<PAGE>
RULE NO. 424(b)(1)
REGISTRATION NO. 333-78149
2,600,000 Shares
[LOGO]
National Discount Brokers Group, Inc.
Common Stock
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We are offering all of the shares of common stock offered under this
Prospectus. Our common stock is listed on the New York Stock Exchange under the
symbol "NDB." On June 21, 1999, the last reported sale price of our common
stock on the New York Stock Exchange was $38.00 per share.
Investing in our common stock involves risks. See "Risk Factors" beginning on
page 5.
<TABLE>
<CAPTION>
Per Share Total
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<S> <C> <C>
Public offering price.................................. $33.000 $85,800,000
Underwriting discounts and commissions................. $ 1.895 $ 4,927,000
Proceeds to National Discount Brokers Group, Inc. ..... $31.105 $80,873,000
</TABLE>
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this Prospectus. Any representation to the contrary is
a criminal offense.
We have granted the underwriters the right to purchase up to 390,000 additional
shares of common stock to cover any over-allotments.
Deutsche Banc Alex. Brown U.S. Bancorp Piper Jaffray
June 22, 1999
<PAGE>
SUMMARY
This summary highlights selected information from this prospectus. It may not
contain all the information that is important to you. To understand this
offering fully, you should carefully read the entire prospectus, including the
risk factors and our financial statements and the related notes. In this
prospectus, "we," "us" and "our" refer to National Discount Brokers Group, Inc.
and its subsidiaries, unless the context requires otherwise. References to
NDB.com refer to Triak Services Corp., our wholly owned subsidiary doing
business as National Discount Brokers/NDB.com. References to Sherwood
Securities refer to Sherwood Securities Corp., our wholly owned subsidiary.
This prospectus contains our registered service marks, trademarks and trade
names.
In June 1999, we sold our membership interest in Equitrade Partners, L.L.C.
to Spear, Leeds & Kellogg Specialists LLC. We have not included any information
regarding Equitrade in this prospectus.
Our fiscal year ends on May 31 of each year. For example, when we refer to
our "fiscal year 1998", we mean our fiscal year that ended on May 31, 1998.
Our Business
We are a leading provider of online retail discount brokerage services and a
leading market maker in Nasdaq equity securities. NDB.com is one of the first
online retail discount brokers and the first to offer flat fee trading. We
offer customers automated securities order placement and information services
through the Internet, as well as through touch tone telephone and registered
representatives. NDB.com has introduced a new Web site. We are the only online
broker to have received in 1999 the highest ratings from both Barron's and
Money magazine. Barron's ranked us the number two online broker in a study
testing trade execution, ease of use, reliability, amenities and commissions.
Similarly, Money magazine ranked us 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 us as the number one online broker for new
online investors. Our customers can place orders, monitor their portfolios and
research investments online 24 hours a day, seven days a week. We offer a wide
range of products and services designed to appeal to all self-directed
investors, including trading on all major U.S. equity markets, real-time market
information, cash management services and educational programs. NDB.com had
over 137,000 accounts as of April 30, 1999, an increase of 750% since May 31,
1994.
Sherwood Securities makes a market in over 3,900 Nasdaq and other over-the-
counter securities, making it the fifth largest Nasdaq market maker based on
the number of stocks in which it makes a market. We provide best execution
trading services to our broker-dealer and institutional customers through our
proprietary trading methodologies and sophisticated trading systems, which we
have designed to manage the risk inherent in trading securities. Sherwood
Securities has also experienced significant growth. Our annual trading volume
has increased 123% over the past four years to over seven billion shares.
Our Market Opportunity
The U.S. market for equity securities has grown dramatically in recent years.
The large increase in the average daily trading volume on Nasdaq has resulted
from the combination of historic market highs and the growing number of issuers
listed on Nasdaq. At the same time, technology has advanced to the point where
more investors are trading online. This has created a new class of self-reliant
and value-oriented investors that are comfortable with electronic commerce. We
believe we are well positioned to take advantage of the significant market
opportunity that exists for faster, easier, more reliable and less expensive
trading systems because we are both an online retail discount broker and a
Nasdaq market maker. Since many of NDB.com customer orders for Nasdaq stocks
are directed to Sherwood Securities, we are involved in both the placement and
execution of these orders, which increases our opportunity to generate revenues
from each transaction.
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Our Strategy
As part of our strategy to leverage this market opportunity, we intend to:
. Build our brand awareness through marketing, advertising and affinity
relationships;
. Maintain our leading technology;
. Differentiate our products and services by providing superior customer
service;
. Become a full service provider by expanding the financial products and
services we offer customers;
. Enhance the content of the information we provide our customers online;
and
. Expand our vertical integration by beginning self-clearing operations.
Our Competitive Advantages
We believe our competitive advantages will enable us to achieve our goals of
becoming the leading, branded provider of online retail discount brokerage
services and enhancing our position as a leading Nasdaq market maker. These
competitive advantages include:
. Easy-to-use systems. Our new Web site has been designed to be easy to
use and navigate. We also offer our customers the option to access our
services by telephone, via our PowerBroker system, or through our
registered representatives.
. Superior customer service. Our "high tech and high touch" approach
emphasizes our commitment to providing customers not only with the
technology and information services necessary for them to make their own
investment decisions, but also with the customer service support self-
directed investors now demand.
. Breadth of products and services. Our wide range of products and
services offers something for every investor, whether an active trader,
life goal planner or serious investor.
. Strong risk management systems. Sherwood Securities has increased its
trading volume to offset narrowing spreads while effectively managing
its risk through its sophisticated trading methodologies and risk
management systems.
. Experienced management. Our senior executive officers have an average of
25 years of experience in all aspects of equity securities transactions
and have designed our technology systems and our products and services
with the needs of our users in mind.
Recent Developments
In June 1999, we sold our 46.845% membership interest in Equitrade Partners,
L.L.C., a registered specialist in over 200 securities listed on the NYSE, to
Spear, Leeds & Kellogg Specialists LLC. Prior to the closing, we exercised our
right to purchase .03% membership interests in Equitrade from three special
members in exchange for cash equal to the capital account of these special
members. We realized a pre-tax gain, net of the bonus accrual for our CEO, on
the sale of approximately $36 million.
Our History
We are a Delaware corporation formed in 1981. Our executive offices are
located at 10 Exchange Place Centre, Jersey City, New Jersey 07302. Our
telephone number is (201) 946-2200. We are the holding company for National
Discount Brokers/NDB.com, our online retail discount broker subsidiary and
Sherwood Securities, our Nasdaq market maker subsidiary. NDB.com and Sherwood
Securities are licensed by the SEC as broker-dealers and are members of the
National Association of Securities Dealers (NASD).
2
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THE OFFERING
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<C> <S>
Common stock offered by us.......................... 2,600,000 shares
Common stock to be outstanding after this offering.. 16,594,924 shares (1)
Use of proceeds..................................... We intend to use the net
proceeds from this
offering for
infrastructure and
technological
improvements, to satisfy
increases in our net
capital requirement
related to the
commencement of self-
clearing operations,
marketing and advertising
and working capital.
New York Stock Exchange symbol...................... NDB
</TABLE>
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(1) Excludes 1,738,946 shares of common stock reserved for issuance under our
stock option plans. Options to purchase 1,485,649 shares were outstanding
at May 31, 1999. This information also assumes no exercise of the
underwriters' over-allotment option.
3
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SUMMARY PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The following unaudited pro forma condensed consolidated financial
information gives effect to the sale of Equitrade as if it occurred as of June
1, 1995. This financial information is not necessarily indicative of what the
financial results would have been if Equitrade had been sold as of June 1, 1995
and is not necessarily indicative of future results. The Statement of Financial
Condition Data reflects the following adjustments:
. eliminating the assets and liabilities of Equitrade;
. recording cash of approximately $82,400,000 (consisting primarily of
gain on sale, return of capital and net repayment of notes receivable);
. recording an accrual for a bonus to our CEO of approximately $6,400,000;
. recording after-tax gain of approximately $20,500,000; and
. recording the increase in income taxes payable on the gain of
approximately $15,500,000 calculated using the statutory tax rate of
43%.
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<CAPTION>
Nine Months Ended February
Years Ended May 31, 28,
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1996 1997 1998 1998 1999
-------------- -------------- -------------- -------------- --------------
(in thousands, except per share and operating data)
<S> <C> <C> <C> <C> <C>
Statement of Income
Data:
Revenues:
Firm securities
transactions--net..... $ 122,691 $ 117,491 $ 90,256 $ 65,485 $ 97,693
Commission income...... 30,724 32,639 37,052 27,359 30,992
Other revenues......... 8,320 11,052 11,504 8,481 12,314
Total revenues........ 161,735 161,182 138,812 101,325 140,999
Income before taxes.... 29,313 12,647 11,739 7,141 21,516
Net income from
continuing
operations............ 16,589 6,350 5,691 3,799 11,442
Net income per share
from continuing
operations:
Basic.................. $1.31 $.49 $.42 $.29 $.82
Diluted................ $1.26 $.49 $.42 $.29 $.81
Operating Data:
NDB.com:
Number of accounts..... 59,000 79,000 99,000 92,000 128,000
Average daily trades... 4,500 4,700 6,100 6,000 7,200
Total account assets... $3,200,000,000 $4,000,000,000 $5,300,000,000 $5,000,000,000 $6,500,000,000
Total marketing
expenses.............. $ 1,722,000 $ 2,376,000 $ 3,240,000 $ 1,217,000 $ 4,592,000
Sherwood Securities:
Trading volume
(shares).............. 5,438,000,000 5,564,000,000 6,473,000,000 5,075,000,000 5,251,000,000
Average daily trades... 12,400 12,700 16,800 16,200 22,000
Stocks in which we make
a market:
Number................ 3,200 3,300 3,400 3,400 3,700
National Market System
listed............... 63% 64% 76% 76% 81%
<CAPTION>
February 28, 1999
------------------------------
Pro forma
Pro forma as adjusted(1)
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<S> <C> <C> <C> <C> <C>
Statement of Financial
Condition Data:
Cash................... $ 83,599 $ 163,072
Total assets........... 242,470 321,943
Total liabilities...... 88,589 88,589
Stockholders' equity... 153,880 233,353
</TABLE>
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(1) As adjusted to reflect the sale of 2,600,000 shares of our common stock in
this offering at an offering price of $33.00 per share (after deducting
underwriting discounts and commissions and estimated offering expenses).
4
<PAGE>
RISK FACTORS
You should carefully consider the following risks before you decide to buy
our common stock. Our business, financial condition or operating results may
suffer if any of the following risks actually occur. Additional risks and
uncertainties not currently known to us may also adversely effect our business,
financial condition or operating results. If any of these risks or
uncertainties occurs, the trading price of our common stock could decline, and
you may lose all or part of the money you paid to buy our common stock.
We have made statements in this prospectus and in documents that are
incorporated by reference into this prospectus that constitute forward-looking
statements, as that term is defined in the Private Securities Litigation Reform
Act of 1995. These statements are subject to risks and uncertainties. These
forward-looking statements generally are accompanied by words such as "intend,"
"anticipate," "believe," "estimate," "expect," "should," or similar
expressions. You should understand that these forward-looking statements are
subject to a number of assumptions, risks and uncertainties that could cause
actual results to differ materially from those expressed or implied in the
forward-looking statements. Important factors that could cause actual results
to differ materially from estimates or projections contained in forward-looking
statements include those described in "Risk Factors."
Adverse Economic and Political Conditions May Cause Substantial Declines in
the Securities Markets and Adversely Affect Our Results of Operations
The securities business is, by its nature, risky and volatile and is directly
affected by many national and international factors that are beyond our
control. Any one of these factors may cause a substantial decline in the
securities markets, which could materially adversely affect our business. These
factors include:
. economic and political conditions in the United States and elsewhere in
the world;
. concerns over inflation;
. the availability of cash for investment by mutual funds and other
institutional and retail investors;
. rising interest rates;
. legislative and regulatory changes; and
. currency values.
In the past several years, the U.S. securities markets have achieved historic
highs. We do not believe these strong markets can continue indefinitely. Our
revenues and profitability are likely to decline significantly during periods
of weak economic or securities market conditions. Even if the securities
markets remain strong, trading in securities is inherently risky due to market
volatility, and we may incur substantial losses. The securities business is
also subject to various other risks, including customer default, employee
mistakes or misconduct and litigation. These risks could have a material
adverse effect on our business, financial condition and operating results.
Sherwood Securities Accounted for 66% of our Revenues in the Nine Months
Ended February 28, 1999
We derive a substantial portion of our revenues from Nasdaq market making
activities and expect this to continue for the foreseeable future. Any factor
adversely affecting market making in general, or our market making activities
in particular, is likely to have a materially adverse effect on our business,
financial condition and operating results. Our future success will depend on
continued growth in
demand for our market making services and our ability to respond to regulatory
and technological changes and customer demands. If demand for our market making
services fails to grow at the rates
5
<PAGE>
we anticipate and we are unable to increase revenues in other areas of our
business, our business, financial condition and operating results would be
materially and adversely affected.
NASD rules require broker-dealers to get best execution of customer orders.
If Sherwood Securities does not adequately assess the market for the best
available price, its customers may direct order flow to other market makers for
execution. In that case, we will miss an opportunity to generate additional
consolidated revenues.
Our Revenues May Decrease Because of Declines in Securities Market Volume or
Securities Prices
Our revenues and profits may decrease because of declines in either the
volume of the securities transactions we engage in or the prices of securities
we trade. Sudden sharp declines in market values of securities can result in:
. illiquid markets;
. declines in the market values of the securities we hold in our
inventory;
. the failure of buyers and sellers of the securities we trade to fulfill
their settlement obligations; and
. increases in claims against us on account of our securities business.
More and more of our revenues in the past few years have come from our online
discount brokerage business. Our brokerage business is also directly affected
by economic and political conditions, broad trends in business and finance and
changes in the volume and price levels of securities and futures transactions.
We are particularly affected by volatility in technology and Internet-related
stocks because a significant portion of our customers invest in these types of
stocks. Lower trading volumes will adversely affect our revenues and our
profitability because our overhead remains relatively fixed. Our brokerage
business, by its nature, is subject to various other risks, including customer
default and employee misconduct and errors. When we permit customers to
purchase securities on margin, we assume the risk of a decline in the value of
the customers' collateral. In a volatile market, the value of our customers'
margin collateral may decline quickly, and we may be unable to liquidate the
collateral before its value drops below what our customers owe us. This could
cause us to incur substantial losses.
Changes in the Securities Industry May Adversely Affect Our Profitability
The securities industry has undergone several fundamental changes over the
past few years. These have caused an increase in the volume of equity
securities traded in the U.S. securities markets and a decrease in the spreads
received by market makers. We cannot assure you that market making spreads will
remain at the same levels in the future. Factors affecting spreads include the
following:
. the emergence of online discount brokers;
. the increased prominence of online retail investors;
. the increased prominence of institutional investors;
. consolidation among firms in the securities industry;
6
<PAGE>
. new regulations at the federal and state level; and
. the increased use of technology.
We derive a substantial portion of our revenues from our market making
activities in securities that trade on Nasdaq. Over the past several years,
Nasdaq has taken regulatory actions to reduce spreads between bid and ask
prices for securities. Nasdaq, the NYSE and AMEX are currently considering
regulations to require that securities trade in decimals rather than fractions.
Adoption of these regulations may result in a further decrease in spreads
between bid and ask prices, which could make our market making less profitable.
Our Operating Results May Fluctuate
Our revenues and profitability have fluctuated from quarter to quarter in the
past. We expect this trend to continue in the future because of a number of
factors, including:
. changes in the value of our inventory of securities and our ability to
manage related risks;
. changes in trade execution and clearance fees we have to pay;
. the addition or loss of some of our sales and trading professionals;
. our cost of complying with government regulations;
. declines in market confidence in Internet and other emerging companies;
. the amount and timing of our capital expenditures;
. timing of our expenditures on marketing;
. timing of the introduction of, or enhancement to, online products and
services by NDB.com or its competitors;
. changes we or our competitors make in pricing policies;
. changes in our strategy; and
. seasonal trends.
Due to these and other factors, period to period comparisons of our operating
results may not be meaningful. You should not rely on these comparisons as an
indication of our expected future performance. We also cannot assure you that
we will be able to grow our revenues or increase our profitability. Our future
operating results may be below the expectations of securities analysts and
investors. If that happens, the market price of our common stock could decline
substantially.
Our Securities Business is Subject to Extensive Government Regulation
The SEC, NASD and other agencies extensively regulate the U.S. securities
industry. We are required to comply strictly with the rules and regulations of
these agencies. As a matter of public policy, these regulatory bodies are
responsible for safeguarding the integrity of the securities and other
financial markets and protecting the interests of investors in those markets.
As a market maker and broker-dealer, most aspects of our business are highly
regulated, including:
. our market making practices;
. the way we deal with our individual and institutional customers;
. our capital structure;
. our record keeping and retention; and
. the conduct of our directors, officers and employees.
7
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If we fail to comply with any of these laws, rules or regulations, we are
subject to censure, fines, cease-and-desist orders or suspension of our
business. Also, one or more of our directors, officers or employees could be
subject to the same penalties. Any of these could have a material adverse
effect on our business reputation, as well as our financial condition and
operating results. These agencies have broad powers to investigate and enforce
compliance and punish non-compliance with their rules and regulations. We
cannot assure you that we and/or our directors, officers and employees will be
able to fully comply and will not be subject to claims or actions by these
agencies.
The Regulatory Environment in Which We Operate Is Subject to Change
There are frequent changes in the laws and regulations affecting the
securities industry and the securities markets. Additional regulation, changes
in existing laws and rules or changes in interpretations or the method of
enforcement of existing laws and rules often directly affect the operations and
profitability of the securities business. For example, the profitability of our
market making activities could decline because of changes in the government's
antitrust policy, the interest rate policies of the Board of Governors of the
Federal Reserve System or the tax treatment of capital gains from securities
transactions. Additional regulation, changes in the interpretation or
enforcement of existing laws, rules and policies by the SEC, the NASD or other
agencies could have a material adverse effect on our business, financial
condition and operating results.
Our business, both directly and indirectly, relies on the Internet and other
electronic communications gateways. We intend to expand our use of these
gateways. To date, the use of the Internet has been relatively free from
regulation. However, the SEC, the NASD and several states are considering
whether to regulate various aspects of use of the Internet for securities
transactions. As a result, there may be new laws or regulations that constrain
our and our customers' ability to transact business over the Internet or by
other electronic communications gateways. This could have a material adverse
effect on our business, financial condition and operating results.
We Are Subject to Net Capital Requirements
The SEC and the NASD have strict rules that require us to maintain sufficient
net capital. If we fail to maintain the required net capital, the SEC or the
NASD may suspend or revoke our broker-dealer licenses. Also, a change in the
net capital rules, the imposition of new rules or any unusually large charge
against our net capital could limit our operations. A significant operating
loss or any unusually large charge against our net capital could adversely
affect our ability to expand or even maintain our present levels of business,
which could have a material adverse effect on our business, financial condition
and operating results. Also, these net capital requirements limit our ability
to transfer funds from our broker-dealer subsidiaries to ourselves. This means
that we may be unable to repay our debts, fund our operations or repurchase our
stock.
Our Business Involves Substantial Credit Risks
We clear our securities transactions through unaffiliated clearing agents.
Under the terms of our clearing agent agreements, our clearing agents have the
right to charge us for losses that result from our customers' failure to
fulfill their contractual obligations. Our policy is to monitor the credit
standing of our customers. However, we cannot assure you that our customers
will not default on their obligations. Any customer default could have a
material adverse effect on our business, financial condition and operating
results. Also, most of our securities assets are held at one or more clearing
agents. Therefore, we would incur substantial losses if one of our clearing
agents were to become insolvent or otherwise unable to meet its financial
obligations. Our clearing agents also lend money to our brokerage customers
through the use of margin credit secured by customers' securities, cash or cash
equivalents. Under the terms of our agreements with the clearing agents, if our
customers fail to (a) pay for their purchases, (b) deliver the securities that
they have sold, or (c) repay funds they have borrowed, the clearing agent has
the right to charge us for any losses it incurs.
8
<PAGE>
We Depend on Our Clearing Agents
Our communications and information systems are coordinated with the
information systems of our clearing agents. They furnish us with the
information necessary to run our business, including transaction summaries,
data feeds for compliance and risk management, execution reports and trade
confirmations. We rely on our clearing brokers to discharge their obligations
to us and our customers on a timely basis. If they fail to do so, or experience
systems failure, Year 2000 issues, interruptions or capacity constraints, our
business, financial condition and operating results may suffer.
Our Proposed Self-Clearing Operations Will Subject us to Additional
Regulation and Risk of Loss Related to Handling Customer Funds
We intend to begin our own clearing operations. This involves the
confirmation, receipt, settlement and delivery functions involved in securities
transactions. Self-clearing operations involve substantial risks of losses,
including losses from clerical errors in the handling of customer funds and
securities. Self-clearing securities firms are subject to substantially more
regulatory control and examination than firms using third party clearing
agents. If we make errors in clearing securities trades or reporting them, we
could incur civil penalties from the SEC or the NASD and claims from parties to
those trades who are financially harmed. Any liability arising from self-
clearing operations could have a material adverse effect on our business,
financial condition and operating results. There can be no assurance that our
self-clearing operations will result in reduced expenses or that we will be
successful in commencing self-clearing operations.
Our NDB.com Business Depends on the Development of E-Commerce and the
Internet
Adoption of e-commerce, especially by those consumers who have historically
relied on traditional means of commerce, will require broad acceptance and use
by consumers of new and substantially different methods. Our services involve a
relatively new approach to trading securities. As a result, we may have to
expend significant time and money on marketing to educate prospective customers
about the benefits of purchasing our products and using our services. We cannot
assure you that a large base of consumers will adopt and continue to use the
Internet as a medium to purchase and sell securities.
The demand for online discount brokerage services is at an early stage and is
rapidly evolving. We cannot be certain that the infrastructure of the Internet
will develop sufficiently to support an increase in e-commerce. Consumers may
reject the Internet as a medium for commerce and communication for a number of
reasons, including:
. concerns about transaction security, privacy, reliability, cost, ease of
use, accessibility and quality of service;
. the infrastructure and related services necessary to support e-commerce
and Internet access and service may fail to develop sufficiently and
have a negative effect on growth of the Internet;
. delays in the development or implementation of new protocols and
standards may cause the Internet to fail to maintain viability;
. slow communication speed on the Internet or our system may delay the
execution of customer transactions; and
. increased governmental regulation of the Internet.
If the Internet fails to further develop as a viable commercial medium, or if
consumers fail to adopt e-commerce as an acceptable and widely used medium for
commerce and communication or do not have confidence in our services and their
security, our NDB.com business is unlikely to succeed over the longer term.
9
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Our Encryption Technology may be Breached or Compromised
Consumers have significant concerns about secure transmissions of
confidential information, especially financial and credit card information,
over public networks like the Internet. This remains a significant barrier to
general acceptance of e-commerce and other aspects of our business. We rely on
encryption, authentication technology, including public key cryptography
technology and firewalls, to provide the necessary security for the
confidential information transmitted to and from NDB.com customers over the
Internet. If we experience a breach or compromise involving the algorithms used
to secure our Internet transmissions, or if consumers are not satisfied that
those transmissions are secure, our NDB.com business may not succeed.
