall be decreased,
and the Special Limited Partnership's Capital Account as General Partner shall
be created or increased, as the case may be, by the contribution thereto of an
amount which bears the same ratio to the aggregate of all sums in the Special
Limited Partner Capital Account as the interest being converted bears to all
Special Limited Partnership Interests held by the Special Limited Partner
immediately prior to such conversion. In the event the Special Limited Partner
converts all or part of its interest as provided in this Section 5(g), the
manner of allocating profits and losses under Section 17 of this Agreement shall
be adjusted so that the Special Limited Partner's share of profits and losses
shall not be changed as a consequence of such conversion.
(h) Upon exercise of (i) the rights set forth in Section 5(e)
above, the Substitute Managing Partner shall succeed to all rights, duties and
obligations of the Managing Partners under this Agreement in substitution of
such Managing Partners and each reference in this Agreement to the Managing
Partners, or any of them, shall refer to the Substitute Managing Partner, and
(ii) upon exercise of the rights set forth in Section 5(e) above, or Section
5(g) above, each Partner shall execute such documents and instruments and take
such other actions as shall be necessary or appropriate to grant to the
Substitute Managing Partner or to the Special Limited Partner, as the case may
be, the powers and rights set forth in this Section 5.
(i) No Managing Partner shall, solely by his appointment as
Managing Partner, acquire any right in or to the income, capital or assets of
the Partnership. Each respective Managing Partner shall serve as agent of the
Partnership and shall receive such compensation, payable by the Partnership, as
shall be determined pursuant to Section 21 hereof.
(j) In the event DiLascio shall resign from his position as,
be removed as or otherwise cease to be a Managing Partner, such person or entity
as Sherwood shall designate shall replace such Managing Partner, provided, that
such designation shall be effective only upon the approval of a majority in
interest of the Partners other than Sherwood and, further provided that in the
event and while Sherwood shall fail to designate one or more replacements and
during any period prior to the date upon which Sherwood's designated
replacement, if any, shall be approved by the other Partners, Sherwood and/or
the Sherwood Managing Partner shall constitute the sole Managing Partner and
shall succeed to the rights, duties and obligations of DiLascio unless and until
a Substitute Managing Partner, if any, shall be designated.
(k) Except as otherwise provided, the Special Limited Partner
(in its capacity as Special Limited Partner) and the Limited Partners shall not
take part in the operation, management or control of the Partnership business.
6. Term. Unless sooner terminated as provided herein, the
Partnership shall continue until the 31st day of December, 2025. The term
of the Partnership shall be deemed to be extended from year to year
thereafter, unless the Partnership is terminated as hereinafter provided.
7. Compliance with Applicable Law and Rules. The Partnership shall
comply at all times with all applicable laws and regulations, including but not
limited to the federal securities laws, the Commodity Exchange Act, the rules
and regulations of the Securities and Exchange Commission and those of the
Commodity Futures Trading Commission, the constitution, rules, regulations,
by-laws, decisions and practices of the Exchange or the constitution and rules
of every other association or governmental body having jurisdiction over the
Partnership and its activities. If any of the terms, conditions or other
provisions of this Agreement shall be in conflict with any thereof, such terms,
conditions or other provisions shall be deemed modified so as to conform
therewith. Each Partner agrees to comply with all such laws, constitution,
rules, regulations and by-laws.
8. Books of Account. At all times during the continuance of the
Partnership, the General Partners shall keep or cause to be kept, true and
complete books of account, including true and correct entries with respect to
each position of the Partnership, on the basis of the Partnership's fiscal year.
9. Availability of Books of Account. All of the books of account
referred to in Section 8, together with an executed copy of this Agreement and
any amendments thereto, shall at all times be maintained at the principal office
of the Partnership, and shall be open to the inspection and examination of any
Partner or his or its representatives during reasonable business hours.
10. Audit of Books. Any Partner may, in his or its sole discretion,
cause the books and records of the Partnership to be audited by a certified
public accounting firm at the end of any fiscal year, provided that such Partner
shall bear the expense of the audit. The Partners, for the purpose of
determining the capital contributions and Capital Accounts of the Partners, may
rely on the books and records of the Partnership and shall not be required to
prepare or have prepared additional audits, reports, books or records for such
purposes.
11. Annual Reports and Statements. The Managing Partners shall cause to
be prepared, within ninety days after expiration of each fiscal year of the
Partnership, or as soon thereafter as may be practicable, a balance sheet as of
the end of such year, a statement of profit and loss for such year, and a copy
of the Federal and State income tax returns for such period.
12. Capital Contribution of the Partners. As of the date hereof, each
Partner has contributed the total amount of cash, marketable securities, or such
other property as shall be acceptable to the Managing Partners set forth
opposite his, her or its name as set forth in Schedule A attached hereto
(hereinafter sometimes referred to as the "Stated Capital" of such Partner).
13. Mandatory Additional Cash Contribution. Each Genera
Partner and the Special Limited Partner shall contribute one-half (1/2)
of his or its annual allocation of Second Tier Profits (as hereinafter
defined) as additional capital to the Partnership each year.
14. Subordinated Loans. The Managing Partners shall be entitled to
accept cash or securities from the Limited Partners or other subordinated
creditors, who need not be Partners, in the form of cash subordination
agreements, secured demand notes, registered subordinated debentures or other
instruments eligible under applicable regulatory provisions for inclusion in the
Net Capital, as defined in Section 19 hereof, of the Partnership, in such
amounts, and on such terms and conditions consistent with the foregoing, as the
Managing Partners may from time to time determine.
<PAGE>
15. Return of Capital Contribution.
(a) No Partner shall have the right to demand the return of
his contribution to the capital of the Partnership except as provided in this
Agreement and no Partner shall have the right to demand or receive property
other than cash in return for his or its contribution, except as provided in
this Agreement.
(b) Notwithstanding any provision to the contrary contained
herein, without the prior written approval of the NYSE, the capital contribution
of a Partner may not be withdrawn on less than six months written notice, given
no sooner than six months after such contribution was first made. Such capital
contribution may not be withdrawn nor may any unsecured loan or advance be made
by the firm to a Partner or employee at any time when such withdrawal, loan or
advance would be prohibited by the provisions of any rule or regulation of the
Exchange or the Securities and Exchange Commission to which the firm is subject,
including, without limitation, the provisions of SEC Rule 15c3-1.
(c) Further, notwithstanding anything to the contrary herein
contained, in the event of the termination of the Partnership, on the expiration
of the term of this agreement, or any extension or renewal thereof, each Partner
agrees that any withdrawal of capital on any such termination which would cause
the Partnership's `Aggregate Indebtedness' to exceed the percentages specified
in Rules 326(a) and 326(b) of the Rules of the Board of Directors of the NYSE
during the six months immediately preceding the date of termination, may be
postponed for a period of up to six (6) months after the stated date of
termination, as the General Partners may deem necessary to ensure compliance
with said rules; and any such capital so retained by the Partnership after the
date of termination shall continue to be subject to all debts and obligations of
the Partnership.
16. Capital Accounts. The Capital Account of each General
Partner shall be credited and charged as follows:
(a) Each Partner's Capital Account shall be credited with (i)
the amount of the Partner's capital contribution, and (ii) the amount of Net
Profits to the Partners pursuant to Section 17 herein.
(b) Each Partner's Capital Account shall be charged with (i)
the amount of any distribution to the Partner, and (ii) the amount of Net Loss
allocated to the Partner pursuant to Section 17 herein.
(c) Each Partner's Capital Account shall be credited with
interest each month at one-half the Prime Rate charged by the principal bank of
the Partnership to its most favored customers, plus 1%, except that the initial
capital contribution of the Special Limited Partner in its capacity as Special
Limited Partner shall not be credited with any interest. DNY shall be credited
with this interest on the first $2.4 million of contributed capital.
(d) DNY shall be credited with NYSE membership costs each
year, or pro rata thereof if for a period of less than twelve months, in an
amount based upon: i) the average yearly rental fee of the five NYSE original
seat leases (of one year duration) executed prior to the date of this Agreement,
as published in the NYSE Weekly Bulletin; ii) multiplied by the number of NYSE
memberships DNY contributes to the Partnership. In determining the average
rental fee, the highest and lowest rental fees shall be omitted from this
calculation. Interest payments made under this Section shall be adjusted each
year based upon the average yearly rental fee for the five NYSE original leases
(of one year duration) executed prior to the Anniversary Date of this Agreement
multiplied by the number of NYSE memberships DNY contributes to the Partnership.
