CONFORMED
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended November 30, 1996
OR
[ ] Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the transition period from to
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Commission file number 1-9480
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The Sherwood Group, Inc.
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(Exact name of Registrant as specified in its charter)
Delaware 22-2394480
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(State or other jurisdiction of (I.R.S.Employer
incorporation or organization) Identification No.)
10 Exchange Place Centre, Jersey City, New Jersey 07302
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(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 bySection 13 or 15(d) of the Securities ExchangeAct of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
---- ----
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
12,827,009 shares of Common Stock, par value $.01 per share, were outstanding
on December 31, 1996.
<PAGE>
THE SHERWOOD GROUP, INC.
AND SUBSIDIARIES
INDEX
PAGE
--------
Part I - Financial Information
Item 1. - Financial Statements
Consolidated Statements of Financial Condition
(Unaudited) - November 30, 1996 and May 31, 1996 3
Consolidated Statements of Income (Unaudited) -
Three Months and Six Months Ended November 30, 1996 and 1995 4
Consolidated Statements of Cash Flows (Unaudited) -
Six Months Ended November 30, 1996 and 1995 5
Notes to Consolidated Financial Statements
(Unaudited) - November 30, 1996 6
Item 2. - Management's Discussion and Analysis of
Financial Condition and Results of Operations 7 - 10
Part II - Other Information
Item 1. - Legal Proceedings 11
Item 4. - Submission of Matters to a Vote of Security Holders 11
Item 6. - Exhibits and Reports on Form 8-K 12
Signatures 13
<PAGE>
<TABLE>
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
THE SHERWOOD GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<CAPTION>
November 30,
1996 May 31,
ASSETS (Unaudited) 1996
------------------- ------------------
<S> <C> <C>
Cash $ 824,230 $ 470,313
Receivables:
Brokers and dealers 49,313,219 78,628,199
Other 540,542 519,631
Securities owned, at fair value 51,502,947 32,181,980
Investment securities not readily marketable, at fair value 501,320 401,320
Investment in partnerships 245,954 261,286
Notes receivable 726,379 697,258
Furniture, fixtures and equipment, and leasehold improvements - at
cost, net of accumulated depreciation and amortization of
$5,315,713 at November 30, 1996 and $8,132,165 at May 31, 1996 13,774,404 12,955,614
Computer software - at cost, net of accumulated amortization of
$629,002 at November 30, 1996 and $493,936 at May 31, 1996 832,945 766,256
Identified intangible assets, net of accumulated amortization of
$1,444,508 at November 30, 1996 and $1,245,176 at May 31, 1996 2,743,772 2,943,104
Exchange memberships (market value $3,392,500 at November 30,
1996 and $2,827,500 at May 31, 1996) 2,616,496 1,166,496
US Treasury Obligations, held as collateral 7,906,138 7,782,514
Subordinated notes receivable 3,750,000 3,250,000
Other assets 5,559,868 1,260,822
------------------- ------------------
$ 140,838,214 $ 143,284,793
=================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Securities sold, not yet purchased, at fair value $ 18,061,974 $ 18,827,302
Accounts payable and accrued expenses, including
compensation payable to officers and employees of
$9,612,752 at November 30, 1996 and $15,583,055
at May 31, 1996 21,284,386 24,242,102
Secured demand notes payable 3,250,000 3,250,000
Income taxes payable 2,163,665 5,338,326
Minority interest in Equitrade 4,766,468 5,057,508
------------------- ------------------
Total liabilities 49,526,493 56,715,238
------------------- ------------------
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 56,958,790 56,958,790
Retained earnings 44,234,466 37,936,140
------------------- ------------------
101,336,688 95,038,362
Less: Treasury stock - at cost, 1,465,248 shares at
November 30, 1996 and 1,313,469 shares at May 31, 1996 (10,024,967) (8,468,807)
------------------ ------------------
Total stockholders' equity 91,311,721 86,569,555
------------------- ------------------
$ 140,838,214 $ 143,284,793
=================== ==================
The accompanying notes are an integral part of these statements.