We Depend on Third Parties to Provide Accurate and Timely Financial
Information, Analyses, Quotes and Other Data
We receive market and financial information, including quotes, news stories,
company research reports, technical analyses and analysts' recommendations from
a number of third parties, including eLogic, Reuters and Briefing.com. We then
distribute this information to our NDB.com customers, primarily through our Web
site. We depend upon these information suppliers to accurately provide and
format this data, in many cases on a real-time basis. If these suppliers fail
to supply accurate or timely information, our customers may develop an adverse
perception of our NDB.com business and cease doing business with us. We may
also be subject to claims for negligence, copyright or trademark infringement
or other theories based on the nature and content of information we provide our
customers. We do not maintain insurance to cover most of these types of
liabilities. Any uninsured or underinsured liability could have a material
adverse effect on our business, financial condition and operating results.
We Depend Significantly on Our Computer and Communications Systems; System
Failures and Capacity Constraints Could Harm Our Business
We rely heavily on various computer and communications systems to operate and
support our business, including NDB.com's new Web site. We rely particularly on
third parties such as Nasdaq, our telephone companies, online service
providers, data processors and software and hardware vendors. Our systems,
including NDB.com's new Web site, or those of our third party providers may
fail or operate slowly, causing one or more of the following:
. unanticipated disruptions in service to our customers;
. slower response times;
. delays in trading;
. failed settlement of trades;
. decreased customer service and customer satisfaction;
. incomplete or inaccurate accounting, recording or processing of trades;
. delays in our introduction of new products and services;
. financial losses;
. litigation or other customer claims; and
. regulatory sanctions.
We cannot assure you that we will not experience systems failures from power,
telecommunications or computer hardware failure, acts of God or war, human
error, natural disasters, fire, power loss, sabotage, computer viruses,
software failure, intentional acts of vandalism and similar events. We do not
currently maintain a disaster recovery center for our systems, although we are
in
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the process of developing such a center. In the event of a system disruption or
failure, we do not have any back-up system to provide any computer-related
services to our customers, including NDB.com's new Web site. Any system failure
that causes an interruption in service or decreases the responsiveness of our
service could impair our reputation, damage our brand name and have a material
adverse effect on our business, financial condition and operating results.
Additionally, we may be required to expend significant time and money to
protect against the threat of security breaches or to alleviate problems caused
by any breaches.
Our New Web Site May Experience Operating Difficulties
NDB.com's future growth depends significantly on the successful operation of
its new Web site. Failure to operate this Web site successfully could
substantially impair the future prospects of NDB.com. This would have a
material adverse effect on our business, financial condition and operating
results.
Our Systems as Well as Those of Others May Prove Not to Be Year 2000
Compliant, Which Could Significantly Disrupt Our Business
Any significant disruption of our computer infrastructure caused by the
inability to recognize dates beginning on January 1, 2000 could significantly
disrupt our business. If our efforts to address Year 2000 compliance issues
fail, or if third parties with whom we do business do not successfully address
this issue, we could experience a systems failure beyond our control. This
would cause prolonged Internet, telecommunications or electrical failure, which
would make it difficult or impossible for us to conduct business. These events
could have a material adverse effect on our business, financial condition and
operating results.
We are Subject to the Risks of Litigation and Securities Laws Liability
Many aspects of our business involve substantial risks of liability. As a
market maker, we are exposed to substantial liability under Federal and state
laws and court decisions, as well as the rules and regulations of the SEC and
the NASD. Additionally, dissatisfied customers frequently make claims of
unauthorized trading, mismanagement, breach of fiduciary duty or even fraud. We
could incur significant legal expenses defending claims, even those without
merit. An adverse resolution of any lawsuits or claims against us could have a
material adverse effect on our business, financial condition and operating
results.
We May Have Difficulty in Managing Our Growth
We have rapidly and significantly expanded our operations over the past few
years and intend to continue to do so. The growth of our business and expansion
of our customer base has placed, and will continue to place, a significant
strain on our management, computer systems and facilities. This growth has
required and will continue to require us to make substantial investments in our
management personnel, financial and management systems and controls and
facilities. If our revenue growth is less than we project, the costs associated
with these investments will cause our operating margins to decline from current
levels. If we fail to make these investments on a timely basis, we may be
unable to operate and manage our business effectively. This could have a
materially adverse effect on our business, financial condition and results of
operations.
We use internally developed systems to operate many parts of our business,
including transaction processing systems that were designed to be scalable.
However, if our customer base increases substantially, we will need to expand
significantly and upgrade our technology, transaction processing systems and
network infrastructure. We cannot be sure that we can expand and upgrade our
systems quickly enough to keep up with growth in our business. Also, we may not
be able to accurately project the necessary timing or cost of our systems'
expansion and upgrades.
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We Depend on Our Ability to Attract and Retain Key Personnel
Our future success depends, in significant part, upon the continued service
of our executive officers, managers, and our sales, trading, compliance and
technical personnel. We require highly skilled, and often specialized,
individuals for these positions. We face intense competition for highly
qualified executives, managers and sales, trading, compliance and technical
personnel. From time to time, companies in the securities industry experience
loss of sales and trading professionals. We cannot assure you that we will be
able to retain our key personnel or that we will be able to attract, assimilate
or retain other highly qualified personnel in the future. The loss of the
services of any of our key personnel or the inability to identify, hire, train
and retain other qualified personnel in the future could have a material
adverse effect on our business, financial condition and operating results.
Several members of our management team, including our Chief Financial Officer
and General Counsel, have recently joined us. We are currently seeking a
marketing director and a Chief Information Officer. We cannot be sure that our
management can work together successfully or that we can find appropriately
qualified people to join our management team.
We Face Intensifying Competition from Both Established and Recently Formed
Entities
We derive a substantial portion of our revenues from our market making
activities. The market for these services, particularly market-making services
through electronic communications gateways, is rapidly evolving and intensely
competitive. Electronic communications networks and Instinet have emerged as an
alternative way for broker-dealers and institutions to direct their limit order
flow and avoid executing their trades through market makers. This may capture a
greater amount of limit order flow, and we may experience a reduction in our
limit order flow. This may cause a decline in our revenues and profits.
Our online discount brokerage business encounters direct competition from
many other companies. These include an increasing number of discount brokerage
firms, some of which are Internet-based, and full-service brokerage firms.
Discount brokerage competitors include Ameritrade, Charles Schwab, Datek
Online, Discover Brokerage Direct, DLJ Direct, E*Trade Securities, Fidelity
Brokerage Services, Quick & Reilly, and Waterhouse Securities. Full-service
brokerage firm competitors include Morgan Stanley Dean Witter, Merrill Lynch
and Paine Webber.
Many of these market makers and brokerage firms are better known, capitalized
and staffed than we are and have significantly larger, more established
customer bases than we do. We are also experiencing increasing competition from
other sources, such as commercial banks and insurance companies offering
financial products and services. These competitors may be able to respond more
quickly to new or evolving opportunities, technologies and customer
requirements than we can, and may be able to undertake more extensive
promotional activities and offer more attractive terms to customers. Moreover,
current and potential competitors have established or may establish cooperative
relationships among themselves or with third parties or may consolidate to
enhance their services and products. New competitors or alliances among
competitors may emerge and may acquire significant market share.
We Will Need To Introduce New Services and Products To Remain Competitive
The demand for market making and online discount brokerage services,
particularly services that rely on the Internet and other electronic
communications gateways, is characterized by:
. rapid technological change;
. changing customer demands;
. the need to enhance existing services and products and introduce new
ones; and
. evolving industry standards.
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Some of our discount brokerage competitors offer a broader range of products
and services than we do. We are in the process of evaluating a number of new
products and services, such as consumer loans, electronic bill presentment and
payment, electronic access to public offerings and various insurance products.
If we fail to introduce these, we may not be able to attract enough new
customers to achieve our growth plans. Also, we may lose some of our existing
customers if they turn to our competitors for products or services we do not
offer.
Services, products and technologies that we or third parties introduce may
render our existing services, products and technologies less competitive. Our
future success will depend, in part, on our ability to respond to the demand
for new services, products and technologies on a timely and cost-effective
basis, and to adapt to technological advancements and changing standards to
address the increasingly sophisticated requirements of our customers. We cannot
assure you that we will be successful in developing, introducing or marketing
new services, products and technologies.
We Have Broad Discretion in How We Use the Proceeds From This Offering
We intend to use the net proceeds of this offering to support the growth of
our online retail discount broker, including for infrastructure and
technological improvements, to satisfy increases in our net capital requirement
related to the commencement of self-clearing operations, marketing and
advertising and working capital purposes. Accordingly, our management will have
significant flexibility in applying the net proceeds of this offering. The
failure of our management to apply these proceeds effectively could have a
material adverse effect on our business, financial condition and operating
results.
We Cannot Predict Our Future Capital Needs or Our Ability to Secure
Additional Financing
Historically, we satisfied our capital needs from internally generated funds
and from the sale of our common stock. We currently anticipate, based on our
experience and current industry trends, that our existing cash resources,
combined with the net proceeds we receive from this offering, will be
sufficient to meet our anticipated working capital and capital expenditure
requirements for at least the next 12 months. However, we may need to raise
additional funds to:
. increase the capital necessary to support our securities positions;
. support more rapid growth in our business, including the purchase of
computer hardware and software;
. develop new or enhanced services and products;
. respond to competitive pressures; and
. respond to unanticipated requirements.
We do not have any credit facilities in place, and we cannot assure you that
we can obtain additional financing when needed on terms acceptable to us.
Third Parties May Infringe Upon Our Intellectual Property Rights; Licenses to
Essential Intellectual Property May Not be Renewed
We rely primarily on copyright, trade secret and trademark laws to protect
our proprietary technology and business methods. Despite the precautions we
have taken to protect our intellectual property rights, it is possible that
third parties may copy or otherwise obtain and use our proprietary technology
without authorization. It is also possible that third parties may independently
develop technologies similar to ours. It may be difficult for us to monitor
unauthorized use of our proprietary technology and intellectual property
rights. We cannot assure you that the steps we have taken will prevent
misappropriation of our technology or intellectual property rights.
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<PAGE>
We are heavily dependent on our proprietary order entry and execution
software system. We monitor the daily operation of our computer system to
detect problems with its operation. We internally support and maintain most of
our computer systems. Our failure to maintain these systems, or to find a
replacement for this technology in a timely and cost-effective manner, would
have a material adverse effect on our business, financial condition and
operating results.
We also license software from third parties, much of which is integral to our
systems and our business. The licenses, and the licensors' daily operation and
support obligations, are terminable if we breach our obligations under the
license agreements. If any of these relationships were terminated or if any of
these third parties were to cease doing business, we may be forced to spend
significant time and money to replace the licensed software. However, we cannot
assure you that the necessary replacements will be available on reasonable
terms, if at all.
Also, we may have to resort to litigation to enforce our intellectual
property rights, protect our trade secrets, determine the validity and scope of
the proprietary rights of others, or defend ourselves from claims of
infringement or invalidity. We may incur substantial costs and diversions of
resources as a result of litigation, even if we win. This could have a material
adverse effect on our business, financial condition and operating results. We
may face claims that we have infringed on the proprietary rights of others or
that our proprietary rights are invalid. These claims, even if without merit,
could be time consuming to defend, result in costly litigation, divert
management's attention and resources or require us to enter into royalty or
licensing agreements. We cannot assure you that licenses would be available to
us on reasonable terms, if at all. Assertion or prosecution of claims of this
type, whether successful or unsuccessful, could have a material adverse effect
on our business, financial condition and operating results.
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USE OF PROCEEDS
We estimate that we will receive net proceeds from the sale of our common
stock offered by this prospectus at an offering price of $33.00 per share
(after deducting underwriting discounts and commissions and estimated offering
expenses) of approximately $79.5 million (approximately $91.6 million if the
underwriters exercise their over-allotment option in full).
We intend to use the net proceeds from this offering as follows:
. up to $30 million for marketing and advertising by NDB.com;
. approximately $29 million for infrastructure and technological
improvements, including the development of a disaster recovery system;
and
. approximately $20 million to satisfy increases in our regulatory net
capital requirement related to the commencement of self-clearing
operations.
We intend to use the remainder of the net proceeds for working capital.
Pending these uses, we will invest the net proceeds in United States government
securities and investment-grade, interest-bearing instruments.
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
Our common stock is listed on the NYSE under the symbol "NDB." Prior to
December 12, 1997, the symbol was "SHD." The following table shows the high and
low sales price per share for our common stock for the periods shown, as
reported by the NYSE.
<TABLE>
<CAPTION>
High Low
------ ------
<S> <C> <C>
Fiscal Year 1997
First Quarter.......................... $12.00 $10.25
Second Quarter......................... 11.00 9.50
Third Quarter.......................... 10.75 9.25
Fourth Quarter ........................ 12.38 9.75
Fiscal Year 1998
First Quarter.......................... 18.50 12.50
Second Quarter......................... 16.19 11.63
Third Quarter.......................... 13.50 10.00
Fourth Quarter ........................ 12.75 11.00
Fiscal Year 1999
First Quarter.......................... 11.63 9.38
Second Quarter......................... 9.56 8.13
Third Quarter.......................... 47.00 8.75
Fourth Quarter......................... 92.94 22.38
Fiscal Year 2000
First Quarter (through June 21, 1999).. 45.50 33.69
</TABLE>
There were approximately 3,000 holders of our common stock as of May 31,
1999.
We did not pay any cash dividends on our common stock during the past three
years, and we do not intend to pay dividends in the foreseeable future. Funds
available for cash dividends are limited to the extent assets are needed to
meet our minimum net capital requirements.
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<PAGE>
CAPITALIZATION
The following table shows our pro forma capitalization as of February 28,
1999:
. on a pro forma basis to reflect the sale of Equitrade; and
. on a pro forma as adjusted basis to reflect the sale of Equitrade and
the sale of 2,600,000 shares of our common stock in this offering at an
offering price of $33.00 per share (after deducting underwriting
discounts and commissions and estimated offering expenses).
This table excludes 1,738,946 shares of our common stock reserved for
issuance under our stock option plans. As of May 31, 1999, options to purchase
1,485,649 shares were outstanding. You should read this table in conjunction
with our financial statements and notes thereto included elsewhere in this
prospectus.
<TABLE>
<CAPTION>
February 28, 1999
-------------------------- ---
Pro Forma
Pro Forma As Adjusted
------------ ------------
(in thousands)
<S> <C> <C> <C>
Total debt.................................... $ -- $ --
============ ============
Preferred stock, $.01 par value, 1,000,000
shares authorized; none issued and
outstanding.................................. $ -- $ --
Common stock, $.01 par value; 50,000,000
shares authorized; 14,343,201 issued, pro
forma; 16,943,201 issued, pro forma as
adjusted..................................... 143,432 169,432
Treasury stock, at cost; 362,010 shares pro
forma and pro forma as adjusted.............. (4,322,747) (4,322,747)
Additional paid in capital.................... 65,522,767 144,969,767
Retained earnings............................. 92,436,992 92,436,992
Cumulative other comprehensive income -
unrealized gain on securities available for
sale ........................................ 100,000 100,000
------------ ------------
Total stockholders' equity.................. 153,880,444 233,353,444
------------ ------------
Total capitalization...................... $153,880,444 $233,353,444
============ ============
</TABLE>
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BUSINESS
Introduction
We are a leading provider of online retail discount brokerage services,
offering customers automated securities order placement and information
capabilities through the Internet via our Web site, as well as through touch
tone telephone, via PowerBroker, and through our registered representatives. We
are also a leading market maker in Nasdaq equity securities. As a market maker,
we execute trades by buying and selling equity securities for our own account.
NDB.com, one of the first online retail discount brokers, has grown rapidly
since it began operations in 1994. NDB.com had over 137,000 accounts as of
April 30, 1999, an increase of 750% since May 31, 1994. Customer assets
currently equal about $7.5 billion, a 2,881% increase over the same period. The
assets in our customer accounts currently average over $50,000, which we
believe is among the highest in the online discount brokerage business.
NDB.com's revenues have also experienced rapid growth, increasing 45% from the
third fiscal quarter of 1998 to the third fiscal quarter of 1999. We are the
only online broker to have received in 1999 the highest rating from both
Barron's and Money magazine, Barron's recently ranked NDB.com as the number two
online broker in a study testing trade execution, ease of use, reliability,
amenities and commissions. Similarly, Money magazine ranked us 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 us the number
one online broker for new online investors.
Sherwood Securities, established in 1968, is the fifth largest Nasdaq market
maker based on the number of securities in which it makes a market and tenth
largest based on the volume of shares traded. Sherwood Securities makes a
market in over 3,900 Nasdaq and other over-the-counter securities, about 73% of
which are traded in the Nasdaq National Market System. Sherwood Securities has
also experienced significant growth. Our annual trading volume has increased
123% over the last four years to over seven billion shares.
Industry Overview
The U.S. market for equity securities has grown dramatically in recent years.
The U.S. equity markets have more than doubled over the past five years, to
$13.5 trillion in total market capitalization in 1998. Nasdaq trading volume
has also experienced rapid growth as favorable market conditions have resulted
in companies increasingly raising capital through the U.S. markets. This has
resulted in a significant increase in the volume of shares traded over Nasdaq
and the number of stocks quoted on Nasdaq. The annual trading volume of Nasdaq
securities has grown from 66 billion shares in 1993 to 202 billion shares in
1998, and the number of issuers whose stocks are quoted on Nasdaq has seen a
net increase of almost 10% to 5,100 over the same period. As the U.S. equity
markets have grown, the way in which retail brokers and market makers conduct
their businesses has been significantly impacted by technological and
regulatory changes.
Online Retail Discount Brokerage
The favorable investing environment and advances in technology have led to
the rapid development of the online retail discount brokerage business.
Technological advances have created new and inexpensive means for individual
investors to access and participate in the equity markets. Access to
information over the Internet and the growing availability of more powerful,
less expensive personal computers has helped create a new type of investor.
This investor is more self-reliant, comfortable with technology and value-
oriented and accepts the Internet as a convenient, secure and reliable means of
commerce. According to International Data Corporation, the number of online
brokerage accounts grew from about one million at the end of 1994 to about 3.7
million at the end of 1997. IDC estimates that there were over 6.4 million
online accounts at the end of 1998, representing
17
<PAGE>
$324.0 billion in assets and over 300,000 trades per day. IDC also estimates
that by 2002, 30% of investors will trade online, and there will be over 24
million online accounts, a 275% increase from 1998.
We believe that as more investors utilize online retail discount brokerage
services to manage their investment portfolios, they will expect their online
brokerage service providers to have broad capabilities. We believe these
investors will differentiate among online retail brokerage service providers
based on their capabilities. These capabilities must include:
. Web sites that are customer-friendly and easy to navigate and use;
. multiple points of access to services that are fast, secure and
reliable;
. efficient and quick order entry and processing;
. high levels of online and offline customer service;
. a wide range of investment tools;
. a large variety of financial products and services;
. educational services for customers; and
. brokers' ability to execute trades outside of current market hours.
Nasdaq Market Making
Market makers offer to buy securities from, and sell securities to, broker-
dealers and institutional investors. Firms that make a market in a security
display the price at which they are willing to buy (bid) or sell (ask) these
securities. They adjust their bid and ask prices in response to the forces of
supply and demand for each security. Historically, market makers relied on
wider spreads between bid and ask prices to ensure profitability and built cost
structures based on these spreads. Regulatory changes have narrowed the spreads
available to market makers and have also made available to retail customers
much of the same information that was previously available only to
institutional investors. The SEC's Limit Order Display Rule, implemented in
1997, allows investors to advertise their orders directly to the market. This
rule has created competition with market maker quotes and reduced the spread
between the bid and ask. Additional regulations recently adopted by the NASD
require market makers to fill customer limit orders before trading for their
own accounts.
Most market makers are either part of diversified securities firms or
independent businesses. The four largest independent market makers, which
include Sherwood Securities, had a combined market share of 30.2% of Nasdaq
trading volume for the quarter ended February 28, 1999, according to the AutEx
Group, a widely recognized industry reporting service that provides daily
trading volume and market share statistics for market makers. This represented
an increase from 21.7% in the same quarter of the prior year. We believe the
growth of independent market makers is the result of both a strong overall U.S.
securities market and an inability of traditional brokerage firms to maintain
profitable market making operations in this competitive environment. Internal
market making departments of diversified securities firms have increasingly
chosen to reduce the number of stocks in which they make a market. This has
contributed to increased trading volume for the independent market makers.
Challenges
In this new narrower spread environment, market makers are finding it more
difficult to maintain profitability. At the same time, customers are demanding
better execution standards and improved service. To maintain profit levels in
this environment, market makers must execute a larger volume of trades and
maintain larger security positions in inventory. However, significant increases
in trading volumes and inventory are only a benefit if market makers are able
to manage the risks associated with larger inventory positions. As a result,
market makers have had to make significant investments in technology and human
resources to enhance their risk management systems.
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In addition to the challenges facing market makers, the rapid growth of the
online retail brokerage business has resulted in a number of challenges to both
customers and online brokers. Many of the largest online brokers have focused
on a Web-only strategy, offering limited opportunities for customers to execute
transactions by phone, slow e-mail response times and limited customer service.
Many of the largest online brokers have experienced significant system outages,
leaving customers with no alternative channel to buy or sell stocks. As
competition has increased among online brokers, increasingly larger mass media
advertising campaigns are driving up the costs to acquire a customer account.
We believe that many of the early customers of online brokers had higher levels
of Internet and trading sophistication and that customers opening online
accounts over the next two years will be less sophisticated. They will require
greater customer service and education in investing in the stock market.
Our Solution
We are a leading provider of online retail discount brokerage services and a
leading market maker in Nasdaq equity securities. Our senior management team
has used its average of over 25 years of experience and success in trading
securities to design our NDB.com products and services to appeal to a wide
range of investors. The team's experience has also allowed it to respond to the
challenges of a narrowing spread environment at Sherwood Securities by
increasing volume while enhancing risk management systems.
Our online retail discount brokerage business combines:
. multiple points of access to services through the Internet, touch tone
telephone and our registered representatives;
. advanced proprietary technologies and systems for superior trade
processing, speed and reliability both during and outside of market
hours;
. superior customer service;
. a broad range of customer-friendly products, services and investment
tools; and
. consumer oriented educational programs.
Our objective is to make our online retail discount brokerage business both
"high tech and high touch." We believe this combination delivers the best value
to our customers. We are the only online broker to have received in 1999 the
highest ratings from both Barron's and Money magazine. We were recently named
the number two online broker by Barron's in a study testing trade execution,
ease of use, reliability, amenities and commissions. Similarly, Money magazine
ranked us 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 us the number one online broker for new online investors. We have
attracted over 137,000 accounts even though we have engaged in only limited
advertising and marketing. NDB.com processed an average of 12,200 trades per
day during April 1999.
Sherwood Securities is the fifth largest market maker of Nasdaq securities
based on the number of stocks in which it makes a market and tenth largest
based on the volume of shares traded. We have designed our trading systems to
utilize techniques derived from our long experience and success in trading
Nasdaq securities. We believe that our automated execution system for over
3,000 stocks offers superior execution opportunities in these stocks for
NDB.com and other Sherwood Securities' customers. Our combination of a market
making business with our online discount brokerage business also provides us
with the opportunity to generate multiple revenue streams from a single order
placed at NDB.com. Sherwood Securities executed an average of 41,100 trades per
day during April 1999, an increase of 224% from April 1996.
