January 13, 1998
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: National Discount Brokers Group, Inc.
Report on Form 10-Q for the Six Months Ended November 30, 1997
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-Q for the six
months ended November 30, 1997 including financial statements and exhibits.
Thank you for your attention to this matter.
Very truly yours,
/s/ Denise Isaac
Denise Isaac
Chief Financial Officer and
Principal Accounting Officer
CONFORMED
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended November 30, 1997
OR
[ ] Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the transition period from to
-------------- -------------
Commission file number 1-9480
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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 No.)
10 Exchange Place Centre, Jersey City, New Jersey 07302
- ----------------------------------------------------------------------------
(Address of principal executive offices) (Zip code)
The Sherwood Group, Inc.
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
---- ----
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
12,733,973 shares of Common Stock, par value $.01 per share, were outstanding
on December 31, 1997.
NATIONAL DISCOUNT BROKERS GROUP, INC. AND SUBSIDIARIES
INDEX
PAGE
--------
Part I - Financial Information
Item 1. - Financial Statements
Consolidated Statements of Financial Condition -
November 30, 1997 (Unaudited) and May 31, 1997 3
Consolidated Statements of Income (Unaudited) -
Three Months and Six Months Ended November 30, 1997 and 1996 4
Consolidated Statements of Cash Flows (Unaudited) -
Six Months Ended November 30, 1997 and 1996 5 - 6
Notes to Consolidated Financial Statements (Unaudited) -
November 30, 1997 7 - 8
Item 2. - Management's Discussion and Analysis of
Financial Condition and Results of Operations 9 - 13
Part II - Other Information
Item 2. - Changes in Securities and Use of Proceeds 13
Item 4. - Submission of Matters to a Vote of Security Holders 13 - 14
Item 6. - Exhibits and Reports on Form 8-K 14
Signatures 15
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
<TABLE>
NATIONAL DISCOUNT BROKERS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<CAPTION>
November 30,
1997 May 31,
ASSETS (Unaudited) 1997
------------------- ------------------
<S> <C> <C>
Cash $ 1,208,317 3,033,818
Funds segregated for customers - 29,203
Receivables:
Brokers and dealers 47,965,095 58,047,183
Other 743,997 599,725
Securities owned, at market value 53,943,315 45,696,436
Investment securities not readily marketable, at fair value 501,320 501,320
Investment in partnerships 13,484 12,984
Notes receivable 870,247 830,589
Furniture, fixtures, equipment, and leasehold improvements - at
cost, net of accumulated depreciation and amortization of $9,952,457
at November 30, 1997 and $7,674,370 at May 31, 1997 20,247,101 20,263,511
Computer software - at cost, net of accumulated amortization of
$812,054 at November 30, 1997 and $929,942 at May 31, 1997 2,625,728 1,853,693
Identified intangible assets, net of accumulated amortization of
$968,374 at November 30, 1997 and $535,853 at May 31, 1997 6,295,437 6,727,958
Exchange memberships (market value $9,035,000 at November 30,
1997 and $7,957,750 at May 31, 1997) 7,416,496 7,416,496
U.S. Treasury Obligations, held as collateral 7,740,226 7,815,254
Subordinated notes receivable 3,500,000 3,000,000
Deferred tax asset (net of valuation allowance) 2,129,165 2,220,472
Other assets 1,314,655 2,112,083
------------------- ------------------
$ 156,514,583 $ 160,160,725
=================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Securities sold, not yet purchased, at market value $ 18,413,953 $ 25,129,290
Accounts payable and accrued expenses, including
compensation payable to officers and employees of
$9,496,452 at November 30, 1997 and $11,831,551
at May 31, 1997 26,848,383 31,734,213
Secured demand notes payable 3,500,000 3,000,000
Income taxes payable 1,282,493 302,501
Minority interest in Equitrade 9,456,208 7,720,236
------------------- ------------------
Total liabilities 59,501,037 67,886,240
------------------- ------------------
Commitments and contingencies (Note 4)
Stockholders' equity (Note 5):
Preferred stock - $.01 par value;
authorized 1,000,000 shares; none issued - -
Class A common stock - $.01 par value;
authorized 50,000,000 shares; none issued - -
Common stock - $.01 par value; authorized
50,000,000 shares; issued 14,343,201 shares 143,432 143,432
Additional paid-in capital 57,893,222 57,189,985
Retained earnings 52,011,598 47,215,833
------------------- ------------------
110,048,252 104,549,250
Less: Treasury stock - at cost, 1,618,577 shares at
November 30, 1997 and 1,648,536 shares at May 31, 1997 (13,034,706) (12,274,765)
------------------- ------------------
Total stockholders' equity 97,013,546 92,274,485
------------------- ------------------
$ 156,514,583 $ 160,160,725
=================== ==================
</TABLE>
The accompanying notes are an integral part of these statements.
(3)
NATIONAL DISCOUNT BROKERS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended November 30, Six Months Ended November 30,
--------------------------------------- --------------------------------
1997 1996 1997 1996
------------------- ------------------ ----------------- --------------
Revenues:
<S> <C> <C> <C> <C>
Firm securities transactions - net $ 26,169,781 $ 26,755,037 $ 50,096,225 $ 56,438,552
Commission income 9,590,738 8,056,241 19,293,445 15,752,392
Floor brokerage income 4,130,485 3,435,834 8,409,483 6,374,138
Equity loss in partnerships - (3,492) 500 (15,332)
Interest income 1,883,830 1,922,670 3,783,846 3,918,229
Fee income 777,852 662,010 1,536,187 1,088,598
Other revenues 397,610 226,835 567,684 488,306
------------------- ------------------ ----------------- --------------
42,950,296 41,055,135 83,687,370 84,044,883
------------------- ------------------ ----------------- --------------
Expenses:
Compensation and benefits 13,491,125 13,452,795 26,233,522 28,477,133
Clearing and related charges 15,197,931 13,835,379 28,785,213 27,946,252
Communications 2,708,409 2,867,614 5,254,591 5,752,803
Depreciation and amortization 1,979,700 1,053,189 3,787,004 2,024,233
Occupancy costs and equipment rental 637,380 709,092 1,263,348 1,401,540
Other expenses 3,002,688 2,769,074 6,091,821 5,968,726
Interest expense 168,945 61,857 384,023 133,598
------------------- ------------------ ----------------- --------------
37,186,178 34,749,000 71,799,522 71,704,285
------------------- ------------------ ----------------- --------------
Income before minority interest and income taxes 5,764,118 6,306,135 11,887,848 12,340,598
Income of Equitrade allocated to
minority partners (2,008,746) (739,360) (3,150,153) (752,960)
------------------- ------------------ ----------------- --------------
Income before income taxes 3,755,372 5,566,775 8,737,695 11,587,638
------------------- ------------------ ----------------- --------------
Income taxes:
Federal, currently payable 1,248,049 1,481,877 2,773,019 3,579,127
State and local, currently payable 435,260 789,613 1,077,604 1,710,185
------------------- ------------------ ----------------- --------------
Total current income tax expense 1,683,309 2,271,490 3,850,623 5,289,312
------------------- ------------------ ----------------- --------------
Federal, deferred (6,624) - 63,717 -
State and local, deferred (8,106) - 27,590 -
------------------- ------------------ ----------------- --------------
Total deferred income tax expense (14,730) - 91,307 -
------------------- ------------------ ----------------- --------------
Total income taxes 1,668,579 2,271,490 3,941,930 5,289,312
------------------- ------------------ ----------------- --------------
Net income $ 2,086,793 $ 3,295,285 $ 4,795,765 $ 6,298,326
=================== ================== ================= ==============
Net income per common and common equivalent share (a):
Net income $ 0.16 $ 0.25 $ 0.37 $ 0.48
=================== ================== ================= =============
Weighted average common shares outstanding 12,793,369 13,028,509 12,816,683 13,039,467
=================== ================== ================= =============
<FN>
(a) For presentation purposes, primary and fully diluted are identical.
</FN>
</TABLE>
The accompanying notes are an integral part of these statements.