(3)
</TABLE>
<PAGE>
<TABLE>
THE SHERWOOD GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<CAPTION>
Three Months Ended November 30, Six Months Ended November 30,
--------------------------------------- ----------------------------
1996 1995 1996 1995
------------------- ------------------ ----------- -----------------
<S> <C> <C> <C> <C>
Revenues:
Firm securities transactions - net $ 26,755,037 $ 23,648,937 $ 56,438,552 $52,939,100
Commission income 8,056,241 6,765,317 15,752,392 13,000,745
Floor brokerage income 3,435,834 2,571,841 6,374,138 5,065,518
Equity income (loss) in partnerships (3,492) 17,160 (15,332) 13,612
Interest income 1,922,670 1,504,478 3,918,229 2,827,533
Fee income 662,010 388,618 1,088,598 619,605
Other revenues 226,835 222,059 488,306 400,562
------------------- ------------------ ----------------- -----------
41,055,135 35,118,410 84,044,883 74,866,675
------------------- ------------------ ----------------- -----------
Expenses:
Compensation and benefits 13,452,795 10,646,501 28,477,133 22,690,276
Clearing and related charges 13,835,379 13,569,627 27,946,252 27,530,723
Communications 2,697,615 2,758,997 5,507,804 5,071,370
Depreciation and amortization 1,053,189 673,843 2,024,233 1,182,519
Occupancy costs and equipment rental 709,092 735,552 1,401,540 1,404,970
Other expenses 2,939,073 2,536,126 6,213,725 4,776,630
Interest expense 61,857 39,206 133,598 76,289
------------------- ------------------ ----------------- -----------
34,749,000 30,959,852 71,704,285 62,732,777
------------------- ------------------ ----------------- -----------
Income before minority interest and
income taxes 6,306,135 4,158,558 12,340,598 12,133,898
------------------- ------------------ ----------------- -----------
Income of Equitrade allocated to
minority partners (739,360) (485,846) (752,960) (1,287,392)
------------------- ------------------ ----------------- -----------
Income before income taxes 5,566,775 3,672,712 11,587,638 10,846,506
------------------- ------------------ ----------------- -----------
Income taxes:
Currently payable:
Federal 1,481,877 365,363 3,579,127 2,161,476
State and local 789,613 133,962 1,710,185 1,043,779
------------------- ------------------ ----------------- -----------
2,271,490 499,325 5,289,312 3,205,255
------------------- ------------------ ----------------- -----------
Net income $ 3,295,285 $ 3,173,387 $ 6,298,326 $ 7,641,251
=================== ================== ================= ===========
Income per common and common equivalent share (a):<F1>
Net income $ 0.25 $ 0.24 $ 0.48 $ 0.57
=================== ================== ================= ===========
Weighted average common shares
outstanding 13,028,509 13,425,900 13,039,467 13,325,472
=================== ================== ================= ===========
<FN>
<F1>(a) For presentation purposes, primary and fully diluted are identical.
</FN>
The accompanying notes are an integral part of these statements.
</TABLE>
(4)
<PAGE>
<TABLE>
THE SHERWOOD GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
Six Months Ended November 30,
---------------------------------------
1996 1995
------------------- ------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 6,298,326 $ 7,641,251
Non-cash items included in net income:
Equity (income) loss in partnerships 15,332 (13,612)
Depreciation and amortization 2,024,233 1,214,186
Income of Equitrade allocated to minority partners 752,960 1,287,392
(Increase) decrease in operating assets:
Receivables:
Brokers and dealers 29,314,980 (8,090,134)
Other (20,911) (177,972)
Securities owned, at fair value (19,320,967) 3,830,597
US Treasury Obligations, held as collateral (123,624) 25,279
Other assets (net of deposits made on furniture, fixtures
and equipment, and leasehold improvements) 358,750 550,061
Increase (decrease) in operating liabilities:
Securities sold, not yet purchased, at fair value (765,328) 2,498,512
Accounts payable and accrued expenses (2,957,716) 1,729,219
Income taxes payable (3,174,661) (229,276)
------------------- ------------------
Net cash provided by operating activities 12,401,374 10,265,503
------------------- ------------------
Cash flows from investing activities:
Purchase of investment securities not readily marketable (100,000) -
Loans made (100,275) (18,275)
Principal collected on notes receivable 71,154 45,625
Purchases of furniture, fixtures and
equipment, and leasehold improvements (2,508,625) (9,717,137)
Deposits made on furniture, fixtures and equipment,
and leasehold improvements (4,657,796) -
Purchases of computer software (201,755) (88,883)
Purchase of exchange membership (1,450,000) -
Issuance of subordinated note (500,000) -
------------------- ------------------
Net cash used in investing activities (9,447,297) (9,778,670)
------------------- ------------------
Cash flows from financing activities:
Purchase of treasury stock (1,556,160) (298,354)
Proceeds from exercise of options - 335,000
Capital withdrawals by minority interest (1,044,000) (672,867)
------------------- ------------------
Net cash used in financing activities (2,600,160) (636,221)
------------------- ------------------
Net increase (decrease) in cash 353,917 (149,388)
Cash at beginning of period 470,313 593,473
------------------- ------------------
Cash at end of period $ 824,230 $ 444,085
=================== ==================
The accompanying notes are an integral part of these statements.
