October 7, 1997
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: The Sherwood Group, Inc.
Report on Form 10-Q for the Three Months Ended August 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-Q for the three months
ended August 31, 1997 including financial statements and exhibits.
Thank you for your attention to this matter.
Very truly yours,
/s/Denise Isaac
Denise Isaac
Chief Financial Officer and
Principal Accounting Officer
CONFORMED
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended August 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 number 1-9480
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The Sherwood Group, Inc.
----------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Delaware 22-2394480
----------------------------------------------------------------------
(State or other jurisdiction of (I.R.S.Employer
incorporation or organization) Identification No.)
10 Exchange Place Centre, Jersey City, New Jersey 07302
- ----------------------------------------------------------------------------
(Address of principal executive offices) (Zip code)
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that
the Registrant was required to file such reports), and (2) has bee
subject to such filing requirements for the past 90 days.
Yes X No
---- ----
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
12,694,665 shares of Common Stock, par value $.01 per share, were outstanding
on September 30, 1997.
THE SHERWOOD GROUP, INC.
AND SUBSIDIARIES
INDEX
PAGE
--------
Part I - Financial Information
Item 1. - Financial Statements
Consolidated Statements of Financial Condition -
August 31, 1997 (Unaudited)and May 31, 1997 3
Consolidated Statements of Income (Unaudited) -
Three Months Ended August 31, 1997 and 1996 4
Consolidated Statements of Cash Flows (Unaudited) -
Three Months Ended August 31, 1997 and 1996 5 - 6
Notes to Consolidated Financial Statements (Unaudited) -
August 31, 1997 7 - 8
Item 2. - Management's Discussion and Analysis of
Financial Condition and Results of Operations 9 - 12
Part II - Other Information
Item 6. - Exhibits and Reports on Form 8-K 13
Signatures 14
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
<TABLE>
THE SHERWOOD GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<CAPTION>
August 31,
1997 May 31,
ASSETS (Unaudited) 1997
---------------------------------------
<S> <C> <C>
Cash $ 1,479,263 3,033,818
Funds segregated for customers - 29,203
Receivables:
Brokers and dealers 54,680,586 58,047,183
Other 582,041 599,725
Securities owned, at market value 49,015,276 45,696,436
Investment securities not readily marketable, at fair value 501,320 501,320
Investment in partnerships 12,984 12,984
Notes receivable 810,450 830,589
Furniture, fixtures, equipment, and leasehold improvements - at
cost, net of accumulated depreciation and amortization of $8,304,128
at August 31, 1997 and $7,674,370 at May 31, 1997 20,081,543 20,263,511
Computer software - at cost, net of accumulated amortization of
$575,685 at August 31, 1997 and $929,942 at May 31, 1997 2,024,300 1,853,693
Identified intangible assets, net of accumulated amortization of
$736,384 at August 31, 1997 and $535,853 at May 31, 1997 6,527,427 6,727,958
Exchange memberships (market value $8,409,500 at August 31,
1997 and $7,957,750 at May 31, 1997) 7,416,496 7,416,496
U.S. Treasury Obligations, held as collateral 7,630,759 7,815,254
Subordinated notes receivable 3,000,000 3,000,000
Deferred tax asset (net of valuation allowance) 2,114,435 2,220,472
Other assets 2,077,278 2,112,083
------------------- ------------------
$ 157,954,158 $ 160,160,725
=================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Securities sold, not yet purchased, at market value $ 25,966,163 $ 25,129,290
Accounts payable and accrued expenses, including
compensation payable to officers and employees of
$7,229,409 at August 31, 1997 and $11,831,551
at May 31, 1997 24,412,562 31,734,213
Secured demand notes payable 3,000,000 3,000,000
Income taxes payable 1,665,409 302,501
Minority interest in Equitrade 7,927,067 7,720,236
------------------- ------------------
Total liabilities 62,971,201 67,886,240
------------------- ------------------
Commitments and contingencies (Note 4)
Stockholders' equity (Note 5):
Preferred stock - $.01 par value;
authorized 1,000,000 shares; none issued - -
Class A common stock - $.01 par value;
authorized 50,000,000 shares; none issued - -
Common stock - $.01 par value; authorized
50,000,000 shares; issued 14,343,201 shares 143,432 143,432
Additional paid-in capital 57,189,985 57,189,985
Retained earnings 49,924,305 47,215,833
------------------- ------------------
107,257,722 104,549,250
Less: Treasury stock - at cost, 1,648,536 shares at
August 31, 1997 and 1,648,536 shares at May 31, 1997 (12,274,765) (12,274,765)
------------------- ------------------
Total stockholders' equity 94,982,957 92,274,485
------------------- ------------------
$ 157,954,158 $ 160,160,725
=================== ==================
The accompanying notes are an integral part of these statements.
