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Securities and Exchange Commission
Washington, D.C. 20549
Form 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
[X] Annual Report Pursuant To Section 13 or 15(d)
Of The Securities Exchange Act Of 1934
For the fiscal year ended May 31, 2000
Or
[ ] Transition Report Pursuant To Section 13 or 15(d)
Of The Securities Exchange Act Of 1934
For the Transition Period from to
Commission File No. 1-9480
National Discount Brokers Group, Inc.
(Exact name of registrant as specified in its charter)
Delaware 22-2394480
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
10 Exchange Place Centre, Jersey City, New Jersey 07302
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (201) 946-2200
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class On which registered
Common Stock, $.01 par value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of June 30, 2000, 20,998,782 common shares were outstanding, and the
aggregate market value of the common shares of National Discount Brokers Group,
Inc. held by non-affiliates was approximately $338,000,000(1).
Documents Incorporated By Reference
Document Incorporated Part of Report
By Reference Into Which Incorporated
Proxy Statement for Annual Meeting
to be held October 25, 2000 Part III
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(1) For purposes of this calculation, the outstanding shares of common stock
beneficially owned by directors and executive officers of the registrant and
both Peter R. Kellogg and his affiliates and Deutsche Bank AG and its
affiliates, as reported in their respective most recent filing pursuant to
Section 13 (d) of the Securities Exchange Act of 1934, as amended, were deemed
owned by affiliates. The registrant does not admit that any such person is an
affiliate of the registrant.
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TABLE OF CONTENTS
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PART I
Item 1. Business............................................................................. 1
Introduction.................................................................... 1
Recent Developments............................................................. 2
Financial Information About Segments............................................ 3
Description of Business......................................................... 3
Revenue by Source.......................................................... 3
Retail Discount Brokerage Services - NDB.com............................... 4
Nasdaq Market Making - NDB Capital Markets.................................14
Proposed Self-Clearing Operations - Millennium Clearing
Company....................................................................16
Investments................................................................17
Personnel............................................................................18
Competition..........................................................................18
Regulation...........................................................................19
Customer Protection and Insurance....................................................20
Net Capital and Customer Reserve Requirements........................................21
Item 2. Properties...........................................................................22
Item 3. Legal Proceedings and Contingencies..................................................22
Item 4. Submission of Matters to a Vote of Security Holders..................................23
PART II
Item 5. Market for NDB Group's Common Stock and Related Security Holder
Matters..............................................................................23
Unregistered Sales of Securities.....................................................24
Item 6. Selected Consolidated Financial Data.................................................24
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations.......................................................................... 26
Results of Operations...........................................................26
Liquidity and Capital Resources.................................................35
Effects of Inflation............................................................37
Impact of the Year 2000 Issue...................................................37
Looking Ahead...................................................................37
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Item 7a. Quantitative and Qualitative Disclosures About Market Risk...........................38
Item 8. Financial Statements and Supplementary Data..........................................40
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure...........................................................................40
PART III
Item 10. Directors and Executive Officers of the Company......................................41
Item 11. Executive Compensation...............................................................41
Item 12. Security Ownership of Certain Beneficial Owners and Management.......................41
Item 13. Certain Relationships and Related Transactions.......................................41
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K......................41
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Forward Looking Statements
Statements regarding the Company's expectations and beliefs as to its
future operations, plans or financial condition and certain other information
contained in the Form 10-K, including, but not limited to, the material under
the headings "Impact of Year 2000 Issue", "Looking Ahead" and "Legal Proceedings
and Contingencies", or in documents incorporated herein by reference constitute
forward looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Although the Company believes that its
expectations and beliefs are based on reasonable assumptions within the bounds
of its knowledge of its business and operation, there can be no assurance that
actual results will not differ materially from its expectations or beliefs.
Factors which could cause actual results to differ from expectations or beliefs
include a general downturn of the economy, changes in the level of activity or
structure of securities markets in which the Company participates, changes in
customer growth, unplanned expense increases, inability of the Company to
attract or retain key employees, changes in government policy or regulation and
unforeseen costs and other effects related to legal proceedings or investigation
of governmental and self-regulatory organizations.
-ii-
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PART I
Item 1. Business
Introduction
National Discount Brokers Group, Inc. ("NDB Group") is a holding
company whose principal wholly owned subsidiaries are National Discount Brokers
Corporation, doing business as NDB.com ("NDB.com"), and NDB Capital Markets
Corporation ("NDBC"), formerly Sherwood Securities Corp. NDB Group and its
subsidiaries, collectively referred to as the "Company", are primarily engaged
in the securities business and in providing related financial services.
NDB.com, a registered broker-dealer, is a deep discount securities
brokerage firm specializing in trade execution for individual investors with
offices in Jersey City, New Jersey. Customers are offered automated securities
order placement and information services through the Internet, as well as,
through touch-tone telephone and registered representatives.
NDBC was formed in 1968 and specializes in the market making of Nasdaq and other
over-the-counter securities and provides trade execution services primarily to
broker-dealer and institutional customers. As a national trading firm with
offices in Jersey City, New Jersey; Chicago, Illinois; Denver, Colorado; Los
Angeles, California; and Boston, Massachusetts, NDBC traded approximately 4,300
Nasdaq and other over-the-counter securities, as of June 30, 2000, as a market
maker and principal for its own account.
NDB Group and another of its wholly owned subsidiaries, SHD Corporation
("SHD"), also owned membership interests in Equitrade Partners, L.L.C., a
Delaware limited liability company ("Equitrade"). Equitrade was a registered
specialist on the New York Stock Exchange ("NYSE"). On June 18, 1999, the
Company sold its 46.845% membership interest in Equitrade to a subsidiary of
Spear Leeds & Kellogg, L.P. ("SLK"), for cash. The operations of Equitrade have
been reflected in discontinued operations in the accompanying audited financial
statements.
In July 1999, NDB Group formed Millennium Clearing Company, L.L.C.
("Millennium") as a wholly owned subsidiary for the purpose of providing
clearing services initially for NDBC and NDB.com and eventually for other
correspondents. Management of the Company anticipates the commencement of
clearing for NDB.com and NDBC by Millennium during early-calendar year 2001.
NDB Group was incorporated under the laws of Delaware in December 1981
under the name The Sherwood Equity Group Ltd. It changed its name to The
Sherwood Capital Group, Inc. in 1983 and to The Sherwood Group, Inc. in 1987. In
December 1997, NDB Group adopted its present name. NDB Group's common stock is
listed on the NYSE under the symbol "NDB".
NDB Group's principal executive offices are located at 10 Exchange
Place Centre, Jersey City, New Jersey and its telephone number is (201)
946-2200.
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Recent Developments
On June 18, 1999, the Company sold its 46.845% interest in Equitrade,
to a subsidiary of SLK. The Company received approximately $85 million in cash,
comprised of a net pre-tax book gain of approximately $36 million and the return
of capital and other cash payments. The $85 million cash payment was net of the
repayment of a $15 million loan made by SLK to NDB Group. The gain from this
transaction has been recognized in the financial statements for the fiscal year
ending May 31, 2000.
On June 25, 1999, NDB Group received approximately $91.6 million, net
of underwriting discounts and commissions and estimated expenses, from the
underwritten public offering of 2,990,000 shares of its common stock.
On February 7, 2000, NDB Group sold an aggregate of 500,000 shares of
its common stock and warrants convertible into an additional 500,000 shares of
its common stock in a private placement to Go2Net, Inc. ("Go2Net") and Vulcan
Ventures Incorporated ("Vulcan") for $13,500,000. The warrants were exercised
during March and April 2000 with NDB Group receiving additional aggregate
proceeds of $16,500,000. Russell C. Horowitz, Chairman, Chief Executive Officer,
Chief Financial Officer and co-founder of Go2Net, was elected to the Board of
Directors of NDB Group effective Monday, February 7, 2000. Mr. Horowitz joined
the board as part of the Company's agreement with Go2Net and Vulcan.
On March 28, 2000, NDB Group announced that it had entered into a
non-binding letter of intent (the "Letter") with Deutsche Bank Americas Holding
Corporation ("DBA"), an affiliate of Deutsche Bank AG ("DB"), pursuant to which
NDB Group would sell 3,000,000 shares of its common stock to DBA or one of its
designated affiliates for $45.31 per share or $135,930,000 in gross proceeds
(the "Investment"). On May 15, 2000, NDB Group and DB U.S. Financial Markets
Holding Corporation ("DBUS"), an affiliate of DB, entered into a definitive
agreement (the "Securities Purchase Agreement") respecting the Investment. On
June 15, 2000, the transaction was consummated.
In connection with the Investment, on June 15, 2000, Kevin Parker,
Managing Director and Global Head of Cash Equity Sales and Trading for DB, was
elected to the board of directors of NDB Group.
In connection with the Investment (i) NDB Group and DBUS and certain
other parties entered into a Registration Rights Agreement (the "Registration
Rights Agreement") covering the right of DBUS to have its shares of common stock
of NDB Group registered under the Securities Act of 1933, as amended; (ii) NDB
Group and Deutsche Bank AG ("DB") entered into a Stockholder Agreement (the
"Stockholder Agreement") providing for (A) the prohibition of certain sales by
NDB Group of Voting Capital Stock (as defined) or Common Stock Equivalents (as
defined) of NDB Group without the consent of DB, (B) certain rights of DB to
acquire Common Stock of NDB Group from NDB Group in the event of issuances or
sales of Common Stock of NDB Group by NDB Group, (C) the appointment of a
representative of DB to the Board of Directors of NDB Group, (D) restrictions on
the voting of Voting Capital Stock of NDB Group held by DB, (E) restrictions on
DB acquiring shares of Voting Capital Stock of NDB Group in excess of the
Standstill Percentage (as defined), (F) the obligation of DB to sell shares of
Common Stock of NDB Group to NDB Group in certain circumstances, and (G)
restrictions on DB conducting proxy contests, or taking certain other actions
with regard to NDB Group; (iii) DB entered into an agreement with NDB.com (the
"Securities Research Agreement") regarding the providing of certain research
materials prepared by DB or certain of its affiliates to customers of NDB Group
or its subsidiaries in the United States, and (iv) DB entered into an agreement
with NDB Group (the "IPO Agreement") with respect to NDB Group or one of its
affiliates being a distributor of initial public offerings of equity securities
in the United States if DB or one of its affiliates is an underwriter of the
securities and the internet is a distribution channel.
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DB and NDB Group also executed term sheets (the "Term Sheets") for
joint ventures between DB or one of and more of its affiliates and NDB Group or
one or more of its affiliates regarding the offering of online discount
brokerage in Western Europe and the rest of the world other than Western Europe
and the United States. There can be no assurance the parties will enter into
definitive agreements regarding these joint ventures.
The foregoing is a summary of the Investment and the related
transactions and is not complete. The Securities Purchase Agreement, the
Securities Research Agreement, the Registration Rights Agreement, the IPO
Agreement, the Stockholders Agreement and the Term Sheets are incorporated
herein by reference. Such agreements were filed as exhibits to either NDB
Group's Forms 8-K dated May 18, 2000 and June 15, 2000 or this Form 10-K.
Financial Information About Segments
The Company provides financial services to individuals, broker-dealers
and institutional customers through two segments: NDB.com, which provides deep
discount brokerage services to individuals, and NDBC, which provides brokerage
services as a market maker to institutions and other broker-dealers. Financial
information by segment for the three years ended May 31, 2000 is set forth in
Note 15 in the Notes to Consolidated Financial Statements and does not include
the financial results of discontinued operations, primarily those of Equitrade.
Description of Business
Revenue by Source
The following table sets forth sources of the Company's revenues from
continuing operations on a comparative basis for the periods indicated.
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Fiscal Year Ended May 31,
2000 1999 1998
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Amount % Amount % Amount %
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Firm securities
transactions (net) $286,956,912 74.39 $145,319,935 69.91 $90,256,181 65.02
Commission income 68,576,731 17.78 45,250,436 21.77 37,052,201 26.69
Investment securities
gain - - 2,370,242 1.14 63,625 0.05
Interest and dividend
income 23,856,633 6.18 10,022,013 4.82 7,599,179 5.47
Fee income 6,094,867 1.58 4,308,393 2.07 3,567,837 2.57
Other income 273,336 0.07 594,153 0.29 272,921 0.20
---------- ------ ------------ ----- ------------ -----
Total revenue $385,758,479 100.00 $207,865,172 100.00 $138,811,944 100.00
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Certain prior year amounts have been reclassified to conform to the fiscal year
ended May 31, 2000 presentation. This table should be read in connection with
the Company's consolidated financial statements.
Retail Discount Brokerage Services -- NDB.com
Introduction
NDB.com offers its customers a wide variety of financial products and
services and investment tools designed to appeal to all self-directed investors,
from active traders and life goal planners to serious investors. NDB.com has
designed its products and services to allow investors to create their own
diversified, manageable portfolios.
Execution Services
NDB.com's customers can place orders with NDB.com to buy or sell:
o any stock listed on Nasdaq, the NYSE or AMEX. Customers can place
market orders, limit orders (good until canceled or day), stop loss
orders, stop limit orders (on listed securities) and most short sales;
o more than 10,000 load, no load and no transaction fee mutual funds.
Customers can search NDB.com's website mutual fund center for funds
meeting their investment needs. NDB.com also offers monthly
investments in any of these mutual funds through automatic account
debit;
o equity and index options listed on the NYSE, AMEX, Chicago Board
Options Exchange or the Philadelphia Stock Exchange; and
o fixed income securities, such as U.S. Treasury obligations, municipal
bonds and corporate bonds.
NDB.com offers its customers the ability to place orders after the
securities markets close. These orders are automatically submitted prior to the
next day's market opening. NDB.com also provides customers real-time
notification of trade execution by automated call back, fax or e-mail and
arranges for the transmittal of shareholder information, such as proxy
statements, annual reports and tender offer materials.
Through its Flat Fee Trading(R) program, NDB.com executes all retail
orders for execution during regular market hours at the following prices
regardless of the number of Nasdaq shares involved (limited to 5,000 shares for
exchange listed securities):
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Market Orders Limit Orders
$14.75 for orders placed online $19.75 for orders placed online
$19.95 for orders placed by $22.95 for orders placed by
PowerBroker PowerBroker
$24.95 for orders placed with our $27.95 for orders placed with
registered representatives our registered representatives
NDB.com recently developed an interactive application capability on its
website. 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.
Next, the customer completes a simple, user-friendly application and
electronically submits the application. NDB.com conducts a compliance and credit
review for each application and then notifies the customer via e-mail whether
his or her application has been accepted. When combined with an electronic
transfer of funds from the new customer, trading can begin the next business
day.
NDB.com believes individual investors gain many advantages from their
NDB.com accounts, including:
o flat fee commission rates for all Nasdaq trades regardless of the
number of shares or dollar amount involved;
o flat-fee commission rates for all listed trades up to 5,000 shares of a
given security per day;
o full commission refund of up to $27.95 if, for any reason, a customer
is not legitimately satisfied with its service;
o real-time account balances and a list of pending orders;
o no minimum account balance requirement to open or maintain an account;
o unlimited insurance protection provided through NDB.com's clearing
broker for securities;
o NDB.com's "Active Trader's Advantage" program so customers can place
multiple orders for the same stock, on the same side of the market
(i.e., all buys or all sells), on the same day for a single flat fee
commission;
o NDB.com's Buy for Free program that allows for the commission-free
purchase of the stock of the company for which the NDB.com customer
works;
o NDB.com's free dividend reinvestment program that allows customers to
purchase additional shares by automatically reinvesting cash dividends
and capital gains; and
o educational programs through NDB University, its joint venture with
Time Inc. New Media's money.com.
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Market Data and Financial Information
During trading hours, NDB.com continually receives and posts detailed
real-time stock quotes, market information and financial news to provide
investors with the information needed to make investment decisions. NDB.com
believes that real-time information services facilitate and encourage customer
investment ideas and increase transaction volume. NDB.com has arrangements with
leading content providers to supply NDB.com with information that customers
desire in connection with their investment decisions. Unless otherwise noted,
all information is available free of charge to both visitors to NDB.com's
website and NDB.com's customers.
NDB.com has engaged eLogic Communications ("eLogic") to gather,
integrate and manage the data supplied by NDB.com's content providers. eLogic
presents this data to NDB.com in a format that is easy to use and navigate.
Real-time quotes, newsletters and some research reports from unaffiliated third
parties are fed directly to NDB.com by individual content providers.
Quotes. Real-time quotes, only available to NDB.com's customers,
are provided by Reuters. Delayed quotes are provided by S&P Comstock.
News. NDB.com receives news and press releases from Reuters, PR
Newswire and Business Wire. The latest business stories and earnings reports are
posted throughout the day, and users can search for information on particular
companies or topics.
Charts. eLogic has developed charting tools that use historical
information provided by Inverson Financial to compare companies and industries.
Analyst Reports. Zacks Investment Research provides research analysts'
recommendations and earnings forecasts.
Insider Trading. Vicker's Stock Research provides detailed insider
trading data. This information is available only to NDB.com's customers.
Research Reports. Market Guide provides fundamental research reports on
over 11,000 public companies, including price performance history, key ratios,
sales and earnings and historical financial statements. This information is only
available to NDB.com's customers.
Market Commentary. Briefing.com and TheStreet.com provide live market
commentary and continual market analysis throughout the day. This information
is available only to NDB.com's customers.
Market Information. NDB.com offers a complete market summary, including
current market indices, most active stocks, intraday market graphics and 90 day
market graphics. NDB.com customers can access more comprehensive information,
such as international market indices and treasury bond, yen and euro quotes.
SEC Filings. NDB.com provides a link to full-text SEC filings by every
public company.
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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 NDB.com's registered
representatives. Customers also receive:
o real-time listing of all their portfolio assets, including current
prices and current market values;
o detailed account balance and transaction information, including cash
and money fund balances, net market value, dividends received, interest
income, deposits and withdrawals;
o quarterly account statements;
o annual tax statements;
o daily profit and loss statements; and
o monthly account statements for active customers, summarizing account
activity, including asset valuation, transaction history, interest
income and distribution summary.
NDB.com is using the Open Financial Exchange (OFX) format to provide customers
the ability to view their portfolio holdings on Yahoo! Finance. NDB.com is
currently evaluating the extension of this service so that customers can
download their online account information directly into personal financial
software programs such as Intuit's Quicken, Microsoft's MSN MoneyCentral
Investor Portfolio and Microsoft's Money.
Cash Management Services
NDB.com offers several cash management options to its customers. These
include ProCash Plus accounts which feature unlimited check writing privileges,
telephone bill payment and access to a Mastercard debit card. NDB.com also
offers customers access to a no fee First USA Visa credit card and electronic
funds transfer by touch-tone telephone. Customers earn interest on uninvested
funds or by investing in several Alliance money market funds.
NDB University
NDB.com offers all website users lessons in finance, investing and
money management through NDB University, its joint venture with Time Inc. New
Media's money.com. These programs are designed to help customers invest, save,
borrow and spend more wisely. New lessons are introduced periodically and
include topics such as the fundamentals of investing in the stock market, issues
to consider when setting investment priorities and tips for saving for college
and planning for retirement. Interactive programs allow investors to personalize
the lessons to fit their individual objectives.
Specialized Services
NDB.com offers specialized services designed to appeal to registered
investment advisors, institutional investors and high net worth individuals.
NDB.com provides custodial, trading and support services to registered
investment advisors ("RIAs") who manage their customers' portfolios. NDB.com
assigns each RIA to an account manager who assists in opening the account and
acts as a liaison with the execution services department. NDB.com also has
customer service representatives and a preferred execution desk dedicated to
RIAs.
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NDB.com has established an institutional trading desk to meet the needs
of institutional investors and hedge funds, which tend to be more active
traders. They frequently place block trades, usually trades of 10,000 shares or
more. NDB.com charges negotiated fees rather than flat fees for these trades.
Through its Concierge Desk, NDB.com has registered customer service
representatives dedicated to meeting the needs of active traders and high net
worth individuals who maintain large account balances at NDB.com.
Investment Tools
NDB.com offers several investment tools designed to assist customers in
making investment decisions. These investment tools include:
Stock Screening. Stockpoint provides two stock screening tools that
permit investors to search for stocks that fit their particular needs on the
NYSE, Nasdaq and AMEX. Customers can search fundamental data on over 8,900
companies based on a variety of parameters, including market capitalization,
price, return on equity and percentage of institutional ownership.
Mutual Fund Screening. Stockpoint provides two mutual fund screening
tools that permit investors to screen over 10,000 mutual funds on up to 27
parameters such as performance, risk, expenses/fees and statistics. Customers
can quickly add, sort, and reorder data fields in their results.
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.
IPOinfo. IPO.com provides customers with Initial Public Offering
up-to-date pricing, filings, calendar, news, and underwriters. Customers also
have the ability to search current IPO information.
Research on Demand. NDB.com offers access to other premium investment
research and analysis for a fee. Available reports include S&P Stock and
Industry Reports and First Call Earnings Estimates.
NDB's StockPulse. A free, proprietary, real-time streaming tool
that tracks securities and displays trade activity in dynamic graphs.
NDB-Silicon Investor Message Boards. NDB.com offers a co-branded
version of the Silicon Investor financial discussion boards on ndb.com.
Customers have the ability to read and post messages at no charge.
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Fully Interactive Charts. Advanced Java charting with 11 technical
indicators. Customers have the ability to customize charts and plot historical
activity.
Tax Center. An online resource destination that provides customers
with: Schedule D-efense, a download of their account history into a
user-friendly "Schedule D" Microsoft Excel spreadsheet, a 1099 and Original
Issue Discounts Help Guide, Tax FAQ's, Tables, Forms and Withholding Calculator.
Smart Alerts. NDB Price Alerts "pop up" on a customer screen when a
user-defined parameter is met. NDB News Alerts notify customers when news has
been released on a position in their portfolio, and are summarized in a Snapshot
E-mail at market close. SEC Filing Alerts notify customers when positions have a
recent SEC Filing. These filings are also summarized in a Snapshot E-mail at
market close.
Pop Up Trade Notifications. National Discount Brokers Trade Monitor
automatically checks for trade execution reports every 5 seconds. If activated,
it will "pop up" to the front of the users' screen whenever there is a trade
execution to report.
Second Opinion. Customers have access to Market Edge's Second Opinion
Weekly, The Idea Generator, and the monthly newsletter "ON the EDGE". Second
Opinion provides investors with a Buy/Hold/Sell opinion as well as a complete
technical picture of the nearly 5,000 stocks followed by Market Edge. The Idea
Generator is a simple, easy to use filtering system, which searches for today's
buy/short candidates selected by Market Edge. On the Edge is a monthly
commentary, which provides detailed, technically based market analysis and a
forecast of the market.
Looking Forward
NDB Mobility. NDB.com intends to offer, by Fall 2000, wireless trading via PDAs
(e.g., Palm Pilots) using Aether Systems' technology, which is now being tested.
NDB.com also plans to develop WAP (Wireless Application Protocol) applications
to enable customers to access ndb.com via cell phones.
Deutsche Bank IPOs and Research. NDB.com has recently entered into a
strategic alliance with Deutsche Bank, one of the world's largest financial
institutions. As a result of this alliance, NDB.com customers will have access
to Deutsche Bank's world class U.S. equity research and certain U.S. initial
public offerings.