</TABLE>
(5)
<PAGE>
THE SHERWOOD GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
November 30, 1996
Note 1 - Business and organization
The Sherwood Group, Inc. and its subsidiaries (the "Company") are primarily
engaged in the securities business and in providing related financial services.
The Company has a principal registered broker-dealer wholly owned subsidiary,
Sherwood Securities Corp. ("Sherwood Securities"). National Discount Brokers
("NDB"), another registered broker-dealer, is a division of the Company's wholly
owned subsidiary, Triak Services Corp. The Company has a 60% special limited
partnership interest in Equitrade Partners ("Equitrade"), which is a specialist
for securities listed on The New York Stock Exchange. In addition, Sherwood
Securities is a specialist for securities listed on the American Stock Exchange.
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 firms and
individuals.
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 1996 Annual Report on Form 10-K. Certain prior year
amounts have been reclassified to conform with the three and six months ended
November 30, 1996 presentations.
Note 3 - Net income per common share
Net income per common share is computed using the weighted average number
of shares of common stock and common stock equivalents outstanding. Common stock
equivalents include stock issuable under stock options. The treasury stock
method of accounting was used in computing the common stock equivalents for the
computation of earnings per common share.
Note 4 - Commitments and contingencies
Certain significant legal proceedings and matters were previously disclosed
in the Company's 1996 Annual Report on Form 10-K and Forms 10-Q filed thereafter
and incorporated herein by reference. In addition, the Company's subsidiaries,
and in some cases the Company, have been named as defendants in lawsuits that
allege violations of Federal and state securities and related laws. Although
there can be no assurance that such lawsuits and investigations involving the
Company are not likely to have a material, adverse effect on the results of
operations of the Company in any future period, depending in part on the results
for such period, based on 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.
Note 5 - Net capital requirements
As registered broker-dealers, Sherwood Securities, NDB and Equitrade are
subject to the Securities and Exchange Commission Uniform Net Capital Rule
15c3-1 (the "Rule"). As of November 30, 1996, the net capital of Sherwood
Securities, NDB and Equitrade exceeded their required net capital by
$33,772,000, $984,000 and $21,639,000, respectively.
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 November 30, 1996, the
payment of dividends and advances to the Company by Sherwood Securities, NDB and
Equitrade is limited to $33,572,000, $911,000 and $21,559,000, respectively,
under the most restrictive of these requirements. The Securities and Exchange
Commission ("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.
(6)
<PAGE>
Item - 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
The results of The Sherwood Group, Inc. and subsidiaries (the "Company")
for the three months and six months ended November 30, 1996 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 and
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"), formerly Market Distribution
Concepts Inc. MXNet delivers comprehensive technical solutions to trading firms
and individuals.
The Company's consolidated net income for the three months ended November
30, 1996 was $3,295,000 compared to $3,173,000 for the three months ended
November 30, 1995. For the quarter ended November 30, 1996, the principal
subsidiaries, Sherwood Securities and Triak had net income of $2,010,000 and
$153,000, respectively, compared to net income of $1,395,000 and $472,000 for
the quarter ended November 30, 1995, respectively. Equitrade had a net profit of
$2,233,000 for the three months ended November 30, 1996 (of which the Company's
share was $1,494,000) as compared to a net profit of $1,344,000 for the three
months ended November 30, 1995 (of which the Company's share was $858,000). The
Company's consolidated net income for the six months ended November 30, 1996 was
$6,298,000 compared to $7,641,000 for the six months ended November 30, 1995.
