August 10, 1998
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: National Discount Brokers Group, Inc.
Report on Form 10-K for the Year Ended May 31, 1998
Gentlemen:
Enclosed please find the following material submitted on behalf of National
Discount Brokers Group, Inc. ("Company"):
One complete copy of the Company's report on Form 10-K for the year ended May
31, 1998 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
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<PAGE>
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Securities And Exchange Commission
Washington, D.C. 20549
Form 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
[X] Annual Report Pursuant To Section 13 Or 15(d)
Of The Securities Exchange Act Of 1934
For the fiscal year ended May 31, 1998
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
National Discount Brokers 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, 1998, 14,078,089 common shares were outstanding, and the
aggregate market value of the common shares of National Discount Brokers Group,
Inc. held by non-affiliates was approximately $69,786,000.
Documents Incorporated By Reference
Document Incorporated Part of Report
By Reference Into Which Incorporated
Proxy Statement for Annual Meeting to be held Part III
October 20, 1998
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<PAGE>
Item 1. Business
Introduction
National Discount Brokers Group, Inc. ("NDBG"), formerly The Sherwood Group,
Inc., is a holding company whose principal wholly owned subsidiaries are
Sherwood Securities Corp. ("Sherwood Securities") and Triak Services
Corp. ("Triak"), doing business as National Discount Brokers ("NDB").
NDBG and its subsidiaries and affiliate, Equitrade Partners, are referred to as
the "Company".
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 provides limited retail brokerage services.
NDB, another registered broker-dealer, is a deep discount brokerage firm
specializing in trade execution for individual investors.
NDBG and another wholly owned subsidiary, SHD Corporation ("SHD"), also own
limited partnership interests in Equitrade Partners, a New York limited
partnership ("Equitrade"). Such limited partnership interests aggregate
approximately 72% of Equitrade's capital as of July 31, 1998. Equitrade is a
registered specialist on the New York Stock Exchange ("NYSE") and, as of July
31, 1998, was a specialist in 157 equity securities.
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 September 5, 1997, the Company
sold all of the stock of Anvil to an independent third party.
On February 13, 1998, MXNet, Inc. ("MXNet"), another wholly owned subsidiary of
NDBG was sold to an independent third party.
On December 22, 1992, the Board of Directors approved a program to repurchase up
to 1,500,000 shares of NDBG'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, 1998, 1,405,178 shares
had been repurchased as part of this program, excluding shares received by the
NDBG as consideration for the exercise of options to acquire common stock of the
Company or to pay withholding taxes related thereto. In June 1998, the Board of
Directors authorized an interim program to repurchase up to an additional
150,000 shares of the Company's common stock. From June 1, 1998 to July 31,
1998, 102,188 additional shares were repurchased under the programs.
NDBG 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 to The Sherwood Group, Inc. in 1987. In December 1997,
NDBG adopted its present name. NDBG's common stock is listed on the NYSE under
the symbol "NDB".
NDBG's principal executive offices are located at 10 Exchange Place Centre,
Jersey City, New Jersey and its telephone number is (201) 946-2200.
Revenue by Source
The following table sets forth sources of the Company's revenues from continuing
operations on a comparative basis for the periods indicated. (Certain prior year
amounts have been reclassified to conform with the fiscal year ended May 31,
1998 presentation):
<TABLE>
<CAPTION>
Fiscal Year Ended May 31,
1998 1997 1996
---- ---- ----
Amount % Amount % Amount %
<S> <C> <C> <C> <C> <C> <C>
Firm securities
transactions (net) $99,776,365 60.67 $122,322,851 67.83 $129,177,423 72.12
Commission income 37,052,201 22.53 32,638,949 18.10 30,723,379 17.15
Floor brokerage
income 15,941,668 9.70 14,198,251 7.87 10,955,277 6.12
Equity income (loss) in
partnerships 1,299 - (26,176) (0.01) 40,106 .02
Investment securities
gain 63,625 .04 - - - -
Interest and dividend
income 7,773,383 4.73 7,774,806 4.31 5,907,779 3.30
Fee income 3,567,837 2.17 2,513,483 1.39 1,353,686 .76
Other income 271,623 0.16 913,051 0.51 952,537 .53
------- ---------- ------- ---------- -------- ------- ---------
Total revenue $164,448,000 100.00 $180,335,215 100.00 $179,110,187 100.00
============ ====== ============ ====== ============ ======
</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, 1998, 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 1998, 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. Until February 27, 1998, Sherwood Securities served as a
specialist in 18 equity securities on the American Stock Exchange ("AMEX"). This
business, which was cleared through Spear Leeds & Kellogg ("SLK"), was sold to
SLK. NDBG and SHD also hold limited partnership interests aggregating
approximately 72% of the capital of Equitrade, whose activity is also cleared
through SLK. As of July 31, 1998, Equitrade served as a specialist in 157 equity
securities on the NYSE.
Securities positions. Sherwood Securities and Equitrade take both long and short
positions in the 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 Sherwood Securities as a specialist on the AMEX
through February 1998 at which time that business was sold. 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>
1996* $83,622,273 58,791,795 71,981,880
1997** $99,440,731 60,363,793 76,123,209
1998*** $181,972,487 80,097,494 102,394,228
<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>
<FN>
***Includes Highest Month End, Lowest Month End and Average Month End for
positions held as a specialist on AMEX of $1,389,918, $837,302 and
$1,079,532, respectively. Includes Highest Month End, Lowest Month End
and Average Month End for positions held as a specialist on NYSE of
$46,088,701, $30,829,514 and
$39,415,284, 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, from time to time, makes and continues
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 of NDBG.
Although the securities of certain of the companies in which the Company
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, 1998, 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.
As additional consideration for a $100,000 loan made to Eurotech, Ltd. in
November 1996, Sherwood Securities received 175,000 shares of Eurotech, Ltd.
common stock. During the year ended May 31, 1998, Sherwood Securities sold
50,000 of these shares, recognizing a gain of approximately $63,000. The
remaining 125,000 shares have been reflected on the statement of financial
condition at their fair market value of approximately $177,000 as of May 31,
1998.
The Company also owns 260,100 shares of Astropower, Inc. common stock, acquired
as part of an underwriting in 1989. This investment has been reflected on the
statement of financial condition at its fair market value of approximately
$2,440,000 as of May 31, 1998.
Between February and April 1998, NDB invested $500,000 for 500,000 shares of
Award Track, Inc. common stock. Award Track, Inc. is currently designing a
new NDB Website.
Investment in property. NDBG, 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 54 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 interactive voice response
("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, which routes certain of
its orders to Sherwood Securities for execution, was created as part of a plan
to capture a greater share of NASDAQ activity. As of July 31, 1998, NDB had over
120,000 customer accounts.
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 and
credit 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.
Effective January 28, 1998, Sherwood Securities clears its wholesale
market-making transactions through Broadcort Capital Corporation ("Broadcort"),
a wholly owned subsidiary of Merrill Lynch & Co., Inc. Prior to that time, these
services were performed by National Financial Services Corporation ("NFSC").
Broadcort also clears Sherwood Securities' customer transactions. Equitrade's
NYSE transactions are cleared through SLK, which also cleared Sherwood
Securities' AMEX transactions through February 27, 1998, at which time that
business was sold. The Sherwood Securities clearing agreement with Broadcort is
for an indefinite period of time and may be terminated upon 180 days prior
written notice by either party. The Equitrade clearing agreement with SLK is for
an indefinite period of time and may be terminated upon 35 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 has a two-year term ending in September 1999, subject to
earlier rights of termination.
Until it was sold by the Company on September 5, 1997, Anvil's transactions were
cleared through Pershing and Broadcort.
Personnel
As of July 31, 1998, the Company had 572 full-time employees of which 359 are
salespeople, traders and trading assistants. Included in the preceding employee
counts are NDB's 219 full-time employees of which 106 are sales personnel and
Equitrade's 60 full-time employees of which 53 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. Through
August 1997, Sherwood Securities' traders and salespeople were paid a percentage
of trading profits as compensation. Beginning in September 1997, traders and
certain sales personnel are paid under a new "Annual Trading/Sales Production
Guarantee" program, based on a number of factors and subject to an annual
review. NDB's registered representatives 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
decided that in addition to whatever normal vacation time to which an employee
is entitled, all full-time employees (except employees of Equitrade) who have
completed five years of employment may take a four-week paid sabbatical. Such
sabbatical must be taken within one year after the employee's fifth anniversary.
Sabbaticals may also be taken for each subsequent five-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. Additional competition has arisen from Electronic Communications
Networks and the Instinet trading market, which enable buyers and sellers to
interact more directly, and allow for trading without the market maker.
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 ("SRO"), such as the National Association of Securities Dealers
("NASD"). The designated SRO for Sherwood Securities and NDB is the NASD, while
the designated SRO for Equitrade is the NYSE. These SROs 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, 1998, Sherwood Securities was
registered with the SEC, the NASD, and in 20 states and Washington, D.C. As of
July 31, 1998, NDB was registered with the SEC, the NASD and in all 50 states,
Washington, D.C. and the Commonwealth of Puerto Rico. As of July 31, 1998,
Equitrade was registered with the SEC and the NYSE.
The legal and compliance departments of NDBG, Sherwood Securities, NDB and
Equitrade are responsible for the oversight of 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 SROs, 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, SROs 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.
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 securities are handled. These rules became
effective on January 20, 1997 and have been phased in for additional NASDAQ
stocks during 1997. These rules, and other rules that have been proposed, as
well as regulatory actions and changes in market practices have had, and may
continue to have, an adverse impact on Sherwood Securities' transaction
revenues, profit margin and on the manner in which it conducts its business.
Further discussion regarding legal and regulatory matters is contained in Item
3, below.
Customer Protection and Insurance
Sherwood Securities, NDB and Equitrade are members of the Securities Investor
Protection Corporation ("SIPC") which provides protection for customers in the
event of the liquidation of the firm. Customers' accounts are protected up to
$500,000 for each customer, as defined in the Securities Investor Protection Act
of 1970, as amended, with a limitation of $100,000 for claims for cash balances.
In addition, each of Sherwood Securities', NDB's and Equitrade's clearing agents
is a member of SIPC and carries private protection which provides, in the event
of the liquidation of such clearing agents, additional coverage (in some cases
up to $25,000,000) for securities positions for each of Sherwood Securities',
NDB's and Equitrade's customers.
The Company carries brokers' blanket bonds covering Sherwood Securities and NDB
for loss or theft of securities, forgery of checks and drafts, embezzlement,
certain employee misconduct and misplacement of securities. Such bonds provide
total coverage of $1,000,000 for Sherwood Securities and $500,000 for NDB. The
bonds each contain deductibles of $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.
In addition, Equitrade, as a specialist on the NYSE, is subject to regulations
pursuant to which it may be required to stabilize, or participate in the
stabilization of certain securities on that exchange. In the event Equitrade is
required to stabilize the price of securities which are declining in value,
whether as a result of a declining market or otherwise, it could suffer
substantial losses.