NDB Select. Select customers (active traders who maintain a set minimum
amount of commissions each month with NDB.com) will be able to access streaming,
real-time Nasdaq Level II quotes. Additional NDB Select features include: a
quote grid display, top ten most active (winners, losers, etc.) equity
information, time and sales of executions, quick snap quote, news (from
providers such as Dow Jones and Comtex), real-time charts, real-time tickers,
and advanced option quotes and analysis.
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New Product and Service Development/Business Development
NDB.com constantly evaluates new ideas to expand or improve the
products and services NDB.com offers to its customers. Its Strategic Planning
and Business Development group is responsible for researching and implementing
projects, including those initiated by our executive management. As of May 31,
2000, the group consisted of two executive vice presidents, a director, a vice
president and three senior analysts with expertise in accounting, finance,
management and project management. The group performs competitive analyses, cost
benefit analyses, trend projections and due diligence and manages the
development of new products and services within specified timeframes and
budgets. The group also seeks qualified companies with whom NDB.com may develop
affinity relationships and other partnerships to provide these new products and
services.
Delivery of NDB.com Services
NDB.com provides its customers with three points of access to trade
securities, obtain research and monitor account balances: its Internet website,
its interactive telephone system and its registered representatives. In
addition, a wireless trading application, currently being tested, is planned to
be available by Fall 2000.
Online Services. NDB.com's website allows customers to electronically
place orders to buy or sell securities from their personal computers 24 hours a
day, seven days a week for execution during regular market hours. NDB.com is the
only online broker to have received in 1999 the highest ratings from both
Barron's and Money magazine. Similarly, Money magazine ranked NDB.com as the
number two online broker in its 1999 study testing ease of use, customer
service, system responsiveness, products and tools, and costs, and also ranked
the website the number one online broker for new online investors. In the March
13, 2000 edition of Barron's, NDB was ranked number one against twenty-six other
online brokers and again received the highest rating of four stars. Barron's
noted NDB.com's superior trade execution, a well designed site, ease of use and
tax reporting as some of the reasons for the superior ranking. NDB.com's website
is designed to be user-friendly with easily accessed help pages and messages
that repeat orders for accuracy and confirmation. Online investors can access
real-time quotes and news as well as a broad array of free investment research
and tools to help them make more informed investment decisions. During the month
of May 2000, approximately 80% of NDB.com's executed trades originated online.
Interactive Telephone System. PowerBroker, NDB.com's touch-tone
telephone interactive response system, is available 24 hours a day, seven days a
week. With PowerBroker, customers can check account positions and balances,
perform account administration and place orders for execution during regular
market hours. PowerBroker is available in four languages: English, Spanish,
Mandarin and Cantonese. During the month of May 2000, approximately 10% of
NDB.com's executed trades originated through PowerBroker.
Registered Representatives. As of May 31, 2000, NDB.com had 176
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 and NDB.com-extended trading hours.
NDB.com is committed to offering its customers the ability to place trades with
registered representatives. During the month of May 2000, approximately 10% of
NDB.com's executed trades originated through its registered representatives.
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NDB.com Affinity Relationships
NDB.com pursues affinity partnerships and business-to-business
relationships to increase its access to potential customers, build brand name
recognition and expand the products and services NDB.com can offer to its
customers. NDB.com is actively pursuing alliances with a variety of companies
whose customers are likely to use its products and services. During the year
ended May 31, 2000, several new relationships were established. Among these were
Go2Net, Inc., Yahoo! Inc. and Sandbox.com.
Another important partnering arrangement was the development of our B2B
Financial Solutions program. B2B Financial Solutions provides financial
institutions with NDB.com's award-winning website as a co-branded online
brokerage solution. This alternative customer acquisition strategy can also
enable NDB.com to establish a "bricks and clicks" presence without the
associated overhead costs. Our initial partners in this program include Bank
United, Pentagon Federal Financial Services, Somerset Valley Bank and 1st
Constitution Bank.
NDB.com believes that its focus on affinity and business-to-business
relationships is likely to result in lower account acquisition costs. NDB.com
intends to expand its affinity and business-to-business programs and will
evaluate potential relationships with new affinity and business-to-business
partners in the future as opportunities arise.
NDB.com Marketing and Advertising
During fiscal year 2000, NDB.com used a variety of media forms to reach
individual investors who may use its services, including broadcast media, print
advertisements, online advertisements and direct mail. In March 2000, NDB.com
launched a new multi-media advertising campaign featuring the tagline, "We Take
You Under Our Wing". In addition, NDB.com signed marketing agreements with
Yahoo! Inc. and Go2Net, Inc. wherein NDB.com would be featured throughout the
Yahoo!, Yahoo! Finance, Silicon Investor and the Go2Net network websites.
During the fiscal year ending May 31, 2001, NDB.com intends to continue
advertising to build awareness of its brand, quality customer service and depth
and breadth of its products and services. NDB.com intends to continue to market
its online investing services to individual investors as a better way of
handling securities transactions, accessing financial and market data and
managing portfolios.
NDB.com Customer Service
NDB.com believes that providing excellent customer service is critical
to its success. As of May 31, 2000, NDB.com had 100 customer service
representatives and supervisors trained to promptly handle all types of customer
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 execution services department. Representatives
are available 24 hours a day on weekdays and from 8:00 am to 6:30 pm on weekends
(other than holidays). NDB.com expects to implement full 24 hour a day, seven
days a week coverage (other than holidays) during the first quarter of fiscal
year 2001. NDB.com is in the process of increasing the number of customer
service representatives to approximately 130.
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Telephone and E-mail Support and Technology. NDB.com's customer service
telephone system is designed along "open architecture" lines to permit regular
hardware and software upgrades with minimal disruption and expense. New releases
of both programs and equipment are only integrated into the customer service
system after adequate equipment testing and training of personnel. PowerBroker,
our automated interactive voice response system, currently handles approximately
27,000 incoming calls daily, greatly reducing the volume of calls which
NDB.com's representatives must handle. This reduces wait times during high
volume trading hours and helps reduce overall customer service costs.
NDB.com also provides customer support via e-mail and live on-line chat
sessions using NDB's iAnswer service. All customer service representatives are
trained to respond to electronic requests using both pre-composed and original
e-mails. NDB.com requires that all e-mail responses are to be reviewed by a
customer service manager before being sent to a customer.
Personnel and Training. NDB.com believes that training is key to
creating an efficient and motivated customer service team. NDB.com is committed
to providing the best available training to its customer service representatives
in an ongoing manner.
NDB.com strives to maintain a ratio of one supervisor for each six
customer service representatives. NDB.com believes that this promotes higher
quality customer service. Supervisors monitor customer service calls and e-mails
to improve training and customer satisfaction. All customer service
representatives undergo both monthly and annual performance reviews to measure
their knowledge of NDB.com's products and services, their level of teamwork,
their work ethic and personal objectives and their ability to deliver NDB.com's
expected level of customer satisfaction.
New customer service representatives take a two month initial course
that covers NDB.com's products, services and policies. Topics include trading
over the Internet, equity and option trading, margin accounts and individual
retirement accounts. Customer service representatives also receive ongoing
training as new products and services are developed and NDB.com's technology
infrastructure is modified or upgraded.
NDB.com Customer Accounts
NDB.com had approximately 245,600 accounts as of May 31, 2000.
NDB.com's customers include individual investors, businesses, investment clubs,
registered investment advisors and institutions. During the fiscal year ended
May 31, 2000, NDB.com averaged approximately 16 executed commissionable trades
per account. At May 31, 2000, NDB.com's customer assets totaled approximately
$9.9 billion, an average per account of over $40,000, which NDB.com believes to
be among the highest in the industry.
NDB.com Technology
NDB.com's technology department develops and maintains a combination of
proprietary and vendor software to support its online brokerage business and to
automate traditionally labor-intensive transactions. The department's primary
goal is to ensure uninterrupted customer access to NDB.com's system through the
Internet and the telephone, full availability of its products and services and
rapid transmission of trades.
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NDB.com's technology is designed along "open architecture" lines to
permit regular hardware and software upgrades with minimal disruption and
reduced expense. This design allows NDB.com to respond quickly to growth in both
trading volumes and number of accounts by adding new computers and improving
software.
NDB.com believes there are many advantages to its technology
infrastructure. NDB.com's system is designed to be:
o highly scalable, which allows it to change its size or configuration to
adapt to increased volume and numbers of users;
o highly fault tolerant, which allows its customers continued access in
the event of certain hardware or software failures;
o highly integrated, which allows it to communicate with any customer's
personal computer;
o load balanced, which allows it to respond to surges in trading volume;
and
o secure. NDB.com uses encryption, authentication technology and
firewalls to secure the confidentiality of the information transmitted
to and from its customers.
NDB.com's Website
The primary components of NDB.com's new website are the presentation
layer, the application servers and the databases.
Presentation Layer. The presentation layer is the display screen of
NDB.com's website accessed by its customers over the Internet. It allows NDB.com
to offer its services on many platforms without the need to specifically modify
its technology for each platform. The presentation layer uses the computer
languages HTML, Java and Java Script and is designed to be user-friendly and
easy to navigate.
Application Servers. NDB.com's Netscape application servers use the
computer languages C++ and Java to permit the interaction between its customers'
computers and its databases. NDB.com's proprietary technology establishes a
common language among these components and allows them to function on different
platforms and in different protocols. The servers also automatically distribute
traffic throughout the system to maintain reliability.
Databases. NDB.com's Oracle databases store all information necessary
to allow customers to execute trades and monitor their accounts. The databases
contain a complete history of each customer's account, including past trades and
current portfolio positions. In addition, the databases allow customers to
personalize their trading experience by customizing quote lists and screen
graphics and alerting them to current news on their stocks.
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NDB.com's Execution System
All customer orders, whether received through the Internet or by
telephone, pass through NDB.com's Unix-based automated processor. This processor
is designed to provide all customers with the same real-time portfolio
information no matter how it is accessed. The automated processor was designed
to rapidly read data, process transactions and transmit information to multiple
locations, which provides a high degree of automation for all transactions. It
applies preprogrammed rules to each order to determine whether it should be
routed to a market maker for execution, reviewed internally or automatically
rejected for a number of reasons, such as inadequate margin availability.
NDB.com has direct connections to multiple points of execution. If the first
market center the order is routed to experiences technical difficulties,
NDB.com's order management system reroutes the customer order to an alternate
market center for execution.
Nasdaq Market Making -- NDB Capital Markets
Introduction
At June 30, 2000, NDBC was a market maker in approximately 4,300 Nasdaq
and other over-the-counter securities, approximately 85% of which were listed on
the Nasdaq National Market System. At May 31, 2000, it was the sixth largest
market maker in the United States based on the number of stocks in which it
makes markets. For the year ended May 31, 2000, NDBC was also the seventh
largest market maker in the United States based on the volume of shares traded
according to a report prepared by Autex. NDBC believes it has attained this
leadership position by providing better execution services to its broker-dealer
and institutional investor customers due to its trading systems and
technologies, as well as its skilled and experienced traders. NDBC has also
developed proprietary trading methods and a risk management system designed to
protect its capital and maximize its trading profits. During the year ended May
31, 2000, NDBC had a trading volume of approximately 16.7 billion shares and
averaged approximately 61,700 batched trades per trading day.
Technology and Operations
NDBC's technology platform and systems are designed to enable it to
process a large volume of order flow reliably and efficiently without
diminishing speed of execution. During the fourth quarter of the fiscal year
ended May 31, 2000, NDBC processed an average of 89,000 batched trades per
trading day, and its systems are capable of processing up to 500,000 executions
per day. On the average, NDBC can process approximately 150 trades per second.
NDBC processes a significant portion of its trading volume over a dedicated
electronic communications network, which connects its trading operations to the
order entry departments of its broker-dealer and institutional customers. This
private communications network provides its customers with immediate access to
NDBC's trading operations and facilitates the handling of customers' orders. As
part of this system, NDBC maintains direct communication lines with 40 regional
brokerage firms across the country, as well as with its branch offices in Los
Angeles, California; Chicago, Illinois; Boston, Massachusetts and Denver,
Colorado. Other brokerage firms in the same geographic regions can use these
dedicated private lines to directly access NDBC's trading operations. NDBC
intends to continue to invest in technology to further enhance its order
processing capabilities in the coming year, with a goal to enable NDBC to
process up to 1,000,000 trades a day at a rate of 250 trades per second.
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Risk Management
NDBC's trading profits depend on its ability to evaluate and act
rapidly on market trends and manage risk successfully. To achieve these
objectives, NDBC has developed a trading methodology designed to monitor and
analyze market activity, price movements and risk on a real-time basis. NDBC
continually analyzes its trading positions in individual securities and monitors
its overall short and long positions and aggregate profits and losses. Its
trading systems provide real-time, online risk management and inventory control
functions, including a 10-minute on-screen scroll that shows all losses greater
than $5,000. Its trading systems also identify all positions held by different
traders in the same security. As part of its risk management policies and
procedures, it allocates each of its traders a limited amount of risk capital
with which to trade and requires that a trader seek permission from his or her
supervisor prior to exceeding that amount. It also requires that its traders
maintain positions meeting a specified potential long/short ratio. NDBC has 15
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 new developments.
During fiscal year 2000, there was 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. NDBC
has implemented procedures designed to allow continuous execution of customers'
orders, while lessening the exposure of the firm to extraordinary market risk.
NDBC's normal policy is to provide continuous automatic execution on orders of
up to 2,000 shares. However, NDBC may reduce or suspend its automatic execution
policy during unusual conditions and at its discretion.
Execution and Customer Services
NDBC believes that a highly skilled and experienced trading and
customer service workforce is critical to delivering best execution practices
and high quality customer service. At May 31, 2000, it had approximately 75
traders and 150 assistants/trainees. Its traders have an average of five years
of trading experience, and NDBC generally requires that its trainees complete a
minimum of two years of extensive in-house training and apprenticeship prior to
permitting them to trade independently. It also has in-house training programs
for traders and trainees, which focus on specialized trading situations, such as
the handling of large institutional orders, large institutional blocks, new
issues and highly volatile stocks. Its customer service workforce consisted, at
May 31, 2000, of approximately 65 sales professionals. These people are
dedicated to establishing and maintaining customer relationships and
facilitating trade executions for its institutional, broker-dealer and trade
program clients. During the fiscal year ending May 31, 2001, NDBC intends to
expand its trading floor and open several branch offices, thereby adding
approximately 100 positions, which will permit it to offer an expanded list of
securities in which it makes markets and handle increased trading activities.
Customers
NDBC customers consisted, at May 31, 2000, of approximately 1,000
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.
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NDBC's Securities Positions
NDBC takes both long (owned assets) and short (assets sold that it did
not own) positions in the securities in which it makes markets. The following
table illustrates its highest, lowest and average month-end inventory at market
value (based on the aggregate of its long and short positions) of securities.
See Note 3 of Notes to Consolidated Financial Statements.
<TABLE>
<CAPTION>
Fiscal Year Highest Lowest Average
Ended May 31, Month End Month End Month End
------------- --------- --------- ---------
<S> <C> <C> <C>
1998 $128,078,159 $27,106,790 $53,688,382
1999 145,951,865 21,329,531 63,564,724
2000 131,747,236 53,434,749 85,700,021
</TABLE>
NDBC's securities positions on any one day may not be representative of
its exposure on any other day because its securities positions may vary
substantially with economic and market conditions, allocations and availability
of capital, and trading volume.
Proposed Self-Clearing Operations - Millennium Clearing Company
The Company currently maintains relationships with two clearing brokers
to clear and settle its securities transactions. The clearing brokers also
provide record keeping, custody and other services. NDB.com's transactions are
cleared through the Pershing Division of Donaldson, Lufkin & Jenrette. The
agreement with Pershing is subject to termination by either party upon 90 days
prior notice. NDBC clears its market making transactions through Broadcort
Capital Corp. ("Broadcort"), a subsidiary of Merrill Lynch. NDBC's agreement
with Broadcort is for an indefinite period of time but may be terminated upon
180 days prior written notice by either party. NDBC has given Broadcort notice
of termination, which is expected to be effective January 2001.
The Company intends to begin self-clearing operations by early-calendar
year 2001. The Company has contracted with ADP Financial Services, Inc. ("ADP"),
a third party service bureau, to provide computer services to support these
operations. The Company's regulatory net capital requirement will increase when
it begins self-clearing operations. The level of that required net capital will
vary with the amount of customer margin borrowings, as well as with other
factors. The Company plans to operate its clearing activities through its wholly
owned subsidiary, Millennium Clearing Company, L.L.C. ("Millennium").
The Company believes that performing clearing operations will offer the
following advantages:
o Margin lending. The Company will be permitted to use customer
securities for its margin lending activities, subject to
regulatory rules;
o Reduction in costs. The Company believes, that over time, it will
be able to perform its own clearing less expensively and more
efficiently than its current clearing arrangements;
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o Cash and securities management. The Company will be able to offer
clearing services to its existing broker-dealer subsidiaries, as
well as other broker-dealers and other financial institutions.
This will give it additional sources of revenue from clearance
fees earned, as well as additional net interest income and fees
relating to margin lending, custody of customer assets, as well as
from securities borrowing and lending activities.
The commencement of clearing activities is subject to several conditions
including the receipt of regulatory approvals. There can be no assurance that
these self-clearing activities will commence as planned or ever.
Investments
Venture capital investments. The Company, from time to time, makes and
continues to hold investments in developing companies or companies in need of
additional financing. Some of these investments are in restricted securities
and, as such, may only be sold pursuant to a registration statement under the
Securities Act of 1933, as amended, or pursuant to an exemption from
registration thereunder.
The Company, for financial reporting purposes, generally carries
venture capital investments at fair value. Although the securities of certain of
the companies in which the Company invested may be publicly traded, the
Company's valuation of such holdings may be discounted significantly from the
public market price due to restrictions on transfer, the size of the holdings or
other legal, contractual or practical restrictions on disposition.
On October 4, 1993, the Company paid $400,000 for 8,000 shares of
common stock of Emmett A. Larkin Company, Inc. ("EAL"), a minority owned
broker-dealer. This holding represents, as of May 31, 2000, approximately 15% of
the outstanding common shares of EAL. As of May 31, 2000, the value of the
Company's investment in EAL was estimated to be approximately $1,047,000.
Between February and April 1998, NDB.com invested $500,000 for 500,000
shares of Award Track, Inc. common stock. During the year ended May 31, 1999,
the entire investment was written off as the Company's management deemed it
worthless. However, on February 15, 2000, Award Track, Inc. was acquired by 24/7
Media Inc. As a result, NDB.com received 39,715 shares of 24/7 Media Inc. common
stock (8,737 shares of which are subject to an escrow agreement) in exchange for
its shares of Award Track, Inc. common stock and reversed the previously
recorded $500,000 loss due to write-off, thereby reflecting the investment at
its currently estimated fair market value.
On October 22, 1999, the Company purchased 20,000 shares of Aether
Systems Inc. common stock for $320,000. The Company sold this investment on
February 23, 2000 and recognized a profit, reflected in firm securities
transaction in the Consolidated Statements of Income and Comprehensive Income,
of approximately $3,500,000.
On April 13, 2000, the Company purchased 750,000 shares of National
Association of Securities Dealers, Inc. ("NASD") common stock for $8,250,000 and
an aggregate of 187,800 warrants to purchase an additional 751,200 shares of
NASD common stock for $2,065,800.
During the fiscal year ended May 31, 2000, the Company also made
investments in several other start-up ventures aggregating $3,352,000.
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Investment in property. NDB Group, through its wholly owned subsidiary,
Sherwood Properties Corp., is an investor in a real estate limited partnership.
This investment is estimated to have a nominal value.
Personnel
The Company had 902 full-time employees as of June 30, 2000 (835 as of
May 31, 2000). Included in the preceding employee count are NDBC's 420 full-time
employees, of which 307 are institutional salespeople, traders and trading
assistants. Also included in the Company's total employee count are NDB.com's
420 full-time employees of which 177 are NASD registered personnel. None of the
Company's personnel are covered by a collective bargaining agreement. The
Company considers its relations with its personnel to be satisfactory.
NDBC's sales and trading personnel, NDB.com's registered
representatives, certain members responsible for managing such activities and
certain Millennium personnel are required to take examinations given by the
NASD. In certain circumstances, additional examinations are required in order
for sales and trading personnel to be qualified to do business in various
states. Traders and certain sales personnel of NDBC are paid under the "Annual
Trading/Sales Production Guarantee" program, based on a number of factors
(including trading profits) and subject to an annual review. NDB.com's
registered representatives work on a salary basis plus discretionary bonus.
All full-time employees who have completed five years of employment may
take a four-week (three months in the case of members of the executive committee
of NDB Group) paid sabbatical. Such sabbatical must be taken within one year
after the employee's fifth anniversary. Sabbaticals may also be taken for each
subsequent five-year period of employment completed. In addition, NDBC has
usually assumed any trading losses incurred in a trader's account during a
trader's sabbatical.
Competition
The market for online investing services, particularly over the
Internet, is new, rapidly evolving and intensely competitive. The Company
expects competition to continue to intensify in the future. NDB.com encounters
direct competition from discount brokerage firms providing either touch-tone
telephone or online investing services, or both. These competitors include
American Express, Ameritrade, Charles Schwab, Datek Online, DLJdirect, E*Trade
Securities, Fidelity Brokerage Services, Quick & Reilly and TD Waterhouse
Securities. NDB.com also encounters competition from the many established
full-commission brokerage firms, such as Merrill Lynch, Morgan Stanley Dean
Witter and PaineWebber. Additionally, NDB.com competes with financial
institutions, mutual fund sponsors and other organizations, some of which
provide online investing services.
The Company believes that the principal competitive factors affecting
the market for NDB.com's services are cost, customer service, quality,
execution, delivery platform capabilities, ease of use, presentation layer look
and feel, depth and breadth of services and content, financial strength and
innovation.
Many of the Company's competitors have longer operating histories and
significantly greater financial, technical, marketing and other resources than
it has. Many current and potential competitors also have greater name
recognition and more extensive customer bases that could be leveraged, thereby
gaining market share to the Company's detriment. Additionally, new competitors
or alliances among competitors may emerge and rapidly acquire significant market
share.
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NDBC is one of several independent broker-dealers whose principal
activity is making markets in a broad range of Nasdaq and other over-the-counter
securities. There are many other broker-dealers making markets in these
securities. NDBC generally has one or more competing market makers for each
security in which it makes a market. NDBC competes primarily on the basis of
price, its experience in market making, its relationship with its customers, the
availability of its dedicated private electronic communications network and its
ability to effect large transactions in an orderly manner. NDBC now faces
increasing competition from electronic communications networks and the Instinet
trading market, which enable buyers and sellers to interact more directly and
allow for trading without a market maker.
Regulation
The Company's business is subject to extensive regulation applicable to
the securities industry in the United States. As a matter of public policy,
regulatory bodies in the United States are charged with safeguarding the
integrity of the securities and other financial markets and with protecting the
interests of customers participating in those markets. The Securities and
Exchange Commission ("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 May 31, 2000, 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. As of May 31, 2000, NDBC
was registered as a broker-dealer with the SEC, the NASD and in 20 states and
the District of Columbia.
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.
NDB.com's and NDBC's sales and trading personnel and certain members of
management are required to take examinations given by the NASD. In some
circumstances, additional examinations are required for sales and trading
personnel to be qualified to do business in various states.
Changes in regulations pertaining to Nasdaq may have a material effect
on NDBC's trading activities. Nasdaq and the SEC have had and have proposed
rules, as well as regulatory actions and changes in market practices that may
continue to have an adverse effect on NDBC's revenues, profit margins and the
manner in which it conducts its business.