(4)
NATIONAL DISCOUNT BROKERS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended November 30,
---------------------------------------
1997 1996
------------------- ------------------
Cash flows from operating activities:
<S> <C> <C>
Net income $ 4,795,765 $ 6,298,326
Non-cash items included in net income:
Equity (income) loss in partnerships (500) 15,332
Depreciation and amortization 3,787,004 2,024,233
Income of Equitrade allocated to minority partners 3,150,153 752,960
Provision for deferred taxes 91,307
(Increase) decrease in operating assets:
Funds segregated for customers 29,203 -
Receivables:
Brokers and dealers 10,082,088 29,314,980
Other (144,272) (20,911)
Securities owned, at market value (8,246,879) (19,320,967)
U.S. Treasury Obligations, held as collateral 75,028 (123,624)
Other assets (net of deposits made on furniture, fixtures
and equipment, and leasehold improvements) 723,300 358,750
Increase (decrease) in operating liabilities:
Securities sold, not yet purchased, at market value (6,715,337) (765,328)
Accounts payable and accrued expenses (5,173,169) (2,957,716)
Income taxes payable 1,255,625 (3,174,661)
------------------- ------------------
Net cash provided by operating activities 3,709,316 12,401,374
------------------- ------------------
Cash flows from investing activities:
Purchase of investment securities not readily marketable - (100,000)
Loans made - (100,275)
Principal collected on notes receivable 63,287 71,154
Purchases of furniture, fixtures and
equipment, and leasehold improvements (2,902,059) (2,508,625)
Deposits made on furniture, fixtures and equipment,
and leasehold improvements (73,815) (4,657,796)
Purchases of computer software (1,208,049) (201,755)
Purchase of exchange membership - (1,450,000)
Issuance of subordinated note - (500,000)
------------------- ------------------
Net cash used in investing activities (4,120,636) (9,447,297)
------------------- ------------------
</TABLE>
(Continued)
(5)
NATIONAL DISCOUNT BROKERS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Continued)
<TABLE>
<CAPTION>
Six Months Ended November 30,
---------------------------------------
1997 1996
------------------- ------------------
Cash flows from financing activities:
<S> <C> <C>
Purchase of treasury stock - (1,556,160)
Capital contributions by minority interest 50,000 -
Capital withdrawals by minority interest (1,464,181) (1,044,000)
------------------- ------------------
Net cash used in financing activities (1,414,181) (2,600,160)
------------------- ------------------
Net increase in cash (1,825,501) 353,917
Cash at beginning of period 3,033,818 470,313
------------------- ------------------
Cash at end of period $ 1,208,317 $ 824,230
=================== ==================
</TABLE>
Supplemental disclosure of non-cash investing and financing activities:
During September 1997, the Company sold the remaining net assets 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, certain executives of the Company exercised an aggregate
of 237,274 options for the purchase of 237,274 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 ($2,194,323) and to reimburse
the Company for the personal income taxes ($332,337) on the gain related to
the transaction, the executives remitted to the Company 207,315 shares of the
Company's common stock with a market value of $2,526,660.
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.
In connection with the closing of NDB's branch offices as of October 31, 1997,
the Company wrote off fixed assets with a net book value of $154,603.
The accompanying notes are an integral part of these statements.
(6)
NATIONAL DISCOUNT BROKERS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
November 30, 1997
Note 1 - Business and organization
National Discount Brokers Group, Inc. ("NDBG"), formerly The Sherwood
Group, Inc., and its subsidiaries (the "Company") are primarily engaged in the
securities business and in providing related financial services. (See "Note 7 -
Subsequent Events".) The Company has a principal registered broker-dealer wholly
owned subsidiary, Sherwood Securities Corp. ("Sherwood Securities"). Sherwood
Securities is also a specialist for securities listed on the American Stock
Exchange. National Discount Brokers ("NDB"), another registered broker-dealer,
is a division of the Company's wholly owned subsidiary, Triak Services Corp.
MXNet, Inc. ("MXNet"), another wholly owned subsidiary, delivers comprehensive
technical solutions to trading organizations. On January 24, 1997, the Company
acquired, from its joint venture partner, the remaining 51% of Anvil
Institutional Services Company (the "Anvil Joint Venture") that it did not
previously own. The Company, therefore, became the 100% owner of Anvil
Institutional Services Inc. ("Anvil"), a broker-dealer previously owned by the
Anvil Joint Venture.
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.
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.
Note 2 - Basis of presentation
The accompanying unaudited consolidated financial statements do not include
all of the information and notes required by generally accepted accounting
principles for complete consolidated financial statements. In the opinion of
management, all adjustments considered necessary for a fair presentation of
consolidated financial condition and results of operations for the periods
presented have been included. All adjustments are of a normal and recurring
nature. It is suggested that these consolidated financial statements be read in
conjunction with the consolidated financial statements and the related notes
included in the Company's 1997 Annual Report on Form 10-K. Certain prior year
amounts have been reclassified to conform to the three and six months ended
November 30, 1997 presentations.
Note 3 - Net income per common share
Net income per common share is computed using the weighted average number
of shares of common stock and common stock equivalents outstanding. Common stock
equivalents include stock issuable under stock options. The treasury stock
method of accounting was used in computing the common stock equivalents for the
computation of earnings per common share.
Note 4 - Commitments and contingencies
Certain significant legal proceedings and matters were previously disclosed
in Item 3, Legal Proceedings, of the Company's 1997 Annual Report on Form 10-K,
and the disclosures regarding such matters are incorporated herein by reference.
The Company's subsidiaries, and in some cases the Company, have been named as
defendants in lawsuits that allege violations of Federal and state securities
and related laws. Sherwood Securities has received additional
(7)
subpoenas in connection with the SEC's ongoing investigation In the Matter of
Certain Market Making Activities on NASDAQ, HO-2974. Sherwood Securities is
continuing to cooperate with the SEC's investigation. Although there can be no
assurance that such lawsuits and investigations involving the Company are not
likely to have a material, adverse effect on the results of operations of the
Company in any future period, depending in part on the results for such period,
based on information currently available, management of the Company believes
that any such lawsuits and investigations are not likely to have a material
adverse effect on the consolidated financial condition and results of operations
or liquidity of the Company in future periods.
Note 5 - Net capital requirements
As registered broker-dealers, Sherwood Securities, NDB and Equitrade are
subject to the Securities Exchange Act of 1934 Uniform Net Capital Rule 15c3-1
(the "Rule"). As of November 30, 1997, the net capital of Sherwood Securities,
NDB and Equitrade exceeded their required net capital by $20,989,000, $4,392,000
and $30,984,000, respectively. On July 10, 1997, SHD filed its notice of
withdrawal from registration as a broker-dealer with the SEC. As such, SHD is no
longer required to compute net capital.
The Rule also provides that equity capital may not be withdrawn or cash
dividends be paid if the resulting net capital of a broker-dealer would be less
than the amount required under the Rule. Accordingly, at November 30, 1997, the
payment of dividends and advances to the Company by Sherwood Securities, NDB and
Equitrade is limited to $20,789,000, $4,329,000 and $30,934,000, respectively,
under the most restrictive of these requirements. The SEC may, by order,
restrict the withdrawal of equity capital on a net basis if the SEC determines
that such withdrawal would be detrimental to the financial integrity of the
broker-dealer or the financial community.
Note 6 - New Accounting Pronouncement
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings per Share"
("Statement 128"), for periods ending after December 15, 1997. Statement 128
replaces the current standard used to calculate primary earnings per share,
Accounting Principles Board Opinion No. 15 ("APB 15"). Statement 128 requires a
calculation of basic earnings per share, as well as a dual presentation of basic
and diluted earnings per share on the face of the statement of income. Basic
earnings per share differs from primary earnings per share under APB 15 in that
dilution for common stock equivalents is excluded. Basic earnings per share
under Statement 128 for the three months ended November 30, 1997 and 1996 would
not have been materially different than primary earnings per share under APB 15.
Note 7 - Subsequent Events
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 Kellogg, will receive shares from the
Company's treasury stock. The transaction, which is expected to close no later
than February 1998 and which is subject to review under the Hart-Scott-Rodino
Antitrust Improvement Act of 1976, as amended, increases Mr. Kellogg's
beneficial ownership of the Company's common stock from approximately 8% to
17.8%. The proceeds of approximately $19,300,000 from the transaction, which
were received by the Company on December 8, 1997 and are expected to be used for
general corporate purposes and marketing activities to support the expansion of
NDB. While management of the Company believes the transaction will close as
scheduled, there can be no assurance that the transaction will be consummated.
If the transaction does not close, the Company must return the funds it has
received from IAT.
Effective December 15, 1997, the Company changed its name to National
Discount Brokers Group, Inc. as part of a strategic initiative to focus on its
NDB subsidiary. The name change will leverage NDB's core competencies in
Internet trading and financial services, as well as help fuel its expansion in
Internet commerce. The Company's ticker symbol on the NYSE also changed, from
"SHD" to "NDB", effective December 22, 1997.