Net Capital and Customer Reserve Requirements
Every registered broker-dealer doing business with the public is subject to the
Uniform Net Capital Rule 15c3-1 (the "Rule") promulgated by the SEC. The Rule,
which is designed to measure the financial integrity and liquidity of
broker-dealers, specifies minimum net capital requirements. Sherwood Securities,
NDB and Equitrade are subject to the Rule.
The Rule provides that a broker-dealer doing business with the public shall not
permit its net capital to be less than the greater of a stated minimum dollar
requirement or one-fifteenth of its aggregate indebtedness (the "basic method")
or, alternatively, that it not permit its net capital to be less than the
greater of a stated minimum dollar requirement or 2% of its aggregate debit
items computed in accordance with Rule 15c3-3 (the "alternative method").
The stated minimum dollar requirement for Sherwood Securities and NDB, which
have elected the alternative method, is $1,000,000 and $250,000, respectively.
The stated minimum dollar requirement for Equitrade, which has elected the basic
method, is $250,000. 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.
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
and Equitrade that require the use of significant amounts of capital, such as
market making activities. Further, assets of the Company, which are included in
the Company's minimum net capital are not available for distribution to the
shareholders of the Company in the form of dividends or otherwise. See Note 14
of Notes to Consolidated Financial Statements. Sherwood Securities, NDB and
Equitrade are presently in compliance with the net capital requirements. Failure
to maintain the required net capital may subject a broker-dealer to suspension
of business and may ultimately require its liquidation.
Sherwood Securities and NDB 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, 1997 through May 31, 1998, Sherwood Securities and NDB were in
compliance with the conditions of this exemption.
Item 2. Properties
Sherwood Securities' and NDBG'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.
NDB's office and sales facilities are located at 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.
See Note 15 to the Company's Consolidated Financial Statements for additional
information concerning other leases to which the Company is a party.
Item 3. Legal Proceedings and Contingencies
Many aspects of the business of the Company 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 is, from time to time, involved in
proceedings with, and investigations by, governmental and self-regulatory
agencies.
NDBG's subsidiaries, and in some cases NDBG, have been named as defendants in
lawsuits and arbitrations and are the subject of investigations that allege,
among other things, violations of Federal and state securities laws and other
laws. A substantial settlement or judgment in any of these cases could have a
material adverse effect on the Company. Except as set forth below, although
there can be no assurance that such lawsuits, arbitrations 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, arbitrations 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.
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 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"). 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 ("National
Association of Securities Dealers Automated Quotations") market-maker
defendants' total number of shares traded as market-makers in the Class
Securities (a designated list of NASDAQ securities) during the period from May
1, 1989 to May 27, 1994. Sherwood Securities' agreed market share of the
Defendants' Market was estimated in the Settlement Agreement, as amended, at
2.10%, which resulted in a total principal payment obligation of $9,187,500. The
Settlement Agreement provided 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 of $4,926,797, including
$333,047 of interest, was paid on April 9, 1998. The 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 Settlement Agreement. The Settlement Agreement has been preliminarily
approved by the Court but is still subject to final approval.
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.
In addition, the Company's results for the year ended May 31, 1998, reflect a
non-tax deductible charge to establish a reserve for the SEC's investigation In
the Matter of Certain Market Making Activities on NASDAQ, HO-2974, based upon
management's assessment of the status and reasonably likely outcome of the
investigation with respect to the Company.
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, 1998.
PART II
Item 5. Market for NDBG's Common Stock and Related Security Holder Matters.
NDBG trades its common stock on the NYSE under the symbol "NDB." Prior to
December 12, 1997, the symbol had been "SHD". There were approximately 4,000
holders of record of NDBG's common stock at July 31, 1998. As of such date, the
closing sales price per share for NDBG's common stock was $11.00.
The following table sets forth the high and low sales price per share for NDBG'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, 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
August 31, 1997 18.5000 12.5000
November 30, 1997 16.1875 11.6250
February 28, 1998 13.5000 10.0000
May 31, 1998 12.3125 11.0000
</TABLE>
There were no cash dividends declared on the common stock of NDBG in the
two-year period ended May 31, 1998. Funds available for distribution to
shareholders of NDBG in the form of dividends are limited to the extent assets
of the Company 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, 1998 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. Certain prior year amounts have been reclassified to
conform with the fiscal year ended May 31, 1998 presentation.
<TABLE>
<CAPTION>
Year Ended May 31,
1998 1997 1996 1995 (b) 1994
---- ---- ---- -------- ----
<S> <C> <C> <C> <C> <C>
Operating Data:
Revenues $164,448 $180,335 $179,110 $101,672 $88,196
Income from
continuing
operations before income 19,436 19,287 35,217 17,773 17,812
taxes
Income taxes 9,358 9,152 15,263 3,532 1,661
Net income from
continuing operations 10,078 10,135 16,151
19,954 14,241
Income (loss) from
operations
of discontinued operations, (821) (855) 178 374 446
net of taxes
Gain from sale of discontinued
operations, net of taxes 2,704 -- -- -- --
Net income (a) 11,960 9,280 20,132 14,615 16,597
Per Share Data (c):
Basic:
Income from continuing
operations, net of taxes .75 .79 1.57 1.14 1.28
Income (loss) from
operations of discontinued operations,
net of taxes (.06) (.07) .02 .03 .03
Gain from sale of discontinued
operations, net of taxes .20 -- -- -- --
Net income .89 .72 1.59 1.17 1.31
Diluted:
Income from continuing
operations, net of taxes .75 .79 1.51 1.04 1.17
Income (loss) from
operations of discontinued operations,
net of taxes (.06) (.07) .01 .03 .03
Gain from sale of discontinued
operations, net of taxes .20 -- -- -- --
Net income .89 .72 1.52 1.07 1.20
Balance Sheet Data:
Total assets 188,474 160,161 143,255 113,031 77,616
Common stockholders' equity 125,428 92,274 86,570 65,978 53,311
Book value per share-basic (c) 9.34 7.16 6.82 5.27 4.21
Book value per share-diluted (c) 9.29 7.13 6.56 4.83 3.86
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 1998 Compared to Fiscal 1997
The results of continuing operations the Company for the year ended May 31, 1998
reflect primarily the activities of Sherwood Securities, NDB and Equitrade.
Certain fiscal 1997 amounts have been reclassified to conform with the fiscal
1998 presentation.
On February 13, 1998, MXNet, Inc. ("MXNet"), a wholly owned subsidiary of NDBG
was sold. In addition, Sherwood Securities sold its AMEX specialist business in
February 1998 for $325,000. Net loss from operations of these discontinued
operations for the year ended May 31, 1998 was $821,000 (net of a tax benefit of
$229,000). For the year ended May 31, 1997, the net loss from operations of
these discontinued operations was $855,000 (net of a tax benefit of $440,000).
(See "Note 13 - Discontinued Operations".)
The Company had a net profit for the year ended May 31, 1998 of $11,960,000,
compared to a net profit of $9,280,000 for the year ended May 31, 1997.
Exclusive of litigation settlement charges of $9,188,000, in 1997, and
associated professional fees, net of reduced bonus and tax expenses, net profit
for the Company would have been $13,155,000 for the year ended May 31, 1997. The
Company's fiscal year 1998 results include a non tax-deductible charge based
upon management's assessment of the status and reasonably likely outcome of the
SEC investigation described in Item 3, above.
Total revenue (from continuing operations) for the Company decreased by
approximately $15,887,000, or 9%, from $180,335,000 in 1997 to $164,448,000 in
1998.
Most of the Company's revenue arises from firm securities transactions. Revenue
from firm securities transactions decreased although overall trading volume
increased approximately 32% for the year ended May 31, 1998, when compared with
the year ended May 31, 1997 as trading profits per ticket continued to decline.
Several factors contributed to this decrease. Regulatory changes enacted by the
SEC and the NASD, such as the limit order handling rules, 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.
The Company's commission income (exclusive of affiliated entities) increased
primarily due to a 31% increase in customer average daily tickets. Offsetting
some of this increase is a continued shift in the way customers trade with NDB.
Throughout the year ended May 31, 1998, more customers traded utilizing the
Company's lower-priced, automated systems, Power Broker(TM) and Webstation(TM),
as opposed to using higher costing live representatives.
Floor brokerage income increased by $1,744,000, or 12%, from $14,198,000 in 1997
to $15,942,000 in 1998. This increase was the result of increases in both the
volume of transactions and an increase in the number of stocks for which the
Company acts as a specialist. The specialist business increased in part as a
result of the Company's acquisition on May 2, 1997 of SHD (formerly Dresdner-NY
Incorporated) which added 54 stocks to the Company's specialist list
For the year ended May 31, 1997, the principal portion of equity income in
partnerships was an equity loss from the Company's 49% limited partnership
interest it held in the Anvil Joint Venture. For the year ended May 31, 1998,
Anvil's results were consolidated with those of the Company until Anvil was sold
on September 5, 1997.
Interest and dividend income remained constant for the two years, decreasing
slightly from $7,775,000 in 1997 to $7,773,000 in 1998, although the sources of
interest income varied. Interest income increased due to the growing margin
debits and free credits balances that customers retain with our clearing broker.
Meanwhile, interest income decreased primarily due to reduced average amounts of
cash being available for investment.
Fee income increased by $1,055,000, or 42%, from $2,513,000 in 1997 to
$3,568,000 in 1998. The increases are due to the Company receiving higher Rule
12b-1 fees from money market funds as customers' balances in those funds have
increased, as well as an increase in the negotiated rates used to calculate the
fees rebated thereon. Finally, in connection with the sale of the AMEX
specialist business, fees were received for certain consulting services
performed during the transition period for the purchaser.
Total expenses (from continuing operations) decreased $17,476,000, or 11%, from
$156,722,000 in 1997 to $139,246,000 in 1998. Exclusive of the litigation
settlement charges 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 $149,271,000, resulting in a decrease of 7% versus the year ended May
31, 1998. The reasons for the decrease in expenses are set forth below.
Clearing and related charges decreased by $7,517,000 from $57,282,000 in 1997 to
$49,765,000 in 1998. The decrease is due primarily to lower correspondent fees
being paid based upon the overall size and type of order flow received. Also
contributing to the decrease are lower per ticket clearance charges due to newly
negotiated rates.
Compensation and benefits decreased $3,939,000 from $58,110,000 in 1997 to
$54,171,000 in 1998. The decrease was primarily due to lower commissions paid to
traders because of the decrease in firm securities transactions.
Communication expenses, which include market data services, decreased by
$965,000 from $11,160,000 in 1997 to $10,195,000 in 1998. The decrease was
mainly due to the upgrade of the Powerbrokersm IVR System and development of an
in-house quote server.
Advertising costs increased $143,000 from $2,802,000 in 1997 to $2,945,000 in
1998 due to additional media buys.
Occupancy costs and equipment rental decreased $92,000 from $2,681,000 in 1997
to $2,589,000 in 1998. The decrease is attributable to a decrease for NDB which,
last year, incurred rent concurrently, from November 1997, on two main office
locations as it awaited the move of its headquarters to 7 Hanover Square in New
York City. In addition, the closing of NDB's branch offices as of October 31,
1997 has led to a reduction in rent expense.