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To become self-clearing, Millennium must obtain approval from the NASD
and other self-regulatory organizations. There can be no guarantee that
Millennium will be successful in obtaining the necessary approvals.
Self-clearing firms are subject to substantially more regulatory
control and supervision than other types of brokerage firms and must comply with
complex and changing regulations. Errors in performing clearing functions or
reporting could lead to civil penalties being imposed by the SEC or the NASD.
Self-clearing will involve a substantial risk of losses due to clerical errors
relating to the handling of customers' funds and securities. There can be no
assurance that Millennium will be able to perform these operations as accurately
and efficiently as these operations are currently being performed for the
Company by its current clearing firms. Clearing processing errors may also lead
to civil claims by parties who are financially harmed by these errors.
Self-clearing firms must obtain and retain highly trained personnel and
maintain sophisticated and redundant computer systems. System failures, employee
errors and circumstances beyond the firm's control can lead to significant
financial losses. Failure to maintain accurate and complete records regarding
customer funds and securities can result in significant financial risk to a
self-clearing firm because of the expense associated with detecting and
correcting those errors. Failure to detect and correct errors involving
securities positions on a timely basis can result in significant losses because
of changes in the market values of securities.
As a self-clearing firm, Millennium will have to pay for a portion of
the securities purchased by customers of NDB.com, to the extent the purchases
are made on margin. As of May 31, 2000, NDB.com customer margin debits at its
clearing firms were $856.5 million. Millennium will also have direct
responsibility for the clearance of customer securities transactions and for the
possession and control of customer securities and other assets. The Company will
also have to record on its consolidated statement of financial condition the
customer receivables and customer payables that are a result of customer margin
loans and customer free credit balances, which will significantly increase the
Company's total assets and liabilities. Millennium will also be required to join
one or more clearing agencies, make substantial deposits at those agencies to
secure its obligations to those agencies, and agree to contribute to those
agencies in the event of losses at those agencies, including losses arising from
the default of other clearing members.
Customer Protection and Insurance
Customers of NDB.com and NDBC are protected against some losses by the
Securities Investor Protection Corporation ("SIPC"). SIPC provides protection
against lost, stolen or missing securities (except loss in value due to a rise
or fall in market prices) for customers in the event of the failure of a
broker-dealer. Accounts are protected up to $500,000 per customer with a limit
of $100,000 for cash balances. Both NDB.com and NDBC are members of SIPC.
However, because the funds and securities of the Company's customers are held by
the Company's clearing firms, Pershing and Broadcort, the Company's customers
are treated for SIPC purposes as customers of Pershing and Broadcort. Therefore,
SIPC coverage comes into play only in the event of the financial failure of one
of those firms. In addition to being members of SIPC, the Company's clearing
firms also carry private insurance, which provides unlimited coverage for
securities held in customer accounts in the event of the failure of those
clearing firms. When the Company becomes self-clearing, the Company plans to
obtain coverage in excess of SIPC coverage from an insurance company, the amount
and terms of which have yet to be determined.
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The Company also carries a financial institutions bond covering NDB
Group and its subsidiaries for loss or theft of securities, forgery of checks
and drafts, embezzlement, certain employee misconduct and misplacement of
securities. This bond provides total coverage of $3,000,000 for the Company and
contains a deductible of $10,000.
Net Capital and Customer Reserve Requirements
As registered broker-dealers and members of the NASD, NDB.com and NDBC
are subject to the SEC's Uniform Net Capital Rule 15c3-1. The Rule specifies the
minimum level of net capital a broker-dealer must maintain and also requires
that at least a minimum part of its assets be kept in relatively liquid form.
The Rule provides that a broker-dealer doing business with the public shall not
permit its net capital to be less than the greater of a stated minimum dollar
requirement or one-fifteenth of its aggregate indebtedness (the "basic method")
or, alternatively, that it not permit its net capital to be less than the
greater of a stated minimum dollar requirement or 2% of its aggregate debit
items computed in accordance with Rule 15c3-3 (the "alternative method"). As of
May 31, 2000, NDB.com was required to maintain minimum net capital of $250,000
and had total net capital of approximately $12,716,000. As of May 31, 2000, NDBC
was required to maintain minimum net capital of $1,000,000 and had total net
capital of approximately $112,818,000. Based upon the activities of NDB.com and
NDBC at May 31, 2000, management of the Company estimates that Millennium would
have a minimum net capital requirement of approximately $86 million.
NDB.com and NDBC qualify for the exemptive provisions for the
computation for determination of reserve requirements for broker-dealers under
subparagraph (k)(2)(ii) of SEC Rule 15c3-3. During the period from June 1, 1999
through May 31, 2000, the Company believes that NDB.com and NDBC were in
compliance with the conditions of this exemption. When the Company becomes
self-clearing, the Company will no longer qualify for exemption from the
provisions of Rule 15c3-3 that require a brokerage firm to compute and maintain
a reserve bank account for the exclusive benefit of the brokerage firm's
customers.
In computing net capital under Rule 15c3-1, various adjustments are
made to exclude assets not readily convertible into cash and to provide a
conservative statement of other assets, such as the inventory of securities.
Therefore, a deduction is made against the market value of securities to reflect
the possibility of a market decline prior to their disposition. Thus, the net
capital rule imposes financial restrictions upon the Company's businesses that
are more severe than those imposed on concerns in other types of businesses.
In addition, the SEC and NASD impose rules that require notification
when net capital falls below certain predefined levels, dictate the ratio of
debt to equity in the regulatory capital composition of a broker-dealer and
limit the ability of a broker-dealer to expand its business volume under certain
circumstances. Moreover, the Uniform Net Capital Rule and the NASD's rules
impose requirements that may have the effect of prohibiting a broker-dealer from
distributing or withdrawing capital and requiring prior notice to the SEC and
NASD for certain withdrawals of capital, even capital in excess of regulatory
requirements. Since NDB Group's principal assets are its ownership of its
broker-dealer subsidiaries, the rules governing net capital and restrictions on
capital withdrawals could prevent NDB Group from meeting its financial
obligations on a timely basis. See Note 13 of Notes to the Consolidated
Financial Statements.
21
<PAGE>
Compliance with the Uniform Net Capital Rule may also limit those
operations of NDB.com and NDBC that require the use of significant amounts of
capital, such as market making activities. Further, assets that are included in
their respective minimum net capital are not available for distribution to NDB
Group's shareholders in the form of dividends or otherwise. At May 31, 2000, the
Company believed NDB.com and NDBC were in compliance with the net capital
requirements. Failure to maintain the required net capital may subject them to
suspension of business and may ultimately require their liquidation.
Item 2. Properties
The corporate headquarters of NDB Group and NDBC's office and trading
facilities occupy an aggregate of approximately 51,600 square feet of space at
10 Exchange Place Centre, Jersey City, New Jersey under a lease signed in
December 1994 and as subsequently amended. This lease commenced on January 1,
1995 and ultimately 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 were relocated to 90 Hudson
Street in Jersey City, New Jersey as of May 2000 from 7 Hanover Square, New
York, New York. The new space, occupied pursuant to a lease signed in May 1999
for approximately 96,000 square feet, commenced in June 1999 and expires in
December 2014, unless extended. Base rent on this space is approximately
$3,000,000 per year with periodic escalations. This space will also be used by
Millennium for its securities clearing operations. NDB.com's former space in New
York City, occupied under a lease signed in March 1996, covered approximately
36,000 square feet. It commenced on April 1, 1996 and expires on September 29,
2008 unless prior notice of termination is provided. NDB.com provided such
notice on February 10, 2000 and effectively abandoned the space as of May 2000.
The final rent payment is due in September 2000. Base rent on this space was
approximately $718,000 per year with periodic escalations.
In May 1999, the Company had also signed an 18-month lease for an
additional 10,000 square feet in New York for base rent of approximately
$320,000 per year. NDB.com used this space for some of its operations through
May 2000 at which time it, too, was abandoned in favor of the new space in
Jersey City. The final rent payment is due in October 2000.
In addition to the above, as of May 31, 2000, the Company had leased
office space in Boston, Massachusetts; Chicago, Illinois; Denver, Colorado; and
Los Angeles, California. During June 2000, the Company signed a lease for
additional space in Tinton Falls, New Jersey. See Note 14 to the Consolidated
Financial Statements.
Item 3. Legal Proceedings and Contingencies
Many aspects of the business of the Company involve substantial risks
of potential liability. In recent years, there has been an increasing incidence
of litigation involving the securities industry, including class action suits
that generally seek substantial damages. Companies engaged in the underwriting
and distribution of securities are exposed to substantial liability under
federal and state securities laws. The Company is, from time to time, involved
in proceedings with, and investigations by, governmental and self-regulatory
agencies.
22
<PAGE>
The Company has been named as a defendant in a number of lawsuits and
arbitrations and is the subject of investigations that allege, among other
things, violations of Federal and state securities laws and other laws. A
substantial settlement or judgement in any of these cases could have a material
adverse effect on the Company. Except as described below, management of the
Company believes that none of these pending lawsuits, arbitrations and
investigations is likely to have a material adverse effect on its financial
condition, results of operations or liquidity, although the Company cannot be
certain of this.
On March 22, 1999, Weiss, Peck & Greer, L.L.C. ("WPG") filed an NASD
arbitration action against NDBC. WPG alleges that NDBC contravened standards of
"commercial reasonableness" and "just and equitable principles of trade" in
connection with the execution of trades of approximately 1.5 million shares of
the stock Amazon.com from Carnegie, Childs & Co. on January 8, 1999. WPG was
Carnegie's clearing broker and alleges that the trades resulted in Carnegie's
having a net short position in 1,462,000 shares of Amazon.com. WPG covered the
short position on January 11, 1999 and alleges it sustained losses of more than
$11 million. NDBC filed an Answer and Statement of Counterclaim dated June 8,
1999 in which NDBC denied liability for the claims asserted by WPG and asserted
a counterclaim against WPG of approximately $1.3 million for losses NDBC
suffered in connection with these trades. WPG filed a Reply to Counterclaim
dated June 28, 1999 denying liability for the claim asserted in the Answer and
Statement of Counterclaim. WPG and NDBC then agreed to non-binding mediation, a
session of which was held on September 24, 1999. The attempted mediation was not
successful. Subsequently, a three-person arbitration panel was appointed and the
parties exchanged discovery requests and responses. A hearing on the merits has
been scheduled for October 2000. NDBC, after consultation with counsel, believes
it has valid defenses to the claims made by WPG and intends to continue to
vigorously contest the claims.
Item 4. Submission of Matters to a Vote of Security Holders.
There were no matters submitted to a vote of security holders during
the fourth quarter of the year ended May 31, 2000.
PART II
Item 5. Market for NDB Group's Common Stock and Related Security Holder Matters.
NDB Group trades its common stock on the NYSE under the symbol "NDB."
Prior to December 12, 1997, the symbol had been "SHD". There were 1,266 holders
of record of NDB Group's common stock at June 30, 2000. As of June 30, 2000, the
closing sales price per share for NDB Group's common stock was $31.875.
The following table sets forth the high and low sales price per share
for NDB Group's common stock for each quarterly period within the two most
recent fiscal years as reported by the New York Stock Exchange:
23
<PAGE>
<TABLE>
<CAPTION>
Sales Prices
Quarter Ended High Low
------------- ---- ---
<S> <C> <C>
August 31, 1998 $11.6250 $ 9.3750
November 30, 1998 9.5625 8.1250
February 28, 1999 47.0000 8.7500
May 31, 1999 92.9375 22.3750
August 31, 1999 61.0625 24.5000
November 30, 1999 37.6875 20.4375
February 29, 2000 45.2500 21.5000
May 31, 2000 59.1250 22.5000
</TABLE>
There were no cash dividends declared on the common stock of NDB Group
in the two-year period ended May 31, 2000. Funds available for distribution to
shareholders of NDB Group in the form of dividends are limited to the extent
assets of the Company are utilized to meet the minimum net capital requirements
of NDB.com, NDBC and the expected minimum capital requirements of Millennium
under Rule 15c3-1 promulgated by the SEC. See "Business - Net Capital and
Customer Reserve Requirements".
Unregistered Sales of Securities
On February 5, 2000, NDB Group sold 500,000 shares of its common stock,
along with warrants to purchase 500,000 shares of its common stock at an
exercise price of $33.00 per share for a period of three years subject to
earlier termination if the market price of the common stock equaled or exceeded
$33.00 per share for a specified period of time. The aggregate sale price of the
initial 500,000 shares and the warrants was $13,500,000. Go2Net, Inc. purchased
130,000 of the shares of common stock and warrants to purchase 130,000 shares of
common stock. Vulcan Ventures Inc. purchased 370,000 shares of common stock and
warrants to purchase 370,000 shares of common stock. On March 27, 2000, Go2Net,
Inc. exercised its warrants for 130,000 shares for a purchase price of
$4,290,000 and on April 14, 2000, Vulcan Ventures Inc. exercised its warrants
for 370,000 shares for a purchase price of $12,210,000. The sales were exempt
from registration under Section 5 of the Securities Act of 1933, as amended, by
virtue of Section 4(2) of the Act and Regulation D of the Securities and
Exchange Commission thereunder.
Item 6. Selected Consolidated Financial Data.
The following selected consolidated financial data for the Company for
each of the five years in the period ended May 31, 2000 should be read in
conjunction with the respective financial statements and related notes thereto,
and the discussion under Management's Discussion and Analysis of Financial
Condition and Results of Operations included in this report. All amounts are in
thousands, except per share amounts. Certain prior year amounts have been
reclassified to conform to the fiscal year ended May 31, 2000 presentation.
24
<PAGE>
<TABLE>
<CAPTION>
Years Ended May 31,
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Operating Data (a):
<S> <C> <C> <C> <C> <C>
Revenues $385,758 $207,865 $138,812 $161,182 $161,735
======== ======== ======== ======== ========
Income from continuing operations
before income taxes $62,761 $34,681 $11,739 $12,647 $29,313
Income taxes 30,132 16,462 5,741 6,031 12,783
------ ------ ----- ----- ------
Net income from continuing
operations 32,629 18,219 5,998 6,616 16,530
Income from discontinued
operations, net of taxes 83 2,786 3,258 2,664 3,602
Gain from sale of discontinued
operations, net of taxes 20,746 -- 2,704 -- --
------ --------- -------- --------- ---------
Net income $53,458 $21,005 $11,960 $9,280 $20,132
======= ======= ======= ====== =======
Per Share Data (b):
Basic:
Income from continuing operations,
net of taxes $1.92 $1.30 $ .45 $ .51 $1.30
Income from discontinued
operations, net of taxes -- .20 .24 .21 .29
Gain from sale of discontinued
operations, net of taxes 1.22 -- .20 -- --
------- ------ ----- ------ ------
Net income $3.14 $1.50 $ .89 $ .72 $1.59
===== ===== ===== ===== =====
Diluted:
Income from continuing operations,
net of taxes $1.86 $1.29 $ .45 $ .51 $1.25
Income from discontinued
operations, net of taxes -- .20 .24 .21 .27
Gain from sale of discontinued
operations, net of taxes 1.19 -- .20 -- --
---- ------ ----- ------ -----
Net income $3.05 $1.49 $ .89 $ .72 $1.52
===== ===== ===== ===== =====
Balance Sheet Data:
Total assets $429,182 $217,291 $188,474 $160,161 $143,255
Common stockholders' equity 317,412 141,995 124,173 92,274 86,570
Book value per share-basic (b) 18.65 10.13 9.24 7.16 6.82
Book value per share-diluted (b) 18.11 10.04 9.20 7.13 6.56
Dividends -- -- -- -- --
25
<PAGE>
<FN>
(a) In May 1999, the Company entered into a definitive agreement to sell its
ownership interest in Equitrade. The transaction closed on June 18, 1999
and, as such, the operations of Equitrade have been reflected in
discontinued operations for all periods reported. In addition, the results
of operations of MXNet, Inc. and the American Stock Exchange Specialist
business of NDBC, each of which was sold in February 1998, have been
included in discontinued operations for all applicable periods.
</FN>
<FN>
(b) Diluted earnings per share and diluted book value per share are computed by
dividing net income and common stockholders' equity, respectively, by the
weighted average number of common shares outstanding (adjusted for the
assumed conversion of outstanding common stock options at average month-end
market price) during each of the years. Basic earnings per share excludes
dilution for the assumed conversion of outstanding common stock options.
</FN>
</TABLE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
Fiscal 2000 Compared to Fiscal 1999
The results of continuing operations of the Company for the year ended
May 31, 2000 reflect primarily the activities of NDB.com and NDBC.
On June 18, 1999, NDB Group sold its 46.845% membership interest in
Equitrade Partners, L.L.C. As a result, the results of operations of this entity
have been segregated and reflected as discontinued operations on the
Consolidated Statements of Income and Comprehensive Income. Accordingly, the
consolidated line items comprising revenue and expenses from continuing
operations have been adjusted to exclude the discontinued operations. Net income
from operations of this discontinued operation (net of taxes) for the years
ended May 31, 2000 and 1999 were $83,000 and $2,786,000, respectively. See Note
12 to the Consolidated Financial Statements.
The Company had $32,629,000 of net income from continuing operations
for the year ended May 31, 2000, compared to $18,219,000 for the year ended May
31, 1999. NDBC had $44,234,000 of net income for the year ended May 31, 2000,
compared to net income for the year ended May 31, 1999 of $20,826,000. NDB.com
had a net loss for the year ended May 31, 2000 of $9,056,000, compared to net
income of $1,463,000 for the year ended May 31, 1999.
Total revenue from continuing operations of the Company increased by
approximately $177,893,000, or 86%, from $207,865,000 in fiscal 1999 to
$385,758,000 in fiscal 2000.
Most of the Company's revenue arises from NDBC's firm securities
transactions. Revenue from firm securities transactions increased by
$141,637,000, from $145,320,000 for the year ended May 31, 1999 to $286,957,000
for the year ended May 31, 2000, an increase of 97%. The increased activity in
the equity markets, particularly trading volume in Internet and high technology
related stocks, resulted in increases in both the Company's ticket and share
volume for the year ended May 31, 2000, as compared to a year ago. NDBC's
overall batched ticket volume increased approximately 146% for the year ended
May 31, 2000 from 6,376,000 to 15,657,000 while its share volume increased 117%
from 7.7 billion in fiscal 1999 to 16.7 billion shares in fiscal 2000. The
foregoing revenue increase occurred despite the fact that NDBC's trading profits
per batched ticket decreased from $22.87 for fiscal year 1999 to $18.03 for
fiscal year 2000.
26
<PAGE>
The Company's commission income, primarily generated by NDB.com,
increased by $23,327,000, or 52%, from $45,250,000 for the year ended May 31,
1999 to $68,577,000 for the year ended May 31, 2000. This increase occurred
primarily due to the increase in NDB.com's average daily ticket count, which was
approximately 12,200 commissionable tickets per day for the year ended May 31,
2000 as compared to approximately 7,900 commissionable tickets per day for the
year ended May 31, 1999.
Interest and dividend income increased by approximately $13,834,000, or
138%, from $10,022,000 in fiscal 1999 to $23,856,000 in fiscal 2000 due
principally to two factors. First, there were larger average amounts of cash
available to earn interest. This was primarily due to the Company taking in
aggregate cash of approximately $206,000,000 in connection with both public and
private offerings of its common stock and the sale of its membership interests
in Equitrade, net of capital expenditure cash outflows. In addition, the average
customer debit and credit balances that are held with NDB.com's clearing broker
continued to rise.
Fee income increased $1,787,000, or 41%, from $4,308,000 in fiscal 1999
to $6,095,000 in fiscal 2000. The increases are due to NDB.com receiving higher
distribution assistance fees from mutual funds as NDB.com customers' balances in
those funds have increased, as well as an increase in the negotiated rates used
to calculate the rebate fees.
Total expenses from continuing operations increased $149,814,000, or
87%, from $173,184,000 in fiscal 1999 to $322,998,000 in fiscal 2000. The
reasons for the increase in expenses are set forth below.
Clearing and related charges increased by approximately $22,833,000
from $45,356,000 in fiscal 1999 to $68,189,000 in fiscal 2000. As a percentage
of revenue, clearing and related charges decreased to 18% for the year ended May
31, 2000 from 22% in the prior year. The increase in expense for the year ended
May 31, 2000 is due principally to increases of 56% and 146% in total trades
executed by NDB.com and NDBC, respectively, during the year ended May 31, 2000
over the prior year. Partially offsetting these increases, and leading to the
decrease in clearing and related brokerage charges as a percentage of revenue,
was a full year's decrease in the per ticket clearing expense rate negotiated
with NDB.com's clearing broker which went into effect as of February 1999.
Compensation and benefits increased by approximately $71,702,000, or
90%, for the year ended May 31, 2000, compared with the prior year. The increase
in expense was primarily due to a rise in compensation paid to NDBC's traders
and salesmen resulting from the increase in NDBC's net trading revenue and
profitability. Further, NDBC's traders are compensated based on a tiered
commission rate schedule, wherein they earn higher rates of commissions as the
profits they generate increase. Thus, the large increase in trading profits in
the current year versus in the prior year led, in part, to the increase in
compensation and benefits. Similarly, based on the increasing profitability and
operational benchmarks of both NDB.com and NDBC, management and employee bonuses
have increased. Finally, the number of employees increased to 854 employees (835
full-time) as of May 31, 2000, from 624 employees as of May 31, 1999.
Communication expenses, which include market data services and
telecommunications expenses, increased by $4,194,000 from $15,610,000 in fiscal
1999 to $19,804,000 in fiscal 2000. The increase is mainly due to a rise in the
aggregate expense associated with obtaining market data and quotation services.
Usage of such services has increased as the number of users has risen since the
prior fiscal year.
27
<PAGE>
Advertising costs increased $26,619,000 from $5,876,000 in fiscal 1999
to $32,495,000 in fiscal 2000. The Company advertises in order to attract retail
accounts directly to NDB.com as well as institutional and broker-dealer order
flow directly to NDBC. The increase is due to additional media buys, the
initiation of Internet advertising programs on Yahoo! and Go2Net, and the costs
to produce new lines of advertisements designed to strengthen NDB.com brand
awareness and to put a focus on its products and services. The Company uses a
combination of network and cable television, local radio, print media and
Internet advertising to attract new customers. NDB.com also attains new
customers through its affinity and business-to-business relationship programs.
Given the significant increase in advertising expenditures during fiscal 2000 in
association with the Company's new multi-media marketing campaigns, acquisition
costs per customer account for NDB.com were $311 and $140 for the years ended
May 31, 2000 and 1999, respectively, based on total advertising expenses for the
Company. Increased media spending by NDB.com, and by its competitors in the
online brokerage industry, has led to the overall increases in the average cost
to acquire an account. NDB.com continues to focus on attracting further affinity
and business-to-business partnerships to help abate these escalating acquisition
costs.
Sales-related travel and entertainment increased by $1,612,000, or 80%,
from $2,011,000 in fiscal 1999 to $3,623,000 in fiscal 2000. The increase is due
mainly to an increase in the number of NDBC's institutional and broker-dealer
sales personnel, additional efforts by this sales force to attract new customers
and maintain existing relationships, and the establishment of a sales force at
NDB.com during fiscal 2000 to attract new customers and maintain existing
relationships.