</TABLE>
(3)
<TABLE>
THE SHERWOOD GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<CAPTION>
Three Months Ended August 31,
---------------------------------------
1997 1996
--------------------------------------------
<S> <C> <C>
Revenues:
Firm securities transactions - net $ 23,926,444 $ 29,683,515
Commission income 9,702,707 7,696,151
Floor brokerage income 4,278,998 2,938,304
Equity loss in partnerships - (11,840)
Interest income 1,900,016 1,995,559
Fee income 758,335 426,588
Other revenues 170,074 261,471
------------------- ------------------
40,736,574 42,989,748
------------------- ------------------
Expenses:
Compensation and benefits 12,742,397 15,024,338
Clearing and related charges 13,587,282 14,110,873
Communications 2,546,182 2,885,189
Depreciation and amortization 1,807,304 971,044
Occupancy costs and equipment rental 625,968 692,448
Other expenses 3,089,133 3,199,652
Interest expense 215,078 71,741
------------------- ------------------
34,613,344 36,955,285
------------------- ------------------
Income before minority interest and income taxes 6,123,230 6,034,463
Income of Equitrade allocated to
minority partners (1,141,407) (13,600)
------------------- ------------------
Income before income taxes 4,981,823 6,020,863
------------------- ------------------
Income taxes:
Federal, currently payable 1,524,970 2,097,250
State and local, currently payable 642,344 920,572
-------------------- ------------------
Total current income tax expense 2,167,314 3,017,822
------------------- ------------------
Federal, deferred 70,341 -
State and local, deferred 35,696 -
------------------- ------------------
Total deferred income tax expense 106,037 -
-------------------- ------------------
Total income taxes 2,273,351 3,017,822
------------------- ------------------
Net income $ 2,708,472 $ 3,003,041
=================== ==================
Net income per common and common equivalent share (a):
Net income $ 0.21 $ 0.23
=================== ==================
Weighted average common shares outstanding 12,840,084 13,050,182
=================== ==================
<FN>
(a) For presentation purposes, primary and fully diluted are identical.
</FN>
</TABLE>
The accompanying notes are an integral part of these statements.
<TABLE>
(4)
THE SHERWOOD GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
Three Months Ended August 31,
---------------------------------------
1997 1996
------------------- ------------------
Cash flows from operating activities:
<S> <C> <C>
Net income $ 2,708,472 $ 3,003,041
Non-cash items included in net income:
Equity (income) loss in partnerships - 11,840
Depreciation and amortization 1,807,304 971,044
Income of Equitrade allocated to minority partners 1,141,407 13,600
Provision for deferred taxes 106,037
(Increase) decrease in operating assets:
Funds segregated for customers 29,203 -
Receivables:
Brokers and dealers 3,366,597 37,834,260
Other 17,684 (24,435)
Securities owned, at market value (3,318,840) (22,146,542)
U.S. Treasury Obligations, held as collateral 184,495 (109,474)
Other assets (net of deposits made on furniture, fixtures
and equipment, and leasehold improvements) 222,434 (1,036,047)
Increase (decrease) in operating liabilities:
Securities sold, not yet purchased, at market value 836,873 (5,500,123)
Accounts payable and accrued expenses (7,321,651) (7,873,432)
Income taxes payable 1,362,908 (1,772,788)
------------------- ------------------
Net cash provided by operating activities 1,142,923 3,370,944
------------------- ------------------
Cash flows from investing activities:
Purchase of investment securities not readily marketable - (100,000)
Principal collected on notes receivable 20,139 54,406
Purchases of furniture, fixtures and
equipment, and leasehold improvements (1,228,012) (1,002,529)
Deposits made on furniture, fixtures and equipment,
and leasehold improvements (187,629) -
Purchases of computer software (367,400) (56,527)
Purchase of exchange membership - (1,450,000)
------------------- ------------------
Net cash used in investing activities (1,762,902) (2,554,650)
------------------- ------------------
</TABLE>
(Continued)
(5)
<TABLE>
THE SHERWOOD GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
(Continued)
Three Months Ended August 31,
---------------------------------------
1997 1996
------------------- ------------------
Cash flows from financing activities:
<S> <C>
Purchase of treasury stock - (135,967)
Capital contributions by minority interest 50,000 -
Capital withdrawals by minority interest (984,576) (371,000)
-------------------- ------------------
Net cash used in financing activities (934,576) (506,967)
-------------------- ------------------
Net increase in cash (1,554,555) 309,327
Cash at beginning of period 3,033,818 470,313
------------------- ------------------
Cash at end of period $ 1,479,263 $ 779,640
=================== ==================
</TABLE>
The accompanying notes are an integral part of these statements.