Professional fees decreased by $1,954,000 from $3,534,000 in 1997 to $1,580,000
in 1998. 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". These prior year expenses did not recur to the
same extent in the current fiscal year, leading to the reduction in professional
fees.
Depreciation and amortization increased by $2,630,000 from $4,551,000 in 1997 to
$7,181,000 in 1998. The increase was primarily due to depreciation and
amortization incurred on fixed asset, leasehold improvement and computer
software additions by the Company aggregating approximately $6,400,000 during
the year ended May 31, 1998, as well as a full year's expense on $11,000,000 of
additions during the prior year.
Travel and entertainment expense decreased $46,000 from $1,858,000 in 1997
to $1,812,000 in 1998. The decrease is primarily due to cost control measures.
Repairs and maintenance expense increased by $1,058,000 from $954,000 in 1997 to
$2,012,000 in 1998. The increase is primarily due to maintenance service
contract fees paid in order to maintain infrastructures as the original
warranties on the various systems expire.
Interest expense increased $370,000 from $429,000 in 1997 to $799,000 in 1998
and primarily represents an increase in interest on capital paid to minority
partners and interest paid by Equitrade on its subordinated debt.
Litigation settlement, for the year ended May 31, 1997, represents charges in
connection with the Settlement Agreement. See Item 3, Legal Proceedings.
Other expenses increased $2,023,000 from $4,174,000 in 1997 to $6,197,000 in
1998. The increase is primarily attributable to increases in public relations
expenses regarding NDBG's name change, customer accomodations related to trade
executions, employment agency fees and certain expense accruals in connection
with the reasonably likely outcome of the SEC investigation. See Item 3, "Legal
Proceedings".
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 years ended May 31, 1998 and May 31, 1997.
The Company's effective tax rate increased from approximately 47% for the year
May 31, 1997 to approximately 48% for the year ended May 31, 1998. The increase
in effective tax rate is due primarily to the non-deductibility of certain
expense accruals for tax purposes in the current year.
In addition, in the fiscal year ended May 31, 1997, the Company recorded for
financial statement purposes, the unpaid expense incurred in connection with the
Settlement Agreement. Such unpaid expense was deemed by the Company to be
nondeductible for income tax purposes in the fiscal year ended May 31, 1997, as
the economic performance rules had not been met and the Company, therefore, has
recorded a deferred tax benefit for the future tax deductibility. For the year
ended May 31, 1998, deferred tax expenses principally relate to the reversal of
the prior year's tax benefit as the remaining balance due under the Settlement
Agreement, as amended, was paid during the year ended May 31, 1998. The Company
can take a deduction on the current year's tax returns for this payment. In
conjunction with the remaining deferred tax asset that the Company has reflected
on its consolidated statements of financial condition, the Company has not
booked any valuation allowance due to management's judgment of the likelihood of
realization.
Fiscal 1997 Compared to Fiscal 1996
The results of continuing operations 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 1998
presentation. In addition, the results of operations of the AMEX specialist
business of Sherwood Securities and of MXNet, each of which was sold by the
Company during February 1998, have been segregated and reflected as discontinued
operations on the consolidated statements of income. As such, the individual
line items comprising revenue and expenses from continuing operations have been
adjusted to exclude the operations of the discontinued operations. Net loss from
operations of these discontinued operations for the year ended May 31, 1997 was
$855,000 (net of a tax benefit of $440,000). For the year ended May 31, 1996,
the net income from operations of these discontinued operations was $178,000
(net of tax expense of $136,000). (See "Note 13 - Discontinued Operations".)
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 (from continuing operations) increased by approximately $1,225,000,
or 1%, from $179,110,000 in 1996 to $180,335,000 in 1997.
Most of the Company's income arises from firm securities transactions. Sherwood
Securities' profits from firm securities transactions (excluding those of its
AMEX specialist business) decreased $5,200,000, or 4%, from $122,691,000 in 1996
to $117,491,000 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 SEC and
the NASD, 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 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 $3,243,000, or 30%, from $10,955,000 in 1996
to $14,198,000 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 $1,159,000 from $1,354,000 in 1996 to $2,513,000 in
1997. The increase is due to larger Rule 12b-1 fees received from money market
funds as NDB's customers' balances in those funds have increased since the prior
year.
Total expenses (from continuing operations) increased $16,458,000, or 12%, from
$140,264,000 in 1996 to $156,722,000 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
$149,271,000, an increase of 6% 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 $1,156,000 from $56,954,000 in 1996 to
$58,110,000 in 1997. The increase was primarily due to higher salaries for
additional employees hired (principally due to 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 $392,000 from $10,768,000 in 1996 to
$11,160,000 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. See Item 3,
"Legal Proceedings".
Depreciation and amortization increased by $562,000 from $3,989,000 in 1996 to
$4,551,000 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 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 $762,000 from $3,412,000 in 1996 to $4,174,000 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 47% 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 expense 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 of continuing operations 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 1998
presentation. In addition, the results of operations of the AMEX specialist
business of Sherwood Securities and of MXNet, each of which was sold by the
Company during February 1998, have been segregated and reflected as discontinued
operations on the consolidated statements of income. As such, the individual
line items comprising revenue and expenses from continuing operations have been
adjusted to exclude the operations of the discontinued operations. Net income
from operations of these discontinued operations for the year ended May 31, 1996
was $178,000 (net of tax expense of $136,000). For the year ended May 31, 1995,
the net income from operations of these discontinued operations was $374,000
(net of tax expense of $93,000). (See "Note 13 - Discontinued Operations".)
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 (from continuing operations) increased by approximately $77,438,000, or
76%, from $101,672,000 in 1995 to $179,110,000 in 1996.
Most of the Company's income arises from firm securities transactions. Sherwood
Securities' profits from firm securities transactions (excluding those of its
AMEX specialist business) increased $47,073,000, or 62%, from $75,618,000 in
1995 to $122,691,000 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
SEC and the NASD 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 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% in the year ended
May 31, 1996 when compared with the previous year.
Floor brokerage income increased by $9,125,000, or 499%, from $1,830,000 in 1995
to $10,955,000 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 Rule 12b-1 fees received from mutual funds as
NDB's customers' balances in those funds have increased since the prior year.
Total expenses increased $57,134,000, or 69%, from $83,130,000 in 1995 to
$140,264,000 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 $26,104,000 from $30,850,000 in 1995 to
$56,954,000 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 $2,383,000 from $1,606,000 in 1995 to
$3,989,000 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 $116,000 from $438,000 in 1995 to
$554,000 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 $1,624,000 from $1,788,000 in 1995 to $3,412,000 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.
Liquidity and Capital Resources
The Company's tangible assets are highly liquid, but subject to market price
fluctuation, with more than 72% 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, 1998, margin account borrowings of
approximately $254,000,000 were available to the Company from its clearing
brokers.
NDBG's broker-dealer subsidiaries, Sherwood Securities, NDB and Equitrade are
subject to the minimum net capital requirement of the SEC which is designed to
measure the general financial soundness and liquidity of brokers. As of May 31,
1998, Sherwood Securities, NDB and Equitrade had approximately $35,739,000,
$3,568,000 and $29,902,000 in excess of the minimum required net capital
requirements, respectively, representing increases of $17,698,000 for Sherwood
Securities, $1,519,000 for NDB and $1,772,000 for Equitrade, from the prior
year. The increase for Sherwood Securities resulted primarily from loans repaid
by NDBG and from the year's net income. The increase in NDB's excess net capital
was principally the result of the year's net income. Equitrade's excess net
capital increase was principally due to fiscal year 1998 net income offset by
distributions made to partners. The net capital rule imposes financial
restrictions upon Sherwood Securities', NDB's and Equitrade's businesses which
are more severe than those imposed on most other businesses.
Cash flows from operations vary on a daily basis as the Company's portfolio of
marketable securities changes. The Company's ability to convert marketable
securities owned 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.
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,
in the past, such borrowings were done on an "as needed" basis.
On December 5, 1997, the Company entered into an agreement with IAT Reinsurance
Syndicate Ltd. ("IAT"), a Bermuda corporation, for the sale of 1,500,000 shares
of the Company's common stock at $12.875 per share. IAT, an entity controlled by
investor Peter A. Kellogg, received shares from the Company's treasury stock.
The transaction increased Mr. Kellogg's beneficial ownership of the Company's
common stock from approximately 8% to 17.8%. The proceeds from the transaction
of approximately $19,300,000, which were received by the Company on December 8,
1997, are being used for general corporate purposes and marketing activities to
support the expansion of NDB.
Fixed assets and computer software of approximately $4,364,000 were purchased
and placed into service by NDB during the year ended May 31, 1998 in connection
with the upgrade of NDB's technological infrastructure.
The Company anticipates that it will spend an additional $3,500,000 and $500,000
over the next year for the ongoing upgrades of NDB's and Sherwood Securities'
technological infrastructures, respectively, and intends to finance these
upgrades out of internally generated funds.
Cash flows from the Company's investment activities are directly related to
market conditions.
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, 1998, approximately 15% of the outstanding common
shares of Emmett A. Larkin Company, Inc.
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 175,000 shares of Eurotech Ltd. common stock. The loan was repaid in
full on March 2, 1998. During December 1997 and January 1998, an aggregate of
50,000 shares of this common stock was sold with the Company recognizing a gain
of approximately $64,000.
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. These funds were expended
in order for NDB 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
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, 1998, 1,405,178 shares had
been repurchased, of which 53,696 were repurchased during fiscal 1998. In June
1998, the Board of Directors authorized an interim program to repurchase up to
an additional 150,000 shares of the Company's common stock. From June 1, 1998 to
July 31, 1998, 102,188 additional shares were repurchased under the programs.
The source of funds for these purchases was internally generated.
Sherwood Securities', NDB's and Equitrade's excess net capital are deemed
adequate by management for their present operations and currently anticipated
future expansion.
Effects of Inflation
The Company's assets are not significantly affected by inflation because they
are primarily monetary in nature. Management believes that replacement costs of
furniture, equipment and leasehold improvements will not materially affect
operations. However, the rate of inflation affects the Company's principal
expenses such as employee benefits and compensation, rent and communication,
which may not be readily recoverable from increased revenues. Due to market
forces and competitive conditions in the securities industry, a broker-dealer
may be unable to unilaterally increase spreads and commissions in order to
recover increased costs related to inflation. Consequently, the Company must
rely on increased volume for this purpose. However, the Company has significant
cash balances on deposit with its principal clearing broker which, in the event
there are higher interest rates, would offset some of the costs.