Depreciation and amortization increased by approximately $9,987,000, or
129%, from $7,770,000 in fiscal 1999 to $17,757,000 for the year ended May 31,
2000. This increase can be attributed to two main factors. NDB.com and NDBC
incurred additional charges for the write-off of obsolete computer equipment and
software in connection with upgrades of their brokerage operations. NDB.com also
wrote off $4,500,000 in net book value of equipment, software and leasehold
improvement costs of assets it abandoned when it moved its headquarters from New
York City to Jersey City during May 2000. Also contributing to the increase is
depreciation and amortization incurred on additional fixed assets, leasehold
improvements and computer software purchased by the Company aggregating
approximately $56,564,000 during the year ended May 31, 2000, of which
approximately $38,000,000 is related to the new office in Jersey City.
Equipment rental costs increased $2,131,000 from $662,000 in fiscal
1999 to $2,793,000 in fiscal 2000. The Company has begun to lease a larger
portion of the equipment used in connection with NDB.com's WebstationTM and
NDBC's trading operations as the useful lives for much of this equipment has
decreased due to the rapidly changing technologies involved.
Technology consulting fees increased $3,074,000 from $2,094,000 in
fiscal 1999 to $5,168,000 in fiscal 2000. The increase is primarily due to
rising fees paid to consultants in order to test and maintain NDB.com's website
and NDBC's proprietary trading system.
Repairs and maintenance expense increased by $1,588,000 from $2,303,000
in fiscal 1999 to $3,891,000 in fiscal 2000. This increase, primarily for
NDB.com, is mainly due to maintenance service contract fees paid for new
equipment and in association with maintaining existing infrastructures as the
original warranties on the various systems continue to expire.
28
<PAGE>
Professional fees decreased by $1,296,000 from $3,373,000 in fiscal
1999 to $2,077,000 in fiscal 2000 primarily due to a decrease in legal fees.
Occupancy costs increased $3,609,000 from $2,610,000 in fiscal 1999 to
$6,219,000 in fiscal 2000. This increase is principally due to the signing of
two additional leases for office locations to house NDB.com and the Company's
forthcoming clearing operations.
Other expenses increased $3,759,000 from $5,465,000 in fiscal 1999 to
$9,224,000 in fiscal 2000. The increase is primarily due to an increase in fees
paid to employment agencies for the placement of new and temporary employees,
principally at NDB.com, and fees for training and conferences for employees of
NDB.com and NDBC. The remainder of the increase in other expenses is due to the
overall growth in the volume of business and the increase in staff size.
The Company's effective tax rate increased from approximately 47% for
the year ended May 31, 1999 to approximately 48% for the year ended May 31,
2000. The increase in effective tax rate is due primarily to an increase in
non-deductible expenses over the prior year, namely meals and entertainment
expenses and certain compensation costs, as well as additional provisions
associated with certain investments. Partially offsetting these items was a
shift in the states in which the Company does business to states with lower tax
rates. In the prior year, a larger portion of the Company's revenues, property
and payroll were allocated to high tax rate states, such as New York.
Fiscal 1999 Compared to Fiscal 1998
The results of continuing operations of the Company for the year ended
May 31, 1999 reflect primarily the activities of NDB.com and NDBC. Certain
fiscal 1999 and 1998 amounts have been reclassified to conform to the fiscal
2000 presentation.
On June 18, 1999, NDB Group sold its 46.845% membership interest in
Equitrade Partners, L.L.C. In addition MXNet, Inc. ("MXNet"), a wholly owned
subsidiary of NDB Group was sold on February 13, 1998. NDBC also sold its AMEX
specialist business in February 1998 for $325,000. As a result, the results of
operations of these entities have been segregated and reflected as discontinued
operations on the Consolidated Statements of Income and Comprehensive Income.
Accordingly, the consolidated line items comprising revenue and expenses from
continuing operations have been adjusted to exclude the discontinued operations.
Net income from operations of these discontinued operations for the year ended
May 31, 1999 was $2,786,000 (net of taxes). For the year ended May 31, 1998, the
net income from operations of these discontinued operations was $3,258,000 (net
of taxes). See Note 12 to the Consolidated Financial Statements.
The Company had net income from continuing operations for the year
ended May 31, 1999 of $18,219,000, compared to net income from continuing
operations of $5,998,000 for the year ended May 31, 1998. NDB.com had net income
for the year ended May 31, 1999 of $1,463,000, compared to net income of
$1,304,000 for the year ended May 31, 1998. NDBC had net income for the year
ended May 31, 1999 of $20,826,000, compared to net income for the year ended May
31, 1998 of $4,259,000. The Company's and NDBC's fiscal year 1998 results
include a non tax-deductible charge of $1,300,000 related to the SEC
investigation captioned In the Matter of Certain Market-Making Activities on
NASDAQ, HO-2974.
29
<PAGE>
Total revenue from continuing operations of the Company increased by
approximately $69,053,000, or 50%, from $138,812,000 in fiscal 1998 to
$207,865,000 in fiscal 1999.
Most of the Company's revenue arises from NDBC's firm securities
transactions. Revenue from firm securities transactions increased $55,064,000
from $90,256,000 for the year ended May 31, 1998 to $145,320,000 for the year
ended May 31, 1999. The increased activity in the equity markets, particularly
trading volume in Internet and high technology related stocks, resulted in
increases in both the Company's ticket and share volume for the year ended May
31, 1999, as compared to a year ago. NDBC's overall ticket volume increased
approximately 51% for the year ended May 31, 1999 from 4,235,000 to 6,376,000.
Trading profits per ticket also increased from $21.32 to $22.87.
The Company's commission income, primarily generated by NDB.com,
increased by $8,198,000, or 22%, from $37,052,000 for the year ended May 31,
1998 to $45,250,000 for the year ended May 31, 1999. These increases occurred
primarily due to the increase in NDB.com's average daily ticket count, which was
approximately 7,900 commissionable tickets per day for the year ended May 31,
1999 as compared to approximately 6,100 commissionable tickets per day for the
year ended May 31, 1998.
Realized gain on securities for the year ended May 31, 1999 represent
gains from the sale of 260,100 shares of Astropower, Inc. common stock by NDB
Group and 75,000 shares of Eurotech, Ltd. common stock by NDBC.
Interest and dividend income increased by approximately $2,423,000, or
32%, from $7,599,000 in fiscal 1998 to $10,022,000 in fiscal 1999 primarily due
to the growing margin debits and free credits balances that customers retain
with NDB.com's clearing broker and the increased average proprietary cash
balance NDBC maintained with its clearing broker.
Fee income increased $740,000, or 21%, from $3,568,000 in fiscal 1998
to $4,308,000 in fiscal 1999. The increases are due to NDB.com receiving higher
distribution assistance fees (formerly called Rule 12b-1 fees) from mutual funds
as NDB.com customers' balances in those funds have increased, as well as an
increase in the negotiated rates used to calculate the rebate fees. The increase
in fee income would have been even higher, except that during the year ended May
31, 1998, NDBC received a non-recurring $275,000 fee for consulting services
rendered in connection with the sale of its AMEX specialist business.
Total expenses from continuing operations increased $46,111,000, or
36%, from $127,073,000 in fiscal 1998 to $173,184,000 in fiscal 1999. The
reasons for the increase in expenses are set forth below.
Compensation and benefits increased by approximately $33,558,000, or
72%, for the year ended May 31, 1999, compared with the prior year. As a
percentage of revenue, employee compensation increased to 39% for the year ended
May 31, 1999, from 33% a year ago. The increases were primarily due to a rise in
compensation paid to NDBC's traders and salesmen resultant from the increase in
NDBC's net trading revenue and profitability. Similarly, based on the increasing
profitability and operational benchmarks of both NDB.com and NDBC, management
and employee bonuses have increased. Finally, the number of employees increased
to 624 employees as of May 31, 1999, from 478 employees as of May 31, 1998.
30
<PAGE>
Clearing and related charges decreased by approximately $820,000 from
$46,176,000 in fiscal 1998 to $45,356,000 in fiscal 1999. As a percentage of
revenue, clearing and related charges decreased to 22% for the year ended May
31, 1999 from 33% in the prior year. The decrease for the year ended May 31,
1999 is due principally to three factors. First, there was the reduction in
clearance charges due to a full year's benefit from decreases in per ticket
rates negotiated with NDBC's clearing broker during the year ended May 31, 1998.
Second, there was a reduction in clearance charges due to a decrease in per
ticket rates negotiated with NDB.com's clearing broker as of February 1999. And,
lastly, there was a reduction in order flow rebate fees paid by NDBC based upon
the overall size and type of the order flow received. These rate reductions were
more than enough to compensate for increases of 51% and 29% in total trades
executed by NDB.com and NDBC, respectively, during the year ended May 31, 1999
over the prior year.
Communication expenses, which include market data services, increased
by $3,916,000 from $11,694,000 in fiscal 1998 to $15,610,000 in fiscal 1999. The
increase is mainly due to an increase in the cost of real-time quotations being
offered on NDB.com WebstationTM.
Advertising costs increased $2,416,000 from $3,460,000 in fiscal 1998
to $5,876,000 in fiscal 1999 due to additional media buys and the costs to
produce a new line of advertisements for NDB.com.
Sales-related travel and entertainment expense increased approximately
$1,250,000 from $761,000 in fiscal 1998 to $2,011,000 in fiscal 1999 and
reflects primarily the entertaining of customers by NDBC's institutional and
broker dealer sales force.
Depreciation and amortization increased by approximately $1,212,000, or
18%, for the year ended May 31, 1999, as compared to the prior year. These
increases can be attributed to three main factors. First, NDB.com incurred
additional charges for the disposition of abandoned assets in connection with a
network upgrade. Second, the useful lives for all of NDBC's and NDB.com's
computer-related equipment were reduced. This revision was necessary due to the
fact that these assets are becoming obsolete faster (due to speed and capacity
limitations) in view of the higher volume and volatility conditions of current
markets. Finally, the fixed asset, leasehold improvement and computer software
additions by NDB.com and NDBC aggregating approximately $4,900,000 and
$2,300,000, respectively, during the period from June 1998 through May 1999 also
increased depreciation and amortization.
Equipment rentals increased $477,000 from $185,000 in fiscal 1998 to
$662,000 in fiscal 1999. The increase is principally due to an increase in the
cost of rental of various computer hardware and software systems related to
NDB.com Webstation(TM).
Technology consulting fees increased $1,351,000 from $743,000 in fiscal
1998 to $2,094,000 in fiscal 1999. The increase is primarily due to the
management of NDB.com new Webstation(TM) development project.
Repairs and maintenance expense at both NDB.com and NDBC increased by
$397,000 from $1,906,000 in fiscal 1998 to $2,303,000 in fiscal 1999. The
increase is principally due to maintenance service contract fees paid in order
to maintain infrastructures as the original warranties on the various systems
continue to expire.
Professional fees increased by $2,668,000 from $705,000 in fiscal 1998
to $3,373,000 in fiscal 1999. The increase is primarily due to a rise in legal
fees associated with a number of projects, including corporate acquisitions and
dispositions by NDB Group, real estate lease negotiations primarily by NDB.com,
architectural and engineering needs analyses and other matters for both NDB.com
and NDBC.
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Occupancy costs increased $323,000 from $2,287,000 in fiscal 1998 to
$2,610,000 in fiscal 1999. This increase is due to additional space leased
during fiscal 1999 by both NDB.com and NDBC, as well as increases in utility
charges.
Other expenses decreased $634,000 from $6,099,000 in fiscal 1998 to
$5,465,000 in fiscal 1999. The decrease is primarily attributable to the absence
in fiscal 1999 of an NDBC charge in connection with the SEC investigation
referred to above, which was recorded in fiscal 1998. Partially offsetting this
decrease was an increase in NDB.com customer accomodations related to trade
executions.
The Company's effective tax rate decreased from approximately 49% for
the year ended May 31, 1998 to approximately 47% for the year ended May 31,
1999. The decrease in effective tax rate is due primarily to the
non-deductibility for tax purposes in the prior year of the charge related to
the SEC investigation referred to above.
Fiscal 1998 Compared to Fiscal 1997
The Company's results of continuing operations for the year ended May
31, 1998 reflect primarily the activities of NDB.com and NDBC. Certain fiscal
1998 and 1997 amounts have been reclassified to conform to the fiscal 2000
presentation.
In addition, the results of operations of Equitrade, MXNet and the AMEX
specialist business of NDBC, each of which was sold by the Company, have been
segregated and reflected as discontinued operations on the Consolidated
Statements of Income and Comprehensive Income. As such, the individual line
items comprising revenue and expenses from continuing operations have been
adjusted to exclude the discontinued operations. Net income from operations of
these discontinued operations for the year ended May 31, 1998 was $3,258,000
(net of taxes). For the year ended May 31, 1997, the net income from operations
of these discontinued operations was $2,664,000 (net of taxes). See Note 12 to
the Consolidated Financial Statements -- Discontinued Operations.
The Company had net income from continuing operations for the year
ended May 31, 1998 of $5,998,000, compared to net income from continuing
operations of $6,616,000 for the year ended May 31, 1997. NDB.com had net income
from continuing operations for the year ended May 31, 1998 of $1,304,000,
compared to a net loss from continuing operations of $300,000 for the year ended
May 31, 1997. NDBC had net income from continuing operations for the year ended
May 31, 1998 of $4,259,000, compared to net income from continuing operations
for the year ended May 31, 1997 of $6,680,000. The results for the Company and
NDBC for fiscal 1997 reflect a litigation settlement charge of $9,188,000 and
associated professional fees. Exclusive of this charge, net of reduced bonus and
tax expenses, net income from continuing operations for the Company and NDBC
would have been $10,491,000 and $11,458,000, respectively, for the year ended
May 31, 1997. The Company's and NDBC's fiscal year 1998 results include a non
tax-deductible charge of $1,300,000 related to the SEC investigation captioned
In the Matter of Certain Market-Making Activities on NASDAQ, HO-2974.
Total revenue from continuing operations for the Company decreased by
approximately $22,370,000, or 14%, from $161,182,000 in fiscal 1997 to
$138,812,000 in fiscal 1998.
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Most of the Company's revenue arises from NDBC's firm securities
transactions. Revenue from firm securities transactions decreased, although
overall trading volume increased approximately 32% for the year ended May 31,
1998, when compared with the year ended May 31, 1997, as trading profits per
ticket continued to decline. Several factors contributed to this decrease.
Regulatory changes enacted by the SEC and the NASD, such as the limit order
handling rules, have resulted in an increase in the number of transactions
executed on an "even" basis. Tightened spreads between "bid" and "ask" prices,
the new limit order display rules, increased volatility in the marketplace and
increased Small Order Execution Systems ("SOES") activity have also been factors
in the decrease in trading profits per ticket.
The Company's commission income, primarily generated by NDB.com,
increased principally due to a 31% increase in customer average daily
commissionable tickets. Offsetting some of this increase is a continued shift in
the way customers trade with NDB.com. Throughout the year ended May 31, 1998,
more customers traded utilizing NDB.com's lower-priced, automated systems,
PowerBrokerSM and Webstation(TM), as opposed to using higher costing live
representatives.
For the year ended May 31, 1997, the principal portion of equity income
in partnerships was an equity loss from NDB Group's 49% limited partnership
interest it held in Anvil Institutional Services Company ("Anvil"). On January
24, 1997, NDB Group acquired the remaining 51% of Anvil that it did not
previously own. As such, for the year ended May 31, 1998, Anvil's results were
consolidated with those of the Company until Anvil was sold on September 5,
1997.
Interest and dividend income decreased slightly from $7,652,000 in
fiscal 1997 to $7,599,000 in fiscal 1998, although the sources of interest
income varied. Interest income increased due to the growing margin debits and
free credit balances that customers retain with NDB.com's clearing broker.
Meanwhile, interest income of NDBC decreased primarily due to reduced average
amounts of cash being available for investment.
Fee income increased by $1,055,000, or 42%, from $2,513,000 in fiscal
1997 to $3,568,000 in fiscal 1998. The increases are due to NDB.com receiving
higher distribution assistance fees from money market funds as customers'
balances in those funds have increased, as well as an increase in the negotiated
rates used to calculate the rebate fees. Finally, in connection with NDBC's sale
of its AMEX specialist business, fees were received for certain consulting
services performed during the transition period for the purchaser.
Total expenses from continuing operations decreased $21,462,000, or
14%, from $148,535,000 in fiscal 1997 to $127,073,000 in fiscal 1998. Exclusive
of the litigation settlement charges of $9,188,000 and associated professional
fees, net of reduced bonus expense, total expenses for the year ended May 31,
1997, would have been $141,084,000, resulting in a decrease of 11% for the year
ended May 31, 1998. The reasons for the decrease in expenses are set forth
below.
Compensation and benefits decreased $6,390,000 from $52,887,000 in
fiscal 1997 to $46,497,000 in fiscal 1998. The decrease was primarily due to
lower commissions paid to NDBC's traders because of the decrease in revenue from
firm securities transactions.
Clearing and related charges decreased by $8,833,000 from $55,009,000
in fiscal 1997 to $46,176,000 in fiscal 1998. The decrease is due primarily to
lower order flow rebates being paid to NDBC's correspondents based upon the
overall size and type of order flow received. Also contributing to the decrease
are lower per ticket clearance charges due to newly negotiated rates with
NDB.com and NDBC's clearing brokers.
Communication expenses, which include market data services, decreased
by $645,000 from $12,339,000 in fiscal 1997 to $11,694,000 in fiscal 1998. The
decrease was mainly due to the fiscal 1997 upgrade of NDB.com's PowerBrokerSM
IVR System and development of an in-house quote server. These costs did not
occur in fiscal 1998.
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Advertising costs increased $1,289,000 from $2,171,000 in fiscal 1997
to $3,460,000 in fiscal 1998 due to additional media buys by NDB.com.
Sales-related travel and entertainment expense primarily incurred by
NDBC decreased $36,000 from $797,000 in fiscal 1997 to $761,000 in fiscal 1998.
The decrease is primarily due to cost control measures.
Depreciation and amortization increased by $2,235,000 from $4,323,000
in fiscal 1997 to $6,558,000 in fiscal 1998. The increase was primarily due to
depreciation and amortization incurred on fixed asset, leasehold improvement and
computer software additions by NDB.com and NDBC aggregating approximately
$4,500,000 and $1,700,000, respectively, during the year ended May 31, 1998, as
well as a full year's expense on $12,000,000 of additions during the prior year.
Repairs and maintenance expense increased by $994,000 from $912,000 in
fiscal 1997 to $1,906,000 in fiscal 1998. The increase is primarily due to
maintenance service contract fees paid by both NDB.com and NDBC in order to
maintain infrastructures as the original warranties on the various systems
expire.
Litigation settlement, for the year ended May 31, 1997, represents
charges for NDBC in connection with the Settlement Agreement. See Note 16 to the
Consolidated Financial Statements, "Contingencies and Legal Matters".
Professional fees decreased by $2,485,000 from $3,190,000 in fiscal
1997 to $705,000 in fiscal 1998. During the year ended May 31, 1997, NDB Group
incurred approximately $535,000 in legal, accounting and investment banker fees
and expenses, financial institution commitment fees and out-of-pocket expenses
in connection with NDB Group's review of a possible acquisition which was not
consummated. NDBC also incurred additional legal fees in connection with the
litigation settlement negotiations and the entry into the Settlement Agreement
in the case entitled In Re: NASDAQ Market-Makers Antitrust Litigation, 94 Civ.
3996(RWS). See Note 16 to the Consolidated Financial Statements, "Contingencies
and Legal Matters". These prior year expenses did not recur to the same extent
in the current fiscal year, leading to the reduction in professional fees.
Occupancy costs decreased $208,000 from $2,495,000 in fiscal 1997 to
$2,287,000 in fiscal 1998. The decrease is attributable to a decrease for
NDB.com which, last year, incurred rent concurrently, from November 1996 on two
main office locations as it awaited the move of its headquarters to 7 Hanover
Square in New York City. In addition, the closing of NDB.com's branch offices as
of October 31, 1997 has led to a reduction in rent expense.
Other expenses increased $1,312,000 from $4,787,000 in fiscal 1997 to
$6,099,000 in fiscal 1998. The increase is primarily attributable to increases
in NDB.com customer accommodations related to trade executions, employment
agency fees and certain expense accruals by NDBC related to the SEC
investigation referred to above.
The Company's effective tax rate increased from approximately 48% for
the year ended May 31, 1997 to approximately 49% for the year ended May 31,
1998. The increase in effective tax rate is due primarily to the
non-deductibility of certain expense accruals for tax purposes in the year ended
May 31, 1998.
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For the year ended May 31, 1998, deferred tax expenses principally
relate to the reversal of the prior year's tax benefit as the remaining balance
due under the Settlement Agreement, as amended, was paid during the year ended
May 31, 1998. The Company took a deduction on its fiscal 1998 tax returns for
this payment.
Liquidity and Capital Resources
The Company's tangible assets are highly liquid, but subject to market
price fluctuation, with more than 76% consisting of cash or assets readily
convertible into cash (principally firm securities positions, U.S. Treasury
obligations, receivables from brokers and cash). The Company's operations have
generally been financed by internally generated funds and, during the past
fiscal year, from the proceeds from the sales of its common stock in both public
and private offerings and the sale of its interest in Equitrade.
NDB Group's broker-dealer subsidiaries, NDB.com and NDBC, are subject
to the minimum net capital requirement of the SEC, which is designed to measure
the general financial soundness and liquidity of brokers. As of May 31, 2000,
NDB.com and NDBC had approximately $12,466,000 and $111,818,000 in excess of the
minimum required net capital requirements, respectively, representing increases
of $8,612,000 for NDB.com and $50,420,000 for NDBC, from the prior year. The
increases for NDB.com and NDBC resulted primarily, in the case of NDBC, from the
year's net income, and from capital contributions to both subsidiaries by NDB
Group. The net capital rule imposes financial restrictions upon NDB.com's and
NDBC's businesses, which are more severe than those imposed on most other
non-financial businesses.
Cash flows from operations vary on a daily basis as the Company's
portfolio of marketable securities changes. The Company's ability to convert
marketable securities owned into cash is determined by the depth of the market
and the size of the Company's security positions in relation to the market as a
whole. The portfolio mix also affects the regulatory capital requirements
imposed on NDB.com and NDBC, which directly affects the amount of funds
available for operating, investing and financing activities.
From time to time, the Company has borrowed funds in connection with
its trading activities. The Company currently has no committed lines of credit
and such borrowings were done on an "as needed" basis. Management is reviewing
alternatives to meeting these funding requirements.
As a result of the sale of Equitrade on June 18, 1999, the Company
received approximately $85,000,000 in net cash proceeds comprised principally of
a pre-tax book gain of approximately $36,000,000 (after a bonus to the Company's
chief executive officer of approximately $6,000,000), the return of capital of
approximately $28,000,000, the repayment of subordinated notes receivable of
$27,000,000 and the repayment of other notes and interest receivable of
approximately $3,000,000. As part of the sale, the Company also repaid its
$15,000,000 loan to Spear, Leeds & Kellogg, LP from the above mentioned
proceeds.
On June 25, 1999, NDB Group closed an underwritten public offering of
2,990,000 shares of its common stock, which resulted in its receipt of
approximately $91,600,000 in proceeds, net of underwriters' discounts and
commissions and expenses related to the offering.