(8)
Item - 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
The results of operations of National Discount Brokers Group, Inc.,
formerly The Sherwood Group, Inc., and its subsidiaries (the "Company"), for the
three and six months ended November 30, 1997 reflect primarily the activities of
Sherwood Securities Corp. ("Sherwood Securities"), National Discount Brokers
("NDB"), a division of the Company's subsidiary, Triak Services Corp. ("Triak")
and Equitrade Partners ("Equitrade"). Sherwood Securities is primarily engaged
in the securities business as a wholesale market maker in NASDAQ National Market
System and Small-Cap securities. NDB is a deep discount brokerage firm
specializing in trade execution for individual investors while Equitrade is a
registered specialist in equity securities on The New York Stock Exchange
("NYSE"). MXNet, Inc. ("MXNet"), another wholly owned subsidiary of the Company,
delivers comprehensive technical solutions to trading organizations.
On January 24, 1997, the Company acquired, from its joint venture partner,
the remaining 51% of Anvil Institutional Services Company (the "Anvil Joint
Venture") that it did not previously own. The Company, therefore, became the
100% owner of Anvil Institutional Services Inc. ("Anvil"), a broker-dealer
previously owned by the Anvil Joint Venture. 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.
The Company's consolidated net income for the three months ended November
30, 1997 was $2,087,000 compared to $3,295,000 for the three months ended
November 30, 1996. For the quarter ended November 30, 1997, Sherwood Securities
had a net loss of $383,000, compared to net income of $2,010,000 for the quarter
ended November 30, 1996 while NDB had net income of $997,000 for the quarter
ended November 30, 1997, compared to net income of $153,000 for the quarter
ended November 30, 1996. Equitrade had a net profit of $4,228,000 for the three
months ended November 30, 1997 (of which the Company's share, inclusive of that
earned by SHD, was $2,219,000) as compared to a net profit of $2,233,000 for the
three months ended November 30, 1996 (of which the Company's share was
$1,494,000).
The Company's consolidated net income for the six months ended November 30,
1997 was $4,796,000 compared to $6,298,000 for the six months ended November 30,
1996. For the six months ended November 30, 1997, Sherwood Securities and NDB
had a net income of $915,000 and $1,450,000, respectively, compared to net
income of $5,130,000 and $231,000 for the six months ended November 30, 1996,
respectively. Equitrade had a net profit of $6,881,000 for the six months ended
November 30, 1997 (of which the Company's share, inclusive of that earned by
SHD, was $3,731,000) as compared to a net profit of $2,633,000 for the six
months ended November 30, 1996 (of which the Company's share was $1,880,000).
Total revenue for the Company increased by approximately $1,896,000, or 5%,
for the three months ended November 30, 1997, and decreased $358,000, or 1%, for
the six months ended November 30, 1997 as compared with the previous year's
respective periods. The reasons for the variances in revenues are set forth
below.
Revenue from firm securities transactions decreased $585,000, or 2%, and
$6,342,000, or 11%, for the three and six month periods ended November 30, 1997,
respectively, as compared with the previous year. Revenues from firm securities
transactions at Sherwood Securities decreased approximately $3,298,000, or 13%,
and $10,975,000, or 20%, for the three and six month periods ended November 30,
1997, respectively, when compared to the prior year, even though Sherwood
Securities' overall ticket volume increased approximately 55% and 36% for the
same periods as trading profits per ticket continued to decline. Several factors
contributed to this decrease. Regulatory changes enacted by the Securities and
Exchange Commission ("SEC") and the National Association of Securities Dealers,
such as limit order protection, have resulted in an increase in the number of
transactions executed on an "even" basis. Tightened spreads between "bid" and
"ask" prices, the new limit order display rules, increased volatility in the
marketplace and increased Small Order Execution Systems ("SOES") activity have
also been factors in the decrease in trading profits per
(9)
ticket. These changes are having an adverse impact on Sherwood Securities'
trading profits. Substantially offsetting the decreases in trading profits at
Sherwood Securities was an increase in revenues from securities transactions at
Equitrade, for the three and six months ended November 30, 1997, of
approximately $2,711,000, or 316%, and $4,632,000, or 2,693%, respectively.
The Company's commission income, primarily generated by NDB, increased by
$1,534,000, or 19%, and $3,541,000, or 22%, respectively, for the three and six
months ended November 30, 1997, when compared with the prior year. The increases
are due largely to the fact that NDB's average daily ticket count increased from
approximately 4,540 to 6,470 tickets per day, an increase of 43%, for the three
months ended November 30, 1997 and from approximately 4,460 to 6,150 tickets per
day, an increase of 38%, for the six months ended November 30, 1997 when
compared with the previous year. The increase in commission income does not
correspond directly to the increase in NDB's ticket count as the mix of NDB's
trades has trended more toward electronic trading (i.e.-IVR telephone and
Internet trading), on which the commission charged is lower than for trades
executed by a live sales representative.
Floor brokerage income increased by approximately $695,000, or 20%, and
$2,035,000, or 32%, respectively, for the three and six months ended November
30, 1997, when compared to the prior year. The increases were the result of
increases in both the volume of Equitrade's transactions and an increase in the
number of stocks in which Equitrade is a specialist. The increase from 98 stocks
at November 30, 1996 to 152 stocks at November 30, 1997 was due principally to
the acquisition, on May 2, 1997, of SHD Corporation, which added 54 stocks to
Equitrade's specialist list.
For the three and six months ended November 30, 1996, the principal portion
of equity loss in partnerships was an equity loss from the Company's 49% limited
partnership interest it held in the Anvil Joint Venture. For the three and six
months ended November 30, 1997, Anvil's results were consolidated with those of
the Company until Anvil was sold on September 5, 1997.
Interest income decreased by approximately $39,000, or 2%, and $134,000, or
3%, for the three and six months ended November 30, 1997, respectively, as
compared to the previous year. The decrease is primarily due to the availability
of lesser amounts of cash for investment. Since November 30, 1996, the Company
has used approximately $24,000,000 for capital expenditures, including
$4,800,000 for four NYSE seats. A significant rise in NDB's customer debit and
credit balances held with the Company's clearing broker led to an increase in
interest earned from that source and substantially offset the decline in
interest income as described above.
Fee income increased by $116,000, or 18%, and $448,000, or 41%, for the
three and six months ended November 30, 1997, respectively, as compared to the
prior year. The increases are principally due to higher 12b-1 fees received from
mutual funds as NDB's customers' balances in those funds have increased since
the prior year, as well as the negotiated rates used to calculate the fees
rebated thereon.
Total expenses for the three months ended November 30, 1997 increased
approximately $2,437,000, or 7%, from $34,749,000 in 1996 to $37,186,000 in
1997. Total expenses for the six months ended November 30, 1997 increased
approximately $95,000, or less than 1%, from $71,704,000 in 1996 to $71,800,000
in 1997. The reasons for the net increases in expenses are set forth below.
Compensation and benefits increased $38,000, or less than 1%, and decreased
$2,244,000, or 8%, for the three and six month periods ended November 30, 1997,
respectively, compared with the prior year. The decrease is due primarily to
lower commissions paid to Sherwood Securities' traders because of the decrease
in trading profits for that subsidiary, and the resulting reduction in accruals
for executive bonuses based on profitability computations.
Clearing and related charges increased by approximately $1,363,000, or 10%,
and $839,000, or 3%, for the three and six month periods ended November 30,
1997, respectively, as compared to the prior year. The increases are due
principally to increased clearance charges at NDB. The rise in NDB's ticket
count offset a reduced rate of clearance per ticket that was negotiated with
NDB's clearing agent during the quarter ended November 30, 1997. Also
contributing to the overall increase in clearing and related charges were higher
execution fees paid by Sherwood Securities, as a result of a rise in ticket
count. Partially offsetting these increases were lower correspondence fees being
paid by Sherwood Securities based on the overall size and type of the order flow
received and decreased clearance charges for Sherwood Securities (despite the
rise in ticket count) based on the decreased rate of clearance charges
negotiated during May 1997.
(10)
Communications expense, which includes quotations, decreased by
approximately $159,000, or 6%, and $498,000, or 9%, for the three and six months
ended November 30, 1997, respectively, as compared to the previous year. The
declines are mainly due to the upgrade of the Powerbrokersm IVR System and
development of an in-house quote server at NDB.