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NDB.com's Advantages
We believe NDB.com's advantages include:
Easy-to-use systems. Our technology provides our customers with rapid, easy-
to-use online investing services. Customers can access our system 24 hours a
day, seven days a week through the Internet or touch tone telephone and can
speak to our registered representatives between 7:00 am and 8:30 pm. Our system
also provides customers with the same real-time portfolio information no matter
how they access it. We have designed our system to maximize security,
scalability and adaptability, which allows us to continue to provide the same
high level of service to our customers in times of high trading volume. We have
spent over $17 million in the last four years developing and enhancing our
technology infrastructure to maximize the experience of our online customers.
We have received industry recognition for our efforts.
Superior customer service and value. We are committed to providing the
highest quality customer service. Our customer service representatives are
trained to respond to any customer inquiry, including questions about order
placement and execution. We believe that our "high tech and high touch"
approach provides customers not only with the technology and information
necessary for them to make their own investment decisions, but also with the
customer service support self-directed investors now demand. We charge a flat
fee commission rate for all Nasdaq or exchange market orders. For Nasdaq
stocks, the flat fee is the same regardless of the number of shares or dollar
amount involved. These rates range from $14.75 for online trades to $24.95 for
trades through our registered representatives. We believe that the combination
of our superior customer service and flat fees offer maximum value to our
customers.
Breadth of products and services. We offer our customers a broad range of
financial products and services designed by our experienced traders to appeal
to all self-directed investors, from active traders and life goal planners to
serious investors. We offer customers real-time market information and
commentary, the ability to trade securities in all major U.S. securities
markets, investment tools and educational programs. We also offer customers
credit cards, research reports, fundamental and technical analysis tools and
access to SEC filings. We currently provide 18 courses through NDB University
free of charge to any visitor to our Web site and expect to offer an additional
five courses in the next few months.
Sherwood Securities' Advantages
We believe Sherwood Securities' advantages include:
Risk management. We have developed proprietary trading methodologies and
systems designed to manage the risks inherent in trading stocks. Drawing from
our extensive and successful trading experience, we use both technology and
human resources to evaluate and act rapidly on market trends to manage risk.
Key components of our trading methodologies include:
. constant supervision of all traders and review of securities positions;
. a limit on the amount of risk capital each trader may use; and
. extensive in-house training programs.
Advanced technology. We have customized our systems to meet the specific
needs of our traders. We have spent over $13 million in the last four years to
enhance our ability to efficiently and rapidly process large volumes of order
flow without diminishing the speed of execution. Our systems are also designed
to assure compliance with regulatory requirements.
Customer service. Our customer service workforce is dedicated to establishing
and maintaining customer relationships and facilitating trade executions for
our institutional, broker-dealer and trade program clients. The level of
expertise we offer our customers comes from years of experience and success in
trading securities.
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Growth Strategy
Our objectives are to be the leading, branded provider of online retail
discount brokerage services by enhancing our relationships with our existing
customers and attracting new ones, and to enhance our position as a leading
Nasdaq market maker. The key elements of our strategy to achieve these
objectives are:
Build Brand Awareness. We intend to increase our brand name recognition
through an aggressive marketing and advertising campaign and also by expanding
our affinity relationships. We have attracted over 137,000 accounts with
limited advertising and promotion. We will significantly increase the amount we
spend on marketing and advertising from $3.2 million in fiscal year 1998 up to
$30 million in fiscal year 2000.
Maintain Leading Technology. We intend to continue to upgrade our technology
as necessary to increase capacity, reliability and speed and to provide an
expanding base of NDB.com customers with greater ease of access to our wide
range of financial products and services. We also intend to continue to invest
in state-of-the-art technology for Sherwood Securities to support higher
trading volumes and further enhance our risk management systems.
Differentiate through Customer Service. We intend to continue our commitment
to superior customer service. As part of this strategy, we plan to hire
additional customer service representatives and expand customer service hours
of operation to 24 hours a day, seven days a week (other than holidays). We
also intend to enhance our existing customer service guarantees to include
guarantees of our customer service response times.
Become a Full Service Provider. We intend to provide a full array of products
and services designed to meet the financial needs of individual investors. We
expect to offer electronic access to initial public offerings and after hours
trading within the next 12 months and are currently evaluating a variety of
products and services such as insurance, electronic bill presentment and
payment and consumer mortgages and other credit products. We also plan to host
the Web sites of smaller commercial banks as a way for us to market our
products and services to their customers.
Enhance Content. To assist our customers in making investment decisions, we
intend to expand our relationships with content providers who can supply us
with a broader range of real-time investment tools. We believe that real-time
investment tools facilitate and encourage customer investment ideas and
increase transaction volume. We also intend to enhance the free educational
programs we offer through NDB University.
Expand our Vertical Integration. We intend to further expand our involvement
in all phases of securities transactions by beginning self-clearing operations.
We expect this to reduce our costs and allow us to realize additional revenue
as some of our customers elect to use our clearing services.
NDB.com Products and Services
We offer our 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. We have designed our
products and services to allow investors to create their own diversified,
manageable portfolios.
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Trading Services
Our customers can place orders with us to buy or sell:
. any stock listed on Nasdaq, the NYSE or AMEX. Customers can place market
orders, limit orders (good until canceled or day), stop loss orders,
stop limit orders and short sales;
. more than 9,000 load, no load and no transaction fee mutual funds.
Customers can search our Web site mutual fund center for funds meeting
their investment needs. We also offer monthly investments in any of
these mutual funds through automatic account debit;
. equity and index options listed on the NYSE, AMEX, Chicago Board Options
Exchange or the Philadelphia Stock Exchange; and
. fixed income securities, such as U.S. Treasury obligations, municipal
bonds and corporate bonds.
We offer our customers the ability to place orders after the securities
markets close. These orders are automatically submitted prior to the next day's
market opening. We also provide customers real-time notification of trade
execution by automated call back, fax or e-mail and arrange for the transmittal
of shareholder information, such as proxy statements, annual reports and tender
offer materials.
Through our Flat Fee Trading program, we execute 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 . $27.95 for orders placed with our
our registered representatives registered representatives
We recently developed an interactive application capability on our 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. We conduct a compliance and credit
review for each application and then notify 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.
We believe individual investors gain many advantages from their NDB.com
accounts, including:
. flat fee commission rates for all Nasdaq trades regardless of the number
of shares or dollar amount involved;
. full commission refund if, for any reason, a customer is not satisfied
with our service;
. real-time account balances and a list of pending orders;
. no minimum account balance requirement;
. unlimited insurance protection provided through our clearing broker for
securities;
. our "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;
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. our free dividend reinvestment program that allows customers to purchase
additional shares by automatically reinvesting cash dividends and
capital gains; and
. educational programs through NDB University, our joint venture with Time
Inc. New Media's money.com.
Market Data and Financial Information
During trading hours, we continually receive and post detailed real-time
stock quotes, market information and financial news to provide investors with
the information necessary to make investment decisions. We believe that real-
time information services facilitate and encourage customer investment ideas
and increase transaction volume. We have arrangements with leading content
providers to supply us with information we believe meets customers needs.
Unless otherwise noted, all information is available free of charge to both
visitors to our Web site and our customers.
We have engaged eLogic Communications to gather, integrate and manage the
data supplied by our content providers. eLogic presents these data to us 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 our customers.
News. We receive 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 our 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 our 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 our customers.
Market Information. We offer 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. We provide a link to full-text SEC filings by every public
company.
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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 our registered
representatives. Customers also receive:
.real-time listing of all their portfolio assets, including current price
and current market value;
. detailed account balance and transaction information, including cash and
money fund balances, net market value, dividends received, interest
income, deposits and withdrawals;
. quarterly account statements;
. annual tax statements;
. daily profit and loss statements; and
. monthly account statements for active customers, summarizing account
activity, including asset valuation, transaction history, interest
income and distribution summary.
We are 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
We offer several cash management options to our customers. These include
ProCash Plus accounts which feature unlimited check writing privileges,
telephone bill payment and access to a Mastercard debit card. We also offer
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
We offer all Web site users lessons in finance, investing and money
management through NDB University, our 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
We offer specialized services designed to appeal to registered investment
advisors, institutional investors and high net worth individuals. We provide
custodial, trading and support services to registered investment advisors
(RIAs) who manage their customers' portfolios. We assign each RIA to an account
manager who assists in opening the account and acts as a liaison with the
trading department. We also have customer service representatives and a
preferred trading desk dedicated to RIAs.
We have 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. We
charge negotiated fees rather than flat fees for these trades.
We have customer service representatives dedicated to meeting the needs of
high net worth individuals who maintain large account balances at NDB.com. We
intend to establish a premium service desk for these investors which we will
staff with dedicated registered representatives who can answer customer
questions, as well as place trades.
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Investment Tools
We offer 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. We offer 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
We constantly evaluate new ideas to expand or improve the products and
services we offer our customers. Our business analyst group is responsible for
researching and implementing projects, including those initiated by our
executive management. The group currently consists 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 we may develop
affinity relationships to provide these new products and services.
Delivery of NDB.com Services
During April 1999, we executed as many as 16,300 trades per day. We provide
our customers with three points of access to trade securities, obtain research
and monitor account balances: our Internet Web site, our interactive telephone
system and our registered representatives.
Online services. Our 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. We are the only online
broker to have received in 1999 the highest ratings from both Barron's and
Money magazine. We were ranked the number two online broker by Barron's.
Similarly, Money magazine ranked us 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 us the number one online broker for new
online investors. Our 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. Approximately 60% of our executed trades
currently originate online.
Interactive telephone system. PowerBroker, our 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. Approximately 26% of our executed trades currently originate
through PowerBroker.
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Registered representatives. We have approximately 60 experienced NASD
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. We are committed to offering our
customers the ability to place trades with registered representatives and will
continue to hire additional representatives as needed. Approximately 14% of our
executed trades currently originate through our registered representatives.
NDB.com Affinity Relationships
We pursue relationships with affinity partners to increase our access to
potential customers, build brand name recognition and expand the products and
services we can offer to our customers. We are actively pursuing alliances with
a variety of companies whose customers are likely to use our products and
services. We believe that our focus on affinity relationships has resulted in
lower account acquisition costs than many other discount brokers. We intend to
expand our 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, we have dedicated a number
of our customer service representatives to servicing the accounts of customers
obtained through these relationships. We currently have relationships with the
following affinity partners:
AST StockPlan. AST StockPlan is a leading full-service provider of
administrative services for employee stock option and stock purchase plans. We
have developed NetLink as a service to the more than 300 corporate clients
served by AST StockPlan. These clients have a total employee base of several
hundred thousand. We currently have agreements with 35 of these clients, which
have generated almost 19,000 accounts. Through NetLink, we establish an account
for each participant in the stock option or stock purchase plan, which contains
information on each option grant. Participants are able to exercise their
options online, by touch tone telephone or through one of our registered
representatives. They can also immediately sell the stock received upon the
option exercise. This highly automated process greatly simplifies the exercise
of options.
Crosswalk.com. Crosswalk.com is a fast growing Christian community site that
serves over 200,000 people in more than 80 countries. We recently established a
direct link to our services through their Web site.
University Alumni Fund. University Alumni Fund is a registered broker-dealer
seeking agreements with alumni associations to offer financial services to
their members, including online trading, financial planning and financial
education. We will be the exclusive online broker recommended by UAF to alumni
associations. The alumni associations will receive fees for each NDB.com
account opened by their members.
NDB.com Marketing and Advertising
To date, we have limited our advertising to print and broadcast media. During
fiscal year 2000, we intend to significantly expand our advertising to build
awareness of our brand, quality customer service and depth and breadth of
products and services. We will market our online investing services to
individual investors as a better way of handing securities transactions,
accessing financial and market data and managing portfolios. We intend to use a
variety of media forms to reach individual investors who may use our services,
including broadcast media, print advertisements, online advertisements and
direct mail.
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Our advertising agency has prepared a comprehensive advertising and marketing
campaign that we are in the process of implementing. We are currently seeking a
marketing director with significant experience in e-commerce to oversee and
refine our marketing and advertising strategies.
NDB.com Customer Service
We believe that providing excellent customer service is critical to our
success. Our 68 customer service representatives and supervisors are trained to
handle all types of customer inquiries. Our customer service department
receives over 2,000 telephone calls and 325 e-mails per day. We respond
promptly to all 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 7:00 am to 8:30 pm New York time. We expect to implement 24 hour a day,
seven day a week coverage (other than holidays) during the next fiscal year. We
are in the process of hiring about 50 additional customer service
representatives.
About 20% of our customer service representatives are dedicated to servicing
accounts gained through our affinity relationships, such as AST StockPlan and
Crosswalk.com. All of these employees are registered representatives that can
assist customers in all aspects of trading.
Telephone and E-mail Support and Technology
Our 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 our representatives must handle. This
reduces wait times during high volume trading hours and helps reduce overall
customer service costs.
We also provide 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
We believe that training is key to creating an efficient and motivated
customer service team. We are committed to providing the best available
training to our customer service representatives in an ongoing manner. We focus
on career development for our staff, which we believe improves employee
retention.
We maintain a ratio of one supervisor for each five customer service
representatives. We believe 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 our
products and services, their level of teamwork, their work ethic and personal
objectives and their ability to deliver our expected level of customer
satisfaction.
New customer service representatives take a two month initial course that
covers our 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 our technology infrastructure is
modified or upgraded.
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NDB.com Customer Accounts
NDB.com had over 137,000 accounts as of April 30, 1999, up from 96,000
accounts one year ago. Our customers include individual investors, businesses,
investment clubs, registered investment advisors and institutions. During the
fiscal quarter ended February 28, 1999, we averaged 4.6 executed trades per
account, an increase from 3.8 executed trades per account in the comparable
period last year. Our assets per account currently average over $50,000, which
we believe to be among the highest in the industry.
NDB.com Technology
Our technology department develops and maintains a combination of proprietary
and vendor software to support our online brokerage business and to automate
traditionally labor-intensive transactions. The department's primary
responsibility is to ensure customer access to our system through the Internet
and the telephone, full availability of our products and services and rapid
transmission of trades. The 55 people currently in our technology department
have many years of experience with a variety of operating systems and software.
Our technology is designed along "open architecture" lines to permit regular
hardware and software upgrades with minimal disruption and expense. This design
allows us to respond quickly to growth in both trading volumes and number of
accounts by adding new computers and improving software.
We believe there are many advantages to our technology infrastructure. Our
system is designed to be
. highly scalable, which allows us to easily change its size or
configuration to adapt to increased volume and numbers of users;
. highly fault tolerant, which allows our customers continued access in
the event of hardware or software failure;
. highly integrated, which allows it to communicate with any customer's
personal computer;
. load balanced, which allows it to respond to surges in trading volume;
and
. secure. We use sophisticated encryption, authentication technology and
firewalls to secure the confidential information transmitted to and from
our customers.
NDB.com's Web Site
The primary components of our new Web site are the presentation layer, the
application servers and the databases.
Presentation Layer. The presentation layer is the display screen of our Web
site accessed by our customers over the Internet. It allows us to offer our
services on many platforms without the need to specifically modify our
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. Our Netscape application servers use the computer
languages C++ and Java to permit the interaction between our customers'
computers and our databases. Our 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 our system to maintain reliability.
Databases. Our 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.
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NDB.com's Trading System
All customer orders, whether received through the Internet or by telephone,
pass through our Unix-based automated processor, which is designed to provide
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, our processor reroutes
the customer order to an alternate market maker.
Sherwood Securities
Sherwood Securities is a market maker in over 3,900 Nasdaq and other over-
the-counter securities. We are the fifth largest market maker based on the
number of stocks in which we make a market and the tenth largest based on the
volume of shares traded. We believe we have attained this leadership position
by providing better execution services to our broker-dealer and institutional
investor customers because of our sophisticated and reliable trading systems
and technologies and highly skilled and experienced traders. We have also
developed proprietary trading methods and a comprehensive risk management
system designed to protect our capital and maximize our trading profits.
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. Recently we have been processing between 30,000
and 40,000 trades per day, and our systems are currently 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 our customers with immediate access to
our trading operations and facilitates our handling of their customers' orders.
As part of this system, we maintain direct communication lines with 40 regional
brokerage firms across the country as well as our branch offices in Los
Angeles, Chicago, Boston and Denver. Other brokerage firms in the same
geographic regions can use these dedicated private lines to directly access our
trading operations. We intend to continue to invest in technology to further
enhance our order processing capabilities.
Risk Management
Our trading profits depend on our ability to evaluate and act rapidly on
market trends and manage risk successfully. To achieve these objectives, we
have developed a trading methodology designed to monitor and analyze market
activity, price movements and risk on a real time basis. We continually analyze
our trading positions in individual securities and monitor our overall short
and long positions and aggregate profits and losses. Our 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. Our trading systems also identify all positions held by different
traders in the same security. As part of our risk management policies and
procedures, we allocate each of our traders a limited amount of risk capital
with which to trade and require that a trader seek permission from his or her
supervisor prior to exceeding that amount. We also require that our traders
maintain positions meeting a specified potential profit/loss ratio. We have 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.
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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, we may reduce or suspend our automatic execution
policy during unusual conditions and at our discretion.
Execution and Customer Services
We believe that providing a highly skilled and experienced trading and
customer service workforce is critical to delivering best execution practices
and high quality customer service. We currently have approximately 60 traders
and 115 assistants/trainees. Our traders have an average of five years of
trading experience, and we generally require that our trainees complete a
minimum of two years of extensive in-house training and apprenticeship prior to
permitting them to trade independently. We also have 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. Our customer service workforce consists of
37 salespeople and assistants. These people are dedicated to establishing and
maintaining customer relationships and facilitating trade executions for our
institutional, broker-dealer and trade program clients.
Customer Accounts
Our customers consist 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 (we own assets) and short (we have sold
assets we do not own) positions in the securities in which it makes a market.
The following table illustrates our highest, lowest and average month-end
inventory at market value (based on the aggregate of our long and short
positions) of securities.
<TABLE>
<CAPTION>
Highest Lowest Average
Month End Month End Month End
------------ ----------- -----------
<S> <C> <C> <C>
Fiscal year ended May 31, 1996....... $ 37,711,783 $26,053,415 $32,009,824
Fiscal year ended May 31, 1997....... 38,561,528 17,472,124 29,820,182
Fiscal year ended May 31, 1998....... 128,078,159 27,106,790 53,688,382
Nine months ended February 28,
1999................................ 145,951,865 21,329,531 61,358,858
</TABLE>
Our securities positions on any one day may not be representative of our
exposure on any other day because our securities positions may vary
substantially with economic and market conditions, allocations and availability
of capital, and trading volume.
NDB.com and Sherwood Securities Operations
Clearing
We currently maintain relationships with two clearing brokers to clear and
settle our securities transactions. The clearing brokers also provide record
keeping and other services, such as custody of cash and securities. Sherwood
Securities clears its market making transactions through Broadcort
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Capital Corp., a subsidiary of Merrill Lynch. Broadcort also clears Sherwood
Securities' customer transactions. Our 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.
We intend to begin self-clearing operations. We expect to initially contract
with a third party to provide computer services to support these operations
during the development stage. Our regulatory net capital requirement will
increase when we begin to self-clear. The level of that required net capital
will vary with the amount of customer assets we will hold from time to time.
We believe that performing our own clearing operations will offer the
following advantages:
. Margin lending. We will be permitted to use customer free credit
balances and securities for our margin lending activities, subject to
SEC and NASD rules;
. Reduction in costs. We believe, that over time, we will be able to
perform our own clearing less expensively and more efficiently than our
current clearing brokers;
. Securities lending. We will receive fees for lending securities to other
brokers to cover their short sales; and
. Additional source of revenue. We will be able to offer clearing services
to other broker-dealers and institutions, which will give us an
additional source of revenue.
Legal and Compliance
Our legal and compliance departments are responsible for overseeing our
compliance with applicable laws and regulations. Our current legal and
compliance staff of 27 employees works with our trading personnel in
implementing required new regulatory procedures, maintaining the required
trading records, maintaining appropriate files and monitoring trading activity.
Our legal and compliance departments also approve all account applications,
conduct periodic audit and quality assurance reviews and handle all contacts
with the various regulatory agencies. These duties are diverse and range from
giving comments on proposed legislation to responding to requests for
information regarding trading activity. Our legal and compliance departments
are also responsible for the registration of our personnel and responding to
customer complaints.
Competition
The market for online investing services, particularly over the Internet, is
new, rapidly evolving and intensely competitive. We expect competition to
continue to intensify in the future. We encounter 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. We also
encounter competition from the many established full-commission brokerage
firms, such as Merrill Lynch, Morgan Stanley Dean Witter, and PaineWebber. We
also compete with financial institutions, mutual fund sponsors and other
organizations, some of which provide online investing services.
We believe that the principal competitive factors affecting the market for
our 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. We believe that we
currently compete favorably with respect to each of these factors.
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Many of our competitors have longer operating histories and significantly
greater financial, technical, marketing and other resources than we have. Many
current and potential competitors also have greater name recognition and more
extensive customer bases that could be leveraged, thereby gaining market share
to our 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 securities.
There are many other broker-dealers making markets in these securities. We
generally have one or more competing market makers for each security in which
we make a market. We compete primarily on the basis of price, our experience in
market making, our relationship with our customers, the availability of our
dedicated private electronic communications network and our ability to effect
large transactions in an orderly manner. We now face 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.
Impact of the Year 2000 Issue
The following information is subject to the Year 2000 Information and
Readiness Disclosure Act of 1998.
State of Readiness. We are 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 because 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 this information could generate erroneous data or cause a
system to fail.
Our plan to deal with the year 2000 issue is a five-step one, which includes
both information technology (IT) and non-information technology (non-IT)
systems. IT systems include our trading system, our accounting software and our
Web site. Non-IT systems include our headquarters' water, sprinkler and
elevator systems. The five steps of our plan 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 us 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 completed by February 28, 1999. Renovation,
which was substantially completed by February 28, 1999, included the conversion
of year 2000 non-compliant systems into year 2000 compliant systems. We believe
that internal software and hardware identified as non-compliant had been made
compliant, or replaced, with the exception of one software application which
was upgraded in April 1999. We are internally verifying compliance of our new
Web site which is expected to be completed by June 30, 1999. Validation
includes the testing of all systems by using test data with dates that include
the year 2000. This is the certification phase of our production platforms.
Implementation will be a final review of all year 2000 production systems in
service. We have constructed a dedicated year 2000 test development environment
to eliminate any potential risks to the production platforms for use in the
validation phase of this plan. We expect the validation and implementation
phases to be completed within the next two months. We are dependent upon
services rendered by third parties, such as telecommunications, electric and
clearance, which have a material effect on our operations. These essential
service providers have indicated to us that they will be year 2000 compliant in
time to meet our schedule, although we cannot be sure that such plans will be
implemented on a timely basis.
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Costs. We estimate that we will spend about $500,000 for software
modifications, hardware and testing related to year 2000. Through February 28,
1999, we spent approximately $145,000, of which $52,000 was incurred during the
quarter ended February 28, 1999. We do not track our 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 our internal
costs.
Worst Case Scenario. We have assessed that business interruption is the most
reasonably likely worst case year 2000 scenario, although the full effect upon
our results of operations, liquidity and financial condition is unknown.
Contingency Plan. At this time, we have formulated a preliminary contingency
plan 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, we could be materially affected.
Regulation
Our 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 SEC 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
NASD. 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 April
30, 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 April 30, 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
member 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 alter 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.
