January 12, 1999
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: National Discount Brokers Group, Inc.
Report on Form 10-Q for the Three Months Ended November 30, 1998
Gentlemen:
Enclosed please find the following material submitted on behalf of National
Discount Brokers Group, Inc. ("Company"):
One complete copy of the Company's report on Form 10-Q for the Three Months
Ended November 30, 1998 including financial statements and exhibits.
Thank you for your attention to this matter.
Very truly yours,
/s/ Denise Isaac
Denise Isaac
Chief Financial Officer and
Principal Accounting Officer
CONFORMED
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended November 30, 1998
OR
[ ] Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the transition period from to
-------------- -------------
Commission file number 1-9480
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National Discount Brokers Group, Inc.
--------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Delaware 22-2394480
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10 Exchange Place Centre, Jersey City, New Jersey 07302
---------------------------------------------------------------------
(Address of principal executive offices) (Zip code)
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(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
---- ----
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
14,010,407 shares of Common Stock, par value $.01 per share, were outstanding
on December 31, 1998.
NATIONAL DISCOUNT BROKERS GROUP, INC.
AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Part I - Financial Information
Item 1. - Financial Statements
Consolidated Statements of Financial Condition -
November 30, 1998 (Unaudited) and May 31, 1998 3
Consolidated Statements of Operations and Comprehensive Income (Unaudited) -
Three Months and Six Months Ended November 30, 1998 and 1997 4 - 5
Consolidated Statements of Cash Flows (Unaudited) -
Six Months Ended November 30, 1998 and 1997 6 - 7
Notes to Consolidated Financial Statements (Unaudited) -
November 30, 1998 8 - 10
Item 2. - Management's Discussion and Analysis of
Financial Condition and Results of Operations 11 - 15
Part II - Other Information
Item 1. - Legal Proceedings 15 - 16
Item 4. - Submission of Matters to a Vote of Security Holders 16
Item 6. - Exhibits and Reports on Form 8-K 17
Signatures 18
</TABLE>
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
NATIONAL DISCOUNT BROKERS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
November 30,
1998 May 31,
ASSETS (Unaudited) 1998
------------------ -------------------
<S> <C> <C>
Cash $ 839,331 1,039,121
Receivables:
Brokers and dealers 79,457,590 67,742,508
Other 878,639 727,099
Securities owned, at market value 63,133,266 67,969,111
Investment securities available for sale, at market value 777,112 2,615,000
Investment securities not readily marketable, at fair value 901,320 1,001,320
Loans and notes receivable 1,602,587 760,409
Furniture, fixtures, equipment, and leasehold improvements - at
cost, net of accumulated depreciation and amortization of
$14,110,863 at November 30, 1998 and $11,832,763 at May 31,
1998 15,548,555 18,011,262
Computer software - at cost, net of accumulated amortization of
$2,085,401 at November 30, 1998 and $1,388,843 at May 31, 1998 2,760,756 2,683,635
Identified intangible assets, net of accumulated amortization of
$1,405,519 at November 30, 1998 and $1,275,041 at May 31, 1998 6,119,512 5,988,770
Exchange memberships (market value $8,340,000 at November 30,
1998 and $9,243,500 at May 31, 1998) 7,416,496 7,416,496
U.S. Treasury Obligations, held as collateral 7,901,481 7,667,463
Subordinated notes receivable 6,000,000 3,500,000
Deferred tax asset (net of valuation allowance) 395,421 282,886
Other assets 1,722,214 1,068,534
------------------ -------------------
$ 195,454,280 $ 188,473,614
================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Securities sold, not yet purchased, at market value $ 30,454,375 $ 28,687,486
Accounts payable and accrued expenses, including
compensation payable to officers and employees of
$8,826,889 at November 30, 1998 and $11,216,667
at May 31, 1998 24,552,861 20,203,279
Secured demand notes payable 3,500,000 3,500,000
Income taxes payable 2,966,901 1,189,260
Minority interest in Equitrade 7,860,237 9,465,741
------------------ -------------------
Total liabilities 69,334,374 63,045,766
------------------ -------------------
Commitments and contingencies (Note 4)
Stockholders' equity (Note 5):
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 65,050,817 65,050,817
Cumulative other comprehensive income-
unrealized gain on securities available for sale 777,112 2,615,000
Retained earnings 63,724,242 59,176,152
------------------ -------------------
129,695,603 126,985,401
Less: Treasury stock - at cost, 352,146 shares at
November 30, 1998 and 162,924 shares at May 31, 1998 (3,575,697) (1,557,553)
------------------ -------------------
Total stockholders' equity 126,119,906 125,427,848
------------------ -------------------
$ 195,454,280 $ 188,473,614
================== ===================
The accompanying notes are an integral part of these statements.