Depreciation and amortization increased by approximately $927,000, or 88%,
and $1,763,000, or 87%, for the three and six months ended November 30, 1997,
respectively, as compared to the prior year. These increases can be attributed
to depreciation and amortization incurred on fixed asset, leasehold improvement,
computer software and intangible asset additions by the Company aggregating
approximately $19,000,000 during the period from December 1996 through November
1997 primarily in conjunction with the upgrade of NDB's infrastructure and the
purchase of a NYSE specialist unit.
Occupancy and equipment rental expenses decreased $72,000, or 10%, and
$138,000, or 10%, for the three and six month periods ended November 30, 1997,
as compared to the prior year. The declines are due to a decrease for NDB which,
last year, incurred rent concurrently on two main office locations as it awaited
the move of its new headquarters to 7 Hanover Square in New York City.
Other expenses increased by approximately $234,000, or 8%, and $123,000, or
2%, for the three and six months ended November 30, 1997, respectively, as
compared to the prior year. The recent upgrade of NDB's technological
infrastructure has led to increased expenses for service contracts. Also
affecting other expenses is an increase in NDB customer accommodations and bad
debt expense related to trade executions. Finally, soft dollar research expenses
from Anvil are included in other expenses as Anvil's results for the current
year have been consolidated while in the prior year, they were accounted for on
the equity basis. Offsetting the aforementioned increases to other expenses is a
decrease in legal fees and other professional fees.
Interest expense increased by approximately $107,000, or 173%, and
$250,000, or 187%, for the three and six months ended November 30, 1997,
respectively, as compared to the previous year. During the three and six months
ended November 30, 1997, Sherwood Securities incurred interest charges on the
remaining unpaid balance of approximately $4,600,000 owed in connection with its
settlement agreement, as amended, in the case entitled In Re: NASDAQ
Market-Makers Antitrust Litigation. In addition, the Company incurred interest
expense on short-term borrowings made in connection with its trading activities.
Income of Equitrade allocated to minority partners represents the share of
Equitrade's net income allocated to the partners of Equitrade, other than the
Company and its subsidiary, SHD, during the three and six months ended November
30, 1997 and 1996, respectively.
The Company's effective tax rate increased from approximately 41% for the
three months ended November 30, 1996 to approximately 44% for the three months
ended November 30, 1997 and decreased from approximately 46% for the six months
ended November 30, 1996 to approximately 45% for the six months ended November
30, 1997.
For the three months ended November 30, 1997, deferred tax benefit of
approximately $15,000, and for the six months ended November 30, 1997, deferred
tax expense of approximately $91,000, included in income tax expense, relate to
the future taxability of certain temporary book to tax basis differences. In
conjunction with the deferred tax asset the Company has recorded, the Company
has booked a valuation allowance of approximately $252,000 due to management's
judgment of the likelihood of realization of the deferred tax asset.
Liquidity
The Company's tangible assets are highly liquid with more than 66% of these
tangible assets consisting of cash or assets readily convertible into cash. The
Company's operations have generally been financed by internally generated funds.
In addition, at November 30, 1997, margin account borrowings of approximately
$145,000,000 were available to the Company from its clearing brokers.
The Company's broker-dealer entities, Sherwood Securities, NDB and
Equitrade, are subject to SEC's minimum net capital requirement, which is
designed to measure the general financial soundness and liquidity of
broker-dealers. On
(11)
July 10, 1997, SHD filed its notice of withdrawal from registration as a
broker-dealer with the SEC. As such, SHD is no longer required to compute net
capital. As of November 30, 1997, Sherwood Securities, NDB and Equitrade had
approximately $20,989,000, $4,392,000 and $30,984,000, respectively, in excess
of the required minimum net capital. The net capital rule imposes financial
restrictions upon Sherwood Securities', NDB's, and Equitrade's businesses which
are more severe than those imposed on most other businesses.
From time to time, the Company has borrowed funds in connection with its
trading activities. The Company currently has no committed lines of credit and
such borrowings were done on an "as needed" basis. Management has found an
alternative to meeting these funding requirements. See "Subsequent Events",
below.
Cash flows from operations will vary on a daily basis as the Company's
portfolio of marketable securities changes. The Company's ability to convert
marketable securities owned into cash is determined by the depth of the market
and the size of the Company's security positions in relation to the market as a
whole. The portfolio mix also affects the regulatory capital requirements
imposed on Sherwood Securities, NDB and Equitrade, which directly affects the
amount of funds available for operating, investing and financing activities.
The Company anticipates that it will spend an additional $900,000 over the
next three months for its subsidiaries' ongoing technological infrastructure
upgrades and intends to finance these upgrades with internally generated funds.
The operations of the Company's American Stock Exchange Specialist book
continue to be funded by the income generated by the book.
Cash flows from the Company's investment activities are directly related to
market conditions.
During the three and six months ended November 30, 1997, the Company did
not repurchase any additional shares in connection with its December 1992 plan
to buy back up to 1,500,000 shares of the Company's common stock from time to
time in the open market or through privately negotiated transactions. As of
November 30, 1997, 1,351,482 shares had been reacquired under this plan. The
source of funds for these purchases was internally generated.
Subsequent Events
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 Kellogg, will receive shares from the
Company's treasury stock. The transaction, which is expected to close no later
than February 1998 and which is subject to review under the Hart-Scott-Rodino
Antitrust Improvement Act of 1976, as amended, increases Mr. Kellogg's
beneficial ownership of the Company's common stock from approximately 8% to
17.8%. The proceeds of approximately $19,300,000 from the transaction, which
were received by the Company on December 8, 1997 and are expected to be used for
general corporate purposes and marketing activities to support the expansion of
NDB. While management of the Company believes the transaction will close as
scheduled, there can be no assurance that the transaction will be consummated.
If the transaction does not close, the Company must return the funds it has
received from IAT.
Effective December 15, 1997, the Company changed its name to National
Discount Brokers Group, Inc. as part of a strategic initiative to focus on its
NDB subsidiary. The name change will leverage NDB's core competencies in
Internet trading and financial services, as well as help fuel its expansion in
Internet commerce. The Company's ticker symbol on the NYSE also changed, from
"SHD" to "NDB", effective December 22, 1997.
Effects of Inflation
The Company's assets are not significantly affected by inflation because
they are primarily monetary in nature. Management believes that replacement
costs of furniture, equipment and leasehold improvements will not materially
affect operations. However, the rate of inflation affects the Company's
principal expenses such as employee compensation, rent and communication, which
may not be readily recoverable from increased revenues.
(12)
Because of market forces and competitive conditions in the securities industry,
a broker-dealer may be unable to restructure its profit margins in order to
recover increased costs related to inflation. Consequently, the Company must
rely on increased volume for this purpose. However, the Company has significant
cash balances on deposit with its principal clearing brokers on which interest
is paid which, in the event there are higher interest rates which normally
result from inflation, would offset some of the costs.
New Accounting Pronouncement
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings per Share" ("Statement
128"), for periods ending after December 15, 1997. Statement 128 replaces the
current standard used to calculate primary earnings per share, Accounting
Principles Board Opinion No. 15 ("APB 15"). Statement 128 requires a calculation
of basic earnings per share, as well as a dual presentation of basic and diluted
earnings per share on the face of the statement of income. Basic earnings per
share differs from primary earnings per share under APB 15 in that dilution for
common stock equivalents is excluded. Basic earnings per share under Statement
128, for the three and six months ended November 30, 1997 would not have been
materially different than primary earnings per share under APB 15.
Forward Looking Statements
Statements regarding the Company's expectations as to its future operations
and financial condition and certain other information contained in this Form
10-Q or in documents incorporated herein by reference constitute forward looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. Although the Company believes that its expectations are based on
reasonable assumptions within the bounds of its knowledge of its business and
operation, there can be no assurance that actual results will not differ
materially from its expectations. Factors which could cause actual results to
differ from expectations include a general downturn in the economy, changes in
the level of activity of securities markets in which the Company participates,
changes in government policy or regulation and unforeseen costs and other
effects related to legal proceedings or investigations of governmental and
self-regulatory organizations.
PART II - OTHER INFORMATION
Item 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS
The Company amended its Restated Certificate of Incorporation to eliminate
Class A Common Stock and to reduce the number of shares of capital stock from
101,000,000 shares to 51,000,000 shares consisting of 1,000,000 shares of
preferred stock and 50,000,000 shares of common stock.
Item 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Company held an Annual Meeting of its Stockholders on October
21, 1997.