33
<PAGE>
Customer Protection and Insurance
Customers of Sherwood Securities and NDB.com are protected against some
losses by the Securities Investor Protection Corporation. 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 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 our customers are held by
our clearing firms, Broadcort and Pershing, our 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, our 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.
We also carry brokers' blanket bonds covering us 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. Each bond
contains a deductible of $10,000.
Net Capital 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. This 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. As of April 30, 1999, Sherwood Securities was required to maintain
minimum net capital of $1,000,000 and had total net capital of $59,533,005. As
of April 30, 1999, NDB.com was required to maintain minimum net capital of
$250,000 and had total net capital of $4,776,523.
In computing net capital under this rule, various adjustments are made to
exclude assets not readily convertible into cash and to provide a conservative
statement of other assets, such as the firm's 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 net capital rule imposes financial restrictions upon our 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 our principal assets are our ownership of our
broker-dealer subsidiaries, the rules governing net capital and restrictions on
capital withdrawals could prevent us from meeting our financial obligations on
a timely basis.
Compliance with the 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 which are included
in our minimum net capital are not available for distribution to our
shareholders in the form of dividends or otherwise. We believe Sherwood
Securities and NDB.com are currently 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.
34
<PAGE>
Personnel
As of March 31, 1999, we had 563 full-time employees, 353 of whom were
salespeople, traders and trading assistants. None of our personnel is covered
by a collective bargaining agreement. We consider our relations with our
personnel to be satisfactory.
Through August 1997, Sherwood Securities' traders and salespeople were paid a
percentage of trading profits as compensation. Since September 1997, they have
been paid under an "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.
Offices
Sherwood Securities' office and trading facilities and our headquarters
occupy approximately 51,600 square feet of leased space at 10 Exchange Place
Centre, Jersey City, New Jersey. This lease began 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 in 36,000 square feet of
leased space at 7 Hanover Square, New York, New York. This lease began on April
1, 1996 and expires on September 29, 2008. Base rent on this space is
approximately $718,000 per year.
We have 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 and compliance. We have also signed a lease for
an additional 96,000 square feet near our 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 used by NDB.com for
its self-clearing operations and its technology and marketing departments.
Legal Proceedings
Many aspects of our broker-dealer businesses involve substantial litigation
risks. In recent years, there has been an increasing incidence of litigation in
the 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.
We are, from time to time, involved in proceedings with, and investigations by,
governmental and self-regulatory agencies.
We have been named as a defendant in a number of lawsuits and arbitrations
and are the subject of investigations that allege, among other things,
violations of Federal and state securities laws and other laws. A substantial
settlement or judgment in any of these cases could have a material adverse
effect on us. Except as we describe below, we believe that none of these
pending lawsuits, arbitrations and investigations is likely to have a material
adverse effect on our financial condition, results of operations or liquidity,
although we cannot be certain of this.
On March 22, 1999, Weiss, Peck & Greer, L.L.C. filed an NASD arbitration
action against Sherwood Securities. Weiss, Peck 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 of Amazon.com from Carnegie,
Childs & Co. on January 8, 1999. Weiss, Peck 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. Weiss, Peck covered the short position on
January 11, 1999 and alleges it sustained losses of more than $11 million. We
believe we have a valid defense to these claims and filed an answer on June 8,
1999. In the answer we asserted counterclaims against Weiss, Peck, including a
claim of approximately $1.3 million for losses we suffered in connection with
these trades. We cannot be certain, however, that we will prevail in this
arbitration.
35
<PAGE>
MANAGEMENT
The following table lists our directors, executive officers and key
employees:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<C> <C> <S>
Directors and Executive Officers
James H. Lynch, Jr............. 68 Chairman of the Board
Arthur Kontos (1).............. 53 Director, Vice Chairman of the Board
and Chief Executive Officer
Dennis Marino (1).............. 53 Director, Chief Administrative Officer
and Chairman of NDB.com
Thomas W. Neumann (1).......... 35 Director, Executive Vice President and
President of Sherwood Securities
Matthew S. Stadler (1)......... 44 Senior Vice President and Chief
Financial Officer
Denise Isaac (1)............... 32 Executive Vice President and Treasurer
Frank E. Lawatsch, Jr. (1)..... 55 Executive Vice President, Secretary and
General Counsel
Stephen J. DiLascio............ 44 Director
Ralph N. Del Deo............... 74 Director
John P. Duffy.................. 58 Director
Charles Kirkland Kellogg....... 30 Director
Key Employees
James Romano (1)............... 52 Executive Vice President and Head of
Capital Markets of Sherwood Securities
Gregg Sharenow (1)............. 35 Co-Chief Operating Officer of NDB.com
Samir M. Shah (1).............. 32 Co-Chief Operating Officer of NDB.com
John Benedickson(1)............ 35 Head of Institutional Sales of Sherwood
Securities
Vincent S. Morano.............. 58 Senior Vice President
</TABLE>
- --------
(1) Member of Executive Committee
James H. Lynch, Jr. has been Chairman of the Board of Directors since July
1989. Mr. Lynch was a general partner and member of the executive committee of
Spear, Leeds & Kellogg for more than five years prior to his retirement from
Spear Leeds in June 1985. Spear Leeds is a broker-dealer and a member of all
major U.S. stock exchanges and acts as a specialist on the New York and
American Stock Exchanges. Mr. Lynch also served as President of Spear, Leeds &
Kellogg Securities, Inc. and as an officer and director of its wholly-owned
subsidiaries, First Options of Chicago and Troster Singer Corporation. Mr.
Lynch is also a director of Consolidated Purchasing Services, Inc.
Arthur Kontos became our Vice Chairman of the Board and Chief Executive
Officer in October 1988. Mr. Kontos was a managing director of Spear Leeds from
June 1988 until October 1988, when he joined us. He became a general partner of
Spear Leeds in 1982 and President of S.G.I. Capital Holdings, Inc. in 1988, and
he resigned from both positions in December 1991. From July 1978 until May
1988, Mr. Kontos served as a director and as President and Chief Executive
Officer of Troster Singer Corporation, a Nasdaq market maker.
Dennis Marino has been a Director since 1981. He has been employed by us
since February 1969 and has served as our Chief Administrative Officer since
1986. Mr. Marino was appointed President of Sherwood Securities in January
1988, a position he held until December 1997, at which time he became Chairman
of NDB.com. In February 1998, Mr. Marino also assumed the positions of
President and Chief Executive Officer of NDB.com. He has been our Executive
Vice President since 1977.
36
<PAGE>
Mr. Marino served as President of the Securities Traders Association of New
York for a term that expired in 1991, served as Chairman of the Securities
Traders Association (STA) in 1997 and currently serves as a governor of the
STA.
Thomas W. Neumann has been a Director since 1992. He has served as our
Executive Vice President since 1991 and was appointed President of Sherwood
Securities in December 1997. Mr. Neumann joined Sherwood Securities in October
1988 and held various trading positions with Sherwood Securities prior to being
appointed a Senior Vice President in 1990 and Head of Capital Markets in 1995.
From June 1986 until October 1988, Mr. Neumann was an employee of Troster
Singer Corporation, a Nasdaq market maker.
Matthew S. Stadler became our Senior Vice President and Chief Financial
Officer in May 1999. From September 1994 to May 1999, he was a Senior Vice
President and Chief Financial Officer of Santander Investment Securities, Inc.,
a registered broker-dealer. Prior to that time, he was the Chief Financial
Officer of Latinvest Securities, Inc.
Denise Isaac joined us in October 1995 as our Chief Financial Officer, became
Treasurer in April 1998 and became our Executive Vice President in May 1999.
Prior to her employment with us, Ms. Isaac was a Senior Manager in the
financial services practice of KPMG Peat Marwick LLP. Ms. Isaac was employed by
KPMG Peat Marwick LLP since 1986 where she worked on various assignments and
taught courses to the securities industry.
Frank E. Lawatsch, Jr. was appointed as our Executive Vice President,
Secretary and General Counsel in April 1999. Prior to that time, he was a
senior partner of Gibbons, Del Deo, Dolan, Griffinger & Vecchione, P.C., a New
Jersey law firm that provides legal services to us. Prior to 1992, Mr. Lawatsch
served as general counsel to two publicly traded financial service
corporations. Mr. Lawatsch has been a member of the bar since 1969. He is
responsible for our legal, corporate, secretarial, compliance and personnel
functions.
Stephen J. DiLascio has been a Director since 1995. He is a Managing Director
of Spear, Leeds & Kellogg, L.P. Mr. DiLascio was the President of Equitrade
from November 1998 when it converted from a limited partnership to a limited
liability company until the sale of Equitrade in June 1999. He began his career
on the trading floor in 1973 with Weiss, Peck & Greer's specialist operation,
the predecessor to Equitrade. He became a specialist in 1978, a partner in 1980
and the managing partner in 1989. Mr. DiLascio is also a director of Securities
Industry Automation Corporation, a governor of the NYSE, a member of the
Alliance of Floor Brokers and a member of the Technology, Planning and
Oversight Committee at the NYSE.
Ralph N. Del Deo has been a Director since 1993. Mr. Del Deo is a senior
partner of Gibbons, Del Deo, Dolan, Griffinger & Vecchione, P.C., a New Jersey
law firm that provides legal services to us. His practice areas include
litigation and general practice.
John P. Duffy has been a Director since 1992. He retired from his position as
a managing director of Spear Leeds in 1991, a position he held from prior to
September 1987 until his retirement. As a managing director of Spear Leeds, Mr.
Duffy acted as a specialist on the NYSE. Mr. Duffy is also a director of Kinney
Oil Co.
Charles Kirkland Kellogg became a Director in April 1999. In May 1999, Mr.
Kellogg obtained an M.B.A. from The College of William and Mary. After
graduation, he became an employee of Performance Specialist Group, L.P., a NYSE
specialist. From 1996 to 1997, Mr. Kellogg served as special projects
coordinator for NDB.com where he assisted in developing our online trading
system. From 1992 to 1995, Mr. Kellogg served in various trading positions at
Sherwood Securities and Equitrade.
37
<PAGE>
James Romano joined Sherwood Securities in June 1992 as Vice President of
Trading and had responsibility over the trading department. In December 1994,
Mr. Romano became our Executive Vice President and in January 1998 he became
Head of Capital Markets of Sherwood Securities. For eleven years prior to
joining us, Mr. Romano held various trading positions at Troster Singer
Corporation, including Vice President of Trading.
Gregg Sharenow joined NDB.com in April 1996 as Director of Cost Analysis and
served as a Managing Director of NDB.com before becoming Co-Chief Operating
Officer in April 1999. Prior to joining us, Mr. Sharenow was an auditor at
Swiss Bank from July 1995 to April 1996 and a Senior Manager in the financial
services practice of KPMG Peat Marwick LLP from December 1993 to July 1995.
Samir M. Shah joined NDB.com in May 1996 as a Managing Director and became
Co-Chief Operating Officer in April 1999. From June 1992 to May 1996, Mr. Shah
was a Vice President of Operations at Chase Investment Services Corp., a wholly
owned subsidiary of Chase Bank.
John Benedickson joined Sherwood Securities in 1993 as an institutional
trader. In January 1998, he became Head of Institutional Sales of Sherwood
Securities.
Vincent S. Morano joined us in May 1999 as Senior Vice President-Brokerage
Operations and focuses on establishing self-clearing operations. From 1995
until he joined us, Mr. Morano was an independent consultant specializing in
securities operations and systems. From 1989 to 1995, he served as President
and Chief Executive Officer of John Hancock Clearing Corp. Prior to that, he
served as Executive Vice President and Director of Operations of Prescott, Ball
& Turben, Inc., a registered broker-dealer, and President and Chief Executive
Officer of Brokerage Clearance Services, Inc., a subsidiary of Kemper Group.
38
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of our common stock as of April 30, 1999 by:
. each person or entity that we know beneficially owns 5% or more of our
common stock;
. our chief executive officer and other four most highly compensated
executive officers as of May 31, 1998;
. each of our directors; and
. all of our current directors and executive officers as a group.
<TABLE>
<CAPTION>
Number of
Shares Percentage of Common
Beneficially Stock Beneficially Owned
Owned -----------------------------
Prior to Prior to After
Name of Beneficial Owner(1) Offering(2) Offering Offering (3)
- --------------------------- ------------ ------------ -------------
<S> <C> <C> <C>
Arthur Kontos(4)................. 2,831,100 19.9% 16.9%
Peter R. Kellogg(5).............. 2,940,222 21.0 17.7
Richard Marino(6) ............... 297,135 2.1 1.8
Thomas W. Neumann(7)............. 203,517 1.4 1.2
Dennis Marino(8)................. 158,254 1.1 *
John P. Duffy(9)................. 53,800 * *
James H. Lynch, Jr. ............. 35,000 * *
Ralph N. Del Deo(10)............. 30,000 * *
James Romano(11)................. 11,666 * *
Charles Kirkland Kellogg......... 1,500 * *
Stephen J. DiLascio.............. 1,000 * *
All Directors and Executive
Officers as a Group
(13 persons) (12)............... 3,635,889 25.4% 21.5%
</TABLE>
- --------
* Less than 1%
(1) The address of each of the persons listed above is 10 Exchange Place
Centre, Jersey City, New Jersey 07302, except Mr. Peter R. Kellogg, whose
address is 120 Broadway, New York, New York 10271.
(2) Beneficial ownership is determined in accordance with the rules of the SEC.
In general, a person who has voting power and/or investment power with
respect to securities is treated as a beneficial owner of those securities.
Shares of common stock subject to options, warrants or rights currently
exercisable or exercisable within 60 days of April 30, 1999 are considered
as beneficially owned by the person holding such options, warrants or
rights. Unless indicated otherwise, we believe that the persons named in
this table have sole voting and investment power with respect to the shares
of common stock shown. The amounts and percentages are based upon
13,981,191 shares of common stock outstanding as of February 28, 1999.
(3) Assumes no exercise of the underwriters' over-allotment option.
(4) Consists of 1,337,854 shares of our common stock held by Mr. Kontos,
197,387 shares of our common stock underlying Mr. Kontos' currently
exercisable stock options, 125,000 shares of our common stock held by the
Arthur Kontos Foundation, 753,562 shares of our common stock held by
limited partnerships of which Mr. Kontos is the general partner and Mr.
Kontos' children are sole limited partners and 417,297 shares over which he
has sole voting power and which are subject to a voting trust agreement
with his former wife.
39
<PAGE>
(5) Consists of 730,942 shares of our common stock held by Mr. Kellogg,
1,850,000 shares of our common stock held by IAT Reinsurance Syndicate
Ltd., a corporation, all of whose voting stock is held by Mr. Kellogg and
of which Mr. Kellogg is president, 346,500 shares of our common stock held
by the Cynthia and Peter Kellogg Foundation and 12,780 shares of our common
stock held by the J.C. Kellogg Foundation. Mr. Kellogg has shared
beneficial ownership over the shares owned by the Cynthia and Peter Kellogg
Foundation and the J.C. Kellogg Foundation.
(6) Consists of 286,966 shares of our common stock held by Mr. R. Marino and
10,169 shares of our common stock underlying Mr. R. Marino's currently
exercisable stock options.
(7) Consists of 121,477 shares of our common stock held by Mr. Neumann and
82,040 shares of our common stock underlying Mr. Neumann's currently
exercisable stock options.
(8) Consists of 118,622 shares of our common stock held by Mr. D. Marino and
39,632 shares of our common stock underlying Mr. D. Marino's currently
exercisable stock options.
(9) Consists of 49,800 shares of our common stock held by Mr. Duffy and 4,000
shares of our common stock held in trust for Mr. Duffy's children.
(10) Consists of 20,000 shares of our common stock held by Mr. Del Deo and
10,000 shares of our common stock held by his wife.
(11) Consists of 16,666 shares of our common stock underlying Mr. Romano's
currently exercisable stock options.
(12) Includes 355,561 shares of our common stock underlying currently
exercisable stock options.
40
<PAGE>
UNDERWRITING
The underwriters named below, through their representatives Deutsche Bank
Securities Inc. and U.S. Bancorp Piper Jaffray have severally agreed to
purchase from us the following numbers of shares of our common stock at the
public offering price less the underwriting discounts and commissions shown on
the cover page of this prospectus.
<TABLE>
<CAPTION>
Number of
Underwriter Shares
------------------------------------------------------------------- ---------
<S> <C>
Deutsche Bank Securities Inc....................................... 960,000
U.S. Bancorp Piper Jaffray......................................... 960,000
BancBoston Robertson Stephens Inc. ................................ 60,000
CIBC World Markets................................................. 60,000
Donaldson, Lufkin & Jenrette Securities Corporation................ 60,000
Hambrecht & Quist LLC.............................................. 60,000
Lehman Brothers Inc. .............................................. 60,000
Sands Brothers & Co. Ltd. ......................................... 60,000
William Blair & Company L.L.C. .................................... 40,000
Jefferies & Company, Inc. ......................................... 40,000
Edgar M. Norris & Co. Inc. ........................................ 40,000
Putnam, Lovell & Thornton Inc. .................................... 40,000
Raymond James & Associates, Inc. .................................. 40,000
SunTrust Equitable Securities Corporation.......................... 40,000
C.E. Unterberg, Towbin............................................. 40,000
Volpe Brown Whelan & Company, LLC.................................. 40,000
---------
Total............................................................ 2,600,000
=========
</TABLE>
We will enter into an underwriting agreement with the underwriters which
provides that the underwriters are obligated to purchase all of the shares of
common stock we are offering to sell in this offering, other than shares
covered by the over-allotment option described below, if any of the shares are
purchased. We expect to issue these shares on June 25, 1999.
The underwriters propose to offer the shares of common stock to the public at
the public offering price set forth on the cover page of this prospectus and to
dealers at a price that represents a concession not in excess of $1.10 per
share under the public offering price. The underwriters may allow, and dealers
may re-allow, a concession not in excess of $0.10 per share to other dealers.
After commencement of the offering, the offering price and other selling terms
may be changed by the representatives of the underwriters.
We have granted to the underwriters an option, exercisable not later than 30
days after the date of this prospectus, to purchase up to 390,000 additional
shares of our common stock at the public offering price less the underwriting
discounts and commissions set forth on the cover page of this prospectus. The
underwriters may exercise this option only to cover over-allotments made in
connection with the sale of the common stock offered in this offering. To the
extent that the underwriters exercise this option, each of the underwriters
will become obligated to purchase approximately the same percentage of
additional shares of common stock as the number of shares of common stock to be
purchased by it in the above table bears to 2,600,000, and we will be obligated
to sell these shares to the underwriters to the extent they exercise the
option. If any additional shares of common stock are purchased, the
underwriters will offer these additional shares on the same terms as those on
which the initial 2,600,000 shares are being offered.
We have agreed to indemnify the underwriters against liabilities in
connection with this offering, including liabilities under the Securities Act.
41
<PAGE>
We have agreed with the underwriters that we will not issue any additional
shares of common stock for 180 days following the date of this offering, except
that we may issue, and grant options or warrants to purchase, shares of our
common stock or securities convertible into, exercisable for or exchangeable
for shares of common stock, under our employee stock option plans and in
connection with any acquisitions. Our executive officers and directors and two
significant shareholders also have agreed not to sell or otherwise dispose of
any shares of our common stock for 180 days following the date of this
offering.
To facilitate the offering of our common stock, the underwriters may engage
in transactions that stabilize, maintain or otherwise affect the market price
of the common stock. Specifically, the underwriters may over-allot shares of
the common stock in connection with this offering by creating a short position
in the common stock for their own accounts. Additionally, to cover these over-
allotments or to stabilize the market price of the common stock, the
underwriters may bid for, and purchase, shares of common stock in the open
market. Finally, the representatives, on behalf of the underwriters, also may
reclaim selling concessions allowed to an underwriter or dealer if the
underwriting syndicate repurchases shares distributed by that underwriter or
dealer. Any of these activities may maintain the market price of our common
stock at a level above that which might otherwise prevail in the open market.
The underwriters are not required to engage in these activities and, if
commenced, may end any of these activities at any time.
The representatives have informed us that the underwriters and dealers
participating in the offering do not intend to confirm sales to any accounts
over which they exercise discretionary authority.
LEGAL MATTERS
The validity of common stock offered by this prospectus will be passed upon
for us by Gibbons, Del Deo, Dolan, Griffinger & Vecchione, a Professional
Corporation, Newark, New Jersey. Gibbons, Del Deo, Dolan, Griffinger &
Vecchione provides legal services to us on an ongoing basis. Mr. Del Deo, one
of our Directors, is a partner of Gibbons, Del Deo, Dolan, Griffinger &
Vecchione and, together with his wife, owns 30,000 shares of our common stock.
In addition, certain legal matters will be passed upon for us by Morgan, Lewis
& Bockius LLP, New York, New York, our special securities counsel. Certain
legal matters related to this offering will be passed upon for the underwriters
by Piper & Marbury L.L.P., Baltimore, Maryland.
EXPERTS
Our statements of financial condition as of May 31, 1997 and 1998 and the
statements of income and comprehensive income, stockholders' equity and cash
flows for each of three years ended May 31, 1998, have been included in this
registration statement in reliance on the report of KPMG LLP, independent
accountants, given on the authority of that firm as experts in accounting and
auditing. Our financial statements as of February 28, 1999 and for the nine
months then ended included in this registration statement have been so included
in reliance on the report of PricewaterhouseCoopers LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.
42
<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and other
information with the SEC. You may read and copy any reports, statements or
other information that we file with the SEC at the SEC's public reference room
at 450 Fifth Street, N.W., Washington, D.C. 20549. Please call the SEC at 1-
800-SEC-0330 for further information on the public reference room. These SEC
filings are also available to the public from commercial document retrieval
services and at the Internet site maintained by the SEC at
"http://www.sec.gov." Reports, proxy statements and other information filed by
us should also be available for inspection at the offices of the New York Stock
Exchange, 120 Broad Street, New York, New York 10005.
We filed a Registration Statement on Form S-3 (the "Registration Statement")
to register with the SEC the shares of our common stock to be issued and sold
in this offering. This prospectus is a part of the Registration Statement. As
allowed by SEC rules, this prospectus does not contain all of the information
you can find in the Registration Statement or the exhibits to that Registration
Statement. You should rely only on the information contained or incorporated by
reference in this prospectus.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The SEC allows us to "incorporate by reference" information into this
prospectus, which means that we can disclose important information to you by
referring you to another document filed separately with the SEC. The
information incorporated by reference is considered part of this prospectus,
except for any information superseded by information contained directly in this
prospectus or in later filed documents incorporated by reference in this
prospectus.
The following documents and information that we have previously filed with
the SEC are incorporated by reference in this prospectus. These documents
contain important information about us and our finances and should be reviewed
carefully and fully:
. Annual Report on Form 10-K for the year ended May 31, 1998;
. Quarterly Reports on Form 10-Q for the quarters ended August 31, 1998,
November 30, 1998 and February 28, 1999;
. Current Reports on Form 8-K filed on February 11, February 25, May 7,
1999 and June 21, 1999; and
. The description of our common stock which is contained in filings we
have made under the Securities Exchange Act of 1934, including all
amendments or reports we have filed for the purpose of updating this
description.
We incorporate by reference additional documents that we may file with the
SEC until all of the shares of our common stock offered by this prospectus have
been sold. These documents include periodic reports, including Annual Reports
on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K,
as well as proxy statements.
