August 18, 1999
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, 1999
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, 1999 including financial statements and exhibits.
Thank you for your attention to this matter.
Very truly yours,
/s/ Matthew Stadler
Matthew Stadler
Chief Financial Officer and
Principal Accounting Officer
<PAGE>
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, 1999
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 June 30, 1999, 16,984,924 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 $624,000,000(1).
Documents Incorporated By Reference
Document Incorporated Part of Report
By Reference Into Which Incorporated
Proxy Statement for Annual Meeting to be Part III
held October 20, 1999
(1) For purposes of this calculation, the outstanding shares of common stock
beneficially owned by directors and executive officers of the registrant and
Peter R. Kellogg as reported in his most recent filing pursuant to Section 13
(d) of the Securities Exchange Act of 1934, as amended were deemed owned by
affiliates. The registrant does not admit that any such person is an affiliate
of the registrant.
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
PART I
<S> <C> <C><C> <C>
Item 1. Business............................................................................... 1
Introduction..................................................................... 1
Recent Developments.............................................................. 2
Financial Information About Segments............................................. 2
Description of Business.......................................................... 3
Revenue by Source............................................................. 3
Nasdaq Market Making - Sherwood Securities.................................... 3
Retail Discount Brokerage Services - NDB.com.................................. 5
Proposed Self Clearing Operations - Millennium Clearing Corp.................. 14
Investments................................................................... 14
Personnel............................................................................. 15
Competition........................................................................... 16
Regulation............................................................................ 16
Customer Protection and Insurance..................................................... 17
Net Capital and Customer Reserve Requirements......................................... 18
Item 2. Properties............................................................................ 19
Item 3. Legal Proceedings and Contingencies................................................... 19
Item 4. Submission of Matters to a Vote of Security Holders................................... 21
PART II
Item 5. Market for NDB Group's Common Stock and Related Security Holder
Matters............................................................................... 21
Item 6. Selected Consolidated Financial Data.................................................. 22
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................................ 23
Results of Operations........................................................... 23
Liquidity and Capital Resources................................................. 32
Effects of Inflation............................................................ 34
Impact of the Year 2000 Issue................................................... 34
Looking Ahead................................................................... 35
Item 7a. Quantitative and Qualitative Disclosures About Market Risk............................ 36
<PAGE>
Item 8. Financial Statements and Supplementary Data........................................... 38
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure............................................................................ 38
PART III
Item 10. Directors and Executive Officers of the Company...................................... 38
Item 11. Executive Compensation............................................................... 38
Item 12. Security Ownership of Certain Beneficial Owners and Management....................... 38
Item 13. Certain Relationships and Related Transactions....................................... 39
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K...................... 39
</TABLE>
Forward Looking Statements
Statements regarding the Company's expectations and beliefs as to its
future operations, plans or financial condition and certain other information
contained in the Form 10-K, including, but not limited to, the material under
the headings "Impact of Year 2000 Issue", "Looking Ahead" and "Legal Proceedings
and Contingencies", 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 and beliefs 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 or beliefs.
Factors which could cause actual results to differ from expectations or beliefs
include a general downturn of the economy, changes in the level of activity or
structure of markets in which the Company participates, changes in government
policy or regulation, inability of the Company to attract or retain key
employees and unforeseen costs and other effects related to legal proceedings or
investigation of governmental and self-regulatory organizations.
<PAGE>
PART I
Item 1. Business
Introduction
National Discount Brokers Group, Inc. ("NDB Group") is a holding company
whose principal wholly owned subsidiaries are Sherwood Securities Corp.
("Sherwood Securities") and Triak Services Corp. doing business as National
Discount Brokers ("NDB.com"). NDB Group and its subsidiaries, collectively, are
referred to as the "Company".
Sherwood Securities was formed in 1968 and specializes in the market making
of Nasdaq and other over-the-counter securities and provides trade execution
services primarily to broker dealer and institutional customers. As a national
trading firm with offices in Jersey City, New Jersey; Chicago, Illinois; Denver,
Colorado; Los Angeles, California, and Boston, Massachusetts, Sherwood
Securities traded as of June 30, 1999 approximately 4,100 Nasdaq and other
over-the-counter securities as market maker and principal for its own account.
NDB.com, a registered broker-dealer, is a deep discount securities
brokerage firm specializing in trade execution for individual investors with
offices in New York, New York and San Francisco, California. Customers are
offered automated securities order placement and information services through
the Internet, as well as, through touch-tone telephone and registered
representatives.
NDB Group and another wholly owned subsidiary, SHD Corporation ("SHD"),
also owned membership interests in Equitrade Partners, L.L.C., a Delaware
limited liability company ("Equitrade"). Equitrade was a registered specialist
on the New York Stock Exchange ("NYSE"). In June 1999, the Company sold its
46.845% membership interest in Equitrade to Spear, Leeds & Kellogg Specialists
LLC, a subsidiary of Spear Leeds & Kellogg, L. P. ("SLK"), for cash. Except
where otherwise indicated, this report will treat the activities of Equitrade as
discontinued operations.
In July 1999, NDB Group formed Millennium Clearing Corp. ("Millennium") as
a wholly owned subsidiary for the purpose of providing clearing services for
Sherwood Securities and NDB.com. Management of the Company anticipates the
commencement of clearing of NDB.com and Sherwood Securities through Millennium
during the year ending December 31, 2000.
On December 22, 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. 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. As of May 31, 1999, 1,650,000
shares had been reacquired, of which 244,822 shares were repurchased during the
fiscal year ended May 31, 1999. The source of funds for these purchases was
internally generated.
NDB Group 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, NDB Group adopted its present name. NDB Group's common stock is
listed on the NYSE under the symbol "NDB".
<PAGE>
NDB Group's principal executive offices are located at 10 Exchange Place
Centre, Jersey City, New Jersey and its telephone number is (201) 946-2200.
Recent Developments
Developments in the Company's business during the fiscal year ended May 31,
1999 included the introduction of an entirely redesigned website by NDB.com. The
new site is designed to be customer-friendly and easy to navigate and use, with
a wide-range of investment tools and educational services for customers.
On February 2, 1999, the Company amended its agreement with S.G.I.
Partners, L.P. ("S.G.I.") to eliminate provisions which had required the Company
to appoint up to two directors designated by S.G.I. to the Company's Board. In a
related matter, Carl Hewitt, who had been the designated director of S.G.I. to
the Company tendered his resignation from the Board.
On June 18, 1999, the Company sold its 46.845% interest in Equitrade, to a
subsidiary of SLK. The Company received approximately $85 million in cash
comprised of a net pre-tax gain of approximately $36 million and the return of
capital and other cash payments. The $85 million cash payment was net of the
repayment of a $15 million loan made by SLK to NDB Group. The gain from this
transaction will be recognized in the first quarter of the fiscal year ending
May 31, 2000.
On June 25, 1999, the Company received approximately $91.6 million, net of
underwriting discounts and commissions and estimated expenses, from the
underwritten public offering of 2,990,000 shares of its common stock.
Financial Information About Segments
The Company provides financial services to individuals, broker-dealers and
institutional customers through two segments: Sherwood Securities, which
provides brokerage services as a market maker to institutions and other
broker-dealers and NDB.com, which provides deep discount brokerage services to
individuals. Financial information by segment for the three years ended May 31,
1999 is set forth in Note 15 in the Notes to Consolidated Financial Statements
and does not include the financial results of discontinued operations, primarily
those of Equitrade.
<PAGE>
Description of Business
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.
<TABLE>
<CAPTION>
Fiscal Year Ended May 31,
1999 1998 1997
<S> <C> <C> <C> <C> <C> <C>
Amount % Amount % Amount %
Firm securities
transactions $145,819,935 70.15 $90,256,181 65.02 $117,490,958 72.89
(net)
Commission income 45,250,436 21.77 37,052,201 26.69 32,638,949 20.25
Investment securities
gain 1,870,242 .90 63,625 .05 - -
Interest and dividend
income 10,022,013 4.82 7,599,179 5.47 7,651,549 4.75
Fee income 4,308,393 2.07 3,567,837 2.57 2,513,483 1.56
Other income 594,153 0.29 272,921 0.20 886,875 0.55
___________ ______ ___________ ______ ___________ ______
Total revenue $207,865,172 100.00 $138,811,944 100.00 $161,181,814 100.00
=========== ====== =========== ====== =========== ======
</TABLE>
Certain prior year amounts have been reclassified to conform with the fiscal
year ended May 31, 1999 presentation. This table should be read in connection
with the Company's consolidated financial statements.
Nasdaq Market Making -- Sherwood Securities
Introduction
At June 30, 1999, Sherwood Securities was a market maker in over 4,100
Nasdaq and other over-the-counter securities, approximately 79% of which were
listed on the Nasdaq National Market System. At June 30, 1999, it was the fifth
largest market maker based on the number of stocks in which it makes a market
and the tenth largest based on the volume of shares traded. Sherwood Securities
believes it has attained this leadership position by providing better execution
services to its broker-dealer and institutional investor customers because of
its sophisticated and reliable trading systems and technologies and highly
skilled and experienced traders. Sherwood Securities has also developed
proprietary trading methods and a comprehensive risk management system designed
to protect its capital and maximize its trading profits. During the year ended
May 31, 1999, Sherwood Securities had a trading volume of approximately 7.7
billion shares and average daily trades of approximately 25,000.
Technology and Operations
Sherwood Securities' technology platform and systems are designed to enable
it to process a large volume of order flow reliably and efficiently without
diminishing speed of execution. During the last fiscal quarter of the fiscal
year ended May 31, 1999, Sherwood Securities processed between 30,000 and 40,000
trades per day, and its systems are capable of processing up to 150,000 trades
per day. At its peak, Sherwood Securities can process between 40 and 80 trades
per second. Sherwood Securities processes a significant portion of its trading
volume over a dedicated electronic communications network which connects its
trading operations to the order entry departments of its broker-dealer and
institutional customers. This private communications network provides its
customers with immediate access to Sherwood Securities' trading operations and
facilitates the handling of customers' orders. As part of this system, Sherwood
Securities maintains direct communication lines with 40 regional brokerage firms
across the country, as well as with its branch offices in Los Angeles,
California; Chicago, Illinois; Boston, Massachusetts, and Denver, Colorado.
Other brokerage firms in the same geographic regions can use these dedicated
private lines to directly access Sherwood Securities' trading operations.
Sherwood Securities intends to continue to invest in technology to further
enhance its order processing capabilities.
Risk Management
Sherwood Securities' trading profits depend on its ability to evaluate and
act rapidly on market trends and manage risk successfully. To achieve these
objectives, Sherwood Securities has developed a trading methodology designed to
monitor and analyze market activity, price movements and risk on a real time
basis. Sherwood Securities continually analyzes its trading positions in
individual securities and monitors its overall short and long positions and
aggregate profits and losses. Its trading systems provide real time, online risk
management and inventory control functions, including a 15 minute on-screen
scroll that shows all losses greater than $5,000. Its trading systems also
identify all positions held by different traders in the same security. As part
of its risk management policies and procedures, it allocates each of its traders
a limited amount of risk capital with which to trade and requires that a trader
seek permission from his or her supervisor prior to exceeding that amount. It
also requires that its traders maintain positions meeting a specified potential
long/short ratio. Sherwood Securities has 12 trading team captains who are
responsible for continually monitoring their team members' positions and profits
and losses. Each of these team captains meets with all members of his or her
trading team weekly to assess individual and team performance and strategy.
Recently, there has been a sharp increase in the price volatility and
record trading volume of many stocks, particularly those of companies that sell
products or services over the Internet. Customers eager to trade Internet and
other stocks have flooded brokers with larger numbers of orders, periodically
leading to large order imbalances and system backlogs. Sherwood Securities has
implemented procedures designed to allow continuous execution of customers'
orders, while lessening the exposure of the firm to extraordinary market risk.
Our normal policy is to provide continuous automatic execution on orders of up
to 2,000 shares. However, Sherwood Securities may reduce or suspend its
automatic execution policy during unusual conditions and at its discretion.
Execution and Customer Services
Sherwood Securities believes that providing a highly skilled and
experienced trading and customer service workforce is critical to delivering
best execution practices and high quality customer service. It had, at May 31,
1999, approximately 60 traders and 115 assistants/trainees. Its traders have an
average of five years of trading experience, and Sherwood Securities generally
requires that its trainees complete a minimum of two years of extensive in-house
training and apprenticeship prior to permitting them to trade independently. It
also has in-house training programs for traders and trainees, which focus on
specialized trading situations, such as the handling of large institutional
orders, large institutional blocks, new issues and highly volatile stocks. Its
customer service workforce consisted, at May 31, 1999, of approximately 60 sales
professionals. These people are dedicated to establishing and maintaining
customer relationships and facilitating trade executions for its institutional,
broker-dealer and trade program clients. During the fiscal year ending May 31,
2000, Sherwood Securities intends to expand its trading floor to add 45
positions which will permit it to offer an expanded list of securities in which
it makes a market and handle increased trading activities.
Customer Accounts
Sherwood Securities customers consisted, at May 31, 1999, of approximately
850 institutional investors, such as mutual funds, pension plan sponsors,
foundations and endowments, more than 400 hedge funds and almost all of the
currently registered national and regional broker-dealers.
Sherwood Securities' Positions
Sherwood Securities takes both long (owned assets) and short (assets sold
it did not own) positions in the securities in which it makes a market. The
following table illustrates its highest, lowest and average month-end inventory
at market value (based on the aggregate of our long and short positions) of
securities. See Note 3 of Notes to Consolidated Financial Statements.
Fiscal Year Highest Lowest Average
Ended May 31, Month End Month End Month End
1997 $38,561,528 $17,472,124 $29,820,182
1998 128,078,159 27,106,790 53,688,382
1999 145,951,865 21,329,531 63,564,724
Sherwood Securities' securities positions on any one day may not be
representative of its exposure on any other day because its securities positions
may vary substantially with economic and market conditions, allocations and
availability of capital, and trading volume.
Retail Discount Brokerage Services -- NDB.com
Introduction
NDB.com offers its customers a wide variety of financial products and
services and investment tools designed to appeal to all self-directed investors,
from active traders and life goal planners to serious investors. NDB.com has
designed its products and services to allow investors to create their own
diversified, manageable portfolios.
Trading Services
NDB.com's customers can place orders with NDB.com to buy or sell:
o any stock listed on Nasdaq, the NYSE or AMEX. Customers can place
market orders, limit orders (good until canceled or day), most stop
loss orders, most stop limit orders and most short sales;
o more than 9,000 load, no load and no transaction fee mutual funds.
Customers can search NDB.com's Web site mutual fund center for funds
meeting their investment needs. NDB.com also offers monthly investments
in any of these mutual funds through automatic account debit;
o equity and index options listed on the NYSE, AMEX, Chicago Board
Options Exchange or the Philadelphia Stock Exchange; and
o fixed income securities, such as U.S. Treasury obligations, municipal
bonds and corporate bonds.
NDB.com offers its customers the ability to place orders after the
securities markets close. These orders are automatically submitted prior to the
next day's market opening. NDB.com also provides customers real-time
notification of trade execution by automated call back, fax or e-mail and
arranges for the transmittal of shareholder information, such as proxy
statements, annual reports and tender offer materials.
Through its Flat Fee Trading program, NDB.com executes all orders at the
following prices regardless of the number of Nasdaq shares involved (limited to
5,000 shares for exchange listed securities):
Market Orders Limit Orders
$14.75 for orders placed online $19.75 for orders placed online
$19.95 for orders placed by $22.95 for orders placed by
PowerBroker PowerBroker
$24.95 for orders placed with our $27.95 for orders placed with our
registered representatives registered representatives
NDB.com recently developed an interactive application capability on its Web
site. This allows new customers to start trading within one business day after
electronically submitting an application. The entire process takes just a few
minutes to complete. First, a new customer selects the type of brokerage account
he or she wishes to open, such as an individual, joint or custodial. Then, the
customer completes a simple, user-friendly application and electronically
submits the application. NDB.com conducts a compliance and credit review for
each application and then notifies the customer whether his or her application
has been accepted. When combined with an electronic transfer of funds from the
new customer, trading can begin the next business day.
NDB.com believes individual investors gain many advantages from their
NDB.com accounts, including:
o flat fee commission rates for all Nasdaq trades regardless of the
number of shares or dollar amount involved;
o full commission refund of up to $27.95 if, for any reason, a customer
is not satisfied with its service;
o real-time account balances and a list of pending orders;
o no minimum account balance requirement;
o unlimited insurance protection provided through NDB.com's clearing
broker for securities;
o NDB.com's "Same Stock-Same Side-Same Day" program so customers can
place multiple orders for the same stock, on the same side of the
market (i.e., all buys or all sells), on the same day for a single flat
fee commission;
o NDB.com's free dividend reinvestment program that allows customers to
purchase additional shares by automatically reinvesting cash dividends
and capital gains; and
o educational programs through NDB University, its joint venture with
Time Inc. New Media's money.com.
Market Data and Financial Information
During trading hours, NDB.com continually receives and posts detailed
real-time stock quotes, market information and financial news to provide
investors with the information necessary to make investment decisions. NDB.com
believes that real-time information services facilitate and encourage customer
investment ideas and increase transaction volume. NDB.com has arrangements with
leading content providers to supply it with information NDB.com believes meets
customers needs. Unless otherwise noted, all information is available free of
charge to both visitors to NDB.com's Web site and NDB.com's customers.
NDB.com has engaged eLogic Communications to gather, integrate and manage
the data supplied by NDB.com's content providers. eLogic presents these data to
NDB.com in a format that is easy to use and navigate. Real-time quotes,
newsletters and some research reports are fed directly to NDB.com by individual
content providers.
Quotes. Real-time quotes are provided by Reuters and delayed quotes by S&P
Comstock. Real-time quotes are only available to NDB.com's customers.
News. NDB.com receives news and press releases from Reuters, PR Newswire
and Business Wire. The latest business stories and earnings reports are posted
throughout the day, and users can search for information on particular companies
or topics.
Charts. eLogic has developed charting tools that use historical information
provided by Inverson Financial to compare companies and industries.
Analyst Reports. Zacks Investment Research provides research analysts'
recommendations and earnings forecasts.
Insider Trading. Vicker's Stock Research provides detailed insider trading
data. This information is available only to NDB.com's customers.
Research Reports. Market Guide provides fundamental research reports on
over 11,000 public companies, including price performance history, key ratios,
sales and earnings and historical financial statements. This information is only
available to NDB.com's customers.
Market Commentary. Briefing.com and TheStreet.com provide live market
commentary and continual market analysis throughout the day. This information is
available only to NDB.com's customers.
Market Information. NDB.com offers a complete market summary, including
current market indices, most active stocks, intraday market graphics and 90 day
market graphics. Customers can access more comprehensive information, such as
international market indices and treasury bond, yen and euro quotes.
SEC Filings. NDB.com provides a link to full-text SEC filings by every
public company.
Portfolio Tracking and Records Management
Customers can access a list of all portfolio assets they hold in their
NDB.com accounts online, by telephone and through NDB.com's registered
representatives. Customers also receive:
o real-time listing of all their portfolio assets, including current
price and current market value;
o detailed account balance and transaction information, including cash
and money fund balances, net market value, dividends received, interest
income, deposits and withdrawals;
o quarterly account statements;
o annual tax statements;
o daily profit and loss statements; and
o monthly account statements for active customers, summarizing account
activity, including asset valuation, transaction history, interest
income and distribution summary.
NDB.com is currently evaluating supporting the Open Financial Exchange
(OFX) standard so that customers can download their online account information
directly into personal financial software programs such as Intuit's Quicken 98
and 99, Microsoft's MSN MoneyCentral Investor Portfolio and Microsoft's Money
99.
Cash Management Services
NDB.com offers several cash management options to its customers. These
include ProCash Plus accounts which feature unlimited check writing privileges,
telephone bill payment and access to a Mastercard debit card. NDB.com also
offers customers access to a no fee First USA Visa credit card and electronic
funds transfer by touch tone telephone. Customers earn interest on uninvested
funds at NDB.com's competitive rates or by investing in several Alliance money
market funds.
NDB University
NDB.com offers all Web site users lessons in finance, investing and money
management through NDB University, its joint venture with Time Inc. New Media's
money.com. These programs are designed to help customers invest, save, borrow
and spend more wisely. New lessons are introduced every other week and include
topics such as the fundamentals of investing in the stock market, issues to
consider when setting investment priorities and tips for saving for college and
planning for retirement. Interactive programs allow investors to personalize the
lessons to fit their individual objectives.
Specialized Services
NDB.com offers specialized services designed to appeal to registered
investment advisors, institutional investors and high net worth individuals.
NDB.com provides custodial, trading and support services to registered
investment advisors ("RIAs") who manage their customers' portfolios. NDB.com
assigns each RIA to an account manager who assists in opening the account and
acts as a liaison with the trading department. NDB.com also has customer service
representatives and a preferred trading desk dedicated to RIAs.
NDB.com has established an institutional trading desk to meet the needs of
institutional investors and hedge funds, who tend to be more active traders.
They frequently place block trades, usually trades of 10,000 shares or more.
NDB.com charges negotiated fees rather than flat fees for these trades.
NDB.com has customer service representatives dedicated to meeting the needs
of high net worth individuals who maintain large account balances at NDB.com.
NDB.com intends to establish a premium service desk for these investors which
NDB.com will staff with dedicated registered representatives who can answer
customer questions, as well as place trades.
Investment Tools
NDB.com offers several investment tools designed to assist customers in
making investment decisions. These investment tools include:
Stock Screening. Stockpoint provides two stock screening tools that permit
investors to search for stocks that fit their particular needs on the NYSE,
Nasdaq and AMEX. Customers can search fundamental data on over 8,900 companies
based on a variety of parameters, including market capitalization, price, return
on equity and percentage of institutional ownership.
Mutual Fund Center. eLogic has developed a searchable database of more than
9,000 mutual funds based upon information provided by Value Line. Customers can
use research and analysis tools to screen funds based on a variety of defined
parameters. They can also obtain a list of the top performing funds in over 75
categories.
Newsletters. Customers can subscribe to over 100 investment newsletters
provided by newsletters.com.
Research on Demand. NDB.com offers access to other premium investment
research and analysis for a fee. Available reports include S&P Stock and
Industry Reports and First Call Earnings Estimates.
New Product and Service Development
NDB.com constantly evaluates new ideas to expand or improve the products
and services NDB.com offers its customers. Its business analyst group is
responsible for researching and implementing projects, including those initiated
by our executive management. At May 31, 1999 the group consisted of six
associates with expertise in accounting, finance, facilities management and
project management. The group performs cost benefit analyses and trend
projections and manages the development of new products and services within
specified timeframes and budgets. The group also seeks qualified companies with
whom NDB.com may develop affinity relationships to provide these new products
and services.
Delivery of NDB.com Services
NDB.com provides its customers with three points of access to trade
securities, obtain research and monitor account balances: its Internet Web site,
its interactive telephone system and its registered representatives.
Online services. NDB.com's Web site allows customers to electronically
place orders to buy or sell securities from their personal computers 24 hours a
day, seven days a week for execution during regular market hours. NDB.com is the
only online broker to have received in 1999 the highest ratings from both
Barron's and Money magazine. NDB.com was ranked the number two online broker by
Barron's. Similarly, Money magazine ranked NDB.com as the number two online
broker in a study testing ease of use, customer service, system responsiveness,
products and tools, and costs, and also ranked the Web site the number one
online broker for new online investors. NDB.com's Web site is designed to be
user-friendly with easily accessed help pages and messages that repeat orders
for accuracy and confirmation. Online investors can access real-time quotes and
news as well as a broad array of free investment research and tools to help them
make more informed investment decisions. During the month of June 1999,
approximately 69% of NDB.com's executed trades originated online.
Interactive telephone system. PowerBroker, NDB.com's touch-tone telephone
interactive response system, is available 24 hours a day, seven days a week.
With PowerBroker, customers can check account positions and balances, perform
account administration and place orders for execution during regular market
hours. PowerBroker is available in four languages: English, Spanish, Mandarin
and Cantonese. During the month of June 1999, approximately 19% of NDB.com's
executed trades originated through PowerBroker.
Registered representatives. NDB.com has approximately 95 registered
representatives to answer questions, accept orders and provide quote and account
information. These representatives are available Monday through Friday, from
7:00 am to 8:30 pm (other than holidays) and place orders for execution during
regular market hours. NDB.com is committed to offering its customers the ability
to place trades with registered representatives and will continue to hire
additional representatives as needed. During the month of June 1999,
approximately 12% of NDB.com's executed trades originated through its registered
representatives.
NDB.com Affinity Relationships
NDB.com pursues relationships with affinity partners to increase its access
to potential customers, build brand name recognition and expand the products and
services NDB.com can offer to its customers. NDB.com is actively pursuing
alliances with a variety of companies whose customers are likely to use its
products and services. NDB.com believes that its focus on affinity relationships
has resulted in lower account acquisition costs than many other discount
brokers. NDB.com intends to expand its affinity program and will evaluate
potential relationships with new affinity partners in the future as
opportunities arise.
To assure a high level of customer satisfaction, NDB.com has dedicated a
number of its customer service representatives to servicing the accounts of
customers obtained through these relationships.
NDB.com Marketing and Advertising
NDB.com has limited its advertising to print and broadcast media. During
the fiscal year ending May 31, 2000, NDB.com intends to significantly expand its
advertising to build awareness of its brand, quality customer service and depth
and breadth of products and services. NDB.com intends to market its online
investing services to individual investors as a better way of handling
securities transactions, accessing financial and market data and managing
portfolios. NDB.com intends to use a variety of media forms to reach individual
investors who may use its services, including broadcast media, print
advertisements, online advertisements and direct mail.
NDB.com's advertising agency has prepared a comprehensive advertising and
marketing campaign that it has begun to implement.
NDB.com Customer Service
NDB.com believes that providing excellent customer service is critical to
its success. Its 85 customer service representatives and supervisors are trained
to handle all types of customer inquiries. NDB.com's customer service department
receives over 2,000 telephone calls and 325 e-mails per day. NDB.com responds
promptly to these inquiries. Customer service representatives answer inquiries
about account status, such as balances, portfolio holdings and trade executions,
and address more complex issues such as margin requirements and research
questions. They also act as a liaison with the trading department to provide
overall customer satisfaction. Representatives are available weekdays from 6:00
am to 10:00 pm New York time (other than holidays). NDB.com expects to implement
24 hour a day, seven day a week coverage (other than holidays) during the fiscal
year ending May 31, 2000. NDB.com is in the process of increasing the number of
customer service representatives to approximately 110.
About 20% of our customer service representatives are dedicated to
servicing accounts gained through NDB.com's affinity relationships. All of these
employees are registered representatives that can assist customers in all
aspects of trading.
Telephone and E-mail Support and Technology. NDB.com's customer service
telephone system is state-of-the-art and designed along "open architecture"
lines to permit regular hardware and software upgrades with a minimum of
disruption and expense. New releases of both programs and equipment are only
integrated into the customer service system after adequate testing and training.
PowerBroker, our automated interactive voice response system, currently handles
approximately 14,000 incoming calls daily, greatly reducing the volume of calls
which NDB.com's representatives must handle. This reduces wait times during high
volume trading hours and helps reduce overall customer service costs.
NDB.com also provides customer support by e-mail. All customer service
representatives are trained to respond to electronic requests using both
pre-composed and original e-mails. All e-mail responses are reviewed by a
customer service manager before being sent to a customer.
Personnel and Training. NDB.com believes that training is key to creating
an efficient and motivated customer service team. NDB.com is committed to
providing the best available training to its customer service representatives in
an ongoing manner. NDB.com focuses on career development for its staff, which it
believes improves employee retention.
NDB.com maintains a ratio of one supervisor for each five customer service
representatives. NDB.com believes that this promotes high quality customer
service. Supervisors monitor customer service calls and e-mail to improve
training and customer satisfaction. All customer service representatives undergo
both monthly and annual performance reviews to measure their knowledge of
NDB.com's products and services, their level of teamwork, their work ethic and
personal objectives and their ability to deliver NDB.com's expected level of
customer satisfaction.
New customer service representatives take a two month initial course that
covers NDB.com's products, services and policies. Topics include trading over
the Internet, equity and option trading, margin accounts and individual
retirement accounts. Customer service representatives also receive ongoing
training as new products and services are developed and NDB.com's technology
infrastructure is modified or upgraded.
NDB.com Customer Accounts
NDB.com had over 147,000 accounts as of June 30, 1999. NDB.com's customers
include individual investors, businesses, investment clubs, registered
investment advisors and institutions. During the fiscal year ended May 31, 1999,
NDB.com averaged approximately 16 executed trades per account. At May 31, 1999,
NDB.com's customer assets were approximately $7.4 billion, an average per
account of over $52,000, which NDB.com believes to be among the highest in the
industry.
NDB.com Technology
NDB.com's technology department develops and maintains a combination of
proprietary and vendor software to support its online brokerage business and to
automate traditionally labor-intensive transactions. The department's primary
responsibility is to ensure customer access to NDB.com's system through the
Internet and the telephone, full availability of its products and services and
rapid transmission of trades.
NDB.com's technology is designed along "open architecture" lines to permit
regular hardware and software upgrades with minimal disruption and expense. This
design allows NDB.com to respond quickly to growth in both trading volumes and
number of accounts by adding new computers and improving software.
NDB.com believes there are many advantages to its technology
infrastructure. NDB.com's system is designed to be:
o highly scalable, which allows it to easily change its size or
configuration to adapt to increased volume and numbers of users;
o highly fault tolerant, which allows its customers continued access in
the event of hardware or software failure;
o highly integrated, which allows it to communicate with any customer's
personal computer;
o load balanced, which allows it to respond to surges in trading volume;
and
o secure. NDB.com uses sophisticated encryption, authentication
technology and firewalls to secure the confidential information
transmitted to and from its customers.
NDB.com's Web Site
The primary components of NDB.com's new Web site are the presentation
layer, the application servers and the databases.
Presentation Layer. The presentation layer is the display screen of
NDB.com's Web site accessed by its customers over the Internet. It allows
NDB.com to offer its services on many platforms without the need to specifically
modify its technology for each platform. The presentation layer uses the
computer languages HTML, Java and Java Script and is designed to be
user-friendly and easy to navigate.
Application Servers. NDB.com's Netscape application servers use the
computer languages C++ and Java to permit the interaction between its customers'
computers and its databases. NDB.com's proprietary technology establishes a
common language among these components and allows them to function on different
platforms and in different protocols. The servers also automatically distribute
traffic throughout its system to maintain reliability.
Databases. NDB.com's Oracle databases store all information necessary to
allow customers to execute trades and monitor their accounts. The databases
contain a complete history of each customer's account, including past trades and
current portfolio positions. In addition, the databases allow customers to
personalize their trading experience by customizing quote lists and screen
graphics and alerting them to current news on their stocks.