(b) (i) The following persons were elected directors for a term of
three years:
<TABLE>
<CAPTION>
Votes Votes
For Withheld
<S> <C> <C>
Dennis Marino 9,004,871 45,510
James H. Lynch, Jr. 9,004,871 45,510
Stephen J. DiLascio 9,001,871 48,510
The following persons continued as directors:
Arthur Kontos, Richard J. Marino, Ralph N. Del Deo, Carl H. Hewitt, John P. Duffy and Thomas Neumann.
</TABLE>
(13)
(ii) The shareholders ratified an amendment to The Company's
Restated Certificate of Incorporation to decrease the number of authorized
shares of the Company's capital stock from 101,000,000 to 51,000,000 shares and
to eliminate provisions related to Class A Common Stock. The following was the
shareholder vote on this matter:
<TABLE>
<CAPTION>
<S> <C>
For: 8,995,756
Against: 46,900
Withheld: 7,725
Broker Non-Vote: 0
</TABLE>
(iii) The shareholders ratified an amendment of The Sherwood
Group, Inc. 1995 Stock Option Plan to increase the number of shares subject to
the Plan from 767,200 to 1,187,200 and expand the types of persons who would
qualify for benefits under the Plan. The following was the shareholder vote on
this matter:
<TABLE>
<CAPTION>
<S> <C>
For: 8,602,430
Against: 426,276
Withheld: 21,675
Broker Non-Vote: 0
</TABLE>
(iv) The shareholders ratified the appointment of KPMG Peat Marwick
LLP as the Company's independent auditors for the fiscal year ending May 31,
1998. The following was the shareholder vote on this matter:
<TABLE>
<CAPTION>
<S> <C>
For: 9,006,891
Against: 39,360
Withheld: 4,130
Broker Non-Vote: 0
</TABLE>
Item 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit 3.1 - Amendment to the Company's Restated Certificate
of Incorporation. Incorporated by reference to Exhibit 4.3 to the Company's
Registration Statement of Form S-8, file number 333-41819 filed on December 9,
1997.
Exhibit 3.2 - Amendment to Restated Certificate of Incorporation, as
amended. Incorporated by reference to Exhibit A to the Company's Proxy Statement
dated November 12, 1997.
Exhibit 3.3 - Restated Certificate of Incorporation, as amended.
Exhibit 3.4 - Amendment to the Company's By-laws.
Exhibit 3.5 - By laws of the Company, as amended. Incorporated by reference
to Exhibit 4.4 to the Company's Registration Statement on Form S-8, file number
333-41819 filed on December 9, 1997.
Exhibit 10.1 - Resolution of the Board of Directors of the Company
terminating The Sherwood Group, Inc. 1996 Executive Incentive Award Plan
Exhibit 10.2 - The Sherwood Group, Inc. 1995 Stock Option Plan, as amended.
Incorporated by reference to Exhibit 4.1 to the Company's Registration Statement
on Form S-8, file number 333-41819 filed on December 9, 1997.
Exhibit 11 - Computation of Net Income Per Common Share
Exhibit 27 - Financial Data Schedule
(b) The Company filed no reports on Form 8-K during the quarter ended
November 30, 1997.
(14)
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
National Discount Brokers Group, Inc.
------------------------------------------
Date: January 12, 1998 By: Dennis Marino
------------------------- ------------------------------------------
Dennis Marino
Executive Vice President
and Chief Administrative
Officer
Date: January 12, 1998 By: Denise Isaac
------------------------ -----------------------------------------
Denise Isaac
Chief Financial Officer and
Principal Accounting Officer
(15)
EXHIBIT 3.3
RESTATED CERTIFICATE OF INCORPORATION, AS AMENDED
OF
NATIONAL DISCOUNT BROKERS GROUP, INC.
It is hereby certified that
1. The name of the Corporation is NATIONAL DISCOUNT
BROKERS GROUP, INC. (hereinafter referred to as the
"Corporation").
2. The address of its registered office in the State
of Delaware is 229 South State Street, in the city of Dover,
County of Kent, 19901. The name of its registered agent at
such address is Prentice Hall Corporate Services.
3. The nature of the business or purposes to be
conducted or promoted is to engage in any lawful act or
activity for which corporations may be organized under the
General Corporation Law of Delaware.
4. The total number of shares of all classes of stock
that the Corporation shall have authority to issue is
51,000,000, of which 1,000,000 shares shall be Preferred
Stock, par value $.01 per share, ("Preferred Stock") and of
which 50,000,000 shares shall be Common Stock, par value $.01
per share ("Common Stock"), and the voting powers,
designations, preferences and relative, participating,
optional or other special qualifications, limitations or
restrictions thereof are set forth hereinafter:
1. Preferred Stock
(a) The Preferred Stock may be
issued in one or more series, each of which shall be
distinctively designated, shall rank equally and
shall be identical in all respects except as
otherwise provided in subsection 1(b) of this Section
4.
(b) Authority is hereby vested in
the Board of Directors to issue from time to time the
Preferred Stock of any series and to state in the
resolution or resolutions providing for the issuance
of shares of any series the voting powers, if any,
designations, preferences and relative,
participating, optional or other special rights, and
the qualifications, limitations or restrictions of
such series to the full extent now or hereafter
permitted by the law of the State of Delaware in
respect of the matters set forth in the following
clauses (1) to (viii) inclusive;
(i) The number of shares to
constitute such series, and the distinctive
designations thereof;
(ii) the voting powers, full or
limited, if any, of such series;
(iii) the rate of dividends
payable on shares of such series, the conditions
on which and the times when such dividends
are payable, the preference to, or the
relation to, the payment of the dividends payable on
any other class, classes or series of stock, whether
cumulative or non-cumulative and, if cumulative, the
date form which dividends on shares of such series
shall be cumulative;
(iv) the redemption price or
prices, if any, and the terms and conditions on which
shares of such series shall be redeemable;
(v) the requirement of any
sinking fund or funds to be applied to the purchase
or redemption of shares of such series and, if so,
the amount of such fund or funds and the manner of
application;
(vi) the rights of shares of
such series upon the liquidation, dissolution or
winding up of, or upon any distribution of the asset
of, the Corporation;
(vii) the rights, if any, of the
holders of shares of such series to convert
such shares into, or to exchange such shares
for, shares of any other class, classes or
series of stock and the price or prices or
the rates of exchange and the adjustments at which
such shares shall be convertible or exchangeable, and
any other terms and conditions of such conversion or
exchange;
(viii) any other preferences
and relative, participating,
optional or other special rights of shares of such
series, and qualifications, limitations or
restrictions including, without limitation, any
restriction on an increase in the number of shares of
any series theretofore authorized and any
qualifications, limitations or restrictions of rights
or powers to which shares of any future series shall
be subject.
(c) The number of authorized shares
of Preferred Stock may be increased or decreased by
the affirmative vote of the holders of a majority of
the votes of all classes of voting securities of the
Corporation without a class vote of the Preferred
Stock, or any series thereof, except as otherwise
provided in the resolution or resolutions fixing the
voting rights of any series of the Preferred Stock.
2. Common Stock
At every meeting of the stockholders
of the Corporation (or with respect to any action by
written consent in lieu of a meeting of
stockholders), each share of Common Stock shall be
entitled to one (1) vote (whether voted in person by
the holder thereof or by proxy) on all matters which
may lawfully be submitted to a vote of stockholders
(except to the extent otherwise required by law).
At the time at which this Restated
Certificate of Incorporation becomes effective, the
par value of each share of Common Stock, par value
$.10 per share, issued and outstanding as at such
time, shall be reduced to $.01 per share.
5. The Corporation is to have perpetual existence.
6. In furtherance and not in limitation of the powers
conferred by statute, the board of directors is expressly
authorized:
To make, alter or repeal the by-laws of the
corporation.
To authorize and cause to be executed
mortgages and liens upon the real and personal
property of the corporation.
To set apart out of any of the funds of the
corporation available for dividends a reserve or
reserves for any proper purpose and to abolish any
such reserve in the manner in which it was created.
By a majority of the whole board, to
designate one or more committees, each committee to
consist of two or more of the directors of the
corporation. The board may designate one or more
directors as alternate members of any committee, who
may replace any absent or disqualified member at any
meeting of the committee. Any such committee, to the
extent provided in the resolution or in the by-laws
of the corporation, shall have and may exercise the
powers of the board of directors in the management of
the business and affairs of the corporation and may
authorize the seal of the corporation to be affixed
to all papers which may require it; provided,
however, the by-laws may provide that in the absence
or disqualification of any member or members thereof
the members or members thereof present at any meeting
and not disqualified from voting, whether or not he
or they constitute a quorum, may unanimously appoint
another member of the board of directors to act at
the meeting in the place of any such absent or
disqualified member.