(6)
THE SHERWOOD GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
August 31, 1997
Note 1 - Business and organization
The Sherwood Group, Inc. and its subsidiaries (the "Company") are primarily
engaged in the securities business and in providing related financial services.
The Company has a principal registered broker-dealer wholly owned subsidiary,
Sherwood Securities Corp. ("Sherwood Securities"). Sherwood Securities is also a
specialist for securities listed on the American Stock Exchange. National
Discount Brokers ("NDB"), another registered broker-dealer, is a division of the
Company's wholly owned subsidiary, Triak Services Corp. During May 1996, the
Company commenced operations of a new wholly owned subsidiary, MXNet, Inc.
("MXNet"). MXNet 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. See Note 7, "Subsequent Event",
regarding the Company's sale of Anvil on September 5, 1997. In addition, 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 acquired a further limited partnership interest
in Equitrade on May 2, 1997 upon the acquisition of all of the stock of SHD
Corporation (formerly Dresdner-NY Incorporated), which was engaged in the
specialist business of 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 losses
from the activities of this specialist book.
Note 2 - Basis of presentation
The accompanying unaudited consolidated financial statements do not include
all of the information and notes required by generally accepted accounting
principles for complete consolidated financial statements. In the opinion of
management, all adjustments considered necessary for a fair presentation of
consolidated financial condition and results of operations for the periods
presented have been included. All adjustments are of a normal and recurring
nature. It is suggested that these consolidated financial statements be read in
conjunction with the consolidated financial statements and the related notes
included in the Company's 1997 Annual Report on Form 10-K. Certain prior year
amounts have been reclassified to conform with the three months ended August 31,
1997 presentation.
Note 3 - Net income per common share
Net income per common share is computed using the weighted average number
of shares of common stock and common stock equivalents outstanding. Common stock
equivalents include stock issuable under stock options. The treasury stock
method of accounting was used in computing the common stock equivalents for the
computation of earnings per common share.
Note 4 - Commitments and contingencies
Certain significant legal proceedings and matters were previously disclosed
in Item 3, Legal Proceedings, of the Company's 1997 Annual Report on Form 10-K,
and the disclosures regarding such matters are incorporated herein by reference.
The Company's subsidiaries, and in some cases the Company, have been named as
defendants in lawsuits that allege violations of Federal and state securities
and related laws. Sherwood Securities has received additional subpoenas in
connection with the SEC's ongoing investigation In the Matter of Certain Market
Making Activities on NASDAQ, HO-2974. Sherwood Securities is continuing to
cooperate with the SEC's investigation. 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 future periods.
(7)
<PAGE>
Note 5 - Net capital requirements
As registered broker-dealers, Sherwood Securities, NDB, Equitrade and Anvil
are subject to the Securities Exchange Act of 1934 Uniform Net Capital Rule
15c3-1 (the "Rule"). As of August 31, 1997, the net capital of Sherwood
Securities, NDB, Equitrade and Anvil exceeded their required net capital by
$20,696,000, $3,361,000, $25,532,000 and $469,000, respectively. On July 10,
1997, SHD filed its notice of withdrawal from registration as a broker-dealer
with the SEC. As such, SHD is no longer required to compute net capital.