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On February 5, 2000, NDB Group sold an aggregate of 500,000 shares of
its common stock and warrants convertible to 500,000 additional shares of its
common stock in a private placement to Go2Net and Vulcan for $13,500,000. The
warrants were exercised during March and April 2000 with NDB Group receiving
additional aggregate proceeds of $16,500,000
The Company made capital expenditures of $56.5 million during the year
ended May 31, 2000. Capital expenditures during fiscal 2000 were primarily
related to the build out of the new facilities at 90 Hudson Street in Jersey
City for NDB.com and Millennium, the expansion of NDBC's trading floor and
offices, and for the continued upgrading of the Company's information technology
systems and telecommunications equipment. The Company expects that it will
continue to invest during fiscal year 2001 in capital expenditures on ongoing
technological improvements and product enhancements. The Company also is
planning to open new branch offices designed to house both additional customer
service personnel for NDB.com and additional trading and sales personnel for
NDBC. The Company intends to finance these upgrades and expansions, estimated to
approximate $20 million to $25 million, with working capital.
Cash flows from the Company's investment activities are directly
related to market conditions.
During the year ended May 31, 1997, NDB Group made two loans of
$3,000,000 each to NDB.com, in the form of subordination agreements. During
fiscal 2000, NDB Group contributed an aggregate of $50,320,000 to NDB.com and
$25,000,000 to NDBC. These funds were expended in order for NDB.com to maintain
adequate regulatory capital levels and for NDBC to be able to increase the level
of securities positions that it could hold in its inventory at any point in
time. The Company is likely to make additional loans or contributions to its
broker-dealer subsidiaries, as necessary, to maintain regulatory capital levels
and to accommodate business growth. In addition, the Company intends to expend,
during fiscal year 2001, between $30,000,000 and $50,000,000 for marketing and
advertising, primarily for its discount brokerage services. Such expenditures
are anticipated to be funded by the Company's working capital.
On October 22, 1999, the Company purchased 20,000 shares of Aether
Systems Inc. common stock for $320,000. The Company sold this investment on
February 23, 2000 and recognized a pretax profit, reflected in firm securities
transaction on the Consolidated Statements of Income and Comprehensive Income,
of approximately $3,500,000.
The Company estimates that it will begin self-clearing NDB.com and NDBC
transactions by early calendar year 2001 through Millennium. Management expects
to incur up front costs associated with the implementation of the clearing
operations and, in addition, Millennium will be required to maintain certain
levels of net capital, which will be based on the amount of customer margin
borrowings as well as other factors. Based upon the activities of NDB.com and
NDBC at May 31, 2000, management of the Company estimates that Millennium would
have a minimum net capital requirement of approximately $86 million. It is
anticipated that such costs and capital requirements associated with Millennium
will be funded by the Company's working capital.
NDB Group has also executed term sheets with Deutsche Bank to launch
joint venture retail discount brokerage activities in Western Europe and the
rest of the world other than the United States. These ventures may result,
during the fiscal year ended May 31, 2001, in expenditures to initiate
operations and the investment of capital in the joint venture.
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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
communications, 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 financial institutions, including money market
accounts, as well as 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.
Impact of the Year 2000 Issue
The Company prepared for the issues associated with the year 2000,
including changes in the programming of internal and vendor computer systems.
The year 2000 problem was pervasive and complex as virtually every computer
operation was affected by the rollover of the two-digit year value to 00. The
issue was whether computer systems would properly recognize date sensitive
information when the year changed to 2000. Systems that would not properly
recognize such information could generate erroneous data or cause a system to
fail. Through the date of this report, the Company has not experienced any year
2000 problems with its production systems. Through May 31, 2000, the Company
spent approximately $488,000 for software modifications, hardware and testing
related to year 2000 of which $285,000 was incurred during the year ended May
31, 2000. The Company did not track internal costs related to year 2000 issues,
which consisted primarily of payroll expenses and, as a result, the foregoing
actual expenditures do not include such internal costs.
Looking Ahead
As a result of the sales of its common stock through both public and
private offerings between June 1999 and June 2000, and the sale of its interest
in Equitrade on June 18, 1999, including the return of its invested capital at
Equitrade, the Company had accumulated cash and other short-term investments of
approximately $289,000,000 as of June 30, 2000. During the fiscal year ending
May 31, 2001, the Company intends to execute the following strategic plan.
NDB.com intends to expend between $30,000,000 and $50,000,000 for
marketing and advertising its discount brokerage services. Specifically, NDB.com
will focus on the continued branding of its services through the use of its
logo, the mallard duck.
Millennium will serve as the vehicle to clearing transactions initially
for NDB.com and NDBC and later for third parties. The Company estimates, based
upon the current level of activity of NDB.com and NDBC, that approximately
$86,000,000 will be needed to satisfy regulatory net capital requirements for
this operation. Additional funds will be expended for the start up of the
operation. The Company estimates that Millennium will commence operation prior
to March 31, 2001. Millennium will be required to register as a broker dealer
and seek other regulatory clearances prior to the commencement of business.
While the Company believes self-clearing NDB.com and NDBC will eventually reduce
clearing expenses for these entities, clearing costs will likely be initially
higher than levels paid to outside clearing brokers used by NDB.com and NDBC.
There can be no assurance that clearing expenses will be reduced or, if it
occurs, when the savings will be achieved.
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In addition, NDB.com intends to continue to invest in the development
and introduction of new products. Products being reviewed are greater access to
initial public offerings, the introduction of insurance and banking products,
electronic bill presentment and payment and credit products.
NDB.com also expects to implement its previously announced co-branded
brokerage services with Bank United, Pentagon Federal Financial Services, Inc.
and two community banks during the late-summer and fall of 2000.
NDBC intends to expand its trading facilities by opening offices in
Long Island, New York and in central New Jersey. These offices are projected to
employ an additional 60 persons engaged in trading and support functions. By May
31, 2001, NDBC plans to expand its current number of traders by between 15 and
20 persons. NDBC also intends to begin making a market in an additional 500 to
1,000 equities, including equities listed on the NYSE, by the end of fiscal year
2001. NDB.com will share each of these new offices with NDBC and employ
approximately 60 people at the facilities.
NDB Group has also executed term sheets with Deutsche Bank to launch
joint venture retail discount brokerage activities in Western Europe and the
rest of the world other than the United States. These ventures may result,
during the fiscal year ended May 31, 2001, in expenditures to initiate
operations and the investment of capital in the joint venture.
Management of the Company believes these investments and innovations
are required to compete in the rapidly evolving businesses of market making and
discount retail brokerage. There can be no assurance that the Company will
implement any part of this strategic plan or that such proposed operations will
be successful.
Item 7a. Quantitative and Qualitative Disclosures About Risk
The Company's principal business activities are, by their nature, risky
and volatile and are directly affected by many national and international
factors. Any one of these factors may cause a substantial decline in the
securities markets, which could materially adversely affect the Company's
business. Managing risk is critical to the Company's profitability and to
reducing the likelihood of earnings volatility. The Company's risk management
policies and procedures have been established to continually identify, monitor
and manage risk. The major types of risk that the Company faces include, but are
not limited to, credit risk, legal risk, operating risk and market risk.
Credit risk is the potential for loss due to a customer or counterparty
failing to perform its contractual obligations. The Company clears its
securities transactions through unaffiliated clearing agents. Under the terms of
its clearing agent agreements, the Company's clearing agents have the right to
charge it for losses that result from its customers' failure to fulfill their
contractual obligations. In order to mitigate risk, the Company's policy is to
monitor the credit standing of its customers and maintain collateral to support
margin loans and short sales. Further, a significant portion of the Company's
and its customer assets are held at one or more clearing agents. Therefore, the
Company would incur substantial losses if one of the Company's clearing agents
were to become insolvent or otherwise unable to meet its financial obligations.
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Operating risk is the potential for loss due to deficiencies in control
processes or computer and technological systems. The Company relies heavily on
various computer and communications systems to operate its business, including
NDB.com's website. The Company relies particularly on third parties such as
Nasdaq, telephone companies, online service providers, clearing agents, data
processors and software and hardware vendors. The Company's business could be
negatively impacted by unanticipated disruptions in service to customers, slower
response times, delays in trading, failed settlement of trades, decreased
customer service and satisfaction, incomplete or inaccurate accounting or
processing of trades, and delays in the Company's introduction of new products
and services. The Company attempts to mitigate operating risk by employing
experienced personnel, maintaining an internal control system, and maintaining
backup and recovery functions.
Legal risk is the risk associated with non-compliance with legal and
regulatory requirements, and counterparty non-performance based upon non-credit
related conditions, such as legal authority or capacity. The SEC, NASD, and
other agencies extensively regulate the U.S. securities industry. The Company is
required to comply strictly with the rules and regulations of these agencies.
Further, there are frequent changes in the laws and regulations affecting the
securities industry and the securities markets. If the Company fails to comply
with any of these laws, rules, or regulations, it is subject to censure, fines,
cease-and-desist orders or suspensions of its business. Additionally, the SEC
and NASD have strict rules that require it to maintain sufficient net capital.
If it fails to maintain the required net capital, the SEC or the NASD may
suspend or revoke its broker-dealer licenses. In addition, the Company may be
subject to lawsuits or arbitration claims by customers, employees or other third
parties in the different jurisdictions in which it conducts business (see Item 3
above). The Company has established procedures in accordance with legal and
regulatory requirements that are designed to reasonably ensure compliance in
these matters.
Market risk is the risk of loss that may result from changes in
interest and foreign exchange rates, equity and commodity prices and the
correlations among them. The Company's current operations and trading activity
limit its exposure to the interest rate and equity price exposure components of
market risk.
Interest rate risk is the possibility of a loss in the value of
financial instruments from changes in interest rates. The Company's primary
exposure to interest rate risk arises from its interest earning assets (mainly
deposits at clearing brokers, loans and notes receivable and U.S. Treasury
obligations) and funding sources (loans payable). The Company attempts to
mitigate this risk by only holding U.S. Treasury obligations with maturities of
one year or less. For the other interest earning assets and funding sources, the
interest rate risk is not material, as the underlying value of such assets will
not vary with changes in interest rates.
Included in the Company's inventory of financial instruments held for
trading purposes are government securities with a fair value of $87.1 million
and $8.4 million at May 31, 2000 and 1999, respectively. The interest rate risk,
which arises from short-term treasury rates, associated with these positions is
not material to the Company's financial position, results of operations or cash
flows. All other financial instruments exposed to interest rate risk are held
for purposes other than trading. For these instruments the interest rate risk is
not material, as the underlying value will not vary with changes in interest
rates.
Equity price risk generally means the risk of loss that may result from
the potential change in the value of a financial instrument as a result of
absolute and relative price movements, price volatility or changes in liquidity,
over which the Company has no control. The Company's market making activities
expose its capital to significant equity price risk. To mitigate this risk,
senior management monitors profits and losses on a real-time basis throughout
the trading day. Further, from the Company's system-generated reports, senior
management reviews positions, mark-to-market valuations, and daily profits and
losses on individual security positions. Additionally, traders are required to
maintain positions meeting a specified potential profit/loss ratio, which is
monitored by management.
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The Company maintains inventories for trading purposes in
exchange-listed, Nasdaq and other over-the-counter securities on both a long and
short basis. The fair value of these securities at May 31, 2000 was $47.5
million in long positions and $12.3 million in short positions. The fair value
of these securities at May 31, 1999 was $38.0 million in long positions and
$11.7 million in short positions. The potential loss in fair value, using a
hypothetical 10% decline in prices, is estimated to be $3.5 million and $2.6
million as of May 31, 2000 and 1999, respectively. A 10% hypothetical decline
was used to represent a significant yet plausible market change.
Other financial instruments exposed to equity rate risk are held for
purposes other than trading. This includes investments by the Company in several
privately held corporations. These investments were valued at their fair value,
$15.3 million and $500,000 at May 31, 2000 and May 31, 1999, respectively, in
the Company's condensed consolidated financial statements under the heading
"Securities not readily marketable". The potential loss in fair value, using a
hypothetical 10% decline in prices, is estimated to be $1.5 million and $50,000
as of May 31, 2000 and 1999, respectively.
Item 8. Financial Statements and Supplementary Data.
The response to this item is submitted in a separate section of this
report commencing on Page F-1.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
On February 12, 1999, KPMG LLP resigned by mutual agreement with NDB
Group as NDB Group's independent public accountants. The Audit Committee of the
Board of Directors of NDB Group recommended to the Board of Directors that
PricewaterhouseCoopers LLP be selected as the independent public accountants for
NDB Group. The Board of Directors approved the recommendation of its Audit
Committee. PricewaterhouseCoopers LLP became NDB Group's independent public
accountants on February 19, 1999. The report of KPMG LLP on the financial
statements of the Company for the fiscal year ended May 31, 1998 did not contain
any adverse opinion or disclaimer of opinion, nor was it qualified or modified
as to uncertainty, audit scope or accounting principles. During the fiscal years
ended May 31, 2000 and 1999, there were no disagreements between NDB Group and
PricewaterhouseCoopers LLP on any matters of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure.
40
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Company.
The material contained in "Election of Directors" and in "Section 16(a)
Beneficial Ownership Reporting Compliance" of NDB Group's definitive proxy
statement (to be filed pursuant to the Securities Exchange Act of 1934, as
amended) for the annual meeting of stockholders to be held on October 25, 2000
is hereby incorporated by reference.
Item 11. Executive Compensation.
The material contained in "Compensation of Directors and Executive
Officers", "Compensation Committee Report on Executive Compensation" and
"Company Performance" of NDB Group's definitive proxy statement (to be filed
pursuant to the Securities Exchange Act of 1934, as amended) for the annual
meeting of stockholders to be held on October 25, 2000 is hereby incorporated by
reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The material contained in "Voting Securities and Principal Holders
Thereof" of NDB Group's definitive proxy statement (to be filed pursuant to the
Securities Exchange Act of 1934, as amended) for the annual meeting of
stockholders to be held on October 25, 2000 is hereby incorporated by reference.
Item 13. Certain Relationships and Related Transactions.
The material contained in "Certain Relationships and Related
Transactions" of NDB Group's definitive proxy statement (to be filed pursuant to
the Securities Exchange Act of 1934, as amended) for the annual meeting of
stockholders to be held on October 25, 2000 is hereby incorporated by reference.
See also, "Recent Developments."
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) Financial Statements
Reference is made to page F-1 for a list of all financial
statements and schedules filed as part of this report.
41
<PAGE>
(b) Reports on Form 8-K
During the fourth quarter of the fiscal year ended May 31,
2000, NDB Group filed three reports on Form 8-K. The first
report, dated March 27, 2000, was filed in regard to the
signing of a non-binding letter of intent (the "letter
agreement") with Deutsche Bank Americas Holding Corporation
("DB") pursuant to which the Corporation would sell
3,000,000 shares of its common stock to DB or one of its
designated affiliates for $45.31 per share. The second
report, dated May 1, 2000, was filed in regard to an
amendment to the letter agreement dated March 27, 2000
between NDB Group and DB to extend the term of the letter
agreement and certain other provisions. The third report,
dated May 18, 2000, was filed because NDB Group had entered
into a Securities Purchase Agreement dated as of May 15,
2000 with DB U.S. Financial Markets Holding Corporation
("DBUS") pursuant to which the Corporation would sell
3,000,000 shares of its common stock to DBUS for $45.31 per
share.
(c) Exhibits
The exhibits that are filed with this report, or that are
incorporated herein by reference, are set forth in the
Exhibit Index beginning on page E-1.
42
<PAGE>
National Discount Brokers Group, Inc. and Subsidiaries
Consolidated Financial Statements
For the Years Ended
May 31, 2000, 1999 and 1998
43
<PAGE>
National Discount Brokers Group, Inc. and Subsidiaries
Index to Consolidated Financial Statements
<TABLE>
<CAPTION>
Page
<S> <C>
Independent Accountants' Reports F-1-2
Consolidated Financial Statements and Notes
Consolidated Statements of Financial Condition -
May 31, 2000 and 1999 F-3
Consolidated Statements of Income and Comprehensive Income -
Years Ended May 31, 2000, 1999 and 1998 F-4-5
Consolidated Statements of Changes in Stockholders' Equity -
Years Ended May 31, 2000, 1999 and 1998 F-6
Consolidated Statements of Cash Flows -
Years Ended May 31, 2000, 1999 and 1998 F-7-10
Notes to Consolidated Financial Statements F-11-30
Schedule I - Condensed Financial Statements of the Registrant (Parent) and Notes
Statements of Financial Condition -
May 31, 2000 and 1999 S-1
Statements of Income and Comprehensive Income-
Years Ended May 31, 2000, 1999 and 1998 S-2
Statements of Cash Flows-
Years Ended May 31, 2000, 1999 and 1998 S-3-6
Notes to Condensed Financial Statements S-7
</TABLE>
<PAGE>
Report of Independent Accountants
To the Board of Directors and Stockholders of
National Discount Brokers Group, Inc.
In our opinion, the accompanying consolidated statements of financial condition
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 at May 31, 2000 and May 31, 1999, and the results of their
operations and their cash flows for each of the two years in the period ended
May 31, 2000, in conformity with accounting principles generally accepted in the
United States. 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 audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States, which require that we plan and perform the audits 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
audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
July 20, 2000
F-1
<PAGE>
Independent Auditors' Report
The Board of Directors and Stockholders of
National Discount Brokers Group, Inc.:
We have audited the accompanying consolidated statements of income and
comprehensive income, changes in stockholders' equity, and cash flows of
National Discount Brokers Group, Inc. and subsidiaries for the year ended May
31, 1998. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the results of operations and cash flows of
National Discount Brokers Group, Inc. and subsidiaries for the year ended May
31, 1998, in conformity with generally accepted accounting principles.