When authorized by the affirmative vote of
the holders of majority of the stock issued and
outstanding having voting power given at a
stockholders' meeting duly called upon such notice as
is required by statute, or when authorized by the
written consent of the holders of a majority of the
voting stock issued and outstanding, to sell, lease
or exchange all or substantially all of the property
and assets of the corporation, including its good
will and its corporate franchises, upon such terms
and conditions and for such consideration, which may
consist in whole or in part of money or property
including shares of stock in, and/or other securities
of, any other corporation or corporations, as its
board of directors shall deem expedient and for the
best interests of the corporation.
7. (a) No person serving as a director
of the Corporation shall be liable to the
Corporation or its shareholders for monetary
damages for breach of fiduciary duty as a
director, provided that this provision shall
not eliminate or limit the liability of a
director (1) for any breach of the
director's duty of loyalty to the
Corporation or its stockholders, (ii) for
acts or omissions not in good faith or which
involve intentional misconduct or a knowing
violation of law, (iii) under Section 174 of
the Delaware General Corporation Law, or
(iv) for any transaction from which the
director derived an improper personal
benefit.
(b) (i) The corporation shall
indemnify, subject to the requirements of
subsection (iii) of this Section, any
person, or his heirs and legal
representatives, who was or is a party or is
threatened to be made a party of any
threatened, pending or completed action,
suit or proceeding, whether civil, criminal,
administrative or investigative, by reason
of the fact that he is or was a director,
officer, employee or agent of another
corporation, partnership, joint venture
trust or other enterprise, against expenses
(including attorneys' fees), judgments,
fines and amounts paid in settlement
actually and reasonably incurred by him in
connection with such action, suit or
proceeding if he acted in good faith and in
a manner he reasonably believed to be in or
not opposed to the best interests of the
Corporation and, with respect to any
criminal action or proceeding, had no
reasonable cause to believe his conduct was
unlawful; except that, as to any threatened,
pending or completed action or suit by or in
the right of the Corporation, such
indemnification shall be limited to expenses
(including attorneys' fees) actually and
reasonably incurred in connection with the
defense or settlement of the case, and in
respect of any such claim, issue or matter
as to which such person shall have been
adjudged to be liable for negligence or
misconduct in the performance of his duty to
the Corporation, shall not be made without
court approval.
(ii) To the extent that a director,
officer, employee or agent of the
corporation shall be successful on the
merits or otherwise in defense of any
action, suit or proceeding referred to in
subsection (a) of this Section, or in
defense of any claim, issue or matter
therein, the Corporation shall indemnify him
against expenses (including attorneys' fees)
actually and reasonably incurred by him in
connection therewith.
(iii) Any indemnification under
subsection (i) of this Section (unless
ordered by a court) shall be made by the
Corporation only as authorized in the
specific case upon a determination that the
director, officer, employee or agent has met
the applicable standard of conduct set forth
in subsection (a) of this Section. Such
determination shall be made (1) by the Board
of Directors by a majority vote of a quorum
consisting of directors who were not parties
to such action, suit or proceeding, of (2)
if such quorum is not obtainable, or, even
if obtainable, a quorum of disinterested
directors so directs, by independent legal
counsel in a written opinion, or (3) by the
stockholders.
(iv) The Corporation shall pay in
advance of the final disposition of a civil
or criminal action, suit or proceeding
expenses incurred by a director, officer,
employee or agent in defending such action,
suit or proceeding upon receipt of an
undertaking by or on behalf of the director,
officer, employee or agent to repay such
amount if it shall ultimately be determined
that he is not entitled to be indemnified by
the Corporation as authorized in this
Section.
(v) The indemnification provided by
this Section shall not limit the Corporation
from providing any other indemnification
permitted by law nor shall it be deemed
exclusive of any other rights to which those
indemnified may be entitled under any
by-law, agreement, vote of stockholders or
disinterested directors or otherwise, both
as to action in his official capacity and as
to action in another capacity while holding
such office, and shall continue as to a
person who has ceased to be a director or
officer, and shall inure to the benefit of
the heirs, executors and administrators of
such a person.
8. (a) Except as otherwise expressly provided
in paragraph c of this Section B:
(i) any merger or consolidation of
the Corporation of any Subsidiary (as hereinafter defined)
with or into any Major Stockholder (as hereinafter defined),
or
(ii) any sale, lease, exchange,
mortgage, pledge, transfer or other disposition to or with any
Major Stockholder of all or substantially all of the assets of
the Corporation, or
(iii) the adoption of any plan or
proposal for the liquidation or dissolution of the Corporation;
shall require the affirmative vote ofd the holders of at least
eighty percent (80%) of the votes entitled to be cast by the
holders of the outstanding Class A Stock and Common Stock of
the Corporation voting together as one class ("Voting
Shares"). Such affirmative vote shall be required
notwithstanding the fact that no vote may be required, or that
some lesser percentage may be specified, by law or otherwise.
(b) For the purposes of this Section 8, (i)
"Major Stockholder" shall mean any individual, firm,
corporation (other than the Corporation) or other entity
which, as of the record date for the determination of
stockholders entitled to notice of and to vote on any of the
transactions described in clauses (i) through (iii) of
paragraph (a) of this Section 8, or immediately prior to the
consummation of any such transaction, is the beneficial owner
of 10% or more of the votes represented by the Voting Shares;
(ii) an individual, firm, corporation or other entity shall be
deemed to be the beneficial owner of any Voting Shares (x)
which it has the right to acquire pursuant to any agreement,
or upon the exercise of conversion rights, warrants, or
options, or otherwise, or (y) which are beneficially owned,
directly or indirectly [including shares deemed owned through
the application of clause (a) above], by it or any "affiliate"
or "associate" (as those terms are defined in Rule 12b-2 of
the General Rules and Regulations under the Securities and
Exchange Act of 1934) of it, or by any other individual, firm,
corporation or other entity with which it or any "affiliate"
or "associate" (as defined above) of it has any agreement,
arrangement or understanding for the purpose of acquiring,
holding, voting or disposing of any shares of capital stock of
the Corporation; (iii) the outstanding Voting Shares shall
include shares deemed owned by a Major Stockholder (or an
individual, firm, corporation or other entity deemed a Major
Stockholder) through the application of clauses (x) and (y) of
clause (ii) above but shall not include any other Voting
Shares which may be issuable by the Corporation to any other
individual, firm, corporation or other entity pursuant to any
agreement, or upon exercise of conversion rights, warrants, or
options, or otherwise; and (iv) "Subsidiary" shall mean any
corporation of which a majority of any class of "equity
security" (as defined in Rule 3all-1 of the General Rules and
Regulations under the Securities Exchange Act of 1934) is
owned, directly or indirectly, by the Corporation.
(c) The provisions of this Section 8 shall
not apply to any transaction described in clauses (i) or (ii)
of paragraph (a) of this Section 8 (i) if the Corporation is
then, and at all times throughout the preceding twelve months
has been, directly or indirectly, the beneficial owner of a
majority of each class of the outstanding "equity securities"
(as defined above) of the Major Stockholder which is a party
to such transaction, (ii) if the Board of Directors of the
Corporation shall by resolution have approved a memorandum of
understanding with the Major Stockholder which is a party to
such transaction, consistent in material terms with such
transaction, prior to the time such Major Stockholder shall
have become a beneficial owner of 10% or more of the votes
represented by the Voting Shares, or (iii) if such transaction
is approved by a resolution adopted prior to the consummation
of such transaction by the affirmative vote of 70% of the
whole Board of Directors of the Corporation (the "whole Board"
being a number of directors which the Corporation would have
if there were no vacancies), provided that a majority of the
members of the Board of Directors voting for the approval of
such transaction were duly elected and acting members of the
Board of Directors prior to the later of (a) the date that
such Major Stockholder first became a beneficial owner of 10%
or more of the votes represented by the Voting Shares or (b)
January 1, 1987 or such majority were the designees or
nominees of such members of the Board of Directors.
(d) Notwithstanding any other provisions of
the Certificate of Incorporation or the By-Laws of the
Corporation (and notwithstanding the fact that some lesser
percentage may be specified by law, the Certificate of
Incorporation or the By-Laws of the Corporation), any
amendment, alteration, change or repeal of this Section 8 of
the Certificate of Incorporation shall require the affirmative
vote of the holders of at least eighty percent (80% of the
votes represented by the Voting Shares.