In determining the average rental fee, the highest and lowest rental fees shall
be omitted from this calculation. DNY will be credited with interest at 8% (on
an annualized basis) on the additional net assets in excess of its NYSE
memberships and contributed NYSE business.
17. Allocation of Net Profits and Net Losses.
(a) The Net Profits and Net Losses which may accrue from the
business of the Partnership, with the exception of the Net Profits and Net
Losses which accrue from the business of specializing in the Equitrade B and
Equitrade C securities, shall be determined in accordance with generally
accepted accounting principles consistently applied as soon as practicable after
the end of each month and after the close of each fiscal year and at such other
time or times as such determination is required pursuant to the terms of this
Agreement or is otherwise desirable. Such calculation shall be made for purpose
of subparagraphs (b) and (c) hereof without regard or reduction or deduction for
restrictive covenant payments or other depreciation or amortization.
(b) The first $800,000, or pro rata thereof if for a period of
less than twelve months, of Net Profits for each fiscal year of the Partnership
("First Tier Profits"), after payment of all expenses, including salaries of the
Partners as hereinafter set forth, shall be allocated to the Special Limited
Partner and the Net Profits for each fiscal year of the Partnership in excess of
$800,000, or pro rata part thereof if for a period of less than twelve months
("Second Tier Profits"), shall be allocated 60% to the Special Limited Partner
and 40% to the General Partners (with such 40% referred to herein as the "GP
profits"). 85% of the GP Profits shall be divided among the General Partners, in
each calendar year following calendar year 1996, in such manner as DiLascio
shall determine and 15% of the GP Profits shall be paid out as bonuses in such
manner as DiLascio shall determine. The determination of the division of GP
Profits and the payment of bonuses by DiLascio shall be approved by the
affirmative vote of a majority in Partnership interests of the General Partners.
If the General Partners shall not approve such division and payment, GP Profits
shall be divided for all purposes in such manner as shall be approved by the
affirmative vote of a majority in Partnership interests of the General Partners.
If the General Partners shall not agree by December 31 of any year upon an
allocation of the GP Profits for the next following year, all GP Profits shall
be allocated by the Sherwood Managing Partner (whether or not any rights under
Section 5 shall have been exercised) in his or its sole and absolute discretion,
which decision shall be final and unappealable and shall be binding upon all the
parties to this Agreement. GP Profits for calendar year 1996 shall be allocated
as set forth on Exhibit D annexed to this Agreement. DNY shall receive from the
Partnership a one time payment of $1.6 million which shall be charged
immediately against DNY's capital account. In addition, DNY shall be credited
with interest of 8% on $1.6 million from the date of the closing of The Sherwood
Group, Inc.'s acquisition of DNY until such time as payment is made. The payment
shall only be made from the operating cash flow of the Partnership's business
from the date of the closing of the DNY acquisition.
(c) Except as otherwise stated herein, Net Losses for each
fiscal year of the Partnership shall be allocated 60% to the Special Limited
Partner and 40% to the General Partners. For each calendar year following the
calendar year 1996, the General Partners' share of Net Losses shall be allocated
among the General Partners in such manner as DiLascio shall determine. The
determination of the division of Net Losses by DiLascio shall be approved by the
affirmative vote of a majority in Partnership interests of the General Partners.
If the General Partners shall not approve such division, Net Losses shall be
divided among the General Partners in such manner as shall be approved by the
affirmative vote of a majority in Partnership interests of the General Partners.
If the General Partners shall not agree by December 31 of any year upon an
allocation of the Net Losses for the next following year, all Net Losses shall
be allocated among the general Partners by the Sherwood Managing Partner
(whether or not any rights under Section 5 shall have been exercised) in his or
its sole and absolute discretion, which decision shall be final and unappealable
and shall be binding upon all the parties to this Agreement. The General
Partners shall settle and pay to the Partnership their pro rata share of Net
Losses on a semi-annual basis. Net Losses allocable to the General Partners for
calendar year 1996 shall be allocated among them in the proportion set forth on
Exhibit D to this Agreement.
(d) Except as otherwise stated herein, no Limited Partner
shall in any event be allocated or liable for or subject to any loss beyond such
Limited Partner's capital account in the Partnership nor shall any Limited
Partner be required to make any additional capital contribution as the result of
losses or otherwise. Except as otherwise stated herein, Limited Partners shall
not participate in profits or losses of the Partnership except to the extent of
receiving interest on their capital contribution.
(e) In the event that the Special Limited Partner, in its
capacity as Special Limited Partner or General Partner, is unable to participate
in profits or losses as hereinabove provided by reason of any rule, regulation,
finding or determination by the Exchange, then it may, in its sole and absolute
discretion, be deemed to have withdrawn as Special Limited Partner or General
Partner, and its respective applicable capital accounts as of the date of such
rule, regulation, finding or determination (the "Determination Date") shall be
converted into a one (1) year subordinated note (the "Note"). The Note shall be
payable on the last day of the twelfth month immediately following the
Determination Date, together with interest thereon at 1% over the prime rate
announced from time to time by the principal bank of the Partnership on the
Determination date, adjusted on and as of each date upon which such bank shall
announce a change in its prime rate. Such note shall be subject to acceleration
upon the failure of the Partnership to pay amount due thereunder when due, the
bankruptcy of the Partnership and such other events as would cause an event of
default under subordinated notes issued by the Partnership or, if the
Partnership has made no such notes, by Sherwood to third parties in an arm's
length transaction.
(f) Net Profits and Net Losses originating from the specialist
activities in the Equitrade B Securities shall be allocated between and among
Emrich, the Special Limited Partner and the General Partners in the following
percentages:
<TABLE>
<CAPTION>
Net Profits Net Losses
<S> <C> <C>
Emrich 50% 50%
The Special Limited Partner 30% 30%
General Partners 20% 20%
</TABLE>
(g) General Partners Net Profits and Net Losses originating
from the specialist activities in the Equitrade B Securities shall be
determined, for each full calendar year, and for any partial year, through and
including the effective date of Emrich's withdrawal as a Limited Partner. Such
determination shall be made on an accrual basis, in accordance with generally
accepted accounting principles, by (1) aggregating all items of realized and
unrealized gain and loss attributable to the specialist activities in the
Equitrade B Securities, and adding to that all dividends, interest, short stock
rebates and commissions earned on transactions effected in or attributable to
the specialist activities in the Equitrade B Securities plus any other income
attributable to the specialist activities in the Equitrade B Securities, plus
any amount received as a result of Equitrade's transfer of its interest to act
as specialist in any Equitrade B Securities and (2) subtracting all expenses
allocable to the specialist activities in the Equitrade B Securities, including
but not limited to the following Expenses:
(i) Salaries, benefits, and other expenses of
partners and employees involved in the specialist
activities in the Equitrade B. As of the date of this
Agreement, such partners and employees are set forth
in Exhibit B annexed hereto;
(ii) Dues, fees and other membership or Floor usage
charges payable to the Exchange attributable to the
specialist activities in the Equitrade B Securities;
(iii) Lease payments for NYSE memberships used by
specialists actively engaged in connection with the
specialist activities in the Equitrade B Securities;
(iv) Clearance charges for transactions in the
Equitrade B Securities, net of any rebates;
(v) Interest and dividend expenses related to
transactions in the Equitrade B Securities;
(vi) Charges for accounting, legal and tax
services attributable to specialist activities
in the Equitrade B Securities;
(vii) the cost of financing positions in
Equitrade B Securities;
(viii) Taxes or fees by any governmental
or taxing authority attributable to the specialist
activities in the Equitrade B Securities;
(ix) Fines and penalties relating to or arising
out of the specialist activities in the
Equitrade B Securities operation;
(x) Any other incremental expenses attributable
to the Equitrade B Securities.
(h) The expenses set forth in the foregoing Paragraph 6(a) may
be estimated by DiLascio, charged to the specialist activities in the Equitrade
B Securities on a monthly basis, and periodically adjusted to reflect actual
expenditures or changes in expense accruals. The Partnership may establish
reasonable reserves with respect to possible future expenses relating to the
specialist activities in the Equitrade B securities.