For the six months ended November 30, 1996, the principal subsidiaries, Sherwood
Securities and Triak had net income of $5,130,000 and $231,000, respectively,
compared to net income of $4,366,000 and $1,283,000 for the six months ended
November 30, 1995, respectively. Equitrade had a net profit of $2,633,000 for
the six months ended November 30, 1996 (of which the Company's share was
$1,880,000) as compared to a net profit of $3,548,000 for the six months ended
November 30, 1995 (of which the Company's share was $2,260,000).
Total revenue for the Company increased by approximately $5,937,000, or
17%, for the three months ended November 30, 1996, and $9,178,000, or 12%, for
the six months ended November 30, 1996, as compared with the previous year's
respective periods. The reasons for the increases in revenues are set forth
below.
Revenue from firm securities transactions increased $3,106,000, or 13%, and
$3,499,000, or 7%, for the three and six month periods ended November 30, 1996,
respectively, as compared with the previous year. Revenues from firm securities
transactions at Sherwood Securities increased approximately $3,029,000, or 13%,
and $5,911,000, or 12%, for the three and six month periods ended November 30,
1996, respectively, when compared to the prior year, while Sherwood Securities'
overall trading volume increased approximately 3% and 2% for the same periods.
This increase in trading volume along with an increase in the average number of
shares per ticket led to an increase in opportunities which resulted in trading
profits. For the three months ended November 30, 1996, revenues from securities
transactions at Equitrade increased by approximately $77,000. The increase in
revenues from firm securities transactions at Sherwood Securities for the six
months ended November 30, 1996 was largely offset by a decline of $2,412,000 in
revenues from firm securities transactions at Equitrade which was primarily due
to trading losses sustained.
The Company's commission income, primarily generated by NDB, increased by
$1,291,000, or 19%, and $2,752,000, or 21%, for the three and six months ended
November 30, 1996, respectively, when compared with the prior year. The
increases are due largely to the fact that NDB's average daily ticket count
increased from approximately 3,900 to 4,500 tickets per day, an increase of 15%,
for the three months ended November 30, 1996 and from 3,800 to 4,500 tickets per
day, an increase of 18%, for the six months ended November 30, 1996 when
compared with the previous year.
Floor brokerage income increased by approximately $864,000, or 34%, and
$1,309,000, or 26%, for the three and six months ended November 30, 1996,
respectively, when compared to the prior year. The majority of the increases
came from increases at Equitrade of $871,000, or 35%, and $1,309,000, or 27%,
for the three and six months ended November 30, 1996, respectively, which
resulted from an increase in the number of stocks in which Equitrade is a
specialist, from 82 stocks at May 31, 1995 to 98 stocks at November 30, 1996.
(7)
<PAGE>
The principal portion of equity loss in partnerships is equity income from
the Company's 49% limited partnership interest in Anvil Institutional Services
Company ("Anvil").
Interest income increased by approximately $418,000, or 28%, and
$1,091,000, or 39%, for the three and six months ended November 30, 1996,
respectively, as compared to the previous year. The increase is due to a
significant rise in NDB's customer debit and credit balances held with 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 was the availability of larger amounts of cash for investment.
Fee income increased by $273,000, or 70%, and $469,000, or 76%, for the
three and six months ended November 30, 1996, respectively, as compared to the
prior year. The increase is principally due to larger 12b-1 fees received from
mutual funds as NDB's customers' balances in those funds have increased since
the prior year.
Total expenses for the three months ended November 30, 1996 increased
approximately $3,789,000, or 12%, from $30,960,000 in 1995 to $34,749,000 in
1996. Total expenses for the six months ended November 30, 1996 increased
approximately $8,971,000, or 14%, from $62,733,000 in 1995 to $71,704,000 in
1996 The reasons for the increase in expenses are set forth below.
Compensation and benefits increased $2,806,000, or 26%, and $5,787,000, or
26%, for the three and six month periods ended November 30, 1996, respectively,
compared with the prior year. The increase is due primarily to higher
commissions paid to traders and salespeople because of higher trading profits at
Sherwood Securities and to an increase in office salaries and related benefits
due principally to an approximate 20% increase in NDB's staff size.
Clearing and related charges increased by approximately $266,000, or 2%,
and $416,000, or 2%, for the three and six month periods ended November 30,
1996, respectively, as compared to the prior year. The increases were due
principally to the operations of NDB for which clearance charges rose by
approximately $323,000 and $832,000 during the three and six months ended
November 30, 1996, respectively, compared to the prior year due to the increase
in the volume of transactions. These increases were largely offset by declines
of approximately $114,000 and $567,000 for the three and six months ended
November 30, 1996, respectively, in clearance, correspondent and execution
charges on Sherwood Securities' OTC market making activities.