Impact of the Year 2000 Issue
Certain of the Company's systems have potential operational problems in
connection with applications that contain a date and/or use a date in a
comparative manner as the date transitions into the Year 2000. The Company has a
comprehensive program to identify and remediate potential problems related to
the Year 2000 in its information systems and infrastructure. In addition, the
Company has initiated formal communications with all of its significant external
interfaces to determine their own potential problems and plans related to the
Year 2000, although management presently has no assurance that such plans will
be implemented on a timely basis. The inability of the Company or significant
external interfaces of the Company to adequately address year 2000 issues could
cause disruption of the Company's business operations.
Many of the Company's systems are Year 2000 compliant, or have been scheduled
for replacement in the Company's ongoing systems plans. The Company has incurred
and expensed approximately $40,000 during the fiscal year ended May 31, 1998
related to the assessment of, and preliminary efforts in connection with, its
Year 2000 program and remediation plan. Future spending for software
modifications and testing required for Year 2000 are currently estimated to be
approximately $500,000 with the majority expected to be incurred in the fiscal
year ended May 31, 1999. The Company's target date for completing its Year 2000
modifications is December 31, 1998 with additional testing and refinements to
identified systems planned for 1999.
Forward Looking Statement
Statements regarding the Company's expectations as to its future operations and
financial condition and certain other information contained in this Form 10-K 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.
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 20, 1998
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 20, 1998 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 20, 1998 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 20, 1998 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, 1998, the
Company filed no reports on Form 8-K.
(c) Exhibits
The exhibits that are filed with this report, or that are
incorporated herein by reference, are set forth in the
Exhibit Index beginning on page E-1.
NATIONAL DISCOUNT BROKERS GROUP, INC.
AND SUBSIDIARIES
Consolidated Financial Statements
May 31, 1998, 1997 and 1996
(With Independent Auditors' Report Thereon)
<PAGE>
NATIONAL DISCOUNT BROKERS 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, 1998 and 1997 F-3 to F-4
Consolidated Statements of Income -
Years ended May 31, 1998, 1997 and 1996 F-5 to F-6
Consolidated Statements of Changes in Stockholders' Equity -
Years ended May 31, 1998, 1997 and 1996 F-7
Consolidated Statements of Cash Flows -
Years ended May 31, 1998, 1997 and 1996 F-8 to F-11
Notes to Consolidated Financial Statements F-12 to F-27
The following financial statement schedule is submitted herein on the pages
indicated below:
Schedule I - Condensed Financial Statements of the Registrant (Parent)
- May 31, 1998 and 1997
and Years ended May 31, 1998, 1997 and 1996 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
National Discount Brokers Group, Inc.:
We have audited the accompanying consolidated statements of financial condition
of National Discount Brokers Group, Inc. and subsidiaries as of May 31, 1998 and
1997, 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, 1998, and the related financial statement schedule. These
consolidated financial statements and related financial statement schedule are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements and financial statement
schedule 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 National Discount
Brokers Group, Inc. and subsidiaries as of May 31, 1998 and 1997, and the
results of their operations and their cash flows for each of the years in the
three-year period ended May 31, 1998, in conformity with generally accepted
accounting principles. Also in our opinion, the related 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
New York, New York
July 15, 1998
F-2
<PAGE>
NATIONAL DISCOUNT BROKERS GROUP, INC.
AND SUBSIDIARIES
Consolidated Statements of Financial Condition
May 31, 1998 and 1997
<TABLE>
<CAPTION>
Assets 1998 1997
---- ----
<S> <C> <C>
Cash $ 1,039,121 3,033,818
Funds segregated for customers - 29,203
Receivables:
Brokers and dealers 67,742,508 58,047,183
Other (note 11) 727,099 599,725
Securities owned, at market value (note 4) 67,969,111 45,696,436
Investment securities available for sale, at market value 2,615,000 -
Investment securities not readily marketable,
at fair value 1,001,320 501,320
Investment in partnerships (note 3) - 12,984
Loans and notes receivable (note 11) 760,409 830,589
Furniture, fixtures, equipment, and leasehold
improvements - at cost, net of accumulated
depreciation and amortization (note 6) 18,011,262 20,263,511
Computer software - at cost, net of accumulated
amortization of $1,388,843 at May 31, 1998 and
$929,942 at May 31, 1997 2,683,635 1,853,693
Intangible assets, net of accumulated
amortization of $1,275,041 at May 31, 1998
and $535,853 at May 31, 1997 (note 3) 5,988,770 6,727,958
Exchange memberships (market value $9,243,500
at May 31, 1998 and $7,957,750 at May 31, 1997) (note 7) 7,416,496 7,416,496
Subordinated notes receivable (note 9) 3,500,000 3,000,000
U.S. Treasury obligations, held as collateral 7,667,463 7,815,254
Deferred tax asset (note 8) 282,886 2,220,472
Other assets 1,068,534 2,112,083
-------------- ---------------
Total assets $ 188,473,614 160,160,725
============== ===============
</TABLE>
F-3
<PAGE>
NATIONAL DISCOUNT BROKERS GROUP, INC.
AND SUBSIDIARIES
Consolidated Statements of Financial Condition, Continued
<TABLE>
<CAPTION>
Liabilities and Stockholders' Equity 1998 1997
---- ----
<S> <C> <C>
Securities sold, not yet purchased, at market
value (note 4) $ 28,687,486 25,129,290
Accounts payable and accrued expenses,
including compensation payable to officers
and employees of $11,216,667 at May 31, 1998
and $11,831,551 at May 31, 1997 (note 15) 20,203,279 31,734,213
Secured demand notes payable (note 9) 3,500,000 3,000,000
Income taxes payable (note 8) 1,189,260 302,501
Minority interest in Equitrade 9,465,741 7,720,236
-------------- ---------------
Total liabilities 63,045,766 67,886,240
-------------- ---------------
Commitments and contingencies (notes 15 and 16)
Stockholders' equity (notes 10 and 14):
Preferred stock - $.01 par value; 1,000,000 shares
authorized, none issued - -
Class A common stock - $.01 par value;
50,000,000 shares authorized at May 31, 1997 and
none authorized at May 31, 1998, none issued - -
Common stock - $.01 par value; 50,000,000 shares
authorized, 14,343,201 shares issued at May 31,
1998 and 1997 143,432 143,432
Additional paid-in capital 65,050,817 57,189,985
Unrealized gain on securities available for sale 2,615,000 -
Retained earnings 59,176,152 47,215,833
---------------------------------------------------------------------- -------------
126,985,401 104,549,250
Less: Treasury stock - at cost, 162,924 shares at
May 31, 1998 and 1,648,536 shares at
May 31, 1997 (1,557,553) (12,274,765)
-------------- ---------------
Total stockholders' equity 125,427,848 92,274,485
-------------- ---------------
Total liabilities and stockholders' equity $ 188,473,614 160,160,725
============== ===============
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
NATIONAL DISCOUNT BROKERS GROUP, INC.
AND SUBSIDIARIES
Consolidated Statements of Income
Years ended May 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenue:
Firm securities transactions - net $ 99,776,365 122,322,851 129,177,423
Commission income 37,052,201 32,638,949 30,723,379
Floor brokerage income 15,941,668 14,198,251 10,955,277
Equity income (loss) in partnerships (note 3) 1,299 (26,176) 40,106
Investment securities gains realized 63,625 - -
Interest and dividends 7,773,383 7,774,806 5,907,779
Fee income 3,567,837 2,513,483 1,353,686
Other 271,622 913,051 952,537
-------------------------------------- ------------- ---------- ----------
Total revenue 164,448,000 180,335,215 179,110,187
--------------- -------------- ----------------
Expenses:
Clearing and related brokerage charges 49,765,223 57,282,285 55,631,233
Compensation and benefits (notes 10, 12 and 15) 54,170,954 58,109,668 56,954,322
Communications 10,194,681 11,159,958 10,767,515
Depreciation and amortization 7,180,689 4,550,796 3,988,767
Advertising costs 2,945,195 2,801,700 1,724,117
Occupancy costs and equipment rental (note 14) 2,589,282 2,681,439 3,165,851
Professional fees 1,579,552 3,533,937 2,243,338
Travel and entertainment 1,811,812 1,858,191 1,502,228
Repairs and maintenance 2,012,389 954,072 553,521
Interest 798,949 429,378 320,812
Litigation settlement (note 16) - 9,187,500 -
Other 6,197,019 4,173,560 3,412,424
------------------------------------------ ----------- ------------ ------------
Total expenses 139,245,745 156,722,484 140,264,128
--------------- -------------- ---------------
Income before minority interest
and income taxes 25,202,255 23,612,731 38,846,059
Income of Equitrade allocated to minority partners (5,766,440) (4,326,095) (3,628,986)
--------------- -------------- ---------------
Income from continuing operations
before income taxes 19,435,815 19,286,636 35,217,073
Income taxes (note 8) 9,358,242 9,151,897 15,263,076
--------------- -------------- ---------------
Net income from continuing operations 10,077,573 10,134,739 19,953,997
--------------- -------------- ---------------
Discontinued operations (notes 8 and 13):
Income (loss) from discontinued operations
(net of taxes) (821,339) (855,046) 177,931
Gain on sale of discontinued operations, net 2,704,085 - -
--------------- -------------- --------------
1,882,746 (855,046) 177,931
--------------- -------------- ---------------
Net income $ 11,960,319 9,279,693 20,131,928
=============== ============== ===============
</TABLE>
F-5
<PAGE>
NATIONAL DISCOUNT BROKERS GROUP, INC.
AND SUBSIDIARIES
Consolidated Statements of Income, Continued
Years ended May 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
equivalent share (a)
Basic:
Net income from continuing operations $ .75 .79 1.57
Loss from discontinued operations
(net of taxes) (.06) (.07) .02
Gain on sale of discontinued operations
(net of taxes) .20 - -
--- --- --
Net income $ .89 .72 1.59
=== ==== ====
Weighted average common shares outstanding 13,432,726 12,890,926 12,699,428
============== ============= ==============
Diluted:
Net income from continuing operations $ .75 .79 1.51
Loss from discontinued operations
(net of taxes) (.06) (.07) .01
Gain on sale of discontinued operations
(net of taxes) .20 - -
--- --- --
Net income $ .89 .72 1.52
=== === ====
Weighted average common shares outstanding 13,501,346 12,946,007 13,201,412
============== ============= ==============
<FN>
(a) The sum of the individual quarters' earnings per common share does not
equal the total amount for the year ended May 31, 1998 due to the effect
of averaging the number of shares of common stock equivalents throughout
the year.
</FN>
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
NATIONAL DISCOUNT BROKERS GROUP, INC.
AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity
Years ended May 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
Unrealized
gain on
Additional securities
Common Common paid-in available Retained Treasury Treasury
shares stock capital for sale earnings shares stock Total
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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
Net income - 11,960,319 11,960,319
Unrealized gain 2,615,000 2,615,000
Acquisition of treasury stock - (309,146) (3,757,376) (3,757,376)
Sale of treasury stock 7,023,900 - 1,500,000 12,243,600 19,267,500
Issuance of treasury stock upon
exercise of options 836,932 - 294,758 2,230,988 3,067,920
Balance at May 31, 1998 14,343,201 $ 143,432 65,050,817 2,615,000 59,176,152 (162,924) (1,557,553) $125,427,848
See accompanying notes to consolidated financial statements.