(i) Emrich shall receive a draw as an advance against his
share of Net Profits of $10,000 each month. Such draw shall be charged against
Emrich's Capital Account.
(j) Net Profits and Net Losses originating from the specialist
activities in the Equitrade B securities shall be allocated between and among
the Special Limited Partner and the General Partners as set forth in Section
17(a), (b) and (c) herein.
(k) Net Profits and Net Losses originating from the specialist
activities in the Equitrade C Securities shall be allocated between and among
Nick, Green, DNY, and the General Partners in the following percentages:
<TABLE>
<CAPTION>
Net Profits Net Losse
<S> <C> <C>
Nick 19% 19%
Green 22% 22%
DNY 38.4% 38.4%
General Partners 20.6% 20.6%
</TABLE>
(l) Net Profits and Net Losses originating from the specialist
activities in the Equitrade C Securities shall be determined, for each full
calendar year, and for any partial year, through and including the effective
date of the withdrawal of Nick and/or Green as a Limited Partner. Such
determination shall be made on an accrual basis, in accordance with generally
accepted accounting principles, by (1) aggregating all items of realized and
unrealized gain and loss attributable to the specialist activities in the
Equitrade C Securities, and adding to that all dividends, interest, short stock
rebates and commissions earned on transactions effected in or attributable to
the specialist activities in the Equitrade C Securities plus any other income
attributable to the specialist activities in the Equitrade C Securities, plus
any amount received as a result of Equitrade's transfer of its interest to act
as specialist in any Equitrade C Securities and (2) subtracting all expenses
allocable to the specialist activities in the Equitrade C Securities, including
but not limited to the following Expenses:
(i) Salaries, benefits, and other expenses of
partners and employees involved in the specialist
activities in the Equitrade C securities. As of this
Agreement, such partners and employees are set forth
in Exhibit C annexed hereto;
(ii) Dues, fees and other membership or Floor usage
charges payable to the Exchange attributable to the
specialist activities in the Equitrade C Securities;
(iii) The cost of the use of all NYSE regular
memberships in connection with the specialist
activities in the Equitrade C Securities;
(iv) Clearance charges for transactions in the
Equitrade C Securities, net of any rebates;
(v) Interest and dividend expenses related to
transactions in the Equitrade C Securities;
(vi) Charges for accounting, legal and tax
services attributable to specialist activities
in the Equitrade C Securities;
(vii) the cost of financing positions in
Equitrade C Securities;
(viii) Taxes or fees by any governmental or
taxing authority attributable to the specialist
activities in the Equitrade C Securities;
(ix) Fines and penalties relating to or arising
out of the specialist activities in the
Equitrade C Securities operation;
(x) Costs related to the transfer of positions in
Equitrade C Securities from DNY to Equitrade; and
(xi) Any other incremental expenses attributable to
the specialist activities in the Equitrade C
Securities.
(m) The expenses set forth in the foregoing Section 17(l)
above may be estimated by DiLascio, charged to the specialist activities in the
Equitrade C Securities on a monthly basis, and periodically adjusted to reflect
actual expenditures or changes in expense accruals. The Partnership may
establish reasonable reserves with respect to possible future expenses.
(n) Twenty Percent (20%) of the aggregate of Net Profits
allocable to Nick and Green pursuant to Section 17(k) herein shall be set aside
as a bonus pool to be distributed in such manner as DiLascio shall determine.
Such bonus pool percentage shall be reviewed on an annual basis.
(o) Nick and Green shall hold their respective
memberships pursuant to A-B-C Agreements with the Partnership which A-B-C
Agreements are annexed hereto
as Exhibit E and made a part hereof.
18. Allocations for Income Tax Purposes. Each item of income, gain,
loss, deduction or credit for each accounting period of the Partnership shall be
allocated for income tax purposes among the Partners in such manner as to
reflect, as nearly as possible, the amounts credited or charged to each
Partner's Capital Account pursuant to this Agreement.
19. Valuation of Partnership Securities. The Partnership
shall use generally acceptable accounting principles for purposes of
determining the value of securities owned by the Partnership.
20. Distributions and Additional Capital Contributions. Each General
Partner and the Special Limited Partner agrees to contribute one-half (1/2) of
the Second Tier Profits allocated to him or it to the Partnership as additional
capital, which amounts shall be credited to such Partner's Capital Account. The
balance of such Second Tier Profits shall be distributed to each General Partner
and each Special Limited Partner as soon as possible after the end of the
Partnership fiscal year to which such Net Profits are attributable.
21. Salaries of the Partners. The following persons shall receive, for
so long as they remain General Partners, as an expense of the Partnership, the
annual salaries set opposite their names, which salaries shall be payable in
such installments as may be convenient and in keeping with the past practice of
the Partnership:
<TABLE>
<CAPTION>
Beginning as of January 1, 1997:
<C> <C>
Stephen J. DiLascio $191,000
Gerard J. Dreyer $191,000
John F. Nicolosi $137,000
Philip Kopp, III $132,000
John Nick $180,000
David Green $180,000
</TABLE>
22. Assignment of Interest. No partner shall sell, assign, pledge or
otherwise encumber or dispose of all or any part of his interest in the
Partnership (including any beneficial interest therein) without the prior
written consent of all General Partners, and any attempt to do so shall be null
and void, except that Sherwood may, upon notice to the Partnership and without
any required consent from the Partners, including the General Partners, assign
any of its Partnership interests, in which case such assignee shall succeed to
all rights and interests so assigned.
23. Withdrawal, Death, Incompetency and Removal.
(a) Except as set forth in Section 24 herein, the withdrawal
or expulsion from the Partnership of any Partner or the death, adjudication of
incompetency, disability or insolvency (as hereinafter defined) of any such
Partner shall not dissolve the Partnership.
The term "disability" when used with respect to a General
Partner shall mean his failure by reason of physical or mental disability to
devote full time to his duties as a General Partner for an aggregate of 180 days
in any period of 12 consecutive calendar months.
The term "insolvency" when used with respect to a Partner
shall be deemed to occur if the Partner: makes an assignment for the benefit of
creditors; files a voluntary petition in bankruptcy court; is adjudicated
bankrupt or insolvent; files a petition or answer seeking for himself any
reorganization, arrangement, composition, readjustment, liquidation or similar
relief under any statute, law, or regulation; files an answer or other pleading
admitting or failing to contest the material allegations of a petition filed
against him in any proceeding of this nature; or seeks, consents to, or
acquiesces in the appointment of a trustee, receiver, or liquidator of the
Partner or of all or any substantial part of his properties; or if 120 days
after the commencement of any proceeding against the Partner seeking
reorganization, arrangement, composition, readjustment, liquidation, or similar
relief under any statute, law or regulation, the proceeding has not been
dismissed, or if within 90 days after the appointment without his consent or
acquiescence of a trustee, receiver, or liquidator of the Partner or of all or
any substantial part of his properties, the appointment is not vacated or stayed
or within 90 days after the expiration of any such stay, the appointment is not
vacated.
The term "removal" when used with respect to a General Partner
or a Managing Partner shall mean his removal from the Partnership upon the
affirmative vote of a majority in interest of the General Partners with the
written approval of Sherwood. The Partner whose removal is sought shall not be
entitled to vote, provided that this sentence shall not negate the requirement
of approval by Sherwood. A vote for removal may be made at any time, or from
time to time, upon the request of any General Partner, any Managing Partner or
the Special Limited Partner. In the event of an affirmative vote for the removal
of any Partner (with the approval of Sherwood), such removal shall be effective
as of the close of business on the date of such vote or, if such day is not a
business day, the business day immediately preceding the date upon which such
vote occurred, unless a later date shall be agreed upon by the Partners entitled
to vote and by Sherwood.
(b) Each General Partner and the Special Limited Partner shall
have the right to withdraw as a Partner from the Partnership, and to withdraw
all of such Partner's capital account in the Partnership, only as of the end of
any fiscal year of the Partnership upon not less than six months' prior written
notice to such effect to the Partnership. Each Limited Partner shall have the
right to withdraw all of such Partner's capital account in the Partnership, only
as of the end of any month on or after May 2, 1997, upon not less than six
months' prior written notice to such effect to the Partnership.
The interest in the Partnership of a Partner withdrawing from
the Partnership pursuant to this paragraph (b) shall be terminated, and such
Partner shall cease to have any interest in the profits and losses of the
Partnership arising after the date of withdrawal.