Communications expense decreased by approximately $61,000, or 2%, and
increased by $436,000, or 9%, for the three and six months ended November 30,
1996, respectively, as compared to the previous year. The decrease for the three
months ended November 30, 1996 is primarily due to a favorable renegotiation of
the rate charged for NDB's telephone service. The increase for the six months
ended November 30, 1996 is mainly due to an increase in the activities of NDB,
primarily the expansion of its 1-800 customer quotation service, as well as to
an increase in other quotation expenses.
Depreciation and amortization increased by approximately $379,000, or 56%,
and $842,000, or 71%, for the three and six months ended November 30, 1996,
respectively, as compared to the prior year. This increase can be attributed to
capital expenditures incurred in connection with the relocation of NDB's and
SSC's headquarters, as well as the commencement of operations of MXNet.
Occupancy and equipment rental expenses decreased $26,000, or 4%, and
3,000, or 1%, for the three and six month periods ended November 30, 1996,
respectively, as compared to the prior year. The decreases are due to a decrease
for Sherwood Securities which incurred rent concurrently on two main locations
during the prior year as Sherwood Securities awaited its move from New York to
New Jersey. Offsetting this decrease were higher occupancy rates incurred as a
result of the signing of a new lease for the relocation of NDB's main offices.
Other expenses increased by approximately $403,000, or 16%, and $1,437,000,
or 30%, for the three and six months ended November 30, 1996, respectively, as
compared to the prior year. The increase was due, specifically, to an increase
in advertising expense and, generally, to the overall increase in the volume of
business and an increase in staff size.
Interest expense increased by approximately $22,000, or 58%, and $57,000,
or 75%, for the three and six months ended November 30, 1996, respectively, as
compared to the previous year due to the operations of Equitrade. Interest
expense on the capital of Equitrade's minority partners has increased as the
level of such capital rose since a year earlier.
<PAGE>
(8)
Income of Equitrade allocated to minority partners represents the share of
Equitrade's net income allocated to the minority partners during the three and
six months ended November 30, 1996 and 1995, respectively.
The Company's effective tax rate increased from approximately 14% for the
three months ended November 30, 1995 to approximately 41% for the three months
ended November 30, 1996 and from 30% for the six months ended November 30, 1995
to 46% for the six months ended November 30, 1996. The difference in the rates
is due to several factors. First, the Company's relocation of its headquarters
from New York to New Jersey during November 1995 led to a retroactive reduction
in the Company's effective tax rate during the quarter ended November 30, 1995.
In addition, during the quarter ended November 30, 1995, the Company recognized
certain tax benefits primarily related to employee compensation arrangements
which were not available during the quarter ended November 30, 1996.
Liquidity
The Company's tangible assets are highly liquid with more than 72% 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 November 30, 1996, margin account borrowings of approximately
$124,000,000 were available to the Company from its clearing brokers.
The Company's broker-dealer entities, Sherwood Securities, NDB and
Equitrade, are subject to the minimum net capital requirement of the SEC which
is designed to measure the general financial soundness and liquidity of
broker-dealers. As of November 30, 1996, Sherwood Securities, NDB and Equitrade
had approximately $33,772,000, $984,000 and $21,639,000, respectively, in excess
of the required minimum net capital. The net capital rule imposes financial
restrictions upon Sherwood Securities', NDB's and Equitrade's businesses which
are more severe than those imposed on most other businesses.
Cash flows from operations will vary on a daily basis as the Company's
portfolio of marketable securities changes. The Company's ability to convert
marketable securities owned into cash is determined by the depth of the market
and the size of the Company's security positions in relation to the market as a
whole. The portfolio mix also affects the regulatory capital requirements
imposed on Sherwood Securities, NDB and Equitrade which directly affects the
amount of funds available for operating, investing and financing activities.
In connection with the relocation of NDB's headquarters during December
1996, the Company made deposits of approximately $4,658,000 on various fixed
assets, accounting for the increase in other assets reflected on the statement
of financial condition as of November 30, 1996. Additionally, fixed assets of
approximately $846,000 were purchased and placed into service by NDB during the
six months ended November 30, 1996. The Company anticipates that it will spend
an additional $5,200,000 over the next 18 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 $1,700,000 for operating costs and purchases of fixed
assets during the six months ended November 30, 1996. The Company anticipates
that it will spend an additional $500,000 over the next year in establishing
MXNet and intends to finance this activity out of 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.