KPMG LLP
July 15, 1998
F-2
<PAGE>
National Discount Brokers Group, Inc. and Subsidiaries
Consolidated Statements of Financial Condition
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>
May 31,
----------------------------------------
2000 1999
------------------- -------------------
Assets
<S> <C> <C>
Cash and cash equivalents $ 17,250,832 $ 411,629
U.S. Treasury obligations, including $928,797 and $8,418,260 held as
collateral, respectively 87,098,695 8,418,260
Receivables
Clearing brokers 175,660,353 86,509,122
Other 5,273,063 2,901,799
Securities owned, at market value 47,500,200 38,048,489
Securities not readily marketable, at fair value 15,315,150 500,000
Investment in discontinued operations - 28,341,746
Loans and notes receivable 1,674,533 1,094,989
Furniture, fixtures, equipment and leasehold improvements, at cost, net
of accumulated depreciation and amortization (Note 5) 48,176,697 14,837,114
Computer software, at cost, net of accumulated amortization of $6,726,857
and $3,624,381, respectively 10,464,153 4,996,223
Exchange memberships (market value of $1,520,000, at May 31, 1999) - 351,496
Secured demand notes receivable - 27,000,000
Income taxes receivable 7,388,870 -
Deferred tax asset 2,199,072 825,797
Other assets 11,180,366 3,054,144
------------------- -------------------
Total assets $ 429,181,984 $ 217,290,808
------------------- -------------------
Liabilities and Stockholders' Equity
Liabilities
Securities sold, not yet purchased, at market value $ 12,335,906 $ 11,723,172
Accounts payable and accrued expenses 99,434,509 46,296,949
Loan payable - 15,000,000
Income taxes payable - 2,275,481
------------------- -------------------
Total liabilities 111,770,415 75,295,602
------------------- -------------------
Commitments and contingencies
Stockholders' equity
Preferred stock-$.01 par value; 1,000,000 shares authorized, none issued - -
Common stock-$.01 par value; 50,000,000 shares authorized, 18,333,201
and 14,343,201, shares issued and outstanding, respectively 183,332 143,432
Additional paid-in capital 187,583,451 65,828,938
Retained earnings 133,639,888 80,181,611
------------------- -------------------
321,406,671 146,153,981
Less: treasury stock, at cost, 334,569 and 348,277 shares, respectively (3,995,102) (4,158,775)
------------------- -------------------
Total stockholders' equity 317,411,569 141,995,206
------------------- -------------------
Total liabilities and stockholders' equity $ 429,181,984 $ 217,290,808
------------------- -------------------
The accompanying notes are an integral part of the consolidated financial statements
</TABLE>
F-3
<PAGE>
National Discount Brokers Group, Inc. and Subsidiaries
Consolidated Statements of Income and Comprehensive Income
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years Ended May 31,
------------------------------------------------------------
2000 1999 1998
-------------------- -------------------- -------------------
<S> <C> <C> <C>
Revenue
Firm securities transactions, net $ 286,956,912 $ 145,319,935 $ 90,256,181
Commission income 68,576,731 45,250,436 37,052,201
Realized gain on securities - 2,370,242 63,625
Interest and dividends 23,856,633 10,022,013 7,599,179
Fee income 6,094,867 4,308,393 3,567,837
Other 273,336 594,153 272,921
-------------------- -------------------- -------------------
Total revenue 385,758,479 207,865,172 138,811,944
-------------------- -------------------- -------------------
Expenses
Compensation and benefits 151,757,218 80,055,124 46,497,144
Clearing and related brokerage charges 68,189,142 45,356,150 46,176,341
Communications 19,804,403 15,609,756 11,694,337
Advertising and marketing
Advertising costs 32,495,362 5,876,159 3,460,371
Sales-related travel and entertainment 3,622,762 2,011,380 761,090
Technology related
Depreciation and amortization 17,756,571 7,769,722 6,557,551
Equipment rental 2,792,581 662,212 184,876
Technology consulting 5,168,463 2,094,070 743,269
Repairs and maintenance 3,891,453 2,302,834 1,906,181
Other
Professional fees 2,076,961 3,372,602 705,127
Occupancy costs 6,218,532 2,609,520 2,286,897
Other 9,224,168 5,464,963 6,099,389
-------------------- -------------------- -------------------
Total expenses 322,997,616 173,184,492 127,072,573
-------------------- -------------------- -------------------
Income from continuing operations before income taxes 62,760,863 34,680,680 11,739,371
Income taxes 30,131,852 16,461,273 5,740,913
-------------------- -------------------- -------------------
Net income from continuing operations 32,629,011 18,219,407 5,998,458
-------------------- -------------------- -------------------
Discontinued operations
Income from discontinued operations, net of taxes 82,994 2,786,052 3,257,776
Gain on sale of discontinued operations, net of
taxes 20,746,272 - 2,704,085
-------------------- -------------------- -------------------
20,829,266 2,786,052 5,961,861
-------------------- -------------------- -------------------
Net income $ 53,458,277 $ 21,005,459 $ 11,960,319
-------------------- -------------------- -------------------
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
F-4
<PAGE>
National Discount Brokers Group, Inc. and Subsidiaries
Consolidated Statements of Income and Comprehensive Income, Continued
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years Ended May 31,
--------------------------------------------------------------
2000 1999 1998
-------------------- ------------------- -------------------
<S> <C> <C> <C>
Other comprehensive (loss) income, before tax: Unrealized
(loss) gain on
securities available-for-sale:
Unrealized holding (loss) gain arising during period $ - $ (275,342) $ 2,615,000
Less: reclassification adjustment for gain included in net
income - (2,290,318) -
-------------------- ------------------- -------------------
Other comprehensive (loss) income, before tax - (2,565,660) 2,615,000
Income tax (benefit) expense related to items of other
comprehensive (loss) income - (1,205,860) 1,255,200
-------------------- ------------------- -------------------
Other comprehensive (loss) income, net - (1,359,800) 1,359,800
-------------------- ------------------- -------------------
Comprehensive income $ 53,458,277 $ 19,645,659 $ 13,320,119
-------------------- ------------------- -------------------
Net income per common and common equivalent share
Basic
Net income from continuing operations $ 1.92 $ 1.30 $ .45
Income from discontinued operations, net of taxes - .20 .24
Gain on sale of discontinued operations, net of taxes 1.22 - .20
-------------------- ------------------- -------------------
Net income $ 3.14 $ 1.50 $ .89
-------------------- ------------------- -------------------
Weighted average common shares outstanding 17,021,113 14,018,257 13,432,726
-------------------- ------------------- -------------------
Diluted
Net income from continuing operations 1.86 1.29 .45
Income from discontinued operations, net of taxes - .20 .24
Gain on sale of discontinued operations, net of taxes 1.19 - .20
-------------------- ------------------- -------------------
Net income $ 3.05 $ 1.49 $ .89
-------------------- ------------------- -------------------
Weighted average common shares outstanding 17,525,126 14,143,240 13,501,346
-------------------- ------------------- -------------------
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
F-5
<PAGE>
National Discount Brokers Group, Inc. and Subsidiaries
Consolidated Statements of Changes in Stockholders' Equity
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years Ended May 31, 2000, 1999 and 1998
------------------------------------------------------------------------------------------------------
Accumulated
Common Stock Additional Other Treasury Stock
------------------ 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, 1997 14,343,201 $143,432 $ 57,189,985 $ - $47,215,833 (1,648,536) $(12,274,765) $ 92,274,485
Net income - - - - 11,960,319 - - 11,960,319
Unrealized gain - - - 1,359,800 - - - 1,359,800
Acquisition of treasury stock - - - - - (309,146) (3,757,376) (3,757,376)
Sale of treasury stock - - 7,023,900 - - 1,500,000 12,243,600 19,267,500
Issuance of treasury stock upon
exercise of options - - 836,932 - - 294,758 2,230,988 3,067,920
------------- ---------- ---------- ------------ ---------- ---------- ------------ -----------
Balance at May 31, 1998 14,343,201 143,432 65,050,817 1,359,800 59,176,152 (162,924) (1,557,553) 124,172,648
Net income - - - - 21,005,459 - - 21,005,459
Reversal of unrealized gain
for investments sold - - - (1,359,800) - - - (1,359,800)
Acquisition of treasury stock - - - - - (244,822) (3,231,647) (3,231,647)
Issuance of treasury stock
upon exercise of options - - 778,121 - - 59,469 630,425 1,408,546
------------ ---------- ----------- ------------- ----------- ----------- ----------- -------------
Balance at May 31, 1999 14,343,201 143,432 65,828,938 - 80,181,611 (348,277) (4,158,775) 141,995,206
Net income - - - - 53,458,277 - - 53,458,277
Issuance of common stock 3,990,000 39,900 121,564,050 - - - - 121,603,950
Issuance of treasury stock
upon exercise of options - - 190,463 - - 13,708 163,673 354,136
------------ --------- ----------- ------------ ----------- ------------ ------------ -------------
Balance at May 31, 2000 18,333,201 $183,332 $187,583,451 $ - $133,639,888 (334,569) $ (3,995,102) $317,411,569
------------ -------- ------------ ---------- ------------ ------------ ------------ -------------
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
F-6
<PAGE>
National Discount Brokers Group, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years Ended May 31,
------------------------------------------------------------
2000 1999 1998
-------------------- -------------------- -------------------
<S> <C> <C> <C>
Cash flows from operating activities
Net income from continuing operations $ 32,629,011 $ 18,219,407 $ 5,998,458
Net income from discontinued operations 20,829,266 2,786,052 3,257,776
Non-cash items included in net income:
Equity income in partnerships - - (1,299)
Depreciation and amortization 17,756,571 7,769,722 7,797,133
Gain on sale of securities available-for-sale - (2,290,318) -
(Gain) loss on sale/write-off of securities not
readily marketable - 420,076 (63,625)
Income of Equitrade allocated to minority partners - - 5,766,440
Provision for deferred taxes (1,373,275) (542,911) 1,937,586
Provision for loss on notes receivable - 102,865 -
(Increase) decrease in operating assets:
Funds segregated for customers - - 29,203
Receivables
Clearing brokers (89,151,231) (18,766,614) (9,695,325)
Other (2,371,264) (2,174,700) (266,289)
Securities owned (9,451,711) 29,920,622 (27,785,967)
Income taxes receivable (7,246,262) - -
Other assets (8,126,222) (1,985,610) 900,905
Increase (decrease) in operating liabilities:
Securities sold, not yet purchased 612,734 (16,964,314) 3,558,196
Accounts payable and accrued expenses 53,137,560 26,093,670 (12,786,419)
Income taxes payable (2,275,481) 1,708,046 (322,518)
(Increase) decrease in operating assets due to
sale/deconsolidation of Equitrade:
Investment in discontinued operations 28,341,746 (28,341,746) -
Furniture, fixtures, equipment and leasehold
improvements - 290,122 -
Intangible assets - 6,394,789 -
Exchange memberships 351,496 7,065,000 -
Secured demand notes receivable - (23,500,000) -
Decrease in operating liabilities due to
deconsolidation of Equitrade
Minority interest in Equitrade - (9,465,741) -
Subordinated notes payable - (3,500,000) -
-------------------- -------------------- -------------------
Net cash provided by (used in) operating
activities $ 33,662,938 $ (6,761,583) $ (21,675,745)
-------------------- -------------------- -------------------
</TABLE>
F-7
<PAGE>
National Discount Brokers Group, Inc. and Subsidiaries
Consolidated Statements of Cash Flows, Continued
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years Ended May 31,
----------------------------------------------------
2000 1999 1998
------------------ --------------- ----------------
<S> <C> <C> <C>
Cash flows from investing activities
Net purchases of U.S. Treasury obligations $ (78,680,435) $ (750,797) $ 5,661,083
Proceeds from sales of securities available-for-sale - 2,290,318 -
Proceeds from sales of securities
not readily marketable - 81,244 63,625
Payment for purchase of securities
not readily marketable (14,815,150) - (500,000)
Loans made and notes issued to employees
and officers (1,660,000) (906,000) (60,000)
Principal collected on notes receivable 1,080,456 468,555 233,124
Purchases of furniture, fixtures,
equipment and leasehold improvements (46,826,753) (3,035,696) (4,949,659)
Purchases of computer software (9,737,331) (4,118,607) (1,842,745)
Acquisition of intangible asset - (450,000) -
Sale of subsidiaries (net of cash, intangibles and
exchange memberships acquired) - - 6,600,000
Principal collected on subordinated notes receivable 27,000,000 - -
Other - - (38,917)
------------------ --------------- ----------------
Net cash provided by (used in)
investing activities (123,639,213) (6,420,983) 5,166,511
------------------ --------------- ----------------
Cash flows from financing activities
Proceeds from issuances of common stock 121,603,950 - -
Proceeds from loan payable - 15,000,000 -
Repayment of loan (15,000,000) - -
Sale of treasury stock - - 19,267,500
Purchase of treasury stock - (3,231,647) (614,281)
Proceeds from exercise of options 211,528 786,721 -
Capital contribution by minority interest - - 275,086
Capital withdrawals by minority interest - - (4,296,021)
------------------ --------------- ----------------
Net cash provided by
financing activities 106,815,478 12,555,074 14,632,284
------------------ --------------- ----------------
Net increase (decrease) in cash 16,839,203 (627,492) (1,876,950)
Cash surrendered on sale of MXNet, Inc. - - (117,747)
Cash at beginning of year 411,629 1,039,121 3,033,818
------------------ --------------- ----------------
Cash at end of year $ 17,250,832 $ 411,629 $ 1,039,121
------------------ --------------- ----------------
</TABLE>
F-8
<PAGE>
National Discount Brokers Group, Inc. and Subsidiaries
Consolidated Statements of Cash Flows, Continued
-------------------------------------------------------------------------------
Supplemental disclosures of cash flow information:
Income tax payments totaled $56,179,617, $17,266,322 and $7,510,410 during the
years ended May 31, 2000, 1999 and 1998, respectively.
Interest payments totaled $164,024, $315,334 and $1,129,763 during the years
ended May 31, 2000, 1999 and 1998, respectively.
Supplemental disclosures of non-cash investing and financing activities:
During September 1997, NDB Group sold all of the stock of its subsidiary,
Anvil Institutional Services, Inc., and received a note in the amount of
$102,945, which was repaid in January 1999.
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 had a stated interest rate of 4% and was
repaid on June 18, 1999.
During February 1998, NDB Group sold the remaining net assets of its
subsidiary, MXNet, Inc., and received a promissory note for $6,600,000 with
interest accrued at 6% from the date of sale. The note was repaid in April
1998.
Between February 1998 and May 1998, certain available-for-sale securities
appreciated due to the entity's successful initial public offering. As such,
NDB Group reflected these securities at fair market value on the consolidated
statements of financial condition. The unrealized gain of $1,359,800, as of
May 31, 1998, associated with marking these securities to fair market value,
is reflected as a component of accumulated comprehensive income on the
consolidated statements of financial condition, net of income taxes of
$1,255,200.
During the year ended May 31, 1999, various employees of NDB Group exercised
an aggregate of 59,469 options for the purchase of 59,469 shares of NDB
Group's common stock with exercise prices ranging from $11.00 per share to
$13.50 per share. In connection with the exercise of these options, NDB Group
recorded an income tax benefit of $621,825.
During the year ended May 31, 2000, various employees of NDB Group exercised
an aggregate of 13,708 options for the purchase of 13,708 shares of NDB
Group's common stock with exercise prices ranging from $13.50 per share to
$22.50 per share. In connection with the exercise of these options, NDB Group
recorded an income tax benefit of $142,608.
The accompanying notes are an integral part of the consolidated
financial statements.
F-9
<PAGE>
National Discount Brokers Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended May 31, 2000, 1999 and 1998
-------------------------------------------------------------------------------
1. Organization and Business
National Discount Brokers Group, Inc. ("NDB Group") and its subsidiaries
(collectively, the "Company") are engaged in the retail discount brokerage
(primarily online) and market making businesses. NDB Group's two
wholly-owned subsidiaries, NDB Capital Markets Corporation (formerly
Sherwood Securities Corp.), and National Discount Brokers Corporation
(formerly Triak Services Corp.), doing business as NDB.com ("NDB.com")are
registered as broker-dealers with the Securities and Exchange Commission
("SEC") and are members of the National Association of Securities Dealers,
Inc. ("NASD").
NDB.com provides retail discount brokerage services. As a retail broker,
NDB.com executes orders for customers to buy and sell securities for a
commission.
NDB Capital Markets Corporation ("NDBC") is a market maker in equity
securities traded on the Nasdaq stock market and over the counter bulletin
board. As a market maker, NDBC 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.
NDBC executes transactions for its own account, the accounts of its
customers and on behalf of other broker-dealers.
NDB Group and another wholly owned subsidiary, SHD Corporation ("SHD"),
also owned membership interests in Equitrade Partners, L.L.C.
("Equitrade"), a Delaware limited liability company, which was a registered
specialist on the New York Stock Exchange ("NYSE"). In June 1999, the
Company sold its 46.845% membership interest in Equitrade to Spear, Leeds &
Kellogg Specialists LLC ("SLK Specialists"). Prior to the closing, NDB
Group exercised its right to purchase .03% membership interests in
Equitrade from three special members in exchange for cash equal to the
capital accounts of these special members. NDB Group and SHD received
approximately $85,000,000 in cash from SLK Specialists net of repayment of
a $15,000,000 loan from Spear, Leeds & Kellogg L.P. ("SLK") to NDB Group.
The Company recognized a net pre-tax economic gain of approximately
$36,000,000 in connection with this transaction. See Note 12 - Discontinued
Operations.
On January 24, 1997, NDB Group acquired, from its joint venture partner at
that time, the remaining 51% of Anvil Institutional Services Company (the
"Anvil Joint Venture") that it did not previously own. NDB Group,
therefore, became the 100% owner of Anvil Institutional Services Inc.
("Anvil"), a broker-dealer previously owned by the Anvil Joint Venture. On
September 5, 1997, NDB Group sold all of the stock of Anvil for $217,000,
which approximated book value.
On February 13, 1998, MXNet, Inc. ("MXNet"), another wholly owned
subsidiary of NDB Group, was sold. In addition, on February 27, 1998, NDBC
sold its American Stock Exchange ("AMEX") specialist business. See Note 12
- Discontinued Operations.
F-10
<PAGE>
National Discount Brokers Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended May 31, 2000, 1999 and 1998
-------------------------------------------------------------------------------
2. Summary of Significant Accounting Policies
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from those
estimates.
The consolidated financial statements include the accounts of NDB Group and
its subsidiaries. All significant intercompany balances and transactions
have been eliminated in consolidation. In 1998, NDB Group consolidated its
majority-owned subsidiary, Equitrade. In 1999, the net assets of Equitrade
are presented as a separate line item in the consolidated statement of
financial condition since its operations have been discontinued.
Firm securities transactions (trading gains, net of trading losses),
commission income and related revenues and expenses are recorded on a
trade-date basis.
Interest and dividend income consists of interest earned on the Company's
and customer balances held by clearing brokers and dividends earned on
securities owned. Interest income is recorded on the accrual basis.
Dividend income is recorded on the ex-dividend date.
Fee income comprises mutual fund distribution assistance fees and short
stock rebates. Fee income is recorded as earned.
Receivable from clearing brokers comprises cash in proprietary accounts,
cash on deposit with the Company's clearing brokers and commissions.
Securities owned and securities sold, not yet purchased, are carried at
market value. The difference between cost and market value is included in
firm securities transactions on the consolidated statements of income and
comprehensive income.
Securities not readily marketable are carried at cost which management
believes approximates fair value.
Management estimates that the fair values of other financial instruments
recognized in the consolidated statement of financial condition are
approximated by their carrying values, as such financial instruments are
short-term in nature, bear interest at current market rates or are subject
to frequent repricing.
Furniture, fixtures and equipment are depreciated using the straight-line method
over their estimated useful lives of 2.5 to 5 years. Leasehold improvements are
amortized using the straight-line method over the terms of the leases or the
estimated useful lives of the improvements, whichever is less.
F-11
<PAGE>
National Discount Brokers Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended May 31, 2000, 1999 and 1998
-------------------------------------------------------------------------------
Computer software is amortized using the straight-line method over its
estimated useful life of three 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 of a change in tax rates is recognized in income in the period that
includes the enactment date.
In accounting for its stock option plans, the Company applies Accounting
Principles Board Opinion No. 25 ("APB 25") to calculate compensation
expense. Under APB 25, compensation expense would be recorded on the date
of an option grant only if the current market price of the underlying stock
exceeded the exercise price. As required, the Company provides pro forma
net income and pro forma earnings per share disclosures for employee stock
option grants made in 1995 and future years as if the fair-value-based
method defined in Statement of Financial Accounting Standards ("SFAS") 123
had been applied.
Net income per common share is computed using the weighted average number
of shares of common stock and potential common stock outstanding. Potential
common stock is comprised of stock issuable under stock options. The
treasury stock method is used in computing the potential common stock for
the computation of diluted earnings per common share. Basic earnings per
share differs from diluted earnings per share in that dilution for
potential common stock is excluded.
Statement of Position 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use" ("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 was implemented by the Company
as of the beginning of fiscal 1999. The adoption of SOP 98-1 did not have a
material impact on the Company's consolidated financial statements.
Certain prior year amounts have been reclassified to conform with the May
31, 2000 presentation. Additionally, the accompanying financial statements
for the year ended May 31, 1998 have been restated to include the income
tax expense related to items of other comprehensive income. The restatement
had no impact on net income for the year ended May 31, 1998.
F-12
<PAGE>
National Discount Brokers Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended May 31, 2000, 1999 and 1998
-------------------------------------------------------------------------------
3. Securities Owned and Sold, Not Yet Purchased
Securities owned and sold, not yet purchased consist solely of corporate
equities as of May 31, 2000 and 1999:
<TABLE>
<CAPTION>
May 31,
-----------------------------------
2000 1999
----------------- ----------------
<S> <C> <C>
Securities owned $47,500,200 $38,048,489
----------------- ----------------
Securities sold, not yet purchased $12,335,906 $11,723,172
----------------- ----------------
</TABLE>
4. Financial Instruments with Off-Balance Sheet Risk and Concentrations of
Credit Risk
In the normal course of business, NDBC and NDB.com clear securities
transactions through two unaffiliated clearing brokers on a fully disclosed
basis. Pursuant to the terms of the agreements between NDBC and NDB.com 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. NDBC and NDB.com seek to control the risk
associated with their customer activities by making credit inquiries when
establishing customer relationships and by monitoring customer trading
activity.
Credit risk arises from the potential inability of counterparties,
including clearing brokers, to fulfill their contractual obligations. The
subsequent settlement of open positions at May 31, 2000 had no material
adverse effect on the financial position of the Company.
During the normal course of business, NDBC and NDB.com may sell securities
which have not yet been purchased, which represent obligations of NDBC and
NDB.com 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 NDBC's and
NDB.com'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. NDBC and NDB.com seek to control such
market risk through the use of internal monitoring guidelines. Neither NDBC
nor NDB.com engage in any derivative activities.
NDBC's balances of receivable from clearing broker, securities owned and
securities sold, but not yet purchased, included in the Company's
consolidated statement of financial condition are held at one major
clearing broker. NDB.com's balances of receivable from clearing broker,
securities owned and securities sold, but not yet purchased, also included
in the Company's consolidated statement of financial condition are held at
a separate major clearing broker.
F-13
<PAGE>
National Discount Brokers Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended May 31, 2000, 1999 and 1998
-------------------------------------------------------------------------------
5. Furniture, Fixtures, Equipment and Leasehold Improvements
Furniture, fixtures, equipment and leasehold improvements consist of the
following:
<TABLE>
<CAPTION>
May 31,
--------------------------------
2000 1999
-------------- ----------------
<S> <C> <C>
Furniture, fixtures and equipment $49,504,928 $26,309,299
Leasehold improvements 24,191,098 3,832,350
-------------- ----------------
73,696,026 30,141,649
Less accumulated depreciation
and amortization 25,519,329 15,304,535
-------------- ----------------
$48,176,697 $14,837,114
-------------- ----------------
</TABLE>
The amounts for furniture, fixtures and equipment and for accumulated
depreciation and amortization are net of amounts related to fully
depreciated/amortized items which have been retired.
6. Acquisition of SHD Corporation (Formerly Dresdner-NY Incorporated)
On May 2, 1997, NDB Group acquired 100% of the stock of Dresdner-NY
Incorporated (subsequently renamed SHD Corporation), a NYSE specialist
firm, from Dresdner Bank AG for a purchase price of $15,261,493, which
included four NYSE seats with a market value of $4,800,000. The purchase
price resulted in an intangible asset amounting to $4,150,000 which was
being amortized on a straight line basis over ten years. The acquisition
was accounted for by the purchase method of accounting and, accordingly,
the results of operations of SHD are included in the accompanying
consolidated statement of income and comprehensive income from the
acquisition date. The SHD business was sold to SLK concurrent with the sale
of Equitrade in June 1999; therefore, the business has been shown as
discontinued operations and the remaining unamortized intangible asset was
expensed.
7. Income Taxes
The Company files consolidated Federal and combined income tax returns for
certain states and localities (inclusive of all subsidiaries, except
Equitrade) based on a May 31 year end. Separate tax returns are filed in
certain states as required.
The current Federal, state and local income tax provisions for the years
ended May 31, 2000, 1999 and 1998 have been provided based on the
appropriate tax computation for each jurisdiction.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. At May 31,
2000, 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
established a valuation allowance of approximately $534,000 because they
concluded that it is more likely than not that a portion of the state tax
benefit at one of its subsidiaries will not be realized.
F-14
<PAGE>
National Discount Brokers Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended May 31, 2000, 1999 and 1998
-------------------------------------------------------------------------------
The provisions for income taxes included in the consolidated statements of
income and comprehensive income are as follows:
<TABLE>
<CAPTION>
Years Ended May 31,
--------------------------------------------------
2000 1999 1998
---------------- --------------- ---------------
<S> <C> <C> <C>
Continuing operations
Federal
Current $ 21,898,953 $ 10,941,702 $ 2,811,254
Deferred (benefit) expense (346,257) (382,360) 1,022,050
---------------- --------------- ---------------
21,552,696 10,559,342 3,833,304
---------------- --------------- ---------------
State and local
Current 9,606,174 6,062,482 992,073
Deferred (benefit) expense (1,027,018) (160,551) 915,536
---------------- --------------- ---------------
8,579,156 5,901,931 1,907,609
---------------- --------------- ---------------
$ 30,131,852 $16,461,273 $5,740,913
---------------- --------------- ---------------
Discontinued operations
Federal
Current $ 46,976 $ 1,577,010 $ 2,325,179
State and local
Current 26,620 893,639 1,063,568
---------------- --------------- ---------------
$ 73,596 $ 2,470,649 $ 3,388,747
---------------- --------------- ---------------
</TABLE>
F-15
<PAGE>
National Discount Brokers Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended May 31, 2000, 1999 and 1998
-------------------------------------------------------------------------------
A reconciliation of differences between the income tax provisions included
in continuing operations and the amounts computed by applying the statutory
Federal income tax rate is as follows:
<TABLE>
<CAPTION>
Years Ended May 31,
--------------------------------------------------
2000 1999 1998
----------------- --------------- --------------
<S> <C> <C> <C>
Statutory provision on pretax income $21,966,302 $12,138,238 $4,108,779
State and local taxes, net of Federal tax benefit 5,576,451 3,836,255 1,239,946
Tax effect of disallowed expenses 946,475 278,236 124,804
Other - net 1,642,624 208,544 267,384
----------------- --------------- --------------
Income tax provision $30,131,852 $16,461,273 $5,740,913
----------------- --------------- --------------
</TABLE>
8. Subordinated Notes Payable
As of May 31, 1998, Equitrade had three subordinated note agreements in the
aggregate amount of $3,000,000, each with a stated interest rate of 5%, and
an additional $500,000 subordinated note agreement ("Additional Note") with
a stated interest rate of 4%. Such notes were due on March 23, 2000, except
for the Additional Note, for which the maturity date was October 1, 1999.
Each note contained yearly automatic roll-over provisions. In connection
with these agreements, the lenders pledged marketable securities with a
market value of approximately $5,940,000 as collateral for the related
secured demand notes receivable. Concurrent with the sale of Equitrade on
June 18, 1999, the aforementioned subordinated note agreements were
cancelled.
9. Stock Option Plans
On October 24, 1995, the stockholders of the Company approved The Sherwood
Group, Inc. 1995 Stock Option Plan (the "1995 Plan") allowing for the
issuance of up to 767,200 shares of the Company's common stock pursuant to
stock options and permitting the issuance of stock appreciation rights in
connection with the issuance of stock options. On October 21, 1997, the
stockholders of the Company approved an amendment to the 1995 Plan to
increase by 420,000 the number of shares of the Company's common stock for
which options and stock appreciation rights may be granted thereunder from
767,200 shares to 1,187,200 shares. The Compensation Committee issued to
employees, exercising options under a plan initiated in 1983 (the "1983
Plan"), new options (reload options) in an amount equal to the number of
shares of common stock the employees used to satisfy the exercise price and
the withholding taxes due upon exercise of the options. Generally, reload
options granted have provided for vesting six months after the date of
grant. Other options granted under the 1995 Plan have provided for vesting
ratably over three years after the date of grant. 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.