The Rule also provides that equity capital may not be withdrawn or cash
dividends be paid if the resulting net capital of a broker-dealer would be less
than the amount required under the Rule. Accordingly, at August 31, 1997, the
payment of dividends and advances to the Company by Sherwood Securities, NDB,
Equitrade and Anvil is limited to $20,496,000, $3,564,000, $25,482,000 and
$459,000, respectively, under the most restrictive of these requirements. The
SEC may, by order, restrict the withdrawal of equity capital on a net basis if
the SEC determines that such withdrawal would be detrimental to the financial
integrity of the broker-dealer or the financial community.
Note 6 - New Accounting Pronouncement
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 months ended August 31, 1997 and 1996 would
not have been materially different than primary earnings per share under APB 15.
Note 7 - Subsequent Events
On September 5, 1997, the Company sold all of the stock of Anvil for
$217,000, which approximated book value. In connection with the sale, the
Company's $250,000 subordinated loan agreement with Anvil was cancelled. As
such, the Company liquidated the $300,000 face value of U.S. Treasury securities
that had been pledged as collateral for the agreement and such funds were
transferred back to the Company.
During the fiscal second quarter, the Company's management decided, based
on a number of factors, to close the four existing branch offices of NDB located
in Chicago, Dallas, West Palm Beach and Los Angeles. In addition to the cost
savings, management believes that NDB's Webstation and the accessibility of its
automated trading facilities have diminished the need for branch locations. The
costs associated with the discontinuation of the branch operations are
immaterial to the consolidated financial statements of the Company and have been
reflected at August 31, 1997 in the books and records of NDB.
(8)
Item - 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
The results of The Sherwood Group, Inc. and subsidiaries (the "Company")
for the three months ended August 31, 1997 reflect primarily the activities of
Sherwood Securities Corp. ("Sherwood Securities"), National Discount Brokers
("NDB"), a division of the Company's subsidiary, Triak Services Corp. ("Triak")
and Equitrade Partners ("Equitrade"). Sherwood Securities is primarily engaged
in the securities business as a wholesale market maker in NASDAQ National Market
System and Small-Cap securities. NDB is a deep discount brokerage firm
specializing in trade execution for individual investors while Equitrade is a
registered specialist in equity securities on The New York Stock Exchange
("NYSE"). During May 1996, the Company commenced operations of a new wholly
owned subsidiary, MXNet Inc. ("MXNet"). MXNet delivers comprehensive technical
solutions to trading organizations. 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. See "Subsequent Event" regarding the Company's sale of
Anvil on September 5, 1997.
The Company's consolidated net income for the three months ended August 31,
1997 was $2,708,000 compared to $3,003,000 for the three months ended August 31,
1996. For the quarter ended August 31, 1997, the principal subsidiaries,
Sherwood Securities and Triak, had a net income of $1,299,000 and $453,000,
respectively, compared to net income of $3,120,000 and $78,000 for the quarter
ended August 31, 1996, respectively. Equitrade had a net profit of $2,653,000
for the three months ended August 31, 1997 (of which the Company's share,
inclusive of that earned by SHD, was $1,512,000) as compared to a net profit of
$400,000 for the three months ended August 31, 1996 (of which the Company's
share was $386,000).
Total revenue for the Company decreased by approximately $2,253,000, or 5%,
for the three months ended August 31, 1997, as compared with the same period of
the previous year. The reasons for the decrease in revenues are set forth below.
Revenue from firm securities transactions decreased $5,757,000, or 19%, for
the three month period ended August 31, 1997, as compared with the previous
year. Revenues from firm securities transactions at Sherwood Securities
decreased approximately $7,677,000, or 25%, for the three month period ended
August 31, 1997, when compared to the prior year, even though Sherwood
Securities' overall ticket volume increased approximately 19% for the same
period 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. These changes
may have an adverse impact on Sherwood Securities' trading profits.
Substantially offsetting the decrease in trading profits at Sherwood Securities
was an increase in revenues from securities transactions at Equitrade, for the
three months ended August 31, 1997, of approximately $1,920,000.