Payment to a Partner, including his estate or personal
representative, whose withdrawal shall be governed by paragraph (b) of Section
23 of the amount of his capital account or accounts as of the applicable
withdrawal date shall be made by the Partnership within ninety (90) days after
the applicable withdrawal date, with interest thereon at the same rate being
paid to General Partners on their Capital Accounts ("Partnership Rate") from the
date after the Withdrawal Date to the date of payment.
(c) In the event of death, adjudication of incompetency,
disability, removal or insolvency of any Partner, such Partner's Partnership
interest shall be terminated, and such Partner shall cease to have any interest
in the profits and losses of the Partnership, as of the close of business on the
date of such Partner's death, adjudication of incompetency, disability or
insolvency or the date upon which such Partner's removal became effective, as
the case may be. Such Partner's Capital Account or Accounts in the Partnership
as of such date shall be determined and shall be paid to such Partner or such
Partner's estate or personal representative, as the case may be, no earlier than
the last day of the sixth month and no later than the last day of the seventh
month after the date of such Partner's death, adjudication of incompetency,
disability, removal or insolvency with interest on the amount of such payment
from the date such Partner shall cease to have any interest in the profits and
losses of the Partnership through the date immediately prior to the date of
payment at the Partnership Rate.
(d) All assets shall be valued as of the close of business on
each Valuation Date, as hereinafter defined, for purposes of determining the
amount of any increase or decrease in value thereof resulting since the last
preceding valuation thereof, except that no value shall be placed upon the
Partnership name, books, records, customers' lists, goodwill or other intangible
assets except as otherwise set forth in this Agreement. For purposes of such
valuation, the value of all securities shall be determined pursuant to Section
19 including, if selected for use by the Partnership, the LIFO Method, which
shall be used for computations relating to the Partnership's transactions as a
specialist in securities listed on the Exchange except to the extent and under
the circumstances set forth below in this subparagraph; and the furniture and
fixtures of the Partnership shall be valued for all purposes at their
depreciated value on the books of the Partnership, that is to say, the cost
thereof, less depreciation. Each such increase or decrease in value applicable
to any period between valuations shall be allocated to the persons and entities
who are Partners during such period in the proportions such Partners shared net
profits or net losses of the Partnership as provided in this Agreement (as the
same may be amended from time to time) in effect during such period.
The term "Valuation Date", for purposes of this Agreement,
shall mean the last business day immediately preceding the date as of which a
Partner shall cease to have any interest in the profits or losses of the
Partnership pursuant to this Agreement, the last business day immediately
preceding the day as of which a new Partner is admitted to the Partnership or
any additional capital contribution is made by an existing Partner, the last day
of each fiscal year, or the Date of Dissolution, as the case may be.
Notwithstanding any other provision of this Agreement to the
contrary, upon the last business day immediately preceding the date as of which
any partner shall cease to have any interest in the profits or losses of the
Partnership pursuant to this Section 23 and upon the Date of Dissolution, the
value of securities owned by the partnership as part of its specialist business
shall be marked to market for purposes of computing (i) the amount of a
Partner's Capital Account or accounts which is payable pursuant to this
Agreement or (ii) the amount of all Partners' Capital Accounts on the Date of
Dissolution, respectively; provided, however, that for purposes of computations
undertaken pursuant to clause (i) or clause (ii) of this sentence, the
withdrawing Partner's Capital Account or Accounts, or in the event of
dissolution, each Partner's Capital Account or Accounts, shall reflect his or
its allocable share of the difference between the LIFO valuation of such
securities and the valuation resulting from marking such securities to market
which is attributable only to the period during which such person or entity was
a Partner, with such allocable share being based on his or its share of the Net
Profits and Net Losses of the Partnership between the Valuation Dates occurring
during such period.
Any Partner entitled to payment of the amount of his or its
Capital Account pursuant to this Agreement shall be entitled to have the
valuation of his or its Capital Account made by the firm of independent public
accountants generally engaged by the Partnership at such time.
<PAGE>
If any Partner shall have deficit in his Capital Account at
the time of his withdrawal, death, adjudication of incompetency, disability,
removal, or insolvency, such Partner shall contribute to the capital of the
Partnership the amount necessary to restore such deficit balance to zero in
compliance with Internal Regulations Code, Regulation Section
1.704-1(b)(2)(ii)(3).
(e) If Emrich should voluntarily withdraw as a Limited Partner
of the Partnership, or if Emrich is removed as a Limited Partner for "just
cause", as defined herein, he shall be entitled, subject to NYSE approval, to
become registered as a specialist in 50% of the Equitrade B Securities and
Equitrade shall withdraw its registration in such securities. If Emrich
voluntarily withdraws as a Limited Partner or is removed for just cause,
Equitrade shall have the right to purchase Emrich's option to become registered
as the specialist in 50% of the Equitrade B Securities for fair market value;
such right must be exercised within 30 days of the date that notice of Emrich's
withdrawal or removal is given. If Emrich and Equitrade are unable to agree upon
"fair market value", a representative, selected by both parties, shall make such
determination which shall be final and binding. If the parties are unable to
mutually agree upon a representative to make such determination, the issue of
fair market value will be submitted for resolution to the NYSE arbitration.
"Just cause" shall be defined as:
i) A material breach of any provision of this
Agreement;
ii) insobriety due to drugs or alcohol during
business hours on more than one occasion; and
iii) any act of dishonesty or falsification
of reports, records or information submitted to Equitrade, the NYSE or any
other regulatory agency.
If Emrich is involuntarily removed as a Limited Partner, and
such removal is not made for "just cause", as defined herein, or if the
Partnership dissolves or a Petition is filed by or against the Partnership in
Bankruptcy, Emrich, at his election, may: a) withdraw as a Limited Partner of
Equitrade and, subject to NYSE approval, become registered as the specialist in
50% of Equitrade B Securities (and Equitrade shall withdraw its registration in
such securities) or b) sell his option to become registered as the specialist in
50% of the Equitrade B Securities to Equitrade for fair market value. If
Equitrade elects to purchase Emrich's option but Emrich and Equitrade are unable
to agree upon "fair market value", a representative, selected by both parties,
shall make such determination which shall be final and binding. If the parties
are unable to mutually agree upon a representative to make such determination,
the issue of fair market value will be submitted for resolution to NYSE
arbitration.
In the event of Emrich's withdrawal, he will not, for a period
commencing upon the date of such withdrawal and continuing until two years after
that date, engage in business as a specialist, or apply for registration on any
exchange as a specialist, in any securities in which Equitrade is engaged as a
specialist after his withdrawal; nor during this period shall he become
associated, directly or indirectly, with any other firm which is a member of
such exchange and which is engaged in specializing in any such securities,
except a firm that has succeeded to Equitrade's interest in such specialization
as a result of a sale or other voluntary transferral. If a transfer of
registration to Emrich is required as a consequence of his withdrawal, Equitrade
will cooperate with Emrich to effect such transfer and if permitted by the rules
of the Exchange, Equitrade consents to the registration in the name of Emrich of
such securities transferral without action on Equitrade's part. Any securities
which shall be withdrawn and/or transferred by Emrich pursuant to this Section
shall be determined by Equitrade and Emrich subject to NYSE approval. If the
parties are unable to reach an agreement as to the securities Emrich shall be
permitted to transfer, a representative, selected by both parties, shall make
such determination which shall be final and binding upon the parties.
(f) If Emrich dies or becomes permanently disabled, as defined
herein, on or before April 13, 1997, Equitrade shall purchase Emrich's option to
become registered as the Specialist in 50% of the Equitrade B Securities for
$1.5 million within 60 days of his death or permanent disability. If Emrich dies
or becomes permanently disabled after April 13, 1997, Equitrade shall be
required to purchase Emrich's option to become registered as the specialist in
50% of the Equitrade B Securities for fair market value. If Emrich or his estate
and Equitrade are unable to agree upon fair market value, a representative,
selected by both parties, shall make such determination which shall be final and
binding. If the parties are unable to mutually agree upon a representative to
make such determination, the issue of fair market value will be submitted for
resolution to NYSE arbitration. If Equitrade purchases Emrich's option to become
registered as the specialist in 50% of the Equitrade B Securities, neither
Emrich nor Emrich's estate shall have any further interest of any kind in the
Equitrade B Securities.