</TABLE>
F-7
<PAGE>
NATIONAL DISCOUNT BROKERS GROUP, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended May 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income from continuing operations $ 10,077,573 10,134,739 19,953,997
Net income (loss) from discontinued operations (821,339) (855,046) 177,931
Non-cash items included in net income:
Equity (income) loss in partnerships (1,299) 26,176 (40,106)
Depreciation and amortization 7,797,133 4,891,324 4,079,015
Gain on sale of investment
securities not readily marketable (63,625) - -
Income of Equitrade allocated to
minority partners 5,766,440 4,326,095 3,628,986
Provision for deferred taxes 1,937,586 (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 (29,203) -
Receivables:
Brokers and dealers (9,695,325) 23,344,762 (30,825,770)
Other (266,289) (78,693) (265,818)
U.S. Treasury obligations held as collateral 147,791 (32,740) 89,337
Securities owned, at market value (22,272,675) (9,733,796) 9,595,915
Other assets 900,905 (457,385) 138,418
Increase (decrease) in operating liabilities:
Securities sold, not yet purchased, at
market value 3,558,196 4,790,211 (5,797,653)
Accounts payable and accrued expenses (12,786,419) 6,814,638 7,138,010
Income taxes payable (322,518) (4,987,878) 3,972,470
--------------- --------------- --------------
Net cash (used in) provided by
operating activities (16,014,662) 36,055,738 16,334,732
--------------- -------------- --------------
</TABLE>
F-8
<PAGE>
NATIONAL DISCOUNT BROKERS GROUP, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
<TABLE>
<CAPTION>
1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from investing activities:
Proceeds from sales of investment securities
not readily marketable $ 63,625 - -
Payment for purchase of investment securities
not readily marketable (500,000) (100,000) -
Loans made and notes issued to employees and
officers (60,000) (237,652) (1,738,840)
Principal collected on notes receivable 233,124 104,321 1,683,617
Purchases of furniture, fixtures and
equipment and leasehold improvements (4,949,659) (11,429,602) (12,556,959)
Purchases of computer software (1,842,745) (1,413,233) (537,136)
Acquisition of intangible asset (4,128,024) -
Payment for purchase of non-compete
agreement - (188,780) -
Sale/(purchase) of subsidiaries (net of cash,
intangibles and exchange memberships
acquired) 6,600,000 (6,311,493) -
Purchase of exchange memberships - (6,250,000) -
Issuance of subordinated note - (500,000) -
Principal collected on subordinated note - 500,000 -
Other (38,917) 5,150 31,000
------------ --------- ------------
Net cash used in investing activities (494,572) (29,949,313) (13,118,318)
--------------- -------------- --------------
Cash flows from financing activities:
Sale of treasury stock 19,267,500 - -
Purchase of treasury stock (614,281) (3,569,937) (2,061,876)
Proceeds from exercise of options - - 635,000
Capital contribution by minority interest 275,086 185,658 29,575
Capital withdrawals by minority interest (4,296,021) (1,849,025) (1,942,273)
--------------- -------------- --------------
Net cash provided by (used in)
financing activities 14,632,284 (5,233,304) (3,339,574)
--------------- -------------- --------------
Net increase (decrease) in cash (1,876,950) 873,121 (123,160)
Cash acquired due to consolidation of:
Equitrade as of March 1, 1995 - - -
Anvil as of January 24, 1997 - 22,740 -
SHD Corporation as of May 2, 1997 - 1,667,644 -
Cash surrendered on sale of MXNet (117,747) - -
Cash at beginning of year 3,033,818 470,313 593,473
--------------- -------------- --------------
Cash at end of year $ 1,039,121 3,033,818 470,313
=============== ============== ==============
</TABLE>
F-9
<PAGE>
NATIONAL DISCOUNT BROKERS GROUP, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
Supplemental disclosures of cash flow information:
Income tax payments totaled $7,510,410, $15,946,000 and $6,948,770 during
the years ended May 31, 1998, 1997 and 1996, respectively.
Interest payments totaled $1,129,763, $658,276 and $890,495 for the years
ended May 31, 1998, 1997 and 1996, 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.
During September 1997, the Company sold all of the stock of its subsidiary,
Anvil Institutional Services, Inc., and received a note in the amount of
$102,945 which is due in December 1998.
During October 1997 and December 1997, certain executives of the Company
exercised an aggregate of 294,758 options for the purchase of 294,758
shares of the Company's common stock with exercise prices ranging from
$7.9375 per share to $10.125 per share. In order to pay for the exercise
price ($2,701,705) and to reimburse the Company for the personal income
taxes ($441,389) on the gain related to the transaction, the executives
remitted to the Company 255,450 shares of the Company's common stock with a
market value of $3,143,094.
F-10
<PAGE>
NATIONAL DISCOUNT BROKERS GROUP, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
During October 1997, Equitrade entered into a $500,000 subordination
agreement with an unrelated party. The note has a stated interest rate of
4% and a maturity date of October 1, 1998.
See accompanying notes to consolidated financial statements.
F-11
<PAGE>
NATIONAL DISCOUNT BROKERS GROUP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
May 31, 1998, 1997 and 1996
(1) Organization and Business
National Discount Brokers Group, Inc. ("NDBG") and its subsidiaries
(formerly known as The Sherwood Group, Inc.) (the "Company") are
primarily engaged in the securities business and in providing related
financial services. NDBG has a principal registered broker-dealer wholly
owned subsidiary, Sherwood Securities Corp. ("Sherwood Securities").
Triak Services Corp., doing business as National Discount Brokers
("NDB"), is another registered broker-dealer, and wholly owned
subsidiaryof NDBG. 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. MXNet, Inc. was a company specializing in the delivery of market
data to trading firms and whose other services included end-of-day
pricing, internet access, trading room contingency services, and
off-floor trading services.
In addition, NDBG 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.
On February 13, 1998, MXNet, Inc. ("MXNet"), another wholly owned
subsidiary of NDBG was sold. In addition, on February 27, 1998, Sherwood
Securities sold its American Stock Exchange ("AMEX") specialist business.
See "Note 13 - Discontinued Operations".
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.
(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.
F-12
<PAGE>
NATIONAL DISCOUNT BROKERS GROUP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(2), Continued
(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.
In accordance with Statement of Financial Accounting Standards No.
115, "Accounting for Certain Investments in Debt and Equity
Securities", available-for-sale securities are stated at fair
value with unrealized gains and losses included in stockholders'
equity.
During February 1998 and March 1998, certain available-for-sale
equity securities appreciated due to the entities' successful
initial public offerings. As such, the Company has reflected these
securities at fair market value on the consolidated statements of
financial condition. The unrealized gain of $2,615,000 associated
with marking these securities to fair market value is reflected as
a separate component of stockholders' equity on the consolidated
statements of financial condition.
(d) For all subsidiaries, except MXNet for the period until it was
sold, 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 depreciated all furniture, fixtures,
equipment and computer software over three years.
(e) Certain prior year amounts have been reclassified to conform with
the fiscal year ended May 31, 1998 presentation.
(f) 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.
(g) 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.
(h) 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
F-13
<PAGE>
NATIONAL DISCOUNT BROKERS GROUP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(2), Continued
(h) 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, 1998, of its
long-lived and intangible assets may not be recoverable.
(i) 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.
(j) 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.
(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 NDBG 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.
NDBG is a special limited partner in Equitrade. In connection with
certain transactions which took place in 1995 and are discussed below,
NDBG 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 special limited partnership interest, led to the
F-14
<PAGE>
NATIONAL DISCOUNT BROKERS GROUP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(3), Continued
determination that consolidation was required commencing March 1995.
Prior to this determination, the Company accounted for Equitrade on an
equity basis. 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 NDBG. 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
NDBG. NDBG 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 September 5, 1997, NDBG sold all of the stock of Anvil Institutional
Services, Inc. ("Anvil") for $217,000, which approximated book value. In
connection with the sale, NDBG's $250,000 subordinated loan agreement
with Anvil was cancelled. As such, NDBG 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 NDBG.
(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-15
<PAGE>
NATIONAL DISCOUNT BROKERS GROUP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(4), Continued
Marketable securities owned and sold, not yet purchased, consist of
securities as follows:
<TABLE>
<CAPTION>
Securities owned 1998 1997
---------------- ---- ----
<S> <C> <C>
Corporate equities $ 67,969,111 40,183,144
U.S. Government obligations - 5,513,292
------------- -------------
Total $ 67,969,111 45,696,436
============= =============
Securities sold, not yet purchased
Corporate equities 28,687,486 25,129,290
------------- -------------
Total $ 28,687,486 25,129,290
============= =============
</TABLE>
In the normal course of business, Sherwood Securities, NDB and Equitrade
execute securities transactions on behalf of customers through clearing
brokers. In connection with these activities, a customer's unsettled
trades may expose Sherwood Securities, NDB and Equitrade to
off-balance-sheet credit risk in the event the customer is unable to
fulfill its contractual obligations. Sherwood Securities, NDB and
Equitrade seek to control the risk associated with their customer
activities by making credit inquiries when establishing customer
relationships and by monitoring customer trading activity.
Sherwood Securities and Equitrade conduct substantially all their
principal trading activities through broker-dealers based in the New York
Metropolitan area. At May 31, 1998, 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, 1998 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 and NDB 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-16
<PAGE>
NATIONAL DISCOUNT BROKERS 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 and NDB execute all customer transactions
through a clearing broker and do not maintain custody of customer funds
or securities. Sherwood Securities and NDB were in compliance with the
conditions of this exemption during the years ended May 31, 1998, 1997
and 1996.
(6) Furniture, Fixtures, Equipment and Leasehold Improvements
Furniture, fixtures, equipment and leasehold improvements consisted of
the following:
<TABLE>
<CAPTION>
May 31,
1998 1997
<S> <C> <C>
Furniture, fixtures and equipment $ 26,325,316 24,890,286
Leasehold improvements 3,518,709 3,047,594
------------- -------------
29,844,025 27,937,880
Less accumulated depreciation
and amortization 11,832,763 7,674,370
------------- -------------
$ 18,011,262 20,263,510
============= =============
</TABLE>
(7) Acquisition of SHD Corporation (Formerly Dresdner-NY Incorporation)
On May 2, 1997, NDBG 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-17
<PAGE>
NATIONAL DISCOUNT BROKERS GROUP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(7), Continued
<TABLE>
<CAPTION>
(In thousands, except share data)
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 12,941,287 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, 1998 year end.
The current Federal, state and local income tax provisions for the years
ended May 31, 1998, 1997 and 1996 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, 1998, the Company had net deferred tax assets which
are primarily due to differences in reserves and expenses, allowable for
book and tax purposes. Management of the Company has not established a
valuation allowance because it concluded that it was more likely than not
that the benefit would be realized.