</TABLE>
(3)
NATIONAL DISCOUNT BROKERS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended November 30, Six Months Ended November 30,
---------------------------------------- -------------------------------
1998 1997 1998 1997
------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues:
Firm securities transactions - net $ 35,792,751 $ 26,179,150 $ 49,558,327 $ 49,982,502
Commission income 9,555,198 9,590,738 18,399,292 19,293,445
Floor brokerage income 4,593,700 4,004,699 8,501,700 8,200,599
Investment securities gains realized 1,379,790 - 1,428,865 -
Interest income 2,136,424 1,883,830 4,145,444 3,783,846
Fee income 999,478 777,852 1,894,138 1,536,187
Other revenues 23,809 79,573 96,839 129,104
------------------ ------------------- ------------- -------------
54,481,150 42,515,842 84,024,605 82,925,683
------------------ ------------------- ------------- -------------
Expenses:
Compensation and benefits 18,324,190 13,089,596 31,446,562 25,457,045
Clearing and related charges 11,721,373 15,179,031 22,317,997 28,747,413
Communications 2,741,176 2,526,148 5,489,673 4,958,193
Advertising and professional fees 2,891,627 642,374 5,393,067 1,401,297
Depreciation and amortization 1,963,543 1,819,217 3,809,363 3,480,529
Occupancy costs and equipment rental 845,121 617,050 1,607,489 1,223,426
Other expenses 2,718,894 2,367,361 5,117,276 4,719,408
Interest expense 113,310 168,945 230,079 384,023
------------------ ------------------- ------------- -------------
41,319,234 36,409,722 75,411,506 70,371,334
------------------ ------------------- ------------- -------------
Income before minority interest and income taxes 13,161,916 6,106,120 8,613,099 12,554,349
(Income) loss of Equitrade allocated to minority partners (2,664,184) (2,008,746) (142,280) (3,150,153)
------------------ ------------------- ------------- -------------
Income from continuing operations before income taxes 10,497,732 4,097,374 8,470,819 9,404,196
------------------ ------------------- ------------- -------------
Income taxes:
Federal, currently payable 3,109,804 1,350,344 2,579,720 2,975,897
State and local, currently payable 1,562,877 471,136 1,455,544 1,106,816
------------------ ------------------- ------------- -------------
Total current income tax expense 4,672,681 1,821,480 4,035,264 4,082,713
------------------ ------------------- ------------- -------------
Federal, deferred (38,078) (6,624) (76,410) 63,717
State and local, deferred (20,284) (8,106) (36,125) 27,590
------------------ ------------------- ------------- -------------
Total deferred income tax expense (58,362) (14,730) (112,535) 91,307
------------------ ------------------- ------------- -------------
Total income taxes from continuing operations 4,614,319 1,806,750 3,922,729 4,174,020
------------------ ------------------- ------------- -------------
Net income from continuing operations 5,883,413 2,290,624 4,548,090 5,230,176
Discontinued operations
Loss from discontinued operations (net of tax benefit) - (203,331) - (434,411)
------------------ ------------------- ------------- -------------
Net income 5,883,413 2,087,293 4,548,090 4,795,765
------------------ ------------------- ------------- -------------
</TABLE>
(Continued)
(4)
NATIONAL DISCOUNT BROKERS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Unaudited)
(Continued)
<TABLE>
<CAPTION>
Three Months Ended November 30, Six Months Ended November 30,
-------------------------------------- ----------------------------------
1998 1997 1998 1997
------------------ ------------------- --------------- ----------------
<S> <C> <C> <C> <C>
Other comprehensive income (loss), before tax
Unrealized gain (loss) on investment securities
available for sale
Unrealized holding gains (losses) arising during period 482,815 - (409,023) -
Less: reclassification adjustment for gains included
in net income (1,428,865) - (1,428,865) -
------------------ ------------------- --------------- ------------
Other comprehensive income (loss), before tax (946,050) - (1,837,888) -
Income tax benefit related to items of other
comprehensive income (loss) (416,262) - (719,487) -
------------------ ------------------- --------------- ------------
(529,788) - (1,118,401) -
Other comprehensive income (loss), net of tax ------------------ ------------------- --------------- ------------
Comprehensive income $ 5,353,625 $ 2,087,293 $ 3,429,689 $ 4,795,765
================== =================== =============== ============
Net income (loss) per common and common
equivalent share (a)
Basic:
Net income from continuing operations $ 0.42 $ 0.18 $ 0.32 $ 0.41
Net loss from discontinued operations - (0.02) - (0.04)
------------------ ------------------- --------------- ------------
Net income $ 0.42 $ 0.16 $ 0.32 $ 0.37
================== =================== =============== ============
Weighted average common shares outstanding 13,991,923 12,710,468 14,041,304 12,702,523
================== =================== =============== ============
Diluted:
Net income from continuing operations $ 0.42 $ 0.18 $ 0.32 $ 0.41
Net loss from discontinued operations - (0.02) - (0.04)
------------------ ------------------- --------------- ------------
Net income $ 0.42 $ 0.16 $ 0.32 $ 0.37
================== =================== =============== ============
Weighted average common shares outstanding 13,994,535 12,795,991 14,049,294 12,820,713
================== =================== =============== ============
<FN>
(a) The sum of the individual quarters' earnings per common share does not
equal the total amount for the six months ended November 30, 1998 due to
the effect of averaging the number of shares of common stock equivalents
throughout the year.
</FN>
</TABLE>
The accompanying notes are an integral part of these statements.
(5)
NATIONAL DISCOUNT BROKERS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended November 30,
----------------------------------------
1998 1997
------------------ -------------------
<S> <C> <C>
Cash flows from operating activities:
Net income from continuing operations $ 4,548,090 $ 5,230,176
Net loss from discontinued operations - (434,411)
Non-cash items included in net income:
Equity income in partnerships - (500)
Depreciation and amortization 3,809,363 3,787,004
Gain on sale of investment securities available for sale (1,348,984) -
Gain on sale of investment securities not readily marketable (79,881) -
Income of Equitrade allocated to minority partners 142,280 3,150,153
Provision for deferred taxes (112,535) 91,307
(Increase) decrease in operating assets:
Funds segregated for customers - 29,203
Receivables:
Brokers and dealers (11,715,082) 10,082,088
Other (151,540) (144,272)
Securities owned, at market value 4,835,845 (8,246,879)
U.S. Treasury Obligations, held as collateral (234,018) 75,028
Other assets (net of deposits made on furniture, fixtures
and equipment, and leasehold improvements) 487,056 723,300
Increase (decrease) in operating liabilities:
Securities sold, not yet purchased, at market value 1,766,889 (6,715,337)
Accounts payable and accrued expenses 4,349,582 (5,173,169)
Income taxes payable 1,777,641 1,255,625
------------------ -------------------
Net cash provided by operating activities 8,074,706 3,709,316
------------------ -------------------
Cash flows from investing activities:
Proceeds from sale of investment securities available for sale 1,348,984 -
Proceeds from sale of investment securities not readily marketable 79,881 -
Loans made (900,000) -
Principal collected on notes receivable 57,822 63,287
(Purchases) sales of furniture, fixtures and
equipment, and leasehold improvements, net (308,242) (2,902,059)
Deposits made on furniture, fixtures and equipment,
leasehold improvements and computer software (1,040,736) (73,815)
Purchases of computer software (796,277) (1,208,049)
Payment for purchase of identified intangible asset (450,000) -
Issuance of subordinated note (2,500,000) -
------------------ -------------------
Net cash used in investing activities (4,508,568) (4,120,636)
------------------ -------------------
</TABLE>
(Continued)
(6)
NATIONAL DISCOUNT BROKERS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Continued)
<TABLE>
<CAPTION>
Six Months Ended November 30,
----------------------------------------
1998 1997
------------------ -------------------
<S> <C> <C>
Cash flows from financing activities:
Purchase of treasury stock (2,018,144) -
Capital contributions by minority interest - 50,000
Capital withdrawals by minority interest (1,747,784) (1,464,181)
------------------ -------------------
Net cash used in financing activities (3,765,928) (1,414,181)
------------------ -------------------
Net increase (decrease) in cash (199,790) (1,825,501)
Cash at beginning of period 1,039,121 3,033,818
------------------ -------------------
Cash at end of period $ 839,331 $ 1,208,317
================== ===================
</TABLE>
The accompanying notes are an integral part of these statements.