Emrich shall be deemed to be permanently disabled if he is
unable, by reason of illness or injury, for a period of 90 consecutive days to
perform his duties under the Agreement, or a doctor or insurance company that
insures his life or against disability issues a certificate that Emrich's
impairment will continue for a period of at least 90 days.
(g) If Nick should voluntarily withdraw as a Limited Partner
of the Partnership, or if Nick is removed as a Limited Partner for "just cause,"
as defined herein, Nick shall be entitled, subject to NYSE approval, to become
registered as a specialist in 19% of the Equitrade C Securities, and Equitrade
shall withdraw its registration in such securities. If Nick voluntarily
withdraws as a Limited Partner or is removed for just cause, then: a) Equitrade
shall have the right to purchase Nick's option to become registered as the
specialist in 19% of the Equitrade C Securities ("Nick's Option") for fair
market value; and b) Nick shall have the right to sell Nick's Option to
Equitrade. If Nick exercises his right to compel Equitrade to purchase Nick's
Option within two years of the date of this Agreement, the purchase price shall
be $1,187,500. If Nick exercises his right to compel Equitrade to purchase
Nick's Option after this Agreement has been in effect for more than two years,
Equitrade shall pay Nick fair market value for Nick's Option. If Nick and
Equitrade are unable to agree upon "fair market value," a representative,
selected by both parties, shall make such determination which shall be final and
binding. If the parties are unable to mutually agree upon a representative to
make such determination, the issue of fair market value will be submitted for
resolution to the NYSE arbitration.
If Green should voluntarily withdraw as a Limited Partner of the
Partnership, or if Green is removed as a Limited Partner for "just cause," as
defined herein, Green shall be entitled, subject to NYSE approval, to become
registered as a specialist in 17% of the Equitrade C Securities, and Equitrade
shall withdraw its registration in such securities. If Green voluntarily
withdraws as a Limited Partner or is removed for just cause, then: a) Equitrade
shall have the right to purchase Green's option to become registered as the
specialist in 17% of the Equitrade C Securities ("Green's Option") for fair
market value; and b) Green shall have the right to sell Green's Option to
Equitrade. If Green exercises his right to compel Equitrade to purchase Green's
Option within two years of the date of this Agreement, the purchase price of
Green's Option shall be $1,375,000. If Green exercises his right to compel
Equitrade to purchase Green's Option after this Agreement has been in effect for
more than two years, Equitrade shall pay Green fair market value for Green's
Option. If Green and Equitrade are unable to agree upon "fair market value," a
representative, selected by both parties, shall make such determination which
shall be final and binding. If the parties are unable to mutually agree upon a
representative to make such determination, the issue of fair market value will
be submitted for resolution to the NYSE arbitration.
"Just cause" shall be defined as:
i) A material breach of any provision of this
Agreement;
ii) insobriety due to drugs or alcohol during
business hours on more than one occasion; and
iii) any act of dishonesty or falsification
of reports, records or information submitted to Equitrade, the NYSE or any
other regulatory agency.
If Nick is involuntarily removed as a Limited Partner, and
such removal is not made for "just cause," as defined herein, or if the
Partnership dissolves or a petition is filed by or against the Partnership in
bankruptcy, Nick at his election, may: a) withdraw as a Limited Partner of
Equitrade and, subject to NYSE approval, become registered as the specialist in
19% of Equitrade C Securities (and Equitrade shall withdraw its registration in
such securities); or b) sell Nick's Option to Equitrade for fair market value.
If Nick and Equitrade are unable to agree upon "fair market
value," of Nick's Option a representative, selected by both parties, shall make
such determination which shall be final and binding. If the parties are unable
to mutually agree upon a representative to make such determination, the issue of
fair market value will be submitted for resolution to NYSE arbitration.
If Green is involuntarily removed as a Limited Partner, and
such removal is not made for "just cause," as defined herein, or if the
Partnership dissolves or a petition is filed by or against the Partnership in
bankruptcy, Green at his election, may: a) withdraw as a Limited Partner of
Equitrade and, subject to NYSE approval, become registered as the specialist in
17% of Equitrade C Securities (and Equitrade shall withdraw its registration in
such securities); or b) sell Green's Option to Equitrade for fair market value.
If Green and Equitrade are unable to agree upon "fair market
value of Green's Option," a representative, selected by both parties, shall make
such determination which shall be final and binding. If the parties are unable
to mutually agree upon a representative to make such determination, the issue of
fair market value will be submitted for resolution to NYSE arbitration.
After Nick's withdrawal pursuant to this Section, Net Profits
and Losses arising from the specialist activities in the Equitrade C Securities
shall be allocated between and among the remaining Partners as follows: 22% to
Green; 49.8% to DNY; and 28.2% to the General Partners.
After Green's withdrawal pursuant to this Section, Net Profits
and Losses arising from the specialist activities in the Equitrade C Securities
shall be allocated between and among the remaining Partners as follows: 19% to
Nick; 48.6% to DNY; and 32.4% to the General Partners.
After the withdrawal of both Nick and Green pursuant to this Section,
Net Profits and Losses arising from the specialist activities is the Equitrade C
securities shall be allocated between and among the remaining Partners as
follows: 60% to DNY; and 40% to the General Partners.
In the event of Nick and/or Green's withdrawal, they will not,
for a period commencing upon the date of such withdrawal and continuing until
two years after that date, engage in business as specialists, or apply for
registration as specialists, on any exchange, in any securities in which
Equitrade is engaged as a specialist after their withdrawal; nor during this
period shall they become associated, directly or indirectly, with any other firm
which is a member of such exchange and which is engaged in specializing in any
such securities, except a firm that has succeeded to Equitrade's interest in
such specialization as a result of a sale or other voluntary transferral. If a
transfer of registration to Nick and/or Green is required as a consequence of
their withdrawal, Equitrade will cooperate with Nick and Green to effect such
transfer and if permitted by the rules of the Exchange, Equitrade consents to
the registration in the name of Nick and Green of such securities transferral
without action on Equitrade's part. Any securities which shall be withdrawn
and/or transferred by Nick and/or Green pursuant to this Section shall be
determined by Equitrade and Nick and/or Green subject to NYSE approval. If the
parties are unable to reach an agreement as to the securities Nick and/or Green
shall be permitted to transfer, a representative, selected by both parties,
shall make such determination which shall be final and binding upon the parties.
(j) If Nick dies or becomes permanently disabled, as defined
herein, within two years of the date of this Agreement (the "Anniversary Date"),
Equitrade shall purchase Nick's option to become registered as the Specialist in
19% of the Equitrade C Securities ("Nick's Option") for $1,187,500 within 60
days of his death or declaration of permanent disability. If Nick dies or
becomes permanently disabled after the expiration of more than two years from
the Anniversary Date, Equitrade shall be required to purchase Nick's Option for
fair market value. If Nick or his estate and Equitrade are unable to agree upon
the fair market value of Nick's Option, a representative, selected by both
parties, shall make such determination which shall be final and binding. If the
parties are unable to mutually agree upon a representative to make such
determination, the issue of the fair market value of Nick's Option will be
submitted for resolution to NYSE arbitration. If Equitrade purchases Nick's
Option, neither Nick nor his estate shall have any further interest of any kind
in the Equitrade C Securities. If Equitrade purchases Nick's Option, Net Profits
and Losses arising from the Specialist C activities shall be allocated as
follows: 22% to Green; 49.8% to DNY; and 28.2% to the General Partners.
If Green dies or becomes permanently disabled, as defined
herein, within two years of the date of this Agreement (the "Anniversary Date"),
Equitrade shall purchase Green's option to become registered as the Specialist
in 17% of the Equitrade C Securities ("Green's Option") for $1,375,000 within 60
days of his death or declaration of permanent disability. If Green dies or
becomes permanently disabled after the expiration of more than two years from
the Anniversary Date, Equitrade shall be required to purchase Green's Option for
fair market value. If Green or his estate and Equitrade are unable to agree upon
the fair market value of Green's Option, a representative, selected by both
parties, shall make such determination which shall be final and binding. If the
parties are unable to mutually agree upon a representative to make such
determination, the issue of the fair market value of Green's Option will be
submitted for resolution to NYSE arbitration. If Equitrade purchases Green's
Option, neither Green nor his estate shall have any further interest of any kind
in the Equitrade C Securities. If Equitrade purchases Green's Option, Net
Profits and Losses arising from the Specialist C activities shall be allocated
as follows: 19% to Nick; 48.6% to DNY and 32.4% to the General Partners.