Any documents filed by us with the SEC and incorporated by reference
(excluding exhibits, unless specifically incorporated in this prospectus) are
available without charge upon written or oral request to Frank E. Lawatsch, Jr.
Esq. Secretary, National Discount Brokers Group, Inc. Telephone requests may be
directed to Mr. Lawatsch at (201) 946-2200.
43
<PAGE>
National Discount Brokers Group, Inc. and Subsidiaries
Index to Pro Forma Condensed Consolidated Financial Statements and
Consolidated Financial Statements
<TABLE>
<CAPTION>
Page
-------
<S> <C>
Pro Forma Condensed Consolidated Financial Statements:
Pro Forma Condensed Consolidated Financial Statements Introductory
Paragraph........................................................... P-1
Pro Forma Condensed Consolidated Statements of Financial Condition--
February 28, 1999................................................... P-2
Pro Forma Condensed Consolidated Statements of Income--
Years Ended May 31, 1996, 1997 and 1998 and
nine months ended February 28, 1998 and 1999........................ P-3-7
Consolidated Financial Statements and Notes:
Reports of Independent Accountants................................... F-1-2
Consolidated Statements of Financial Condition--
May 31, 1997 and 1998 and February 28, 1999......................... F-3-4
Consolidated Statements of Income and Comprehensive Income--
Years ended May 31, 1996, 1997 and 1998 and
nine months ended February 28, 1998 (unaudited) and 1999............ F-5-6
Consolidated Statements of Changes in Stockholders' Equity--
Years ended May 31, 1997 and 1998 and
nine months ended February 28, 1999................................. F-7
Consolidated Statements of Cash Flows--
Years ended May 31, 1996, 1997 and 1998 and
nine months ended February 28, 1998 (unaudited) and 1999............ F-8-11
Notes to Consolidated Financial Statements........................... F-12-26
</TABLE>
44
<PAGE>
National Discount Brokers Group, Inc. and Subsidiaries
Pro Forma Condensed Consolidated Financial Statements
Introductory Paragraph
In June 1999, the Company sold 100% of its membership interests in Equitrade
Partners, L.L.C. ("Equitrade") to Spear, Leeds & Kellogg Specialists LLC. Under
the terms of the sale agreement, all intercompany assets and liabilities were
cash settled and the Company repaid its $15,000,000 loan payable to Spear,
Leeds & Kellogg, LP. The following unaudited pro forma condensed consolidated
financial statements give effect to the sale agreement as if it occurred as of
June 1, 1995. The unaudited pro forma condensed consolidated financial
statements are not necessarily indicative of what the financial results would
have been if Equitrade had been sold on June 1, 1995 and are not necessarily
indicative of future results. These unaudited pro forma condensed consolidated
financial statements are based on certain assumptions which are set forth
below.
The following unaudited pro forma condensed consolidated financial statements
give effect to the adjustments to record the sale of the Company's membership
interests in Equitrade. The adjustments comprise the elimination of the
operations, assets and liabilities of Equitrade, receipt of cash of
approximately $82,400,000 (consisting of gain on sale, return of capital and
net repayment of notes receivable), recording the after-tax gain of
approximately $20,500,000, accruing income taxes payable of $15,500,000 and the
bonus to the Company's chief executive officer of approximately $6,400,000, and
additional adjustments which are directly attributable to the sale. Such pro
forma information is based upon the historical consolidated statement of
financial condition of the Company and Equitrade as of February 28, 1999.
The unaudited pro forma condensed consolidated statements of income give
effect to the sale of the Company's membership interests in Equitrade as if the
sale had occurred as of June 1, 1995. Therefore, the revenues and expenses of
Equitrade subsequent to June 1, 1995 have been eliminated and additional
adjustments which are directly attributable to the sale have been recorded. The
unaudited pro forma condensed consolidated statements of income are presented
for the three years ended May 31, 1996, 1997, and 1998 and for the nine months
ended February 28, 1998 and 1999.
These unaudited pro forma condensed consolidated financial statements should
be read in conjunction with the Company's historical financial statements and
notes thereto included elsewhere in this registration statement.
P-1
<PAGE>
National Discount Brokers Group, Inc. and Subsidiaries
Pro Forma Condensed Consolidated Financial Statements
Statement of Financial Condition
<TABLE>
<CAPTION>
February 28, 1999
----------------------------------------------------------
Condensed Pro Forma
Consolidated Condensed
Statement of Consolidated
Financial Condition Statement of
as Reported Adjustments Financial Condition
------------------- ------------ -------------------
(unaudited) (unaudited)
<S> <C> <C> <C>
ASSETS
Cash.................... $ 1,975,501 $ 81,623,461 (/1/) $ 83,598,962
Receivables............. 109,628,832 (22,198,176)(/2/) 87,430,656
Securities owned, at
market value........... 89,158,495 (37,549,610) 51,608,885
Fixed and intangible
assets................. 33,731,883 (15,475,864) 18,256,019
Other assets............ 9,125,195 (7,550,024)(/3/) 1,575,171
------------ ------------ ------------
$243,619,906 $ (1,150,213) $242,469,693
============ ============ ============
LIABILITIES AND
STOCKHOLDERS' EQUITY
Liabilities:
Securities sold, not
yet purchased, at
market value.......... $ 39,358,930 $ (7,412,570) $ 31,946,360
Accounts payable and
accrued expenses, and
loans and secured
demand notes payable.. 50,987,403 (12,675,642)(/4/) 38,311,761
Income taxes payable... 2,913,112 15,418,016 (/5/) 18,331,128
Minority interest in
Equitrade............. 17,021,118 (17,021,118) --
------------ ------------ ------------
Total liabilities....... 110,280,563 (21,691,314) 88,589,249
Stockholders' equity:
Preferred stock--$.01
par value; authorized
1,000,000 shares; none
issued................ -- -- --
Common stock--$.01 par
value; authorized
50,000,000 shares;
issued 14,343,201
shares................ 143,432 -- 143,432
Additional paid-in
capital............... 65,522,767 -- 65,522,767
Retained earnings and
cumulative
comprehensive income.. 71,995,891 20,541,101 (/6/) 92,536,992
------------ ------------ ------------
137,662,090 20,541,101 158,203,191
Less: treasury stock--at
cost, 362,010 shares... (4,322,747) -- (4,322,747)
------------ ------------ ------------
Total stockholders'
equity................. 133,339,343 20,541,101 153,880,444
------------ ------------ ------------
$243,619,906 $ (1,150,213) $242,469,693
============ ============ ============
</TABLE>
- --------
(1) To record the cash received on the sale net of the elimination of
Equitrade's cash of approximately $740,000.
(2) To eliminate Equitrade's accounts and notes receivables of approximately
$21,300,000 and, pursuant to the terms of the sale agreement, to reflect
the repayment of principal and interest of approximately $930,000 for
NDBG's note receivable from an Equitrade minority interest owner.
(3) To eliminate Equitrade's NYSE memberships and other assets of approximately
$7,200,000 and, pursuant to the terms of the sale agreement, to reflect the
sale of NDBG's NYSE membership interest of approximately $351,000,
previously leased to Equitrade.
(4) To eliminate Equitrade's accounts payable and subordinated notes payable of
approximately $4,000,000 and, pursuant to the sale agreement, to reflect
the repayment by NDBG of principal and interest of approximately
$15,065,000 due on a loan payable to SLK, and record the bonus payable of
approximately $6,400,000 to NDBG's CEO for the gain on sale.
(5) To record the increase in income taxes payable on the gain on sale of
approximately $15,500,000, calculated using the statutory tax rate of 43%
net of the elimination of Equitrade's recorded tax liability.
(6) To record the gain on sale, net of income taxes.
P-2
<PAGE>
National Discount Brokers Group, Inc. and Subsidiaries
Pro Forma Condensed Consolidated Financial Statements
Statement of Income
<TABLE>
<CAPTION>
Year Ended May 31, 1996
------------------------------------------------------
Pro Forma
Condensed Condensed
Consolidated Consolidated
Statement of Income Adjustments(1) Statement of Income
------------------- -------------- -------------------
(Unaudited) (Unaudited)
<S> <C> <C> <C>
Revenues:
Firm securities
transactions--net..... $129,177,423 $ (6,486,203) $122,691,220
Commission income...... 30,723,379 -- 30,723,379
Floor brokerage
income................ 10,955,277 (10,955,277) --
Other revenues......... 8,254,108 65,930 8,320,038
------------ ------------ ------------
179,110,187 (17,375,550) 161,734,637
------------ ------------ ------------
Expenses:
Compensation and
benefits.............. 56,954,322 (5,014,411) 51,939,911
Clearing and related
charges............... 55,631,233 (1,606,993) 54,024,240
Other expenses......... 27,678,573 (1,221,248) 26,457,325
------------ ------------ ------------
140,264,128 (7,842,652) 132,421,476
------------ ------------ ------------
Income before minority
interest and
income taxes........... 38,846,059 (9,532,898) 29,313,161
Income of Equitrade
allocated to
minority partners...... (3,628,986) 3,628,986 --
------------ ------------ ------------
Income before income
taxes................. 35,217,073 (5,903,912) 29,313,161
Income taxes........... 15,263,076 (2,538,682) 12,724,394
------------ ------------ ------------
Net income from
continuing
operations............ $ 19,953,997 $ (3,365,230) $ 16,588,767
============ ============ ============
Net income per share--
continuing operations
Basic................. $ 1.57 $ 1.31
============ ============
Diluted............... $ 1.51 $ 1.26
============ ============
Weighted average shares
outstanding
Basic................. 12,699,428 12,699,428
============ ============
Diluted............... 13,201,412 13,201,412
============ ============
</TABLE>
- --------
(1) The pro forma condensed consolidated statement of income has been adjusted
to eliminate the income and expenses of Equitrade as well as the related
income tax at the statutory rate of 43%. An additional adjustment to reduce
NDBG's compensation and benefits expense of approximately $1,042,000 has
been made to reflect the reduction in the bonus to NDBG's CEO which would
have resulted if the net income of Equitrade were not included in the
consolidated results of NDBG. Income from continuing operations does not
reflect the gain recognized on sale of Equitrade.
P-3
<PAGE>
National Discount Brokers Group, Inc. and Subsidiaries
Pro Forma Condensed Consolidated Financial Statements
Statement of Income
<TABLE>
<CAPTION>
Year Ended May 31, 1997
-----------------------------------------
Pro Forma
Condensed Condensed
Consolidated Consolidated
Statement of Statement of
Income Adjustments(1) Income
------------ -------------- ------------
(Unaudited) (Unaudited)
<S> <C> <C> <C>
Revenues:
Firm securities transactions--net... $122,322,851 $(4,831,893) $117,490,958
Commission income................... 32,638,949 -- 32,638,949
Floor brokerage income.............. 14,198,251 (14,198,251) --
Other revenues...................... 11,175,164 (123,257) 11,051,907
------------ ----------- ------------
180,335,215 (19,153,401) 161,181,814
------------ ----------- ------------
Expenses:
Compensation and benefits........... 58,109,668 (5,222,481) 52,887,187
Clearing and related charges........ 57,282,285 (1,569,276) 55,713,009
Other expenses...................... 41,330,531 (1,395,616) 39,934,915
------------ ----------- ------------
156,722,484 (8,187,373) 148,535,111
------------ ----------- ------------
Income before minority interest and
income taxes....................... 23,612,731 (10,966,028) 12,646,703
Income of Equitrade allocated to
minority partners.................. (4,326,095) 4,326,095 --
------------ ----------- ------------
Income before income taxes.......... 19,286,636 (6,639,933) 12,646,703
Income taxes........................ 9,151,897 (2,855,171) 6,296,726
------------ ----------- ------------
Net income from continuing
operations......................... $ 10,134,739 $(3,784,762) $ 6,349,977
============ =========== ============
Net income per share--continuing
operations
Basic.............................. $ 0.79 $ 0.49
============ ============
Diluted............................ $ 0.79 $ 0.49
============ ============
Weighted average shares outstanding
Basic.............................. 12,890,926 12,890,926
============ ============
Diluted............................ 12,946,007 12,946,007
============ ============
</TABLE>
- --------
(1) The pro forma condensed consolidated statement of income has been adjusted
to eliminate the income and expenses of Equitrade as well as the related
income tax at the statutory rate of 43%. An additional adjustment to reduce
NDBG's compensation and benefits expense of approximately $1,172,000 has
been made to reflect the reduction in the bonus to NDBG's CEO which would
have resulted if the net income of Equitrade were not included in the
consolidated results of NDBG. Income from continuing operations does not
reflect the gain recognized on sale of Equitrade.
P-4
<PAGE>
National Discount Brokers Group, Inc. and Subsidiaries
Pro Forma Condensed Consolidated Financial Statements
Statement of Income
<TABLE>
<CAPTION>
Year Ended May 31, 1998
-------------------------------------------------
Condensed
Consolidated Pro Forma Condensed
Statement of Consolidated
Income Adjustments (1) Statement of Income
------------ --------------- -------------------
(Unaudited) (Unaudited)
<S> <C> <C> <C>
Revenues:
Firm securities
transactions--net.......... $ 99,776,365 $ (9,520,184) $ 90,256,181
Commission income........... 37,052,201 -- 37,052,201
Floor brokerage income...... 15,941,668 (15,941,668) --
Other revenues.............. 11,677,766 (174,204) 11,503,562
------------ ------------ ------------
164,448,000 (25,636,056) 138,811,944
------------ ------------ ------------
Expenses:
Compensation and benefits... 54,170,954 (7,673,811) 46,497,143
Clearing and related
charges.................... 49,765,223 (2,125,672) 47,639,551
Other expenses.............. 35,309,568 (2,373,689) 32,935,879
------------ ------------ ------------
139,245,745 (12,173,172) 127,072,573
------------ ------------ ------------
Income before minority
interest and income taxes.. 25,202,255 (13,462,884) 11,739,371
Income of Equitrade
allocated to minority
partners................... (5,766,440) 5,766,440 --
------------ ------------ ------------
Income before income taxes.. 19,435,815 (7,696,444) 11,739,371
Income taxes................ 9,358,242 (3,309,471) 6,048,771
------------ ------------ ------------
Net income from continuing
operations................. $ 10,077,573 $ (4,386,973) $ 5,690,600
============ ============ ============
Net income per share--contin-
uing operations
Basic...................... $ 0.75 $ 0.42
============ ============
Diluted.................... $ 0.75 $ 0.42
============ ============
Weighted average shares out-
standing
Basic...................... 13,432,726 13,432,726
============ ============
Diluted.................... 13,501,346 13,501,346
============ ============
</TABLE>
- --------
(1) The pro forma condensed consolidated statement of income has been adjusted
to eliminate the income and expenses of Equitrade as well as the related
income tax at the statutory rate of 43%. An additional adjustment to reduce
NDBG's compensation and benefits expense of approximately $1,358,000 has
been made to reflect the reduction in the bonus to NDBG's CEO which would
have resulted if the net income of Equitrade were not included in the
consolidated results of NDBG. Income from continuing operations does not
reflect the gain recognized on sale of Equitrade.
P-5
<PAGE>
National Discount Brokers Group, Inc. and Subsidiaries
Pro Forma Condensed Consolidated Financial Statements
Statement of Income
<TABLE>
<CAPTION>
Nine months ended February 28, 1998
-----------------------------------------
Pro forma
Condensed Condensed
Consolidated Consolidated
Statement of Statement of
Income Adjustments(1) Income
------------ -------------- ------------
(Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C>
Revenues:
Firm securities transactions--net... $ 72,526,721 $ (7,042,028) $ 65,484,693
Commission income................... 27,358,479 -- 27,358,479
Floor brokerage income.............. 12,073,144 (12,073,144) --
Other revenues...................... 8,687,541 (206,189) 8,481,352
------------ ------------ ------------
120,645,885 (19,321,361) 101,324,524
------------ ------------ ------------
Expenses:
Compensation and benefits........... 39,357,852 (5,663,633) 33,694,219
Clearing and related charges........ 38,738,646 (1,582,880) 37,155,766
Other expenses...................... 25,045,058 (1,711,213) 23,333,845
------------ ------------ ------------
103,141,556 (8,957,726) 94,183,830
------------ ------------ ------------
Income before minority interest and
income taxes....................... 17,504,329 (10,363,635) 7,140,694
(Income) loss of Equitrade allocated
to minority partners............... (4,512,453) 4,512,453 --
------------ ------------ ------------
Income before income taxes.......... 12,991,876 (5,851,182) 7,140,694
Income taxes........................ 5,858,172 (2,516,008) 3,342,164
------------ ------------ ------------
Net income from continuing
operations......................... $ 7,133,704 $ (3,335,174) $ 3,798,530
============ ============ ============
Net income per share--continuing
operations
Basic.............................. $ 0.54 $ 0.29
============ ============
Diluted............................ $ 0.54 $ 0.29
============ ============
Weighted average shares outstanding
Basic.............................. 13,168,693 13,168,693
============ ============
Diluted............................ 13,254,140 13,254,140
============ ============
</TABLE>
- --------
(1) The pro forma condensed consolidated statement of income has been adjusted
to eliminate the income and expenses of Equitrade as well as the related
income tax at the statutory rate of 43%. An additional adjustment to reduce
NDBG's compensation and benefits expense of approximately $1,033,000 has
been made to reflect the reduction in the bonus to NDBG's CEO which would
have resulted if the net income of Equitrade were not included in the
consolidated results of NDBG. Income from continuing operations does not
reflect the gain recognized on sale of Equitrade.
P-6
<PAGE>
National Discount Brokers Group, Inc. and Subsidiaries
Pro Forma Condensed Consolidated Financial Statements
Statement of Income
<TABLE>
<CAPTION>
Nine Months Ended February 28, 1999
-----------------------------------------
Condensed Pro Forma
Consolidated Condensed
Statement of Consolidated
Income Statement of
as Reported Adjustments(1) Income
------------ -------------- ------------
(Unaudited) (Unaudited)
<S> <C> <C> <C>
Revenues:
Firm securities transactions--net... $ 96,087,492 $ 1,605,348 $ 97,692,840
Commission income................... 30,992,390 -- 30,992,390
Floor brokerage income.............. 13,226,000 (13,226,000) --
Other revenues...................... 11,954,874 358,709 12,313,583
------------ ------------ ------------
152,260,756 (11,261,943) 140,998,813
------------ ------------ ------------
Expenses:
Compensation and benefits........... 57,729,844 (4,990,621) 52,739,223
Clearing and related charges........ 36,185,916 (1,977,049) 34,208,867
Other expenses...................... 34,465,136 (1,930,193) 32,534,943
------------ ------------ ------------
128,380,896 (8,897,863) 119,483,033
------------ ------------ ------------
Income before minority interest and
income taxes....................... 23,879,860 (2,364,080) 21,515,780
(Income) loss of Equitrade allocated
to
minority partners.................. (122,574) 122,574 --
------------ ------------ ------------
Income before income taxes.......... 23,757,286 (2,241,506) 21,515,780
Income taxes........................ 11,037,547 (963,848) 10,073,699
------------ ------------ ------------
Net income from continuing opera-
tions.............................. $ 12,719,739 $ (1,277,658) $ 11,442,081
============ ============ ============
Net income per share--continuing op-
erations:
Basic.............................. $ 0.91 $ 0.82
============ ============
Diluted............................ $ 0.90 $ 0.81
============ ============
Weighted average shares outstanding:
Basic.............................. 14,028,253 14,028,253
============ ============
Diluted............................ 14,101,184 14,101,184
============ ============
</TABLE>
- --------
(1) The pro forma condensed consolidated statement of income has been adjusted
to eliminate the income and expenses of Equitrade as well as the related
income tax at the statutory rate of 43%. An additional adjustment to reduce
NDBG's compensation and benefits expense of approximately $396,000 has been
made to reflect the reduction in the bonus to NDBG's CEO which would have
resulted if the net income of Equitrade were not included in the
consolidated results of NDBG. Income from continuing operations does not
reflect the gain recognized on sale of Equitrade.
P-7
<PAGE>
Report of Independent Accountants
To the Board of Directors and Stockholders of
National Discount Brokers Group, Inc.