NDB.com's Trading System
All customer orders, whether received through the Internet or by telephone,
pass through NDB.com's Unix-based automated processor. This processor is
designed to provide all customers with the same real-time portfolio information
no matter how it is accessed. The automated processor was designed to rapidly
read data, process transactions and transmit information to multiple locations,
which provides a high degree of automation for all transactions. It applies
preprogrammed rules to each order to determine whether it should be routed to a
market maker for execution, reviewed internally or automatically rejected for a
number of reasons, such as inadequate margin availability. If a market maker
experiences technical difficulties or is unable to execute a trade, NDB.com's
processor reroutes the customer order to an alternate market maker.
Proposed Self Clearing Operations - Millennium Clearing Corp.
The Company currently maintains relationships with two clearing brokers to
clear and settle its securities transactions. The clearing brokers also provide
record keeping, custody and other services. Sherwood Securities clears its
market making transactions through Broadcort Capital Corp., a subsidiary of
Merrill Lynch. Sherwood Securities' agreement with Broadcort is for an
indefinite period of time but may be terminated upon 180 days prior written
notice by either party. NDB.com's transactions are cleared through the Pershing
Division of Donaldson, Lufkin & Jenrette. The agreement with Pershing expires in
March 2000, subject to termination by either party.
The Company intends to begin self-clearing operations. The Company expects
to initially contract with a third party to provide computer services to support
these operations during the development stage. The Company's regulatory net
capital requirement will increase when it begins to self-clear. The level of
that required net capital will vary with the amount of customer margin
borrowing. The Company plans to operate its clearing activities through its
wholly owned subsidiary, Millennium Clearing Corp.
The Company believes that performing its own clearing operations will offer
the following advantages:
o Margin lending. The Company will be permitted to use customer
securities for its margin lending activities, subject to regulatory
rules;
o Reduction in costs. It believes, that over time, the Company will be
able to perform its own clearing less expensively and more efficiently
than its current clearing arrangements;
o Securities lending. The Company will receive fees for lending
securities to other brokers; and
o Additional source of revenue. The Company will be able to offer
clearing services to other broker-dealers and other financial
institutions, which will give it an additional source of revenue.
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
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 NDB
Group. 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, 1999, 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 were sold during the year ended May 31, 1999 with
Sherwood Securities recognizing a gain of approximately $80,000.
The Company owned 260,100 shares of Astropower, Inc. common stock, acquired
as part of an underwriting in 1989. During the year ended May 31, 1999, all of
the shares were sold with the Company recognizing a gain of approximately
$2,300,000.
Between February and April 1998, NDB.com invested $500,000 for 500,000
shares of Award Track, Inc. common stock. During the year ended May 31, 1999,
the entire investment was written off as the Company's management deemed it
worthless.
Investment in property. NDB Group, 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.
Personnel
As of June 30, 1999, the Company had 668 full-time employees of which 375
are salespeople, traders and trading assistants. Included in the preceding
employee counts are NDB.com's 314 full-time employees of which 149 are NASD
registered 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 and NDB.com's registered
representatives and certain members responsible for managing 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 the "Annual Trading/Sales Production Guarantee" program, based on
a number of factors and subject to an annual review. NDB.com's registered
representatives work on a salary basis.
All full-time employees who have completed five years of employment may
take a four-week (three months in the case of members of the executive committee
of the Company) 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
The market for online investing services, particularly over the Internet,
is new, rapidly evolving and intensely competitive. The Company expects
competition to continue to intensify in the future. NDB.com encounters direct
competition from discount brokerage firms providing either touch-tone telephone
or online investing services, or both. These competitors include Ameritrade,
Charles Schwab, Datek Online, Discover Brokerage Direct, DLJdirect, E*Trade
Securities, Fidelity Brokerage Services, Quick & Reilly and Waterhouse
Securities. NDB.com also encounters competition from the many established
full-commission brokerage firms, such as Merrill Lynch, Morgan Stanley Dean
Witter and PaineWebber. Additionally, NDB.com competes with financial
institutions, mutual fund sponsors and other organizations, some of which
provide online investing services.
The Company believes that the principal competitive factors affecting the
market for NDB.com's services are cost, customer service, quality, execution,
delivery platform capabilities, ease of use, presentation layer look and feel,
depth and breadth of services and content, financial strength and innovation.
The Company believes that NDB.com currently competes favorably with respect to
each of these factors.
Many of the Company's competitors have longer operating histories and
significantly greater financial, technical, marketing and other resources than
it has. Many current and potential competitors also have greater name
recognition and more extensive customer bases that could be leveraged, thereby
gaining market share to the Company's detriment. Additionally, new competitors
or alliances among competitors may emerge and rapidly acquire significant market
share.
Sherwood Securities is one of several independent broker-dealers whose
principal activity is making markets in a broad range of Nasdaq and other
over-the-counter securities. 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
electronic communications network and its ability to effect large transactions
in an orderly manner. Sherwood now faces increasing competition from electronic
communications networks and the Instinet trading market, which enable buyers and
sellers to interact more directly and allow for trading without a market maker.
Regulation
The Company's business is subject to extensive regulation applicable to the
securities industry in the United States. As a matter of public policy,
regulatory bodies in the United States are charged with safeguarding the
integrity of the securities and other financial markets and with protecting the
interests of customers participating in those markets. The Securities and
Exchange Commission is the federal agency charged with administration of the
federal securities laws. However, the SEC has delegated some regulatory matters
to self-regulatory organizations, such as the National Association of Securities
Dealers. The NASD adopts rules (which are subject to approval by the SEC),
examines broker-dealers and requires strict compliance with its rules and
regulations. Securities firms are also subject to regulation by state securities
commissions in the states in which they are registered. As of May 31, 1999,
Sherwood Securities was registered as a broker-dealer with the SEC, the NASD and
in 20 states and the District of Columbia. As of May 31, 1999, NDB.com was
registered as a broker-dealer with the SEC, the NASD and in all 50 states, the
District of Columbia and the Commonwealth of Puerto Rico. NDB.com is also a
member of the Boston Stock Exchange and the Chicago Stock Exchange.
SEC and NASD regulations cover many aspects of a broker-dealer's business,
including, but not limited to, capital structure and withdrawals, sales methods,
trade practices among broker-dealers, use and safekeeping of customers' funds
and securities, recordkeeping, the financing of customers' purchases,
broker-dealer and employee registration and the conduct of directors, officers
and employees. Additional legislation, changes in rules promulgated by the SEC
and the NASD, or changes in the interpretation or enforcement of existing law
and rules may directly affect the method of operation and profitability of
broker-dealers. The SEC, the NASD and state securities commissions may conduct
administrative proceedings, which can result in censure, fine, the issuance of
cease-and-desist orders or the suspension or expulsion of a broker-dealer, its
officers or employees.
Sherwood Securities' and NDB.com's sales and trading personnel, and certain
members of management, are required to take examinations given by the NASD. In
some circumstances, additional examinations are required for sales and trading
personnel to be qualified to do business in various states.
Changes in regulations pertaining to Nasdaq may have a material effect on
Sherwood Securities' trading activities. For example, in August 1996, the SEC
adopted new rules known as the order handling rules, which altered the manner in
which orders for stocks are handled. These rules became effective on January 20,
1997 and were phased in for additional Nasdaq stocks during 1997. These rules
and other rules that were proposed, as well as regulatory actions and changes in
market practices, have had, and may continue to have, an adverse effect on
Sherwood Securities' revenues, profit margins and the manner in which it
conducts its business.
Customer Protection and Insurance
Customers of Sherwood Securities and NDB.com are protected against some
losses by the Securities Investor Protection Corporation ("SIPC"). SIPC provides
protection against lost, stolen or missing securities (except loss in value due
to a rise or fall in market prices) for customers in the event of the failure of
a broker-dealer. Accounts are protected up to $500,000 per customer with a limit
of $100,000 for cash balances. Both Sherwood Securities and NDB.com are members
of SIPC. However, because the funds and securities of the Company's customers
are held by the Company's clearing firms, Broadcort and Pershing, the Company's
customers are treated for SIPC purposes as customers of Broadcort and Pershing.
Therefore, SIPC coverage comes into play only in the event of the financial
failure of one of those firms. In addition to being members of SIPC, the
Company's clearing firms also carry private insurance, which provides unlimited
coverage for securities held in customer accounts in the event of the failure of
those clearing firms.
The Company also carries brokers' blanket bonds covering Sherwood
Securities and NDB.com for loss or theft of securities, forgery of checks and
drafts, embezzlement, certain employee misconduct and misplacement of
securities. These bonds provide total coverage of $1,000,000 for Sherwood
Securities and $550,000 for NDB.com. The bonds each contain deductibles of
$10,000.
Net Capital and Customer Reserve Requirements
As registered broker-dealers and members of the NASD, Sherwood Securities
and NDB.com are subject to the SEC's Uniform Net Capital Rule 15c3-1. The Rule
specifies the minimum level of net capital a broker-dealer must maintain and
also requires that at least a minimum part of its assets be kept in relatively
liquid form. 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").
As of May 31, 1999, Sherwood Securities was required to maintain minimum net
capital of $1,000,000 and had total net capital of $62,398,000. As of May 31,
1999, NDB.com was required to maintain minimum net capital of $250,000 and had
total net capital of approximately $4,104,000.
Sherwood Securities and NDB.com meet the exemptive provisions for the
computation for determination of reserve requirements for broker-dealers under
subparagraph (k)(2)(ii) of SEC Rule 15c3-3. During the period from June 1, 1998
through May 31, 1999, Sherwood Securities and NDB.com were in compliance with
the conditions of this exemption.
In computing net capital under Rule 15c3-1, various adjustments are made to
exclude assets not readily convertible into cash and to provide a conservative
statement of other assets, such as the inventory of securities. Therefore, a
deduction is made against the market value of securities to reflect the
possibility of a market decline prior to their disposition. Thus, this Rule
imposes financial restrictions upon the Company's businesses that are more
severe than those imposed on concerns in other types of businesses.
In addition, the SEC and NASD impose rules that require notification when
net capital falls below certain predefined levels, dictate the ratio of debt to
equity in the regulatory capital composition of a broker-dealer and limit the
ability of a broker-dealer to expand its business volume under certain
circumstances. Moreover, the Uniform Net Capital Rule and the NASD's rules
impose requirements that may have the effect of prohibiting a broker-dealer from
distributing or withdrawing capital and requiring prior notice to the SEC and
NASD for certain withdrawals of capital, even capital in excess of regulatory
requirements. Since NDB Group's principal assets are its ownership of its
broker-dealer subsidiaries, the rules governing net capital and restrictions on
capital withdrawals could prevent NDB Group from meeting its financial
obligations on a timely basis. See Note 13 of Notes to the Consolidated
Financial Statements.
Compliance with the Uniform Net Capital Rule may also limit those
operations of Sherwood Securities and NDB.com that require the use of
significant amounts of capital, such as market making activities. Further,
assets that are included in their respective minimum net capital are not
available for distribution to NDB Group's shareholders in the form of dividends
or otherwise. At May 31, 1999, the Company believed Sherwood Securities and
NDB.com were in compliance with the net capital requirements. Failure to
maintain the required net capital may subject them to suspension of business and
may ultimately require their liquidation.
Item 2. Properties
The corporate headquarters of NDB Group and Sherwood Securities' office and
trading facilities occupy approximately 51,600 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. Base rent for this space is approximately $1,500,000 per year with
periodic escalations.
NDB.com'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. Base rent on this space is approximately $718,000 per year
with periodic escalations.
The Company has signed an 18-month lease for an additional 10,000 square
feet in New York for base rent of approximately $320,000 per year. This space
will be used by NDB.com for its operations. The Company also signed a lease for
an additional 96,000 square feet near its headquarters in Jersey City, New
Jersey, for base rent of approximately $2,900,000 per year. This lease is for a
term of 15 years, which may be extended. This space will be the corporate
headquarters for NDB.com and Millennium and will primarily be used for the
self-clearing operations, data center and call center. See Note 14 to the
Consolidated Financial Statements
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.
The Company has been named as a defendant in a number of lawsuits and
arbitrations and is the subject of investigations that allege, among other
things, violations of Federal and state securities laws and other laws. A
substantial settlement or judgement in any of these cases could have a material
adverse effect on the Company. Except as described below, management of the
Company believes that none of these pending lawsuits, arbitrations and
investigations is likely to have a material adverse effect on its financial
condition, results of operations or liquidity, although the Company cannot be
certain of this.
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
provided 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. On November 9, 1998, Judge Sweet of the United
States District Court for the Southern District of New York (the "Court")
approved the Settlement Agreement and entered a Final Judgment and Order of
Dismissal. The Court's Final Judgment has been appealed to the United States
Court of Appeals for the Second Circuit by certain class members, and such
appeals are pending.
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 and that approval was affirmed on appeal by the United States
Court of Appeals for the Second Circuit. No timely petition for review by the
United States Supreme Court has been filed.
As part of a global settlement involving more than 25 Nasdaq market-making
firms, Sherwood Securities has settled proceedings brought against it in
connection with the investigation by the Securities and Exchange Commission
("SEC"), captioned In the Matter of Certain Market-Making Activities on NASDAQ,
HO-2974. In connection with the settlement, Sherwood Securities consented to the
entry of certain Orders by the SEC instituting proceedings, making findings and
imposing sanctions. Sherwood Securities neither admitted nor denied the
substantive allegations set forth in the Orders. The Orders state that Sherwood
Securities, aided and abetted by certain traders employed by Sherwood Securities
during the relevant time, engaged in or caused certain violations of Section
15(c)(1) and (2) and Section 17(a) of the Securities Exchange Act of 1934
("Exchange Act") and Rules 15c1-2, 15c2-7 and 17a-3 thereunder, and orders
Sherwood Securities and certain of its traders to cease and desist from
committing or causing future violations of these provisions. In addition, the
Orders also stated that Sherwood Securities had failed to reasonably supervise
its market-making activities, in violation of Section 15(b)(4)(E) of the
Exchange Act.
As part of the settlement, Sherwood Securities paid a civil penalty of
$1,000,000 to the SEC and the sum of $8,138 in disgorgement. Sherwood Securities
previously fully reserved for the penalty payment, which was made January 22,
1999. Sherwood Securities also agreed to a review by an independent consultant
appointed by the SEC of its policies, procedures and practices relating to
prevention and detection of those types of conduct described in the Orders which
relate to Sherwood Securities. Finally, three present and one former trader
employed by Sherwood Securities also consented, neither admitting nor denying
the allegations, to the entry of the Orders and to individual suspensions
ranging from 7 to 12 weeks and individual penalties ranging from $25,000 to
$50,000 each.
On March 22, 1999, Weiss, Peck & Greer, L.L.C. ("WPG") filed an NASD
arbitration action against Sherwood Securities. WPG alleges that Sherwood
Securities contravened standards of "commercial reasonableness" and "just and
equitable principles of trade" in connection with the execution of trades of
approximately 1.5 million shares of the stock Amazon.com from Carnegie, Childs &
Co. on January 8, 1999. WPG was Carnegie's clearing broker and alleges that the
trades resulted in Carnegie's having a net short position in 1,462,000 shares of
Amazon.com. WPG covered the short position on January 11, 1999 and alleges it
sustained losses of more than $11 million. Sherwood Securities filed an Answer
and Statement of Counterclaim dated June 8, 1999 in which Sherwood Securities
denied liability for the claims asserted by WPG and asserted a counterclaim
against WPG of approximately $1.3 million for losses Sherwood Securities
suffered in connection with these trades. WPG has filed a Reply to Counterclaim
dated June 28, 1999 denying liability for the claim asserted in the Answer and
Statement of Counterclaim. Sherwood Securities, after consultation with counsel,
believes it has valid defenses to the claims made by WPG and intends to
vigorously contest the claims.
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, 1999.
PART II
Item 5. Market for NDB Group's Common Stock and Related Security Holder Matters.
NDB Group trades its common stock on the NYSE under the symbol "NDB." Prior
to December 12, 1997, the symbol had been "SHD". There were 1,345 holders of
record of NDB Group's common stock at June 30, 1999. As of June 30, 1999, the
closing sales price per share for NDB Group's common stock was $58.
The following table sets forth the high and low sales price per share for
NDB Group's common stock for each quarterly period within the two most recent
fiscal years as reported by the New York Stock Exchange:
Sales Prices
Quarter Ended High Low
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
August 31, 1998 11.6250 9.3750
November 30, 1998 9.5625 8.1250
February 28, 1999 47.0000 8.7500
May 31, 1999 92.9375 22.3750
There were no cash dividends declared on the common stock of NDB Group in
the two-year period ended May 31, 1999. Funds available for distribution to
shareholders of NDB Group 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 and NDB.com 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, 1999 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, 1999 presentation.
<TABLE>
<CAPTION>
Years Ended May 31,
1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
Operating Data (b)
Revenues $207,865 $138,812 $161,182 $161,735 $94,740
Income from continuing operations
before income taxes $34,681 $11,739 $12,647 $29,313 $13,560
Income taxes 16,462 5,741 6,031 12,783 1,847
Net income from continuing
operations 18,219 5,998 6,616 16,530 11,713
Income from discontinued
operations, net of taxes 2,786 3,258 2,664 3,602 2,902
Gain from sale of discontinued
operations, net of taxes -- 2,704 -- -- --
Net income (a) $21,005 $11,960 $9,280 $20,132 $14,615
Per Share Data (c):
Basic:
Income from continuing operations,
net of taxes $1.30 $ .45 $ .51 $1.30 $ .94
Income from discontinued
operations , net of taxes .20 .24 .21 .29 .23
Gain from sale of discontinued
operations, net of taxes -- .20 -- -- --
Net income $1.50 $ .89 $ .72 $1.59 $1.17
Diluted:
Income from continuing operations,
net of taxes $1.29 $ .45 $ .51 $1.25 $ .86
Income from discontinued
operations, net of taxes .20 .24 .21 .27 .21
Gain from sale of discontinued
operations, net of taxes -- .20 -- -- --
Net income $1.49 $ .89 $ .72 $1.52 $1.07
Balance Sheet Data:
Total assets $217,291 $188,474 $160,161 $143,255 $113,031
Common stockholders' equity 141,995 124,173 92,274 86,570 65,978
Book value per share-basic (c) 10.13 9.24 7.16 6.82 5.27
Book value per share-diluted (c) 10.04 9.20 7.13 6.56 4.83
Dividends -- -- -- -- --
<FN>
(a) The results of operations for the years ended May 31, 1995 include $4,687,
or $.34 per share, of benefit from a net operating loss carryforward which
would have been shown as an extraordinary item prior to the adoption of the
Statement of Financial Accounting Standard No. 109, "Accounting for Income
Taxes".
</FN>
<FN>
(b) In May 1999, the Company entered into a definitive agreement to sell its
ownership interest in Equitrade. The transaction closed on June 18, 1999,
and as such, the operations of Equitrade have been reflected in
discontinued operations for all periods reported. In addition, the results
of operations of MXNet, Inc. and the American Stock Exchange Specialist
business of Sherwood Securities, each of which was sold in February 1998,
have been included in discontinued operations for all applicable periods.
</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 1999 Compared to Fiscal 1998
The results of continuing operations of the Company for the year ended May
31, 1999 reflect primarily the activities of Sherwood Securities and NDB.com.
On June 18, 1999, NDB Group sold its 46.845% membership interest in
Equitrade Partners, L.L.C. In addition MXNet, Inc. ("MXNet"), a wholly owned
subsidiary of NDB Group was sold on February 13, 1998. Sherwood Securities also
sold its AMEX specialist business in February 1998 for $325,000. As a result,
the results of operations of these entities have been segregated and reflected
as discontinued operations on the Consolidated Statements of Income and
Comprehensive Income. Accordingly, the consolidated line items comprising
revenue and expenses from continuing operations have been adjusted to exclude
the discontinued operations. Net income from operations of these discontinued
operations for the year ended May 31, 1999 was $2,786,000 (net of taxes). For
the year ended May 31, 1998, the net income from operations of these
discontinued operations was $3,258,000 (net of taxes). See Note 12 to the
Consolidated Financial Statements.
The Company had a net income from continuing operations for the year ended
May 31, 1999 of $18,219,000, compared to a net profit from continuing operations
of $5,998,000 for the year ended May 31, 1998. Sherwood Securities had a net
income for the year ended May 31, 1999 of $20,826,000, compared to a net profit
for the year ended May 31, 1998 of $4,259,000. The Company's and Sherwood
Securities' fiscal year 1998 results include a non tax-deductible charge of
$1,300,000 based upon management's assessment of the status and reasonably
likely outcome of the SEC investigation described in Item 3, above. NDB.com had
a net income for the year ended May 31, 1999 of $1,463,000, compared to a net
income of $1,304,000 for the year ended May 31, 1998.
Total revenue from continuing operations of the Company increased by
approximately $69,053,000, or 50%, from $138,812,000 in 1998 to $207,865,000 in
1999.
Most of the Company's revenue arises from Sherwood Securities' firm
securities transactions. Revenue from firm securities transactions increased
$55,564,000 from $90,256,000 for the year ended May 31, 1998 to $145,820,000 for
the year ended May 31, 1999. The increased activity in the equity markets,
particularly trading volume in internet and high technology related stocks,
resulted in increases in both the Company's ticket and share volume for the year
ended May 31, 1999, as compared to a year ago. Sherwood Securities' overall
ticket volume increased approximately 51% for the year ended May 31, 1999 from
4,235,000 to 6,376,000. Trading profits per ticket also increased from $21.32 to
$22.87.
The Company's commission income, primarily generated by NDB.com, increased
by $8,198,000, or 22%, from $37,052,000 for the year ended May 31, 1998 to
$45,250,000 for the year ended May 31, 1999. These increases occurred primarily
due to the increase in NDB.com's average daily ticket count, which was
approximately 7,900 tickets per day for the year ended May 31, 1999 as compared
to approximately 6,100 tickets per day for the year ended May 31, 1998.
Realized gain on securities for the year ended May 31, 1999 represent gain
from the sale of 260,100 shares of Astropower, Inc. common stock by NDB Group
and 75,000 shares of Eurotech, Ltd. common stock by Sherwood Securities offset
by the write-off of NDB.com's investment in 500,000 shares of Award Track, Inc.
common stock deemed by management to be worthless.
Interest and dividend income increased by approximately $2,423,000, or 32%,
from $7,599,000 in 1998 to $10,022,000 in 1999 primarily due to the growing
margin debits and free credits balances that customers retain with NDB.com's
clearing broker and the increased proprietary average cash balance Sherwood
Securities maintained with its clearing broker.
Fee income increased $740,000, or 21%, from $3,568,000 in 1998 to
$4,308,000 in 1999. The increases are due to NDB.com receiving higher
distribution assistance fees (formerly called Rule 12b-1 fees) from mutual funds
as NDB.com customers' balances in those funds have increased, as well as an
increase in the negotiated rates used to calculate the fees rebated thereon. The
increase in fee income would have been even higher, except that during the year
ended May 31, 1998, Sherwood Securities received a non recurring $275,000 fee
for consulting services rendered in connection with the sale of its AMEX
specialist business.
Total expenses from continuing operations increased $46,111,000, or 36%,
from $127,073,000 in 1998 to $173,184,000 in 1999. The reasons for the increase
in expenses are set forth below.
Clearing and related charges decreased by approximately $964,000 from
$46,320,000 in 1998 to $45,356,000 in 1999. As a percentage of revenue, clearing
and related charges decreased to 22% for the year ended May 31, 1999 from 33% in
the prior year. The decrease for the year ended May 31, 1999 is due principally
to three factors. First, there was the reduction in clearance charges due to a
full year's benefit from decreases in per ticket rates negotiated with Sherwood
Securities' clearing broker during the year ended May 31, 1998. Second, there
was a reduction in clearance charges due to a decrease in per ticket rates
negotiated with NDB.com's clearing broker as of February 1999. And, lastly, was
the reduction in order flow rebate fees paid by Sherwood Securities based upon
the overall size and type of the order flow received. These rate reductions were
more than enough to compensate for increases of 51% and 29% in total trades
executed by Sherwood Securities and NDB.com, respectively, during the year ended
May 31, 1999 over the prior year.
Compensation and benefits increased by approximately $33,558,000, or 72%,
for the year ended May 31, 1999, compared with the prior year. As a percentage
of revenue, employee compensation increased to 39% for the year ended May 31,
1999, from 33% a year ago. The increases were primarily due to a rise in
compensation paid to Sherwood Securities' traders and salesmen resultant from
the increase in Sherwood Securities' net trading revenue and profitability.
Similarly, based on the increasing profitability and operational benchmarks of
both NDB.com and Sherwood Securities, management and employee bonuses have
increased. Finally, the number of employees increased to 624 employees as of May
31, 1999, from 478 employees as of May 31, 1998.
Communication expenses, which include market data services, increased by
$2,927,000 from $10,865,000 in 1998 to $13,792,000 in 1999. The increase is
mainly due to an increase in the cost of real-time quotations now being offered
on NDB.com Webstation(TM).
Advertising costs increased $3,548,000 from $4,146,000 in 1998 to
$7,694,000 in 1999 due to additional media buys and the costs to produce a new
line of advertisements for NDB.com.
Occupancy costs increased $363,000 from $2,287,000 in 1998 to $2,650,000 in
1999. This increase is due to additional space leased during fiscal 1999 by both
Sherwood Securities and NDB.com, as well as increases in utility charges.
Equipment rentals increased $436,000 from $185,000 in 1998 to $621,000 in
1999. The increase is principally due to an increase in the cost of rental of
various computer hardware and software systems related to NDB.com
Webstation(TM).
Professional fees increased by $2,663,000 from $705,000 in 1998 to
$3,368,000 in 1999. The increase is primarily due to a rise in legal fees
associated with a number of projects, including corporate acquisitions and
dispositions by NDB Group, real estate lease negotiations primarily by NDB.com,
architectural and engineering needs analyses and other matters for both NDB.com
and Sherwood Securities.
Technology consulting fees increased $1,355,000 from $743,000 in 1998 to
$2,098,000 in 1999. The increase is primarily due to the management of NDB.com
new Webstation(TM) development project.
Depreciation and amortization increased by approximately $1,212,000, or
18%, for the year ended May 31, 1999, as compared to the prior year. These
increases can be attributed to three main factors. First, NDB.com incurred
additional charges for the disposition of abandoned assets in connection with a
network upgrade. Second, the useful lives for all of Sherwood Securities' and
NDB.com's computer-related equipment were reduced. This revision was necessary
due to the fact that these assets are becoming obsolete faster (due to speed and
capacity limitations) in view of the higher volume and volatility conditions of
current markets. Finally, the fixed asset, leasehold improvement andcomputer
software additions by Sherwood Securities and NDB.com aggregating approximately
$2,300,000 and $4,900,000, respectively, during the period from June 1998
through May 1999 also increased depreciation and amortization.
Travel and entertainment expense increased approximately $1,177,000 from
$1,672,000 in 1998 to $2,849,000 in 1999 and reflects primarily the entertaining
of customers by Sherwood Securities' institutional and broker dealer sales
force.
Repairs and maintenance expense at both NDB.com and Sherwood Securities
increased by $397,000 from $1,906,000 in 1998 to $2,303,000 in 1999. The
increase is principally due to maintenance service contract fees paid in order
to maintain infrastructures as the original warranties on the various systems
continue to expire.
Interest expense increased $51,000 from $339,000 in 1998 to $390,000 in
1999 primarily due to interest incurred by NDB Group on its $15,000,000 loan
from SLK.
Other expenses decreased $613,000 from $4,850,000 in 1998 to $4,237,000 in
1999. The decrease is primarily attributable to the absence in fiscal 1999 of a
Sherwood Securities charge in connection with the SEC investigation, which was
recorded in fiscal 1998. See Item 3, "Legal Proceedings". Partially offsetting
this decrease was an increase in NDB.com customer accomodations related to trade
executions.
The Company's effective tax rate decreased from approximately 49% for the
year ended May 31, 1998 to approximately 47% for the year ended May 31, 1999.
The decrease in effective tax rate is due primarily to the non-deductibility for
tax purposes in the prior year of the charge related to the SEC investigation
described in Item 3 above.
Fiscal 1998 Compared to Fiscal 1997
The Company's results of continuing operations for the year ended May 31,
1998 reflect primarily the activities of Sherwood Securities and NDB.com.
Certain fiscal 1997 amounts have been reclassified to conform with the fiscal
1999 presentation.
In addition, the results of operations of Equitrade, MXNet and the AMEX
specialist business of Sherwood Securities, each of which was sold by the
Company, have been segregated and reflected as discontinued operations on the
Consolidated Statements of Income and Comprehensive Income. As such, the
individual line items comprising revenue and expenses from continuing operations
have been adjusted to exclude the discontinued operations. Net income from
operations of these discontinued operations for the year ended May 31, 1998 was
$3,258,000 (net of taxes). For the year ended May 31, 1997, the net income from
operations of these discontinued operations was $2,664,000 (net of taxes). See
Note 12 to the Consolidated Financial Statements -- Discontinued Operations.
The Company had a net income from continuing operations for the year ended
May 31, 1998 of $5,998,000, compared to a net income from continuing operations
of $6,616,000 for the year ended May 31, 1997. Sherwood Securities had a net
income from continuing operations for the year ended May 31, 1998 of $4,259,000,
compared to a net income from continuing operations for the year ended May 31,
1997 of $6,680,000. The results for the Company and Sherwood Securities for
fiscal 1997 reflect a litigation settlement charge of $9,188,000, and associated
professional fees. Exclusive of this charge, net of reduced bonus and tax
expenses, net income from continuing operations for the Company and Sherwood
Securities would have been $10,491,000 and $11,458,000, respectively, for the
year ended May 31, 1997. The Company's and Sherwood Securities' 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. NDB.com had a profit for the year ended May 31, 1998 of
$1,304,000, compared to a net loss of $300,000 for the year ended May 31, 1997.
Total revenue from continuing operations for the Company decreased by
approximately $22,370,000, or 14%, from $161,182,000 in 1997 to $138,812,000 in
1998.
Most of the Company's revenue arises from Sherwood Securities' 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, primarily generated by NDB.com, increased
principally 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.com. Throughout the year ended May 31, 1998, more customers traded utilizing
NDB.com's lower-priced, automated systems, PowerBroker(SM) and Webstation(TM),
as opposed to using higher costing live representatives.
For the year ended May 31, 1997, the principal portion of equity income in
partnerships was an equity loss from NDB Group's 49% limited partnership
interest it held in Anvil Institutional Services Company ("Anvil"). On January
24, 1997, NDB Group acquired the remaining 51% of Anvil that it did not
previously own. As such, 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 decreased slightly from $7,652,000 in 1997 to
$7,599,000 in 1998, although the sources of interest income varied. Interest
income increased due to the growing margin debits and free credit balances that
customers retain with NDB.com's clearing broker. Meanwhile, interest income of
Sherwood Securities 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 NDB.com receiving higher
distribution assistance 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 Sherwood
Securities' sale of its AMEX specialist business, fees were received for certain
consulting services performed during the transition period for the purchaser.