The Company's commission income, primarily generated by NDB, increased by
$2,007,000, or 26%, for the three months ended August 31, 1997, when compared
with the prior year. The increase is due largely to the fact that NDB's average
daily ticket count increased from approximately 4,400 to 5,700 tickets per day,
an increase of 30%, for the three months ended August 31, 1997, when compared
with the previous year.
Floor brokerage income increased by approximately $1,341,000, or 46%, for
the three months ended August 31, 1997, when compared to the prior year. The
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 a
specialist. The increase from 97 stocks at August 31, 1996 to 155 stocks at
August 31, 1997 was due principally to the acquisition, on May 2, 1997, of SHD
Corporation, which added 54 stocks to Equitrade's specialist list.
For the three months ended August 31, 1996, the principal portion of equity
loss in partnerships was an equity loss from the Company's 49% limited
partnership interest it held in the Anvil Joint Venture. For the three months
ended August 31, 1997, Anvil's results are consolidated with those of the
Company. See "Subsequent Event" regarding the Company's sale of Anvil on
September 5, 1997.
(9)
Interest income decreased by approximately $96,000, or 5%, for the three
months ended August 31, 1997, as compared to the previous year. The decrease is
primarily due to the availability of lesser amounts of cash for investment.
During the past year, the Company has used approximately $28,000,000 for capital
expenditures. A significant rise in NDB's customer debit and credit balances
held with the Company's clearing broker led to an increase in interest earned
from that source and substantially offset the decline in interest income as
described above.
Fee income increased by $332,000, or 78%, for the three months ended August
31, 1997, as compared to the prior year. The increase is principally due to
higher 12b-1 fees received from mutual funds as NDB's customers' balances in
those funds have increased since the prior year.
Total expenses for the three months ended August 31, 1997 decreased
approximately $2,342,000, or 6%, from $36,955,000 in 1996 to $34,613,000 in
1997. The reasons for the net decrease in expenses are set forth below.
Compensation and benefits decreased $2,282,000, or 15%, for the three month
period ended August 31, 1997, compared with the prior year. The decrease is due
primarily to lower commissions paid to Sherwood Securities' traders because of
the decrease in trading profits for that subsidiary, and the resulting reduction
in accruals for executive bonuses based on profitability computations.
Clearing and related charges decreased by approximately $523,000, or 4%,
for the three month period ended August 31, 1997, as compared to the prior year.
The decrease is due principally to lower correspondence fees being paid by
Sherwood Securities based on the improvement in the overall size and type of the
order flow received. Partially offsetting this decrease was increased clearance
charges at NDB due to the 30% rise in ticket count. However, during the fiscal
second quarter that ends on November 30, 1997, certain clearing agreements have
been negotiated by the Company on more favorable terms than those prevailing in
prior periods. As a result, clearing costs as a percentage of revenues is
expected to decline during the fiscal second quarter as compared to prior
periods. However, there can be no assurance that this result will, in fact,
occur, because expenses are impacted by a number of other factors including, but
not limited to, ticket count, the size of orders and other fees.
Communications expense, which includes quotations, decreased by
approximately $339,000, or 12%, for the three months ended August 31, 1997, as
compared to the previous year. The decline is mainly due to the upgrade of the
Powerbrokersm IVR System and development of an in-house quote server at NDB.
Depreciation and amortization increased by approximately $836,000, or 86%,
for the three months ended August 31, 1997, as compared to the prior year. This
increase can be attributed to depreciation and amortization incurred on fixed
asset, leasehold improvement, computer software and intangible asset additions
by the Company aggregating approximately $18,000,000 during the period from
September 1996 through August 1997.
Occupancy and equipment rental expenses decreased $66,000, or 10%, for the
three month period ended August 31, 1997, as compared to the prior year. The
decline is due to a decrease for NDB which, last year, incurred rent
concurrently on two main office locations as it awaited the move of its
headquarters to 7 Hanover Square.
Other expenses decreased by approximately $111,000, or 3%, for the three
months ended August 31, 1997, as compared to the prior year. A decrease in legal
fees offset by an increase in the cost to maintain the recently upgraded
technological infrastructure of NDB led to the net decrease in other expenses.