(7)
NATIONAL DISCOUNT BROKERS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
November 30, 1998
Note 1 - Business and organization
National Discount Brokers Group, Inc. ("NDBG") and its subsidiaries
(collectively the "Company") are primarily engaged in the securities business
and in providing related financial services. The Company has two principal
registered broker-dealer wholly owned subsidiaries, Sherwood Securities Corp.
("Sherwood Securities") and Triak Services Corp., doing business as National
Discount Brokers ("NDB"). In addition, NDBG and its wholly owned subsidiary, SHD
Corp., own membership interests in Equitrade Partners L.L.C. ("Equitrade"), a
limited liability company, which is a specialist for securities listed on The
New York Stock Exchange ("NYSE"). On November 30, 1998, Equitrade Partners L.P.
("Old Equitrade") merged into Equitrade, a newly formed limited liability
company. Effective August 14, 1998, NDBG acquired an additional partnership
interest in Old Equitrade from one of its minority partners for $450,000. In the
aggregate, the Company's membership interests comprised approximately 53% of
Equitrade's membership interests as of November 30, 1998 (see Note 7 -
Subsequent Event).
Note 2 - Basis of presentation
The accompanying unaudited consolidated financial statements do not include
all of the information and notes required by generally accepted accounting
principles for complete consolidated financial statements. In the opinion of
management, all adjustments considered necessary for a fair presentation of
consolidated financial condition and results of operations for the periods
presented have been included. All adjustments are of a normal and recurring
nature. It is suggested that these consolidated financial statements be read in
conjunction with the consolidated financial statements and the related notes
included in the Company's 1998 Annual Report on Form 10-K. Certain prior year
amounts have been reclassified to conform to the three and six months ended
November 30, 1998 presentations.
Note 3 - Net income per common share
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings per Share" ("Statement
128"), for periods ending after December 15, 1997. Statement 128 requires a
calculation of basic earnings per share, as well as a dual presentation of basic
and diluted earnings per share on the face of the statement of income. Basic
earnings per share differs from diluted earnings per share in that dilution for
common stock equivalents is excluded.
Net income per common share is computed using the weighted average number
of shares of common stock and common stock equivalents outstanding. Common stock
equivalents include stock issuable under stock options. The treasury stock
method of accounting was used in computing the common stock equivalents for the
computation of diluted earnings per common share.
Note 4 - Commitments and contingencies
Certain significant legal proceedings and matters were previously disclosed
in Item 3, Legal Proceedings, of the Company's 1998 Annual Report on Form 10-K,
and the disclosures regarding such matters are incorporated herein by reference.
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 Securities and Exchange Commission
("SEC"), captioned In the Matter of Certain Market-Making Activities on NASDAQ,
HO-2974. In connection with the settlement, Sherwood Securities consented to the
entry of certain Orders by the SEC instituting proceedings, making findings and
imposing sanctions. Sherwood Securities neither admitted nor denied the
substantive allegations set forth in the Orders. The Orders state that Sherwood
Securities, aided and abetted by certain traders employed by Sherwood Securities
during the relevant time, engaged in or caused certain violations of Section
15(c)(1) and (2) and Section 17(a) of the Securities Exchange Act of 1934
("Exchange Act") and Rules 15c1-2, 15c2-7 and 17a-3 thereunder, and
(8)
orders Sherwood Securities and certain of its traders to cease and desist from
committing or causing future violations of these provisions. In addition, the
Orders also stated that Sherwood Securities had failed to reasonably supervise
its market-making activities, in violation of Section 15(b)(4)(E) of the
Exchange Act.
As part of the settlement, Sherwood Securities has agreed to pay a civil
penalty of $1,000,000 to the SEC and the sum of $8,138 in disgorgement. As
referenced in prior filings, Sherwood Securities previously fully reserved for
the penalty payment, which will be made prior to January 21, 1999. Sherwood
Securities also agreed to a review by an independent consultant appointed by the
SEC of its policies, procedures and practices relating to prevention and
detection of those types of conduct described in the Orders which relate to
Sherwood Securities. Finally, three present and one former trader employed by
Sherwood Securities also consented, neither admitting nor denying the
allegations, to the entry of the Orders and to individual suspensions ranging
from 7 to 12 weeks and individual penalties ranging from $25,000 to $50,000
each.
On July 16, 1996, Sherwood Securities entered into a Stipulation and Order
resolving a civil complaint filed in the United States District Court for the
Southern District of New York (the "Complaint") by the United States Department
of Justice ("DOJ") alleging that Sherwood Securities and 23 other NASDAQ market
makers violated Section 1 of the Sherman Act in connection with certain market
making practices. The Complaint alleges, among other things, that NASDAQ market
makers reached a common understanding to adhere to a "quoting convention"
relating to the manner in which bids and asks would be displayed on NASDAQ. The
relief sought in the Complaint was a declaration that the defendants have
violated Section 1 of the Sherman Act, as well as injunctive relief and such
other relief as the court deemed appropriate. In entering into the Stipulation
and Order, Sherwood Securities did not admit that the DOJ's allegations were
correct, but 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. The Stipulation and Order was approved by
the United States District Court of the Southern District of New York following
a public hearing and that approval was affirmed on appeal by the United States
Court of Appeals for the Second Circuit. No timely petition for review by the
United States Supreme Court has been filed.