F-16
<PAGE>
National Discount Brokers Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended May 31, 2000, 1999 and 1998
-------------------------------------------------------------------------------
On April 21, 1999, the Board of Directors of the Company approved the
National Discount Brokers Group, Inc. 1999 Non-Qualified Stock Option Plan
(the "1999 Plan") permitting the granting of non-qualified stock options
covering up to 1,000,000 additional shares of the Company's common stock.
Options granted under the 1999 Plan have generally provided for vesting
ratably over three years after the date of grant except those granted to
non-employee directors. All options granted have exercise prices equal to
or greater than the fair market value of the Company's common stock on the
date of the grant and have a ten year term.
On October 20, 1999, the stockholders of the Company approved the 2000
National Discount Brokers Group, Inc. Compensation Plan (the "2000 Plan")
allowing for the issuance of up to 800,000 additional shares of the
Company's common stock pursuant to stock options or as stock awards.
Options granted under the 2000 Plan have generally provided for vesting
ratably over three years after the date of grant. All options granted have
exercise prices equal to or greater than the fair market value of the
Company's common stock on the date of grant and have a ten year term.
At May 31, 2000, an aggregate of 590,863 shares were available for future
grant under the 1995 Plan, the 1999 Plan and the 2000 Plan. No stock
appreciation rights or stock awards have been issued. The following table
summarizes transactions in stock options granted under the 1995 Plan, the
1999 Plan and the 2000 Plan from June 1, 1997 through May 31, 2000:
<TABLE>
<CAPTION>
Optioned Shares
-------------------------------
Weighted
Average
Number of Exercise Price
Shares per Share
-------------- -------------------
<S> <C> <C>
Balance at June 1, 1997 465,857 $ 9.45
Options exercised (294,758) 9.17
Options granted (including 255,450 reload options) 539,600 12.94
Options cancelled (68,214) 11.77
--------------
Balance at May 31, 1998 642,485 12.26
Options exercised (59,469) 13.23
Options granted - original 942,750 52.81
Options cancelled (40,117) 13.29
--------------
Balance at May 31, 1999 1,485,649 37.93
Options exercised (13,708) 15.43
Options granted - original 578,600 31.52
Options cancelled (116,166) 50.24
--------------
Balance at May 31, 2000 1,934,375 35.43
--------------
</TABLE>
F-17
<PAGE>
National Discount Brokers Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended May 31, 2000, 1999 and 1998
-------------------------------------------------------------------------------
The following table summarizes information about stock options outstanding
and exercisable at May 31, 2000.
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------------ --------------------------------
Weighted-Average Weighted-Average Weighted-Average
Range of Number Remaining Exercise Price Number Exercise Price
Exercise Prices Outstanding Contractual Life Per Share Exercisable Per Share
<S> <C> <C> <C> <C> <C> <C>
$ 8.81 - $12.69 365,375 6.9 $ 11.42 365,375 $ 11.42
13.25 13.50 160,199 7.5 13.48 92,378 13.47
22.50 - 29.16 630,736 9.3 25.57 52,928 22.67
39.63 53.88 44,000 8.9 45.07 23,333 41.66
-
60.06 60.06 734,065 8.9 60.06 225,433 60.06
------------ ------------
-
8.81 60.06 1,934,375 8.5 35.43 759,447 27.82
------------ ------------
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions used for grants under the option plans for the years ended May
31, 2000, 1999 and 1998.
<TABLE>
<CAPTION>
Years Ended May 31,
------------------------------------------------------------
Weighted-Average Assumptions 2000 1999 1998
-------------------- -------------------- --------------------
<S> <C> <C> <C>
Dividend yield 0% 0% 0%
Expected volatility 74.0% 66.0% 37.0%
Risk-free interest rate 6.10% 4.92% 5.61%
Expected lives 3 3 3
</TABLE>
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including the
expected stock price volatility. Because the Company's stock options have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect
the fair value estimate, in management's opinion, the existing models do
not necessarily provide a reliable single measure of the fair value of its
employee stock options.
Had the Company accounted for its stock-based compensation plans based on
the fair value of awards at grant date in a manner consistent with the
methodology of SFAS 123, the Company's net income and income per common
share would have decreased as indicated in the table below. For purposes of
pro forma disclosures, the estimated fair value of stock-based compensation
plans and other options is amortized to expense primarily over the vesting
period.
F-18
<PAGE>
National Discount Brokers Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended May 31, 2000, 1999 and 1998
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years Ended May 31,
-------------------------------------------------------
2000 1999 1998
----------------- ----------------- -----------------
<S> <C> <C> <C>
Net income
As reported $53,458,277 $21,005,459 $11,960,319
SFAS 123 fair value adjustment (4,846,529) (995,559) (672,646)
----------------- ----------------- -----------------
Pro forma $48,611,748 $20,009,900 $11,287,673
----------------- ----------------- -----------------
Net income per common share:
Basic
As reported $3.14 $1.50 $0.89
SFAS 123 fair value adjustment (.28) (.07) (.05)
----------------- ----------------- -----------------
Pro forma $2.86 $1.43 $.84
----------------- ----------------- -----------------
Diluted
As reported $3.05 $1.49 $0.89
SFAS 123 fair value adjustment (.27) (.07) (.05)
----------------- ----------------- -----------------
Pro forma $2.78 $1.42 $.84
----------------- ----------------- -----------------
</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,
1999 Plan and 2000 Plan for the years ended May 31, 2000, 1999 and 1998
were $16.31, $25.39 and $3.93, respectively.
10. Related Party Transactions
The Company has, from time to time, entered into short-term borrowing
facilities with Spear, Leeds & Kellogg, L.P. ("SLK") for the purpose of
financing trading positions. On December 31, 1998, NDB Group borrowed
$15,000,000, at an interest rate of 6% per annum and a six-month maturity,
from SLK in order to increase the capital of Equitrade. Concurrent with the
sale of Equitrade on June 18, 1999 to SLK Specialists, the $15,000,000 loan
from SLK was repaid in full. See Note 1 for a description of the sale of
Equitrade to SLK Specialists.
On December 8, 1997, the Company sold, at market value, 1,500,000 shares of
its common stock held in treasury to IAT Reinsurance Syndicate Ltd., an
affiliate of Peter R. Kellogg. Prior to this acquisition, Mr. Kellogg
beneficially owned 1,025,000 shares of NDB Group common stock.
During the year ended May 31, 2000, the Company paid $7,500,000 to Go2Net,
Inc. related to the Company's advertising plan. This amount is being
charged to income over the term of the agreement. As of May 31, 2000,
included in other assets on the consolidated statement of financial
condition is approximately $5,625,000 in relation to the Go2Net agreement.
Go2Net, Inc. is a stockholder of the Company and Russell C. Horowitz,
Go2Net, Inc.'s Chairman and Chief Executive Officer, is a member of the
Company's Board of Directors.
F-19
<PAGE>
National Discount Brokers Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended May 31, 2000, 1999 and 1998
-------------------------------------------------------------------------------
11. Employee Benefit Plans
The Company has an employee deferred compensation plan covering
substantially all employees which qualifies under Section 401(k) of the
Internal Revenue Code. The Company contributed $108,221, $93,115 and
$82,013 to the plan for the years ended May 31, 2000, 1999 and 1998,
respectively.
12. Discontinued Operations
Pursuant to Accounting Principles Board Opinion No. 30, "Reporting the
Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions", the consolidated financial statements of the Company have
been reclassified to reflect the dispositions of Equitrade, MXNet and
NDBC's AMEX specialist business.
In May 1999, the Company entered into a definitive agreement to sell its
ownership interest in Equitrade. The transaction closed on June 18, 1999,
and as such, the operations of Equitrade have been reflected in
discontinued operations for all periods reported. Prior to the allocation
of minority interest and income taxes, revenues and expenses for the year
ended May 31, 2000 applicable to this discontinued operation were
$1,728,146 and $1,690,147, respectively; for the year ended May 31, 1999
were $21,834,533 and $13,934,463, respectively; and for the year ended May
31, 1998 were $25,636,056 and $12,173,172, respectively. The gain from this
transaction was $20,746,272, net of $15,073,923 of applicable income taxes
and other expenses directly related to the sale.
On February 13, 1998, NDB Group sold 100% of the common stock of its
subsidiary, MXNet, to IPC Information Systems, Inc. for cash proceeds
amounting to $6,600,000. In addition, during February 1998, NDBC sold its
AMEX specialist business for $325,000. The aggregate net gain on the
aforementioned sales was $2,704,000, net of $2,353,000 of applicable income
taxes and other expenses directly related to the sales. Revenues and
expenses for the year ended May 31, 1998 applicable to these discontinued
operations were $1,324,114 and $2,374,035, respectively.
13. Net Capital and Customer Reserve Requirements
NDBC and NDB.com introduce all customer transactions to clearing brokers
and do not maintain custody of customer funds or securities. Accordingly,
NDBC and NDB.com qualify for exemption from the provisions of SEC Rule
15c3-3 under subparagraph (k)(2)(ii). NDBC and NDB.com were in compliance
with the conditions of this exemption during the years ended May 31, 2000,
1999 and 1998.
As registered broker-dealers, NDBC and NDB.com are subject to SEC Uniform
Net Capital Rule 15c3-1 (the "Rule"). As of May 31, 2000, the net capital
of NDBC and NDB.com exceeded their SEC required net capital by $111,817,563
and $12,465,936, respectively.
F-20
<PAGE>
National Discount Brokers Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended May 31, 2000, 1999 and 1998
-------------------------------------------------------------------------------
The Rule also provides that equity capital may not be withdrawn or cash
dividends paid if the resulting net capital of a broker-dealer would be
less than the amount required under the Rule. Accordingly, at May 31, 2000,
the payment of dividends and advances to the Company by NDBC and NDB.com is
limited to $111,617,563 and $12,415,936, respectively, under the most
restrictive of these requirements.
14. Commitments
The Company has non-cancelable operating leases for rental of office space
at its various locations expiring at various dates through 2014. All leases
are subject to escalation for increases in taxes, fuel and other costs.
Commitments for minimum lease payments under non-cancelable operating
leases as of May 31, 2000 are as follows:
<TABLE>
<CAPTION>
<S> <C>
Fiscal year ending May 31,
2001 $ 5,146,000
2002 4,853,000
2003 4,800,000
2004 4,820,000
2005 4,888,000
Thereafter 34,349,000
------------
$58,856,000
------------
</TABLE>
The Company has free rent periods which are being amortized over the lives
of the leases.
Included in occupancy costs are office rental expenses of approximately
$5,210,000, $2,097,000 and $2,201,000 for the years ended May 31, 2000,
1999 and 1998, respectively.
F-21
<PAGE>
National Discount Brokers Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended May 31, 2000, 1999 and 1998
-------------------------------------------------------------------------------
NDB Group has a contract with Arthur Kontos, Chief Executive Officer
("CEO") of NDB Group, with an initial term ending on May 31, 2000. The
contract has been extended, pursuant to its terms, for fiscal year ended
May 31, 2001 and may be extended one additional year in accordance with its
terms. Remuneration under this contract consists of base salary and a cash
bonus. The CEO's cash bonus is paid pursuant to the National Discount
Brokers Group, Inc. 1996 CEO Bonus Plan (the "CEO Plan"). The CEO Plan
provides, through May 31, 2000, for an annual cash bonus payout equal to
10% of the first $10,000,000 of income (as defined) and 15% of income over
$10,000,000. Included in accounts payable and accrued expenses is
approximately $8,244,000 and $3,530,000 due to the CEO at May 31, 2000 and
1999, respectively. The CEO has waived the receipt of $2,400,000 of his
cash bonus under the CEO Plan for the fiscal year ended May 31, 2000. In
connection with this contract and the CEO Plan, approximately $10,515,000,
$5,532,000 and $1,366,000 is reflected in compensation and benefits for the
years ended May 31, 2000, 1999 and 1998, respectively. Additionally, for
the years ended May 31, 1999 and 1998, approximately $928,000 and
$1,358,000, respectively, were netted against income from discontinued
operations and for the years ended May 31, 2000 and May 31, 1998,
approximately $6,337,000 and $755,000 were netted against the gain on sale
of discontinued operations as reflected in the accompanying consolidated
statements of income and comprehensive income.
A senior executive officer of NDB Group has agreed to defer $3,000,000 of
his cash bonus for the fiscal year ended May 31, 2000 over a three year
period payable $1,000,000 per year on January 1, 2001, 2002 and 2003. The
deferred bonus will bear interest at the 90-day treasury bill rate.
15. Segments
Under the provisions of SFAS 131, the Company has two reportable segments:
discount brokerage and market making. NDB.com transacts all business that
will be reported in the Company's discount brokerage segment. Its revenues
are principally in the form of retail commission income, distribution
assistance fees from mutual funds and interest earned on its customers'
balances held at its clearing broker. NDBC represents the Company's market
making segment, which primarily derives its firm securities transaction
revenues from the spread between the price paid when a security is bought
and the price received when a security is sold or from proprietary
investments, as well as limited interest and dividend income. "All Other"
category revenues consist principally of interest and realized gains/losses
on marketable securities.
The accounting policies of the segments are the same as those described in
Note 2. Revenues from the transactions with other segments within the
Company (referred to as intersegment revenues) are recorded at market
value, as if the transactions were with third parties.
F-22
<PAGE>
National Discount Brokers Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended May 31, 2000, 1999 and 1998
--------------------------------------------------------------------------------
The Company evaluates the performance of its segments based on profit or
loss from operations before income taxes. No single customer accounted for
more than 10% of the Company's consolidated revenues. Information on
segment assets is not disclosed because it is not used for evaluating
segment performance and deciding how to allocate resources to segments.
However, capital expenditures are used in evaluating segment performance
and are therefore disclosed. Capital expenditures are reported net of
proceeds from the sale of fixed assets, if any. Substantially all of the
Company's revenues and assets are attributable to or located in the U.S.
Financial information for the Company's reportable segments is presented in
the following table which excludes the Company's discontinued operations,
primarily Equitrade.
<TABLE>
<CAPTION>
Year Ended May 31, 2000
----------------------------------------------------------------------
Discount Market All
Brokerage Making Other Total
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Revenue from external sources $88,314,000 $290,195,000 $7,249,000 $385,758,000
Intersegment revenue 6,458,000 5,000 548,000 7,011,000
---------------- ---------------- ---------------- ----------------
Total revenue $94,772,000 $290,200,000 $7,797,000 $392,769,000
---------------- ---------------- ---------------- ----------------
Interest and dividends (included in
total revenues) $12,032,000 $ 5,297,000 $7,081,000 $ 24,410,000
Interest expense 433,000 1,000 88,000 522,000
Depreciation and amortization 13,114,000 4,255,000 388,000 17,757,000
Profit or (loss) before income taxes (14,858,000) 78,916,000 (1,297,000) 62,761,000
Capital expenditures 30,766,000 7,418,000 18,380,000 56,564,000
Year Ended May 31, 1999
----------------------------------------------------------------------
Discount Market All
Brokerage Making Other Total
---------------- ---------------- ---------------- ----------------
Revenue from external sources $54,706,000 $150,194,000 $2,965,000 $207,865,000
Intersegment revenue 6,979,000 118,000 2,862,000 9,959,000
---------------- ---------------- ---------------- ----------------
Total revenue $61,685,000 $150,312,000 $5,827,000 $217,824,000
---------------- ---------------- ---------------- ----------------
Interest and dividends (included in
total revenues) $ 6,938,000 $ 2,635,000 $ 856,000 $ 10,429,000
Interest expense 407,000 7,000 383,000 797,000
Depreciation and amortization 4,350,000 3,377,000 43,000 7,770,000
Profit or loss before income taxes 2,570,000 38,387,000 (6,276,000) 34,681,000
Capital expenditures 4,865,000 2,329,000 410,000 7,604,000
Year Ended May 31, 1998
----------------------------------------------------------------------
Discount Market All
Brokerage Making Other Total
---------------- ---------------- ---------------- ----------------
Revenue from external sources $44,186,000 $93,583,000 $1,043,000 $138,812,000
Intersegment revenue 6,976,000 100,000 2,302,000 9,378,000
---------------- ---------------- ---------------- ----------------
Total revenue $51,162,000 $93,683,000 $3,345,000 $148,190,000
---------------- ---------------- ---------------- ----------------
Interest and dividends (included in
total revenues) $ 5,448,000 $ 1,610,000 $ 984,000 $ 8,042,000
Interest expense 435,000 303,000 44,000 782,000
Depreciation and amortization 3,844,000 2,704,000 10,000 6,558,000
Profit before income taxes 2,183,000 8,223,000 1,334,000 11,740,000
Capital expenditures 4,454,000 1,668,000 671,000 6,793,000
</TABLE>
F-23
<PAGE>
National Discount Brokers Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended May 31, 2000, 1999 and 1998
--------------------------------------------------------------------------------
The following table is a reconciliation of reportable segment revenues,
profit or loss before income taxes and other significant items, to the
Company's consolidated totals.
<TABLE>
<CAPTION>
Years Ended May 31,
--------------------------------------------------------
2000 1999 1998
----------------- ----------------- ------------------
<S> <C> <C> <C>
Revenue
Total revenue for reportable segments $384,972,000 $211,997,000 $144,845,000
Other revenue 7,797,000 5,827,000 3,345,000
Elimination of intersegment revenue (7,011,000) (9,959,000) (9,378,000)
----------------- ----------------- ------------------
Total consolidated revenue $385,758,000 $207,865,000 $138,812,000
----------------- ----------------- ------------------
Profit or loss before income taxes
Total profit or loss before income taxes for
reportable segments $64,058,000 $40,957,000 $10,406,000
Other profit or loss (1,297,000) (6,276,000) 1,334,000
Elimination of intersegment profit or loss - - -
----------------- ----------------- ------------------
Total consolidated profit or loss before
Income taxes $62,761,000 $34,681,000 $11,740,000
----------------- ----------------- ------------------
Interest and dividends
Total interest and dividends for reportable
segments $17,329,000 $9,573,000 $7,058,000
Other interest and dividends 7,081,000 856,000 984,000
Elimination of intersegment interest and dividends (553,000) (407,000) (443,000)
----------------- ----------------- ------------------
Total consolidated interest and dividends $23,857,000 $10,022,000 $7,599,000
----------------- ----------------- ------------------
Interest expense
Total interest expense for reportable
segments $434,000 $414,000 $738,000
Other interest expense 88,000 383,000 44,000
Elimination of intersegment interest expense (433,000) (407,000) (443,000)
----------------- ----------------- ------------------
Total consolidated interest expense $89,000 $390,000 $339,000
----------------- ----------------- ------------------
Depreciation and amortization
Total depreciation and amortization for
reportable segments $17,369,000 $7,727,000 $6,548,000
Other depreciation and amortization 388,000 43,000 10,000
Elimination of intersegment depreciation
and amortization - - -
----------------- ----------------- ------------------
Total consolidated depreciation and amortization $17,757,000 $7,770,000 $6,558,000
----------------- ----------------- ------------------
Capital expenditures
Total capital expenditures for reportable
segments $38,184,000 $7,194,000 $6,122,000
Other capital expenditures 18,380,000 410,000 671,000
Elimination of intersegment capital expenditures - - -
----------------- ----------------- ------------------
Total consolidated capital expenditures $56,564,000 $7,604,000 $6,793,000
----------------- ----------------- ------------------
</TABLE>
F-24
<PAGE>
National Discount Brokers Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended May 31, 2000, 1999 and 1998
--------------------------------------------------------------------------------
During the year, NDB Group acquired a principal trading position in the
amount $320,000. This position was subsequently transferred to NDB.com and
recorded as a capital contribution at NDB Group's original cost. The
position was subsequently liquidated by NDB.com at a gain of approximately
$3,470,000 which is included in revenues from principal transactions in the
consolidated statement of income.
16. Contingencies and Legal Matters
NDB Group's subsidiaries, and in some cases NDB Group, have been named as
defendants in lawsuits and arbitrations and are the subject of
investigations, that allege, among other things, violations of Federal and
state securities and related laws and other laws.
As part of a global settlement involving more than 25 Nasdaq market making
firms, NDBC has settled proceedings brought against it in connection with
an investigation by the SEC. In connection with the settlement, NDBC
consented to the entry of certain Orders by the SEC instituting
proceedings, making findings and imposing sanctions. NDBC neither admitted
nor denied the substantive allegations set forth in the Orders. As part of
the settlement, NDBC paid a civil penalty of $1,000,000 to the SEC and the
sum of $8,138 in disgorgement. NDBC's results for the year ended May 31,
1998 reflect a charge to establish a reserve for the SEC's investigation,
which is included in professional fees on the consolidated statement of
income and comprehensive income, which was paid in January 1999.
On April 9, 1997, NDBC entered into a settlement agreement (the "Settlement
Agreement") in the case of In Re: NASDAQ Market-Makers Antitrust
Litigation, 94 Civ. 3996(RWS) currently pending in the United States
District Court for the Southern District of New York (the "Court"). The
Settlement Agreement provided for payment by NDBC of $4,375,000 per
percentage point of its market share of the "Defendants' Market". NDBC's
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, NDBC 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.
F-25
<PAGE>
National Discount Brokers Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended May 31, 2000, 1999 and 1998
--------------------------------------------------------------------------------
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
NDBC 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 from Carnegie, Childs & Co., L.L.C.
("Carnegie") on January 8, 1999. WPG was Carnegie's clearing broker. WPG
alleges that the trades resulted in Carnegie having a net short position in
Amazon.com of 1,462,000 shares. WPG covered the short position on January
11, 1999 and alleges it sustained losses in excess of $11,000,000. WPG has
requested relief of compensatory damages in excess of $11,000,000 plus
consequential damages and interest, WPG's costs and attorneys' fees and
such other relief as the arbitration panel deems just and appropriate.
Management of NDBC, after consultation with counsel, believes it has valid
defenses to these claims and intends to vigorously defend against these
claims. NDBC filed an Answer and Statement of Counterclaim dated June 8,
1999 in which NDBC denies liability for the claims asserted by WPG and
asserts a counterclaim of approximately $1,300,000 for losses NDBC suffered
in connection with trades in Amazon.com executed by NDBC for Carnegie on
January 8, 1999. WPG has filed a Reply to Counterclaim dated June 28, 1999
denying liability for the claim asserted in the Answer and Statement of
Counterclaim.
17. Subsequent Events
On June 15, 2000, NDB Group consummated the sale of 3,000,000 shares of its
common stock to DB U.S. Financial Markets Holding Corporation, an indirect
subsidiary of Deutsche Bank AG ("DB"), for $135,930,000 in gross proceeds
pursuant to a Securities Purchase Agreement dated as of May 15, 2000. NDB
Group and DB also entered into (1) a Stockholder Agreement providing for,
among other things, the appointment of a representative of DB to NDB
Group's board of directors, (2) an agreement regarding the providing of
certain research materials prepared by DB or certain of its affiliates to
customers of the Company in the United States and (3) an agreement with
respect to the Company being a distributor of initial public offerings of
equity securities in the United States if DB or one of its affiliates is an
underwriter of the securities and the internet is a distribution channel.
The Company and DB also executed term sheets for joint ventures between DB
and the Company regarding the offering of online discount brokerage in
Western Europe and the rest of the world other than Western Europe and the
United States.
As part of the CEO's employment contract with NDB Group, which was extended
by NDB Group until May 31, 2001 when it exercised its option, the CEO has
agreed to reduce the annual cash bonus payout due to him by 20% effective
June 1, 2000.