Interest expense increased by approximately $143,000, or 200%, for the
three months ended August 31, 1997, as compared to the previous year. During the
three months ended August 31, 1997, Sherwood Securities incurred interest
charges on the remaining unpaid balance of approximately $4,600,000 owed in
connection with its settlement agreement, as amended, in the case entitled In
Re: NASDAQ Market-Makers Antitrust Litigation. In addition, the Company incurred
interest expense on short-term borrowings made in connection with its trading
activities.
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 three months ended August 31, 1997
and 1996, respectively.
The Company's effective tax rate decreased from approximately 50% for the
three months ended August 31, 1996 to approximately 46% for the three months
ended August 31, 1997.
(10)
For the three months ended August 31, 1997, deferred taxes of approximately
$106,000, included in income tax expense, relate to the future taxability of
certain temporary book to tax basis differences. In conjunction with the
deferred tax asset the Company has recorded, the Company has booked a valuation
allowance of approximately $217,000 due to management's judgment of the
likelihood of realization of the deferred tax asset.
Liquidity
The Company's tangible assets are highly liquid with more than 66% of these
tangible assets consisting of cash or assets readily convertible into cash. The
Company's operations have generally been financed by internally-generated funds.
In addition, at August 31, 1997, margin account borrowings of approximately
$151,000,000 were available to the Company from its clearing brokers.
The Company's broker-dealer entities, Sherwood Securities, NDB, Equitrade
and, previously, Anvil, are subject to SEC's minimum net capital requirement of
the SEC which is designed to measure the general financial soundness and
liquidity of broker-dealers. On July 10, 1997, SHD filed its notice of
withdrawal from registration as a broker-dealer with the SEC. As such, SHD is no
longer required to compute net capital. As of August 31, 1997, Sherwood
Securities, NDB, Equitrade and Anvil had approximately $20,696,000, $3,361,000,
$25,532,000 and $469,000, respectively, in excess of the required minimum net
capital. The net capital rule imposes financial restrictions upon Sherwood
Securities', NDB's, Equitrade's and Anvil's businesses which are more severe
than those imposed on most other businesses.
From time to time, the Company has borrowed 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. Management is reviewing
alternatives to meeting these funding requirements.
Cash flows from operations will vary on a daily basis as the Company's
portfolio of marketable securities changes. The Company's ability to convert
marketable securities owned into cash is determined by the depth of the market
and the size of the Company's security positions in relation to the market as a
whole. The portfolio mix also affects the regulatory capital requirements
imposed on Sherwood Securities, NDB, Equitrade and Anvil, which directly affects
the amount of funds available for operating, investing and financing activities.
The Company anticipates that it will spend an additional $1,100,000 over
the next 3 months for its subsidiaries' ongoing technological infrastructure
upgrades and intends to finance these upgrades with internally generated funds.
The operations of the Company's American Stock Exchange Specialist book
continue to be funded by the income generated by the book.
Cash flows from the Company's investment activities are directly related to
market conditions.
During the three months ended August 31, 1997, the Company did not
repurchase any additional shares in connection with its December 1992 plan to
buy back up to 1,500,000 shares of the Company's common stock from time to time
in the open market or through privately negotiated transactions. As of August
31, 1997, 1,351,482 shares had been reacquired under this plan. The source of
funds for these purchases was internally-generated.
Subsequent Events
On September 5, 1997, the Company sold all of the stock of Anvil for
$217,000, which approximated book value. In connection with the sale, the
Company's $250,000 subordinated loan agreement with Anvil was cancelled. As
such, the Company liquidated the $300,000 face value of U.S. Treasury securities
that had been pledged as collateral for the agreement and such funds were
transferred back to the Company.
(11)
During the fiscal second quarter, the Company's management decided, based
on a number of factors, to close the four existing branch offices of NDB located
in Chicago, Dallas, West Palm Beach and Los Angeles. In addition to the cost
savings, management believes that NDB's Webstationsm and the accessibility of
its automated trading facilities have diminished the need for branch locations.
The costs associated with the discontinuation of the branch operations are
immaterial to the consolidated financial statements of the Company and have been
reflected at August 31, 1997 in the books and records of NDB.