As set forth in Item 3, Legal Proceedings, of the Company's Annual Report
on Form 10-K, on April 9, 1997, Sherwood Securities entered into a settlement
agreement (the "Settlement Agreement") with Plaintiffs' co-lead counsel on
behalf of the class action plaintiffs in the case In Re: Nasdaq Market Makers
Antitrust Litigation, 94 Civ. 3996(RWS). On November 9, 1998, Judge Sweet of the
United States District Court for the Southern District of New York (the "Court")
approved the Settlement Agreement and entered a Final Judgment and Order of
Dismissal. The Court's Final Judgment has been appealed to the United States
Court of Appeals for the Second Circuit, and such appeals are pending. The
specific terms of Sherwood Securities' Settlement Agreement are set forth in the
Company's filing on Form 10-K for the fiscal year ended May 31, 1998 and
incorporated herein by reference.
The Company is also involved in other litigation and, except as set forth
above, although there can be no assurance that such lawsuits, arbitrations and
investigations involving the Company are not likely to have a material, adverse
effect on the results of operations of the Company in any future period,
depending in part on the results for such period, based on information currently
available, management of the Company believes that any such lawsuits,
arbitrations and investigations are not likely to have a material adverse effect
on the consolidated financial condition and results of operations or liquidity
of the Company in future periods.
Note 5 - Net capital requirements
As registered broker-dealers, Sherwood Securities, NDB and Equitrade are
subject to the Securities Exchange Act of 1934 Uniform Net Capital Rule 15c3-1
(the "Rule"). As of November 30, 1998, the net capital of Sherwood Securities,
NDB and Equitrade exceeded their required net capital by $45,678,000, $3,045,000
and $26,768,000, respectively.
The Rule also provides that equity capital may not be withdrawn or cash
dividends be paid if the resulting net capital of a broker-dealer would be less
than the amount required under the Rule. Accordingly, at November 30, 1998 the
payment of dividends and advances to the Company by Sherwood Securities, NDB and
Equitrade is limited to $45,478,000, $2,995,000 and $26,718,000, 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 exchange, 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. (see Note 7)
(9)
Note 6 - New Accounting Pronouncement
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income"
("Statement 130"), for periods beginning after December 15, 1997. Statement 130
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 a statement of financial position.
Comprehensive income is defined as the change in equity of a business enterprise
during a period from transactions
and other events and circumstances from nonowner sources. It includes all
changes in equity during a period except those resulting from investments by
owners and distributions to owners. Statement 130 has been implemented by the
Company for the six months ended November 30, 1998.
Note 7 - Subsequent Event
On September 4, 1998, Equitrade signed a letter of intent to with RSF
Partners, L.P. ("RSF"), a New York limited partnership to acquire certain assets
of RSF including all of RSF's rights to act as a specialist on the NYSE. RSF was
a specialist in 39 securities. As of December 31, 1998, RSF and Equitrade
together with the general partners of RSF entered into the Contribution
Agreement. Pursuant to the Contribution Agreement, on December 31, 1998, 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 approximately 46.8%. The staff of the NYSE has required
Equitrade to increase its capital to $55,000,000 as a result of this
transaction. 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., with a six-month
maturity, and the balance was provided by internally generated funds of the
Company. In addition, Equitrade acquired the inventory of securities of RSF, the
fair market value of which (approximately $2,700,000) will be applied to satisfy
$3,500,000 in subordinated loans from Equitrade to RSF. RSF has repaid the
remaining approximately $800,000 of the subordinated loan by a cash transfer to
Equitrade. (See "Management's Discussion and Analysis of Financial Condition and
Results of Operations".)
(10)
Item - 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
The results of continuing operations of National Discount Brokers Group,
Inc. and subsidiaries (collectively the "Company") for the three and six months
ended November 30, 1998 reflect primarily the activities of Sherwood Securities
Corp. ("Sherwood Securities"), Triak Services Corp., doing business as National
Discount Brokers ("NDB"), and Equitrade Partners L.L.C. ("Equitrade"). Sherwood
Securities is primarily engaged in the securities business as a wholesale market
maker in Nasdaq National Market System and Small-Cap securities. NDB is a
discount brokerage firm specializing in trade execution for individual
investors. Equitrade is a registered specialist in equity securities on The New
York Stock Exchange ("NYSE").
The Company's consolidated net income from continuing operations for the
three months ended November 30, 1998 was $5,883,000 compared to $2,291,000 for
the three months ended November 30, 1997.
The Company's consolidated net income from continuing operations for the
six months ended November 30, 1998 was $4,548,000 compared to $5,230,000 for
the six months ended November 30, 1997.
Total revenue for the Company increased by approximately $11,965,000, or
28%, for the three months ended November 30, 1998, as compared with November 30,
1997, and increased $1,099,000, or 1%, for the six months ended November 30,
1998 as compared with November 30,1997. The reasons for the increase in revenues
are set forth below.
Revenue from firm securities transactions increased $9,614,000, or 37%, and
decreased $424,000, or less than 1%, for the three and six months ended November
30, 1998, respectively, as compared with the same periods in the previous year.
The heightened activity in the equity markets, particularly with increased
trading volume in internet and high technology related stocks, resulted in
increases in both the Company's ticket and share volume for the quarter ended
November 30, 1998, as compared to the second quarter a year ago and enabled the
Company to significantly overcome most of the losses recorded during the quarter
ended August 31, 1998.
The Company's commission income decreased by $36,000, or less than 1%, and
by $894,000, or 5%, for the three and six months ended November 30, 1998,
respectively, when compared with the same periods in the prior year. This
decrease occurred even though average daily ticket count remained fairly
consistent at approximately 6,500 tickets per day for the three months ended
November 30, 1998 and 6,180 tickets per day for the six months ended November
30, 1998, when compared with the previous year's comparable periods. The decline
in commission income is primarily attributable to a continued shift in the way
customers trade with NDB, as more customers traded utilizing NDB's lower-priced,
automated systems, Power BrokerTM and WebstationTM, as opposed to using live
representatives at higher commission rates.