Total expenses from continuing operations decreased $21,462,000, or 14%,
from $148,535,000 in 1997 to $127,073,000 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 $141,084,000, resulting in a decrease of 11% for the year ended May
31, 1998. The reasons for the decrease in expenses are set forth below.
Clearing and related charges decreased by $8,689,000 from $55,009,000 in
1997 to $46,320,000 in 1998. The decrease is due primarily to lower order flow
rebates being paid to Sherwood Securities' correspondents 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 with Sherwood
Securities and NDB.com's clearing brokers.
Compensation and benefits decreased $6,390,000 from $52,887,000 in 1997 to
$46,497,000 in 1998. The decrease was primarily due to lower commissions paid to
Sherwood Securities' traders because of the decrease in revenue from firm
securities transactions.
Communication expenses, which include market data services, decreased by
$986,000 from $11,851,000 in 1997 to $10,865,000 in 1998. The decrease was
mainly due to the 1997 upgrade of NDB.com's PowerBrokerSM IVR System and
development of an in-house quote server, which costs did not occur in 1998.
Advertising costs increased $1,487,000 from $2,659,000 in 1997 to
$4,146,000 in 1998 due to additional media buys by NDB.com.
Occupancy costs decreased $208,000 from $2,495,000 in 1997 to $2,287,000 in
1998. The decrease is attributable to a decrease for NDB.com which, last year,
incurred rent concurrently, from November 1996 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.com's branch offices as of October 31, 1997 has led
to a reduction in rent expense.
Professional fees decreased by $2,485,000 from $3,190,000 in 1997 to
$705,000 in 1998. During the year ended May 31, 1997, NDB Group 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 NDB Group's review of a possible acquisition which was not
consummated. Sherwood Securities 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 $2,235,000 from $4,323,000 in
1997 to $6,558,000 in 1998. The increase was primarily due to depreciation and
amortization incurred on fixed asset, leasehold improvement and computer
software additions by Sherwood Securities and NDB.com aggregating approximately
$1,700,000 and $4,500,000, respectively during the year ended May 31, 1998, as
well as a full year's expense on $12,000,000 of additions during the prior year.
Travel and entertainment expense primarily incurred by Sherwood Securities
decreased $187,000 from $1,859,000 in 1997 to $1,672,000 in 1998. The decrease
is primarily due to cost control measures.
Repairs and maintenance expense increased by $994,000 from $912,000 in 1997
to $1,906,000 in 1998. The increase is primarily due to maintenance service
contract fees paid by both Sherwood Securities and NDB.com in order to maintain
infrastructures as the original warranties on the various systems expire.
Interest expense increased $232,000 from $107,000 in 1997 to $339,000 in
1998 primarily due to interest incurred by Sherwood Securities on the remaining
unpaid balance of approximately $4,600,000, due in April 1998, owed in
connection with its settlement agreement, as amended, in the case entitled In
Re: NASDAQ Market-Makers Antitrust Litigation.
Litigation settlement, for the year ended May 31, 1997, represents charges
for Sherwood Securities in connection with the Settlement Agreement. See Item 3,
"Legal Proceedings".
Other expenses increased $1,232,000 from $3,618,000 in 1997 to $4,850,000
in 1998. The increase is primarily attributable to increases in NDB.com customer
accommodations related to trade executions, employment agency fees and certain
expense accruals by Sherwood Securities in connection with the reasonably likely
outcome of the SEC investigation. See Item 3, "Legal Proceedings".
The Company's effective tax rate increased from approximately 48% for the
year ended May 31, 1997 to approximately 49% 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 year ended May 31, 1998.
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 took a deduction on its fiscal 1998 tax returns for this
payment.
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 and NDB.com. Certain
fiscal 1996 amounts have been reclassified to conform with the fiscal 1999
presentation.
In addition, the results of operations of Equitrade, MXNet and the AMEX
specialist business of Sherwood Securities, each of which was sold by the
Company, have been segregated and reflected as discontinued operations on the
Consolidated Statements of Income and Comprehensive 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, 1997 was $2,664,000 (net of taxes). For the year ended May 31, 1996, the net
income from operations of these discontinued operations was $3,602,000 (net of
taxes). See Note 12 to the Consolidated Financial Statements -- Discontinued
Operations.
The Company had a net profit from continuing operations for the year ended
May 31, 1997 of $6,616,000, compared to a net profit from continuing operations
of $16,530,000 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
from continuing operations for the year ended May 31, 1996 of $15,318,000. The
results for the Company and Sherwood Securities for fiscal 1997 reflect a
litigation settlement charge of $9,188,000 and associated professional fees.
Exclusive of this charge, net of reduced bonus and tax expenses, net profit from
continuing operations for the Company and Sherwood Securities would have been
$10,491,000 and $11,458,000, respectively, for the year ended May 31, 1997.
NDB.com 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.
Revenue from continuing operations decreased by approximately $553,000, or
less than 1%, from $161,735,000 in 1996 to $161,182,000 in 1997.
Most of the Company's income from continuing operations was resultant from
Sherwood Securities' firm securities transactions. Sherwood Securities' profits
from firm securities transactions 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 in late fiscal 1997, 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.
The Company's commission income, primarily generated by NDB.com, increased
by $1,916,000, or 6%, from $30,723,000 in 1996 to $32,639,000 in 1997. This
modest increase is due to increases in trading volume and customer accounts.
Partially offsetting some of these increases is a shift in the way customers
trade with NDB.com. Throughout the year ended May 31, 1997, more customers
traded through NDB.com's lower-priced, automated systems, PowerBrokerSM and
Webstation(TM), as opposed to live representatives.
Interest and dividend income increased by $1,678,000 from $5,974,000 in
1996 to $7,652,000 in 1997. The increase is primarily due to a significant rise
in NDB.com's customer debit and credit balances held with the NDB.com'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 by Sherwood Securities,
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 distribution assistance fees received from
money market funds as NDB.com's customers' balances in those funds have
increased since the prior year.
Total expenses from continuing operations increased $16,114,000, or 12%,
from $132,421,000 in 1996 to $148,535,000 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
$141,084,000, an increase of 7% from the prior year. The reasons for the
increase in expenses are set forth below.
Clearing and related charges increased by $1,274,000 from $53,735,000 in
1996 to $55,009,000 in 1997. This increase is principally due to the operations
of NDB.com 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' market making activities.
Compensation and benefits increased $947,000 from $51,940,000 in 1996 to
$52,887,000 in 1997. The increase was primarily due to higher salaries for
additional employees hired (principally due to the expansion of NDB.com) offset
by decreases in both traders' commissions and in executive and staff bonuses.
The decrease in Sherwood Securities' trading profits led directly to the
reduction in bonuses and commission payouts.
Communication expenses increased by $784,000 from $11,067,000 in 1996 to
$11,851,000 in 1997. The increase was mainly due to an increase in the
activities of NDB.com, primarily the expansion of its toll-free customer
quotation service and an increase in trading volume.
Advertising costs increased $932,000 from $1,727,000 in 1996 to $2,659,000
in 1997. During the second half of fiscal 1997, NDB.com launched a new
advertising campaign that included various forms of media advertising.
Occupancy costs decreased $371,000 from $2,866,000 in 1996 to $2,495,000 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.com's main offices to 7 Hanover Square.
Professional fees increased by $1,173,000 from $2,017,000 in 1996 to
$3,190,000 in 1997. During the year ended May 31, 1997, NDB Group 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 NDB Group's review of a possible acquisition which was not
consummated. Sherwood Securities 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 $528,000 from $3,795,000 in 1996
to $4,323,000 in 1997. The increase was primarily due to depreciation and
amortization incurred on fixed asset and leasehold improvement additions by
Sherwood Securities and NDB.com of approximately $2,000,000 and $10,000,000,
respectively, during the year ended May 31, 1997.
Travel and entertainment expense increased $400,000 from $1,459,000 in 1996
to $1,859,000 in 1997. The increase is primarily due to additional entertaining
of customers by Sherwood Securities' institutional sales force.
Repairs and maintenance expense increased by $472,000 from $440,000 in 1996
to $912,000 in 1997. The increase is primarily due to maintenance service
contract fees paid in order to maintain Sherwood Securities' and NDB.com's
infrastructures as the original warranties on the various systems expire.
Interest expense increased $96,000 from $11,000 in 1996 to $107,000 in 1997
and primarily represents interest owed on the underpayment of estimated income
taxes for certain tax jurisdictions.
Litigation settlement, for the year ended May 31, 1997, represents a charge
by Sherwood Securities in connection with the Settlement Agreement.
Other expenses increased $642,000 from $2,976,000 in 1996 to $3,618,000 in
1997. Contributing to the increase is the assumption of costs related to the
advent of a debit card program for preferred customers of NDB.com. The remainder
of the increase is due to the overall increase in the volume of business and the
increase in staff size of NDB.com.
The Company's effective tax rate increased from approximately 44% for the
year ended May 31, 1996 to approximately 48% for the year ended May 31, 1997.
The difference in rates is due to several factors. During the year ended May 31,
1996, the Company recognized certain tax benefits primarily related to employee
compensation arrangements, which were not available during the year ended May
31, 1997. In addition, as a result of significant capital additions during the
year ended May 31, 1997 for NDB.com, the Company's consolidated state income tax
rate increased.
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.
Liquidity and Capital Resources
The Company's tangible assets are highly liquid, but subject to market
price fluctuation, with more than 61% 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.
NDB Group's broker-dealer subsidiaries, Sherwood Securities and NDB.com 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,
1999, Sherwood Securities and NDB.com had approximately $61,398,000 and
$3,854,000 in excess of the minimum required net capital requirements,
respectively, representing increases of $25,659,000 for Sherwood Securities and
$286,000 for NDB.com, from the prior year. The increases for Sherwood Securities
and NDB.com resulted primarily from the year's net income. The net capital rule
imposes financial restrictions upon Sherwood Securities' and NDB.com'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 and NDB.com, which directly affects the amount of funds
available for operating, investing and financing activities.
From time to time, the Company has borrowed funds in connection with its
trading activities. The Company currently has no committed lines of credit and
such borrowings were done on an "as needed" basis. Management is reviewing
alternatives to meeting these funding requirements.
Fixed assets and computer software of approximately $4,900,000 were
purchased and placed into service by NDB.com during the year ended May 31, 1999
in connection with the upgrade of NDB.com's technological infrastructure.
The Company anticipates that it will spend an additional $35,000,000 over
the next 9 months for its subsidiaries' ongoing technological infrastructure
upgrades and the relocation of NDB.com's offices and intends to finance these
activities with funds received from the sale of 2,990,000 shares of its common
stock during June 1999.
Cash flows from the Company's investment activities are directly related to
market conditions.
The Company owned 260,100 shares of Astropower, Inc. common stock, acquired
as part of an underwriting in 1989. During the year ended May 31, 1999, all of
the shares were sold with the Company recognizing a gain of approximately
$2,300,000.
Between February and April 1998, NDB.com invested $500,000 for 500,000
shares of Award Track, Inc. common stock. During the year ended May 31, 1999,
the entire investment was written off as the Company's management deemed it
worthless.
During the year ended May 31, 1997, the Company made two loans of
$3,000,000 each to NDB.com, in the form of subordination agreements. In July
1999, NDB Group contributed $10,000,000 to NDB.com. These funds were expended in
order for NDB.com to maintain adequate regulatory capital levels. The Company
will make additional loans or contributions to its broker-dealer subsidiaries,
as necessary, to ensure regulatory compliance.
On December 22, 1992, the Company announced it would by 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. 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. As of May 31, 1999, 1,650,000
shares had been reacquired, of which 244,822 shares were repurchased during the
fiscal year ended May 31, 1999. The source of the funds for these purchases was
internally generated.
As a result of Equitrade's acquisition on December 31, 1998 of RSF
Partners'assets, including the right to act as a specialist in 39 securities on
the NYSE, the NYSE required Equitrade to increase its capital to $55,000,000. In
order to increase Equitrade's capital, a $22,000,000 subordinated loan was made
to Equitrade by NDB Group. NDB Group obtained the funds by borrowing $15,000,000
from SLK, with a six-month maturity, and the balance was provided by internally
generated funds of the Company. Concurrent with the sale of Equitrade to SLK on
June 18, 1999, NDB Group was repaid for its $22,000,000 subordinated loan and
NDB Group repaid its $15,000,000 loan to SLK.
As a result of the sale of Equitrade on June 18, 1999, the Company received
approximately $85,000,000 in cash (net of $15,000,000 used to repay the loan
from SLK). On June 25, 1999, the Company closed an underwritten public offering
of 2,990,000 shares of its common stock, which resulted in its receipt of
approximately $91,600,000 in proceeds net of underwriters' discounts and
commissions and expenses related to the offering.
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
This material is subject to the Year 2000 Information and Readiness
Disclosure Act of 1998.
State of Readiness - The Company is preparing for the issues associated
with the year 2000, including changes in the programming of internal and vendor
computer systems. The year 2000 problem is pervasive and complex as virtually
every computer operation will be affected by the rollover of the two digit year
value to 00. The issue is whether computer systems will properly recognize date
sensitive information when the year changes to 2000. Systems that do not
properly recognize such information could generate erroneous data or cause a
system to fail. The Company's plan to deal with the year 2000 issue is a
five-step plan, which includes both information technology ("IT") and
non-information technology ("non-IT") systems. IT systems include the Company's
trading system, the Company's accounting software and the NDB.com WebstationTM.
Non-IT systems include the Company's headquarters' water, sprinkler and elevator
systems. The five steps are awareness, assessment, renovation, validation and
implementation. Awareness required the notification of all employees,
particularly senior management, of the potential year 2000 problem. Assessment
included taking inventory of every product or service produced or used by the
Company that relies on the use of dates. The date could be used to store,
search, retrieve or calculate information. The awareness and assessment phases
of the plan were 100% complete as of May 31, 1999. Renovation, which has also
been substantially completed as of May 31, 1999, includes the conversion of year
2000 non-compliant systems into year 2000 compliant systems. The Company
believes that internal software and hardware identified as non-compliant have
been made compliant or replaced, in all material respects, as of May 31, 1999,
except that the Company was notified by Nasdaq that the operating systems of
certain of its level II workstations need to be upgraded to be compliant. The
Company intends to upgrade these workstations by August 31, 1999. The Company
internally verified compliance of its new NDB.com WebstationTM by August 1999.
Validation comprises the testing of all systems by using test data with dates
that include the year 2000. This is the certification phase of the Company's
production platforms. Implementation will be a final review of all year 2000
production systems, IT and non-IT, in service. The Company has constructed a
dedicated year 2000 test development environment to eliminate potential risks to
the production platforms for use in the validation phase of this plan. The
Company completed, in all material respects, the validation and implementation
phases by June 30, 1999. The Company is dependent upon services rendered by
third parties, such as telecommunications, electric and clearance, which may
have a material effect on operations. Except as indicated below, these essential
service providers have indicated to the Company that they will be year 2000
compliant in time to meet the Company's schedule, although management presently
has no assurance that such plans will be implemented on a timely basis. The
Company has been unable to obtain verification that the building located at 3
New York Plaza, New York, New York is year 2000 compliant. On an interim basis,
NDB.com has some of its operational units in this building. NDB.com is arranging
for the performance of these operations at its other locations in the event year
2000 problems prevent utilization of this space. Sherwood Securities continues
to conduct market tests with communication lines pursuant to which it receives
order flow. Not all of these tests have been successfuly completed as of the
date of this report. However, both NDB.com and Sherwood Securities intend to
continue to enhance and modify mission critical systems as necessary after June
30, 1999. The Company intends to test each enhancement or modification to
determine if it is Year 2000 compliant. The Company is aware that its clearing
brokers may not be willing to modify their systems until after January 1, 2000
in response to requests by the Company to make changes to accommodate
enhancements to its systems. Costs - The Company estimates that it will spend
$500,000 for software modifications, hardware and testing related to year 2000.
Through May 31, 1999, the Company has spent approximately $203,000 of which
$163,000 was incurred during the fiscal year ended May 31, 1999. The Company
does not track internal costs related to year 2000 issues, which consist
primarily of payroll expenses and, as a result, the foregoing estimate and
actual expenditures do not include such internal costs.
The Company has assessed that business interruption is the most reasonably
likely worst case year 2000 scenario, although the effect upon the Company's
results of operations, liquidity and financial condition is unknown.
Contingency Plan - At this time, the Company has formulated contingency
plans should internal systems, vendors or customers fail to become compliant or
fail to operate as a result of year 2000 problems. In case of a non-replaceable
vendor suffering a failure in the year 2000, the Company could be materially
affected.
Looking Ahead
During the fiscal year ending May 31, 2000, the Company intends to execute
the following strategic plan. As a result of the underwritten public offering of
its common stock that closed on June 25, 1999 and the sale of Equitrade on June
18, 1999, the Company has accumulated cash of approximately $177,000,000,
including the return of its invested capital at Equitrade.
NDB.com intends to expend up to $30,000,000 for marketing and advertising
its discount brokerage services. Specifically, NDB.com will focus on branding
its services through the use of its logo, the duck.
NDB.com is building a new data center and office space at a new location in
Jersey City, New Jersey. The estimated cost of this project is $35,000,000. Most
of the expenditures are projected to occur during the fiscal year ending May 31,
2000.
NDB Group has formed a new subsidiary, Millennium Clearing Corp., which
will serve as the vehicle to clearing transactions initially for NDB.com and
Sherwood Securities and later for third parties. The Company estimates that
approximately $20,000,000 will be needed to satisfy regulatory net capital
requirements for this operation. Additional funds will be expended for the start
up of the operation. The Company estimates that Millennium will commence
operation during the year ending December 31, 2000. Millennium will be required
to register as a broker dealer and seek other regulatory clearances prior to the
commencement of business. While the Company believes self-clearing NDB.com and
Sherwood Securities will eventually reduce clearing expenses for these entities,
there can be no assurance that this will occur or if it occurs when the savings
will be achieved.
In addition, NDB.com intends to continue to invest in the development and
introduction of new products. Products being reviewed are access to initial
public offerings, insurance and banking products, electronic bill presentment
and payment and credit products.
Management of the Company believes these investments and innovations are
required to compete in the rapidly evolving businesses of market making and
discount retail brokerage.
Item 7a. Quantitative and Qualitative Disclosures About Risk
The Company's principal business activities are, by their nature, risky and
volatile and are directly affected by many national and international factors.
Any one of these factors may cause a substantial decline in the securities
markets, which could materially adversely affect the Company's business.
Managing risk is critical to the Company's profitability and to reducing the
likelihood of earnings volatility. The Company's risk management policies and
procedures have been established to continually identify, monitor, and manage
risk. The major types of risk, which the Company faces include, credit risk,
legal risk, operating risk, and market risk.
Credit risk is the potential for loss due to a customer or counterparty
failing to perform its contractual obligations. The Company clears its
securities transactions through unaffiliated clearing agents. Under the terms of
its clearing agent agreements, the Company's clearing agents have the right to
charge it for losses that result from its customers' failure to fulfill their
contractual obligations. In order to mitigate risk, the Company's policy is to
monitor the credit standing of its customers and maintain collateral to support
margin loans to customers. Further, most of the Company's assets are held at one
or more clearing agents. Therefore, it would incur substantial losses if one of
the Company's clearing agents were to become insolvent or otherwise unable to
meet its financial obligations.
Operating risk is the potential for loss due to deficiencies in control
processes or computer and technological systems. The Company relies heavily on
various computer and communications systems to operate its business, including
NDB.com's web site. The Company relies particularly on third parties such as
Nasdaq, telephone companies, online service providers, data processors and
software and hardware vendors. The Company's business could be negatively
impacted by unanticipated disruptions in service to customers, slower response
times, delays in trading, failed settlement of trades, decreased customer
service and satisfaction, incomplete or inaccurate accounting or processing of
trades, and delays in the Company's introduction of new products and services.
The Company attempts to mitigate operating risk by employing experienced
personnel, maintaining an internal control system, and maintaining backup and
recovery functions.
Legal risk is the risk associated with non-compliance with legal and
regulatory requirements, and counterparty non-performance based upon non-credit
related conditions, such as legal authority or capacity. The SEC, NASD, and
other agencies extensively regulate the U.S. securities industry. The Company is
required to comply strictly with the rules and regulations of these agencies.
Further, there are frequent changes in the laws and regulations affecting the
securities industry and the securities markets. If the Company fails to comply
with any of these laws, rules, or regulations, it is subject to censure, fines,
cease-and-desist orders or suspensions of its business. Additionally, the SEC
and NASD have strict rules that require it to maintain sufficient net capital.
If it fails to maintain the required net capital, the SEC or the NASD may
suspend or revoke its broker-dealer licenses. In addition, the Company may be
subject to lawsuits or arbitration claims by customers, employees or other third
parties in the different jurisdictions in which it conducts business. The
Company has established procedures in accordance with legal and regulatory
requirements that are designed to reasonably ensure compliance in these matters.
Market risk is the risk of loss that may result from changes in interest
and foreign exchange rates, equity and commodity prices and the correlations
among them. The Company's current operations and trading activity limit its
exposure to the interest rate and equity price exposure components of market
risk.
Interest rate risk is the possibility of a loss in the value of financial
instruments from changes in interest rates. The Company's primary exposure to
interest rate risk arises from its interest earning assets (mainly deposits at
clearing brokers, loans and notes receivable and U.S. Treasury obligations) and
funding sources (loans payable). The Company attempts to mitigate this risk by
only holding U.S. Treasury obligations with maturities of one year or less.
Included in its inventory of financial instruments held for trading
purposes are government securities with a fair value of $8.4 million and $7.7
million at May 31, 1999 and 1998, respectively. The interest rate risk, which
arises from short term treasury rates, associated with these positions is not
material to the Company's financial position, results of operations or cash
flows. All other financial instruments exposed to interest rate risk are held
for purposes other than trading. For these instruments the interest rate risk is
not material as the underlying value will not vary with changes in interest
rates.
Equity price risk generally means the risk of loss that may result from the
potential change in the value of a financial instrument as a result of absolute
and relative price movements, price volatility or changes in liquidity, over
which the Company has no control. The Company's market making activities expose
its capital to significant equity price risk. To mitigate this risk, senior
management monitors profits and losses on a real-time basis throughout the
trading day. Further, from the Company's system-generated reports, senior
management reviews positions, mark-to-market valuations, and daily profits and
losses on individual security positions. Additionally, traders are required to
maintain positions meeting a specified potential profit/loss ratio, which is
monitored by management.
. The Company maintains inventories for trading purposes in
exchange-listed, Nasdaq and other over-the-counter securities on both a long and
short basis. The fair value of these securities at May 31, 1999, was $38.0
million in long positions and $11.7 million in short positions. The fair value
of these securities at May 31, 1998, was $68.0 million in long positions and
$28.7 million in short positions. The potential loss in fair value, using a
hypothetical 10% decline in prices, is estimated to be $2.6 million and $3.9
million for 1999 and 1998, respectively. A 10% hypothetical decline was used to
represent a significant yet plausible market change.
Other financial instruments exposed to equity rate risk are held for
purposes other than trading. This includes investments by the Company in two
privately held corporations. These investments were valued at their cost,
$500,000 and $1,001,320 at May 31, 1999 and May 31, 1998, respectively, in the
Company's financial statements under the heading "Securities not readily
marketable". The potential loss in fair value, using a hypothetical 10% decline
in prices, is estimated to be $50,000 for 1999 and $100,000 for 1998.
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.
On February 12, 1999, KPMG LLP resigned by mutual agreement with the
Company as the Company's independent public accountants. The Audit Committee of
the Board of Directors of NDB Group recommended to the Board of Directors that
PricewaterhouseCoopers LLP be selected as the independent public accountants for
the Company. The Board of Directors approved the recommendation of its Audit
Committee. PricewaterhouseCoopers LLP became the Company's independent public
accountants on February 19, 1999. The report of KPMG LLP on the financial
statements of the Company for the fiscal years ended May 31, 1997 and 1998 did
not contain any adverse opinion or disclaimer of opinion, nor were they
qualified or modified as to uncertainty, audit scope or accounting principles.
During the fiscal years ended May 31, 1998 and 1999, there were no disagreements
between the Company and KPMG LLP on any matters of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure.
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 NDB Group'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, 1999
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 NDB Group'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, 1999 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 NDB Group'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, 1999 is hereby incorporated by reference.
<PAGE>
Item 13. Certain Relationships and Related Transactions.
The material contained in "Certain Relationships and Related Transactions"
of NDB Group'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, 1999 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) Reports on Form 8-K
During the last quarter of the year ended May 31, 1999, NDB
Group filed one report on Form 8-K. The report, dated April
21, 1999, was filed in regard to the adoption of the
National Discount Brokers Group, Inc. 1999 Stock Option
Plan, the signing of a definitive agreement regarding the
sale of Equitrade Partners, L.L.C., the signing of a change
of control agreement with an executive of NDB Group and NDB
Group's signing of a new lease.
(c) Exhibits
The exhibits that are filed with this report, or that are
incorporated herein by reference, are set forth in the
Exhibit Index beginning on page E-1.
<PAGE>
National Discount Brokers Group, Inc. and Subsidiaries
Consolidated Financial Statements
For the Years Ended
May 31, 1999, 1998 and 1997
<PAGE>
National Discount Brokers Group, Inc. and Subsidiaries
Index to Consolidated Financial Statements
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Page
<S> <C> <C>
Independent Accountants' Reports F-1-2
Consolidated Financial Statements and Notes
Consolidated Statements of Financial Condition -
May 31, 1999 and 1998 F-3
Consolidated Statements of Income and Comprehensive Income -
Years Ended May 31, 1999, 1998 and 1997 F-4-5
Consolidated Statements of Changes in Stockholders' Equity -
Years Ended May 31, 1997, 1998 and 1999 F-6
Consolidated Statements of Cash Flows -
Years Ended May 31, 1999, 1998 and 1997 F-7-10
Notes to Consolidated Financial Statements F-11-30
Schedule I - Condensed Financial Statements of the Registrant (Parent) and Notes
Statements of Financial Condition -
May 31, 1999 and 1998 S-1
Statements of Income and Comprehensive Income-
Years Ended May 31, 1999, 1998 and 1997 S-2
Statements of Cash Flows-
Years Ended May 31, 1999, 1998 and 1997 S-3-6
Notes to Condensed Financial Statements S-7
</TABLE>
<PAGE>
Report of Independent Accountants
July 15, 1999
To the Board of Directors and Stockholders of
National Discount Brokers Group, Inc.
In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the financial position of
National Discount Brokers Group, Inc. and its Subsidiaries at May 31, 1999, and
the results of their operations and their cash flows for the year ended May 31,
1999, in conformity with generally accepted accounting principles. In addition,
in our opinion, the financial statement schedule listed in the accompanying
index presents fairly, in all material respects, the information set forth
therein when read in conjunction with the related consolidated financial
statements. These financial statements and financial statement schedule are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements and financial statement schedule based on
our audit. We conducted our audit of these statements in accordance with
generally accepted auditing standards which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
F-1
<PAGE>
Independent Auditors' Report
The Board of Directors and Stockholders of
National Discount Brokers Group, Inc.:
We have audited the accompanying consolidated statement of financial condition
of National Discount Brokers Group, Inc. and subsidiaries as of May 31, 1998,
and the related consolidated statements of income and comprehensive income,
changes in stockholders' equity and cash flows for each of the years in the
two-year period then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of National Discount
Brokers Group, Inc. and subsidiaries as of May 31, 1998, and the results of
their operations and their cash flows for each of the years in the two-year
period then ended, in conformity with generally accepted accounting principles.