Effects of Inflation
The Company's assets are not significantly affected by inflation because
they are primarily monetary in nature. Management believes that replacement
costs of furniture, equipment and leasehold improvements will not materially
affect operations. However, the rate of inflation affects the Company's
principal expenses such as employee compensation, rent and communication, which
may not be readily recoverable from increased revenues. Because of market forces
and competitive conditions in the securities industry, a broker-dealer may be
unable to restructure its profit margins 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 brokers on which interest is paid which, in the
event there are higher interest rates which normally result from inflation,
would offset some of the costs.
New Accounting Pronouncement
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 and nine months ended August 31, 1997 would not have been materially
different than primary earnings per share under APB 15.
Forward Looking Statements
Statements regarding the Company's expectations as to its future operations
and financial condition and certain other information contained in this Form
10-Q or in documents incorporated herein by reference constitute forward looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. Although the Company believes that its expectations are based on
reasonable assumptions within the bounds of its knowledge of its business and
operation, there can be no assurance that actual results will not differ
materially from its expectations. Factors which could cause actual results to
differ from expectations include a general downturn in the economy, changes in
the level of activity of securities markets in which the Company participates,
changes in government policy or regulation and unforeseen costs and other
effects related to legal proceedings or investigations of governmental and
self-regulatory organizations.
(12)
PART II - OTHER INFORMATION
Item 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit 11 - Computation of Net Income Per Common Share
Exhibit 27 - Financial Data Schedule
(b) The Company filed no reports on Form 8-K during the quarter ended
August 31, 1997.
(13)
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
The Sherwood Group, Inc.
--------------------------------
Date: October 6, 1997 By: Dennis Marino
----------------- --------------------------------
Dennis Marino
Executive Vice President
and Chief Administrative
Officer
Date: October 6, 1997 By: Denise Isaac
----------------- --------------------------------
Denise Isaac
Chief Financial Officer and
Principal Accounting Officer
(14)
THE SHERWOOD GROUP, INC. AND SUBSIDIARIES EXHIBIT 11
COMPUTATION OF NET INCOME PER COMMON SHARE
<TABLE>
<CAPTION>
Three Months Ended August 31,
---------------------------------------
1997 1996
------------------- ------------------
<S> <C> <C>
Common stock and common stock equivalents:
Average common stock outstanding 12,694,665 13,017,406
Average common stock equivalents
issuable under stock options 145,419 32,776
------------------- ------------------
Total average common stock and common stock
equivalents used for earnings per share computation 12,840,084 13,050,182
=================== ==================
Income:
Net income $ 2,708,472 $ 3,003,041
=================== ==================
Net income per common and common equivalent share (a):
Net income $ 0.21 $ 0.23
=================== ==================
<FN>
(a) For presentation purposes, primary and fully diluted are identical.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> BD
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements for the quarter ended August 31, 1997 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAY-31-1998
<PERIOD-START> JUN-01-1997
<PERIOD-END> AUG-31-1997
<CASH> 1479263
<RECEIVABLES> 59073077
<SECURITIES-RESALE> 0
<SECURITIES-BORROWED> 0
<INSTRUMENTS-OWNED> 49015276
<PP&E> 20081543
<TOTAL-ASSETS> 157954158
<SHORT-TERM> 0
<PAYABLES> 26077971
<REPOS-SOLD> 0
<SECURITIES-LOANED> 0
<INSTRUMENTS-SOLD> 25966163
<LONG-TERM> 3000000
0
0
<COMMON> 143432
<OTHER-SE> 94839525
<TOTAL-LIABILITY-AND-EQUITY> 157954158
<TRADING-REVENUE> 23926444
<INTEREST-DIVIDENDS> 1900016
<COMMISSIONS> 9702707
<INVESTMENT-BANKING-REVENUES> 0
<FEE-REVENUE> 758335
<INTEREST-EXPENSE> 215078
<COMPENSATION> 12742397
<INCOME-PRETAX> 4981823
<INCOME-PRE-EXTRAORDINARY> 2708472
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2708472
<EPS-PRIMARY> 0.21
<EPS-DILUTED> 0.21
</TABLE>