Floor brokerage income increased by approximately $589,000, or 15%, and by
$301,000, or 4%, for the three and six months ended November 30, 1998,
respectively, when compared to the prior year. The increases were the result of
a rise in the volume of transactions in the stocks in which the Company acts as
a specialist on the NYSE. However, although share volume was up 47% and 41% for
the three and six months ended November 30, 1998, respectively, over the
comparable periods of the prior year, due to increased competition, floor
brokerage rates have been decreasing as a trend and discounts are often given to
high volume customers.
Realized investment securities gains for the three and six months ended
November 30, 1998 resulted entirely from sales of an aggregate of 124,500 shares
of common stock of Eurotech Ltd. and 170,000 shares of common stock of
Astropower, Inc., respectively. There were no realized investment securities
gains or losses during the three or six-month periods ended November 30, 1997.
Interest income increased by approximately $253,000, or 13%, and $362,000,
or 10%, for the three and six months ended November 30, 1998, respectively, as
compared to the previous year. The increase is primarily due to a rise in
average customer debit and credit balances held with the Company's clearing
broker that led to an increase in interest earned and to larger average amounts
of cash available to earn interest, which was offset by a decrease in average
interest rates.
(11)
Fee income increased by $222,000, or 28%, and $358,000, or 23%, for the
three and six months ended November 30, 1998, respectively, as compared to the
prior year. The increase is principally due to the Company receiving higher Rule
12b-1 fees from money market funds as customers' balances in those funds have
increased since the prior year.
Total expenses for the three months ended November 30, 1998 increased
approximately $4,909,000, or 13%, from $36,410,000 in the quarter ended November
30, 1997 to $41,319,000 during the quarter ended November 30, 1998. Total
expenses for the six months ended November 30, 1998 increased approximately
$5,041,000, or 7%, from $70,371,000 in 1997 to $75,412,000 in 1998. The reasons
for the increase in expenses are set forth below.
Compensation and benefits increased $5,235,000, or 40%, and $5,990,000, or
24% for the three and six months ended November 30, 1998, respectively, compared
with the prior year. The increase is due primarily to a rise in compensation
paid to traders and salesmen. In September 1997, Sherwood Securities began to
pay its traders and certain sales personnel under a new "Annual Trading/Sales
Production Guarantee" program. Under the program, these traders and salesmen are
guaranteed a minimum salary regardless of trading profitability. Prior to
September 1997, they were paid a percentage of trading profits generated as
compensation. In addition, officer and staff salaries were higher than in the
prior year due to new hires.
Clearing and related charges decreased by approximately $3,458,000, or 23%,
and $6,429,000, or 22%, for the three and six months ended November 30, 1998,
respectively, as compared to the prior year. The decrease is due principally to
two factors. First, there was a reduction in clearance charges due to a decrease
in per ticket rates negotiated subsequent to November 30, 1997. Also
contributing to the decrease are lower correspondent fees paid based upon the
overall size and type of the order flow received.
Communications expense, which includes market data services, increased by
approximately $215,000, or 9%, and $531,000, or 11%, for the three and six
months ended November 30, 1998, respectively, as compared to the comparable
periods in the previous year. The increase is mainly due to an increase in the
cost of real-time quotations now being offered on NDB WebstationTM.
Advertising and professional fees increased by approximately $2,249,000, or
350%, and $3,992,000, or 285%, for the three and six months ended November 30,
1998, respectively, as compared to the same periods of the prior year. The
increase is primarily due to a rise in the costs associated with the Company's
new advertising and marketing plan, in addition to legal and professional fees
associated with the conversion of Old Equitrade to a limited liability company
and the acquisition of RSF Partners, L.P.
Depreciation and amortization increased by approximately $144,000, or 8%,
and $329,000, or 9%, for the three and six months ended November 30, 1998,
respectively, as compared to the prior year. This increase is primarily
attributable to depreciation and amortization incurred on fixed asset, leasehold
improvement, computer software and intangible asset additions by the Company
aggregating approximately $4,200,000 during the period from December 1997
through November 1998.
Occupancy costs and equipment rental expenses increased $228,000, or 37%,
and $384,000, or 31%, for the three and six month periods ended November 30,
1998, respectively, as compared to the prior year. The increase is principally
due to an increase in the cost of rental of various computer hardware and
software systems.
Other expenses increased by approximately $352,000, or 15%, and $398,000,
or 8%, for the three and six month periods ended November 30,1998, respectively,
as compared to the prior year. These increases can be attributed to an increase
in entertainment and public relations costs, as well as an increase in
maintenance service contract fees paid in order to maintain infrastructures as
the original warranties on the various systems continue to expire.
Interest expense decreased by approximately $56,000, or 33%, and $154,000,
or 40%, for the three and six months ended November 30, 1998, respectively, as
compared to the previous year. During the three and six months ended November
30, 1997, Sherwood Securities incurred interest charges on the remaining unpaid
balance of approximately $4,600,000 owed in connection with its settlement
agreement, as amended, in the case entitled In Re: NASDAQ Market-Makers
Antitrust Litigation. In addition, the Company incurred interest expense during
the three and six months ended November 30, 1997 on short-term borrowings made
in connection with its trading activities.
(12)
Income of Equitrade allocated to minority partners represents the share of
Equitrade's net income allocated to the partners of Equitrade, other than the
Company and one of its subsidiaries, during the three and six months ended
November 30, 1998 and 1997, respectively. For the three months ended November
30, 1998, Equitrade's net income was up by 23% over the same period of the prior
year. The share allocated to the minority partners, however, increased by 33% as
a larger portion of Equitrade's income for the three months ended November 30,
1998 was generated in the specialist books where the minority partners'
percentage interest was higher than had been generated in the prior year.
Conversely, a larger portion of Equitrade's loss for the three months ended
August 31, 1998 had been generated in the specialist books where the minority
partners' percentage interest was higher. This caused the minority partners'
share of Equitrade's net income for the six months ended November 30, 1998 to
fall 95% from the prior year although Equitrade's net income for the same period
only declined by 89%.