Nick and/or Green shall be deemed to be permanently disabled
if they are unable, by reason of illness or injury, for a period of 180
consecutive days to perform their duties under the Agreement, or a doctor or
insurance company that insures Nick and/or Green's life or against disability
issues a certificate that Nick and/or Green's impairment will continue for a
period of at least 180 days.
24. Dissolution and Termination. The Partnership shall be dissolved and
terminated upon the withdrawal or bankruptcy of the Special Limited Partner or
upon the consent of a majority of the General Partners including the Managing
Partners and the consent of Sherwood. Upon termination, the Partnership shall
wind up its affairs and shall be liquidated. Upon any such termination of the
Partnership, each of the following shall be accomplished:
(a) The Managing Partners, or other Partners, as the case may
be, shall cause to be prepared a statement setting forth the assets and
liabilities of the Partnership as of the date of termination, and such statement
shall be furnished to all of the Partners;
(b) The property and assets of the Partnership shall b
liquidated as promptly as possible but in an orderly and businesslike manner so
as not to involve undue sacrifice;
(c) The Managing Partners or the other Partners, as the case
may be, shall proceed to wind up the affairs of the Partnership and in so
winding up may engage in such actions as it deems prudent to preserve the value
of the assets of the Partnership, and shall, after payment and discharge of the
claims of all creditors of the Partnership who are not Partners (or adequate
reserves for such claims having been established) out of the Partnership assets,
as promptly as practicable in accordance with the then existing rules of the
NYSE, but in any event within one year of the date of termination in the
following order and priority: (i) to the payment and discharge pro rata of the
claims of all creditors of the Partnership who are Partners and (ii) to the
Partners in the proportion that their Capital Accounts bear to each other.
Subject to NYSE approval, the Managing Partner shall return to DNY all of the
NYSE seats contributed by DNY to the Partnership.
(d) In the event the Partnership is "liquidated" within the
meaning of Internal Revenue Code Regulations Section 1.704-1(b)(2)(ii)(g), then
(a) distributions shall be made pursuant to this Section 24 to the Partners who
have positive Capital Accounts in compliance with Regulations Section
1.704-1(b)(2)(ii)(b)(2), and (b) if any Partner's Capital Account has a deficit
balance (after giving effect to all contributions, distributions, and
allocations for all taxable years, including the year during which such
liquidation occurs), such Partner shall contribute to the capital of the
Partnership the amount necessary to restore such deficit balance to zero in
compliance with Regulations Section 1.704-1(b)(2)(ii)(3).
25. Liability and Indemnification. None of the Partners, any Sherwood
Managing Partner nor any Substitute Managing Partner shall be liable to the
Partnership for any act or omission performed or omitted by them pursuant to the
authority granted to them by this Agreement, except for fraud or gross
negligence. The Partnership shall indemnify and save harmless the Partners and
each Sherwood Managing Partner and Substitute Managing Partner and, in the sole
discretion of the Partners, their employees, agents, independent advisers and
consultants, or the Partnership's agents, employees or independent advisers and
consultants, from any loss, damage, liability or costs incurred by them, or any
of them, by reason of any act performed pursuant to the authority granted by
this Agreement, by them, or any of them on behalf of the Partnership or the
furtherance of the Partnership's interest. Notwithstanding the foregoing,
neither the Partners, nor their agents, employees, independent advisers or
consultants nor any Sherwood Managing Partner or Substitute Managing Partner
shall be relieved from liability for fraud or gross negligence and there shall
be no indemnification relating to matters as to which such parties are adjudged
to have so breached any duty owned by the Partnership.
26. Outside Activities. The Partners, each Sherwood Managing Partner
and each Substitute Managing Partner may engage in and hold interests in other
business ventures of every kind and description for their own accounts and no
Partner, Sherwood Managing Partner or Substitute Managing Partner shall, by
virtue of this Agreement or the operations of the Partnership, have any right to
participate in any manner in any profits or income earned or derived by any
other Partner, Sherwood Managing Partner or Substitute Managing Partner from or
in connection with any such other business venture. Nothing contained in this
Agreement or arising by virtue of the operation of the Partnership shall prevent
any Partner, Sherwood Managing Partner or Substitute Managing Partner from
trading for his or her own account; provided that such trading by any Partner,
Sherwood Managing Partner or Substitute Managing Partner shall be done only
through the member firm or firms of the Exchange through which the Partnership
officially and regularly clears transactions.
27. Goodwill and Use of Partnership Name. In the event of the
withdrawal, death, adjudication of incompetency, insolvency, removal or
disability of any Partner, the right to use the Partnership's name or any
portion thereof shall be and remain the property of the remaining or surviving
Partners. No value shall be attributed to the use of the Partnership name or
goodwill for any purpose except as expressly provided in this Agreement.
28. Fiscal Year and Partnership Books. The fiscal year of the
Partnership shall be the period ending on December 31 in each year. The
Partnership shall keep and maintain regular books of account in the customary
manner and consistent with the provisions of this Agreement, which books shall
be open for inspection by any of the Partners during the term of the Partnership
and for a reasonable time thereafter. The books of account shall be available
for inspection by the Withdrawing Partners for period prior to their withdrawal
during normal business hours and upon reasonable notice. As soon as practicable
after the end of each month, a statement shall be prepared showing the profits
and losses for such period of the Partnership.
29. Use of Partnership Facsimile Signature. The Managing Partners shall
have full power and authority on behalf of all of the Partners of the
Partnership, at any time and from time to time, in accordance with the rules of
any national securities exchange of which the Partnership may be a member firm
(a) to designate one or more persons (i) to assign securities registered in the
name of the Partnership, (ii) to execute powers of assignments of securities and
(iii) to make any certification or guarantee of any signature or document
submitted in support of the transfer of any securities, all with the same effect
as if the name of the Partnership had been signed under like circumstances by
one of the Partners of the Partnership; (b) to adopt and authorize the use of a
mechanically reproduced facsimile signature of the Partnership in connection
with (i) the assignment of securities registered in the name of the Partnership
and (ii) the execution of powers of substitution; (c) to designate one or more
of the employees of the Partnership to sign written contracts covering "seller's
option", "when issued" and "when distributed" transactions in the name of the
Partnership as if the same had been signed under like circumstances by one of
the Partners of the Partnership; and (d) to execute and file with any national
securities exchange of which the Partnership may be a member firm, in the name
and on behalf of the Partnership, and the Partners, any and all such powers of
attorney, agreements and other instruments (including agreements of
indemnification) as may be required by any such exchange to evidence or support
action under clauses (a), (b), and (c) above. Each Partner, upon executing this
Agreement, or any amendment hereof, specifically ratifies and approves all such
powers of attorney, agreements and other instruments (including agreements of
indemnification) as may heretofore have been executed and filed on behalf of the
Partnership with any such exchange and which are still in force in connection
with any matter described in clauses (a), (b), or (c) above.
30. Power of Attorney. Each party hereby designates the Managing
Partners (and each successor Managing Partner and each Substitute Managing
Partner, if applicable) as such Partner's irrevocable attorney-in-fact, with the
right to execute for such Partner and in such Partner's name and to file all
instruments, documents and certificates relating to the Partnership which may,
from time to time be required by law, or by any governmental, administrative or
other body, including, without limitation, the Securities and Exchange
Commission, the National Association of Securities Dealers, Inc., any securities
exchange of which the Partnership is a member firm or associate member firm and
any state agency regulating the business of the Partnership to effectuate,
implement and continue the valid and subsisting evidence of the Partnership,
including, without limitation, any certificate of limited partnership and any
amendments thereto which may be required to be filed with the State of New York
and any document necessary to cause the existing certificate of limited
partnership to be amended to show the withdrawal of the Withdrawing Partner or
any other appropriate matters therein.
31. Arbitration of Disputes. Any dispute arising between the Partners
either during the period of the Partnership or in connection with its
dissolution, or thereafter arising in relation to the Partnership, which cannot
be adjusted by mutual agreement, shall be submitted to arbitration in accordance
with the Constitution, By-Laws and Rules then obtaining of the Exchange.