KPMG LLP
July 15, 1998
F-2
<PAGE>
National Discount Brokers Group, Inc. and Subsidiaries
Consolidated Statements of Financial Condition
<TABLE>
<CAPTION>
May 31, May 31,
1999 1998 1999 1998
<S> <C> <C> <C> <C> <C>
Assets Liabilities and Stockholders' Equity
Cash $ 411,629 $ 1,039,121 Liabilities
Receivables Securities sold,
Clearing brokers 86,509,122 67,742,508 not yet purchased, at market value $ 11,723,172 $ 28,687,486
Other 2,901,799 727,099 Accrued compensation, accounts
Securities owned, payable and accrued expenses 46,296,949 20,203,279
at market value 46,466,749 75,636,574 Loan payable 15,000,000 -
Securities available- Subordinated notes payable - 3,500,000
for-sale, at fair Income taxes payable 2,275,481 2,444,460
value - 2,615,000 Minority interest in Equitrade - 9,465,741
Securities not readiily Total liabilities 75,295,602 64,300,966
marketable, at fair
value 500,000 1,001,320 Commitments and contingencies
Investment in discontinued
operations 28,341,746 - Stockholders' equity
Loans and notes receivable 1,094,989 760,409 Preferred stock - $.01 par value;
Furniture, fixtures, 1,000,000 shares authorized, none issued - -
equipment and leasehold Common stock - $.01 par value; 50,000,000
improvements, at cost, net shares authorized, 14,343,201
of accumulated depreciation shares issued 143,432 143,432
and amortization 14,837,114 18,011,262 Additional paid-in capital 65,828,938 65,050,817
Computer software, at cost, Accumulated comprehensive
net of accumulated income,unrealized gain on
amortizaton of $3,624,381 securities available-for-sale - 1,359,800
and $1,388,843, respectively 4,996,223 2,683,635 Retained earnings 80,181,611 59,176,152
Intangible assets, net of 146,153,981 125,730,201
accumulated amortization of Less: treasury stock, at cost,
$1,275,041 - 5,988,770 348,277 shares and 162,924 shares,
Exchange memberships respectively (4,158,775) (1,557,553)
(market value of Total stockholders' equity 141,995,206 124,172,648
$1,520,000 and $9,243,500, Total liabilities and stockholders'
respectively) 351,496 7,416,496 equity $ 217,290,808 $188,473,614
Secured demand notes
receivable 27,000,000 3,500,000
Deferred tax asset 825,797 282,886
Other asset 3,054,144 1,068,534
Total assets $ 217,290,808 $188,473,614
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
<PAGE>
National Discount Brokers Group, Inc. and Subsidiaries
Consolidated Statements of Income and Comprehensive Income
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years Ended May 31,
------------------------------------------------------------
1999 1998 1997
------------------- ------------------ ------------------
<S> <C> <C> <C> <C>
Revenue
Firm securities transactions, net $145,819,935 $ 90,256,181 $117,490,958
Commission income 45,250,436 37,052,201 32,638,949
Realized gain on securities, net of write-off 1,870,242 63,625 -
Interest and dividends 10,022,013 7,599,179 7,651,549
Fee income 4,308,393 3,567,837 2,513,483
Other 594,153 272,921 886,875
------------------- ------------------ ------------------
Total revenue 207,865,172 138,811,944 161,181,814
------------------- ------------------ ------------------
Expenses
Compensation and benefits 80,055,124 46,497,144 52,887,187
Clearing and related brokerage charges 45,356,150 46,320,341 55,008,913
Communications 13,791,681 10,864,528 11,850,743
Depreciation and amortization 7,769,722 6,557,551 4,322,880
Advertising costs 7,694,235 4,146,180 2,659,051
Occupancy costs 2,650,354 2,286,897 2,495,192
Equipment rental 621,376 184,876 144,504
Professional fees 3,368,282 705,127 3,190,172
Technology expense 2,098,391 743,269 293,618
Travel and entertainment 2,849,043 1,671,659 1,858,944
Repairs and maintenance 2,302,834 1,906,181 911,619
Interest 390,334 338,523 107,099
Litigation settlement - - 9,187,500
Other 4,236,966 4,850,297 3,617,689
------------------- ------------------ ------------------
Total expenses 173,184,492 127,072,573 148,535,111
------------------- ------------------ ------------------
Income from continuing operations before income taxes 34,680,680 11,739,371 12,646,703
Income taxes 16,461,273 5,740,913 6,031,128
------------------- ------------------ ------------------
Net income from continuing operations 18,219,407 5,998,458 6,615,575
------------------- ------------------ ------------------
Discontinued operations
Income from discontinued operations,
net of taxes 2,786,052 3,257,776 2,664,118
Gain on sale of discontinued operations,
net of taxes - 2,704,085 -
------------------- ------------------ ------------------
2,786,052 5,961,861 2,664,118
------------------- ------------------ ------------------
Net income $ 21,005,459 $ 11,960,319 $ 9,279,693
------------------- ------------------ ------------------
</TABLE>
F-4
<PAGE>
National Discount Brokers Group, Inc. and Subsidiaries
Consolidated Statements of Income and Comprehensive Income, Continued
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years Ended May 31,
--------------------------------------------------------
1999 1998 1997
------------------ ----------------- -----------------
<S> <C> <C> <C> <C> <C>
Other comprehensive (loss) income, before tax:
Unrealized (loss) gain on securities
available-for-sale:
Unrealized holding (loss) gain arising
during period $ (275,342) $ 2,615,000 $ -
Less: reclassification adjustment for gain
included in net income (2,290,318) - -
------------------ ----------------- -----------------
Other comprehensive (loss) income, before tax (2,565,660) 2,615,000 -
Income tax (benefit) expense related to items of
other comprehensive (loss) income (1,205,860) 1,255,200 -
------------------ ----------------- -----------------
Other comprehensive (loss) income, net (1,359,800) 1,359,800 -
------------------ ----------------- -----------------
Comprehensive income $19,645,659 $13,320,119 $ 9,279,693
------------------ ----------------- -----------------
Net income per common and common
equivalent share
Basic
Net income from continuing operations $ 1.30 $ .45 $ .51
Income from discontinued operations,
net of taxes .20 .24 .21
Gain on sale of discontinued operations,
net of taxes - .20 -
------------------ ----------------- -----------------
Net income $ 1.50 $ .89 $ .72
------------------ ----------------- -----------------
Weighted average common shares outstanding 14,018,257 13,432,726 12,890,926
------------------ ----------------- -----------------
Diluted
Net income from continuing operations $ 1.29 $ .45 $ .51
Income from discontinued operations,
net of taxes .20 .24 .21
Gain on sale of discontinued operations,
net of taxes - .20 -
------------------ ----------------- -----------------
Net income $ 1.49 $ .89 $ .72
------------------ ----------------- -----------------
Weighted average common shares outstanding 14,143,240 13,501,346 12,946,007
------------------ ----------------- -----------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
<PAGE>
National Discount Brokers Group, Inc. and Subsidiaries
Consolidated Statements of Changes in Stockholders' Equity
<TABLE>
<CAPTION>
Years Ended May 31, 1997, 1998 and 1999
Accumulated
Additional Other
Common Stock Paid-in Comprehensive Retained Treasury Stock
Shares Amount Capital Income Earnings Shares Amount Total
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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 - - - 1,359,800 - - - 1,359,800
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 1,359,800 59,176,152 (162,924) (1,557,553) 124,172,648
Net income - - - - 21,005,459 - - 21,005,459
Reversal of
unrealized gain
for investments sold - - - (1,359,800) - - - (1,359,800)
Acquisition of
treasury stock - - - - - (244,822) (3,231,647) (3,231,647)
Issuance of
treasury stock
upon exercise of
options - - 778,121 - - 59,469 630,425 1,408,546
Balance at
May 31, 1999 14,343,201 $ 143,432 $ 65,828,938 $ - $ 80,181,611 (348,277) $(4,158,775) $ 141,995,206
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
<PAGE>
National Discount Brokers Group, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years Ended May 31,
--------------------------------------------------
1999 1998 1997
---------------- ---------------- ----------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income from continuing operations $ 18,219,407 $ 5,998,458 $ 6,615,575
Net income from discontinued operations 2,786,052 3,257,776 2,664,118
Non-cash items included in net income:
Equity (income) loss in partnerships - (1,299) 26,176
Depreciation and amortization 7,769,722 7,797,133 4,891,324
Gain on sale of securities available-for-sale (2,290,318) - -
(Gain) loss on sale/write-off of
securities not readily marketable 420,076 (63,625) -
Income of Equitrade allocated to
minority partners - 5,766,440 4,326,095
Provision for deferred taxes (542,911) 1,937,586 (2,220,472)
Provision for loss on notes receivable 102,865 - -
Loss on sale of subsidiary - - 123,006
(Increase) decrease in operating assets:
Funds segregated for customers - 29,203 (29,203)
Receivables
Clearing brokers (18,766,614) (9,695,325) 23,344,762
Other (2,174,700) (266,289) (78,693)
Securities owned 29,169,825 (22,124,884) (9,766,536)
Other assets (1,985,610) 900,905 (457,385)
Increase (decrease) in operating liabilities:
Securities sold, not yet purchased (16,964,314) 3,558,196 4,790,211
Accrued compensation, accounts payable and
accrued expenses 26,093,670 (12,786,419) 6,814,638
Income taxes payable 1,708,046 (322,518) (4,987,878)
(Increase) decrease in operating assets due to deconsolidation
of Equitrade:
Investment in discontinued operations (28,341,746) - -
Furniture, fixtures, equipment and leasehold improvements 290,122 - -
Intangible assets 6,394,789 - -
Exchange memberships 7,065,000 - -
Secured demand notes receivable (23,500,000) - -
Decrease in operating liabilities due to deconsolidation of
Equitrade:
Minority interest in Equitrade (9,465,741) - -
Subordinated notes payable (3,500,000) - -
---------------- ---------------- ----------------
Net cash (used in) provided by operating activities $ (7,512,380) $ (16,014,662) $ 36,055,738
---------------- ---------------- ----------------
</TABLE>
F-7
<PAGE>
National Discount Brokers Group, Inc. and Subsidiaries
Consolidated Statements of Cash Flows, Continued
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years Ended May 31,
------------------------------------------------
1999 1998 1997
-------------- --------------- ---------------
<S> <C> <C> <C>
Cash flows from investing activities:
Proceeds from sales of securities available-for-sale $ 2,290,318 $ - $ -
Proceeds from sales of securities not readily marketable 81,244 63,625 -
Payment for purchase of securities not readily marketable - (500,000) (100,000)
Loans made and notes issued to employees
and officers (906,000) (60,000) (237,652)
Principal collected on notes receivable 468,555 233,124 104,321
Purchases of furniture, fixtures, equipment
and leasehold improvements (3,035,696) (4,949,659) (11,429,602)
Purchases of computer software (4,118,607) (1,842,745) (1,413,233)
Acquisition of intangible assets (450,000) - (4,316,804)
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 notes receivable - - (500,000)
Principal collected on subordinated notes receivable - - 500,000
Other - (38,917) 5,150
-------------- --------------- ---------------
Net cash used in investing activities (5,670,186) (494,572) (29,949,313)
-------------- --------------- ---------------
Cash flows from financing activities:
Proceeds from loan payable 15,000,000 - -
Sale of treasury stock - 19,267,500 -
Purchase of treasury stock (3,231,647) (614,281) (3,569,937)
Proceeds from exercise of options 786,721 - -
Capital contribution by minority interest - 275,086 185,658
Capital withdrawals by minority interest - (4,296,021) (1,849,025)
-------------- --------------- ---------------
Net cash provided by (used in)
financing activities 12,555,074 14,632,284 (5,233,304)
-------------- --------------- ---------------
Net (decrease) increase in cash (627,492) (1,876,950) 873,121
Cash acquired due to consolidation of:
Anvil as of January 24, 1997 - - 22,740
SHD Corporation as of May 2, 1997 - - 1,667,644
Cash surrendered on sale of MXNet, Inc. - (117,747) -
Cash at beginning of year 1,039,121 3,033,818 470,313
-------------- --------------- ---------------
Cash at end of year $ 411,629 $ 1,039,121 $ 3,033,818
-------------- --------------- ---------------
</TABLE>
F-8
<PAGE>
National Discount Brokers Group, Inc. and Subsidiaries
Consolidated Statements of Cash Flows, Continued
- --------------------------------------------------------------------------------
Supplemental disclosures of cash flow information:
Income tax payments totaled $17,266,322, $7,510,410 and $15,946,000 during the
years ended May 31, 1999, 1998 and 1997, respectively.
Interest payments totaled $315,334, $1,129,763 and $658,276 during the years
ended May 31, 1999, 1998 and 1997, 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, NDB Group wrote off the remaining book value of certain
computer software and intangible assets aggregating $225,193. In addition, as
part of the sale, NDB Group 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, NDB Group acquired, from its joint venture partner at
that time, the remaining 51% of Anvil Institutional Services Company (the
"Anvil Joint Venture") that it did not previously own. NDB Group, 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 were consolidated with
those of NDB Group 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
September 1997, NDB Group sold all of the stock of its subsidiary, Anvil, and
received a note in the amount of $102,945, which was repaid in January 1999.
During February 1997, an executive of NDB Group exercised an aggregate of
94,027 options for the purchase of 94,027 shares of NDB Group'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 of $838,324 and to reimburse NDB Group for
the personal income taxes of $54,569 on the gain related to the transaction,
the executive remitted to NDB Group 88,187 shares of NDB Group's common stock
with a market value of $892,893. In connection with the exercise of these
options, NDB Group recorded an income tax benefit of $49,743.
On May 2, 1997, NDB Group 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 NDB Group 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 October 1997 and December 1997, certain executives of NDB Group
exercised an aggregate of 294,758 options for the purchase of 294,758 shares
of NDB Group'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 of
$2,701,705 and to reimburse NDB Group for the personal income taxes of
$441,389 on the gain related to the transaction, the executives remitted to
NDB Group 255,450 shares of NDB Group's common stock with a market value of
$3,143,094. In connection with the exercise of these options, NDB Group
recorded an income tax benefit of $366,215.
F-9
<PAGE>
National Discount Brokers Group, Inc. and Subsidiaries
Consolidated Statements of Cash Flows, Continued
- --------------------------------------------------------------------------------
During October 1997, Equitrade Partners L.P. entered into a $500,000
subordinated note agreement in the form of a secured demand note receivable
with an unrelated party. The note has a stated interest rate of 4% and a
maturity date of October 1, 1999.
During February 1998, NDB Group 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 April
1998.
Between February 1998 and May 1998, certain available-for-sale securities
appreciated due to the entity's successful initial public offering. As such,
NDB Group reflected these securities at fair market value on the consolidated
statements of financial condition. The unrealized gain of $1,359,800, as of
May 31, 1998, associated with marking these securities to fair market value,
is reflected as a component of accumulated comprehensive income on the
consolidated statements of financial condition, net of income taxes of
$1,255,200.
Between December 1998 and May 1999, various employees of NDB Group exercised
an aggregate of 59,469 options for the purchase of 59,469 shares of NDB
Group's common stock with exercise prices ranging from $11.00 per share to
$13.50 per share. In connection with the exercise of these options, NDB Group
recorded an income tax benefit of $621,825.
The accompanying notes are an integral part of the consolidated financial
statements.
F-10
<PAGE>
National Discount Brokers Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
For the Years Ended May 31, 1999, 1998 and 1997
1. Organization and Business
National Discount Brokers Group, Inc. ("NDB Group") and its subsidiaries
(collectively, the "Company") are engaged in the retail discount brokerage
(primarily online) and market making businesses. NDB Group's two
wholly-owned subsidiaries, Sherwood Securities Corp. ("Sherwood
Securities") and Triak Services Corp., doing business as National Discount
Brokers or NBD.com ("NDB"), are registered as broker-dealers with the
Securities and Exchange Commission ("SEC") and are members of the National
Association of Securities Dealers, Inc. ("NASD").
NDB provides retail discount brokerage services. As a retail broker, NDB
executes orders to buy and sell securities for a commission.
Sherwood Securities is a market maker in equity securities traded on the
Nasdaq stock market and over the counter bulletin board. As a market maker,
Sherwood Securities maintains firm bid and offer prices in a given security
by standing ready to buy or sell at publicly quoted prices and maintains an
inventory in the securities in which it makes a market. Sherwood Securities
executes transactions for its own account, the accounts of its customers
and on behalf of other broker-dealers.
NDB Group and another wholly owned subsidiary, SHD Corporation ("SHD"),
also owned limited partnership interests in Equitrade Partners, L.L.C., a
New York limited liability company ("Equitrade"). Equitrade is a registered
specialist on the New York Stock Exchange ("NYSE"). In June 1999, the
Company sold its 46.845% membership interest in Equitrade to Spear, Leeds &
Kellogg Specialists LLC ("SLK Specialists"). See Note 12 - Discontinued
Operations.
On January 24, 1997, NDB Group acquired, from its joint venture partner at
that time, the remaining 51% of Anvil Institutional Services Company (the
"Anvil Joint Venture") that it did not previously own. NDB Group,
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, NDB Group sold all of the stock of Anvil for $217,000,
which approximated book value.
On February 13, 1998, MXNet, Inc. ("MXNet"), another wholly owned
subsidiary of NDB Group, was sold. In addition, on February 27, 1998,
Sherwood Securities sold its American Stock Exchange ("AMEX") specialist
business. See Note 12 - Discontinued Operations.
2. Summary of Significant Accounting Policies
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.
The consolidated financial statements include the accounts of NDB Group and
its subsidiaries. All significant intercompany balances and transactions
have been eliminated in consolidation. In 1998 and 1997, NDB Group
consolidated its majority-owned subsidiary, Equitrade. In 1999, the net
assets of Equitrade are presented as a separate line item in the
consolidated statement of financial condition
F-11
<PAGE>
National Discount Brokers Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
For the Years Ended May 31, 1999, 1998 and 1997
since its operations have been discontinued. NDB Group accounts for a 15%
owned investee on the cost method.
Firm securities transactions (trading gains, net of trading losses),
commission income and related revenues and expenses are recorded on a
trade-date basis.
Interest and dividend income consists of interest earned on the Company's
and customer balances held by clearing brokers and dividends earned on
securities owned. Interest income is recorded on the accrual basis.
Dividend income is recorded on the ex-dividend date.
Fee income comprises mutual fund distribution assistance fees and short
stock rebates. Fee income is recorded as earned.
Receivable from clearing brokers comprises cash in proprietary accounts,
cash on deposit with the Company's clearing brokers and commissions.
Securities owned and securities sold, not yet purchased, are generally
carried at the last "bid" and "ask" prices, respectively. The difference
between cost and market value is included in firm securities transactions
in the consolidated statements of income and comprehensive income.
Securities available-for-sale, held by NDB Group, are stated at fair value
with unrealized gains and losses included as a separate component of
stockholders' equity. Securities not readily marketable are comprised of
cost method investments.
Management estimates that the fair values of other financial instruments
recognized in the consolidated statement of financial condition are
approximated by their carrying values, as such financial instruments are
short-term in nature or bear interest at current market rates.
Furniture, fixtures and equipment are depreciated using the straight-line
method over their estimated useful lives of three to five years. The
estimated useful lives for the Company's computer-related equipment were
reduced from 5 years due to the fact that these assets have become obsolete
faster. This change in estimate reduced income from continuing operations
by approximately $274,000 for the year ended May 31, 1999. Leasehold
improvements are amortized using the straight-line method over the terms of
the leases or the estimated useful lives of the improvements, whichever is
less.
Computer software is amortized using the straight-line method over its
estimated useful life of three years.
Intangible assets consisted of acquired rights to specialize in securities,
goodwill and covenants not-to-compete. These assets were carried at cost
and were amortized using the straight-line method over estimated useful
lives of ten to fifteen years.
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
F-12
<PAGE>
National Discount Brokers Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
For the Years Ended May 31, 1999, 1998 and 1997
settled. The effect on deferred taxes of a change in tax rates is
recognized in income in the period that includes the enactment date.
In accounting for its stock option plans, the Company applies Accounting
Principles Board Opinion No. 25 ("APB 25") to calculate compensation
expense. 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. As required, the Company provides 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 123 had been applied.
Net income per common share is computed using the weighted average number
of shares of common stock and potential common stock outstanding. Potential
common stock is comprised of stock issuable under stock options. The
treasury stock method is used in computing the potential common stock for
the computation of diluted earnings per common share. Basic earnings per
share differs from diluted earnings per share in that dilution for
potential common stock is excluded.
In March 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position
98-1, "Accounting for the Costs of Computer Software Developed or Obtained
for Internal Use" ("SOP 98-1"). SOP 98-1 provides guidance on accounting
for the costs of computer software developed or obtained for internal use
and for determining when specific costs should be capitalized and when they
should be expensed. SOP 98-1 has been implemented by the Company as of the
beginning of fiscal 1999. The adoption of SOP 98-1 did not have a material
impact on the Company's consolidated financial statements.
Certain prior year amounts have been reclassified to conform with the May
31, 1999 presentation. Additionally, the accompanying financial statements
for the year ended May 31, 1998 have been restated to include the income
tax expense related to items of other comprehensive income. The restatement
had no impact on net income for the year ended May 31, 1998 and reduced
stockholders' equity and increased income taxes payable at May 31, 1998 by
$1,255,200.
F-13
<PAGE>
National Discount Brokers Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
For the Years Ended May 31, 1999, 1998 and 1997
3. Securities Owned and Sold, Not Yet Purchased
Securities owned and sold, not yet purchased consist of the following:
<TABLE>
<CAPTION>
May 31,
1999 1998
----------------- -----------------
<S> <C> <C>
Securities owned
Corporate equities $38,048,489 $67,969,111
U.S. Government obligations 8,418,260 7,667,463
----------------- -----------------
Total $46,466,749 $75,636,574
----------------- -----------------
Securities sold, not yet purchased
Corporate equities $11,723,172 $28,687,486
----------------- -----------------
</TABLE>
4. Financial Instruments with Off-Balance Sheet Risk and Concentrations of
Credit Risk
In the normal course of business, Sherwood Securities and NDB clear
securities transactions through two unaffiliated clearing brokers on a
fully disclosed basis. Pursuant to the terms of the agreements between
Sherwood Securities and NDB and their respective clearing brokers, the
clearing brokers have the right to recover losses resulting from a
counterparty's failure to fulfill its contractual obligations. Sherwood
Securities and NDB seek to control the risk associated with their customer
activities by making credit inquiries when establishing customer
relationships and by monitoring customer trading activity.
Credit risk arises from the potential inability of counterparties,
including clearing brokers, to fulfill their contractual obligations. The
subsequent settlement of open positions at May 31, 1999, had no material
adverse effect on the financial position of the Company.
During the normal course of business, Sherwood Securities and NDB may sell
securities which have not yet been purchased, which represent obligations
of Sherwood Securities and NDB 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 NDB's ultimate obligation to satisfy the
sale of securities sold, but not yet purchased, may exceed the amount
recorded on the consolidated statement of financial condition. Sherwood
Securities and NDB seek to control such market risk through the use of
internal monitoring guidelines. Neither Sherwood Securities nor NDB engage
in any derivative activities.
F-14
<PAGE>
National Discount Brokers Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
For the Years Ended May 31, 1999, 1998 and 1997
5. Furniture, Fixtures, Equipment and Leasehold Improvements
Furniture, fixtures, equipment and leasehold improvements consist of the
following:
<TABLE>
<CAPTION>
May 31,
1999 1998
<S> <C> <C>
Furniture, fixtures and equipment $26,309,299 $26,325,316
Leasehold improvements 3,832,350 3,518,709
30,141,649 29,844,025
Less: accumulated depreciation
and amortization 15,304,535 11,832,763
$14,837,114 $18,011,262
</TABLE>
6. Acquisition of SHD Corporation (Formerly Dresdner-NY Incorporated)
On May 2, 1997, NDB Group acquired 100% of the stock of Dresdner-NY
Incorporated (subsequently renamed SHD Corporation), a NYSE specialist
firm, from Dresdner Bank AG for a 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 was
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 are included in the accompanying consolidated
statement of income and comprehensive income from the acquisition date. The
SHD business was sold to SLK concurrent with the sale of Equitrade in June
1999; therefore, the business has been shown as discontinued operations and
the remaining unamortized intangible asset was expensed.
7. Income Taxes
The Company files consolidated Federal and combined income tax returns for
certain states and localities (inclusive of all subsidiaries, except
Equitrade) based on a May 31 year end. Separate tax returns are filed in
certain states as required.
The current Federal, state and local income tax provisions for the years
ended May 31, 1999, 1998 and 1997 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,
1999, the Company had net deferred tax assets which are primarily due to
differences in the period in which depreciation and rent expenses are
deductible for book and tax purposes. Management of the Company has not
established a valuation allowance because they concluded that it is more
likely than not that the benefit will be realized.
F-15
<PAGE>
National Discount Brokers Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
For the Years Ended May 31, 1999, 1998 and 1997
The provisions for income taxes included in the consolidated statements of
income and comprehensive income are as follows:
<TABLE>
<CAPTION>
Years Ended May 31,
-----------------------------------------------------
1999 1998 1997
----------------- ---------------- ----------------
<S> <C> <C> <C>
Continuing operations
Federal
Current $10,941,702 $2,811,254 $5,481,573
Deferred (benefit) expense (382,360) 1,022,050 (1,203,645)
----------------- ---------------- ----------------
10,559,342 3,833,304 4,277,928
----------------- ---------------- ----------------
State and local
Current 6,062,482 992,073 2,770,027
Deferred (benefit) expense (160,551) 915,536 (1,016,827)
----------------- ---------------- ----------------
5,901,931 1,907,609 1,753,200
----------------- ---------------- ----------------
$16,461,273 $5,740,913 $6,031,128
----------------- ---------------- ----------------
Discontinued operations
Federal
Current $ 1,577,010 $2,325,179 $1,743,838
State and local
Current 893,639 1,063,568 937,015
----------------- ---------------- ----------------
$ 2,470,649 $3,388,747 $2,680,853
----------------- ---------------- ----------------
</TABLE>
F-16
<PAGE>
National Discount Brokers Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
For the Years Ended May 31, 1999, 1998 and 1997
A reconciliation of differences between the income tax provisions included
in continuing operations and the amounts computed by applying the statutory
Federal income tax rate is as follows:
<TABLE>
<CAPTION>
Years Ended May 31,
-----------------------------------------------------
1999 1998 1997
----------------- ---------------- ----------------
<S> <C> <C> <C>
Statutory provision on pretax income $12,138,238 $4,108,779 $4,426,346
State and local taxes, net of Federal 3,836,255 1,239,946 1,139,580
tax benefit
Tax effect of disallowed expenses 278,236 124,804 206,411
Other, net 208,544 267,384 258,791
----------------- ---------------- ----------------
Income tax provision $16,461,273 $5,740,913 $6,031,128
----------------- ---------------- ----------------
</TABLE>
8. Subordinated Notes Payable
As of May 31, 1998, Equitrade had three subordinated note agreements in the
aggregate amount of $3,000,000, each with a stated interest rate of 5%, and
an additional $500,000 subordinated note agreement ("Additional Note") with
a stated interest rate of 4%. Such notes were due on March 23, 2000, except
for the Additional Note, for which the maturity date was October 1, 1999.
Each note contained yearly automatic roll-over provisions. In connection
with these agreements, the lenders pledged marketable securities with a
market value of approximately $5,940,000 as collateral for the related
secured demand notes receivable. Concurrent with the sale of Equitrade on
June 18, 1999, the aforementioned subordinated note agreements were
cancelled.
9. Stock Option Plans
On October 24, 1995, the stockholders of the Company approved The Sherwood
Group, Inc. 1995 Stock Option Plan (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 rights may be granted
thereunder from 767,200 shares to 1,187,200 shares. The Compensation
Committee issued to employees, exercising options under a plan initiated in
1983 (the "1983 Plan"), new options (reload options) in an amount equal to
the number of shares of common stock the employees used to satisfy the
exercise price and the withholding taxes due upon exercise of the options.
Generally, reload options granted have provided for vesting six months
after the date of grant. Other options granted under the 1995 Plan have
provided for vesting ratably over three years after the date of grant.
F-17
<PAGE>
National Discount Brokers Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
For the Years Ended May 31, 1999, 1998 and 1997
All options granted have exercise prices equal to the fair market value of
the Company's common stock on the date of the grant and have a ten-year
term.
On April 21, 1999, the Board of Directors of the Company approved the
National Discount Brokers Group, Inc. 1999 Non-Qualified Stock Option Plan
(the "1999 Plan") permitting the granting of non-qualified stock options
covering up to 1,000,000 shares of the Company's common stock. Options
granted under the 1999 Plan have provided for vesting ratably over three
years after the date of grant. All options granted have exercise prices
equal to the fair market value of the Company's common stock on the date of
the grant and have a ten year term.
At May 31, 1999, an aggregate of 253,297 shares were available for future
grant under the 1995 Plan and the 1999 Plan. No stock appreciation rights
have been issued. The following table summarizes transactions in stock
options granted under the 1995 Plan and the 1999 Plan from May 31, 1996
through May 31, 1999:
<TABLE>
<CAPTION>
Optioned Shares
Weighted Average
Number of Exercise Price
Shares Per Share
<S> <C> <C>
Balance at May 31, 1996 394,697 $ 8.84
Options exercised (94,027) 8.92
Options granted (including 88,187 reload options) 165,187 10.63
________
Balance at May 31, 1997 465,857 9.45
Options exercised (294,758) 9.17
Options granted (including 255,450 reload options) 539,600 12.94
Options cancelled (68,214) 11.77
________
Balance at May 31, 1998 642,485 12.26
Options exercised (59,469) 13.23
Options granted - original 942,750 52.81
Options cancelled (40,117) 13.29
_________ ______
Balance at May 31, 1999 1,485,649 37.93
========= ======
</TABLE>
F-18
<PAGE>
National Discount Brokers Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
For the Years Ended May 31, 1999, 1998 and 1997
The following table summarizes information about stock options outstanding
and exercisable, at May 31, 1999.
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------------------------------------------------
Weighted-Average Weighted-Average Weighted-Average
Range of Number Remaining Exercise Price Number Exercise Price
Exercise Prices Outstanding Contractual Life Per Share Exercisable Per Share
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$ 8.81 - $ 12.69 365,375 7.9 $ 11.42 351,374 $11.43
13.25 - 13.50 178,424 8.5 13.49 33,695 13.42
22.50 - 24.25 181,850 9.7 22.64 400 22.50
60.06 - 60.06 760,000 9.9 60.06 - -
_________ _______
8.81 - 60.06 1,485,649 9.2 37.93 385,469 11.61
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
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 plans for the years ended May
31, 1999, 1998 and 1997.
<TABLE>
<CAPTION>
Years Ended May 31,
----------------------------------
Weighted-Average
Assumptions 1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Dividend yield 0% 0% 0%
Expected volatility 66.0% 37.0% 34.5%
Risk-free interest rate 4.92% 5.61% 6.20%
Expected lives 3 3 3
</TABLE>
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.
Had the Company accounted for its stock-based compensation plans based on
the fair value of awards at grant date in a manner consistent with the
methodology of SFAS 123, the Company's net income and income per common
share would have decreased as indicated in the table below. 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.
F-19
<PAGE>
National Discount Brokers Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
For the Years Ended May 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
Years Ended May 31,
------------------------------------------------------
1999 1998 1997
----------------- ----------------- ---------------
<S> <C> <C> <C>
Net income
As reported $21,005,459 $11,960,319 $9,279,693
SFAS 123 fair value adjustment (995,559) (672,646) (346,631)
----------------- ----------------- ---------------
Pro forma $20,009,900 $11,287,673 $8,933,062
----------------- ----------------- ---------------
Net income per common share:
Basic
As reported $ 1.50 $ .89 $ .72
SFAS 123 fair value adjustment (.07) (.05) (.03)
----------------- ----------------- ---------------
Pro forma $ 1.43 $ .84 $ .69
----------------- ----------------- ---------------
Diluted
As reported $ 1.49 $ .89 $ .72
SFAS 123 fair value adjustment (.07) (.05) (.03)
----------------- ----------------- ---------------
Pro forma $ 1.42 $ .84 $ .69
----------------- ----------------- ---------------
</TABLE>
The effects of applying SFAS 123 for providing pro forma disclosures during
the initial phase-in period may not be representative of the effects on
reported net income for future years.
The weighted-average fair value of options granted under the 1995 Plan and
1999 Plan for the years ended May 31, 1999, 1998 and 1997 were $25.39,
$3.93 and $3.32, respectively.
10. Related Party Transactions
Included in notes receivable at May 31, 1998 was $339,000 due from an
officer of the Company. This note was repaid in full in February 1999.
The Company has, from time to time, entered into short-term borrowing
facilities with Spear, Leeds & Kellogg, L.P. ("SLK") for the purpose of
financing trading positions. On December 31, 1998, NDB Group borrowed
$15,000,000, at an interest rate of 6% per annum and a six-month maturity,
from SLK in order to increase the capital of Equitrade. Concurrent with the
sale of Equitrade on June 18, 1999 to SLK Specialists, the $15,000,000 loan
from SLK was repaid in full.
On December 8, 1997, the Company sold, at market value, 1,500,000 shares of
its common stock held in treasury to IAT Reinsurance Syndicate Ltd., an
affiliate of Peter R. Kellogg. Prior to this acquisition, Mr. Kellogg
beneficially owned 1,025,000 shares of common stock.
F-20
<PAGE>
National Discount Brokers Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
For the Years Ended May 31, 1999, 1998 and 1997
11. Employee Benefit Plans
The Company has an employee deferred compensation plan covering
substantially all employees, which qualifies under Section 401(k) of the
Internal Revenue Code. The Company contributed $93,115, $82,013 and $63,699
for the years ended May 31, 1999, 1998 and 1997, respectively.