In our opinion, the accompanying consolidated statement of financial condition
as of February 28, 1999 and the related consolidated statements of income and
comprehensive income, changes in stockholders' equity and cash flows present
fairly, in all material respects, the financial position of National Discount
Brokers Group, Inc. and its subsidiaries (the "Company") at February 28, 1999,
and the results of their operations and their cash flows for the nine months
then ended, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements 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
New York, New York
May 7, 1999
F-1
<PAGE>
Report of Independent Accountants
The Board of Directors and Stockholders of
National Discount Brokers Group, Inc.:
We have audited the accompanying consolidated statements of financial condition
of National Discount Brokers Group, Inc. and subsidiaries as of May 31, 1998
and 1997, and the related consolidated statements of income and comprehensive
income, changes in stockholders' equity and cash flows for each of the years in
the three-year period ended May 31, 1998 and the related financial statement
schedule. These consolidated financial statements and related financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of National Discount
Brokers Group, Inc. and subsidiaries as of May 31, 1998 and 1997, and the
results of their operations and their cash flows for each of the years in the
three-year period ended May 31, 1998, in conformity with generally accepted
accounting principles. Also in our opinion, the related financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
KPMG LLP
July 15, 1998
F-2
<PAGE>
National Discount Brokers Group, Inc. and Subsidiaries
Consolidated Statements of Financial Condition
Assets
<TABLE>
<CAPTION>
May 31,
------------------------- February 28,
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
Cash................................... $ 3,033,818 $ 1,039,121 $ 1,975,501
Funds segregated for customers......... 29,203 -- --
Receivables:
Brokers and dealers.................. 58,047,183 67,742,508 103,862,826
Other................................ 599,725 727,099 1,167,352
Securities owned, at market value (note
3).................................... 45,696,436 67,969,111 80,854,888
Securities available-for-sale, at fair
value................................. -- 2,615,000 100,000
Securities not readily marketable, at
fair value............................ 501,320 1,001,320 501,320
Investment in partnerships............. 12,984 -- --
Loans and notes receivable (note 10)... 830,589 760,409 1,098,654
Furniture, fixtures, equipment and
leasehold improvements, at cost, net
of accumulated depreciation and
amortization (note 5)................. 20,263,511 18,011,262 14,945,704
Computer software, at cost, net of
accumulated amortization of $929,942,
$1,388,843 and $2,904,399,
respectively.......................... 1,853,693 2,683,635 3,602,039
Intangible assets, net of accumulated
amortization of $535,853, $1,275,041
and $1,674,224, respectively.......... 6,727,958 5,988,770 15,184,140
Exchange memberships (market value of
$7,957,750, $9,243,500 and
$11,467,500, respectively)............ 7,416,496 7,416,496 7,416,496
Secured demand notes receivable (note
8).................................... 3,000,000 3,500,000 3,500,000
U.S. Treasury obligations, at market... 7,815,254 7,667,463 7,702,287
Deferred tax asset (note 7)............ 2,220,472 282,886 707,501
Other assets........................... 2,112,083 1,068,534 1,001,198
------------ ------------ ------------
Total assets....................... $160,160,725 $188,473,614 $243,619,906
============ ============ ============
</TABLE>
F-3
<PAGE>
National Discount Brokers Group, Inc. and Subsidiaries
Consolidated Statements of Financial Condition--(Continued)
Liabilities and Stockholders' Equity
<TABLE>
<CAPTION>
May 31,
-------------------------- February 28,
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
Liabilities:
Securities sold, not yet purchased,
at market value (note 3)........... $ 25,129,290 $ 28,687,486 $ 39,358,930
Accounts payable and accrued
expenses, including compensation
payable to officers and employees
of $11,831,551, $11,216,667 and
$18,372,603, respectively (note
14)................................ 31,734,213 20,203,279 32,487,403
Loan payable........................ -- -- 15,000,000
Subordinated notes payable (note
8)................................. 3,000,000 3,500,000 3,500,000
Income taxes payable (note 7)....... 302,501 2,444,460 2,913,112
Minority interest in Equitrade...... 7,720,236 9,465,741 17,021,118
------------ ------------ ------------
Total liabilities.................. 67,886,240 64,300,966 110,280,563
------------ ------------ ------------
Commitments and contingencies (notes
14 and 16)
Stockholders' equity (notes 9 and 13)
Preferred stock--$.01 par value;
1,000,000 shares authorized, none
issued............................. -- -- --
Class A common stock--$.01 par
value,
50,000,000 shares authorized at May
31, 1997,
none authorized at May 31, 1998 and
February 28, 1999, none issued..... -- -- --
Common stock--$.01 par value;
50,000,000 shares authorized,
14,343,201 shares issued........... 143,432 143,432 143,432
Additional paid-in capital.......... 57,189,985 65,050,817 65,522,767
Accumulated comprehensive income,
unrealized gain on securities
available-for-sale, net of
income taxes, as restated (Note
2)................................. -- 1,359,800 100,000
Retained earnings................... 47,215,833 59,176,152 71,895,891
------------ ------------ ------------
104,549,250 125,730,201 137,662,090
Less: treasury stock, at cost,
1,648,536 shares, 162,924 shares
and 362,010 shares, respectively... (12,274,765) (1,557,553) (4,322,747)
------------ ------------ ------------
Total stockholders' equity......... 92,274,485 124,172,648 133,339,343
------------ ------------ ------------
Total liabilities and stockholders'
equity............................ $160,160,725 $188,473,614 $243,619,906
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
National Discount Brokers Group, Inc. and Subsidiaries
Consolidated Statements of Income and Comprehensive Income
<TABLE>
<CAPTION>
Nine Months
Ended
Years Ended May 31, February 28,
--------------------------------------- ------------------------
1996 1997 1998 1998 1999
------------ ------------ ----------- ----------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C>
Revenue:
Firm securities
transactions, net........ $129,177,423 $122,322,851 $99,776,365 $72,526,721 $96,087,492
Commission income......... 30,723,379 32,638,949 37,052,201 27,358,479 30,992,390
Floor brokerage income.... 10,955,277 14,198,251 15,941,668 12,073,144 13,226,000
Equity income (loss) in
partnerships............. 40,106 (26,176) 1,299 500 --
Realized gain on
securities, net of write-
off...................... -- -- 63,625 63,625 1,753,550
Interest and dividends.... 5,907,779 7,774,806 7,773,383 5,728,192 6,671,042
Fee income................ 1,353,686 2,513,483 3,567,837 2,644,885 3,042,604
Other..................... 952,537 913,051 271,622 250,339 487,678
------------ ------------ ----------- ----------- -----------
Total revenues............ 179,110,187 180,335,215 164,448,000 120,645,885 152,260,756
------------ ------------ ----------- ----------- -----------
Expenses:
Compensation and benefits
(notes 9, 11 and 14)... 56,954,322 58,109,668 54,170,954 39,357,852 57,729,844
Clearing and related
brokerage charges........ 55,631,233 57,282,285 49,765,223 38,738,646 36,185,916
Communications............ 10,767,515 11,159,958 10,194,681 7,795,447 8,368,028
Depreciation and
amortization............. 3,988,767 4,550,796 7,180,689 5,382,613 6,761,554
Advertising costs......... 1,724,117 2,801,700 2,945,195 1,313,316 4,543,791
Occupancy costs and
equipment rental (note
14)...................... 3,165,851 2,681,439 2,589,282 1,810,859 2,442,216
Professional fees......... 2,243,338 3,533,937 1,579,552 1,910,832 4,729,448
Travel and entertainment.. 1,502,228 1,858,191 1,811,812 1,294,399 1,689,689
Repairs and maintenance... 553,521 954,072 2,012,389 1,532,558 1,740,812
Interest.................. 320,812 429,378 798,949 595,806 511,717
Litigation settlement
(note 16)................... -- 9,187,500 -- -- --
Other..................... 3,412,424 4,173,560 6,197,019 3,409,228 3,677,881
------------ ------------ ----------- ----------- -----------
Total expenses............ 140,264,128 156,722,484 139,245,745 103,141,556 128,380,896
------------ ------------ ----------- ----------- -----------
Income before minority
interest and income
taxes..................... 38,846,059 23,612,731 25,202,255 17,504,329 23,879,860
Income of Equitrade
allocated to minority
partners.................. (3,628,986) (4,326,095) (5,766,440) (4,512,453) (122,574)
------------ ------------ ----------- ----------- -----------
Income from continuing
operations before
income taxes.............. 35,217,073 19,286,636 19,435,815 12,991,876 23,757,286
Income taxes (note 7)...... 15,263,076 9,151,897 9,358,242 5,858,172 11,037,547
------------ ------------ ----------- ----------- -----------
Net income from continuing
operations................ 19,953,997 10,134,739 10,077,573 7,133,704 12,719,739
------------ ------------ ----------- ----------- -----------
Discontinued operations
(notes 7 and 12)..........
Income (loss) from
discontinued operations,
net of income taxes....... 177,931 (855,046) (821,339) (821,339) --
Gain on sale of
discontinued operations,
net of income taxes....... -- -- 2,704,085 2,704,085 --
------------ ------------ ----------- ----------- -----------
177,931 (855,046) 1,882,746 1,882,746 --
------------ ------------ ----------- ----------- -----------
Net income................ 20,131,928 9,279,693 11,960,319 9,016,450 12,719,739
------------ ------------ ----------- ----------- -----------
</TABLE>
F-5
<PAGE>
National Discount Brokers Group, Inc. and Subsidiaries
Consolidated Statements of Income and Comprehensive Income--(Continued)
<TABLE>
<CAPTION>
Nine Months
Ended
Years Ended May 31, February 28,
----------------------------------- ------------------------
1996 1997 1998 1998 1999
----------- ---------- ----------- ----------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C> <C>
Other comprehensive
income (loss), before
tax:
Unrealized gain (loss)
on securities
available-for-sale:
Unrealized holding
gains (losses)
arising during
period............... -- -- 2,615,000 2,427,600 (159,446)
Less: reclassification
adjustment for gains
included in net
income............... -- -- -- -- (2,173,517)
----------- ---------- ----------- ----------- -----------
Other comprehensive
income (loss), before
tax.................... -- -- 2,615,000 2,427,600 (2,332,963)
Income tax expense
(benefit) related to
items of other
comprehensive income
(loss)................. -- -- 1,255,200 1,116,696 (1,073,163)
----------- ---------- ----------- ----------- -----------
Other comprehensive
income (loss), net..... -- -- 1,359,800 1,310,904 (1,259,800)
----------- ---------- ----------- ----------- -----------
Comprehensive
income............. $20,131,928 $9,279,693 $13,320,119 $10,327,354 $11,459,939
=========== ========== =========== =========== ===========
Net income per common
and potential common
share:
Basic:
Net income from
continuing
operations........... $ 1.57 $ .79 $ .75 $ .54 $ .91
Income (loss) from
discontinued
operations, net of
income taxes......... .02 (.07) (.06) (.06) --
Gain on sale of
discontinued
operations, net of
income taxes......... -- -- .20 .20 --
----------- ---------- ----------- ----------- -----------
Net income.......... $ 1.59 $ .72 $ .89 $ .68 $ .91
=========== ========== =========== =========== ===========
Weighted average common
shares outstanding..... 12,699,428 12,890,926 13,432,726 13,168,693 14,028,253
=========== ========== =========== =========== ===========
Diluted:
Net income from
continuing
operations............ $ 1.51 $ .79 $ .75 $ .54 $ .90
Income (loss) from
discontinued
operations, net of
income taxes.......... .01 (.07) (.06) (.06) --
Gain on sale of
discontinued
operations, net of
income taxes.......... -- -- .20 .20 --
----------- ---------- ----------- ----------- -----------
Net income.......... $ 1.52 $ .72 $ .89 $ .68 $ .90
=========== ========== =========== =========== ===========
Weighted average common
shares outstanding..... 13,201,412 12,946,007 13,501,346 13,254,140 14,101,184
=========== ========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
National Discount Brokers Group, Inc. and Subsidiaries
Consolidated Statements of Changes in Stockholders' Equity
<TABLE>
<CAPTION>
Common Stock Treasury Stock
------------------- ------------------------
Accumulated
Additional Other
Paid-in Comprehensive Retained
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, net of
income taxes, as
restated.............. -- -- -- 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............. -- -- -- -- 12,719,739 -- -- 12,719,739
Reversal of
unrealized gain for
investments sold...... -- -- -- (1,259,800) -- -- -- (1,259,800)
Acquisition of treasury
stock................. -- -- -- -- -- (244,822) (3,231,647) (3,231,647)
Issuance of treasury
stock upon exercise of
options............... -- -- 471,950 -- -- 45,736 466,453 938,403
---------- -------- ----------- ----------- ----------- ---------- ------------ ------------
Balance at
February 28, 1999..... 14,343,201 $143,432 $65,522,767 $ 100,000 $71,895,891 (362,010) $ (4,322,747) $133,339,343
========== ======== =========== =========== =========== ========== ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
National Discount Brokers Group, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Nine Months Ended
Years Ended May 31, February 28,
--------------------------------------- --------------------------
1998
1996 1997 1998 (unaudited) 1999
------------ ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net income from
continuing operations.. $ 19,953,997 $10,134,739 $ 10,077,573 $ 7,133,704 $ 12,719,739
Net income (loss) from
discontinued
operations............. 177,931 (855,046) (821,339) (821,339) --
Non-cash items included
in net income:
Equity (income) loss in
partnerships........... (40,106) 26,176 (1,299) (500) --
Depreciation and
amortization........... 4,079,015 4,891,324 7,797,133 5,999,057 6,761,554
Gain on sale of
investment securities
available-for-sale..... -- -- -- -- (2,173,517)
(Gain) loss on
sale/write-off of
investment securities
not readily
marketable............. -- -- (63,625) (63,625) 419,967
Income of Equitrade
allocated to minority
partners............... 3,628,986 4,326,095 5,766,440 4,512,453 122,574
Provision for deferred
taxes.................. -- (2,220,472) 1,937,586 132,104 (424,615)
Provision for loss on
notes receivable....... -- -- -- -- 102,865
Loss on sale of
subsidiary............. -- 123,006 -- -- --
Tax benefit related to
employee compensation
arrangements........... 4,490,000 -- -- -- --
(Increase) decrease in
operating assets:
Funds segregated for
customers.............. -- (29,203) 29,203 29,203 --
Receivables:
Brokers and dealers.... (30,825,770) 23,344,762 (9,695,325) (20,726,461) (36,120,318)
Other.................. (265,818) (78,693) (266,289) (593,904) (440,253)
Securities owned........ 9,595,915 (9,733,796) (22,272,675) (15,282,714) (8,934,558)
U.S. Treasury
obligations............ 89,337 (32,740) 147,791 236,555 (34,824)
Other assets............ 138,418 (457,385) 900,905 353,899 72,335
Increase (decrease) in
operating liabilities:
Securities sold, not
yet purchased......... (5,797,653) 4,790,211 3,558,196 13,786,653 9,322,287
Accounts payable and
accrued expenses...... 7,138,010 6,814,638 (12,786,419) (9,400,957) 12,284,124
Income taxes payable... 3,972,470 (4,987,878) (322,518) 1,340,889 2,055,277
------------ ----------- ------------ ------------ ------------
Net cash (used in)
provided by operating
activities........... 16,334,732 36,055,738 (16,014,662) (13,364,983) (4,267,363)
------------ ----------- ------------ ------------ ------------
</TABLE>
F-8
<PAGE>
National Discount Brokers Group, Inc. and Subsidiaries
Consolidated Statements of Cash Flows--(Continued)
<TABLE>
<CAPTION>
Nine Months Ended
Years Ended May 31, February 28,
--------------------------------------- ------------------------
1996 1997 1998 1998 1999
------------ ------------ ----------- ----------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from
investing activities:
Proceeds from sales of
securities available-
for-sale.............. -- -- -- -- 2,173,517
Proceeds from sales of
securities not readily
marketable............ -- -- 63,625 63,625 80,033
Payment for purchase of
securities not readily
marketable............ -- (100,000) (500,000) (333,000) --
Loans made and notes
issued to employees
and officers.......... (1,738,840) (237,652) (60,000) (60,000) (906,000)
Principal collected on
notes receivable...... 1,683,617 104,321 233,124 69,975 464,890
Purchases of furniture,
fixtures, equipment
and leasehold
improvements.......... (12,556,959) (11,429,602) (4,949,659) (3,533,424) (1,573,104)
Purchases of computer
software.............. (537,136) (1,413,233) (1,842,745) (1,572,373) (2,453,332)
Acquisition of
intangible assets..... -- (4,316,804) -- -- (450,000)
Sale (purchase) of
subsidiaries (net of
cash, intangibles and
exchange memberships
acquired)............. -- (6,311,493) 6,600,000 -- --
Purchase of exchange
memberships........... -- (6,250,000) -- -- --
Issuance of
subordinated notes
receivable............ -- (500,000) -- -- (3,500,000)
Principal collected on
subordinated notes
receivable............ -- 500,000 -- -- 897,938
Other.................. 31,000 5,150 (38,917) (38,603) (5,000)
------------ ------------ ----------- ----------- -----------
Net cash used in
investing
activities.......... (13,118,318) (29,949,313) (494,572) (5,403,800) (5,271,058)
------------ ------------ ----------- ----------- -----------
Cash flows from
financing activities:
Proceeds from loan
payable............... -- -- -- -- 15,000,000
Sale of treasury
stock................. -- -- 19,267,500 19,267,500 --
Purchase of treasury
stock................. (2,061,876) (3,569,937) (614,281) (49,760) (3,231,647)
Proceeds from exercise
of options............ 635,000 -- -- -- 606,978
Capital contribution by
minority interest..... 29,575 185,658 275,086 275,086 362,527
Capital withdrawals by
minority interest..... (1,942,273) (1,849,025) (4,296,021) (2,540,302) (2,263,057)
------------ ------------ ----------- ----------- -----------
Net cash provided by
(used in) financing
activities.......... (3,339,574) (5,233,304) 14,632,284 16,952,524 10,474,801
------------ ------------ ----------- ----------- -----------
Net increase
(decrease) in cash.. (123,160) 873,121 (1,876,950) (1,816,259) 936,380
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) (117,747) --
Cash at beginning of
period.............. 593,473 470,313 3,033,818 3,033,818 1,039,121
------------ ------------ ----------- ----------- -----------
Cash at end of
period.............. $ 470,313 $ 3,033,818 $ 1,039,121 $ 1,099,812 $ 1,975,501
============ ============ =========== =========== ===========
</TABLE>
F-9
<PAGE>
National Discount Brokers Group, Inc. and Subsidiaries
Consolidated Statements of Cash Flows--(Continued)
Supplemental disclosures of cash flow information:
Income tax payments totaled $6,948,770, $15,946,000 and $7,510,410 during the
years ended May 31, 1996, 1997 and 1998, respectively, and $4,160,918
(unaudited) and $9,390,422 during the nine months ended February 28, 1998 and
1999, respectively.
Interest payments totaled $890,495, $658,276 and $1,129,763 for the years
ended May 31, 1996, 1997 and 1998, respectively, and $906,930 (unaudited) and
$1,111,496 during the nine months ended February 28, 1998 and 1999,
respectively.
Supplemental disclosures of non-cash investing and financing activities:
During the period from November 1995 through February 1996, certain
executives of the Company exercised an aggregate of 670,000 options for the
purchase of 670,000 shares of the Company's common stock with an exercise price
of $1 per share and 66,000 options for the purchase of 66,000 shares with an
exercise price of $3.625 per share. In order to pay for the exercise price and
to fund the personal income taxes of $2,602,997 on the gain related to the
transaction, the executives remitted to the Company 394,697 shares of the
Company's common stock with a market value of $3,487,247.
As a result of the sale of its subsidiary, Stock Market Index, Inc., during
December 1996, the Company wrote off the remaining book value of certain
computer software and intangible assets aggregating $255,193. In addition, as
part of the sale, the Company received a note in the face amount of $132,187
from the buyer, resulting in a net loss of $123,006.
On January 24, 1997, the Company acquired, from its joint venture partner at
that time, the remaining 51% of Anvil Institutional Services Company (the
"Anvil Joint Venture") that it did not previously own. The Company, therefore,
became the 100% owner of Anvil Institutional Services Inc. ("Anvil"), a broker-
dealer previously owned by the Anvil Joint Venture. Accordingly, the assets,
liabilities and stockholder's equity of Anvil were consolidated with those of
the Company as of the acquisition date. The increases or decreases in operating
assets and liabilities reflected in the consolidated statement of cash flows
for the year ended May 31, 1997 exclude amounts for the assets and liabilities
of Anvil which were assumed as part of the acquisition.
During February 1997, an executive of the Company exercised an aggregate of
94,027 options for the purchase of 94,027 shares of the Company's common stock
with exercise prices ranging from $7.9375 per share to $9.1875 per share. In
order to pay for the exercise price of $838,324 and to reimburse the Company
for the personal income taxes of $54,569 on the gain related to the
transaction, the executive remitted to the Company 88,187 shares of the
Company's common stock with a market value of $892,893. In connection with the
exercise of these options, the Company estimated an income tax benefit of
$49,743.
On May 2, 1997, the Company acquired 100% of the common stock of Dresdner-NY
Incorporated, subsequently renamed SHD Corporation ("SHD"). Accordingly, the
assets, liabilities and stockholder's equity of SHD have been consolidated with
those of the Company as of the acquisition date. The increases or decreases in
operating assets and liabilities reflected in the consolidated statement of
cash flows for the year ended May 31, 1997 exclude amounts for the assets and
liabilities of SHD which were assumed as part of the acquisition.
During September 1997, the Company sold all of the stock of Anvil and
received a note in the amount of $102,945 which was subsequently repaid in
January 1999.
F-10
<PAGE>
National Discount Brokers Group, Inc. and Subsidiaries
Consolidated Statements of Cash Flows--(Continued)
During October 1997 and December 1997, certain executives of the Company
exercised an aggregate of 294,758 options for the purchase of 294,758 shares of
the Company's common stock with exercise prices ranging from $7.9375 per share
to $10.125 per share. In order to pay for the exercise price of $2,701,705 and
to reimburse the Company for the personal income taxes of $441,389 on the gain
related to the transaction, the executives remitted to the Company 255,450
shares of the Company's common stock with a market value of $3,143,094. In
connection with the exercise of these options, the Company estimated an income
tax benefit of $366,215.
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, the Company sold the remaining net assets of its
subsidiary, MXNet, Inc., and received a promissory note for $6,600,000 with
interest accrued at 6% from the date of sale. The note was repaid in full in
April 1998.
During February 1998 and May 1998, certain available-for-sale securities
appreciated due to the entity's successful initial public offering. As such,
the Company has reflected these securities at fair market value on the
consolidated statements of financial condition. The cumulative unrealized gains
of $1,262,352 and $1,359,800 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 cumulative income
taxes of $1,165,248 and $1,255,200, respectively.
Between July 1998 and December 1998, Equitrade Partners L.L.C. ("Equitrade")
(prior to December 1, 1998, Equitrade Partners, L.P.) loaned RSF Partners L.P.
("RSF") an aggregate of $3,500,000 under nine subordinated notes receivable
agreements each with interest payable at 8% per annum and a one-year term.
Effective January 1, 1999, Equitrade acquired the trading rights to equity
securities in which RSF specialized on The New York Stock Exchange. Equitrade
issued a 13% membership interest in exchange for these trading rights which
were valued at $9,333,333. Concurrent with this acquisition, Equitrade received
from RSF $2,602,062 in net market value of securities ($3,951,219 in securities
owned less $1,349,157 in securities sold, not yet purchased) and $897,938 in
cash, which was applied against the outstanding balance of the subordinated
notes receivable.
Between December 1998 and February 1999, various employees of the Company
exercised an aggregate of 45,736 options for the purchase of 45,736 shares of
the Company'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, the
Company estimated an income tax benefit of $331,425, which has been used to
reduce the Company's current liability for income taxes.
See accompanying notes to consolidated financial statements.
F-11
<PAGE>
National Discount Brokers Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
1. Organization and Business
National Discount Brokers Group, Inc. ("NDBG") and its subsidiaries
(collectively, the "Company") are engaged in the retail discount brokerage
(primarily online), market making and specialist businesses. NDBG'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"). NDBG's 46.845% owned consolidated subsidiary, Equitrade Partners,
L.L.C. ("Equitrade"), is also registered as a broker-dealer with the SEC and is
a member firm of The New York Stock Exchange, Inc. ("NYSE").
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.
Equitrade operates as a specialist in equity securities on the NYSE. As a
specialist on the NYSE, Equitrade maintains a fair and orderly market in one or
more equity securities. As a member firm, Equitrade executes orders on the
floor of the exchange for clients and receives floor brokerage income for such
services.
As of December 31, 1998, RSF Partners, L.P. ("RSF") and Equitrade, together
with the general partners of RSF, entered into a Contribution Agreement.
Pursuant to the Contribution Agreement, RSF contributed its specialist rights
to Equitrade in exchange for a 13% membership interest in Equitrade. The
Company's membership interest in Equitrade after the transaction with RSF is
46.845%. As a result of this transaction, 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 NDBG. NDBG obtained
the funds by borrowing $15,000,000 from Spear, Leeds & Kellogg, L.P. ("SLK")
with the balance provided by internally generated funds of the Company. In
addition, Equitrade received the inventory of securities of RSF, with a fair
market value of approximately $2,600,000, to satisfy a portion of the
$3,500,000 in subordinated notes receivable from RSF. RSF repaid the remaining
balance of approximately $900,000 by a cash transfer to Equitrade.
Concurrent with the RSF transaction, the allocation of profits of Equitrade
was changed so that 100% of First Tier Profits, as defined in the Operating
Agreement ($1,129,600 for calendar year 1999), or the pro rata part thereof if
less than a period of twelve months, is allocated to NDBG. Net profits in
excess of the First Tier Profits and losses, are generally allocated 41.845% to
NDBG and 5% to SHD Corporation ("SHD"), a wholly owned subsidiary of NDBG.
Effective December 1, 1998, Equitrade Partners, L.P. ("Old Equitrade") was
converted to a limited liability company, Equitrade L.L.C. Upon conversion, the
allocation of profits was changed so that the first $800,000 of net profits, or
the pro rata part thereof if less than a period of twelve months, was allocated
100% to NDBG. Net profit in excess of $800,000 or losses, or the pro rata part
thereof if less than a period of twelve months, was generally allocated 48.845%
to NDBG and 5% to SHD.
F-12
<PAGE>
National Discount Brokers Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements--(Continued)
On May 2, 1997, the Company acquired a further limited partnership interest
in Old Equitrade when it contributed to Old Equitrade the net assets, except
cash, of SHD.