9. Whenever a compromise or arrangement is proposed
between this Corporation and its creditors or any class of
them and/or between this Corporation and its stockholders or
any class of them, any court of equitable jurisdiction within
the State of Delaware may, on the application in a summary way
of this Corporation or any creditor or stockholder thereof, or
on the application o f any receiver or receivers appointed for
this Corporation under the provisions of Section 291 of Title
8 of the Delaware Code or on the application of trustees in
dissolution or any receiver or receivers appointed for this
Corporation under the provisions of Section 279 of Title 8 of
the Delaware Code order a meeting of the creditors or class of
creditors, and/or of the stockholders or class of stockholders
of this Corporation, as the case may be, to be summoned in
such manner as the said court directs. If a majority in number
representing three-fourths in value of the creditors or class
of creditors, and/or of the stockholders or class of
stockholders of this Corporation, as the case may be, agree to
any compromise or arrangement and to any reorganization of
this Corporation as consequence of such compromise or
arrangement, the said compromise or arrangement and the said
reorganization shall, if sanctioned by the court to which the
said application has been made, be binding on all the
creditors or class of creditors, and/or on all the
stockholders or class of stockholders, of this Corporation, as
the case may be, and also on this Corporation.
10. (a) Commending with the first meeting of
shareholder at which directors are to be elected following the
effective date of this Restated Certificate of Incorporation,
the directors of the Corporation shall be classified with
respect to the time for which they shall severally hold office
by dividing them into three (3) classes, each class to be as
nearly equal in number as possible, which classes shall be
designated as Class 1, Class 2 and Class 3. Subject to the
provisions hereof, the number of directors in each class shall
from time to time be designated by the Board of Directors of
the Corporation. The Class 1 directors shall be elected
initially for a term of one year which term shall expire at
the first Annual Meeting of Shareholders following the
classification of the Board of Directors, the Class 2
directors shall be elected initially for a term of two years
which term shall expire at the Annual Meeting of Shareholders
following the classification of the Board of Directors, and
the Class 3 directors shall be elected initially for a term of
three (3) years which term shall expire at the third Annual
Meeting of Shareholders to be held following the
classification of the Board of Directors. At each Annual
Meeting, commencing with the first Annual Meeting to be held
following the classification of the Board of Directors, the
successors to the class shall be elected to hold office for a
term of three years so that the term of office of one class of
directors shall expire each year.
(b) Notwithstanding any other provisions of
the Certificate of Incorporation or the By-Laws of the
Corporation (and notwithstanding the fact that some lesser
percentage may be specified by law, the Certificate of
Incorporation or the By-Laws of the Corporation), any
amendment, alteration, change or repeal of this Section 10 of
the Certificate of Incorporation shall require the affirmative
vote of the holders of at least eighty percent (80%) of the
votes represented by the Voting Shares.
11. Meeting of stockholders may be held within or
without the State of Delaware, as the By-laws may provide. The
books of the Corporation may be kept (subject to any provision
contained in the statutes) outside the State of Delaware at
such place or places as may be designated from time to time by
the Board of Directors or in the By-laws of the Corporation.
Elections of directors need not be by written ballot, unless
the By-Laws of the Corporation shall so provide.
12. The Corporation reserves the right to amend,
alter, change or repeal any provision contained in this
Restated Certificate of Incorporation, in the manner now, or
hereafter prescribed by statute, and all rights conferred upon
stockholders herein are granted subject to this reservation.
<PAGE>
CERTIFICATE OF AMENDMENT
TO
RESTATED CERTIFICATE OF INCORPORATION
OF
THE SHERWOOD GROUP, INC.
The Sherwood Group, Inc., a corporation organized and existing under
and by virtue of Section 242 of the General Corporation Law of the State of
Delaware (the "Corporation"), DOES HEREBY CERTIFY:
1. By Unanimous Written Consent dated August 19, 1997, resolutions were
duly adopted by the Board of Directors of the Corporation setting forth a
proposed amendment of the Restated Certificate of Incorporation of the
Corporation filed on February 4, 1987 with the Delaware Department of State (the
"Certificate"), declaring said amendment to be advisable and calling a meeting
of the stockholders of the Corporation for consideration thereof pursuant to
Section 222 of the General Corporation Law of the State of Delaware.
2. At an annual meeting of the stockholders of the Corporation held on
October 21, 1997, resolutions to amend the Certificate were proposed and duly
adopted by a sufficient number of shares entitled to vote as required by
Delaware law. The resolution setting forth the proposed amendment is as follows:
"RESOLVED, that the Corporation's Certificate of Incorporation shall be
amended as follows:
Article 4 is amended and restated in its entirety as follows:
"4. The total number of shares of all classes of stock that
the Corporation shall have authority to issue is 51,000,000, of which 1,000,000
shares shall be Preferred Stock, par value $.01 per share ("Preferred Stock")
and of which 50,000,000 shares shall be Common Stock, par value $.01 per share
("Common Stock"), and the voting powers, designations, preferences and relative,
participating, optional or other special qualifications, limitations or
restrictions thereof are set forth hereinafter:
1. Preferred Stock
(a) The Preferred Stock may be issued in one or more series,
each of which shall be distinctively designated, shall rank equally and shall be
identical in all respects except as otherwise provided in subsection 1(b) of
this Section 4.
(b) Authority is hereby vested in the Board of Directors to
issue from time to time the Preferred Stock of any series and to state in the
resolution or resolutions providing for the issuance of shares of any series the
voting powers, if any, designations, preferences and relative, participating,
optional or other special rights, and the qualifications, limitations or
restrictions of such series to the full extent now or hereafter permitted by the
law of the State of Delaware in respect of the matters set forth in the
following clauses (i) to (viii) inclusive;
(i) the number of shares to constitute such series,
and the distinctive designations thereof;
(ii) the voting powers, full or limited, if any, of
such series;
(iii) the rate of dividends payable on shares of such
series, the conditions on which and the times when such dividends are
payable, the preference to, or the relation to, the payment of the
dividends payable on any other class, classes or series of stock,
whether cumulative or non-cumulative and, if cumulative, the date from
which dividends on shares of such series shall be cumulative;
(iv) the redemption price or prices, if any, and the
terms and conditions on which shares of such series shall be
redeemable;
(v) the requirement of any sinking fund or funds to
be applied to the purchase or redemption of shares of such series and,
if so, the amount of such fund or funds and the manner of application;
(vi) the rights of shares of such series upon the
liquidation, dissolution or winding up of, or upon any distribution of
the assets of, the Corporation;
(vii) the rights, if any, of the holders of shares of
such series to convert such shares into, or to exchange such shares
for, shares of any other class, classes or series of stock and the
price or prices or the rates of exchange and the adjustments at which
such shares shall be convertible or exchangeable, and any other terms
and conditions of such conversion or exchange;
(viii) any other preferences and relative,
participating, optional or other special rights of shares of such
series, and qualifications, limitations or restrictions including,
without limitation, any restriction on an increase in the number of
shares of any series theretofore authorized and any qualifications,
limitations or restrictions of rights or powers to which shares of any
future series shall be subject.
(c) The number of authorized shares of Preferred Stock may be
increased or decreased by the affirmative vote of the holders of a majority of
the votes of all classes of voting securities of the Corporation without a class
vote of the Preferred Stock, or any series thereof, except as otherwise provided
in the resolution or resolutions fixing the voting rights of any series of the
Preferred Stock.
2. Common Stock
At every meeting of the stockholders of the Corporation (or
with respect to any action by written consent in lieu of a meeting of
stockholders), each share of Common Stock shall be entitled to one (1) vote
(whether voted in person by the holder thereof or by proxy) on all matters which
may lawfully be submitted to a vote of stockholders (except to the extent
otherwise required by law).
At the time at which this Restated Certificate of Incorporation becomes
effective, the par value of each share of Common Stock, par value $.10 per
share, issued and outstanding as at such time, shall be reduced to $.01 per
share."
3. The following votes were cast in connection with the
aforementioned amendment: 10,077,542 votes in favor 46,900
votes against 7,725 votes abstained
4. The amendment was duly adopted in accordance with the provisions of
Section 242 of the General Corporation Law of the State of Delaware.
IN WITNESS WHEREOF, the Corporation has caused this Certificate to be
signed by Arthur Kontos, its President, this 21st day of October, 1997.
THE SHERWOOD GROUP, INC.
/s/ Arthur Kontos
------------------
Arthur Kontos
President and Chief
Executive Officer
ATTEST:
/s/ Laura Singer
- ---------------------------------
Laura Singer, Assistant Secretary
EXHIBIT 3.4
Unanimous Written Consent of the
Board of Directors of
The Sherwood Group, Inc.