12. Discontinued Operations
Pursuant to Accounting Principles Board Opinion 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 Equitrade, MXNet and
Sherwood Securities' AMEX specialist business.
In May 1999, the Company entered into a definitive agreement to sell its
ownership interest in Equitrade. The transaction closed on June 18, 1999,
and as such, the operations of Equitrade have been reflected in
discontinued operations for all periods reported. Prior to the allocation
of minority interest and income taxes, revenues and expenses for the year
ended May 31, 1999 applicable to this discontinued operation were
$21,834,533 and $13,934,463, respectively; for the year ended May 31, 1998
were $25,636,056 and $12,173,172, respectively; and for the year ended May
31, 1997 were $19,153,401 and $8,187,373, respectively. The gain from this
transaction will be recorded during the first quarter of the fiscal year
ending May 31, 2000.
On February 13, 1998, NDB Group 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. 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; and
for the year ended May 31, 1997 were $733,762 and $2,028,724, respectively.
13. Net Capital and Customer Reserve Requirements
Sherwood Securities and NDB introduce all customer transactions to clearing
brokers and do not maintain custody of customer funds or securities.
Accordingly, Sherwood Securities and NDB qualify for exemption from the
provisions of SEC Rule 15c3-3 under subparagraph (k)(2)(ii). Sherwood
Securities and NDB were in compliance with the conditions of this exemption
during the years ended May 31, 1999, 1998 and 1997.
As registered broker-dealers, Sherwood Securities and NDB are subject to
SEC Uniform Net Capital Rule 15c3-1 (the "Rule"). As of May 31, 1999, the
net capital of Sherwood Securities and NDB exceeded their SEC required net
capital by approximately $61,398,000 and $3,854,000, respectively.
F-21
<PAGE>
National Discount Brokers Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
For the Years Ended May 31, 1999, 1998 and 1997
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. Accordingly, at May 31, 1999,
the payment of dividends and advances to the Company by Sherwood Securities
and NDB is limited to approximately $61,198,000 and $3,804,000,
respectively, under the most restrictive of these requirements.
14. Commitments
The Company has non-cancelable operating leases for rental of office space
at its various locations expiring at various dates through 2014. 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, 1999 are as follows, exclusive of escalation charges:
<TABLE>
<CAPTION>
<S> <C>
Fiscal year ending May 31,
2000 $ 3,843,000
2001 5,439,000
2002 5,300,000
2003 5,178,000
2004 5,196,000
Thereafter 38,845,000
------------------
$63,801,000
------------------
</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 $2,097,000, $2,201,000 and $2,429,000 for the
years ended May 31, 1999, 1998 and 1997, respectively.
NDB Group has an employment contract with Arthur Kontos, Chief Executive
Officer ("CEO") of NDB Group, with a term ending on May 31, 2000 with
certain rights for extension of the term or earlier termination.
Remuneration under this contract 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
CEO's cash bonus is paid pursuant to the National Discount Brokers 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 accrued
compensation, accounts payable and accrued expenses is approximately
$3,530,000, $1,836,000 and $1,251,000 due to the CEO at May 31, 1999, 1998
and 1997, respectively. In connection with this contract and the CEO Plan,
approximately $5,532,000, $1,366,000 and $1,889,000 is reflected in
compensation and benefits for the years ended May 31, 1999, 1998 and 1997,
respectively. Additionally, for the years ended May 31, 1999, 1998 and
1997, approximately $928,000, $1,358,000 and $1,172,000, respectively, were
netted against income from discontinued operations and for the year ended
May 31, 1998,
F-22
<PAGE>
National Discount Brokers Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
For the Years Ended May 31, 1999, 1998 and 1997
approximately $755,000 was netted against the gain on sale of discontinued
operations as reflected in the accompanying consolidated statements of
income and comprehensive income.
During the fiscal year ended May 31, 1997, NDB Group established The
Sherwood Group, Inc. 1996 Executive Incentive Award Plan (the
"Executive Plan"). The Executive Plan allowed for the creation of a
compensation pool at an amount equal to 4.25% of Net Income, which was
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 NDB Group's Board of Directors during the year ended May 31,
1998, effective June 1, 1997. Under the Executive Plan, bonuses for the
Company's executives were to be determined at the discretion of the
Compensation Committee of the Board of Directors. In determining Net Income
for the fiscal 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).
15. Segments
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, "Disclosures about Segments of an Enterprise and Related
Information" ("SFAS 131"). This standard established the criteria for
determining an operating segment and the required financial information to
be disclosed. SFAS 131 also establishes standards for disclosing related
information regarding products and services, geographic areas and major
customers. This standard is limited to issues of reporting and presentation
and does not address recognition or measurement. Its adoption, therefore,
does not have an effect on the Company's earnings, liquidity or capital
resources.
Under the provisions of SFAS 131, the Company has two reportable segments:
discount brokerage and market making. NDB transacts all business that will
be reported in the Company's discount brokerage segment. Its revenues are
principally in the form of retail commission income, distribution
assistance fees from mutual funds and interest earned on its customers'
balances held at its clearing broker. Sherwood Securities represents the
Company's market making segment, which primarily derives its firm
securities transaction revenues from the spread between the price paid when
a security is bought and the price received when a security is sold. "All
Other" category revenues consist principally of interest, realized
gains/losses on securities available for sale and administrative fees.
The accounting policies of the segments are the same as those described in
Note 2. Revenues from the transactions with other segments within the
Company (referred to as intersegment revenues) are recorded at market
value, as if the transactions were with third parties.
The Company evaluates the performance of its segments based on profit or
loss from operations before income taxes. No single customer accounted for
more than 10% of the Company's consolidated revenues. Information on
segment assets is not disclosed because it is not used for evaluating
segment performance and deciding how to allocate resources to segments.
However, capital expenditures are used in evaluating segment performance
and are therefore disclosed. Capital expenditures are reported in total, as
opposed to net of proceeds, from the sale of fixed assets. Substantially
all of the Company's revenues and assets are attributable or located in the
U.S.
F-23
<PAGE>
National Discount Brokers Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
For the Years Ended May 31, 1999, 1998 and 1997
Financial information for the Company's reportable segments is presented in
the following table which excludes the Company's discontinued operations,
primarily Equitrade.
<TABLE>
<CAPTION>
Year Ended May 31, 1999
------------------------
Discount
Brokerage Market Making All Other Total
<S> <C> <C> <C> <C>
-----------------------------------------------------------
Revenue from external sources $ 54,706,000 $150,194,000 $ 2,965,000 $207,865,000
Intersegment revenue 6,979,000 118,000 2,862,000 9,959,000
-----------------------------------------------------------
Total revenue $ 61,685,000 $150,312,000 $ 5,827,000 $217,824,000
-----------------------------------------------------------
Interest and dividends (included in total revenue) $ 6,938,000 $ 2,635,000 $ 856,000 $ 10,429,000
Interest expense 407,000 7,000 383,000 797,000
Depreciation and amortization 4,350,000 3,377,000 43,000 7,770,000
Profit or loss before income taxes 2,570,000 38,387,000 (6,276,000) 34,681,000
Capital expenditures 4,865,000 2,329,000 410,000 7,604,000
</TABLE>
<TABLE>
<CAPTION>
Year Ended May 31, 1998
------------------------
Discount
Brokerage Market Making All Other Total
<S> <C> <C> <C> <C>
------------------------------------------------------------
Revenue from external sources $ 44,186,000 $ 93,583,000 $ 1,043,000 $138,812,000
Intersegment revenue 6,976,000 100,000 2,302,000 9,378,000
------------------------------------------------------------
Total revenue $ 51,162,000 $ 93,683,000 $ 3,345,000 $148,190,000
------------------------------------------------------------
Interest and dividends included in total revenue) $ 5,448,000 $ 1,610,000 $ 984,000 $ 8,042,000
Interest expense 435,000 303,000 44,000 782,000
Depreciation and amortization 3,844,000 2,704,000 10,000 6,558,000
Profit or loss before income taxes 2,183,000 8,223,000 1,334,000 11,740,000
Capital expenditures 4,454,000 1,668,000 671,000 6,793,000
</TABLE>
<TABLE>
<CAPTION>
Year Ended May 31, 1997
------------------------
Discount
Brokerage Market Making All Other Total
<S> <C> <C> <C> <C>
-------------------------------------------------------------
Revenue from external sources $ 38,253,000 $121,401,000 $ 1,528,000 $161,182,000
Intersegment revenue 7,628,000 111,000 1,121,000 8,860,000
------------------------------------------------------------
Total revenue $ 45,881,000 $121,512,000 $ 2,649,000 $170,042,000
------------------------------------------------------------
Interest and dividends (included in total revenue) $ 4,769,000 $ 2,418,000 $ 602,000 $ 7,789,000
Interest expense 125,000 54,000 65,000 244,000
Depreciation and amortization 1,810,000 2,292,000 221,000 4,323,000
Profit or loss before income taxes (428,000) 12,173,000 902,000 12,647,000
Capital expenditures 9,762,000 1,907,000 5,491,000 17,160,000
</TABLE>
F-24
<PAGE>
National Discount Brokers Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
For the Years Ended May 31, 1999, 1998 and 1997
The following table is a reconciliation of reportable segment revenues,
profit or loss before income taxes and other significant items, to the
Company's consolidated totals.
<TABLE>
<CAPTION>
Year Ended May 31,
------------------
<S> <C> <C> <C>
1999 1998 1997
Revenue
Total revenue for reportable segments $ 211,997,000 $ 144,845,000 $167,393,000
Other revenue 5,827,000 3,345,000 2,649,000
Elimination of intersegment revenue (9,959,000) (9,378,000) (8,860,000)
-----------------------------------------------
Total consolidated revenue $ 207,865,000 $ 138,812,000 $161,182,000
-----------------------------------------------
Profit or Loss Before Income Taxes
Total profit or loss before income taxes for $ 40,957,000 $ 10,406,000 $ 11,745,000
reportable segments
Other profit or loss (6,276,000) 1,334,000 902,000
Elimination of intersegment profit or loss - - -
------------------------------------------------
Total consolidated profit or loss before income taxes $ 34,681,000 $ 11,740,000 $ 12,647,000
------------------------------------------------
Interest and dividends
Total interest and dividends for reportable segments $ 9,573,000 $ 7,058,000 $ 7,187,000
Other interest and dividends 856,000 984,000 602,000
Elimination of intersegment interest and dividends (407,000) (443,000) (137,000)
------------------------------------------------
Total consolidated interest and dividends $ 10,022,000 $ 7,599,000 $ 7,652,000
------------------------------------------------
Interest Expense
Total interest expense for reportable segments $ 414,000 $ 738,000 $ 179,000
Other interest expense 383,000 44,000 65,000
Elimination of intersegment interest expense (407,000) (443,000) (137,000)
------------------------------------------------
Total consolidated interest expense $ 390,000 $ 339,000 $ 107,000
------------------------------------------------
Depreciation and Amortization
Total depreciation and amortization for $ 7,727,000 $ 6,548,000 $ 4,102,000
reportable segments
Other depreciation and amortization 43,000 10,000 221,000
Elimination of intersegment depreciation
and amortization - - -
----------------------------------------------
Total consolidated depreciation and amortization $ 7,770,000 $ 6,558,000 $ 4,323,000
----------------------------------------------
Capital expenditures
Total capital expenditures for reportable segments $ 7,194,000 $ 6,122,000 $ 11,669,000
Other capital expenditures 410,000 671,000 5,491,000
Elimination of intersegment capital expenditures - - -
----------------------------------------------
Total consolidated capital expenditures $ 7,604,000 $ 6,793,000 $ 17,160,000
----------------------------------------------
</TABLE>
F-25
<PAGE>
National Discount Brokers Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
For the Years Ended May 31, 1999, 1998 and 1997
16. Contingencies and Legal Matters
NDB Group's subsidiaries, and in some cases NDB Group, 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 and related laws and other laws.
As part of a global settlement involving more than 25 Nasdaq market making
firms, Sherwood Securities has settled proceedings brought against it in
connection with the investigation by the SEC captioned In the Matter of
Certain Market-Making Activities on NASDAQ, HO-2974. In connection with the
settlement, Sherwood Securities consented to the entry of certain Orders by
the SEC instituting proceedings, making findings and imposing sanctions.
Sherwood Securities neither admitted nor denied the substantive allegations
set forth in the Orders. As part of the settlement, Sherwood Securities
paid a civil penalty of $1,000,000 to the SEC and the sum of $8,138 in
disgorgement. Sherwood Securities' results for the year ended May 31, 1998
reflect a charge to establish a reserve for the SEC's investigation, which
is included in professional fees on the consolidated statement of income
and comprehensive income, which was paid in January 1999.
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 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 agreed 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.
On April 9, 1997, Sherwood Securities entered into a settlement agreement
(the "Settlement Agreement") 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." 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 has been granted final approval by the Court and judgement has
been entered. The judgement has been appealed to the United States Court of
Appeals for the Second Circuit by certain class members. No argument has
been scheduled.
Weiss, Peck & Greer, L.L.C. ("WPG") has filed a Statement of Claim dated
March 22, 1999 in an arbitration before the NASD titled In the Matter of
the Arbitration of Weiss, Peck & Greer, L.L.C., Claimant against Sherwood
Securities Corp., Respondent. In the Statement of Claim, WPG alleges that
Sherwood Securities contravened standards of "commercial reasonableness"
and "just and
F-26
<PAGE>
National Discount Brokers Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
For the Years Ended May 31, 1999, 1998 and 1997
equitable principles of trade" in connection with trades of approximately
1.5 million shares of Amazon.com from Carnegie, Childs & Co., L.L.C.
("Carnegie") on January 8, 1999. WPG was Carnegie's clearing broker. WPG
alleges that the trades resulted in Carnegie having a net short position in
Amazon.com of 1,462,000 shares. WPG covered the short position on January
11, 1999 and alleges it sustained losses in excess of $11,000,000. WPG has
requested relief of compensatory damages in excess of $11,000,000 plus
consequential damages and interest, WPG's costs and attorneys' fees and
such other relief as the arbitration panel deems just and appropriate.
Management of Sherwood Securities, after consultation with counsel,
believes it has valid defenses to these claims and intends to vigorously
defend against these claims. Sherwood Securities filed an Answer and
Statement of Counterclaim dated June 8, 1999 in which Sherwood Securities
denies liability for the claims asserted by WPG and asserts a counterclaim
of approximately $1,300,000 for losses Sherwood Securities suffered in
connection with trades in Amazon.com executed by Sherwood Securities for
Carnegie on January 8, 1999. WPG has filed a Reply to Counterclaim dated
June 28, 1999 denying liability for the claim asserted in the Answer and
Statement of Counterclaim.
17. Subsequent Events
On June 18, 1999, NDB Group and SHD sold their membership interests in
Equitrade to SLK Specialists. NDB Group and SHD owned a combined 46.845%
membership interest in Equitrade. Prior to the closing, NDB Group exercised
its right to purchase .03% membership interests in Equitrade from three
special members in exchange for cash equal to the capital accounts of these
special members. NDB Group and SHD received approximately $85,000,000 in
cash from SLK Specialists net of repayment of a $15,000,000 loan from SLK
to NDB Group. The Company recognized a net pre-tax gain of approximately
$36,000,000 in connection with this transaction which will be recorded in
the first quarter of the fiscal year ended May 31, 2000.
On June 25, 1999, NDB Group sold 2,990,000 shares of common stock in an
underwritten public offering at $33 per share. Net of underwriting
discounts and commissions, and expenses related to the offering, NDB Group
received approximately $91,600,000 in proceeds.
F-27
<PAGE>
National Discount Brokers Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
For the Years Ended May 31, 1999, 1998 and 1997
18. Quarterly Financial Information (unaudited)
(In thousands, except per share data)
<TABLE>
<CAPTION>
First Second Third Fourth
---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
1999
Revenues $31,748 $45,379 $63,873 $66,865
Expenses 32,483 37,617 49,383 53,701
---------- ---------- ---------- -----------
Income (loss) from continuing operations before taxes (735) 7,762 14,490 13,164
Income taxes (85) 3,330 6,740 6,477
---------- ---------- ---------- -----------
Net income (loss) from continuing operations (650) 4,432 7,750 6,687
Income (loss) from discontinued operations (685) 1,451 422 1,598
---------- ---------- ---------- -----------
Net income (loss) $(1,335) $ 5,883 $ 8,172 $ 8,285
---------- ---------- ---------- -----------
Basic income (loss) per share:
Continuing operations $ (.04) $ .32 $ .55 $ .48
Discontinued operations (.05) .10 .03 .11
---------- ---------- ---------- -----------
Net income (loss) per share - basic $ (.09) $ .42 $ .58 $ .59
---------- ---------- ---------- -----------
Diluted income (loss) per share:
Continuing operations $ (.04) $ .32 $ .55 $ .47
Discontinued operations (.05) .10 .03 .11
---------- ---------- ---------- -----------
Net income (loss) per share - diluted $ (.09) $ .42 $ .58 $ .58
---------- ---------- ---------- -----------
</TABLE>
F-28
<PAGE>
National Discount Brokers Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
For the Years Ended May 31, 1999, 1998 and 1997
18. Quarterly Financial Information (unaudited), continued
(In thousands, except per share data)
<TABLE>
<CAPTION>
First Second Third Fourth
---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
1998
Revenues $34,896 $34,845 $31,584 $37,485
Expenses 31,377 33,198 29,610 32,888
---------- ---------- ---------- -----------
Income from continuing operations before taxes 3,519 1,647 1,974 4,597
Income taxes 1,527 655 925 2,634
---------- ---------- ---------- -----------
Net income from continuing operations 1,992 992 1,049 1,963
Income from discontinued operations 716 1,095 468 981
Gain on sale of discontinued operations - - 2,704 -
---------- ---------- ---------- -----------
Net income $ 2,708 $ 2,087 $ 4,221 $ 2,944
---------- ---------- ---------- -----------
Basic income per share:
Continuing operations $ .16 $ .07 $ .07 $ .14
Discontinued operations .05 .09 .03 .07
Sale of discontinued operations - - .20 -
---------- ---------- ---------- -----------
Net income per share - basic $ .21 $ .16 $ .30 $ .21
---------- ---------- ---------- -----------
Diluted income per share:
Continuing operations $ .16 $ .07 $ .07 $ .14
Discontinued operations .05 .09 .03 .07
Sale of discontinued operations - - .20 -
---------- ---------- ---------- -----------
Net income per share - diluted $ .21 $ .16 $ .30 $ .21
---------- ---------- ---------- -----------
</TABLE>
F-29
<PAGE>
National Discount Brokers Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
For the Years Ended May 31, 1999, 1998 and 1997
18. Quarterly Financial Information (unaudited), continued
(In thousands, except per share data)
<TABLE>
<CAPTION>
First Second Third Fourth
---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
1997
Revenues $40,595 $36,607 $44,968 $39,012
Expenses 35,008 32,270 46,787 34,470
---------- ---------- ----------- ----------
Income (loss) from continuing operations before taxes 5,587 4,337 (1,819) 4,542
Income taxes 2,795 1,623 (521) 2,134
---------- ---------- ----------- ----------
Net income from continuing operations 2,792 2,714 (1,298) 2,408
Income from discontinued operations 211 581 1,056 816
---------- ---------- ----------- ----------
Net income (loss) $ 3,003 $ 3,295 $ (242) $ 3,224
---------- ---------- ----------- ----------
Net income (loss) per share:
Continuing operations $ .21 $ .21 $ (.10) $ .19
Discontinued operations .02 .04 .08 .06
---------- ---------- ----------- ----------
Net income (loss) per share $ .23 $ .25 $ (.02) $ .25
---------- ---------- ----------- ----------
</TABLE>
F-30
<PAGE>
National Discount Brokers Group, Inc. and Subsidiaries
Condensed Financial Statements of the Registrant (Parent)
- --------------------------------------------------------------------------------
Statements of Financial Condition Schedule I
<TABLE>
<CAPTION>
May 31,
--------------------
------------------ ------------------
1999 1998
------------------ ------------------
<S> <C> <C>
Assets
Cash $ 145,619 $ 221,328
Receivables 1,488,294 14,117,784
Notes receivable 1,028,481 568,710
Securities available for sale, at market value - 2,438,438
Securities not readily marketable, at fair value 400,000 401,320
Investment in, less net amounts due to,
subsidiaries and affiliates 107,057,296 81,751,054
Investment in discontinued operations 17,946,870
Investment in partnerships - 13,775,483
Furniture and equipment, net 5,938 2,374
Intangible asset, net 409,091 20
Subordinated notes receivable 38,000,000 16,000,000
U.S. Treasury obligations, held as collateral 5,971,505 5,223,882
Other assets 2,105,525 444,951
------------------ ------------------
Total assets $174,558,619 $134,945,344
------------------ ------------------
Liabilities and stockholders' equity
Accrued compensation, accounts payable and
accrued expenses (including income taxes payable) $ 12,563,413 $ 5,467,903
Subordinated note payable 5,000,000 5,000,000
Loan payable 15,000,000 -
------------------ ------------------
32,563,413 10,467,903
------------------ ------------------
Stockholders' equity
Common stock 143,432 143,432
Retained earnings and other equity 141,851,774 124,334,009
------------------ ------------------
141,995,206 124,477,441
------------------ ------------------
Total liabilities
and stockholders' equity $174,558,619 $134,945,344
------------------ ------------------
</TABLE>
The accompanying notes are an integral part of the condensed financial
statements.
S-1
<PAGE>
National Discount Brokers Group, Inc. and Subsidiaries
Condensed Financial Statements of the Registrant (Parent), continued
- --------------------------------------------------------------------------------
Statements of Income and Comprehensive Income Schedule I
<TABLE>
<CAPTION>
Years Ended May 31,
--------------------------------------------------------
1999 1998 1997
----------------- ----------------- -----------------
<S> <C> <C> <C>
Revenues
Equity loss in partnership $ - $ - $ (27,099)
Interest 974,433 1,063,774 677,898
Realized gain on
securities available-for-sale 2,290,318 - -
Service fees paid by subsidiaries
eliminated in consolidation 4,140,000 4,233,345 5,640,015
Other 6,444 - (119,346)
----------------- ----------------- -----------------
7,411,195 5,297,119 6,171,468
----------------- ----------------- -----------------
Expenses
Compensation and benefits 11,858,572 4,016,895 4,675,853
Interest 382,828 35,033 -
Other, net 2,560,359 1,299,167 1,403,486
----------------- ----------------- -----------------
14,801,759 5,351,095 6,079,339
----------------- ----------------- -----------------
Income (loss) from continuing operations
before equity in income of
subsidiaries and income taxes (7,390,564) (53,976) 92,129
Equity in income of subsidiaries 22,835,661 8,837,016 5,650,335
----------------- ----------------- -----------------
Income from continuing operations
before income taxes 15,445,097 8,783,040 5,742,464
Income tax expense (benefit) (2,742,257) (218,785) (115,960)
----------------- ----------------- -----------------
Net income from continuing
operations 18,187,354 9,001,825 5,858,424
Income from discontinued operations, net of taxes 2,818,105 3,663,155 3,748,519
Loss on sale of discontinued operations, net of taxes - (727,116) -
----------------- ----------------- -----------------
Net income 21,005,459 11,937,864 9,606,943
Other comprehensive income (loss),
net of taxes (1,359,800) 1,359,800 -
----------------- ----------------- -----------------
Comprehensive income $19,645,659 $13,297,664 $ 9,606,943
----------------- ----------------- -----------------
</TABLE>
The accompanying notes are an integral part of the condensed financial
statements.
S-2
<PAGE>
National Discount Brokers Group, Inc. and Subsidiaries
Condensed Financial Statements of the Registrant (Parent), continued
- --------------------------------------------------------------------------------
Statements of Cash Flows Schedule I
<TABLE>
<CAPTION>
Years Ended May 31,
--------------------------------------------------------
1999 1998 1997
------------------ ----------------- -----------------
<S> <C> <C> <C>
Cash flows from operating activities
Net income from continuing operations $18,187,354 $ 9,001,825 $ 5,858,424
Net income from discontinued operations 2,818,105 3,663,155 3,748,519
Non-cash items included in net income:
Net equity in gain of subsidiaries (22,835,661) (8,837,016) (5,650,335)
Equity income in partnerships (3,568,584) (5,852,353) (6,163,136)
Loss on sale of subsidiary - - 123,006
Depreciation and amortization 42,079 144,494 265,658
Gain on sale of investment securities
available-for-sale (2,290,318) - -
Decrease (increase) in operating assets:
Receivables 12,629,490 (13,480,564) 4,298,488
U.S. Treasury obligations, held as collateral (747,623) 257,938 (52,141)
Other assets (1,659,252) 179,234 (258,429)
(Decrease) increase in operating liabilities
Accounts payable, accrued expenses and
other liabilities 8,972,534 (3,464,080) (3,731,976)
------------------ ----------------- -----------------
Net cash provided by (used in)
operating activities 11,548,124 (18,387,367) (1,561,922)
------------------ ----------------- -----------------
Cash flows from investing activities
Proceeds from sales of securities
available-for-sale 2,290,318 - -
Investment in discontinued operations (602,803) (444,068) (320,437)
Distribution from partnerships - 4,362,952 3,771,646
Loans made to employees and officers (900,000) - (137,652)
Principal collected on notes receivable 440,229 45,465 44,967
Purchase of subsidiaries, net of cash acquired - - (15,763,434)
Return of capital from subsidiary - 3,538,554 2,409,659
Purchase of furniture, fixtures, equipment
and leasehold improvements (4,715) - -
Payment for purchase of identified
intangible asset (450,000) - (188,780)
Additional capital contributed to subsidiaries - - -
Issuance of subordinated notes receivable (22,000,000) - (6,000,000)
------------------ ----------------- -----------------
Net cash (used in) provided by
investing activities (21,226,971) 7,502,903 (16,184,031)
------------------ ----------------- -----------------
</TABLE>
S-3
<PAGE>
National Discount Brokers Group, Inc. and Subsidiaries
Condensed Financial Statements of the Registrant (Parent), continued
- --------------------------------------------------------------------------------
Statements of Cash Flows Schedule I
<TABLE>
<CAPTION>
Years Ended May 31,
--------------------------------------------------------
1999 1998 1997
------------------ ----------------- -----------------
<S> <C> <C> <C>
Cash flows from financing activities
Sale of treasury stock $ - $19,267,500 $ -
Purchase of treasury stock (3,231,647) (614,281) (3,569,937)
Proceeds from exercise of options 786,721 - -
Proceeds from loan payable 15,000,000 - -
Net receipts (disbursements) on
intercompany borrowings (2,951,936) (7,633,750) 21,341,380
------------------ ----------------- -----------------
Net cash provided by
financing activities 9,603,138 11,019,469 17,771,443
------------------ ----------------- -----------------
Net (decrease) increase in cash (75,709) 135,005 25,490
Cash at beginning of year 221,328 86,323 60,833
------------------ ----------------- -----------------
Cash at end of year $ 145,619 $ 221,328 $ 86,323
------------------ ----------------- -----------------
</TABLE>
S-4
<PAGE>
National Discount Brokers Group, Inc. and Subsidiaries
Condensed Financial Statements of the Registrant (Parent), continued
- --------------------------------------------------------------------------------
Statements of Cash Flows, continued Schedule I
Supplemental disclosures of cash flow information:
Income tax payments totaled $14,420,322, $6,287,938 and $14,077,485 during
the years ended May 31, 1999, 1998 and 1997, respectively.
Interest payments totaled $307,828, $35,033 and $52,991 during the years
ended May 31, 1999, 1998 and 1997, 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, NDB Group wrote off the remaining book value of certain
computer software and intangible assets aggregating $225,193. In addition,
as part of the sale, NDB Group 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, NDB Group acquired, from its joint venture partner at
that time, the remaining 51% of Anvil Institutional Services Company (the
"Anvil Joint Venture") that it did not previously own. NDB Group, 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 were consolidated with
those of NDB Group as of the acquisition date. The increases or decreases in
operating assets and liabilities reflected in the 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
September 1997, NDB Group sold all of the stock of its subsidiary, Anvil,
and received a note in the amount of $102,945, which was repaid in January
1999.
During February 1997, an executive of NDB Group exercised an aggregate of
94,027 options for the purchase of 94,027 shares of NDB Group'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 NDB Group for
the personal income taxes of $54,569 on the gain related to the transaction,
the executive remitted to NDB Group 88,187 shares of NDB Group's common
stock with a market value of $892,893. In connection with the exercise of
these options, NDB Group recorded an income tax benefit of $49,743.
On May 2, 1997, NDB Group 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 NDB Group 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 October 1997 and December 1997, certain executives of NDB Group
exercised an aggregate of 294,758 options for the purchase of 294,758 shares
of NDB Group'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 of
$2,701,705 and to reimburse NDB Group for the personal income taxes of
$441,389 on the gain related to the transaction, the executives remitted to
NDB Group 255,450 shares of NDB Group's
S-5
<PAGE>
National Discount Brokers Group, Inc. and Subsidiaries
Condensed Financial Statements of the Registrant (Parent), continued
- --------------------------------------------------------------------------------
Statements of Cash Flows, continued Schedule I
common stock with a market value of $3,143,094. In connection with the
exercise of these options, NDB Group recorded an income tax benefit of
$366,215.
During February 1998, NDB Group 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 April
1998.
Between February 1998 and May 1998, certain available-for-sale securities
appreciated due to the entity's successful initial public offering. As such,
NDB Group reflected these securities at fair market value on the statements
of financial condition. The unrealized gain of $1,359,800, as of May 31,
1998, associated with marking these securities to fair market value, is
reflected as a component of accumulated comprehensive income on the
statements of financial condition, net of income taxes of $1,255,200.
Between December 1998 and May 1999, various employees of the NDB Group
exercised an aggregate of 59,469 options for the purchase of 59,469 shares
of NDB Group's common stock with exercise prices ranging from $11.00 per
share to $13.50 per share. In connection with the exercise of these options,
NDB Group recorded an income tax benefit of $621,825.
The accompanying notes are an integral part of the condensed financial
statements.
S-6
<PAGE>
National Discount Brokers Group, Inc. and Subsidiaries
Condensed Financial Statements of the Registrant (Parent), continued
Notes to Condensed Financial Statements
- --------------------------------------------------------------------------------
Schedule I
Registrant (Parent) Disclosures
The condensed financial statements of the registrant should be read in
conjunction with the consolidated financial statements and notes to
consolidated financial statements which are included elsewhere herein.
Investment in, less net amounts due to, subsidiaries and affiliates
represents the NDB Group's investment in its subsidiary companies after
deducting net amounts owed to several subsidiaries primarily related to the
funding of the NDB Group's cash flow needs by its operating subsidiaries.