In accordance with the terms of the amended and restated partnership
agreement dated May 2, 1997, except for certain specialist positions, the net
profits and losses of Old Equitrade were allocated to its partners prior to the
amortization of restrictive covenants and other partnership intangibles. The
first $800,000 of net profits, or the pro rata part thereof if less than a
period of twelve months, were allocated 100% to NDBG. Net profits in excess of
$800,000 or losses, or the pro rata part thereof if less than a period of
twelve months after adjustment for certain specialists positions, were
allocated 60% to NDBG. For certain specialist positions of Old Equitrade, NDBG
was entitled to 30% of the net profits and net losses and 38.4% of the net
profits and net losses of the specialist activities of SHD which were
contributed to Old Equitrade.
On January 24, 1997, the Company 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. The Company, therefore,
became the 100% owner of Anvil Institutional Services Inc. ("Anvil"), a broker-
dealer previously owned by the Anvil Joint Venture.
On September 5, 1997, the Company sold all of the stock of Anvil for
$217,000, which approximated book value.
On February 13, 1998, MXNet, Inc. ("MXNet"), another wholly owned subsidiary
of NDBG, was sold. In addition, on February 27, 1998, Sherwood Securities sold
its American Stock Exchange ("AMEX") specialist business. See "Note 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 the Company and
its subsidiaries. All significant intercompany balances and transactions have
been eliminated in consolidation. The Company consolidates its 46.845% owned
subsidiary, Equitrade, as the Company exercises significant influence over
Equitrade's operations. The Company accounts for a 15% owned investee on the
cost method.
Firm securities transactions (trading gains, net of trading losses),
commission income (including order flow rebates), floor brokerage 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 distribution assistance fees and short stock rebates.
Fee income is recorded as earned.
F-13
<PAGE>
National Discount Brokers Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements--(Continued)
Receivable from clearing brokers comprises cash in proprietary accounts, cash
on deposit with the Company's clearing brokers and commissions and floor
brokerage receivable.
Securities owned and securities sold, not yet purchased, are generally
carried at the last "bid" and "ask" prices as quoted by Sherwood Securities,
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 NDBG, are stated at fair value with
unrealized gains and losses included as a separate component of stockholders'
equity. Securities not readily marketable are primarily composed of a cost
method investment.
Furniture, fixtures and equipment are depreciated using the straight-line
method over their estimated useful lives of three to five years. Leasehold
improvements are amortized using the straight-line method over the terms of the
leases or the useful lives of the improvements, whichever is less.
Computer software is amortized using the straight-line method over its
estimated useful life of three years.
Intangible assets consist of acquired rights to specialize in securities,
goodwill and covenants not-to-compete. These assets are carried at cost and are
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 settled. The effect on deferred taxes for a change
in tax rates is recognized in income in the period that includes the enactment
date.
Statement of Financial Accounting Standards No. 123 "Accounting for Stock-
Based Compensation" ("SFAS 123") amends the current standard used to calculate
compensation expense in regard to stock-based compensation, Accounting
Principles Board Opinion No. 25 ("APB 25"). Under APB 25, compensation expense
would be recorded on the date of an option grant only if the current market
price of the underlying stock exceeded the exercise price. SFAS 123 permits an
entity to recognize as compensation expense over the vesting period the fair
value of all stock-based awards on the date of grant. Alternatively, SFAS 123
also allows entities to continue to apply the provisions of APB 25 and provide
pro forma net income and pro forma earnings per share disclosures for employee
stock option grants made in 1995 and future years as if the fair-value-based
method defined in SFAS 123 had been applied. The Company has elected to
continue to apply the provisions of APB 25 and provide the pro forma
disclosures required by SFAS 123.
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 includes stock issuable under stock options. The treasury stock method of
accounting 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.
F-14
<PAGE>
National Discount Brokers Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements--(Continued)
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("SFAS 130"), effective for periods beginning after December 15, 1997,
requires that an enterprise (a) classify items of other comprehensive income by
their nature in a financial statement and (b) display the accumulated balance
of other comprehensive income separately from retained earnings and additional
paid-in capital in the equity section of the statement of financial condition.
SFAS 130 has been implemented by the Company for the nine months ended February
28, 1999.
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 establishes 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
supercedes Statement of Financial Accounting Standards No. 14, "Financial
Reporting of Segments for a Business Enterprise". The Company will adopt SFAS
131 as of May 31, 1999. This standard is limited to issues of reporting and
presentation and does not address recognition or measurement. Its adoption,
therefore, will not have an effect on the Company's earnings, liquidity or
capital resources.
Under the provisions of SFAS 131, the Company expects to have three
reportable segments: discount brokerage, market-making and specialist
activities. 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 money market 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 revenues from the spread between the price paid when a
security is bought and the price received when the security is sold. Equitrade,
the Company's NYSE specialist, primarily derives its revenues in the form of
floor brokerage income. The income and expense from this activity will comprise
the specialist segment.
The accounting policies of the segments will be the same as those described
in Note 2. The Company will evaluate the performance of its segments based on
profit or loss from operations before income taxes. Information on segment
assets will not be disclosed because it will not be used for evaluating segment
performance and deciding how to allocate resources to segments. Intersegment
revenues and expenses will be eliminated between segments.
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
February 28, 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
adjustment had no impact on net income for the year ended May 31, 1998 and had
the impact of reducing stockholders' equity and increasing income taxes payable
at May 31, 1998 by $1,255,200.
F-15
<PAGE>
National Discount Brokers Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements--(Continued)
3. Securities Owned and Sold, not yet Purchased
Securities owned and sold, not yet purchased consist of the following:
<TABLE>
<CAPTION>
May 31,
----------------------- February 28,
1997 1998 1999
----------- ----------- ------------
<S> <C> <C> <C>
Securities owned:
Corporate equities....................... $40,183,144 $67,969,111 $80,854,888
U.S. Government obligations.............. 5,513,292 -- --
----------- ----------- -----------
Total.................................... $45,696,436 $67,969,111 $80,854,888
=========== =========== ===========
Securities sold, not yet purchased:
Corporate equities....................... $25,129,290 $28,687,486 $39,358,930
=========== =========== ===========
</TABLE>
4. Financial Instruments with Off-Balance Sheet Risk and Concentrations of
Credit Risk
In the normal course of business, Sherwood Securities, NDB and Equitrade
clear securities transactions through affiliated and unaffiliated clearing
brokers on a fully disclosed basis. Pursuant to the terms of the agreements
between Sherwood Securities, NDB, Equitrade 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, NDB and Equitrade seek to control the risk associated with their
customer activities by making credit inquiries when establishing customer
relationships and by monitoring customer trading activity.
At February 28, 1999, all principal securities positions were in the
possession or control of their clearing brokers. Credit exposure may result in
the event that Sherwood Securities' or Equitrade's clearing brokers are unable
to fulfill their contractual obligations. The subsequent settlement of open
positions at February 28, 1999 had no material adverse effect on the financial
position of Sherwood Securities or Equitrade.
During the normal course of business, Sherwood Securities and Equitrade may
sell securities which have not yet been purchased, which represent obligations
of Sherwood Securities and Equitrade to deliver the specified security at a
later date, thereby creating a liability to purchase the security in the market
at prevailing prices. Such transactions result in off-balance sheet market risk
as Sherwood Securities and Equitrade's ultimate obligation to satisfy the sale
of securities sold, but not yet purchased, may exceed the amount recorded on
the consolidated statement of financial condition. Sherwood Securities and
Equitrade seek to control such market risk through the use of internal
monitoring guidelines. Neither Sherwood Securities nor Equitrade engage in any
derivative activities.
Sherwood Securities and Equitrade conduct substantially all of their
principal trading activities with broker-dealers based in the New York
Metropolitan area.
5. Furniture, Fixtures, Equipment and Leasehold Improvements
Furniture, fixtures, equipment and leasehold improvements consist of the
following:
<TABLE>
<CAPTION>
May 31,
----------------------- February 28,
1997 1998 1999
----------- ----------- ------------
<S> <C> <C> <C>
Furniture, fixtures and equipment........ $24,890,287 $26,325,316 $24,912,636
Leasehold improvements................... 3,047,594 3,518,709 4,068,296
----------- ----------- -----------
27,937,881 29,844,025 28,980,932
Less: accumulated depreciation and
amortization............................ 7,674,370 11,832,763 14,035,228
----------- ----------- -----------
$20,263,511 $18,011,262 $14,945,704
=========== =========== ===========
</TABLE>
F-16
<PAGE>
National Discount Brokers Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements--(Continued)
6. Acquisition of SHD Corporation (Formerly Dresdner-NY Incorporated)
On May 2, 1997, NDBG acquired 100% of the stock of Dresdner-NY Incorporated
(subsequently renamed SHD Corporation), a NYSE specialist firm, from Dresdner
Bank AG for 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 is being amortized on a straight line basis
over 10 years. The acquisition was accounted for by the purchase method of
accounting and, accordingly, the results of operations of SHD are included in
the accompanying consolidated statement of income and comprehensive income from
the acquisition date.
Presented below are unaudited pro forma condensed combined results of
operations of the Company and Dresdner-NY Incorporated. Amounts presented give
effect to the acquisition of Dresdner-NY Incorporated as if the transaction was
consummated at the beginning of each of the years presented.
(In thousands, except share data)
<TABLE>
<CAPTION>
Years Ended May 31,
-----------------------
1996 1997
----------- -----------
(unaudited) (unaudited)
<S> <C> <C>
Revenues................................................ $187,071 $182,891
Net income.............................................. 20,512 8,406
Net income per common share (diluted)................... 1.55 .65
Shares used in computation.............................. 13,201,412 12,946,007
</TABLE>
The unaudited pro forma condensed combined results of operations are
presented for comparative purposes only and are not necessarily indicative of
the actual results that would have occurred if the acquisition had been
consummated at the beginning of the periods presented, or of future operations
of the combined companies under the ownership and management of the Company.
7. Income Taxes
The Company files consolidated Federal and combined state and local income
tax returns (inclusive of all subsidiaries except Equitrade). The current
Federal, state and local income tax provisions for the years ended May 31,
1996, 1997 and 1998 and the nine months ended February 28, 1998 and 1999 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 February 28, 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-17
<PAGE>
National Discount Brokers Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements--(Continued)
The provisions for income taxes included in the consolidated statements of
income and comprehensive income are as follows:
<TABLE>
<CAPTION>
Nine Months Ended
Years Ended May 31, February 28,
---------------------------------- ------------------------
1996 1997 1998 1998 1999
----------- ---------- ---------- ----------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C>
Continuing Operations:
Federal
Current............... $12,257,332 $7,672,751 $5,351,081 $4,109,037 $ 7,455,747
Deferred expense
(benefit)............ -- (1,203,645) 1,022,050 (97,361) (302,034)
----------- ---------- ---------- ---------- -----------
12,257,332 6,469,106 6,373,131 4,011,676 7,153,713
----------- ---------- ---------- ---------- -----------
State and local:
Current................ 3,005,744 3,699,618 2,069,575 1,617,031 4,006,415
Deferred expense
(benefit)............. -- (1,016,827) 915,536 229,465 (122,581)
----------- ---------- ---------- ---------- -----------
3,005,744 2,682,791 2,985,111 1,846,496 3,883,834
----------- ---------- ---------- ---------- -----------
$15,263,076 $9,151,897 $9,358,242 $5,858,172 $11,037,547
=========== ========== ========== ========== ===========
Discontinued operations:
Federal................
Current expense
(benefit)............ $ 109,299 $ (447,340) $ (214,648) $ (217,811) $ --
State and local:
Current expense
(benefit)............. 26,802 7,424 (13,934) (12,769) --
----------- ---------- ---------- ---------- -----------
$ 136,101 $ (439,916) $ (228,582) $ (230,580) $ --
=========== ========== ========== ========== ===========
</TABLE>
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>
Nine Months Ended
Years Ended May 31, February 28,
--------------------------------- -----------------------
1996 1997 1998 1998 1999
----------- ---------- ---------- ----------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C>
Statutory provision on
pretax income.......... $12,325,976 $6,750,323 $6,802,535 $4,547,157 $ 8,315,050
State and local taxes,
net of Federal tax
benefit................ 1,953,734 1,743,814 1,940,322 1,200,222 2,524,493
Tax effect of disallowed
expenses............... 193,967 242,785 124,804 82,977 152,686
Other, net.............. 789,399 414,975 490,581 27,816 45,318
----------- ---------- ---------- ---------- -----------
Income tax provision.. $15,263,076 $9,151,897 $9,358,242 $5,858,172 $11,037,547
=========== ========== ========== ========== ===========
</TABLE>
8. Subordinated Notes Payable
Equitrade has three subordinated note agreements in the aggregate amount of
$3,000,000 each with a stated interest rate of 5%. Such notes are due on March
23, 2000 and contain yearly automatic roll-over provisions. In connection with
these agreements, the lenders pledged marketable securities with a market value
of approximately $5,410,000 as collateral for the related secured demand notes
receivable.
On October 1, 1997, Equitrade entered into an additional $500,000
subordinated note agreement with a stated interest rate of 4%. Such note is due
on October 1, 1999, and contains a yearly automatic roll-over provision. In
connection with this agreement, the lender pledged U.S. Treasury obligations
with a market value of approximately $530,000 as collateral for the related
secured demand notes receivable.
F-18
<PAGE>
National Discount Brokers Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements--(Continued)
9. Common Stock and Stock Options
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. 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 February 28, 1999,
8,099 shares were available for future grant under the 1995 Plan. No stock
appreciation rights have been issued. The following table summarizes
transactions in stock options granted under the 1983 Plan and the 1995 Plan
from May 31, 1995 through February 28, 1999:
<TABLE>
<CAPTION>
Optioned Shares
----------------------------
Weighted Average
Number of Exercise Price
Shares Per Share
---------- ----------------
<S> <C> <C>
Balance at May 31, 1995........................... 1,346,000 $ 1.13
Options exercised................................ (1,346,000) 1.13
Options granted--reload options.................. 394,697 8.84
----------
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................................ (45,736) 13.27
Options granted--original........................ 182,750 22.64
Options cancelled................................ (34,919) 13.02
----------
Balance at February 28, 1999...................... 744,580 14.71
==========
</TABLE>
F-19
<PAGE>
National Discount Brokers Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements--(Continued)
The following table summarizes information about stock options outstanding
and exercisable, at February 28, 1999.
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- ---------------------------------------------------------------- ----------------------------
Range of Weighted-Average Weighted-Average Weighted-Average
Exercise Number Remaining Exercise Price Number Exercise Price
Prices Outstanding Contractual Life Per Share Exercisable Per Share
- ------------------ ----------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C> <C>
$ 8.81 - $12.69 368,041 8.2 $11.42 348,373 $11.43
13.25 - 13.50 193,789 8.7 13.49 46,469 13.45
22.50 - 24.25 182,750 9.9 22.64 -- --
------- -------
8.81 - 24.25 744,580 8.7 14.71 394,842 11.67
======= =======
</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 plan during the years ended May
31, 1996, 1997 and 1998 and the nine months ended February 28, 1998 and 1999,
respectively.
<TABLE>
<CAPTION>
Nine Months
Ended
Years Ended May 31, February 28,
---------------------- ----------------
Weighted-Average Assumptions 1996 1997 1998 1998 1999
- ---------------------------- ------ ------ ------ ----------- ----
(unaudited)
<S> <C> <C> <C> <C> <C>
Dividend yield....................... 0% 0% 0% 0% 0%
Expected volatility.................. 37.3% 34.5% 37.0% 37.0% 57.0%
Risk-free interest rate.............. 5.30% 6.20% 5.61% 5.61% 4.48%
Expected lives (in years)............ 3 3 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-20
<PAGE>
National Discount Brokers Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements--(Continued)
<TABLE>
<CAPTION>
Nine Months Ended
Years Ended May 31, February 28,
------------------------------------ ------------------------
1996 1997 1998 1998 1999
----------- ---------- ----------- ----------- -----------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Net income:
As reported............ $20,131,928 $9,279,693 $11,960,319 $9,016,450 $12,719,739
SFAS 123 fair value
adjustment............ (362,666) (346,631) (672,646) (610,614) (424,144)
----------- ---------- ----------- ---------- -----------
Pro forma.............. $19,769,262 $8,933,062 $11,287,673 $8,405,836 $12,295,595
----------- ---------- ----------- ---------- -----------
Net income per common
share:
Basic
As reported............ $ 1.59 $ .72 $ .89 $ .69 $ .91
SFAS 123 fair value
adjustment............ (.03) (.03) (.05) (.05) (.03)
----------- ---------- ----------- ---------- -----------
Pro forma.............. $ 1.56 $ .69 $ .84 $ .64 $ .88
----------- ---------- ----------- ---------- -----------
Diluted:
As reported............ $ 1.52 $ .72 $ .89 $ .68 $ .90
SFAS 123 fair value
adjustment............ (.02) (.03) (.05) (.05) (.03)
----------- ---------- ----------- ---------- -----------
Pro forma.............. $ 1.50 $ .69 $ .84 $ .63 $ .87
----------- ---------- ----------- ---------- -----------
</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 during
the years ended May 31, 1996, 1997 and 1998 and the nine months ended February
28, 1998 and 1999 were $2.65, $3.32, $3.93, $3.93 (unaudited) and $10.03,
respectively.
10. Related Party Transactions
Included in notes receivable at May 31, 1997 and 1998 are amounts due from an
officer of the Company aggregating to approximately $379,000 and $339,000,
respectively. This note was repaid in full in February 1999.
The Company has, from time to time, entered into short-term borrowing
facilities with SLK for the purpose of financing trading positions. On December
31, 1998, NDBG 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 as a
result of Equitrade's acquisition of RSF.
Equitrade clears its securities transactions through SLK. SLK also served as
the clearing broker for securities transactions in the Sherwood Securities'
AMEX specialist book until its sale in February 1998. For the years ended May
31, 1996, 1997 and 1998 and the nine months ended February 28, 1998 and 1999,
the clearing fees paid to SLK were $905,157, $940,347, $1,884,010, $1,421,897
(unaudited) and $1,735,565, respectively.
On December 8, 1997, the Company sold 1,500,000 shares of its common stock
held in treasury to IAT Reinsurance Syndicate Ltd., an affiliate of Peter R.
Kellogg, a managing director of SLK.
F-21
<PAGE>
National Discount Brokers Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements--(Continued)
11. Employee Benefit Plans
The Company has a 401(k) profit-sharing plan (the "Plan"). Under the
provisions of the Plan, employees of the Company (except Equitrade) are
eligible to participate once they have completed six months of service and
attain age 21. The Company makes annual matching contributions to the Plan on a
discretionary basis as determined by the Board of Directors of NDBG. For the
years ended May 31, 1996, 1997 and 1998 and the nine months ended February 28,
1998 and 1999, there were discretionary Company contributions to the Plan of
$48,029, $63,699, $82,013, $82,013 (unaudited) and $93,115, respectively, which
are included in compensation and benefits in the consolidated statements of
income and comprehensive income.
Equitrade sponsors, for its eligible employees, the Equitrade Partners 401(k)
Savings Plan, wherein Equitrade contributes a matching contribution equal to
one-half of the first 4% of an employee's contribution. In July 1997, Equitrade
formed a second plan, the Equitrade Discretionary Contribution Plan, whereby
Equitrade contributes an additional 3% of the employee's compensation for all
employees regardless of whether the employee participates in the Equitrade
Partners 401(k) Savings Plan. To be eligible, the employee must complete six
months of service. Equitrade's contributions vest 20% per year for each of 5
years. For the years ended May 31, 1996, 1997 and 1998 and the nine months
ended February 28, 1998 and 1999, Equitrade contributed a total of $43,011,
$46,749, $165,780, $125,310 (unaudited) and $136,102, 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 MXNet and Sherwood Securities' AMEX
specialist business.
On February 13, 1998, NDBG sold 100% of the common stock of its subsidiary,
MXNet, to IPC Information Systems, Inc. for cash proceeds amounting to
$6,600,000. In addition, during February 1998, Sherwood Securities sold its
AMEX specialist business for $325,000. 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, 1996 applicable to these discontinued operations
were $1,075,021 and $760,989, respectively; for the year ended May 31, 1997
were $733,762 and $2,028,724, respectively; and for the year ended May 31, 1998
were $1,324,114 and $2,374,035, respectively.
13. Net Capital and Customer Reserve Requirements
Sherwood Securities and NDB execute all customer transactions through a
clearing broker and do not maintain custody of customer funds or securities.
Accordingly, Sherwood Securities and NDB have been granted exemptions by the
National Association of Securities Dealers, Inc. ("NASD") from the computation
for determination of reserve requirements for broker-dealers under subparagraph
(k)(2)(ii) of the SEC Rule 15c3-3. Sherwood Securities and NDB were in
compliance with the conditions of this exemption during the years ended May 31,
1996, 1997 and 1998 and the nine months ended February 28, 1998 (unaudited) and
1999.
F-22
<PAGE>
National Discount Brokers Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements--(Continued)
As registered broker-dealers, Sherwood Securities, NDB and Equitrade are
subject to SEC Uniform Net Capital Rule 15c3-1 (the "Rule"). As of February 28,
1999, the net capital of Sherwood Securities, NDB and Equitrade exceeded their
SEC required net capital by approximately $52,287,000, $4,128,000 and
$51,746,000, respectively.
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 February 28, 1999, the
payment of dividends and advances to the Company by Sherwood Securities, NDB
and Equitrade is limited to approximately $52,087,000, $4,078,000 and
$51,696,000, respectively, under the most restrictive of these requirements.
The SEC may, by order, restrict the withdrawal of equity capital on a net basis
if the SEC determines that such withdrawal would be detrimental to the
financial integrity of the broker-dealer or the financial community.
The NYSE has the authority to set minimum levels of capitalization for
specialists on the NYSE, including Equitrade. The NYSE has imposed a minimum
capital requirement on Equitrade of $55,000,000 as a result of its transaction
with RSF Partners, L.P. Equitrade's adjusted net capital, for NYSE purposes,
was $55,672,956 as of February 28, 1999.
14. Commitments
The Company has non-cancelable operating leases for rental of office space at
its various locations. All leases are subject to escalation for increases in
taxes, fuel and other costs.
Commitments for minimum lease payments under non-cancelable operating leases
as of February 28, 1999 are as follows, exclusive of escalation charges:
<TABLE>
<S> <C>
Period from March 1, 1999 through May 31, 1999..................... $ 607,430
Fiscal year ending May 31,
2000............................................................. 2,506,425
2001............................................................. 2,616,976
2002............................................................. 2,611,597
2003............................................................. 2,505,592
2004............................................................. 2,532,552
Thereafter....................................................... 8,238,611
-----------
$21,619,183
===========
</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 $2,729,000, $2,535,000, $2,255,000, $1,456,000
(unaudited), $1,598,000, for the years ended May 31, 1996, 1997 and 1998, and
nine months ended February 28, 1998 and 1999 respectively.
NDBG has an employment contract with Arthur Kontos as the Chief Executive
Officer ("CEO") of NDBG with a term ending on May 31, 2000 with certain rights
of extension of the term and earlier termination. Remuneration under these
contracts 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 Sherwood Group, Inc. 1996 CEO Bonus Plan (the "CEO Plan"). The
CEO Plan provides for an annual cash bonus
F-23
<PAGE>
National Discount Brokers Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements--(Continued)
payout equal to 10% of the first $10,000,000 of income (as defined) and 15% of
income over $10,000,000. Included in accounts payable and accrued liabilities
is approximately $1,251,000, $1,836,000 and $2,133,000 due to the CEO at May
31, 1997, May 31, 1998 and February 28, 1999, respectively. In connection with
this agreement and the CEO Plan, approximately $6,137,000, $3,061,000,
$2,724,000, $2,053,000 (unaudited) and $3,604,000 is reflected in compensation
and benefits for the years ended May 31, 1996, 1997 and 1998 and the nine
months ended February 28, 1998 and 1999, respectively. Additionally, for the
nine months ended February 28, 1998 (unaudited) and for the year ended May 31,
1998, $755,000 of the CEO's bonus was netted against the gain on sale of
discontinued operations on the consolidated statements of income and
comprehensive income.