32. Notice. Any notice required hereunder to be given to any party
hereto or to his legal representative(s) shall be in writing and shall either be
served personally upon him or upon any one of his legal representatives or shall
be sent by prepaid registered or certified mail, return receipt requested, to
his last known post office address as shown on the records of the Partnership or
the last known post office address of any one of his legal representatives as
shown on the records of the Partnership. Such notice shall be deemed to have
been given when served personally or upon mailing. Notice of the Partnership
shall be given at the address of its principal place of business.
33. Binding Effect, Amendment.
(a) This Agreement shall be binding upon, and shall inure to
the benefit of, the parties hereto and their respective executors,
administrators, successors, assigns, heirs and legal representatives.
(b) This Agreement may not be changed or modified,
except by an Agreement in writing, signed by or on behalf of all the parties
hereto.
34. Sale of the Assets of the Partnership. In the event of
the sale of all or substantially all of the assets of the Partnership, or
of all or substantially all of the partnership interests therein, the
proceeds of such sale shall be applied as follows in the order indicated:
(a) To the payment in full of all creditors of the
Partnership, including contributors of any Secured Demand Note Collateral
Assignment and cash subordinated loans.
(b) To return to Harvey Silverman and Cynthia Kellogg the
amount of their Capital Accounts and accrued interest thereon.
(c) To return to DNY all NYSE memberships which DNY
contributed to the Partnership plus accrued interest pursuant to Section 16(d)
of this Agreement which has not been distributed to DNY.
(d) To Sherwood in the aggregate amount of Sherwood's
capital contribution, as set forth on Exhibit A annexed hereto.
(e) To the General Partners and Limited Partners in the
aggregate amount of their capital contribution as set forth on Exhibit A annexed
hereto.
(f) 60% of the balance to Sherwood and the remaining balance
to the General Partners allocable as Net Profits pursuant to Section 17 of this
Agreement, except as provided in Sections 34(g) and (h) of this Agreement.
(g) The proceeds of the sale of the specialist business in the
Equitrade B Securities shall be allocated as Net Profits pursuant to Section
17(f) of this Agreement.
(h) The proceeds of the sale of the specialist business in
Equitrade C Securities shall be allocated as Net Profits pursuant to Section
17(k) through (o) of this Agreement.
35. Effective Date. This Agreement shall be effective, and
all rights, duties, liabilities and obligations hereunder shall be in full
force and effect as of April 11, 1997.
36. Applicable Law. This Agreement shall be construed in
accordance with and governed by the internal laws of the State of New York.
37. Entire Agreement. This Agreement constitutes the entire
agreement, and supersedes all other prior agreements and understandings,
both written or oral, among the Partners, or any of them, with respect to
the subject matter hereof.
<PAGE>
38. Counterparts. This Agreement may be executed in any
number of counterparts, and each such counterpart shall for all purposes be
deemed an original, and all such counterparts shall together constitute but
one and the same agreement.
39. Headings. The section headings herein are for
convenience only and shall not affect the construction hereof.
<PAGE>
IN WITNESS HEREOF, the parties hereto have hereunder set their hands as
of the 2nd day of May, 1997.
Stephen J. DiLascio John F. Nicolosi
Gerard J. Dreyer Philip J. Kopp, III
Cynthia K. Kellogg Harvey J. Silverman
John W. Nick, Jr. David Green
THE SHERWOOD GROUP, INC.
James C. Emrich
DRESDNER-NY INCORPORATED By:
By:
STATE OF NEW YORK )
)ss.:
COUNTY OF NEW YORK )
On the day of , 1997, before me personally came
, to me known, who being by me duly sworn, did depose
and say that he/she is the
of The Sherwood Group, Inc., the corporation described in and which
executed the foregoing instrument; that he/she knows the seal of said
corporation; that the seal affixed to said instrument is such corporate seal;
that it was so affixed by order of the Board of Directors of said corporation;
and that he/she signed his/her name thereto by like order.
Notary Public
- -------------------------------------------------------------------------------
STATE OF NEW YORK )
)ss.:
COUNTY OF NEW YORK )
On the day of , 1997, before me personally came
, to me known, who being by me duly sworn, did depose
and say that he/she is the
of Dresdner-NY Incorporated, the corporation described in and which
executed the foregoing instrument; that he/she knows the seal of said
corporation; that the seal affixed to said instrument is such corporate seal;
that it was so affixed by order of the Board of Directors of said corporation;
and that he/she signed his/her name thereto by like order.
Notary Public
<PAGE>
STATE OF NEW YORK )
)ss.:
COUNTY OF NEW YORK )
On the day of , 1997, before me personally came Stephen J. DiLascio, to
me known and known to me to be the individual described in and who executed the
foregoing instrument, and he duly acknowledged to me that he executed the same.
Notary Public
- -------------------------------------------------------------------------------
STATE OF NEW YORK )
)ss.:
COUNTY OF NEW YORK )
On the day of , 1997, before me personally came Gerard J. Dreyer, to me
known and known to me to be the individual described in and who executed the
foregoing instrument, and he duly acknowledged to me that he executed the same.
Notary Public
<PAGE>
STATE OF NEW YORK )
)ss.:
COUNTY OF NEW YORK )
On the day of , 1997, before me personally came Philip J. Kopp, III, to
me known and known to me to be the individual described in and who executed the
foregoing instrument, and he duly acknowledged to me that he executed the same.
Notary Public
- -------------------------------------------------------------------------------
STATE OF NEW YORK )
)ss.:
COUNTY OF NEW YORK )
On the day of , 1997, before me personally came John F. Nicolosi, to me
known and known to me to be the individual described in and who executed the
foregoing instrument, and he duly acknowledged to me that he executed the same.
Notary Public
<PAGE>
STATE OF NEW YORK )
)ss.:
COUNTY OF NEW YORK )
On the day of , 1997, before me personally came Cynthia K. Kellogg, to
me known and known to me to be the individual described in and who executed the
foregoing instrument, and he duly acknowledged to me that he executed the same.
Notary Public
- -------------------------------------------------------------------------------
STATE OF NEW YORK )
)ss.:
COUNTY OF NEW YORK )
On the day of , 1997, before me personally came Harvey Silverman, to me
known and known to me to be the individual described in and who executed the
foregoing instrument, and he duly acknowledged to me that he executed the same.
Notary Public
<PAGE>
STATE OF NEW YORK )
)ss.:
COUNTY OF NEW YORK )
On the day of , 1997, before me personally came David Green, to me
known and known to me to be the individual described in and who executed the
foregoing instrument, and he duly acknowledged to me that he executed the same.
Notary Public
- -------------------------------------------------------------------------------
STATE OF NEW YORK )
)ss.:
COUNTY OF NEW YORK )
On the day of , 1997, before me personally came James C. Emrich, to me
known and known to me to be the individual described in and who executed the
foregoing instrument, and he duly acknowledged to me that he executed the same.
Notary Public
<PAGE>
STATE OF NEW YORK )
)ss.:
COUNTY OF NEW YORK )
On the day of , 1997, before me personally came John W. Nick, Jr.
to me known and known to me to be the individual described in and who executed
the foregoing instrument, and he duly acknowledged to me that he executed the
same.
Notary Public
- -------------------------------------------------------------------------------
STATE OF NEW YORK )
)ss.:
COUNTY OF NEW YORK )
On the day of , 1997, before me personally came James C. Emrich, to me
known and known to me to be the individual described in and who executed the
foregoing instrument, and he duly acknowledged to me that he executed the same.
Notary Public
<PAGE>
EXHIBIT A
The following Partners have contributed the amounts of Stated Capital
set forth opposite their respective names, either in cash, marketable
securities, or such other property as shall be acceptable to the Managing
Partners for capital purposes, as set forth below:
<TABLE>
<CAPTION>
<S> <C>
General Partners Capital Contributions
Stephen J. DiLascio $ 2,645,497
Gerard J. Dreyer $ 1,445,058
John F. Nicolosi $ 1,091,001
Philip J. Kopp, III $ 1,004,437
Special Limited Partner
The Sherwood Group, Inc. $10,713,786
Limited Partners
James C. Emrich $ 766,596
John W. Nick, Jr. $ 100
David A. Green $ 100
Cynthia K. Kellogg $ 1,000
Harvey Silverman $ 1,000
Dresdner-NY Incorporated $11,150,000*
Total Capital $28,818,575
<FN>
* Includes DNY's NYSE Specialist Business having a market value as of the date
of contribution of $4,000,000; and four (4) NYSE memberships having a market
value of $4,800,000; Estimated net long positions approximately $2,000,000;
Estimated floor brokerage income approximately $350,000.