WHEREAS, the Board of Directors of The Sherwood Group, Inc. (the
"Corporation") desires to amend the By-Laws of the Corporation (the "By-Laws")
to clarify that the Chairman of the Board of Directors is not an officer of the
Corporation;
NOW THEREFORE, the undersigned, being all the directors of the
Corporation, do hereby consent to the adoption of the following resolutions
pursuant to Section 141(f) of the General Corporation Law of the State of
Delaware, without the formality of convening a meeting:
RESOLVED, that the By-Laws shall be amended to add the following as Section
11 of Article III of the By-Laws:
"Section 11. The chairman of the board shall be a member of
the board and shall be selected by a majority vote or
unanimous written consent of the members of the board. He
shall perform such duties as may from time to time be assigned
to him by the board."
RESOLVED, that the first sentence of Article V, Section 1 of the
By-Laws shall be deleted and the following shall be substituted therefor:
"Section 1. The officers of the corporation shall be chosen
by the board of directors and shall be a president, a
vice-president, a secretary and a treasurer."
RESOLVED, that Article V, Section 2 of the By-Laws shall be deleted and
the following shall be substituted therefor:
"Section 2. The board of directors at its first meeting
after each annual meeting of stockholders shall choose a
president, one or more vice-presidents, a secretary and a
treasurer."
RESOLVED, that the proper officers of the Company be, and each of them
hereby is, authorized and empowered, in the name and on behalf of the Company,
to execute all such further documents, and to take all such further action, as
any such officer may deem necessary, proper, convenient or desirable and approve
in order to carry out each of the foregoing resolutions and to fully effectuate
the purposes and intents thereof.
IN WITNESS WHEREOF, the undersigned have executed this written consent
effective as of the ____ day of December, 1997.
- -------------------------------- ----------------------------------
Arthur Kontos, Director Carl Hewitt, Director
- -------------------------------- ----------------------------------
James H. Lynch, Jr. Director Dennis Marino, Director
- -------------------------------- ----------------------------------
Richard J. Marino, Director Thomas Neumann, Director
- -------------------------------- ----------------------------------
Ralph Del Deo, Director Stephen J. DiLascio, Director
- --------------------------------
John Duffy, Director
EXHIBIT 10.1
Unanimous Written Consent of the
Board of Directors of The Sherwood Group, Inc.
----------------------------------
The undersigned, being all the directors of The Sherwood Group, Inc.
(the "Corporation"), do hereby consent to the adoption of the following
resolutions pursuant to Section 141 (f) of the General Corporation Law of the
State of Delaware as of October 9, 1997:
RESOLVED, that Article 1 of the Corporation's Restated Certificate of
Incorporation, as amended to date, be amended to read as follows:
"1. The name of the corporation is NATIONAL DISCOUNT BROKERS
GROUP, INC. (hereinafter referred to as the "Corporation").";
FURTHER RESOLVED, that the proposed amendment to the Corporation's
Restated Certificate of Incorporation, as amended, in the form presented above
is approved and that such amendment be submitted to the stockholders of the
Corporation with the recommendation of the Board of Directors that the
stockholders give their consent authorizing such amendment;
FURTHER RESOLVED, that the Board of Directors hereby calls a
Special Meeting of Stockholders of the Corporation to be held on December 12,
1997 at 4:00 p.m. at 10 Exchange Place Centre, Jersey City, New Jersey;
FURTHER RESOLVED, that the Board of Directors solicit the proxies of
the stockholders of the Corporation for approval of the Amendment to the
Corporation's Restated Certificate of Incorporation, as amended, and Dennis
Marino and Thomas Neumann are appointed proxies;
FURTHER RESOLVED, that the Board of Directors hereby fixes the close of
business on November 11, 1997 as the record date for determination of
stockholders of the Corporation entitled to vote at the Special Meeting;
FURTHER RESOLVED, that a proxy statement (the "Proxy Statement") and
any amendments thereto, and proxy cards and related material be prepared
pursuant to the Securities Exchange Act of 1934, as amended, and that the
officers of the Corporation be, and they hereby are, authorized and empowered to
execute the Proxy Statement and related proxy material in the name of and on
behalf of the Corporation and to file such Proxy Statement, together with
appropriate exhibits and materials, with the United States Securities and
Exchange Commission;
FURTHER RESOLVED, that the officers of the Corporation be, and they
hereby are, authorized and empowered to execute and deliver the Proxy Statement
together with appropriate exhibits and materials to the stockholders of the
Corporation;
FURTHER RESOLVED, that the officers of the Corporation be, and they
hereby are, authorized and empowered to execute and deliver all additional
certificates and other instruments as they deem appropriate and to do and
perform such other acts as said officers shall deem necessary and proper in
order to carry into effect the foregoing resolutions;
FURTHER RESOLVED, that the Corporation pay a cash bonus to Thomas
Neumann in the amount of $107,000 as soon as possible;
FURTHER RESOLVED, that pursuant to Section 7 of The Sherwood Group,
Inc. 1996 Executive Incentive Award Plan, the Board hereby terminates the plan
effective immediately.
Dated: October 9, 1997
- -------------------------------- ----------------------------------
Arthur Kontos, Director Carl Hewitt, Director
- -------------------------------- ----------------------------------
James H. Lynch, Director Dennis Marino, Director
- -------------------------------- --------------------------------
Richard J. Marino, Director Thomas Neumann, Director
- -------------------------------- ----------------------------------
Ralph Del Deo, Director Stephen J. DiLascio, Director
- --------------------------------
John Duffy, Director
EXHIBIT 11
NATIONAL DISCOUNT BROKERS GROUP, INC. AND SUBSIDIARIES
COMPUTATION OF NET INCOME PER COMMON SHARE
<TABLE>
<CAPTION>
Three Months Ended November 30,
---------------------------------------
1997 1996
------------------- ------------------
<S> <C> <C>
Common stock and common stock equivalents:
Average common stock outstanding 12,710,468 12,972,734
Average common stock equivalents
issuable under stock options 82,901 55,775
------------------- ------------------
Total average common stock and common stock
equivalents used for earnings per share computation 12,793,369 13,028,509
=================== ==================
Income:
Net income $ 2,087,293 $ 3,295,285
=================== ==================
Net income per common and common equivalent share (a):
Net income $ 0.16 $ 0.25
=================== ==================
<FN>
(a) For presentation purposes, primary and fully diluted are identical.
</FN>
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended November 30,
---------------------------------------
1997 1996
------------------- ------------------
<S> <C> <C>
Common stock and common stock equivalents:
Average common stock outstanding 12,702,523 12,995,192
Average common stock equivalents
issuable under stock options 114,160 44,275
------------------- ------------------
Total average common stock and common stock
equivalents used for earnings per share computation 12,816,683 13,039,467
=================== ==================
Income:
Net income $ 4,795,765 $ 6,298,326
=================== ==================
Net income per common and common equivalent share (a):
Net income $ 0.37 $ 0.48
=================== ==================
<FN>
(a) For presentation purposes, primary and fully diluted are identical.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> BD
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements for the six months ended November 30, 1997 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAY-31-1998
<PERIOD-START> JUN-01-1997
<PERIOD-END> NOV-30-1997
<CASH> 1,208,317
<RECEIVABLES> 53,079,339
<SECURITIES-RESALE> 0
<SECURITIES-BORROWED> 0
<INSTRUMENTS-OWNED> 53,943,315
<PP&E> 20,247,101
<TOTAL-ASSETS> 156,514,583
<SHORT-TERM> 0
<PAYABLES> 28,130,876
<REPOS-SOLD> 0
<SECURITIES-LOANED> 0
<INSTRUMENTS-SOLD> 18,413,953
<LONG-TERM> 3,500,000
0
0
<COMMON> 143,432
<OTHER-SE> 96,870,114
<TOTAL-LIABILITY-AND-EQUITY> 156,514,583
<TRADING-REVENUE> 50,096,225
<INTEREST-DIVIDENDS> 3,783,846
<COMMISSIONS> 19,293,445
<INVESTMENT-BANKING-REVENUES> 0
<FEE-REVENUE> 1,536,187
<INTEREST-EXPENSE> 384,023
<COMPENSATION> 26,233,522
<INCOME-PRETAX> 8,737,695
<INCOME-PRE-EXTRAORDINARY> 4,795,765
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,795,765
<EPS-PRIMARY> 0.37
<EPS-DILUTED> 0.37
</TABLE>