The provisions for income taxes included in the accompanying
consolidated statements of income are as follows:
<TABLE>
<CAPTION>
Years ended May 31,
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Federal:
Current $ 5,351,081 7,672,751 12,257,332
Deferred expense (benefit) 1,022,050 (1,203,645) -
------------ -------------- -------------
$ 6,373,131 6,469,106 12,257,332
========= ============== ==============
</TABLE>
F-18
<PAGE>
NATIONAL DISCOUNT BROKERS GROUP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(8), Continued
<TABLE>
<CAPTION>
Years ended May 31,
1998 1997 1996
<S> <C> <C> <C>
State and local:
Current $ 2,069,575 3,699,618 3,005,744
Deferred expense (benefit) 915,536 (1,016,827) -
------------ -------------- ------------
2,985,111 2,682,791 3,005,744
------------ -------------- -------------
$ 9,358,242 9,151,897 15,263,076
============ ============== =============
Discontinued operations:
Federal:
Current expense (benefit) $ (214,648) (447,340) 109,299
------------ -------------- ------------
State and local:
Current expense (benefit) (13,934) 7,424 26,802
------------ -------------- ------------
$ (228,582) (439,916) 136,101
============ ============== ============
</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:
<TABLE>
<CAPTION>
Years ended May 31,
1998 1997 1996
<S> <C> <C> <C>
Statutory provision on pretax income $ 6,802,535 6,750,323 12,325,976
State and local taxes, net of Federal tax 1,940,322 1,743,814 1,953,734
Tax effect of meals and entertainment
and club dues 124,804 242,785 193,967
Other - net 490,581 414,975 789,399
------------- ------------- --------------
Income tax provision $ 9,358,242 9,151,897 15,263,076
============= ============= ==============
</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,
1999 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.
On October 1, 1997, Equitrade entered into a $500,000 subordination
agreement. Such note is due on October 1, 1998 and contains a yearly
automatic roll-over provision. In connection with this agreement, the
lender pledged treasury securities with a market value in excess of
$500,000.
F-19
<PAGE>
NATIONAL DISCOUNT BROKERS GROUP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(10) Common Stock and Stock Options
(a) 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. On October 21, 1997, the stockholders of the Company
approved an amendment to the 1995 Plan to increase by 420,000 the
number of shares of the Company's common stock for which options
and stock appreciation right may be granted thereunder from
767,200 shares to 1,187,200 shares. The Compensation Committee,
pursuant to the 1995 Plan, has issued to employees exercising
options under the 1983 Plan and the 1995 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,
reload options granted under the 1995 Plan have provided for
vesting six months after the date of grant. Other options granted
under the 1995 Plan have provided for vesting over three years
after the date of grant. At May 31, 1998, 163,930 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,
1998:
<TABLE>
<CAPTION>
Optioned shares
Number of Exercise price
shares per share
<S> <C> <C>
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
Options exercised (294,758) 7.9375 - 10.125
Options granted - reload 255,450 12.1875 - 13.25
Options granted - original 276,150 13.50
Options cancelled (68,214) 8.625 - 13.50
------------- ------------------
Balance at May 31, 1998 634,485 $ 8.8125 - 13.50
============= ==================
</TABLE>
(b) 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, 1998, 1997 and 1996,
respectively: dividend yield of 0%, 0% and 0%, expected volatility
of 37.00%, 34.49% and 37.28%, risk-free interest rate ranging from
4.92% to 6.50%, 4.92% to 6.50% and 4.92% to 5.54%, and expected
lives of 3 years.
F-20
<PAGE>
NATIONAL DISCOUNT BROKERS GROUP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(10), Continued
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.
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, 1998 and 1997:
<TABLE>
<CAPTION>
Years Ended May 31
--------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
As reported $ 11,960,319 9,279,693 20,131,928
Fair value of options on grant
date as compensation expense (672,646) (346,631) (362,666)
-------------- ------------ --------------
Proforma $ 11,287,673 8,933,062 19,769,262
============== ============ ==========
Net income per common share:
Basic:
As reported $ 0.89 0.72 1.59
Fair value of options on grant
date as compensation expense (0.05) (0.03) (0.03)
------ ------- -----
Proforma $ 0.84 0.69 1.56
====== ======= =====
Diluted:
As reported 0.89 0.72 1.52
Fair value of options on grant
date as compensation expense (0.05) (0.03) (0.02)
------ ------- -----
Proforma $ 0.84 0.69 1.50
====== ======= =====
</TABLE>
F-21
<PAGE>
NATIONAL DISCOUNT BROKERS GROUP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(10), Continued
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.
The weighted-average fair value of options granted under the 1995
Plan during the year ended May 31, 1998 was $11.02. The average
remaining contractual life of the options outstanding at May 31,
1998 was approximately 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, 1998, SGI and the Chief Executive Officer of the
Company are the beneficial owners of approximately 28% and 20%,
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, 1998 and 1997 are notes and
interest due from officers of the Company amounting to approximately
$339,000 and $379,000, respectively.
The Company has, from time to time, entered 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, 1998, no such borrowings are
outstanding.
On December 8, 1997, the Company sold 1,500,000 shares of its treasury
common stock to IAT Reinsurance Syndicate Ltd., an affiliate of Peter A.
Kellogg. Prior to this acquisition, Mr. Kellogg beneficially owned
1,025,000 shares of common stock and is a partner of SGI.
(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 National Discount Brokers Group, Inc. For the years ended
May 31, 1998, 1997 and 1996, there were discretionary Company
contributions to the Plan of $82,013, $63,699 and $48,029, respectively,
which are included in compensation and benefits in the accompanying
consolidated statements of income.
F-22
<PAGE>
NATIONAL DISCOUNT BROKERS GROUP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(12), Continued
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. In July 1997, Equitrade formed a second plan, the Equitrade
Discretionary Contribution Plan, whereby Equitrade contributes an
additional 3% of the employee's compensation for all employees regardless
of whether the employee participates in the Equitrade Partners 401(k)
Savings Plan. To be eligible, the employee must complete six months of
service. Vesting is 20% per year for each of 5 years. For the years ended
May 31, 1998, 1997 and 1996, Equitrade contributed a total of $165,780,
$46,749, and $43,011, respectively.
(13) Discontinued Operations
Pursuant to Accounting Principles Board Opinion ("APB") No. 30,
"Reporting the Results of Operations Reporting the Effects of Disposal of
a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions, " the consolidated financial
statements of the Company have been reclassified to reflect the
dispositions of MXNet and Sherwood Securities AMEX specialist business.
On February 13, 1998, NDBG sold 100% of the common stock of its
subsidiary, MXNet, to IPC Information Systems, Inc. for cash proceeds
amounting to $6,600,000. In addition, during February 1998, Sherwood
Securities sold its AMEX specialist business for $325,000, which was
subsequently received in March 1998. The aggregate net gain on the
aforementioned sales was $2,704,000, net of $2,353,000 of applicable
income taxes and other expenses directly related to the sales. Revenues
and expenses for the year ended May 31, 1998, applicable to these
discontinued operations were $1,324,114 and $2,374,035, respectively; for
the year ended May 31, 1997 were $733,762 and $2,028,724, respectively;
and for the year ended May 31, 1996 were $1,075,021 and $760,989,
respectively.
(14) Net Capital Requirements
Sherwood Securities, NDB and Equitrade are subject to the SEC Uniform Net
Capital Rule 15c3-1 (the "Rule"), which requires the maintenance of
minimum net capital. As of May 31, 1998, Sherwood Securities had
regulatory net capital of approximately $36,739,000, or approximately
$35,739,000 in excess of required net capital, NDB had regulatory net
capital of approximately $3,818,000, or approximately $3,568,000 in
excess of required net capital and Equitrade had regulatory net capital
of approximately $30,152,000, or approximately $29,902,000 in excess of
required net capital.
The Rule also provides that equity capital may not be withdrawn or cash
dividends paid if the resulting net capital of a broker-dealer would be
less than the amount required under the Rule.
F-23
<PAGE>
NATIONAL DISCOUNT BROKERS GROUP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(14), Continued
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.
(15) 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.
Commitments for minimum lease payments under non-cancelable operating
leases as of May 31, 1998 are as follows, exclusive of escalation
charges:
<TABLE>
<CAPTION>
Fiscal year ending May 31,
<S> <C>
1999 $ 2,191,000
2000 2,098,000
2001 2,202,000
2002 2,197,000
2003 2,079,000
Thereafter 10,026,000
-------------
$ 20,793,000
</TABLE>
The Company has free rent periods which are being amortized over the
lives of the leases.
Included in occupancy costs and equipment rental expenses are office
rental expenses of approximately $2,255,000, $2,535,000 and $2,729,000
for the years ended May 31, 1998, 1997 and 1998, respectively.
NDBG has had employment contracts with Arthur Kontos as the Chief
Executive Officer of NDBG ("CEO") commencing on January 1, 1993. During
December 1995, the CEO exercised his option to extend his then current
contract until May 31, 1997. NDBG entered into a new employment contract
with the CEO, with a term commencing June 1, 1997 and ending on May 31,
2000 with certain rights of extension of the term and earlier
termination. Remuneration under these contacts consisted of base salary
and a cash bonus based on the Company's Income. Income is defined as
consolidated income before taxes and the payment or accrual of the CEO's
annual cash bonus. The annual cash bonus was equal to
F-24
<PAGE>
NATIONAL DISCOUNT BROKERS GROUP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(15), Continued
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. Commencing with the
fiscal year ended May 31, 1997, the CEO's cash bonus is paid pursuant to
The Sherwood Group, Inc. 1996 CEO Bonus Plan (the "CEO Plan"). The CEO
Plan provides for an annual cash bonus payout equal to 10% of the first
$10,000,000 of income (as defined) and 15% of income over $10,000,000.
Included in accounts payable and accrued liabilities is approximately
$1,836,000, $1,251,000 and $3,897,000 due to the CEO at May 31, 1998,
1997 and 1996, respectively. In connection with these agreements and the
CEO Plan, approximately $2,724,000, $3,061,000 and $6,137,000 is
reflected in compensation and benefits for the years ended May 31, 1998,
1997 and 1996, respectively. Additionally, for the year ended May 31,
1998, $755,000 has been netted against the gain on sale of discontinued
operations as reflected on the accompanying statements of income.
During the fiscal year ended May 31, 1997, NDBG 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. The Executive Plan was terminated
by Company's Board of Directors during the year ended May 31, 1998,
effective June 1, 1997. Bonuses for the Company's executives are to be
determined at the discretion of the Compensation Committee of the Board
of Directors. 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.
(16) 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-25
<PAGE>
NATIONAL DISCOUNT BROKERS GROUP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(16), 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"). 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 is defined as the 35 NASDAQ ("National
Association of Securities Dealers Automated Quotations") market-maker
defendants' total number of shares traded as market-makers in the Class
Securities (a designated list of NASDAQ securities) during the period
from May 1, 1989 to May 27, 1994. Sherwood Securities' agreed market
share of the Defendants' Market was set in the Settlement Agreement, as
amended, at 2.10% which resulted in a total principal payment obligation
of $9,187,500. The Settlement Agreement provided 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 of $4,926,797, including $333,047 of interest, was paid
on April 9, 1998. The 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
Settlement Agreement. The Settlement Agreement has been preliminarily
approved by the Court but is still subject to final approval.