During the fiscal year ended May 31, 1997, NDBG established The Sherwood
Group, Inc. 1996 Executive Incentive Award Plan (the "Executive Plan"). The
Executive Plan 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 the Company'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.
Included in accounts payable and accrued liabilities is approximately
$1,147,000 due to participants in the Executive Plan at May 31, 1997. In
determining Net Income, 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. Estimated Fair Value of Financial Instruments
The Company's securities owned, U.S. Treasury obligations and securities
sold, not yet purchased are carried at market value. Management estimates that
the fair values of other financial instruments recognized on the consolidated
statements of financial condition (including receivables, payables and accrued
expenses, loan payable and secured demand notes payable) are approximated by
their carrying values, as such financial instruments are short-term in nature,
bear interest at current market rates or are subject to frequent repricing.
16. Contingencies and Legal Matters
NDBG's subsidiaries, and in some cases NDBG, have been named as defendants in
lawsuits and arbitrations and are the subject of investigations, that allege,
among other things, violations of Federal and state securities 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 in January 1999 to the SEC and the sum of $8,138 in disgorgement.
Sherwood Securities' results for the year ended May 31, 1998 reflect a non-tax
deductible charge to establish a reserve for the SEC's investigation.
F-24
<PAGE>
National Discount Brokers Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements--(Continued)
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 class action litigation 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.
17. Subsequent Events
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 equitable principles of trade" in connection with trades of
approximately 1.5 million shares of Amazon.com, Inc. 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, Inc. 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 intends to vigorously defend against these
claims and, after consultation with counsel believes it has valid defenses to
these claims and intends to assert counterclaims, including a claim of
approximately $1,300,000 for losses it suffered in connection with trades in
Amazon.com, Inc. shares executed by Sherwood Securities for Carnegie on January
8, 1999.
On April 21, 1999, the Company's Board of Directors approved a new stock
option plan (the "1999 Plan") allowing for the issuance of up to 1,000,000
shares of the Company's common stock pursuant to stock options and approved the
grant of options to purchase 750,000 shares at an exercise price of $60.0625
per share. All options granted have exercise prices equal to the fair market
value of the stock on the date of the grant, a 10 year term and vest ratably
over a three year period commencing on the date of grant.
F-25
<PAGE>
National Discount Brokers Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements--(Continued)
On May 7, 1999, the Company entered into a definitive agreement to sell its
46.845% membership interest in Equitrade to a subsidiary of SLK. The Company
will receive approximately $82,400,000 in cash for its membership interest
(consisting primarily of gain on sale, return of capital and net repayment of
notes and interest receivable). The Company will record an after-tax gain of
approximately $20,500,000, accrued income taxes payable of approximately
$15,500,000 (calculated at the statutory rate of 43%) and a bonus to its chief
executive officer of approximately $6,400,000. In connection with execution of
this agreement, the Company and SLK agreed to defer repayment of the
$15,000,000 loan due to SLK until closing of the sale. If the sale agreement is
terminated without a closing, the loan will mature 18 months from such
termination.
18. Quarterly Financial Information (unaudited)
<TABLE>
<CAPTION>
First Second Third Fourth
----------- ----------- ----------- -----------
(In thousands, except per common share data)
<S> <C> <C> <C> <C>
1999
Revenues.................. $ 29,543 $ 54,481 $ 68,236
Expenses.................. 34,092 41,319 52,969
Minority interest......... 2,522 (2,664) 19
----------- ----------- -----------
Income (loss) from
continuing operations
before taxes............. $ (2,027) $ 10,498 $ 15,286
----------- ----------- -----------
Net income (loss)......... $ (1,335) $ 5,883 $ 8,172
----------- ----------- -----------
Net income (loss) per
common share--basic...... $ (.09) $ .42 $ .58
----------- ----------- -----------
Net income (loss) per
common share--diluted.... $ (.09) $ .42 $ .58
----------- ----------- -----------
1998
Revenues.................. $ 40,420 $ 42,535 $ 37,691 $ 43,802
Expenses.................. 33,963 36,410 32,770 36,103
Minority interest......... (1,142) (2,009) (1,363) (1,252)
----------- ----------- ----------- -----------
Income from continuing
operations before taxes.. $ 5,315 $ 4,116 $ 3,558 $ 6,447
----------- ----------- ----------- -----------
Loss from discontinued
operations............... $ (238) $ (228) $ (355) $ --
----------- ----------- ----------- -----------
Gain on sale of
discontinued operations.. $ -- $ -- $ 2,704 $ --
----------- ----------- ----------- -----------
Net income................ $ 2,708 $ 2,087 $ 4,221 $ 2,944
----------- ----------- ----------- -----------
Net income per common
share--basic............. $ .21 $ .16 $ .30 $ .21
----------- ----------- ----------- -----------
Net income per common
share--diluted........... $ .21 $ .16 $ .30 $ .21
----------- ----------- ----------- -----------
1997
Revenues.................. $ 42,725 $ 40,861 $ 51,860 $ 44,889
Expenses.................. 36,577 34,230 49,011 36,904
Minority interest......... (14) (739) (2,114) (1,459)
----------- ----------- ----------- -----------
Income from continuing
operations before taxes.. $ 6,134 $ 5,892 $ 735 $ 6,526
----------- ----------- ----------- -----------
Loss from discontinued
operations............... $ (87) $ (245) $ (288) $ (235)
----------- ----------- ----------- -----------
Net income (loss)......... $ 3,003 $ 3,295 $ (242) $ 3,224
----------- ----------- ----------- -----------
Net income (loss) per
common share............. $ .23 $ .25 $ (.02) $ .25
----------- ----------- ----------- -----------
1996
Revenues.................. $ 39,453 $ 34,955 $ 46,995 $ 57,707
Expenses.................. 31,579 30,768 37,851 40,066
Minority interest......... (801) (486) (995) (1,347)
----------- ----------- ----------- -----------
Income from continuing
operations before taxes.. $ 7,073 $ 3,701 $ 8,149 $ 16,294
----------- ----------- ----------- -----------
Gain (loss) from
discontinued operations.. $ 57 $ (16) $ 30 $ 107
----------- ----------- ----------- -----------
Net income................ $ 4,468 $ 3,173 $ 5,141 $ 7,350
----------- ----------- ----------- -----------
Net income per common
share.................... $ .33 $ .24 $ .39 $ .56
----------- ----------- ----------- -----------
</TABLE>
F-26
<PAGE>
National Discount Brokers Group, Inc. and Subsidiaries
Index to Financial Statement Schedule
<TABLE>
<S> <C>
Report of Independent Accountants................................... S-2
Condensed Financial Statements of the Registrant (Parent)........... S-3-8
</TABLE>
S-1
<PAGE>
Report of Independent Accountants
To the Board of Directors and Stockholders of
National Discount Brokers Group, Inc.
In connection with our audit of the consolidated financial statements of
National Discount Brokers Group, Inc. and its subsidiaries as of February 28,
1999 and for the nine months then ended, which financial statements are
included in the Registration Statement, we have also audited the financial
statement schedule listed in Item 16(b) herein.
In our opinion, the information set forth in the accompanying financial
statement schedule, when read in conjunction with the consolidated financial
statements from which it has been derived, is fairly stated in all material
respects in relation thereto.
PricewaterhouseCoopers LLP
New York, New York
May 7, 1999
S-2
<PAGE>
National Discount Brokers Group, Inc. and Subsidiaries
Financial Statement Schedule
Condensed Financial Statements of the Registrant (Parent)
Statements of Financial Condition
ASSETS
<TABLE>
<CAPTION>
May 31,
------------------------- February 28,
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
Cash.................................... $ 86,323 $ 221,328 $ 212,855
Receivables............................. 637,220 14,117,784 1,583,064
Notes receivable........................ 511,230 568,710 1,028,482
Securities available for sale, at market
value.................................. -- 2,438,438 100,000
Securities not readily marketable, at
fair value............................. 401,320 401,320 401,320
Investment in, less net amounts due to,
subsidiaries and affiliates............ 67,000,227 81,751,054 98,765,938
Investment in partnerships.............. 11,842,014 13,775,483 15,680,460
Furniture, net.......................... -- 2,374 1,609
Intangible asset, net................... 130,873 20 422,010
Subordinated and secured demand notes
receivable............................. 16,250,000 16,000,000 38,000,000
U.S. Treasury obligations, pledged...... 5,481,820 5,223,882 5,151,581
Other assets............................ 624,185 444,951 508,715
------------ ------------ ------------
Total assets.......................... $102,965,212 $134,945,344 $161,856,034
============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable, accrued expenses and
other liabilities (including income
taxes payable)......................... $ 5,113,478 $ 5,467,903 $ 8,516,691
Subordinated note payable............... 5,250,000 5,000,000 5,000,000
Loan payable............................ -- -- 15,000,000
------------ ------------ ------------
10,363,478 10,467,903 28,516,691
------------ ------------ ------------
Stockholders' equity
Common stock........................... 143,432 143,432 143,432
Retained earnings and other equity..... 92,458,302 124,334,009 133,195,911
------------ ------------ ------------
92,601,734 124,477,441 133,339,343
------------ ------------ ------------
Total liabilities and stockholders'
equity............................... $102,965,212 $134,945,344 $161,856,034
============ ============ ============
</TABLE>
See accompanying notes to the condensed financial statements.
S-3
<PAGE>
National Discount Brokers Group, Inc. and Subsidiaries
Financial Statement Schedule
Condensed Financial Statements of the Registrant (Parent)--(Continued)
Statements of Income and Comprehensive Income
<TABLE>
<CAPTION>
Nine Months Ended
Years Ended May 31, February 28,
------------------------------------ ------------------------
1996 1997 1998 1998 1999
----------- ----------- ----------- ----------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C>
Revenues:
Equity income in
partnerships.......... $ 5,546,428 $ 6,163,136 $ 5,852,353 $ 4,469,583 $ 1,302,174
Interest............... 1,101,129 1,446,341 1,980,535 1,335,540 1,767,566
Realized gain on
securities available-
for-sale.............. -- -- -- -- 2,173,517
Service fees paid by
subsidiaries
eliminated in
consolidation......... 4,675,000 5,640,015 4,233,345 3,198,345 3,105,000
Other.................. 114,126 (5,346) 142,500 106,875 113,319
----------- ----------- ----------- ----------- -----------
11,436,683 13,244,146 12,208,733 9,110,343 8,461,576
----------- ----------- ----------- ----------- -----------
Expenses:
Compensation and
benefits.............. 7,408,107 4,675,853 4,016,895 2,277,926 6,695,103
Interest............... -- -- 35,033 31,288 152,828
Other, net............. 403,816 1,403,486 1,299,167 960,293 1,840,252
----------- ----------- ----------- ----------- -----------
7,811,923 6,079,339 5,351,095 3,269,507 8,688,183
----------- ----------- ----------- ----------- -----------
Income (loss) from
continuing operations
before equity in income
of subsidiaries and
income taxes........... 3,624,760 7,164,807 6,857,638 5,840,836 (226,607)
Equity in income of
subsidiaries........... 18,471,286 5,650,335 8,837,016 6,491,313 13,111,734
----------- ----------- ----------- ----------- -----------
Income from continuing
operations before
income taxes........... 22,096,046 12,815,142 15,694,654 12,332,149 12,885,127
Income tax expense...... 1,964,118 3,208,199 3,029,674 2,572,543 165,388
----------- ----------- ----------- ----------- -----------
Net income from
continuing
operations........... 20,131,928 9,606,943 12,664,980 9,759,606 12,719,739
Discontinued operations,
net of income taxes.... -- -- (727,116) (727,116) --
----------- ----------- ----------- ----------- -----------
Net income............ 20,131,928 9,606,943 11,937,864 9,032,490 12,719,739
Other comprehensive
income (loss), net of
income taxes........... -- -- 1,359,800 1,310,904 (1,259,800)
----------- ----------- ----------- ----------- -----------
Comprehensive income.. $20,131,928 $ 9,606,943 $13,297,664 $10,343,394 $11,459,939
=========== =========== =========== =========== ===========
</TABLE>
See accompanying notes to the condensed financial statements.
S-4
<PAGE>
National Discount Brokers Group, Inc. and Subsidiaries
Financial Statement Schedule
Condensed Financial Statements of the Registrant (Parent)--(Continued)
Statements of Cash Flows
<TABLE>
<CAPTION>
Nine Months
Ended
Years Ended May 31, February 28,
--------------------------------------- ------------------------
1996 1997 1998 1998 1999
------------ ----------- ------------ ----------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from
operating activities:
Net income from
continuing
operations............ $ 20,131,928 $ 9,606,943 $ 12,664,980 $ 9,759,606 $12,719,739
Non-cash items included
in net income:
Net equity in gain of
subsidiaries.......... (18,471,286) (5,650,335) (8,837,016) (6,491,313) (13,111,734)
Equity income in
partnerships.......... (5,546,428) (6,163,136) (5,852,353) (4,469,583) (1,302,174)
Loss on sale of
subsidiary............ -- 123,006 -- -- --
Depreciation and
amortization.......... 207,877 265,658 144,494 142,989 28,775
Allocated tax benefit
related to the
exercise of options... 4,490,000 -- -- -- --
Decrease (increase) in
operating assets:
Receivables........... (4,816,300) 4,298,488 (13,480,564) (18,432,039) 12,534,720
U.S. Treasury
obligations,
pledged.............. (5,154,471) (52,141) 257,938 333,197 72,301
Other assets.......... 4,879,003 (258,429) 179,234 63,695 (63,766)
(Decrease) increase
in operating
liabilities
Accounts payable,
accrued expenses and
other liabilities.... 1,344,002 (3,731,976) (3,464,080) (2,242,344) 4,635,415
------------ ----------- ------------ ----------- -----------
Net cash provided by
(used in) operating
activities.......... (2,935,675) (1,561,922) (18,387,367) (21,335,792) 15,513,276
------------ ----------- ------------ ----------- -----------
Cash flows from
investing activities:
Investment in
partnerships.......... (242,790) (320,437) (444,068) (444,068) (602,803)
Distribution from
partnerships.......... 3,041,010 3,771,646 4,362,952 4,362,952 --
Loans made to employees
and officers.......... (1,622,765) (137,652) -- -- (900,000)
Principal collected on
notes receivable...... 1,662,765 44,967 45,465 45,465 440,228
Purchase of
subsidiaries, net of
cash acquired......... -- (15,763,434) -- -- --
Return of capital from
subsidiary............ -- 2,409,659 3,538,554 3,538,554 --
Payment for purchase of
identified intangible
asset................. -- (188,780) -- -- (450,000)
Additional capital
contributed to
subsidiaries.......... (25,100) -- -- -- --
Issuance of
subordinated notes
receivable............ -- (6,000,000) -- -- (22,000,000)
------------ ----------- ------------ ----------- -----------
Net cash (used in)
provided by
investing
activities.......... 2,813,120 (16,184,031) 7,502,903 7,502,903 (23,512,575)
------------ ----------- ------------ ----------- -----------
Cash flows from
financing activities:
Sale of treasury
stock................. -- -- 19,267,500 19,267,500 --
Purchase of treasury
stock................. (2,061,876) (3,569,937) (614,281) (49,760) (3,231,647)
Proceeds from exercise
of options............ -- -- -- -- 606,978
Proceeds from loan
payable............... 635,000 -- -- -- 15,000,000
Net receipts
(disbursements) on
intercompany
borrowings............ 1,587,445 21,341,380 (7,633,750) (5,184,988) (4,384,505)
------------ ----------- ------------ ----------- -----------
Net cash provided by
financing
activities.......... 160,569 17,771,443 11,019,469 14,032,752 7,990,826
------------ ----------- ------------ ----------- -----------
Net (decrease) increase
in cash................ 38,014 25,490 135,005 199,863 (8,473)
Cash at beginning of
period.............. 22,819 60,833 86,323 86,323 221,328
------------ ----------- ------------ ----------- -----------
Cash at end of
period.............. $60,833 $ 86,323 $ 221,328 $ 286,186 $ 212,855
============ =========== ============ =========== ===========
</TABLE>
S-5
<PAGE>
National Discount Brokers Group, Inc. and Subsidiaries
Financial Statement Schedule
Condensed Financial Statements of the Registrant (Parent)--(Continued)
Statements of Cash Flows--(Continued)
Supplemental disclosures of cash flow information:
Income tax payments aggregated $5,732,131, $14,077,485 and $6,287,938 during
the years ended May 31, 1996, 1997 and 1998, respectively, and $3,407,836
(unaudited) and $7,358,685 during the nine months ended February 28, 1998 and
1999, respectively.
Interest payments aggregated $0, $52,991 and $35,033 during the years ended
May 31, 1996, 1997 and 1998, respectively, and $31,288 (unaudited) and $87,828
during the nine months ended February 28, 1998 and 1999, respectively.
Supplemental disclosures of non-cash investing and financing activities:
During July 1995, National Discount Brokers Group, Inc. ("NDBG") contributed
an additional $250,000, in the form of U.S. Treasury securities with a face
value of $246,562, which were included in other assets at May 31, 1997 and
1996, to Anvil Institutional Services Company ("Anvil Joint Venture").
During the period from November 1995 through February 1996, certain
executives of NDBG and its subsidiaries (collectively the "Company") exercised
an aggregate of 670,000 options for the purchase of 670,000 shares of NDBG's
common stock with an exercise price of $1 per share and 66,000 options for the
purchase of 66,000 shares with an exercise price of $3.625 per share. In order
to pay for the exercise price and to fund the personal income taxes of
$2,602,997 on the gain related to the transaction, the executives remitted to
NDBG 394,697 shares of NDBG's common stock with a market value of $3,487,247.
As a result of the sale of its subsidiary, Stock Market Index, Inc., during
December 1996, NDBG wrote off the remaining book value of certain computer
software and intangible assets aggregating $225,193. In addition, as part of
the sale, NDBG 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, NDBG acquired, from its joint venture partner at that
time, the remaining 51% of the Anvil Joint Venture that it did not previously
own. NDBG, therefore, became the 100% owner of Anvil Institutional Services,
Inc. ("Anvil"). Accordingly, the assets, liabilities and stockholder's equity
of Anvil were consolidated with those of NDBG 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 February 1997, an executive of NDBG exercised an aggregate of 94,027
options for the purchase of 94,027 shares of NDBG'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 fund the personal income taxes of $54,569 on
the gain related to the transaction, the executive remitted to NDBG 88,187
shares of NDBG's common stock with a market value of $892,893. In connection
with the exercise of these options, the Company estimated an income tax benefit
of $49,743.
On May 2, 1997, NDBG acquired 100% of the common stock of Dresdner-NY
Incorporated, subsequently renamed SHD. Accordingly, the assets, liabilities
and stockholder's equity of SHD have been consolidated with those of NDBG 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.
S-6
<PAGE>
National Discount Brokers Group, Inc. and Subsidiaries
Financial Statement Schedule
Condensed Financial Statements of the Registrant (Parent)--(Continued)
Statements of Cash Flows--(continued)
During September 1997, NDBG sold all of the stock of Anvil and received a
note in the amount of $102,945, which was repaid in full in January 1999.
During October 1997 and December 1997, certain executives of the Company
exercised an aggregate of 294,758 options for the purchase of 294,758 shares of
NDBG'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
fund the personal income taxes of $441,389 on the gain related to the
transaction, the executives remitted to NDBG 255,450 shares of NDBG's common
stock with a market value of $3,143,094. In connection with the exercise of
these options, NDBG estimated an income tax benefit of $366,215.
During February 1998, NDBG sold the remaining net assets of its subsidiary,
MXNet, Inc., and received a promissory note for $6,600,000 with interest
accrued at 6% from the date of sale. The note was repaid in full in April 1998.
During February 1998 and May 1998, certain available-for-sale securities
appreciated due to the entity's successful initial public offering. As such,
the Company has reflected these securities at fair market value on the
consolidated statements of financial condition. The cumulative unrealized gains
of $1,262,352 and $1,359,800 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 cumulative income
taxes of $1,165,248 and $1,255,200, respectively.
Between December 1998 and February 1999, various employees of the Company
exercised an aggregate of 45,736 options for the purchase of 45,736 shares of
NDBG'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, NDBG
estimated an income tax benefit of $331,425, which has been used to reduce
NDBG's current liability for income taxes.
See accompanying notes to the condensed financial statements.
S-7
<PAGE>
National Discount Brokers Group, Inc. and Subsidiaries
Financial Statement Schedule
Condensed Financial Statements of the Registrant (Parent)--Continued
Notes to Condensed Financial Statements
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
NDBG's investment in its subsidiary companies after deducting net amounts owed
to several subsidiaries primarily related to the funding of NDBG's cash flow
needs by its operating subsidiaries. Income and losses of the subsidiaries are
recognized using the equity method accounting.
During the year ended May 31, 1995, NDBG entered into two subordination
agreements with Old Equitrade. The first note has a stated interest rate of 0%
and matures on February 28, 2000. In connection with this agreement, NDBG 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, NDBG loaned Old Equitrade $5,000,000.
During the year ended May 31, 1997, NDBG entered into two subordination
agreements with Triak Services Corp. ("NDB"). The first note has a stated
interest rate of "broker call" and matures on December 31, 2000. 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 nine months ended
February 28, 1999. In connection with each of these subordination agreements,
NDBG loaned NDB $3,000,000.
On December 31, 1998, NDBG 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, NDBG loaned Equitrade $22,000,000.
No dividends were paid to NDBG by its wholly owned subsidiaries during the nine
months ended February 28, 1999 and 1998 (unaudited), and the years ended May
31, 1998, 1997 and 1996.
S-8
<PAGE>
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You may rely only on the information contained in this Prospectus. We have not
authorized anyone to provide information different from that contained in this
Prospectus. Neither the delivery of this Prospectus nor sale of common stock
means that information contained in this Prospectus is correct after the date
of this Prospectus. This Prospectus is not an offer to sell or solicitation of
an offer to buy these shares of common stock in any circumstances under which
the offer or solicitation is unlawful.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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<S> <C>
Summary.................................................................. 1
The Offering............................................................. 3
Summary Pro Forma Consolidated Financial Information..................... 4
Risk Factors............................................................. 5
Use of Proceeds.......................................................... 15
Price Range of Common Stock and Dividend Policy.......................... 15
Capitalization........................................................... 16
Business................................................................. 17
Management............................................................... 36
Principal Stockholders................................................... 39
Underwriting............................................................. 41
Legal Matters............................................................ 42
Experts.................................................................. 42
Where You Can Find More Information...................................... 43
Incorporation of Certain Documents by Reference.......................... 43
Index to Pro Forma Condensed Consolidated Financial Statements and
Consolidated Financial Statements....................................... 44
</TABLE>
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2,600,000 Shares
[LOGO]
National Discount Brokers Group, Inc.
Common Stock
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PROSPECTUS
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Deutsche Banc Alex. Brown
U.S. Bancorp Piper Jaffray
June 22, 1999
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