On August 13, 1996, the Company purchased 100,000 restricted shares of
Intra Serve Corp. for $100,000.
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 50,000 shares of Eurotech Ltd. Common stock.
During July 1996, Equitrade purchased an additional seat on the NYSE for
$1,450,000.
On November 21, 1996, Equitrade loaned RSF Partners, a NYSE specialist
firm, $500,000 under a subordination
(9)
<PAGE>
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 the six months ended November 30, 1996, the Company repurchased
151,779 additional shares in connection with its December 1992 plan to buy back
up to 1,500,000 shares of the Company's common stock from time to time in the
open market or through privately negotiated transactions. As of November 30,
1996, 1,164,479 shares had been reacquired under this plan. The source of funds
for these purchases were internally generated.
Subsequent Events
As of December 31, 1996, the Company entered into an agreement with the
president of its subsidiary, Stock Market Index, Inc. ("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
$63,000 on this sale.
As of January 13, 1997, the Company was negotiating a letter of intent with
its joint venture partner in Anvil to acquire its partner's joint venture
interest for $150,000 plus the payment of $25,000 in legal fees. The transaction
is subject to the execution of a definitive agreement by the parties.
On December 24, 1996, Equitrade reached an oral agreement in principle to
acquire a 64% interest in, and certain other unaffiliated parties a 36% interest
in, the specialist business of Dresdner-NY Incorporated which trades 54 issues
on the NYSE. Equitrade will pay the entire $10,300,000 purchase price which
includes the acquisition of four seats on the NYSE. The transaction and specific
terms are subject to execution of definitive agreements by the parties and
approval by the NYSE. There can be no assurance that Equitrade will conclude
this transaction or that regulatory approvals will be granted.
Effects of Inflation
The Company's assets are not significantly affected by inflation because
they are primarily monetary in nature. Management believes that replacement
costs of furniture, equipment and leasehold improvements will not materially
affect operations. However, the rate of inflation affects the Company's
principal expenses such as employee compensation, rent and communication, which
may not be readily recoverable from increased revenues. Because of market forces
and competitive conditions in the securities industry, a broker-dealer may be
unable to unilaterally increase spreads and commissions in order to recover
increased costs related to inflation. Consequently, the Company must rely on
increased volume for this purpose. However, the Company has significant cash
balances on deposit with its principal clearing 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.
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.
(10)
<PAGE>
PART II - OTHER INFORMATION
Item 1 - LEGAL PROCEEDINGS
In Part I, Item 3 "Legal Proceedings" of its Form 10-K for the fiscal year
ended May 31, 1996, the Company reported upon a class action complaint entitled
In re NASDAQ Market-Makers Antitrust Litigation, 94 Civ. 3996(RWS), in which the
Company is one of several defendants. The Honorable Robert W. Sweet, U.S.D.J.,
by opinion issued on November 26, 1996, granted 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.
Item 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Company held an Annual Meeting of its Stockholders on October 22,
1996.
<TABLE>
(b) (i) The following persons were elected directors for a term of three
years:
<CAPTION>
Votes Votes
For Withheld
<S> <C> <C>
Carl H. Hewitt 10,935,818 15,032
John P. Duffy 10,935,818 15,032
Thomas Neumann 10,935,818 15,032
The following persons continued as directors: James H. Lynch, Jr., Dennis
Marino, Arthur Kontos, Richard J. Marino, Ralph N. Del Deo and Stephen
J.DiLascio.
</TABLE>
<TABLE>
(ii) The shareholders ratified the adoption of the Sherwood Group, Inc.
1996 CEO Bonus Plan. The following was the shareholder vote on this
matter:
<S> <C>
For: 10,901,658
Against: 36,741
Withheld: 7,905
Broker Non-Vote: 4,546
</TABLE>
<TABLE>
(iii) The shareholders ratified the adoption of the Sherwood Group, Inc.