Income and losses of the subsidiairies are recognized using the equity
method accounting.
During the year ended May 31, 1995, NDB Group entered into two subordination
agreements with Equitrade. The first note has a stated interest rate of 0%
and matures on February 28, 2000. In connection with this agreement, NDB
Group 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, 2000. In connection with this agreement, NDB Group loaned
Equitrade $5,000,000. Concurrent with the sale of Equitrade on June 18,
1999, the aforementioned subordinated note agreements were cancelled.
During the year ended May 31, 1997, NDB Group entered into two subordination
agreements with NDB. The first note has a stated interest rate of broker
call and matures on December 31, 2001. The second note also has a stated
interest rate of broker call and matures on March 31, 2001. The weighted
average broker call rate was 6.9% for the year ended May 31, 1999. In
connection with each of these subordination agreements, NDB Group loaned NDB
$3,000,000.
On December 31, 1998, the NDB Group entered into a subordination agreement
with Equitrade. The note has a stated interest rate of 6% and matures on
December 31, 1999. In connection with this agreement, the NDB Group loaned
Equitrade $22,000,000.
No dividends were paid to the NDB Group by its wholly owned subsidiaries for
the years ended May 31, 1999, 1998 and 1997.
Subsequent Events
On June 18, 1999, NDB Group sold its membership interest in Equitrade to
Spear, Leeds & Kellogg Specialists LLC. NDB Group owned a 41.845% membership
interest in Equitrade (another 5.0% interest owned by a subsidiary of NDB
Group was also sold). Prior to the closing, NDB Group exercised its right to
purchase a .03% membership interests in Equitrade from three special members
in exchange for cash equal to the capital accounts of these special members.
NDB Group received approximately $69,000,000 in cash from the purchaser net
of repayment of a $15,000,000 loan from SLK. NDB Group recognized a pre-tax
gain of approximately $30,000,000 in connection with this transaction which
will be recorded in the first quarter of the fiscal year ended May 31, 2000.
On June 25, 1999, NDB Group sold 2,990,000 shares of common stock in an
underwritten public offering at $33 per share. Net of underwriting discounts
and commissions and expenses related to the offering, NDB Group received
approximately $91,600,000 in proceeds.
On July 15, 1999, NDB Group made an additional capital contribution of
$10,000,000 to NDB.
S-7
<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 16, 1999 NATIONAL DISCOUNT BROKERS GROUP, INC.
By: /s/ Arthur Kontos
Arthur Kontos
Chief Executive Officer
By: /s/ Matthew S. Stadler
Matthew S. Stadler
Chief Financial Officer
and Principal Accounting Officer
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, this report has been signed below by the following persons on
behalf of the registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ James H. Lynch, Jr. Chairman of the Board August 16, 1999
James H. Lynch, Jr.
/s/ Arthur Kontos Director and Chief August 16, 1999
Arthur Kontos Executive Officer
/s/ Dennis V. Marino Director August 16, 1999
Dennis V. Marino
/s/ Thomas W. Neumann Director August 16, 1999
Thomas W. Neumann
/s/ John P. Duffy Director August 16, 1999
John P. Duffy
/s/ Ralph N. Del Deo Director August 16, 1999
Ralph N. Del Deo
/s/ Charles Kirkland Kellogg Director August 16, 1999
Charles Kirkland Kellogg
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT INDEX
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 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").
3.3 Amendment to Restated Certificate of Incorporated by reference to Exhibit A to the
Incorporation, as amended. Company's proxy Statement dated November 12, 1997.
3.4 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").
3.5 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.
4.1 Registration Rights Agreement between the Company Incorporated by reference to Exhibit 4 to the
and IAT Reinsurance Syndicate Ltd. dated as of Company's Form 8-K dated January 29, 1998.
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 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.
10.7 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 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.
10.9 Letter of Arthur Kontos exercising his option Incorporated by reference to Exhibit 10.2 to Form
under the Employment Agreement dated September 12, 10-Q for the quarter ended November 30, 1995.
1995.
10.10 Waiver of Bonus by Arthur Kontos. Incorporated by reference to Exhibit 10.1 of Form
10-Q for the quarter ended February 29, 1996.
10.11 Mortgage Loan Agreements dated March 24, 1993 Incorporated by reference to Exhibit 10.6 to
among the Company, Thomas Neumann and Geralyn Form 10-K for Fiscal Year ended May 31, 1993.
Neumann.
10.12 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.
10.13 Voting Trust Agreement between Arthur Kontos and Incorporated by reference to Exhibit 10.7 to Form
Vicki Kontos dated May 11, 1993. 10-K for Fiscal Year ended May 31, 1994.
10.14 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.
10.15 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.
10.16 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.
10.17 Stock Purchase Agreement dated as of April 11, Incorporated by reference to Exhibit 10(b) to Form
1997 between Dresdner Bank A.G. and the Company. 10-Q for the quarter ended February 28, 1997.
10.18 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.
10.19 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.
10.20 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.
10.21 Settlement Agreement. Incorporated by reference to Exhibit 10(a) of Form
10-Q for the quarter ended February 28, 1997.
10.22 Amended Settlement Agreement. Incorporated by reference to Exhibit 10.23 to the
1997 Form 10-K.
10.23 Equitrade Partners Amended and Restated Incorporated by reference to Exhibit 10.24 to the
Partnership Agreement dated as of May 2, 1997. 1997 Form 10-K.
10.24 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.
10.25 Resolution of the Board of Directors of the Incorporated by reference to Exhibit 10.1 to the
Company terminating The Sherwood Group, Inc. 1996 November 1997 Form 10-Q.
Executive Incentive Award Plan.
10.26 The Sherwood Group, Inc. 1995 Stock Option Plan, Incorporated by reference to Exhibit 4.1 to the
as amended. December 1997 Form S-8.
10.27 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
10.28 Letter of Intent of Equitrade Partners, L.L.C. and Incorporated by reference to Exhibit 2 to the
RSF Partners Company's Form 10-Q for the quarter ended November
30, 1998.
10.29 Amended and Restated Operating Agreement of Incorporated by reference to Exhibit 10.1 to the
Equitrade Partners, L.L.C. Company's Form 10-Q for the quarter ended February
28, 1999.
10.30 Contribution Agreement dated as of December 31, Incorporated by reference to Exhibit 10.2 to the
1998 among Equitrade Partners, L.L.C., RSF Company's Form 10-Q for the quarter ended February
Partners, L.P., Joseph Rodriguez, James Bowen, 28, 1999.
Isidore Fields and Robert Prosser
10.31 Employment Agreement dated as of April 1, 1999 Incorporated by reference to Exhibit 10.3 to the
between Frank E. Lawatsch, Jr. and the Company Company's Form 10-Q for the quarter ended February
28, 1999.
10.32 Change of Control Agreement dated as of April 1, Incorporated by reference to Exhibit 10.4 to the
1999 between Frank E. Lawatsch, Jr. and the Company Company's From 10-Q for the quarter ended February
28, 1999.
10.33 Amended and Restated Purchase Agreement dated as Incorporated by reference to Exhibit 2 to the
of June 11, 1999 among Spear, Leeds & Kellogg Company's Form 8-K dated June 21, 1999.
Specialists LLC, the Selling Members listed on the
Signature Pages thereto and the Members'
Representative relating to the purchase and sale
of 100% of the Membership Interests in Equitrade
Partners L.L.C. dated June 21, 1999 (with
schedules and Exhibits which the Company agrees to
provide to the staff of the Commission at its
request)
10.34 Amended Lease at 90 Hudson Street, Jersey City, Incorporated by reference to Exhibit 10 (a) to the
New Jersey Company's Form 8-K dated June 21, 1999.
10.35 National Discount Brokers Group, Inc. 1999 Stock Incorporated by reference to Exhibit 10 (a) to the
Option Plan Company's Form 8-K dated May 7, 1999.
10.36 Change of Control Agreement between Matthew Incorporated by reference to Exhibit 10 (b) to the
Stadler and the Company Company's Form 8-K dated May 7, 1999.
10.37 National Discount Brokers Group, Inc. 1999 Stock Filed herewith.
Option Plan, as amended and restated
10.38 Amendments to Lease at 10 Exchange Place Centre Filed herewith.
11. Statement re: computation of per share earnings. Filed herewith.
16. Letter from KPMG LLP Filed herewith.
21. Subsidiaries of the Company Filed herewith.
23.1 Consent of Independent Public Accountants. Filed herewith.
23.2 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, Incorporated by reference to Exhibit 99.3 to Form
1995 in the principal amount of $5,000,000 related 8-K dated February 28, 1995.
to 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 Subordinated Loan Agreement - Cash dated December Filed herewith.
31, 1998 between the Company and Equitrade
Partners, L.L.C.
99.7 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 8-K dated September 18, 1995.
its executive officers and directors.
99.8 Form of Lockup Agreement Filed herewith.
</TABLE>
EXHIBIT 10.37
NATIONAL DISCOUNT BROKERS GROUP, INC.
1999 NON-QUALIFIED STOCK OPTION PLAN, AS AMENDED
SECTION 1. PURPOSE
The purpose of National Discount Brokers Group, Inc. 1999 Stock Option
Plan (the "Plan") is to provide an additional incentive to employees,
independent contractors, agents and consultants of National Discount Brokers
Group, Inc. (the "Company") and its subsidiaries, to aid in attracting and
retaining employees, independent contractors, agents and consultants, and to
closely align their interests with those of shareholders. The Plan also provides
for the granting of additional incentives to members of the Board of Directors
of the Company who are not Employees.
SECTION 2. DEFINITIONS
Unless the context clearly indicates otherwise, the following terms,
when used in the Plan, shall have the meanings set forth in this Section 2.
(a) "Board" shall mean the Board of Directors of the Company.
(b) "Change in Control". A change in control of the Company shall be
deemed to have occurred if, over the initial opposition of the then-incumbent
Board (whether or not such Board ultimately acquiesces therein), (i) any person
or group of persons shall acquire, directly or indirectly, stock of the Company
having at least 25% of the combined voting power of the Company's
then-outstanding securities, or (ii) any shareholder or group of shareholders
shall elect a majority of the members of the Board in each case after January 1,
1999.
(c) "Code" shall mean the Internal Revenue Code of 1986 and the rules
and regulations thereunder, as it or they may be amended from time to time.
(d) "Committee" shall mean the Compensation Committee of the Board or
such other committee as may be designated by the Board. The Committee shall
consist of two or more members of the Board who are Non-Employee Directors as
such term is defined in Rule 16b-3 of the Exchange Act.
(e) "Date of Exercise" shall mean the earlier of the date on which written
notice of exercise, together with payment in full, is received at the office of
the Secretary of the Company or the date on which such notice and payment are
mailed to the Secretary of the Company at its principal office by certified or
registered mail.
(f) "Employee" shall mean any employee or any officer of the Company or any of
its Subsidiaries, or any other person, who is an independent contractor, agent
or consultant of the Company or any of its Subsidiaries, and excluding any
director of the Company who is not otherwise an employee of the Company.
(g) "Exchange Act" shall mean the Securities and Exchange Act of 1934, as
amended.
(h) "Fair Market Value" shall mean for any day the mean of the highest
and lowest selling prices of the Stock as reported on the Composite Tape for
securities traded on the New York Stock Exchange.
(i) "Grantee" shall mean an Employee or an Independent Director granted
a Stock Option.
(j) "Granting Date" shall mean the date on which the Committee in the case of an
Employee or the Plan in the case of an Independent Director authorizes the
issuance of a Stock Option for a specified number of shares of Stock to a
specified Employee or Independent Director.
(k) "Nonqualified Stock Option" shall mean a Stock Option granted
within the Plan which is not an incentive stock option, under Section 422 of the
Code or otherwise qualified under similar tax provisions.
(l) "Progressive Stock Options" shall mean Nonqualified Stock Options
granted pursuant to Section 5(h) of this Plan.
(m) "Stock" shall mean the Common Stock, as par value $.01 per share,
of the Company.
(n) "Stock Option" shall mean a Nonqualified Stock Option granted
pursuant to the Plan to purchase shares of Stock.
(o) "Subsidiary" shall mean any subsidiary corporation as defined in Section 424
of the Code.
(p) "Independent Director" means a member of the Board who is not an Employee at
the time of the Granting Date or within two years prior thereto.
SECTION 3. SHARES OF STOCK SUBJECT TO THE PLAN
Subject to adjustment pursuant to Section 8, 1,000,000 shares of Stock
shall be reserved for issuance upon the exercise of Stock Options granted
pursuant to the Plan. Shares delivered under the Plan may be authorized and
unissued shares or issued shares held by the Company in its treasury. If any
Stock Options expire or terminate without having been exercised, the shares of
Stock covered by such Stock Option shall become available again for the grant of
Stock Options hereunder. Shares of Stock covered by Stock Options surrendered
for Stock pursuant to Section 6, however, shall not become available again for
the grant of Stock Options hereunder.
SECTION 4. ADMINISTRATION OF THE PLAN
(a) The Plan shall be administered by the Committee. Subject to the
express provisions of the Plan, the Committee shall have authority to interpret
the Plan, to prescribe, amend and rescind rules and regulations relating to it,
to determine the terms and provisions of Stock Option grants, and to make all
other determinations necessary or advisable for the administration of the Plan.
(b) It is intended that the Plan and any transaction hereunder meet all
of the requirements of Rule 16b-3 promulgated by the Securities and Exchange
Commission, as such rule is currently in effect or as hereafter modified or
amended, and all other applicable laws. If any provision of the Plan or any
transaction would disqualify the Plan or such transaction under, or would not
comply with, Rule 16b-3 or other applicable laws, such provision or transaction
shall be construed or deemed amended to conform to Rule 16b-3 or such other
applicable laws or otherwise shall be deemed to be null and void, in each case
to the extent permitted by law and deemed advisable by the Committee.
(c) Any controversy or claim arising out of or related to the Plan
shall be determined unilaterally by and at the sole discretion of the Committee.
SECTION 5. GRANTING OF STOCK OPTIONS
(a) Except as provided in Subsection 5 (i), only Employees shall be
eligible to receive Stock Options under the Plan. Except as provided in
Subsection 5 (i), Directors of the Company who are not also employees of the
Company or one of its Subsidiaries shall not be eligible for Stock Options.
(b) Except as provided in Subsection 5 (i), the option price of each
share of Stock subject to a Nonqualified Stock Option shall be 100% of the Fair
Market Value of a share of the Stock on the Granting Date, or such other price
either greater than or less than the Fair Market Value (but in no event less
than the par value of the Stock) as the Committee shall determine appropriate to
the purposes of the Plan and to the Company's total compensation program.
(c) The Committee shall determine and designate from time to time those
Employees who are to be granted Stock Options and shall also specify the number
of shares covered by and the option price per share of each Stock Option. Each
Stock Option granted under the Plan shall be clearly identified as to its status
as a Nonqualified Stock Option.
(d) A Stock Option shall be exercisable during such period or periods
and in such installments as shall be fixed by the Committee at the time the
Stock Option is granted or in any amendment thereto, but each Stock Option shall
expire not later than ten years from the Granting Date.
(e) The Committee shall have the authority to grant both transferable
Stock Options and nontransferable Stock Options, and to amend outstanding
nontransferable Stock Options to provide for transferability. Each
nontransferable Stock Option intended to qualify under Rule 16b-3 or otherwise
shall provide by its terms that it is not transferable otherwise than by will or
the laws of descent and distribution and is exercisable, during the Grantee's
lifetime, only by the Grantee. Each transferable Stock Option may provide for
such limitations on transferability and exercisability as the Committee may
designate at the time a Stock Option is granted or is otherwise amended to
provide for transferability.
(f) Stock Options may be granted to an Employee who has previously
received Stock Options or other options whether such prior Stock Options or
other options are still outstanding, have previously been exercised or
surrendered in whole or in part, or are canceled in connection with the issuance
of new Stock Options.
(g) Subject to adjustment pursuant to Section 8, the aggregate number
of shares of Stock subject to Stock Options granted to an Employee or Director
under the Plan shall not exceed 125,000 shares (as such number is adjusted
pursuant to Section 8).
(h) Subject to Section 5 (g), without in any way limiting the authority
of the Committee to make grants of Stock Options under the Plan, and in order to
induce Employees to retain ownership of Stock, the Committee shall have the
authority (but not the obligation) to include within any agreement reflecting a
Stock Option a provision entitling the Grantee of such Stock Option to a further
Stock Option (a "Progressive Stock Option") in the event the Grantee exercises
such Nonqualified Stock Option evidenced by such agreement, in whole or in part,
by surrendering other shares of Stock in accordance with this Plan and the terms
and conditions of such agreement. Any such Progressive Stock Option shall be for
a number of shares of Stock equal to the number of surrendered shares, shall
become exerciseable no sooner than six months after the Granting Date of the
Stock Option or such longer period as the Committee may establish, shall have an
option price per share equal to one hundred percent (100%) of the Fair Market
Value of a share of Stock on the Granting Date of the Progressive Stock Option,
and shall be subject to such other terms and conditions as the Committee may
determine.
(i) Notwithstanding any provision of the Plan to the contrary, each
Independent Director shall receive a one time grant of a Stock Option covering
5,000 shares of stock (adjusted as provided in Section 8) on the date when the
Independent Director first joins the Board after July 28, 1999 or on July 28,
1999 in the case of any Independent Director serving on the Board on July 28,
1999. The Stock Option will have an Exercise Price equal to Fair Market Value at
the Granting Date, have a term of 9 years and 364 days from the Granting Date,
vest six months after the Granting Date for the Stock Option, be transferable to
the extent permitted by the Committee for Employees, not be subject to the
benefits of Subsection 5(h) and 6(c), and otherwise be subject to the terms and
conditions of the Plan except that the Stock Option awarded to an Independent
Director shall not expire when the Independent Director leaves the Board but
shall continue until the earlier of two years from the date the Director leaves
the Board or the date the Stock Option expires.
SECTION 6. EXERCISE OF STOCK OPTIONS
(a) Except for the Stock Option granted to an Independent Director and
except as provided in Section 7, no Stock Option may be exercised at any time
unless the Grantee is an Employee on the Date of Exercise.
(b) The Grantee shall pay the option price in full on the Date of
Exercise of a Stock Option in cash, by check, or by delivery of full shares of
Stock of the Company, duly endorsed for transfer to the Company with signature
guaranteed, or by any combination thereof. Stock will be accepted at its Fair
Market Value on the Date of Exercise.
(c) Subject to the approval of the Committee, or of such person to whom
the Committee may delegate such authority ("its designee"), the Company may loan
to the Grantee a sum equal to an amount which is not in excess of 100% of the
purchase price of the shares of Stock acquired upon exercise of a Stock Option,
such loan to be evidenced by the execution and delivery of a promissory note.
Interest shall be paid on the unpaid balance of the promissory note at such
times and at such rate as shall be determined by the Committee or its designee.
Such promissory note shall be secured by the pledge to the Company of shares of
Stock having an aggregate purchase price on the date of purchase equal to or
greater than the amount of such note. A Grantee shall have, as to such pledged
shares of Stock, all rights of ownership including the right to vote such shares
of Stock and to receive dividends paid on such shares of Stock, subject to the
security interest of the Company. Such shares of Stock shall not be released by
the Company from the pledge unless the proportionate amount of the note secured
thereby has been repaid to the Company; provided, however that shares of Stock
subject to a pledge may be used to pay all or part of the purchase price of any
other option granted hereunder or under any other stock incentive plan of the
Company under the terms of which the purchase price of an option may be paid by
the surrender of shares of Stock, subject to the terms and conditions of the
Plan relating to the surrender of shares of Stock in payment of the exercise
price of an option. In such event, that number of the newly purchased shares of
Stock equal to the shares of Stock previously pledged shall be immediately
pledged as substitute security for the pre-existing debt of the Grantee to the
Company, and thereupon shall be subject to the provisions hereof relating to
pledged shares of Stock. All notes executed hereunder shall be payable at such
times and in such amounts and shall contain such other terms as shall be
specified by the Committee or its designee or stated in the option agreement;
provided, however, that such terms shall conform to requirements contained in
any applicable regulations which are issued by any governmental authority.
SECTION 7. TERMINATION OF EMPLOYMENT
Except as otherwise provided by the Committee at the time the Stock
Option is granted or any amendment thereto, if a Grantee ceases to be an
Employee then:
(a) if termination of employment is voluntary or involuntary without
cause, the Grantee may exercise each Stock Option held by the Grantee within
three months after such termination (but not after the expiration date of the
Stock Option) to the extent of the number of shares subject to the Stock Option
which are purchasable pursuant to its terms at the date of termination;
(b) if termination is for cause, all Stock Options held by the Grantee
shall be canceled as of the date of termination;
(c) subject to the provisions of Section 7(d), if termination is (i) by reason
of retirement at a time when the Grantee is entitled to the current receipt of
benefits under any retirement plan maintained by the Company or any Subsidiary,
or (ii) by reason of disability, each Stock Option held by the Grantee may be
exercised by the Grantee at any time (but not after the expiration date of the
Stock Option) to the extent of the number of shares subject to the Stock Option
which were purchasable pursuant to its terms at the date of termination;
(d) if termination is by reason of the death of the Grantee, or if the
Grantee dies after retirement or disability as referred to in Section 7(c), each
Stock Option held by the Grantee may be exercised by the Grantee's estate, or by
any person who acquires the right to exercise the Stock Option by reason of the
Grantee's death, at any time within a period of three years after death (but not
after the expiration date of the Stock Option) to the extent of the total number
of shares subject to the Stock Option which were purchasable pursuant to its
terms at the date of termination; or
(e) if the Grantee should die within three months after voluntary
termination of employment or involuntary termination without cause, as
contemplated in Section 7(a), each Stock Option held by the Grantee may be
exercised by the Grantee's estate, or by any person who acquires the right to
exercise by reason of the Grantee's death, at any time within a period of one
year after death (but not after the expiration date of the Stock Option) to the
extent of the number of shares subject to the Stock Option which were
purchasable pursuant to its terms at the date of termination.
SECTION 8. ADJUSTMENTS
In the event of any merger, consolidation, reorganization,
recapitalization, stock dividend, stock split or other change in the corporate
structure or capitalization affecting the Stock, there shall be an appropriate
adjustment made by the Board in the number and kind of shares that may be
granted in the aggregate and to individual Employees or Independent Directors
under the Plan, the number and kind of shares subject to each outstanding Stock
Option and the option prices. In the event of a transaction involving (i) the
liquidation or dissolution of the Company, (ii) a merger or consolidation in
which the Company is not the surviving corporation or (iii) the sale or
disposition of all or substantially all of the Company's assets, provision shall
be made in connection with such transaction for the assumption of Stock Options
theretofore granted under the Plan, or the substitution for such Stock Options
of new options of the successor corporation, with appropriate adjustment as to
the number and kind of stock and the purchase price for stock thereunder, or, in
the discretion of the Committee, the Plan and the Stock Options issued hereunder
shall terminate on the effective date of such transaction if appropriate
provision is made for payment to the Grantee of an amount in cash equal to the
fair market value of a share of stock multiplied by the number of shares of
stock subject to the Stock Options (to the extent such Stock Options have not
been exercised) less the exercise price for such Stock Options (to the extent
such Stock Options have not been exercised); provided, however, that in no event
shall the Committee take any action or make any determination under this Section
8 which would prevent a transaction described in clause (ii) or (iii) above from
being treated as a pooling of interests under generally accepted accounting
principles.
SECTION 9. TENDER OFFER; CHANGE IN CONTROL
A Stock Option shall become immediately exercisable to the extent of
the total number of shares subject to the Stock Option in the event of (i) a
tender offer by a person or persons other than the Company for all or any part
of the outstanding Stock if, upon consummation of the purchases contemplated,
the offeror or offerors would own, beneficially or of record, an aggregate of
more than 25% of the outstanding Stock, or (ii) a Change in Control of the
Company.
SECTION 10. GENERAL PROVISIONS
(a) Each Stock Option shall be evidenced by a written instrument
containing such terms and conditions, not inconsistent with this Plan, as the
Committee shall approve.
(b) The granting of a Stock Option in any year shall not give the
Grantee any right to similar grants in future years or any right to be retained
in the employ of the Company or any Subsidiary or interfere in any way with the
right of the Company or such Subsidiary to terminate an Employee's employment at
any time.
(c) Notwithstanding any other provision of the Plan, the Company shall
not be required to issue or deliver any certificate or certificates for shares
of Stock under the Plan prior to fulfillment of all of the following conditions:
(i) The listing, or approval for listing upon notice of
issuance, of such shares on the New York Stock Exchange;
(ii) Any registration or other qualification of such shares
under any state or federal law or regulation, or the maintaining in effect of
any such registration or other qualification which the Committee may, in its
discretion upon the advice of counsel, deem necessary or advisable; and
(iii) The obtaining of any other consent, approval or permit
from any state or federal governmental agency which the Committee may, in its
discretion upon the advice of counsel, determine to be necessary or advisable.
(d) The Company shall have the right to deduct from any payment or
distribution under the Plan any federal, state or local taxes of any kind
required by law to be withheld with respect to such payments or to take such
other action as may be necessary to satisfy all obligations for the payment of
such taxes. In case distributions are made in shares of Stock, the Company shall
have the right to retain the value of sufficient shares of Stock to equal the
amount of tax to be withheld for such distributions or require a recipient to
pay the Company for any such taxes required to be withheld on such terms and
conditions prescribed by the Committee.
(e) No Grantee shall have any of the rights of a shareholder by reason
of a Stock Option until it is exercised.
(f) The Plan shall be construed and enforced in accordance with the
laws of the State of Delaware (without regard to the legislative or judicial
conflict of laws rules of any state), except to the extent superseded by federal
law.
SECTION 11. AMENDMENT AND TERMINATION
(a) The Plan shall terminate on April 1, 2008 and no Stock Option shall
be granted hereunder after that date, provided that the Board may terminate the
Plan at any time prior thereto.
(b) The Board may amend the Plan at any time without notice.
(c) No termination or amendment of the Plan may, without the consent of
a Grantee to whom a Stock Option shall theretofore have been granted, adversely
affect the rights of such Grantee under such Stock Option.
EXHIBIT 10.38
AMENDMENT NO. 1 TO LEASE AGREEMENT
AMENDMENT NO. 1 TO LEASE AGREEMENT (this "Amendment") made as of the 18
day of July, 1996, by and between S.P.N.W. MANAGEMENT ASSOCIATES LIMITED
PARTNERSHIP (the "Landlord"), having an office in care of Prudential Real Estate
Investors, 51 JFK Parkway, Short Hills, New Jersey 07078, and SHERWOOD
SECURITIES CORP. (the "Tenant"), having an office at Ten Exchange Place, Jersey
City, New Jersey 07302.
WITNESSETH:
WHEREAS, pursuant to a Lease Agreement dated as of November 30, 1994
(the "Lease"), Landlord leased to Tenant, and Tenant hired from Landlord, the
entire fifteenth (15th) floor of the Building, containing approximately 36,624
rentable square feet; and
WHEREAS, Tenant desires to hire from Landlord, and Landlord desires to
lease to Tenant, approximately 2,817 rentable square feet of additional space on
the fourteenth (14th) floor of the Building (the "Additional Space"); and
WHEREAS, Landlord and Tenant desire to amend the Lease to reflect the
leasing of the Additional Space;
NOW, THEREFORE, in consideration of the mutual covenants contained
herein and other good and valuable consideration, the receipt and adequacy of
which are hereby acknowledged, Landlord and Tenant hereby agree as follows:
1. Subject to the terms and conditions of the Lease, as amended by this
Amendment, Landlord hereby leases to Tenant, and Tenant hereby hires from
Landlord, the Additional Space for the Amendment Term (as defined in Paragraph 2
hereof). The location of the Additional Space on the fourteenth (14th) floor is
shown on the floor plan annexed hereto and made a part hereof as Schedule 1.
2. The term of this Amendment (hereinafter referred to as the "Amendment Term")
shall commence on the date on which Landlord delivers possession of the
Additional Space to Tenant in broom-clean condition (the "Effective Date"), and
shall expire on the day immediately preceding the third (3rd) anniversary of the
Effective Date; provided, however, if the Effective Date is a day other than the
first (1st) day of a calendar month, then the Amendment Term shall expire on the
last day of the calendar month in which the third (3rd) anniversary of the
Effective Date occurs.
3. Tenant expressly acknowledges that Landlord shall not be required to do any
work to the Additional Space to prepare the same for Tenant's occupancy, and
that Tenant agrees to accept the Additional Space in its "AS IS" condition as of
the Effective Date.
4. Tenant agrees to pay to Landlord the sum of $70,425.00 per annum as base rent
for the Additional Space (hereinafter referred to as the "Additional Base
Rent"), which shall be payable in equal monthly installments of $5,868.75 on the
first (1st) day each calendar month during the Amendment Term. The first monthly
installment of the Additional Base Rent shall be paid on the execution of this
Amendment and shall be applied against the first (1st) full calendar month of
the Amendment Term. If the Effective Date is a day other than the first (1st)
day of a calendar month, then Tenant shall pay to Landlord on the Effective Date
a prorated amount for the balance of said calendar month.
5. During the Amendment Term, the Lease shall be deemed amended further as
follows:
(a) The term "Premises", as defined in Section1.1 of the Lease,
shall be deemed to include the Additional space for all
purposes of the Lease, except for purposes of Article V and
Exhibit B, and except for any other purposes inconsistent with
the provisions and intent of this Amendment.
(b) The term "Base Rent", as defined in Section 3.1(a) of the
Lease, shall be deemed to include the Additional Base Rent for
all purposes of the Lease, except for purposes of Section 2.3
and Section 3.1(a), and except for any other purposes
inconsistent with the provisions and intent of this Amendment.
(c) The aggregate rentable square footage of the Premises shall be
increased from 36,624 square feet to 39,441 square feet.
(d) Tenant's Percentage shall be increased from 5.255% to 5.66%
for all purposes of the Lease, except for the provisions of
Section 3.5 of the Lease, and except for any other purposes
inconsistent with the provisions and intent of this Amendment.
(e) The number of non-exclusive parking spaces shall be increased
from twenty-three (23) spaces to twenty-five (25) spaces.
(f) With respect to the Additional Space, Tenant shall pay to
Landlord, in addition to and together with the monthly
installment of the Additional Base Rent, one-twelfth of 7.69%
of the cost of common utility service used on the fourteenth
(14th) floor of the Building based upon a reading of the
electric submeter for said floor. The amount payable pursuant
to this Paragraph 5(f) shall be deemed Additional Rent under
the terms of the Lease.