</FN>
</TABLE>
EXHIBIT B
<TABLE>
EQUITRADE B SECURITIES
<CAPTION>
Ticker Issuer
<S> <C>
ACO Acordia, Inc.
BLN Blackrock New York Insured Municipal 2008
Term Trust Inc.
FPL Florida Power and Light
FPL-PRA Florida Power and Light Preferred A Stock
FBS First Bank System
FBS-PRX First Bank System Preferred X Stock
KRG Quantum Restaurant Group, Inc.
MDA Mapco
MVJ Munivest New Jersey Fund, Inc.
NB Nationabank Corporation
NNN Commercial Net Lease Realty
SJK St. John Knits
SW Stone and Webster
TXU Texas Utilities
TUE-PR Texas Utilities Electric Company
TUE-PRA Texas Utilities Electric Company Preferred A Stock
TUE-PRE Texas Utilities Electric Company Preferred B Stock
VMO Van Kampen Merritt Municipal Opportunity Trust
WWP Washington Water and Power
</TABLE>
<PAGE>
EXHIBIT B
EQUITRADE PARTNERS AND EMPLOYEES
Eustace deCordova
Mr. Joseph J. McCarthy - Broker
Mr. Robert L. Celenza
Mrs. Aphrodite Amorgianos
Mr. James Emrich, Jr.
Miss Gloria Pascale
Mr. Daniel J. Mulholland
Mr. Joseph J. Quaglieri
Mr. Daniel Harkins
<PAGE>
EXHIBIT C
<TABLE>
EQUITRADE C SECURITIES
<CAPTION>
Ticker Issuer
<S> <C>
CDS Alliance Entertainment Corporation
ATR Aptargroup, Inc.
ASL Ashanti Goldfields Company Limited
BKUPRA Bank United of Texas Noncumulative Preferred A
BKUPRB Bank United of Texas Noncumulative Preferred B
BTZ Berlitz International, Inc.
BTV BET Holdings
CNIPP Canadian National Railway Company
CIC Carson Products, Inc.
ECP Central Newspapers
CXE Colonial High Income Municipal Trust
COP Consolidated Products, Inc.
CON Continental Home Holdings Corp.
DM Dames and Moore
DY Dycom Industries, Inc.
ELM Empresa La Moderna S.A. de C.V.
EWB E.W. Blanch Holdings, Inc.
FGP Ferellgas Partners, L.P.
FLH Fila Holdings, SPA
FBP First Federal Savings Bank of Puerto Rico
FMS Fresenius Medical Care AG
FMSPR Fresenius Medical Care AG Preferred
GML Global Directmail Corp.
IO Input/Output, Inc.
JFI Jardine Fleming India Fund, Inc.
LCI LCI International, Inc.
MWT McWhorter Technologies, Inc.
MIBRA Midland Bank PLC Preferred A
MIBRB Midland Bank PLC Preferred B
MIBRC Midland Bank PLC Preferred C
MIBRD Midland Bank PLC Preferred D
RLR Rellia Star Financial
RLRPRA Rellia Star Financial Preferred A
NCO Nuveen California Municipal Market Opportunity Fund
PPR Pilgrim Prime Rate Trust
</TABLE>
<PAGE>
EXHIBIT C
<TABLE>
EQUITRADE C SECURITIES (CON'T)
<CAPTION>
Ticker Issuer
<S> <C>
PI Premdor, Inc.
RIT Ritchoice Managed Care, Inc.
SQF Seligman Quality Municipal Fund, Inc.
SEL Seligman Select Municipal Fund, Inc.
SSW Sterling Software, Inc.
TCB T.C.F. Financial Corp.
TK Teekay Shipping Corporation
TL Telex Chile, S.A.
TCT The Town and Country Trust
TMM Transportacion Maritima ADS L
TMMA Transportacion Maritima ADS Ordinary
VLY Valley National Bancorp.
VAL The Valspar Corporation
VCD Value City Department Stores, Inc.
VPI Vintage Petroleum, Inc.
WSO Watsco, Inc.
</TABLE>
<PAGE>
EXHIBIT C
EQUITRADE PARTNERS AND EMPLOYEES
John W. Nick, Jr.
David A. Green
Richard K. Green
James Fraschilla
Robert Poulos
Nicholas Abdinoor
Robert T. Hally
Gregory Kane
James Lancaro
Turlough Pollard
Eric Poscak
<PAGE>
EXHIBIT D
<TABLE>
Net Profits and Net Losses allocable to the General Partners shall be
allocable between and among them according to the following schedule:
<CAPTION>
<S> <C>
DiLascio 40%
Dreyer 34%
Nicolosi 16%
Kopp 10%
</TABLE>
Subject to the allocation of 15% of all such profits, which shall be
set aside as a bonus pool to be distributed in such manner as DiLascio shall
determine as set forth in the Agreement to which this Exhibit forms an
attachment. Such percentage shall be reviewed on an annual basis.
EXHIBIT 11
THE SHERWOOD GROUP, INC.
AND SUBSIDIARIES
<TABLE>
Computation of Earnings Per Common Share
Years ended May 31, 1997, 1996 and 1995
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net income $ 9,279,693 20,131,928 14,614,888
============= ============== ==============
Primary:
Net income per common share $ .72 1.50 1.07
=== ==== ====
Fully diluted:
Net income per common share $ .72 1.52 1.07
=== ==== ====
Historical:
Weighted average number of
common stock and common stock
equivalents outstanding:
Primary 12,941,287 13,200,867 13,624,603
=============== ============== ==============
Fully diluted 12,946,008 13,201,412 13,652,084
============= ============== ==============
</TABLE>
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE SHERWOOD GROUP, INC.
A) SHERWOOD SECURITIES CORP., incorporated under the laws of the State
of Delaware.
B) SHERWOOD CAPITAL, INC., incorporated under the laws of the State of New
Jersey.
C) SHERWOOD PROPERTIES CORP., incorporated under the laws of the State
of Delaware.
D) SHERWOOD NEWCO CORP., incorporated under the laws of the State of Delaware.
E) THE EBERCOM COMPANY., incorporated under the laws of the State of Delaware.
F) SIMCON CORPORATION, incorporated under the laws of the State of Delaware.
G) SHERWOOD MANAGEMENT CORP., incorporated under the laws of the State
of Delaware.
H) TRIAK SERVICES CORP., incorporated under the laws of the State of New York.
I) MXNET INC., incorporated under the laws of the State of Delaware.
J) ANVIL INSTITUTIONAL SERVICES, INC., incorporated under the laws of the
State of California.
K) SHD CORPORATION, incorporated under the laws of the State of Delaware.
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, 1997 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
New York, New York
August 7, 1997
<TABLE> <S> <C>
<ARTICLE> BD
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS FOR THE YEAR ENDED MAY 31, 1997 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAY-31-1997
<PERIOD-START> JUN-01-1996
<PERIOD-END> MAY-31-1997
<CASH> 3,033,818
<RECEIVABLES> 62,477,497
<SECURITIES-RESALE> 0
<SECURITIES-BORROWED> 0
<INSTRUMENTS-OWNED> 45,696,436
<PP&E> 20,263,511
<TOTAL-ASSETS> 160,160,725
<SHORT-TERM> 0
<PAYABLES> 32,036,714
<REPOS-SOLD> 0
<SECURITIES-LOANED> 0
<INSTRUMENTS-SOLD> 18,827,302
<LONG-TERM> 3,000,000
0
0
<COMMON> 143,432
<OTHER-SE> 92,131,053
<TOTAL-LIABILITY-AND-EQUITY> 160,160,725
<TRADING-REVENUE> 122,658,577
<INTEREST-DIVIDENDS> 7,774,806
<COMMISSIONS> 47,227,006
<INVESTMENT-BANKING-REVENUES> 0
<FEE-REVENUE> 2,521,713
<INTEREST-EXPENSE> 429,378
<COMPENSATION> 59,398,845
<INCOME-PRETAX> 17,991,674
<INCOME-PRE-EXTRAORDINARY> 9,279,693
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,279,693
<EPS-PRIMARY> 0.72
<EPS-DILUTED> 0.72
</TABLE>