1996 Executive Incentive Award Plan. The following was the
shareholder vote on this matter:
<CAPTION>
<S> <C>
For: 7,538,142
Against: 614,101
Withheld: 28,375
Broker Non-Vote: 2,770,232
</TABLE>
<TABLE>
(iv) The shareholders ratified the appointment of KPMG Peat Marwick LLP as
the Company's independent auditors for the fiscal year ending May 31,
1997. The following was the shareholder vote on this matter:
<CAPTION>
<S> <C>
For: 7,511,663
Against: 642,551
Withheld: 30,950
Broker Non-Vote: 2,765,686
</TABLE>
(11)
<PAGE>
Item 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit 10(a) - 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.
Exhibit 10(b) - The Sherwood Group, Inc. 1996 Executive
Incentive Award Plan - incorporated by reference to Exhibit
B to The Sherwood Group, Inc. proxy statement dated September
10, 1996.
Exhibit 11 - Computation of Earnings Per Share
Exhibit 27 - Financial Data Schedule
(b) The Company filed no reports on Form 8-K during the quarter ended
November 30, 1996.
(12)
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
The Sherwood Group, Inc.
------------------------
Date: January 13, 1997 By: /s/ Dennis Marino
---------------------------- ------------------------
Dennis Marino
Executive Vice President
and Chief Administrative
Officer
Date: January 13, 1997 By: /s/ Denise Isaac
----------------------------- --------------------------
Denise Isaac
Chief Financial Officer
and Principal Accounting
Officer
(13)
<PAGE>
January 13, 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 Six Months Ended November 30, 1996
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 six
months ended November 30, 1996 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
<PAGE>
<TABLE>
THE SHERWOOD GROUP, INC. AND SUBSIDIARIES EXHIBIT 11
COMPUTATION OF NET INCOME PER COMMON SHARE
<CAPTION>
Three Months Ended November 30,
-----------------------------------------------------------
1996 1995
------------------- ------------------
<S> <C> <C>
Common stock and common stock equivalents:
Average common stock outstanding 12,972,734 12,602,174
Average common stock equivalents
issuable under stock options 55,775 823,726
------------------- ------------------
Total average common stock and common stock
equivalents used for earnings per share computation 13,028,509 13,425,900
=================== ==================
Income:
Net income $ 3,295,285 $ 3,173,387
=================== ==================
Income per common and common equivalent share (a):<F1>
Net income $ 0.25 $ 0.24
=================== ==================
<FN>
<F1>(a) For presentation purposes, primary and fully diluted are identical.
</FN>
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended November 30,
---------------------------------------
1996 1995
------------------- ------------------
<S> <C> <C>
Common stock and common stock equivalents:
Average common stock outstanding 12,995,192 12,502,958
Average common stock equivalents
issuable under stock options 44,275 822,514
------------------- ------------------
Total average common stock and common stock
equivalents used for earnings per share computation 13,039,467 13,325,472
=================== ==================
Income:
Net income $ 6,298,326 $ 7,641,251
=================== ==================
Income per common and common equivalent share (a):<F1>
Net income $ 0.48 $ 0.57
=================== ==================
<FN>
<F1>(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 six months ended November 30, 1996 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<CIK> 0000811917
<NAME> The Sherwood Group, Inc.
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAY-31-1997
<PERIOD-START> JUN-01-1996
<PERIOD-END> NOV-30-1996
<EXCHANGE-RATE> 1
<CASH> 824230
<RECEIVABLES> 54330140
<SECURITIES-RESALE> 0
<SECURITIES-BORROWED> 0
<INSTRUMENTS-OWNED> 51502947
<PP&E> 13774404
<TOTAL-ASSETS> 140838214
<SHORT-TERM> 0
<PAYABLES> 23448051
<REPOS-SOLD> 0
<SECURITIES-LOANED> 0
<INSTRUMENTS-SOLD> 18061974
<LONG-TERM> 3250000
0
0
<COMMON> 143432
<OTHER-SE> 91168289
<TOTAL-LIABILITY-AND-EQUITY> 140838214
<TRADING-REVENUE> 56438552
<INTEREST-DIVIDENDS> 3918229
<COMMISSIONS> 15752392
<INVESTMENT-BANKING-REVENUES> 0
<FEE-REVENUE> 1088598
<INTEREST-EXPENSE> 133598
<COMPENSATION> 28477133
<INCOME-PRETAX> 11587638
<INCOME-PRE-EXTRAORDINARY> 6298326
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6298326
<EPS-PRIMARY> 0.48
<EPS-DILUTED> 0.48
</TABLE>