(g) In addition to the Additional Base Rent to be paid as herein
provided in this Amendment, Tenant shall pay, as Additional
Rent, 0.405% of Operating Expenses for any Calendar Year
during the Amendment Term in excess of the Operating
Expenses for Calendar Year 1996 (hereinafter called the
"Additional Base Year"). For the purposes of this Paragraph
5 (g), all of the terms and conditions of Section 3.5 of the
Lease are hereby incorporated herein and made a part hereof,
subject to the following changes: (i) the term "Tenant's
Percentage" shall mean the percentage 0.405%; (ii) the term
"Additional Base Year" shall be substituted for the term "Base
Year" and for the amount "$4,463,675.00"; (iii) the date
"January 1, 1997" shall be substituted for the date "January
1, 1995"; and (iv) the date "December, 1996" shall be
substituted for the date "December, 1994".
6. Landlord and Tenant each represent and warrant to each other that neither of
them has employed or dealt with any broker, agent or finder in carrying on the
negotiations relating to this Amendment, except to the extent of the
representation of Cushman and Wakefield of New Jersey, Inc. (the "Broker").
Landlord and Tenant shall indemnify and hold each other harmless from and
against any claim or claims for brokerage or other commissions asserted by any
broker, agent or finder (other than the Broker) engaged by Landlord or Tenant or
with whom Landlord or Tenant has dealt. This provision shall survive the
expiration or earlier termination of the Lease, but shall not be deemed for the
benefit of any third party.
7. Except as expressly provided herein, all of the terms and conditions of the
Lease shall remain unmodified and shall continue in full force and effect, and
are hereby ratified and confirmed. Capitalized terms used in this Amendment, but
not defined herein, shall have the meaning ascribed to such terms in the Lease.
8. This Amendment may not be changed orally and shall be binding upon and inure
to the benefit of the parties hereto and their respective successors, permitted
assigns and legal representatives.
9. If any provision of this Amendment shall be held invalid or unenforceable
according to law, the remaining provisions herein shall not be affected thereby
and shall continue in full force and effect.
IN WITNESS WHEREOF, the parties have signed this Amendment as of the
date first above written.
S.P.N.W. MANAGEMENT ASSOCIATES
LIMITED PARTNERSHIP, a New Jersey
Limited Partnership
BY: The Prudential Insurance
Company of America, a New Jersey
Corporation (its General Partner)
By: /s/ /Terry McHugh
Name: Terry McHugh
Title: Vice President
SHERWOOD SECURITIES CORP.
BY: /s/ William Karsh
Name: William Karsh
Title: EVP & Treasurer
<PAGE>
AMENDMENT NO. 2 TO LEASE AGREEMENT
AMENDMENT NO. 2 TO LEASE AGREEMENT (this "Amendment") made as of the 31
day of July, 1998, by and between S.P.N.W. MANAGEMENT ASSOCIATES LIMITED
PARTNERSHIP (the "Landlord"), a New Jersey limited partnership, having an office
at 10 Exchange Place, Jersey City, New Jersey 07302, and SHERWOOD SECURITIES
CORP., (the "Tenant"), a Delaware corporation, having an office at 10 Exchange
Place, Jersey City, New Jersey 07302.
WITNESSETH:
WHEREAS, pursuant to a certain Lease Agreement dated as of
November 30, 1994, as amended by Amendment No. 1 to Lease Agreement dated as of
August ___, 1996 (the "First Amendment"), and further amended by a Generator
Agreement dated as of August 28, 1996 (the "Generator Agreement") (said Lease
Agreement, as amended, being hereinafter referred to as the "Lease"), Landlord
leased to Tenant, and Tenant hired from Landlord, approximately 36,624 rentable
square feet consisting of the entire fifteenth (15th) floor of the Building
(defined in the Lease), and approximately 2,817 rentable square feet on the
fourteenth (14th) floor of the Building (collectively referred to as the
"Existing Premises"); and
WHEREAS, Tenant desires to lease approximately 4,274 rentable
square feet of additional space on the eighth floor of the Building (the "First
Additional Space"), and another approximately 7,875 rentable square feet of
additional space on the eighth floor of the Building (the "Second Additional
Space"); and
WHEREAS, Landlord desires to lease the First Additional Space
and the Second Additional Space (collectively, the "Additional Space") to
Tenant, subject, however, to the terms and conditions contained in this
Amendment;
NOW, THEREFORE, in consideration of the mutual covenants
contained herein and other good and valuable consideration, the receipt and
adequacy of which are hereby acknowledged, Landlord and Tenant hereby agree as
follows:
1. Subject to the provisions of this Amendment, Landlord
hereby leases to Tenant, and Tenant hereby hires from Landlord, the Additional
Space. Annexed hereto and made a part hereof as Schedule 1 is the floor plan for
the eighth (8th) floor of the Building, which has been cross-hatched to indicate
the location of the First Additional Space and the Second Additional Space. The
leasing of the Additional Space shall be subject to the terms and conditions of
the Lease, as amended by this Amendment.
2. (a)(i) Landlord and Tenant acknowledge and agree that the
term of the leasing of the First Additional Space shall commence on the First
Effective Date (as herein defined) and shall expire on January 31, 2007. After
the occurrence of the First Effective Date, Landlord and Tenant agree to execute
and deliver a document ratifying and confirming the First Effective Date. For
the purposes of this Amendment, the term "First Effective Date" shall mean the
date of the delivery of possession of the First Additional Space to Tenant free
of any claims and/or occupancy by third parties. Tenant shall not have any
liability with regard to the First Additional Space for the period prior to the
First Effective Date.
(ii) Landlord hereby advises Tenant that the First Additional
Space is presently leased to Hestair Computer Group, Inc. ("Hestair") and that
Landlord is presently negotiating a lease termination agreement with Hestair.
Tenant acknowledges and agrees that (x) this Lease is contingent upon Landlord
and Hestair entering into an unconditional, binding lease termination agreement
on terms and conditions satisfactory to Landlord in its sole discretion, and (y)
Landlord shall have the right, for any reason or no reason, to discontinue
negotiations with Hestair and/or to refuse to enter into a lease termination
agreement with Hestair without incurring any liability whatsoever to Tenant.
Tenant hereby releases Landlord from all liability, claim or expense incurred by
Tenant as a result of the non-occurrence of the contingency described in clause
(x) above.
(iii) The Effective Date shall not occur until the contingency
described in clause (x) of Paragraph 2(a)(ii) above is satisfied. If such
contingency is not satisfied within thirty (30) days after the date of this
Amendment, then Landlord or Tenant shall have the right to cancel this Amendment
by notice given to the other party after the expiration of said thirty (30) day
period. If Landlord or Tenant exercises its cancellation right, then this
Amendment shall be deemed cancelled, and of no further force or effect, as of
the date of the other party's receipt of said cancellation notice.
(b) Landlord and Tenant acknowledge and agree that the term of
the leasing of the Second Additional Space shall commence on the Second
Effective Date (as herein defined) and shall expire on January 31, 2007. After
the occurrence of the Second Effective Date, Landlord and Tenant agree to
execute and deliver a document ratifying and confirming the Second Effective
Date. For the purposes of this Amendment, the term "Second Effective Date" shall
mean the date of the delivery of possession of the Second Additional Space to
Tenant free of any claims and/or occupancy by third parties. Tenant shall not
have any liability with regard to the Second Additional Space for the period
prior to the Second Effective Date.
3. (a) Tenant shall pay to Landlord (i) the sum of $141,042.00
per annum ($33.00 per rentable square foot), in equal monthly installments of
$11,753.50, as rent for the First Additional Space for the period from the First
Effective Date to September 30, 2002, inclusive, and (ii) the sum of $149,590.00
per annum ($35.00 per rentable square foot), in equal monthly installments of
$12,465.83, as rent for the First Additional Space for the period from the
October 1, 2002 through January 31, 2007, inclusive (which rent shall
hereinafter be referred to as "First Additional Space Base Rent"). Tenant agrees
to pay the monthly installments of First Additional Space Base Rent at the same
time, in the same manner and to the same place as the installments of the Base
Rent, and Tenant acknowledges that, as used in the Lease, the term "Base Rent"
shall be deemed to include the Base Rent payable in connection with the Existing
Premises and the First Additional Space Base Rent for all purposes of the Lease.
In the event the First Effective Date is a day other than the first (1st) day of
a calendar month, then the First Additional Space Base Rent shall be prorated
for such calendar month.
(b) Tenant shall pay to Landlord (i) the sum of $273,656.25
per annum ($34.75 per rentable square foot), in equal monthly installments of
$22,804.69, as rent for the Second Additional Space for the period from the
Second Effective Date to April 30, 2003, inclusive, and (ii) the sum of
$289,406.25 per annum ($36.75 per rentable square foot), in equal monthly
installments of $24,117.19, as rent for the Second Additional Space for the
period from the May 1, 2003 through January 31, 2007, inclusive (which rent
shall hereinafter be referred to as "Second Additional Space Base Rent"). Tenant
agrees to pay the monthly installments of Second Additional Space Base Rent at
the same time, in the same manner and to the same place as the installments of
the Base Rent, and Tenant acknowledges that, as used in the Lease, the term
"Base Rent" shall be deemed to include the Base Rent payable in connection with
the Existing Premises and the Second Additional Space Base Rent for all purposes
of the Lease. In the event the Second Effective Date is a day other than the
first (1st) day of a calendar month, then the Second Additional Space Base Rent
shall be prorated for such calendar month.
4. (a)(i) Commencing on the First Effective Date, and
continuing during each subsequent Calendar Year during the Lease Term, Tenant
shall pay, as Additional Rent for the First Additional Space, 0.613% of the
Operating Expenses in excess of the Operating Expenses for the Calendar Year
1998. For purposes of computing such Additional Rent, the provisions of Section
3.5 of the Lease shall be deemed incorporated herein, except that Calendar Year
1998 shall be deemed the "Base Year" and 0.613% shall be deemed to be "Tenant's
Percentage". Said Additional Rent shall be in addition to the Additional Rent
paid by Tenant with respect to the Existing Premises pursuant to the Lease.
(ii) The provisions of Paragraphs 4(a)(i) address
Tenant's Percentage of the increases in the Operating Expenses. For all
purposes of the Lease (other than those provisions relating to the increases in
the Operating Expenses), Tenant's Percentage shall be deemed to be 6.273% as of
the First Effective Date.
(b)(i) Commencing on the Second Effective Date, and continuing
during each subsequent Calendar Year during the Lease Term, Tenant shall pay, as
Additional Rent for the Second Additional Space, 1.13% of the Operating Expenses
in excess of the Operating Expenses for the Calendar Year 1999. For purposes of
computing such Additional Rent, the provisions of Section 3.5 of the Lease shall
be deemed incorporated herein, except that Calendar Year 1999 shall be deemed
the "Base Year" and 1.13% shall be deemed to be "Tenant's Percentage". Said
Additional Rent shall be in addition to the Additional Rent paid by Tenant with
respect to the Existing Premises pursuant to the Lease.
(ii) The provisions of Paragraphs 4(b)(i) address
Tenant's Percentage of the increases in the Operating Expenses. For all
purposes of the Lease (other than those provisions relating to the increases in
the Operating Expenses), Tenant's Percentage shall be deemed to be 7.403% as of
the Second Effective Date.
(c) Tenant's Percentage set forth in paragraphs (a)(ii) and
(b)(ii) above shall be reduced by 0.405% at the expiration of the Amendment Term
described in Amendment No. 1.
5. (a) Supplementing the provisions of Section 3.5 of the
Lease, Tenant shall be required to pay with respect to the First Additional
Space, in addition to and together with the monthly installment of Additional
Base Rent, and Additional Rent relating to the Existing Premises, one-twelfth of
11.67% of the cost of common utility service used on the eighth (8th) floor of
the Building; such payments will be based upon a reading of the electric
submeter for said floors.
(b) Supplementing the provisions of Section 3.5 of the Lease,
Tenant shall be required to pay with respect to the Second Additional Space, in
addition to and together with the monthly installment of Additional Base Rent,
and Additional Rent relating to the Existing Premises, one-twelfth of 21.50% of
the cost of common utility service used on the eighth (8th) floor of the
Building (so that, combined with the First Additional Space, Tenant's share of
common utility services for the eighth (8th) floor shall be 33.17%); such
payments will be based upon a reading of the electric submeter for said floors.
6. (a) As of the First Effective Date, the Lease shall be
amended further in accordance with the following provisions:
(i) The term "Premises", as previously amended,
shall be deemed to include the Existing Premises and the First Additional
Space for all purposes except for the provisions of Article V and Exhibit B
of the Lease and for any other purpose which is inconsistent with the
provisions of this Amendment.
(ii) The total rentable square footage of the
Premises shall be deemed to be 43,715 rentable square feet.
(iii) The total number of parking spaces allocated to
Tenant pursuant to Section 1.3
shall be increased by three (3) spaces.
(b) As of the Second Effective Date, the Lease shall be
amended further in accordance with the following provisions:
(i) The term "Premises", as previously amended,
shall be deemed to include the Existing Premises, the First Additional
Space and the Second Additional Space for all purposes except for the
provisions of Article V and Exhibit B of the Lease and for any other purpose
which is inconsistent with the provisions of this Amendment.
(ii) The total rentable square footage of the
Premises shall be deemed to be 51,990 rentable square feet.
(iii) The total number of parking spaces allocated to
Tenant pursuant to Section 1.3
shall be increased by five (5) spaces.
(c) As of the expiration of the Amendment Term described in
Amendment No. 1, (i) the total rentable square footage of the Premises set forth
in paragraphs (a)(ii) and (b)(ii) above shall be reduced by 2,817 rentable
square feet, and (ii) the total number of parking spaces allocated to Tenant
pursuant to Section 1.3 shall be reduced by two (2) spaces.
7. (a) Tenant acknowledges and agrees that Landlord shall not
be required to do any work to the Additional Space to prepare the same for
Tenant's occupancy, and Tenant agrees to accept the Additional Space in its "AS
IS" condition as of the First Effective Date or the Second Effective Date, as
the case may be, except that Landlord shall be required to deliver the
Additional Space to Tenant in broom clean condition, vacant, and free and clear
of all tenancies and occupancies.
(b) Tenant agrees, at its sole cost, to
prepare the Additional Space for its occupancy and to construct the
improvements thereto in accordance with the provisions of Sections 9.5 and
9.6, and Exhibit B of the Lease, except that the provisions of Paragraphs 1,
2(h) and 4 of Exhibit B shall not apply. Tenant agrees further to reimburse
Landlord for any out-of-pocket costs Landlord may incur to review Tenant's
plans and specifications.
(c) Tenant may install lines connecting the
Additional Space to the Generator (defined in the Generator Agreement),
provided that Tenant first submits plans therefor to Landlord in accordance
with the provisions of Exhibit B to the Lease, except that Landlord may reject
such plans in its reasonable discretion, which may include rejection because
the risers and other portions of the Building where such lines are to be
installed cannot accommodate such proposed lines.
(d) Landlord hereby acknowledges that Tenant may
install supplemental air conditioning units and associated piping and
equipment in the Additional Space and the Existing Premises, so long as Tenant
complies with subsection (b) above.
If the supplemental air conditioning units require condenser water, Landlord
agrees to provide to the Additional Space or the Existing Premises not more than
an aggregate of twenty (20) tons of condenser water per year for the
supplemental air conditioning units, subject, however, to the terms and
conditions of this Section 7(d). In consideration for the use of the condenser
water, Tenant agrees to pay to Landlord (i) a one-time connection fee of
$1,000.00 per ton of condenser water and (ii) an annual fee (in equal monthly
installments) calculated by multiplying (x) Landlord's then charge for the use
of the condenser water, by (y) the number of tons of condenser water supplied by
Landlord to the supplemental air conditioning unit. The current charge for the
use of the condenser water is $250.00 per ton per year. Tenant shall pay the
connection fee and the 1st monthly installment of the annual fee on or before
the date on which the supplemental air conditioning unit becomes operational;
thereafter, Tenant shall pay the monthly installment of the annual fee on or
before the 1st day of each calendar month during the Lease Term.
(e) Upon the expiration or earlier termination
of the Lease, Tenant shall remove the supplemental air conditioning units
and associated piping and equipment installed in the Premises, restore the
Premises and shall repair all damage to the Premises and/or to the Building.
8. Landlord and Tenant each represent and warrant to each
other that neither of them has employed or dealt with any broker, agent or
finder in carrying on the negotiations relating to this Amendment, except to the
extent of the representation of Cushman & Wakefield of New Jersey, Inc. (the
"Broker"), and any inconsistent provisions of the Lease are not incorporated
herein by reference. Landlord and Tenant shall indemnify and hold each other
harmless from and against any claim or claims for brokerage or other commissions
asserted by any broker, agent or finder (other than the Broker) engaged by the
indemnifying party or with whom the indemnifying party has dealt. This provision
shall survive the expiration or earlier termination of the Lease, but shall not
be for the benefit of any third party.
9. Except as expressly provided herein, all of the terms and
conditions of the Lease shall remain unmodified and shall continue in full force
and effect, and are hereby ratified and confirmed. Capitalized terms used in
this Amendment, but not defined herein, shall have the meaning ascribed to such
items in the Lease.
10. This Amendment may not be changed orally and shall be
binding upon and inure to the benefit of the parties hereto and their respective
successors, permitted assigns and legal representatives.
11. If any provision of this Amendment shall be held invalid
or unenforceable according to law, the remaining provisions herein shall not be
affected thereby and shall continue in full force and effect.
IN WITNESS WHEREOF, the parties have signed this Amendment as
of the date first above written.
LANDLORD:
S.P.N.W. MANAGEMENT ASSOCIATES
LIMITED PARTNERSHIP, a New
Jersey Limited Partnership
BY: The Prudential Insurance
Company of America, a New
Jersey Corporation (its
General Partner)
By:/s/TerryMcHugh
Name:Terry McHugh
Title:Vice President
TENANT:
SHERWOOD SECURITIES CORP.
BY: /s/ Thomas Neumann
Name: Thomas Neumann
Title:President
<PAGE>
SCHEDULE 1
FLOOR PLANS FOR ADDITIONAL SPACE
<PAGE>
AMENDMENT NO. 3 TO LEASE AGREEMENT
THIS AGREEMENT (hereinafter referred to as the "Amendment") made the
29th day of March 1999, between BBV HUDSON STREET LIMITED PARTNERSHIP, a New
Jersey limited partnership, whose address is c/o Clarion Realty Services,
Building Management Office, 10 Exchange Place, Jersey City, New Jersey 07302
(hereinafter referred to as "Landlord"); and SHERWOOD SECURITIES CORP., a New
York corporation, with offices at 10 Exchange Place, Jersey City, New Jersey
07302 (hereinafter referred to as "Tenant").
W I T N E S S E T H:
WHEREAS, pursuant to the terms and conditions of a certain long-term
ground lease dated October 7, 1985 (hereinafter referred to as the "Ground
Lease") between BBV US Real Estate Fund III, L.P., a Georgia limited partnership
(successor-in-interest to FJN Corporation), as ground lessor, and BBV Exchange
Centre Urban Renewal Limited Partnership, a New Jersey limited partnership
(successor-in-interest to Exchange Place Urban Renewal Associates Limited
Partnership) (hereinafter referred to as "BBVEC"), as ground lessee, BBVEC has
leased a certain tract of land (hereinafter referred to as the "Property") lying
and being in the City of Jersey City, County of Hudson and State of New Jersey,
which tract of land is commonly known as Lot 1, Block 8.4 on the Official Tax
Map of Jersey City and is more particularly described on Exhibit 1 annexed to
the Lease; and
WHEREAS, BBVEC's predecessor has constructed on the Property a building
containing approximately 914,249 rentable square feet (hereinafter referred to
as the "Building"), of which 696,876 square feet is rentable office and
ancillary lobby retail space and 217,373 square feet is above-grade garage area
for approximately 439 automobiles. For the purposes of this Amendment, the
garage area of the Building is hereinafter referred to as the "Garage," and the
Property, the Building and all other improvements on the Property are
hereinafter, collectively, referred to as the "Real Property"; and
WHEREAS, pursuant to the terms and conditions of a certain Lease
Agreement dated December 29, 1989 (hereinafter referred to as the "Master
Lease"), BBVEC has leased to Landlord's predecessor-in-interest, S.P.N.W.
Management Associates Limited Partnership, certain portions of the Building
(said portions being hereinafter referred to as the "Master Lease Space"); and
<PAGE>
WHEREAS, Landlord's predecessor-in-interest and Tenant entered into a
Lease Agreement dated as of November 30, 1994, as amended by Amendment No. 1 to
Lease Agreement dated July 18, 1996 (hereinafter the "First Amendment"), a
Generator Agreement dated as of August 28, 1996 (hereinafter the "Generator
Agreement") and Amendment No. 2 to Lease Agreement dated July 31, 1998
(hereinafter the "Second Amendment") (hereinafter collectively referred to as
the "Lease"), whereby Tenant is presently in possession of premises containing
approximately 36,624 rentable square feet of space constituting the entire
fifteenth (15th) floor of the Building and approximately 2,817 rentable square
feet of space on the fourteenth (14th) floor of the Building and approximately
4,274 rentable square feet of space on the eighth (8th) floor of the Building
(hereinafter collectively referred to as the "Premises"); and
WHEREAS, Tenant has requested that Landlord expedite the delivery of
the Second Additional Space, as such term is defined in the Second Amendment, by
Landlord entering into an agreement with the current tenant thereof whereby such
tenant agrees to surrender possession of the Second Additional Space earlier
than the scheduled expiration of its lease; and
WHEREAS, Landlord is willing to accept an early surrender of the Second
Additional Space from the current tenant provided Tenant agrees to accept
delivery thereof upon the tender of possession by Landlord; and
WHEREAS, the parties hereto desire to amend the Lease only in the
respects and on the conditions hereinafter stated.
NOW, THEREFORE, Landlord and Tenant agree as follows:
1. For purposes of this Amendment, capitalized terms shall have the
meanings ascribed to them in the Lease unless otherwise defined herein.
2. Landlord and Tenant hereby confirm that the Lease Commencement Date
of the Lease Term was January 1, 1995 and that the expiration date of the Lease
Term is January 31, 2007.
3. From and after the date Landlord delivers possession of the Second
Additional Space to Tenant in the condition required under Paragraph 2(b) of the
Second Amendment (hereinafter referred to as the "Second Effective Date") which
date is anticipated to be March 21, 1999, Tenant shall lease from Landlord,
through the remainder of the Lease Term, the Second Additional Space consisting
of approximately 7,875 rentable square feet on the eighth (8th) floor of the
Building, which Second Additional Space is as shown on Schedule 1 attached to
the Second Amendment. The Additional Space is being leased to Tenant in the
condition described in Paragraph 7(a) of the Second Amendment. From and after
the Second Effective Date, Sections 1.1 and 3.2 of the Lease shall be deemed
amended to reflect that the Premises shall mean the Premises and the Second
Additional Space for a total square footage of 51,590 rentable square feet.
4. From and after the Second Effective Date, all of the terms and
provisions of the Second Amendment as they pertain to the Second Additional
Space shall become operative and shall govern the relationship between the
parties.
5. Notwithstanding anything contained herein to the contrary,
calculations of Tenant's Percentage of Operating Expenses and Taxes for the
period prior to the Second Effective Date shall remain as provided in the Lease
prior to this Amendment.
6. From and after the Second Effective Date, Paragraph 7(d) of the
Second Amendment is amended to replace "twenty (20) tons of condenser water per
year" with "sixty (60) tons of condenser water per year."
7. Tenant represents and warrants to the Landlord that Cushman &
Wakefield of New Jersey, Inc. is the sole broker with whom Tenant has negotiated
in bringing about this Amendment. Tenant agrees to indemnify and hold Landlord
harmless from any and all claims of other brokers and expenses in connection
therewith arising out of or in connection with the negotiation of or the
entering into this Amendment by Landlord and Tenant.
8. Tenant represents, warrants and covenants that Landlord is not in
default under any of its obligations under the Lease and that, to the best of
Tenant's knowledge, Tenant is not in default of any of its obligations under the
Lease, and no event has occurred which, with the passage of time or the giving
of notice, or both, would constitute a default by either Landlord or Tenant
thereunder. Landlord represents, warrants and covenants that Tenant is not in
default of any of its monetary obligations owed to Landlord for which Landlord
has billed Tenant.
9. Except as modified by this Amendment, the Lease and all the
covenants, agreements, terms, provisions and conditions thereof shall remain in
full force and effect and are hereby ratified and affirmed. The covenants,
agreements, terms, provisions and conditions contained in this Amendment shall
bind and inure to the benefit of the parties hereto and their respective
successors and assigns. In the event of any conflict between the terms contained
in this Amendment and the Lease, the terms herein contained shall supersede and
control the obligations and liabilities of the parties.
10. This Amendment shall becomes effective only upon execution and
delivery thereof by Landlord and Tenant.
IN WITNESS WHEREOF, Landlord and Tenant have hereunto set their hands and seals
as of the date and year first above written, and acknowledge the one to the
other that they possess the requisite authority to enter into this transaction
and to sign this Amendment.
BBV HUDSON STREET LIMITED PARTNERSHIP, Landlord
By: /s/ A.Bartkiewicz
Name: A.Bartkiewicz
Title: Authorized Representative
HRB Capital Markets/Asset Manager
SHERWOOD SECURITIES CORP., Tenant
By: /s/ Denise Isaac
Name: Denise Isaac
Title: Chief Financial Officer
<PAGE>
AMENDMENT NO. 4 TO LEASE
THIS AGREEMENT (hereinafter referred to as the "Amendment") made the 22
day of June 1999, between BBV HUDSON STREET LIMITED PARTNERSHIP, a New Jersey
limited partnership, whose address is c/o Clarion Realty Services, Building
Management Office, 10 Exchange Place, Jersey City, New Jersey 07302 (hereinafter
referred to as "Landlord"); and SHERWOOD SECURITIES CORP., a New York
corporation, with offices at 10 Exchange Place, Jersey City, New Jersey 07302
(hereinafter referred to as "Tenant").
W I T N E S S E T H:
WHEREAS, pursuant to the terms and conditions of a certain long-term
ground lease dated October 7, 1985 (hereinafter referred to as the "Ground
Lease") between BBV US Real Estate Fund III, L.P., a Georgia limited partnership
(successor-in-interest to FJN Corporation), as ground lessor, and BBV Exchange
Centre Urban Renewal Limited Partnership, a New Jersey limited partnership
(successor-in-interest to Exchange Place Urban Renewal Associates Limited
Partnership) (hereinafter referred to as "BBVEC"), as ground lessee, BBVEC has
leased a certain tract of land (hereinafter referred to as the "Property") lying
and being in the City of Jersey City, County of Hudson and State of New Jersey,
which tract of land is commonly known as Lot 1, Block 8.4 on the Official Tax
Map of Jersey City and is more particularly described on Exhibit 1 annexed to
the Lease and made a part hereof; and
WHEREAS, BBVEC's predecessor has constructed on the Property a building
containing approximately 914,249 rentable square feet (hereinafter referred to
as the "Building"), of which 696,876 square feet is rentable office and
ancillary lobby retail space and 217,373 square feet is above-grade garage area
for approximately 439 automobiles. For the purposes of this Amendment, the
garage area of the Building is hereinafter referred to as the "Garage," and the
Property, the Building and all other improvements on the Property are
hereinafter, collectively, referred to as the "Real Property"; and
WHEREAS, pursuant to the terms and conditions of a certain lease
agreement dated December 29, 1989 (hereinafter referred to as the "Master
Lease"), BBVEC has leased to Landlord certain portions of the Building (said
portions being hereinafter referred to as the "Master Lease Space"); and
WHEREAS, Landlord's predecessor-in-interest and Tenant entered into a
Lease Agreement dated as of November 30, 1994, as amended by Amendment No. 1 to
Lease Agreement dated July 18, 1996 (hereinafter the "First Amendment"), a
Generator Agreement dated as of August 28, 1996 (hereinafter the "Generator
Agreement"), Amendment No. 2 to Lease Agreement dated July 31, 1998 (hereinafter
the "Second Amendment") and Amendment No. 3 to Lease dated March 29, 1999
(hereinafter, collectively, referred to as the "Lease"), whereby Tenant is
presently in possession of premises containing approximately 51,590 rentable
square feet of space consisting of: approximately 36,624 rentable square feet of
space constituting the entire fifteenth (15th) floor of the Building;
approximately 2,817 rentable square feet of space on the fourteenth (14th) floor
of the Building (hereinafter referred to as the "14th Floor Space"); and
approximately 12,149 rentable square feet of space on the eighth (8th) floor of
the Building (hereinafter, collectively, referred to as the "Premises"); and
WHEREAS, notwithstanding the provisions of Paragraph 6(c) of the Second
Amendment to Lease, Tenant desires to extend the Lease term for the 14th Floor
Space which term is otherwise scheduled to expire on July 7, 1999, and Landlord
is willing to extend the term for the 14th Floor Space on the terms and
provisions set forth in the Lease, except to the extent provided for herein; and
WHEREAS, the parties hereto desire to amend the Lease only in the
respects and on the conditions hereinafter stated.
NOW, THEREFORE, Landlord and Tenant agree as follows:
1. For purposes of this Amendment, capitalized terms shall have the
meanings ascribed to them in the Lease unless otherwise defined herein.
2. Landlord and Tenant hereby confirm that the Lease Commencement Date
of the Lease Term was January 1, 1995 and that the expiration date of the Lease
Term is January 31, 2007.
3. Tenant acknowledges and agrees that it is currently in possession of
the 14th Floor Space. From and after July 8, 1999 (hereinafter referred to as
the "Third Effective Date"), Tenant shall continue to lease from Landlord,
through December 31, 2005 (hereinafter referred to as the "14th Floor Space
Extended Term"), the 14th Floor Space which 14th Floor Space is as shown on
Schedule 1 annexed to the First Amendment. The 14th Floor Space is being leased
to Tenant in its "AS IS" condition. During the 14th Floor Space Extended Term,
Sections 1.1 and 3.2 of the Lease shall be deemed to reflect that the Premises
shall mean the Premises containing a total square footage of approximately
51,590 rentable square feet.
4. Supplementing the provisions of Section 3.5 of the Lease, Tenant
shall be required to pay, with respect to the 14th Floor Space, in addition to
and together with the monthly installment of the Additional Base Rent,
one-twelfth (1/12) of 7.69(%) percent of the cost of common utility service used
on the fourteenth (14th) floor of the Building based upon a reading of the
electric submeter for said floor. The amount payable pursuant to this paragraph
shall be deemed Additional Rent under the terms of the Lease.