The Company's effective tax rate was approximately 44% for both the three
months ended November 30, 1998 and November 30, 1997 and increased from
approximately 44% for the six months ended November 30, 1997 to approximately
46% for the six months ended November 30, 1998.
For the three and six months ended November 30, 1998, deferred tax benefits
of approximately $58,000 and $112,000, respectively, included in income tax
expense, relate to the future taxability of certain temporary book to tax basis
differences. In conjunction with the deferred tax asset the Company has
recorded, no valuation allowance has been established because, in management's
judgment, it was concluded that it was more likely than not that the benefit
would be realized.
Liquidity
The Company's tangible assets are highly liquid with more than 73% of these
tangible assets consisting of cash or assets readily convertible into cash. The
Company's operations have generally been financed by internally-generated funds.
In addition, at November 30, 1998, margin account borrowings of approximately
$281,000,000 were available to the Company from its clearing brokers. On
December 31, 1998, NDBG borrowed $15,000,000 to increase the capital of
Equitrade as a result of Equitrade's acquisition of RSF Partners, L.P. (See Note
7 to the Consolidated Financial Statements.) The borrowing has a six month
maturity and bears interest at the rate of 6% per annum, with the principal and
interest payable at maturity.
The Company's broker-dealer subsidiaries and affiliates, Sherwood
Securities, NDB and Equitrade, are subject to the SEC's minimum net capital
requirement, which is designed to measure the general financial soundness and
liquidity of broker-dealers. As of November 30, 1998, Sherwood Securities, NDB
and Equitrade had approximately $45,678,000, $3,045,000 and $26,768,000,
respectively, in excess of the required minimum net capital. The net capital
rule imposes financial restrictions upon Sherwood Securities', NDB's and
Equitrade's businesses, which are more severe than those imposed on most other
businesses. The NYSE has the authority to set minimum levels of capitalization
for specialists on the exchange, including Equitrade. The NYSE has imposed a
minimum capital requirement on Equitrade of $55,000,000 as a result of its
transaction with RSF, a NYSE specialist firm.
From time to time, the Company has borrowed funds in connection with its
trading activities. The Company currently has no committed lines of credit and
such borrowings were done on an "as needed" basis. Management is reviewing
alternatives to meeting these funding requirements.
Cash flows from operations will vary on a daily basis as the Company's
portfolio of marketable securities changes. The Company's ability to convert
marketable securities owned into cash is determined by the depth of the market
and the size of the Company's securities positions in relation to the market as
a whole. The portfolio mix also affects the regulatory capital requirements
imposed on Sherwood Securities, NDB and Equitrade, which directly affects the
amount of funds available for operating, investing and financing activities.
Effective August 14, 1998, NDBG purchased an additional interest in Old
Equitrade from one of Old Equitrade's limited partners for $450,000. Concurrent
with this purchase, NDBG loaned $900,000 to another limited partner to enable
the partner to purchase an additional limited partnership interest in Old
Equitrade. The loan, which is due on December 31, 2003, bears interest at the
rate of 7% per annum and is secured by a pledge of the limited partner's
partnership interest.
The Company anticipates that it will spend an additional $1,000,000 over
the next 3 months for its subsidiaries' ongoing technological infrastructure
upgrades and intends to finance these upgrades with internally generated funds.
(13)
Cash flows from the Company's investment activities are directly related to
market conditions.
Between July 1998 and December 1998, Old Equitrade and Equitrade loaned RSF
an aggregate of $3,500,000, under nine subordination agreements, each with
interest payable at 8% per annum and a one-year term. As part of the acquisition
of RSF, Equitrade received approximately $2,700,000 in market value of
securities and $800,000 in cash, which will be applied against the outstanding
balance of the subordinated loans.
In December 1992, the Company announced it would buy back up to 1,500,000
shares of the Company's common stock from time to time in the open market or
through privately negotiated transactions. In June 1998, the Board of Directors
authorized an interim program to repurchase up to an additional 150,000 shares
of the Company's common stock. As of November 30, 1998, 1,594,400 shares had
been reacquired, of which 189,222 shares were repurchased during the six months
ended November 30, 1998. The source of funds for these purchases was internally
generated.
Effects of Inflation
The Company's assets are not significantly affected by inflation because
they are primarily monetary in nature. Management believes that replacement
costs of furniture, equipment and leasehold improvements will not materially
affect operations. However, the rate of inflation affects the Company's
principal expenses such as employee compensation, rent and communication, which
may not be readily recoverable from increased revenues. Because of market forces
and competitive conditions in the securities industry, a broker-dealer may be
unable to restructure its profit margins in order to recover increased costs
related to inflation. Consequently, the Company must rely on increased volume
for this purpose. However, the Company has significant cash balances on deposit
with its principal clearing brokers on which interest is paid which, in the
event there are higher interest rates, which normally result from inflation,
would offset some of the costs.
Year 2000 Compliance
This material is subject to the Year 2000 Information and Readiness
Disclosure Act of 1998.
The Company is preparing for the issues associated with the year 2000,
including changes in the programming of internal and vendor computer systems.
The "year 2000" problem is pervasive and complex as virtually every computer
operation will be affected by the rollover of the two digit year value to 00.
The issue is whether computer systems will properly recognize date sensitive
information when the year changes to 2000. Systems that do not properly
recognize such information could generate erroneous data or cause a system to
fail.
The Company's plan to deal with the year 2000 issue is a five-step plan,
which includes both information technology ("IT") and non-information technology
("non-IT") systems. IT systems include the Company's trading system, the
Company's accounting software and the NDB WebstationTM. Non-IT systems include
the Company's headquarters' water, sprinkler and elevator systems. The five
steps are awareness, assessment, renovation, validation and implementation.