In addition, Sherwood Securities' results for the year ended May 31,
1998, reflect a non-tax deductible charge to establish a reserve for the
SEC's investigation In the Matter of Certain Market Making Activities on
NASDAQ, HO-2974, based upon management's assessment of the status and
reasonably likely outcome of the investigation with respect to Sherwood
Securities.
(17) Quarterly Financial Information (Unaudited)
<TABLE>
<CAPTION>
(In thousands, except per common share data)
1998 First Second Third Fourth
---- ----- ------ ----- ------
<S> <C> <C> <C> <C>
Revenues $ 40,420 42,535 37,691 43,802
Expenses 33,963 36,410 32,770 36,103
Minority interest (1,142) (2,009) (1,363) (1,252)
-------- --------- --------- --------
Income from continuing
operations before taxes $ 5,315 4,116 3,558 6,447
======== ========= ========= ========
Loss from operations of
discontinued operations $ (238) (228) (355) -
======== ========= ========= =======
Gain on sale of discontinued
operations $ - - 2,704 -
======== ========= ========= =======
</TABLE>
F-26
<PAGE>
NATIONAL DISCOUNT BROKERS GROUP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(17), Continued
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Net income $ 2,708 2,087 4,221 2,944
======== ============= ============ ==============
Net income per common
share - Basic $ .21 .16 .30 .21
======== ======== ========= ========
Net income per common
share - Diluted $ .21 .16 .30 .21
======== =========== =========== ============
1997 First Second Third Fourth
---- ----- ------ ----- ------
Revenues $ 42,725 40,861 51,860 44,889
Expenses 36,577 34,230 49,011 36,904
Minority interest (14) (739) (2,114) 1,459)
-------- --------- --------- --------
Income from continuing
operations before taxes $ 6,134 5,892 735 6,526
======== ========= ========= ========
Loss from operations
of discontinued operations $ (87) (245) (288) (235)
======== ========= ========= ========
Net income (loss) $ 3,003 3,295 (242) 3,224
======== ========= ========= ========
Net income (loss) per
common share$ .23 .25 (.02) .25
========= ======= ======== ==========
1996 First Second Third Fourth
---- ----- ------ ----- ------
Revenues $ 39,453 34,955 46,995 57,707
Expenses 31,579 30,768 37,851 40,066
Minority interest (801) (486) (995) (1,347)
-------- --------- --------- --------
Income from continuing
operations before taxes $ 7,073 3,701 8,149 16,294
======== ========= ========= ========
Income (loss) from operations
of discontinued operations $ 57 (16) 30 107
======== ========= ========= ========
Net income$ 4,468 3,173 5,141 7,350
======== ============= ============ =============
Net income per common
share $ .33 .24 .39 .56
======= ============ ============= ============
</TABLE>
F-27
<PAGE>
NATIONAL DISCOUNT BROKERS GROUP, INC.
AND SUBSIDIARIES
Schedule I
Condensed Financial Statements
of the Registrant (Parent)
Statements of Financial Condition
May 31, 1998 and 1997
<TABLE>
<CAPTION>
Assets 1998 1997
---- ----
<S> <C> <C>
Cash $ 221,328 86,323
Receivables 14,117,784 637,220
Notes receivable 568,710 511,230
Investment securities available for sale, at market value 2,438,438 -
Investment securities not readily marketable 401,320 401,320
Investment in, less net amounts due to,
subsidiaries and affiliates 81,751,054 67,000,227
Investment in partnerships 13,775,483 11,842,014
Equipment, furniture and leasehold improvements - net 2,374 -
Intangible asset - net 20 130,873
Subordinated notes receivable 16,000,000 16,250,000
U.S. Treasury Obligations, held as collateral 5,223,882 5,481,820
Other assets 444,951 624,185
-------------- ---------------
Total assets $ 134,945,344 102,965,212
============== ===============
Liabilities and
Stockholders' Equity
Accounts payable, accrued expenses and other liabilities $ 4,212,703 5,113,478
Secured demand note payable 5,000,000 5,250,000
-------------- ---------------
9,212,703 10,363,478
Stockholders' equity:
Common stock 143,432 143,432
Retained earnings and other equity 125,589,209 92,458,302
-------------- ---------------
125,732,641 92,601,734
Total liabilities and stockholders' equity $ 134,945,344 102,965,212
============== ===============
</TABLE>
See accompanying notes to condensed financial statements.
S-1
<PAGE>
NATIONAL DISCOUNT BROKERS GROUP, INC.
AND SUBSIDIARIES
Schedule I, Continued
Condensed Financial Statements
of the Registrant (Parent)
Statements of Income
Years ended May 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Revenues:
Equity income in partnerships $ 5,852,353 6,163,136 5,546,428
Interest 1,980,535 1,446,341 1,101,129
Service fees paid by subsidiaries eliminated
in consolidation 4,233,345 5,640,015 4,675,000
Other 142,500 (5,346) 114,126
------------- -------------- -------------
12,208,733 13,244,146 11,436,683
------------- -------------- -------------
Expenses:
Compensation and benefits 4,016,895 4,675,853 7,408,107
Interest 35,033 - -
Other - net 1,299,167 1,403,486 403,816
------------- -------------- -------------
5,351,095 6,079,339 7,811,923
------------- -------------- -------------
6,857,638 7,164,807 3,624,760
Equity in income of subsidiaries 8,837,016 5,650,335 18,471,286
------------- -------------- -------------
Income from continuing operations
before income taxes 15,694,654 12,815,142 22,096,046
------------- -------------- -------------
Income taxes:
Currently payable (receivable):
Federal 2,238,245 2,626,612 2,108,345
State and local 592,528 780,488 (144,227)
------------- -------------- -------------
2,830,773 3,407,100 1,964,118
------------- -------------- -------------
Deferred payable (receivable):
Federal (104,224) 104,224 -
State and local 303,125 (303,125) -
------------- -------------- ------------
198,901 (198,901) -
------------- -------------- -------------
3,029,674 3,208,199 1,964,118
------------- -------------- --------------
Net income from continuing
operations 12,664,980 9,606,943 20,131,928
------------- -------------- -------------
Discontinued operations:
Discontinued operations (net) (727,116) - -
------------- -------------- ------------
Net income $ 11,937,864 9,606,943 20,131,928
============= ============== =============
</TABLE>
See accompanying notes to condensed financial statements.
S-2
<PAGE>
NATIONAL DISCOUNT BROKERS GROUP, INC.
AND SUBSIDIARIES
Schedule I, Continued
Condensed Financial Statements
of the Registrant (Parent)
Statements of Cash Flows
Years ended May 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income from continuing operations $ 12,664,980 9,606,943 20,131,928
Non-cash items included in net income:
Net equity in gain of subsidiaries (8,837,016) (5,650,335) (18,471,286)
Equity income in partnerships (5,852,353) (6,163,136) (5,546,428)
Loss on sale of subsidiary - 123,006 -
Depreciation and amortization 144,494 265,658 207,877
Allocated tax benefit related to the
exercise of options - - 4,490,000
Decrease (increase) in operating assets:
Receivables (13,480,564) 4,298,488 (4,816,300)
U.S. Treasury obligations, held as collateral 257,938 (52,141) (5,154,471)
Other assets 179,234 (258,429) 4,879,003
(Decrease) increase in operating liabilities:
Accounts payable and accrued expenses (3,464,080) (3,731,976) 1,344,002
--------------- --------------- --------------
Net cash used in
operating activities (18,387,367) (1,561,922) (2,935,675)
--------------- --------------- --------------
Cash flows from investing activities:
Investment in partnerships (444,068) (320,437) (242,790)
Distribution from partnerships 4,362,952 3,771,646 3,041,010
Loans made to employees and officers - (137,652) (1,622,765)
Principal collected on notes receivable 45,465 44,967 1,662,765
Purchase of subsidiaries, net of cash acquired - (15,763,434) -
Return of capital from subsidiary 3,538,554 2,409,659 -
Payment for purchase of identified
intangible asset - (188,780) -
Additional capital contributed to subsidiaries - - (25,100)
Issuance of subordinated notes - (6,000,000) -
Net cash (used in) / provided by
investing activities 7,502,903 (16,184,031) 2,813,120
--------------- --------------- ----------------
</TABLE>
S-3
<PAGE>
NATIONAL DISCOUNT BROKERS GROUP, INC.
AND SUBSIDIARIES
Schedule I, Continued
Condensed Financial Statements
of the Registrant (Parent)
Statements of Cash Flows, Continued
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Cash flows from financing activities:
Sale of treasury stock $ 19,267,500 (3,569,937) (2,061,876)
Purchase of treasury stock (614,281) - 635,000
Net receipts (disbursements) on intercompany
borrowings (7,633,750) 21,341,380 1,587,445
--------------- --------------- ---------------
Net cash provided by financing
activities 11,019,469 17,771,443 160,569
------------- ------------- -------------
Net increase in cash 135,005 25,490 38,014
Cash at beginning of year 86,323 60,833 22,819
------------- ------------- -------------
Cash at end of year $ 221,328 86,323 60,833
=========== =========== ============
</TABLE>
Supplemental disclosures of cash flow information:
Income tax payments aggregated $6,287,938, $14,077,485 and $5,732,131 for
the years ended May 31, 1998, 1997 and 1996, respectively.
Interest payments aggregated $35,033, $52,991 and $0 for the years ended May
31, 1998, 1997 and 1996, 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, 1998 and 1997, to Anvil Institutional
Services Company (the "Anvil Joint Venture").
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>
NATIONAL DISCOUNT BROKERS 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.
During September 1997, the Company sold all of the stock of its subsidiary,
Anvil Institutional Services, Inc., and received a note in the amount of
$102,945 which is due in December 1998.
During October 1997 and December 1997, certain executives of the Company
exercised an aggregate of 294,758 options for the purchase of 294,758 shares of
the Company's common stock with exercise prices ranging from $7.9375 per share
to $10.125 per share. In order to pay for the exercise price ($2,701,705) and to
reimburse the Company for the personal income taxes ($441,389) on the gain
related to the transaction, the executives remitted to the Company 255,450
shares of the Company's common stock with a market value of $3,143,094.
On December 8, 1997, the Company received net cash proceeds of $19,267,500 from
the sale of 1,500,000 shares of its common stock to IAT Reinsurance Syndicate
Ltd.
During February 1998, the Company sold the remaining net assets of its
subsidiary, MXNet, Inc., and received a promissory note for $6,600,000 with
interest accrued at 6% from the date of sale. The note was repaid in full in
April 1998.
During February 1998 and March 1998, certain available-for-sale securities held
by the Company and by its subsidiaries appreciated due to the entities'
successful initial public offerings. As such, the Company has reflected these
securities at fair market value on the consolidated statements of financial
condition. The unrealized gain of $2,615,000 associated with marking these
securities to fair market value is reflected as part of stockholders' equity on
the statements of financial condition.