<PAGE>
Tenant shall pay to Landlord during the 14th Floor Space Extended
Term, in addition to the Base Rent for the Premises as they
existed prior to this Amendment, Base Rent for the 14th Floor
Space only as follows:
<TABLE>
<CAPTION>
======================================== ----------------------- ----------------------- ===========================
Annual Monthly Base Rent Per
Period Base Rent Base Rent Square Foot
======================================== ----------------------- ----------------------- ===========================
<S> <C> <C> <C>
Third Effective Date - 12/31/02
$90,144.00 $7,512.00 $32.00
======================================== ======================= ======================= ===========================
01/01/03 - 12/31/05 $98,595.00 $8,216.25 $35.00
======================================== ======================= ======================= ===========================
</TABLE>
The aforesaid monthly installments of Base Rent shall be payable in advance on
or before the first day of each calendar month during the 14th Floor Space
Extended Term, except that a proportionately lesser sum may be paid for the
first month following the Third Effective Date and the last month of the 14th
Floor Space Extended Term if the Third Effective Date is on a day other than the
first day of the month, and Section 3.1 of the Lease shall be deemed modified
accordingly. Landlord acknowledges receipt from Tenant of the sum of Seven
Thousand Five Hundred Twelve and 00/100 ($7,512.00) Dollars, by check, subject
to collection, which shall be applied by Landlord to Base Rent for the 14th
Floor Space for the first month following the Third Effective Date.
6. Provided Tenant is not in default pursuant to any of the terms and
conditions of the Lease and subject to the rights of all existing tenants in the
Building with respect to the 14th Floor Space, Tenant shall have the option,
exercisable by notice in writing to Landlord no later than December 31, 2004, to
extend the 14th Floor Space Extended Term to expire coterminously with the Term
for the Premises (i.e. January 31, 2007). Should Tenant exercise such option,
Landlord and Tenant shall enter into a modification of the Lease, which
modification shall reflect that the Base Rent for the 14th Floor Space during
such extension shall be at the same rate payable during the last year of the
14th Floor Space Extended Term.
7. During the 14th Floor Space Extended Term, Section 3.3 of the Lease
shall continue to reflect that Tenant's Percentage shall be 7.403(%) percent.
8. With respect to calculating Tenant's Percentage of Operating
Expenses during the 14th Floor Space Extended Term, Section 3.5 of the Lease
shall be amended to reflect that the Base Year with respect to the 14th Floor
Space only shall be Calendar Year 2000.
9. Notwithstanding anything contained herein to the contrary,
calculations of Tenant's Percentage of Operating Expenses for the period prior
to the 14th Floor Space Extended Term shall remain as provided in the Lease
prior to this Amendment.
10. During the 14th Floor Space Extended Term, Section 1.3 of the Lease
shall continue to reflect that Tenant shall have the right to contract with the
Operator on a month-to-month basis for the use of an additional two (2)
non-exclusive parking spaces in the Garage.
11. Landlord and Tenant acknowledge that Tenant has requested the use
of forty (40) additional amps of electrical energy in the Premises. Landlord
acknowledges and agrees that subject to Tenant complying with all of the terms
and provisions of the Lease with respect thereto, including by way of example
but not limitation, the provisions of Sections 4.2(a) through 4.2(c), Tenant
shall have use of such additional electrical energy for the balance of the Term.
Payment for Tenant's consumption of such additional electrical energy shall be
made in accordance with Section 13.4 of the Lease.
12. Tenant represents and warrants to the Landlord that Cushman &
Wakefield, Inc. is the sole broker with whom Tenant has negotiated in bringing
about this Amendment. Tenant agrees to indemnify and hold Landlord harmless from
any and all claims of other brokers and expenses in connection therewith arising
out of or in connection with the negotiation of or the entering into this
Amendment by Landlord and Tenant. Landlord shall pay Cushman & Wakefield, Inc.
any fees or commissions due as a result of this transaction pursuant to the
terms of a separate agreement.
13. Tenant represents, warrants and covenants that, to the best of
Tenant's knowledge, Landlord is not in default under any of its obligations
under the Lease and Tenant is not in default of any of its obligations under the
Lease, and no event has occurred which, with the passage of time or the giving
of notice, or both, would constitute a default by either Landlord or Tenant
thereunder. Landlord represents, warrants and covenants that Tenant is not in
default of any of its monetary obligations owed to Landlord for which Landlord
has billed Tenant.
14. Except as modified by this Amendment, the Lease and all the
covenants, agreements, terms, provisions and conditions thereof shall remain in
full force and effect and are hereby ratified and affirmed. The covenants,
agreements, terms, provisions and conditions contained in this Amendment shall
bind and inure to the benefit of the parties hereto and their respective
successors and assigns. In the event of any conflict between the terms contained
in this Amendment and the Lease, the terms herein contained shall supersede and
control the obligations and liabilities of the parties.
15. The submission of this Amendment for examination does not
constitute a reservation of, or option for, the Third Additional Space, and this
Amendment becomes effective only upon execution and delivery thereof by Landlord
and Tenant.
IN WITNESS WHEREOF, Landlord and Tenant have hereunto set their hands
and seals as of the date and year first above written, and acknowledge the one
to the other that they possess the requisite authority to enter into this
transaction and to sign this Amendment.
BBV HUDSON STREET LIMITED PARTNERSHIP, Landlord
By: /s/ A.Bartkiewicz
Name: A.Bartkiewicz
Title: Authorized Representative (Asset Manager)
SHERWOOD SECURITIES CORP., Tenant
By: /s/ Thomas Neumann
Name: Thomas Neumann
Title: President & CEO
EXHIBIT 11
NATIONAL DISCOUNT BROKERS GROUP, INC.
AND SUBSIDIARIES
Computation of Earnings Per Common Share
Years ended May 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Net income from continuing operations $ 18,219,407 5,998,458 6,615,575
Discontinued operations (net) 2,786,052 5,961,861 2,664,118
Net income $ 21,005,459 11,960,319 9,279,693
Net income per common share Basic:
Net income from continuing operations $1.30 .45 .51
Discontinued operations, (net) .20 .44 .21
Net income 1.50 .89 .72
Diluted:
Net income from continuing operations $1.29 .45 .51
Discontinued operations, (net) . 20 .44 .21
Net income $1.49 .89 .72
Historical:
Weighted average number of
common stock and common stock
equivalents outstanding:
Basic 14,018,257 13,432,726 12,890,926
Diluted 14,143,240 13,501,346 12,946,007
</TABLE>
EXHIBIT 16
August 6, 1999
Office of the Chief Accountant
Securities and Exchange Commission
SECPS Letter Files
Mail Stop 9-5
450 Fifth Street, N.W.
Washington, D.C. 20549
Ladies and Gentlemen:
We were previously principal accountants for National Discount Brokers Group,
Inc. and, under the date of July 15, 1998, we reported on the consolidated
financial statements of National Discount Brokers Group, Inc. and subsidiaries
as of and for the years ended May 31, 1998 and 1997. On February 12, 1999, we
resigned. We have read National Discount Brokers Group, Inc. statements included
under Item 9 of its Form 10-K for the year ended May 31, 1999, and we agree with
such statements, except for the statements relating to PricewaterhouseCoopers
LLP as we have no basis to confirm such statements.
Very truly yours,
KPMG LLP
cc: Arthur Kontos - National Discount Brokers Group, Inc.
Paul Wirth - KPMG LLP
Steven Gallotta - KPMG LLP
EXHIBIT 21
SUBSIDIARIES OF NATIONAL DISCOUNT BROKERS GROUP, INC.
A) SHERWOOD SECURITIES CORP., incorporated under the laws of the State of
Delaware.
B) SHERWOOD CAPITAL, INC., incorporated under the laws of the State of New
Jersey.
C) SHERWOOD PROPERTIES CORP., incorporated under the laws of the State of
Delaware.
D) NDB INSURANCE AGENCY CORP. (formerly SHERWOOD NEWCO CORP.), incorporated
under the laws of the State of Delaware.
E) THE EBERCOM COMPANY., incorporated under the laws of the State of Delaware.
F) SIMCON CORPORATION, incorporated under the laws of the State of Delaware.
G) SHERWOOD MANAGEMENT CORP., incorporated under the laws of the State of
Delaware.
H) TRIAK SERVICES CORP., incorporated under the laws of the State of New York.
I SHD CORPORATION, incorporated under the laws of the State of Delaware.
J) MILLENNIUM CLEARING CORP., incorporated under the laws of the State of
Delaware.
EXHIBIT 23.1
Consent of Independent Accountants
August 18, 1999
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (No. 333-41819, No. 033-64571 and No. 33-72790) of
National Discount Brokers Group, Inc. of our report dated July 15, 1999 relating
to the financial statements and financial statement schedule, which appears in
this Form 10-K.
PricewaterhouseCoopers LLP
EXHIBIT 23.2
Consent of Independent Accountants
The Board of Directors
National Discount Brokers Group, Inc.:
We consent to incorporation by reference in the registration statements (Nos.
33-72790, 033-64571, and 333-41819) on Form S-8 of National Discount Brokers
Group, Inc. of our report dated July 15, 1998, relating to the consolidated
statement of financial condition of National Discount Brokers Group, Inc. and
subsidiaries as of May 31, 1998, and the related consolidated statements of
income, changes in stockholders' equity, and cash flows for each of the years in
the two-year period then ended, which report appears in the May 31, 1999 annual
report on Form 10-K of National Discount Brokers Group, Inc.
KPMG LLP
New York, New York
August 18, 1999
<TABLE> <S> <C>
<ARTICLE> BD <LEGEND> This schedule contains summary financial
information extracted from the financial statements for the year ended May 31,
1999 and is qualified in its entirety by reference to such financial statements.
- -----------------------------------------------------------------------------
</LEGEND>
<S> <C>
<PERIOD-TYPE> year
<FISCAL-YEAR-END> May-31-1999
<PERIOD-START> Jun-01-1998
<PERIOD-END> May-31-1999
<CASH> 411,629
<RECEIVABLES> 117,505,910
<SECURITIES-RESALE> 0
<SECURITIES-BORROWED> 0
<INSTRUMENTS-OWNED> 46,466,749
<PP&E> 14,837,114
<TOTAL-ASSETS> 217,290,808
<SHORT-TERM> 15,000,000
<PAYABLES> 48,572,430
<REPOS-SOLD> 0
<SECURITIES-LOANED> 0
<INSTRUMENTS-SOLD> 11,723,172
<LONG-TERM> 0
0
0
<COMMON> 143,432
<OTHER-SE> 141,851,774
<TOTAL-LIABILITY-AND-EQUITY> 217,290,808
<TRADING-REVENUE> 145,819,935
<INTEREST-DIVIDENDS> 10,022,013
<COMMISSIONS> 45,250,436
<INVESTMENT-BANKING-REVENUES> 0
<FEE-REVENUE> 4,308,393
<INTEREST-EXPENSE> 390,334
<COMPENSATION> 80,055,124
<INCOME-PRETAX> 34,680,680
<INCOME-PRE-EXTRAORDINARY> 21,005,459
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 21,005,459
<EPS-BASIC> 1.50
<EPS-DILUTED> 1.49
</TABLE>
EXHIBIT 99.6
NYSE CSA FORM 1D
SUBORDINATED LOAN AGREEMENT - CASH
THIS AGREEMENT is entered into this 31st day of December 1998, between National
Discount Brokers Group, Inc. (the "Lender") and Equitrade Partners, L.L.C., (the
"Organization").
1. GENERAL - Subject to the terms and conditions hereinafter set forth,
the Organization promises to pay to the Lender or assigns, on January 1, 2000
(the "Scheduled Maturity Date") (the last day of the month at least 1 year and
not more than 10 years from the date thereof) at the principal office of the
Organization, $22,000,000 and interest payable annually at a rate of 6% per
annum from the date hereof. By written notice delivered to the Organization at
its principal office and to the New York Stock Exchange, Inc. (the "Exchange")
no sooner than 6 months from the date hereof, the Lender may accelerate such
payment date to the last business day of a calendar month not less than 6 months
after the receipt of such notice by both the Organization and the Exchange, but
the right of the Lender to receive payment of the principal amount hereof and
interest shall remain subordinate as hereinafter provided.
2. SUSPENDED REPAYMENT
The Organization's obligation to pay the principal amount
hereof on the Scheduled Maturity Date or any accelerated maturity date shall be
suspended and the obligation shall not mature for any period of time during
which after giving effect to such payment (together with (a) the payment of any
other obligation of the Organization payable at or prior to the payment hereof
and (b) the return of any Secured Demand Note and the Collateral therefor held
by the Organization and returnable at or prior to the payment hereof).
(i) in the event that he Organization is not operating
pursuant to the alternative net capital
requirement provided for in paragraph (a)(1)(ii) of
Rule 15c3-1 (the "Rule") under the Securities
Exchange Act of 1934, as amended (the "Act"),
the aggregate indebtedness of the Organization would
exceed 1200 percent of its net capital as those terms
are defined in the Rule or any successor rule as in
effect at the time payment is to be made, or such
other percent as may be made applicable le to the
Organization at the time of such payment by the New
York Stock Exchange, Inc. (the "Exchange") or the
Securities and Exchange Commission (the "SEC"), or
(ii) in the event that the Organization is operating
pursuant to such alternative net capital requirement,
the net capital of the Organization would be less
than 5 percent (or such other percent as may be made
applicable to the Organization at the time of such
payment by the Exchange or the SEC) of aggregate
debit items computed in accordance with Exhibit A to
Rule 15c3-3 under the Act or any successor rule as in
effect at such time, or
(iii) in the event that the Organization is registered as a
futures commission merchant under the Commodity
Exchange Act ( the "CEA"), the net capital of the
Organization (as defined in the CEA or the
regulations thereunder as in effect at the time of
such payment) would be less than 6 percent (or such
other percentum as my be made applicable to the
Organization at the time of such payment by the
commodity Futures Trading Commission ( the "CFTC") of
the funds required to be segregated pursuant to the
CEA and the regulations thereunder, and the foreign
futures or foreign options secured amount less the
market value of commodity options purchased by
customers on or subject to the rules of a contract
market or a foreign board of trade (provided,
however, the deduction for each customer shall be
limited to the amount of customer funds in such
customer's account(s) and foreign futures and
foreign options secured amounts), or the
Organization's net capital would be less than the
minimum capital requirement as defined by the DSRO,
or
(iv) the Organization's net capital, as defined in the
Rule or any successor rule as in effect at the time
of such payment, would be less than 120 percent (or
such other percent as may be made applicable to the
Organization at the time of such payment by the
Exchange or the SEC) of the minimum dollar amount
required by the Rule as in effect at such time (or
such other dollar amount as may be made applicable to
the Organization at the time of such payment by the
Exchange or the SEC), or
(v) in the event that the Organization's registered as a
futures commission merchant under the CEA and if its
net capital, as defined in the CEA or the regulations
thereunder as in effect at the time of such payment,
would be less than 120 percent (or such other percent
as my be made applicable to the Organization at any
time of such payment by the CFTC) of the minimum
dollar amount required by the CEA or the regulations
thereunder as in effect at such time (or such other
dollar amount as may be made applicable to the
Organization at the time of such payment by the
CFTC), or
(vi) in the event that the Organization is subject to the
provisions of Paragraph (a)(6)(v) or (c)(2)(x)(C) of
the Rule, the net capital of the Organization would
be less than the amount required to satisfy the 1000
percent test (or such other percentum test as may be
made applicable to the Organization at the time of
such payment by the Exchange or the SEC) stated in
such applicable paragraph,
(the net capital necessary to enable the Organization to avoid such suspension
of its obligation to pay the principal amount hereof being hereinafter referred
to as the "Applicable Minimum Capital") and during any such suspension the
Organization shall, as promptly as consistent with the protection of its
customers, reduce its business to a condition whereby the principal amount
hereof with accrued interest thereon could be paid (together with (a) the
payment of any other obligation of the Organization payable at or prior to the
payment hereof and (b) the return of any Secured Demand Note and the Collateral
therefor held by the Organization and returnable at or prior to the payment
hereof) without the Organization's net capital being below the Applicable
Minimum Capital, at which time the Organization shall repay the principal amount
hereof plus accrued interest thereon on not less than five days' prior written
notice to the Exchange. The aggregate principal amount outstanding pursuant to
this Agreement shall mature on the first day at which under this paragraph the
Organization has an obligation to pay the principal amount hereof. If pursuant
to the terms hereof the Organization's obligation to pay the principal amount
hereof is suspended and does not mature, the Organization agrees (and the Lender
recognizes) that if its obligation to pay the principal amount hereof is ever
suspended for a period of six months or more, it will promptly take whatever
steps are necessary to effect a rapid and orderly complete liquidation of its
business. If payment is made of all or any part of the principal hereof on the
Scheduled Maturity Date or any accelerated maturity date and if immediately
after any such payment the Organization's net capital is less than the
Applicable Minimum Capital, the Lender agrees irrevocably (whether or not such
Lender had any knowledge or notice of such fact at the time of any such payment)
to repay to re Organization, its successors or assigns, the sum so paid, to be
held by the Organization pursuant to the provisions hereof as if such payment
had never been made; provided, however, that any suit for the recovery of any
such payment must be commenced within two years of the date of such payment.
3. SUBORDINATION OF OBLIGATIONS
The Lender irrevocably agrees that the obligations of the
Organization under this Agreement with respect to the payment of principal and
interest are and shall be fully and irrevocably subordinate in right of payment
and subject to the prior payment or provision for payment in full of all claims
of all other present and future creditors of the Organization whose claims are
not similarly subordinated (claims hereunder shall rank part passu with claims
similarly subordinated) and to claims which are now or hereafter expressly
stated in the instruments creating such claims to be senior in right of payment
to the claims of the class of this claim arising out of any matter occurring
prior to the date or which the Organizations obligation to make such payment
matures consistent with the provisions hereof. In the event of the appointment
of a receiver or trustee of the Organization or in the event of its insolvency,
liquidation pursuant to the Securities Investor Protection Act of 1970 ("SIPA")
or otherwise, its bankruptcy, assignment for the benefit of creditors,
reorganization whether or not pursuant to bankruptcy laws, or any other
marshalling of the assets and liabilities of the Organization, the holder hereof
shall not be entitled to participate or share, ratably or otherwise, in the
distribution of the assets or the Organization until all claims are senior
hereto, have been fully satisfied, or adequate provision has been made therefor.
4. PERMISSIVE PREPAYMENT
With the prior written approval of the Exchange, the
Organization may, at its option, make Prepayment of all or any portion of the
principal amount hereof to the Lender prior to the Scheduled Maturity Date at
any time subsequent to one year form the effective date of this agreement. No
Prepayment shall be made, however, if after giving effect thereto (and to all
other payments of principal of outstanding subordination agreements of the
Organization, including the return of any Secured Demand Note and the Collateral
therefor held by the Organization, the maturity or accelerated maturity of which
are scheduled to occur within six months after the date such Prepayment is to
occur pursuant to the provisions of this paragraph, or on or prior to the
Scheduled Maturity Date for payment of the principal amount hereof disregarding
this paragraph, whichever date is earlier) without reference to any projected
profit or loss of the Organization.
(i) in the event that the Organization is not operating
pursuant to the alternative net capital requirement
provided for in paragraph (a)(1)(ii) of the Rule, the
aggregate indebtedness of the Organization would
exceed 1000 percent of its net capital as those terms
are defined in the rule or any successor rule as in
effect at the time such Prepayment is to be made (or
such other percent as may be made applicable at such
time to the Organization by the Exchange or the SEC),
or
(ii) in the event that the Organization is operating
pursuant to such alternative net capital requirement,
the net capital of the Organization would be less
than 5 percent (or such other percent as may be made
applicable to the Organization at the time of such
Prepayment by the Exchange or the SEC) of aggregate
debit items computed in accordance with Exhibit A to
Rule 15c3-3 under the Act or any successor rule as in
effect at such time, or
(iii) in the event that the Organization is registered as a
futures commission merchant under the CEA, the net
capital of the Organization (as defined in the CEA or
the regulations thereunder as in effect at the time
of such Prepayment) would be less than 7 percent (or
such other percent as may be made applicable to
the Organization at the time of such Prepayment by
the CFTC) of the funds required to be segregated
pursuant to the CEA and the regulations
thereunder, and the foreign futures or foreign
options secured amount less the market value of
commodity options purchased by customers of the
Organization on or subject to the rules of a contract
market or a foreign board of trade (provided,
however, the deduction for each customer shall be
limited to the amount of customer funds in such
customer's account(s) and foreign futures and foreign
options secured amounts) or the Organization's net
capital would be less than the minimum capital
requirement as defined by the DSRO, or
(iv) The Organization's net capital as defined in the Rule
or any successor rule as in effect at the time of
such Prepayment, would be less than 120 percent (or
such other percent as may be made applicable to the
Organization at the time of such Prepayment by the
Exchange or the SEC) of the minimum dollar amount
required by the Rule as in effect at such time (or
such other dollar amount as may be made applicable to
the Organization at the time of such Prepayment by
the Exchange or the SEC), or
(v) In the event that the Organization is registered as a
futures commission merchant under the CEA, its net
capital, as defined in the CEA or the regulations
thereunder as in effect at the time of such
Prepayment would be less than 120 percent (or such
other percent as may be made applicable to the
Organization at the time of such Prepayment by the
CFTC) of the minimum dollar amount required by the
CEA or the regulations thereunder as in effect at
such time or such other dollar amount as may be made
applicable to the Organization at the time of such
Prepayment by the CFTC, or
(vi) In the event that the Organization is subject to the
provisions of paragraph (a)(6)(v) or (c)(2)(x)(c) of
the Rule, the net capital of the Organization would
be less than the amount required to satisfy the 1000
percent test (or such other percent test as may be
made applicable to the Organization at the time of
such Prepayment by the Exchange or the SEC) stated in
such applicable paragraph, or
If Prepayment is made of all or any part of the principal hereof prior to the
Scheduled Maturity Date and if the Organization's net capital is less than the
amount required to permit such Prepayment pursuant to the foregoing provisions
of this Paragraph, the Lender agrees revocable (whether or not such Lender had
an knowledge or notice of such fact at the time of such Prepayment) to repay the
organization, its successors or assigns, the sum so paid to be held by the
Organization pursuant to the provisions hereof as if such Prepayment had never
been made; provided, however, that any suit for the recovery of any such
Prepayment must be commenced within two years of the date of such Prepayment.
5. ACCELERATION IN EVENT OF INSOLVENCY
The Organization's obligation to pay the unpaid principal
amount hereof shall forthwith mature, together with interest accrued thereon, in
the event of any receivership, insolvency, liquidation pursuant to SIPA or
otherwise, bankruptcy, assignment of the benefit of creditors, reorganization
whether or not pursuant to bankruptcy laws, or any other marshalling of the
assets and liabilities of the organization; but payment of the same shall remain
subordinate as herinabove set forth.
6. EFFECT OF DEFAULT
Default in any payment hereunder, including the payment of
interest, shall not accelerate the maturity hereof except as herein specifically
provided, and the obligation to make payment shall remain subordinated as herein
above set forth.
7. NOTICE OF MATURITY OR ACELERATED MATURITY
The organization shall immediately notify the Examining
Authority for such broker or dealer, if, after giving effect to all Payments of
Payment Obligations (as that term is defined in (a)(2)(iv) of Appendix D of the
Rule) under subordination agreements then outstanding that are then due or
mature within the following six months without reference to any projected profit
or loss of the broker or dealer either the aggregate indebtedness of the broker
or dealer would exceed 1200 percent of its net capital or its net capital wold
be less than 120 percent of the minimum dollar amount required by the Rule, or,
in the case of a broker or dealer operating pursuant to paragraph (a)(1)(ii) of
the Rule, its net capital would be less than 5 percent of aggregate debit items
computed in accordance with Exhibit A to Rule 15c3-3 under the Act or any
successor rule as in effect at such time, or, if registered as a futures
commission merchant, 6 percent of the funds required to be segregated pursuant
to the Commodity Exchange Act and the regulations thereunder (less the market
value of commodity options purchased by option customers on or subject to the
rules of a contract market, each such deduction not to exceed the amount of
funds in the option customer's account), if greater, or less than 120 percent of
the minimum dollar amount required by paragraphs (a)(1)(ii) of the rule.
8. NON-LIABILITY OF EXCHANGE
The Lender irrevocably agrees that the loan evidenced hereby
is not being made in reliance upon the standing of the Organization as a member
organization of the Exchange or upon the Exchange's surveillance of the
Organization's financial position or its compliance with the Constitution, Rules
and practices of the Exchange. The Lender has made such investigation of the
Organization and its partners, officer, directors and stockholder, as the Lender
deems necessary and appropriate under the circumstance. The Lender is not
relying upon the Exchange to provide any information concerning or relating to
the Organization and agrees that the Exchange has no responsibility to disclose
to the Lender any information concerning or relating to the Organization which
it may now, or at any future time, have. The lender agrees that neither the
Exchange, its Special Trust Fund, or any director, officer, trustee nor employee
of the Exchange or said Trust Fund shall be liable to the Lender with respect to
this agreement or the repayment of the loan evidenced hereby or of any interest
thereon.
9. STATUS OF PROCEEDS
The proceeds hereof shall be dealt with in all respects as
capital of the Organization, shall be subject to the risks of its business, and
may be deposited in an account or accounts in the Organization's name in any
bank or trust company.
10. FUTURES COMMISSION MERCHANTS
If the Organization is a futures commission merchant, as that
term is defined in the CEA, the Organization agrees, consistent with the
requirements of Section 1.17(h) of the regulations of the CFTC (17 CFR 1.17(h)),
that:
(a) whenever prior written notice by the Organization to
the Exchange is required pursuant to the provision of
this agreement, the same prior written notice shall
be given by the Organization to (i) the CFTC at its
principal office in Washington, DC, Attention Chief
Accountant of Division of Trading and Markets, and/or
(ii) the commodity exchange of which the Organization
is a member and which is then designated by the CFTC
as the Organization's designated self-regulatory
organization (the "DSRO"), and
(b) whenever prior written consent, permission or
approval of the Exchange is required pursuant to the
provisions of this agreement, the Organization shall
also obtain the prior written consent, permission or
approval of the CFTC and/or of the DSRO, and
(c) whenever the Organization receives written notice of
acceleration of maturity pursuant to the provisions
of this agreement, the Organization shall promptly
give written notice thereof to the CFTC at the
address stated and/or o the DSRO.
11. DEFINITION OF ORGANIZATION
The term "Organization" as used in this agreement shall
include the Organization, its heirs, executors, administrators, successors and
assigns.
12. EFFECT OF EXCHANGE MEMBERSHIP TERMINATION
Upon termination of the Organization as a member organization
of the Exchange, the references herein to the Exchange shall be deemed to refer
to the Examining Authority. The term "Examining Authority" shall refer to the
regulatory body having responsibility for inspecting or examining the
Organization for compliance with financial responsibility requirements under
Section 9(c) of SIPA and Section 17(d) of the Act.
13. UPON WHOM BINDING
The provision of this agreement shall be binding upon the
Lender, his or its heirs, executors, administrators, successors and assigns and
upon the Organization.
14. ARBITRATION
Any controversy arising out of or relating to this agreement
shall be submitted to and settled by arbitration pursuant to the Constitution
and Rules of the Exchange. The Organization and Lender shall be conclusively
bound by such arbitration.
15. EFFECTIVE DATE
This agreement shall be effective from the date on which it is
approved by the Exchange and shall not be modified or amended without the prior
written approval of the Exchange.
16. ENTIRE AGREEMENT
This instrument embodies the entire agreement between the
Organization and the Lender and no other evidence of such agreement has been or
will be executed without the prior written consent of the Exchange.
17. GOVERNING LAW
This agreement shall be deemed to have been made under, and
shall be governed by, the laws of the State of New York in all respects.
18. CANCELLATION
This agreement shall not be subject to cancellation by either
party, unless the New York Stock Exchange agrees in writing to such cancellation
30 days in advance.
19. NO RIGHT OF SET-OFF
The Lender agrees that it is not taking and will not take or
assert as security for the payment of the loan any security interest in or lien
upon, whether created by contract, statute or otherwise, any property of the
Organization or any property in which the Organization may have an interest,
which is or at any time may be in the possession or subject to the control of
the lender. The Lender hereby waives, and further agrees that it will not seek
to obtain payment of the note in whole or in any part by exercising any right of
set-off it may assert or possess whether created by contract, statute or
otherwise. Any agreement between the organization and the Lender (whether in the
nature of a general loan and collateral agreement, a security or pledge
agreement or otherwise) shall be deemed amended hereby to the extent necessary
so as not to be inconsistent with the provision of this paragraph.
20. * Check this box if you wish to incorporate the
following optional provision:
The Scheduled Maturity Date hereof in each year, without
further action by either the lender or organization shall be extended an
additional year, unless on or before the day seven months preceding the
Scheduled Maturity Date then in effect, the lender shall notify the Organization
in writing, with a written copy to the New York Stock Exchange, Inc., that such
Scheduled Maturity Date shall not be extended.
IN WITNESS HEREOF the parties hereto have set their hands and seals this 31st
day of December, 1998.
By:/s/ Stephen J. DiLascio By:/s/ Laura R. Singer
Name: Stephen J. DiLascio Name: Laura R. Singer
Title : Equitrade Partners, L.L.C. Title: National Discount Brokers
(Organization) Group, Inc. (Lender)
EXHIBIT 99.8
May __, 1999
BT Alex. Brown Incorporated
as Representatives of the Several Underwriters
c/o BT Alex. Brown Incorporated
One South Street
Baltimore, Maryland 21202
Re: National Discount Brokers Group, Inc. Follow-on Public Offering
I am an executive officer, director and/or shareholder of National
Discount Brokers Group, Inc., a Delaware corporation ("NDBG"), Sherwood
Securities Corp. or Triak Services Corp. (collectively, the "Company"). I hereby
agree and represent to you that, without the prior written approval of BT Alex.
Brown Incorporated, I will not directly or indirectly make or cause any
offering, sale, short sale, hypothecation, pledge or other disposition of any
shares of common stock of NDBG (the "Common Stock") or any securities
convertible into or exercisable or exchangeable for shares of Common Stock or
derivative of Common Stock that I own either of record or beneficially on the
date hereof, and of which I have the power to control the disposition, other
than (i) gifts of shares of the Common Stock if the donee agrees in writing to
be bound by the terms of this letter; (ii) transfer(s) to NDBG for the purpose
of either exercising options to acquire the Common Stock or paying taxes related
to such exercise; or (iii) transfer(s) of shares of Common Stock or options to
acquire Common Stock granted by NDBG to a spouse, a child of mine or a trust for
the benefit of my children so long as the recipient or a guardian or parent in
the care of a minor child agrees to be bound by the terms of this letter with
respect to such transferred shares or options from this date to a date 180 days
after the effective date of the Registration Statement, Form S-3 (File No.
333-__________) filed by NDBG with the United States Securities and Exchange
Commission under the Securities Act of 1933, as amended. I recognize that you
and NDBG are relying on my representations and agreement contained in this
letter in entering into underwriting arrangements with respect to the offering
contemplated by such Registration Statement, as amended.
Very truly yours,
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(print name)