Awareness required the notification of all employees, particularly senior
management, of the potential year 2000 problem. Assessment included taking
inventory of every product or service produced or used by the Company that
relies on the use of dates. The date could be used to store, search, retrieve or
calculate information. The awareness and assessment phases of the plan were 100%
complete as of November 30, 1998. Renovation, which has also been completed as
of November 1998, includes the conversion of those systems that have year 2000
problems into year 2000 compliant systems. Validation comprises the testing of
all new systems by using test data with dates that include the year 2000. This
is the certification phase of the Company's production platforms. Implementation
will be a final review of all year 2000 production systems, IT and non-IT, in
service. The Company has constructed a dedicated year 2000 test development
environment to eliminate any potential risks to the production platforms for use
in the validation phase of this plan. The Company expects the validation and
implementation phases to be completed by June 1999. The Company is dependent
upon services rendered by third parties, such as telecommunications, electric
and clearance, which may have a material effect on operations. These essential
service providers have indicated to the Company that they will be year 2000
compliant in time to meet the Company's schedule although management presently
has no assurance that such plans will be implemented on a timely basis.
The Company estimates that it will spend $500,000 for software
modifications, hardware and testing related to year 2000. Through November 30,
1998, the Company has spent approximately $93,000 of which $13,000 was
(14)
incurred during the three months ended November 30, 1998.
The Company has assessed that business interruption is the most reasonably
likely worst case year 2000 scenario although the effect upon the Company's
results of operations, liquidity and financial condition is unknown.
At this time, the Company is in the process of formulating contingency
plans should vendors or customers fail to become compliant although no set
timetable has been established. In case of a non-replaceable vendor suffering a
failure in the year 2000, the Company could be materially affected.
Forward Looking Statements
Statements regarding the Company's expectations as to its future operations
and financial condition and certain other information contained in this Form
10-Q or in documents incorporated herein by reference constitute forward looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. Although the Company believes that its expectations are based on
reasonable assumptions within the bounds of its knowledge of its business and
operation, there can be no assurance that actual results will not differ
materially from its expectations. Factors which could cause actual results to
differ from expectations include a general downturn in the economy, changes in
the level of activity of securities markets in which the Company participates,
changes in government policy or regulation and unforeseen costs and other
effects related to legal proceedings or investigations of governmental and
self-regulatory organizations.
PART II - OTHER INFORMATION
Item 1 - LEGAL PROCEEDINGS
Certain significant legal proceedings and matters were previously disclosed
in Item 3, Legal Proceedings, of the Company's 1998 Annual Report on Form 10-K,
and the disclosures regarding such matters are incorporated herein by reference.
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 Securities and Exchange Commission
("SEC"), captioned In the Matter of Certain Market-Making Activities on NASDAQ,
HO-2974. In connection with the settlement, Sherwood Securities consented to the
entry of certain Orders by the SEC instituting proceedings, making findings and
imposing sanctions. Sherwood Securities neither admitted nor denied the
substantive allegations set forth in the Orders. The Orders state that Sherwood
Securities, aided and abetted by certain traders employed by Sherwood Securities
during the relevant time, engaged in or caused certain violations of Section
15(c)(1) and (2) and Section 17(a) of the Securities Exchange Act of 1934
("Exchange Act") and Rules 15c1-2, 15c2-7 and 17a-3 thereunder, and orders
Sherwood Securities and certain of its traders to cease and desist from
committing or causing future violations of these provisions. In addition, the
Orders also stated that Sherwood Securities had failed to reasonably supervise
its market-making activities, in violation of Section 15(b)(4)(E) of the
Exchange Act.
As part of the settlement, Sherwood Securities has agreed to pay a civil
penalty of $1,000,000 to the SEC and the sum of $8,138 in disgorgement. As
referenced in prior filings, Sherwood Securities previously fully reserved for
the penalty payment, which will be made prior to January 21, 1999. Sherwood
Securities also agreed to a review by an independent consultant appointed by the
SEC of its policies, procedures and practices relating to prevention and
detection of those types of conduct described in the Orders which relate to
Sherwood Securities. Finally, three present and one former trader employed by
Sherwood Securities also consented, neither admitting nor denying the
allegations, to the entry of the Orders and to individual suspensions ranging
from 7 to 12 weeks and individual penalties ranging from $25,000 to $50,000
each.
On July 16, 1996, Sherwood Securities entered into a Stipulation and Order
resolving a civil complaint filed in the United States District Court for the
Southern District of New York (the "Complaint") by the United States Department
of Justice ("DOJ") alleging that Sherwood Securities and 23 other NASDAQ market
makers violated Section 1 of the Sherman Act in connection with certain market
making practices. The Complaint alleges, among other things, that NASDAQ market
makers reached a common understanding to adhere to a "quoting convention"
relating to the manner
(15)
in which bids and asks would be displayed on NASDAQ. The relief sought in the
Complaint was a declaration that the defendants have violated Section 1 of the
Sherman Act, as well as injunctive relief and such other relief as the court
deemed appropriate. In entering into the Stipulation and Order, Sherwood
Securities did not admit that the DOJ's allegations were correct, but 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. The Stipulation and Order was approved by the United States
District Court of the Southern District of New York following a public hearing
and that approval was affirmed on appeal by the United States Court of Appeals
for the Second Circuit. No timely petition for review by the United States
Supreme Court has been filed.
As set forth in Item 3, Legal Proceedings, of the Company's Annual Report
on Form 10-K, on April 9, 1997, Sherwood Securities entered into a settlement
agreement (the "Settlement Agreement") with Plaintiffs' co-lead counsel on
behalf of the class action plaintiffs in the case In Re: Nasdaq Market Makers
Antitrust Litigation, 94 Civ. 3996(RWS). On November 9, 1998, Judge Sweet of the
United States District Court for the Southern District of New York (the "Court")
approved the Settlement Agreement and entered a Final Judgment and Order of
Dismissal. The Court's Final Judgment has been appealed to the United States
Court of Appeals for the Second Circuit, and such appeals are pending. The
specific terms of Sherwood Securities' Settlement Agreement are set forth in the
Company's filing on Form 10-K for the fiscal year ended May 31, 1998 and
incorporated herein by reference.
The Company is also involved in other litigation and, except as set forth
above, although there can be no assurance that such lawsuits, arbitrations and
investigations involving the Company are not likely to have a material, adverse
effect on the results of operations of the Company in any future period,
depending in part on the results for such period, based on information currently
available, management of the Company believes that any such lawsuits,
arbitrations and investigations are not likely to have a material adverse effect
on the consolidated financial condition and results of operations or liquidity
of the Company in future periods.