See accompanying notes to condensed financial statements.
S-5
<PAGE>
NATIONAL DISCOUNT BROKERS GROUP, INC.
AND SUBSIDIARIES
Schedule I, Continued
Condensed Financial Statements
of the Registrant (Parent)
Notes to Condensed Financial Statements
May 31, 1998, 1997 and 1996
(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, 1999. 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, 1999. 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 was 7.25% for the year. 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, 1998, 1997 and 1996.
S-6
<PAGE>
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934 the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Dated: August 7, 1998 NATIONAL DISCOUNT BROKERS 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>
James H. Lynch, Jr. Chairman of the Board August 7, 1998
- -----------------------
James H. Lynch, Jr.
/s/ Arthur Kontos Director and Chief August 7, 1998
- -----------------
Arthur Kontos Executive Officer
/s/ Richard J. Marino Director August 7, 1998
- ---------------------
Richard J. Marino
/s/ Dennis V. Marino Director August 7, 1998
- --------------------
Dennis V. Marino
/s/ Carl H. Hewitt Director August 7, 1998
- ------------------
Carl H. Hewitt
/s/ Thomas Neumann Director August 7, 1998
- ------------------
Thomas Neumann
/s/ John P. Duffy Director August 7, 1998
- -----------------
John P. Duffy
/s/ Ralph Del Deo Director August 7, 1998
- -----------------
Ralph Del Deo
/s/ Stephen DiLascio Director August 7, 1998
- --------------------
Stephen DiLascio
</TABLE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Description of Document SEC Exhibit Document
<S> <C> <C>
3.1 Restated Certificate of Incorporation of the Incorporated by reference to Exhibit 3.1 to the
Company. 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.
3.3 Amendment to the Company's Restated Certificate of Incorporated by reference to Exhibit 4.3 to the
Incorporation. Company's Registration Statement on Form S-8, file
number 333-41819 filed on December 9, 1997 (the
"December 1997 Form S-8").
3.4 Amendment to Restated Certificate of Incorporation, Incorporated by reference to Exhibit A to the
as amended Company's Proxy Statementas amended.
dated November 12, 1997.
3.5 Restated Certificate of Incorporation, as amended. Incorporated by reference to Exhibit 3.3 to the Company's
Form 10-Q for the quarter end November 30, 1997 (the
"November 1997 Form 10-Q").
3.6 Amendment to the Company's By-laws. Incorporated by reference to Exhibit 3.5 to the
November 1997 Form 10-Q.
3.7 By-laws of the Company, as amended. Incorporated by reference to Exhibit 4.4 to the
December 1997 Form S-8.
4.1 Registration Rights Agreement between the Company Incorporated by reference to Exhibit 4 to the
and IAT dated as of January 29, 1998. Company's Form 8-K dated January 29, 1998.
10.1 Clearing Agreement dated February 16, 1983 between Incorporated by reference to Exhibit 10.7 to the
Spear Leeds & Kellogg and Sherwood Securities. Initial Registration Statement.
10.2 Agreement of Lease dated December, 1985 between Incorporated by reference to Exhibit 10.8 to the
Aetna Life Insurance Company and Sherwood Initial Registration Statement.
Securities Corp.
10.3 The Company's Employee Stock Ownership Plan as Incorporated by reference to Exhibit 10.9 to the
amended. 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. Incorporated by reference to Exhibit 10.5 to the
Company's Form 10-K for the Fiscal Year ended May
31, 1997 (the "1997 Form 10-K").
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 Incorporated by reference to Exhibit 10.7 to the
Stock Option Plan. 1997 Form 10-K.
10.8 Employment Agreement dated September 12, 1995 by Incorporated by reference to Exhibit 10.1 of Form
and between Arthur Kontos and the Company. 10-Q for the quarter ended November 30, 1995.
10.9 Employment Agreement dated as of May 31, 1997 by Incorporated by reference to Exhibit 10.9 to the
and between Arthur Kontos and the Company. 1997 Form 10-K.
10.10 Letter of Arthur Kontos exercising his option under Incorporated by reference to Exhibit 10.2 to Form
the Employment Agreement dated September 12, 1995. 10-Q for the quarter ended November 30, 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 among Incorporated by reference to Exhibit 10.6 to the
the Company, Thomas Neumann and Geralyn Neumann. Form 10-K for Fiscal Year ended May 31, 1993.
10.13 Secured Note and Pledge Agreement dated July 23, Incorporated by reference to Exhibit 10.13 to the
1997 among the Company, Thomas Neumann and Geralyn 1997 Form 10-K.
Neumann.
10.14 Voting Trust Agreement between Arthur Kontos and Incorporated by reference to Exhibit 10.7 to Form
Vicki Kontos dated May 11, 199. 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 Form
Connecticut General Life Insurance Company and 10-K for Fiscal Year ended May 31, 1994.
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.
10.16 Exhibit 10.13 Sublease Agreement between Johnson & Incorporated by reference to Exhibit 10.2 of Form
Higgins and Triak Services Corp. 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 Form
Johnson & Higgins and NY Broad Holdings, Inc. 10-K for Fiscal Year ended May 31, 1996.
10.18 Stock Purchase Agreement dated as of April 11, 1997 Incorporated by reference to Exhibit (b) to Form
between Dresdner Bank A.G. and the Company. 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 Form
between S.P.N.W. Management Associates Limited 10-Q for the quarter ended November 30, 1994.
Partnership and Sherwood Securities Corp.
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. Incorporated by reference to Exhibit 10.23 to the
1997 Form 10-K.
10.24 Equitrade Partners Amended and Restated Partnership Incorporated by reference to Exhibit 10.24 to the
Agreement dated as of May 2, 1997. 1997 Form 10-K.
10.25 Stock Purchase Agreement between The Sherwood Incorporated by reference to Exhibit 10 to Form
Group, Inc. and IAT Reinsurance Syndicate Ltd. 8-K dated December 5, 1997.
10.26 Resolution of the Board of Directors of the Company Incorporated by reference to Exhibit 10.1 to the
terminating The Sherwood Group, Inc. 1996 Executive November 1997 Form 10-Q.
Incentive Award Plan.
10.27 The Sherwood Group, Inc. 1995 Stock Option Plan, as Incorporated by reference to Exhibit 4.1 to the
amended. December 1997 Form S-8.
10.28 Stock Purchase Agreement dated as of February 13, Incorporated by reference to Exhibit 10 to the 1998
between MXNet, Inc., the Company and IPC Company's Form 10-Q for the quarter ended February
Information Systems, Inc. 28, 1998.
11. Statement re: computation of per share earnings. Filed herewith.
21. Subsidiaries of the Company Incorporated by reference to Exhibit 21 to the
1997 Form 10-K.
23. Consent of Independent Public Accountant. Filed herewith.
27. Financial Data Schedule. Filed herewith.
99.1 Secured Demand Note Collateral Agreement and Incorporated by reference to Exhibit 99.1 to Form
Amendment to Secured Demand Note Collateral 8-K dated February 28, 1995.
Agreement.
99.2 Secured Demand Note in the principal amount of Incorporated by reference to Exhibit 99.2 to Form
$5,000,000. 8-K dated February 28, 1995.
99.3 Roll-Over Equity Investment dated February 15, 1995 Incorporated by reference to Exhibit 99.3 to Form
in the principal amount of $5,000,000 related to 8-K dated February 28, 1995.
the Secured Demand Note.
99.4 Cash Subordination Agreement dated as of February Incorporated by reference to Exhibit 99.4 to Form
15, 1995 and Amendment to Cash Subordination 8-K dated February 28, 1995.
Agreement.
99.5 Roll-Over for Equity Investment dated February 15, Incorporated by reference to Exhibit 99.5 to Form
1995 in the principal amount of $5,000,000 related 8-K dated February 28, 1995.
to the Cash Subordination Agreement.
99.6 Form of Indemnification Agreement to be entered Incorporated by reference to Exhibit 99.1 to Form
into between the Company and each of certain of its 8-K dated September 18, 1995.
executive officers and directors.
99.7 Press release dated January 29, 1998. Incorporated by reference to Exhibit 99(a) to Form
8-K dated January 29, 1998.
</TABLE>
EXHIBIT 11
NATIONAL DISCOUNT BROKERS GROUP, INC.
AND SUBSIDIARIES
Computation of Earnings Per Common Share
Years ended May 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Net income from continuing operations $ 10,077,573 10,134,739 19,953,997
Discontinued operations (net) 1,882,746 (855,046) 177,931
Net income $ 11,960,319 9,279,693 20,131,928
Net income per common share Basic:
Net income from continuing operations $ .75 .79 1.57
Discontinued operations, (net) .14 (.07) .02
Net income $ .89 .72 1.59
Diluted:
Net income from continuing operations $ .75 .79 1.51
Discontinued operations, (net) .14 (.07) .01
Net income $ .89 .72 1.52
Historical:
Weighted average number of
common stock and common stock
equivalents outstanding:
Basic 13,432,726 12,890,926 12,699,428
Diluted 13,501,346 12,946,007 13,201,412
</TABLE>
<PAGE>
EXHIBIT 23
Independent Auditors' Consent
The Board of Directors and Stockholders of
National Discount Brokers Group, Inc.:
We consent to the use of our report dated July 15, 1998 incorporated by
reference in Registration Statement No. 33-72790 on Form S-8 filed with the
Securities and Exchange Commission on December 13, 1994.
KPMG Peat Marwick LLP
New York, New York
August 7, 1998
<PAGE>
<TABLE> <S> <C>
<ARTICLE> BD
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements for the year ended May 31, 1998 and is qualified in
its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAY-31-1998
<PERIOD-START> JUN-01-1997
<PERIOD-END> MAY-31-1998
<CASH> 1,039,121
<RECEIVABLES> 72,730,016
<SECURITIES-RESALE> 0
<SECURITIES-BORROWED> 0
<INSTRUMENTS-OWNED> 67,969,111
<PP&E> 18,011,262
<TOTAL-ASSETS> 188,473,614
<SHORT-TERM> 0
<PAYABLES> 21,392,539
<REPOS-SOLD> 0
<SECURITIES-LOANED> 0
<INSTRUMENTS-SOLD> 28,687,486
<LONG-TERM> 3,500,000
0
0
<COMMON> 143,432
<OTHER-SE> 125,284,416
<TOTAL-LIABILITY-AND-EQUITY> 188,473,614
<TRADING-REVENUE> 99,776,365
<INTEREST-DIVIDENDS> 7,773,383
<COMMISSIONS> 52,993,869
<INVESTMENT-BANKING-REVENUES> 0
<FEE-REVENUE> 3,567,837
<INTEREST-EXPENSE> 798,949
<COMPENSATION> 54,170,954
<INCOME-PRETAX> 19,435,815
<INCOME-PRE-EXTRAORDINARY> 11,960,319
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,960,319
<EPS-PRIMARY> 0.89
<EPS-DILUTED> 0.89
</TABLE>