Item 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Company held an Annual Meeting of its Stockholders on October
20, 1998.
(b) (i) The following persons were elected directors for a term of
three years:
<TABLE>
<CAPTION>
Votes Votes
For Withheld
<S> <C> <C>
Arthur Kontos 13,265,868 45,777
Richard J. Marino 13,265,943 45,702
Ralph N. Del Deo 13,266,068 45,577
</TABLE>
The following persons continued as directors:
Dennis Marino, James H. Lynch, Jr., Stephen J. DiLascio, Carl
H. Hewitt, John P. Duffy and Thomas Neumann.
(ii) The shareholders ratified the appointment of KPMG Peat Marwick
LLP as the Company's independent auditors for the fiscal year
ending May 31, 1999. The following was the shareholder vote
on this matter:
<TABLE>
<CAPTION>
<S> <C>
For: 13,298,234
Against: 5,101
Withheld: 8,310
Broker Non-Vote: 0
</TABLE>
(16)
Item 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit 11 - Computation of Net Income Per Common Share
Exhibit 27 - Financial Data Schedule
(b) The Company filed no reports on Form 8-K during the quarter ended
November 30, 1998.
(17)
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
National Discount Brokers Group, Inc.
--------------------------------------
Date: January 12, 1999 By: Dennis Marino
---------------------------- --------------------------------------
Dennis Marino
Executive Vice President
and Chief Administrative
Officer
Date: January 12, 1999 By: Denise Isaac
---------------------------- --------------------------------------
Denise Isaac
Chief Financial Officer and
Principal Accounting Officer
(18)
EXHIBIT 11
NATIONAL DISCOUNT BROKERS GROUP, INC. AND SUBSIDIARIES
COMPUTATION OF NET INCOME PER COMMON SHARE
<TABLE>
<CAPTION>
Three Months Ended November 30,
Basic Diluted
------------------ ------------------- --------------- ------------
1998 1997 1998 1997
------------------ ------------------- ---------------- ------------
<S> <C> <C> <C> <C>
Common stock and common stock equivalents:
Average common stock outstanding 13,991,923 12,710,468 13,991,923 12,710,468
Average common stock equivalents
issuable under stock options - - 2,612 85,523
------------------ ------------------- --------------- ------------
Total average common stock and common stock
equivalents used for earnings per share computation 13,991,923 12,710,468 13,994,535 12,795,991
================== =================== =============== ============
Income:
Net income from continuing operations $ 5,883,413 $ 2,290,624 $ 5,883,413 $ 2,290,624
Net loss from discontinued operations - (203,331) - (203,331)
------------------ ------------------- --------------- ------------
Net income $ 5,883,413 $ 2,087,293 $ 5,883,413 $ 2,087,293
================== =================== =============== ============
Net income (loss) per common and common equivalent share:
Net income from continuing operations $ 0.42 $ 0.18 $ 0.42 $ 0.18
Net loss from discontinued operations - (0.02) - (0.02)
------------------ ------------------- --------------- ------------
$ 0.42 $ 0.16 $ 0.42 $ 0.16
================== =================== =============== ============
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended November 30,
Basic Diluted
------------------ ------------------- --------------- ------------
1998 1997 1998 1997
-------------------- ---------------------------------------------------
<S> <C> <C> <C> <C>
Average common stock outstanding 14,041,304 12,702,523 14,041,304 12,702,523
Average common stock equivalents
issuable under stock options - - 7,990 118,190
------------------ ------------------- --------------- ------------
Total average common stock and common stock
equivalents used for earnings per share computation 14,041,304 12,702,523 14,049,294 12,820,713
================== =================== =============== ============
Income:
Net income from continuing operations $ 4,548,090 $ 5,230,176 $ 4,548,090 $ 5,230,176
Net loss from discontinued operations - (434,411) - (434,411)
------------------ ------------------- --------------- ------------
Net income $ 4,548,090 $ 4,795,765 $ 4,548,090 4,795,765
================== =================== =============== ============
Net income (loss) per common and common equivalent share (a):
Net income from continuing operations $ 0.32 $ 0.41 $ 0.32 $ 0.41
Net loss from discontinued operations - (0.04) - (0.04)
------------------ ------------------- --------------- ------------
Net income $ 0.32 $ 0.37 $ 0.32 $ 0.37
================== =================== =============== ============
<FN>
(a) The sum of the individual quarters' earnings per common share does not
equal the total amount for the six months ended November 30, 1998 due to
the effect of averaging the number of shares of common stock equivalents
throughout the year.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> BD
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements for the six months ended November 30, 1998 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAY-31-1999
<PERIOD-START> JUN-01-1998
<PERIOD-END> NOV-30-1998
<CASH> 839,331
<RECEIVABLES> 87,938,816
<SECURITIES-RESALE> 0
<SECURITIES-BORROWED> 0
<INSTRUMENTS-OWNED> 63,133,266
<PP&E> 15,548,555
<TOTAL-ASSETS> 195,454,280
<SHORT-TERM> 0
<PAYABLES> 27,519,762
<REPOS-SOLD> 0
<SECURITIES-LOANED> 0
<INSTRUMENTS-SOLD> 30,454,375
<LONG-TERM> 3,500,000
0
0
<COMMON> 143,432
<OTHER-SE> 125,976,474
<TOTAL-LIABILITY-AND-EQUITY> 195,454,280
<TRADING-REVENUE> 49,558,327
<INTEREST-DIVIDENDS> 4,145,444
<COMMISSIONS> 26,900,992
<INVESTMENT-BANKING-REVENUES> 0
<FEE-REVENUE> 1,894,138
<INTEREST-EXPENSE> 230,079
<COMPENSATION> 31,446,562
<INCOME-PRETAX> 8,470,819
<INCOME-PRE-EXTRAORDINARY> 4,548,090
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,548,090
<EPS-PRIMARY> 0.32
<EPS-DILUTED> 0.32
</TABLE>