The Compensation Committee of the Board of Directors has approved the NDB
Capital Markets CEO Bonus Plan ("NDBC Bonus Plan") which provides for the
payment of a cash bonus to the Chief Executive Officer of NDBC commencing
with the fiscal year ended May 31, 2001. The plan is subject to Board of
Director and stockholder approvals. The bonus is equal to 5% of the
Company's pre-tax income from continuing operations before reduction for
the bonuses under the NDBC Bonus Plan and the CEO Plan.
F-26
<PAGE>
National Discount Brokers Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended May 31, 2000, 1999 and 1998
-------------------------------------------------------------------------------
18. Quarterly Financial Information (unaudited)
(In thousands, except per share data)
<TABLE>
<CAPTION>
First Second Third Fourth
------------ ------------ ------------- ------------
<S> <C> <C> <C> <C>
Year ended May 31, 2000
Revenues $53,022 $70,855 $141,213 $120,668
Expenses 52,221 62,709 106,008 102,059
------------ ------------ ------------- ------------
Income from continuing operations before income taxes 801 8,146 35,205 18,609
Income taxes 366 3,835 15,974 9,957
------------ ------------ ------------- ------------
Net income from continuing operations 435 4,311 19,231 8,652
Income from discontinued operations 83 - - -
Gain on sale of discontinued operations, net 20,055 461 - 230
------------ ------------ ------------- ------------
Net income $20,573 $4,772 $19,231 $8,882
------------ ------------ ------------- ------------
Basic income per share:
Continuing operations $.02 $.25 $1.12 $.49
Discontinued operations .01 .00 .00 .00
Gain on sale of discontinued operations, net 1.24 .03 .00 .01
------------ ------------ ------------- ------------
Net income per share - basic $1.27 $.28 $1.12 $.50
------------ ------------ ------------- ------------
Diluted income per share:
Continuing operations $.02 $.25 $1.10 $.47
Discontinued operations .01 .00 .00 .00
Gain on sale of discontinued operations, net 1.22 .03 .00 .01
------------ ------------ ------------- ------------
Net income per share - diluted $1.25 $.28 $1.10 $.48
------------ ------------ ------------- ------------
</TABLE>
F-27
<PAGE>
National Discount Brokers Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended May 31, 2000, 1999 and 1998
--------------------------------------------------------------------------------
18. Quarterly Financial Information (unaudited), continued
(In thousands, except per share data)
<TABLE>
<CAPTION>
First Second Third Fourth
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Year ended May 31, 1999
Revenues $ 31,748 $ 45,379 $ 63,873 $ 66,865
Expenses 32,483 37,617 49,383 53,701
------------- ------------- ------------- -------------
Income from continuing operations before taxes (735) 7,762 14,490 13,164
Income taxes (85) 3,330 6,740 6,477
------------- ------------- ------------- -------------
Net income (loss) from continuing operations (650) 4,432 7,750 6,687
Income (loss) from discontinued operations (685) 1,451 422 1,598
------------- ------------- ------------- -------------
Net income (loss) $ (1,335) $ 5,883 $ 8,172 $ 8,285
------------- ------------- ------------- -------------
Basic income (loss) per share:
Continuing operations $ (.04) $ .32 $ .55 $ .48
Discontinued operations (.05) .10 .03 .11
------------- ------------- ------------- -------------
Net income (loss) per share - basic $ (.09) $ .42 $ .58 $ .59
------------- ------------- ------------- -------------
Diluted income (loss) per share:
Continuing operations $ (.04) $ .32 $ .55 $ .47
Discontinued operations (.05) .10 .03 .11
------------- ------------- ------------- -------------
Net income (loss) per share - diluted $ (.09) $ .42 $ .58 $ .58
------------- ------------- ------------- -------------
</TABLE>
F-28
<PAGE>
National Discount Brokers Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended May 31, 2000, 1999 and 1998
--------------------------------------------------------------------------------
18. Quarterly Financial Information (unaudited), continued
(In thousands, except per share data)
<TABLE>
<CAPTION>
First Second Third Fourth
<S> <C> <C> <C> <C>
Year ended May 31, 1998
Revenues $ 34,896 $ 34,845 $ 31,584 $ 37,485
Expenses 31,377 33,198 29,610 32,888
---------------- ------------ ------------ -----------
Income from continuing operations before taxes 3,519 1,647 1,974 4,597
Income taxes 1,527 655 925 2,634
---------------- ------------ ------------ -----------
Net income from continuing operations 1,992 992 1,049 1,963
Income from discontinued operations 716 1,095 468 981
Gain on sale of discontinued operations - - 2,704 -
---------------- ------------ ------------ -----------
Net income $ 2,708 $ 2,087 $ 4,221 $ 2,944
---------------- ------------ ------------ -----------
Basic income per share:
Continuing operations $ .16 $ .07 $ .07 $ .14
Discontinued operations .05 .09 .03 .07
Gain on sale of discontinued operations, net - - .20 -
---------------- ------------ ------------ -----------
Net income per share - basic $ .21 $ .16 $ .30 $ .21
---------------- ------------ ------------ -----------
Diluted income per share:
Continuing operations $ .16 $ .07 $ .07 $ .14
Discontinued operations .05 .09 .03 .07
Gain on sale of discontinued operations, net - - .20 -
---------------- ------------ ------------ -----------
Net income per share - diluted $ .21 $ .16 $ .30 $ .21
---------------- ------------ ------------ -----------
</TABLE>
F-29
<PAGE>
National Discount Brokers Group, Inc. and Subsidiaries
Condensed Financial Statements of the Registrant (Parent)
Statements of Financial Condition Schedule I
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
May 31,
----------------------------------------
2000 1999
------------------- -------------------
<S> <C> <C>
Assets
Cash and cash equivalents $ 15,938,335 $ 145,619
U.S. Treasury obligations, $753,709 and $5,971,505 held as collateral, 86,923,607 5,971,505
respectively
Receivables 248,090 1,488,294
Notes receivable 1,608,025 1,028,481
Investment in securities, not readily marketable 4,399,350 400,000
Investment in, less net amounts due to,
subsidiaries and affiliates 198,365,711 107,057,296
Investment in discontinued operations - 17,946,870
Furniture, equipment and leasehold improvements, net 17,998,922 5,938
Intangible asset, net - 409,091
Subordinated notes receivable 6,000,000 38,000,000
Income taxes receivable 6,466,690 -
Other assets 699,029 2,105,525
------------------- -------------------
Total assets $338,647,759 $174,558,619
------------------- -------------------
Liabilities and Stockholders' Equity
Accounts payable and accrued expenses (including income taxes
payable in 1999) $ 21,236,190 $ 12,563,413
Subordinated note payable - 5,000,000
Loan payable - 15,000,000
------------------- -------------------
21,236,190 32,563,413
------------------- -------------------
Stockholders' equity
Common stock 183,332 143,432
Retained earnings and other equity 317,228,237 141,851,774
------------------- -------------------
317,411,569 141,995,206
------------------- -------------------
Total liabilities and stockholders' equity $338,647,759 $174,558,619
------------------- -------------------
The accompanying notes are an integral part of the condensed financial statements.
</TABLE>
S-1
<PAGE>
National Discount Brokers Group, Inc. and Subsidiaries
Condensed Financial Statements of the Registrant (Parent), continued
Statements of Income and Comprehensive Income Schedule I
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years Ended May 31,
-------------------------------------------------------
2000 1999 1998
----------------- ----------------- -----------------
<S> <C> <C> <C>
Revenues
Firm securities transactions, net $ 647,350 $ 974,433 $ 1,063,774
Interest 7,029,911 - -
Realized gain on securities available-for-sale - 2,290,318 -
Service fees paid by subsidiaries eliminated
in consolidation - 4,140,000 4,233,345
Other 69,478 6,444 -
----------------- ----------------- -----------------
7,746,739 7,411,195 5,297,119
----------------- ----------------- -----------------
Expenses
Compensation and benefits 3,213,869 11,858,572 4,016,895
Interest 87,655 382,828 35,033
Other 5,673,046 2,560,359 1,299,167
----------------- ----------------- -----------------
8,974,570 14,801,759 5,351,095
----------------- ----------------- -----------------
Loss from continuing operations before equity in income of
subsidiaries and income taxes (1,227,831) (7,390,564) (53,976)
Equity in income of subsidiaries 34,311,049 22,835,661 8,837,016
----------------- ----------------- -----------------
Income from continuing operations
before income taxes 33,083,218 15,445,097 8,783,040
Income tax benefit (1,318,366) (2,742,257) (218,785)
----------------- ----------------- -----------------
Net income from continuing operations 34,401,584 18,187,354 9,001,825
Income from discontinued operations, net of taxes 38,683 2,818,105 3,663,155
Gain (loss) on sale of discontinued operations, net of taxes 19,018,010 - (727,116)
----------------- ----------------- -----------------
Net income 53,458,277 21,005,459 11,937,864
Other comprehensive income (loss), net of taxes - (1,359,800) 1,359,800
----------------- ----------------- -----------------
Comprehensive income $53,458,277 $19,645,659 $13,297,664
----------------- ----------------- -----------------
The accompanying notes are an integral part of the condensed financial statements.
</TABLE>
S-2
<PAGE>
National Discount Brokers Group, Inc. and Subsidiaries
Condensed Financial Statements of the Registrant (Parent), continued
Statements of Cash Flows Schedule I
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years Ended May 31,
---------------------------------------------------------
2000 1999 1998
------------------- ----------------- ----------------
<S> <C> <C> <C>
Cash flows from operating activities
Net income from continuing operations $ 34,401,584 $ 18,187,354 $ 9,001,825
Net income from discontinued operations 19,056,693 2,818,105 3,663,155
Non-cash items included in net income:
Net equity in gain of subsidiaries (34,311,049) (22,835,661) (8,837,016)
Equity income in discontinued operations - (3,568,584) (5,852,353)
Depreciation and amortization 387,514 42,079 144,494
Gain on sale of investment securities
available-for-sale - (2,290,318) -
Decrease (increase) in operating assets:
Receivables 1,240,204 12,629,490 (13,480,564)
Income taxes receivable (8,365,660) - -
Other assets 1,406,497 (1,659,252) 179,234
(Decrease) increase in operating liabilities
Accounts payable and accrued expenses 10,714,352 8,972,534 (3,464,080)
(Increase) decrease in operating assets due to sale of
Equitrade:
Investment in discontinued operations 17,946,870 - -
Exchange membership 406,507 - -
------------------- ----------------- ----------------
Net cash provided by (used in) operating
activities 42,883,512 12,295,747 (18,645,305)
------------------- ----------------- ----------------
Cash flows from investing activities
Net purchases of U.S. Treasury obligations (80,952,102) (747,623) 257,938
Proceeds from sales of securities available-for sale - 2,290,318 -
Investment in discontinued operations - (602,803) (444,068)
Purchase of investment securities not readily marketable (3,999,350) - -
Distribution from partnerships - - 4,362,952
Loans made (1,660,000) (900,000) -
Principal collected on notes receivable 1,080,456 440,229 45,465
Return of capital from subsidiary - - 3,538,554
Purchase of furniture, equipment and
leasehold improvements (18,377,914) (4,715) -
Payment for purchase of identified intangible asset - (450,000) -
Additional capital contributed to subsidiaries (75,000,000) - -
Issuance of subordinated notes receivable - (22,000,000) -
Principal collected on subordinated notes receivable 27,000,000 - -
------------------- ----------------- ----------------
Net cash (used in) provided by
investing activities $(151,908,910) $ (21,974,594) $7,760,841
------------------- ----------------- ----------------
</TABLE>
S-3
<PAGE>
National Discount Brokers Group, Inc. and Subsidiaries
Condensed Financial Statements of the Registrant (Parent), continued
Statements of Cash Flows, continued Schedule I
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years Ended May 31,
------------------------------------------------------
2000 1999 1998
------------------ ----------------- ---------------
<S> <C> <C> <C>
Cash flows from financing activities
Proceeds from issuances of common stock $ 121,603,950 $ - $ -
Sale of treasury stock - - 19,267,500
Purchase of treasury stock - (3,231,647) (614,281)
Proceeds from exercise of options 211,528 786,721 -
Proceeds from loan payable - 15,000,000 -
Repayment of loan payable (15,000,000) - -
Net receipts (disbursements) on intercompany
borrowings 18,002,636 (2,951,936) (7,633,750)
------------------ ----------------- ---------------
Net cash provided by financing activities 124,818,114 9,603,138 11,019,469
------------------ ----------------- ---------------
Net increase (decrease) in cash 15,792,716 (75,709) 135,005
Cash at beginning of year 145,619 221,328 86,323
------------------ ----------------- ---------------
Cash at end of year $ 15,938,335 $ 145,619 $ 221,328
------------------ ----------------- ---------------
</TABLE>
S-4
<PAGE>
National Discount Brokers Group, Inc. and Subsidiaries
Condensed Financial Statements of the Registrant (Parent), continued
Statements of Cash Flows, continued Schedule I
--------------------------------------------------------------------------------
Supplemental disclosures of cash flow information:
Income tax payments totaled $48,515,074, $14,420,322 and $6,287,938 during
the years ended May 31, 2000, 1999 and 1998, respectively.
Interest payments totaled $162,655, $307,828 and $35,033 during the years
ended May 31, 2000, 1999 and 1998, respectively.
Supplemental disclosures of non-cash investing and financing activities:
During September 1997, NDB Group sold all of the stock of its subsidiary,
Anvil Institutional Services, Inc., and received a note in the amount of
$102,945, which was repaid in January 1999.
During October 1997 and December 1997, certain executives of NDB Group
exercised an aggregate of 294,758 options for the purchase of 294,758 shares
of NDB Group's common stock with exercise prices ranging from $7.9375 per
share to $10.125 per share. In order to pay for the exercise price of
$2,701,705 and to reimburse NDB Group for the personal income taxes of
$441,389 on the gain related to the transaction, the executives remitted to
NDB Group 255,450 shares of NDB Group's common stock with a market value of
$3,143,094. In connection with the exercise of these options, NDB Group
recorded an income tax benefit of $366,215.
During February 1998, NDB Group sold the remaining net assets of its
subsidiary, MXNet, Inc., and received a promissory note for $6,600,000 with
interest accrued at 6% from the date of sale. The note was repaid in April
1998.
Between February 1998 and May 1998, certain available-for-sale securities
appreciated due to the entity's successful initial public offering. As such,
NDB Group reflected these securities at fair market value on the statements
of financial condition. The unrealized gain of $1,359,800, as of May 31,
1998, associated with marking these securities to fair market value, is
reflected as a component of accumulated comprehensive income on the
statements of financial condition, net of income taxes of $1,255,200.
Between December 1998 and May 1999, various employees of NDB Group exercised
an aggregate of 59,469 options for the purchase of 59,469 shares of NDB
Group's common stock with exercise prices ranging from $11.00 per share to
$13.50 per share. In connection with the exercise of these options, NDB
Group recorded an income tax benefit of $621,825.
During the year ended May 31, 2000, various employees of NDB Group exercised
an aggregate of 13,708 options for the purchase of 13,708 shares of NDB
Group's common stock with exercise prices ranging from $13.50 per share to
$22.50 per share. In connection with the exercise of these options, NDB
Group recorded an income tax benefit of $142,608.
S-5
<PAGE>
National Discount Brokers Group, Inc. and Subsidiaries
Condensed Financial Statements of the Registrant (Parent), continued
Statements of Cash Flows, continued Schedule I
--------------------------------------------------------------------------------
On November 30, 1999, NDB Group received a dividend from its subsidiary,
Sherwood Securities Corp. (subsequently renamed NDB Capital Markets
Corporation). In lieu of making the payment in cash, Sherwood Securities
Corp. offset the then outstanding receivable balance it was owed by NDB
Group, $51,985,840.
During February 2000, NDB Group contributed $320,000 as additional
paid-in-capital to its subsidiary, National Discount Brokers Corporation, in
the form of 20,000 shares of a common stock position.
The accompanying notes are an integral part of the condensed
financial statements.
S-6
<PAGE>
National Discount Brokers Group, Inc. and Subsidiaries
Condensed Financial Statements of the Registrant (Parent), continued
Notes to Condensed Financial Statements Schedule I
--------------------------------------------------------------------------------
Registrant (Parent) Disclosures
The condensed financial statements of the registrant should be read in
conjunction with the consolidated financial statements and notes to
consolidated financial statements which are included elsewhere herein.
Investment in, less net amounts due to, subsidiaries and affiliates
represents NDB Group's investment in its subsidiary companies after
deducting net amounts owed to several subsidiaries primarily related to the
funding of NDB Group's cash flow needs by its operating subsidiaries. Income
and losses of the subsidiaries are recognized using the equity method of
accounting.
During the year ended May 31, 1995, NDB Group entered into two subordination
agreements with Equitrade. The first note had a stated interest rate of 0%
and a maturity date of February 28, 2000. In connection with this agreement,
NDB Group pledged U.S. Treasury securities with a market value in excess of
$5,000,000. The second note had a stated interest rate of 8% and a maturity
date of February 28, 2000. In connection with this agreement, NDB Group
loaned Equitrade $5,000,000. On December 31, 1998, NDB Group entered into a
subordination agreement with Equitrade. The note had a stated interest rate
of 6% and a maturity date of December 31, 1999. In connection with this
agreement, NDB Group loaned Equitrade $22,000,000. Concurrent with the sale
of Equitrade on June 18, 1999, the aforementioned subordinated note
agreements were cancelled.
During the year ended May 31, 1997, NDB Group entered into two subordination
agreements with NDB.com. The first note has a stated interest rate of broker
call and matures on December 31, 2001. The second note also has a stated
interest rate of broker call and matures on March 31, 2002. The weighted
average broker call rate was 7.22% for the year ended May 31, 2000. In
connection with each of these subordination agreements, NDB Group loaned
NDB.com $3,000,000.
No dividends were paid to NDB Group by its wholly owned subsidiaries for the
years ended May 31, 2000, 1999 and 1998; however, NDBC did offset a
receivable balance due from NDB Group in lieu of a dividend payment of
$51,985,840.
Subsequent Events
On June 15, 2000, NDB Group consummated the sale of 3,000,000 shares of its
common stock to DB U.S. Financial Markets Holding Corporation, an indirect
subsidiary of Deutsche Bank AG ("DB") for $135,930,000 in gross proceeds
pursuant to a Securities Purchase Agreement dated as of May 15, 2000. NDB
Group and DB also entered into (1) a Stockholder Agreement providing for,
among other things, the appointment of a representative of DB to NDB Group's
board of directors, (2) an agreement regarding the providing of certain
research materials prepared by DB or certain of its affiliates to customers
of the Company in the United States and (3) an agreement with respect to the
Company being a distributor of initial public offerings of equity securities
in the United States if DB or one of its affiliates is an underwriter of the
securities and the internet is a distribution channel. The Company and DB
also executed term sheets for joint ventures between DB and the Company
regarding the offering of online discount brokerage in Western Europe and
the rest of the world other than Western Europe and the United States.
S-7
<PAGE>
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934 the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Dated: August 15, 2000 NATIONAL DISCOUNT BROKERS GROUP, INC.
By: /s/ Arthur Kontos
Arthur Kontos
Chief Executive Officer
By: /s/ Daniel Fishbane
Daniel Fishbane
Chief Financial Officer
and Principal Accounting Officer
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, this report has been signed below by the following persons on
behalf of the registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ James H. Lynch, Jr. Chairman of the Board August 15, 2000
-----------------------
James H. Lynch, Jr.
/s/ Arthur Kontos Director and Chief August 15, 2000
----------------- Executive Officer
Arthur Kontos
/s/ Dennis V. Marino Director August 15, 2000
--------------------
Dennis V. Marino
/s/ Thomas W. Neumann Director August 15, 2000
---------------------
Thomas W. Neumann
/s/ John P. Duffy Director August 15, 2000
-----------------
John P. Duffy
/s/ Ralph N. Del Deo Director August 15, 2000
--------------------
Ralph N. Del Deo
/s/ Charles Kirkland Kellogg Director August 15, 2000
----------------------------
Charles Kirkland Kellogg
/s/ Russell C. Horowitz Director August 15, 2000
-----------------------
Russell C. Horowitz
/s/ Kevin Parker Director August 15, 2000
---------------------
Kevin Parker
</TABLE>
43
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT INDEX
Description of Document SEC Exhibit Document
<S> <C> <C>
3.1 Restated Certificate of Incorporated by reference to Exhibit 3.1 to NDB
Incorporation of NDB Group. Group's Registration Statement No. 33-12904 on
Form S-1, effective May 29, 1987 (the "Initial
Registration Statement").
3.2 Amendment to NDB Group's Restated Certificate of Incorporated by reference to Exhibit 4.3 to NDB
Incorporation. Group's Registration Statement on Form S-8, file
number 333-41819 filed on December 9, 1997 (the
"December 1997 Form S-8").
3.3 Amendment to NDB Group's Restated Certificate of Incorporated by reference to Exhibit A to NDB
Incorporation, as amended. Group's Proxy Statement dated November 12, 1997.
3.4 Restated Certificate of Incorporation, as amended. Incorporated by reference to Exhibit 3.3 to NDB
Group's Form 10-Q for the quarter end November 30,
1997 (the "November 1997 Form 10-Q").
3.5 By-Laws of NDB Group, as amended. Incorporated by reference to Exhibit 4.4 to NDB
Group's Registration Statement on Form S-8, file
number 333-41819 filed on December 9, 1997.
4.1 Registration Rights Agreement among NDB Group and Incorporated by reference to Exhibit 10(a) to NDB
stockholders listed therein dated as of June 15, Group's Form 8-K dated June 15, 2000.
2000.
4.2 Stockholder Agreement between NDB Group and Incorporated by reference to Exhibit 10(a) to NDB
Deutsche Bank AG dated as of June 15, 2000. Group's Form 8-K dated June 15, 2000.
4.3 Common Stock Purchase Warrants of NDB Group in Incorporated by reference to Exhibits 4(b) and
favor of each of Vulcan Ventures Incorporated and 4(c) to NDB Group's Form 8-K dated February 5,
Go2Net, Inc. dated February 5, 2000. 2000.
4.4 Securities Purchase Agreement among NDB Group and Incorporated by reference to Exhibit 99(a) to NDB
Vulcan Ventures Incorporated and Go2Net, Inc. Group's Form 8-K dated February 5, 2000.
dated February 5, 2000.
10.1 Form of Option Agreement under NDB Group's 1995 Incorporated by reference to Exhibit 10.7 to NDB
Stock Option Plan. Group's Form 10-K for Fiscal Year ended May 31,
1997.
10.2 Employment Agreement dated as of May 31, 1997 by Incorporated by reference to Exhibit 10.9 to NDB
and between Arthur Kontos and NDB Group. Group's Form 10-K for Fiscal Year ended May 31,
1997.
1
<PAGE>
10.3 Waiver of Bonus by Arthur Kontos. Incorporated by reference to Exhibit 10.1 to NDB
Group's Form 10-Q for the quarter ended
February 29, 1996.
10.4 Voting Trust Agreement between Arthur Kontos and Incorporated by reference to Exhibit 10.7 to NDB
Vicki Kontos dated May 11, 1993. Group's Form 10-K for Fiscal Year ended May 31,
1994.
10.5 Exhibit 10.13 Sublease Agreement between Johnson & Incorporated by reference to Exhibit 10.2 to NDB
Higgins and Triak Services Corp. Group's Form 10-Q for the quarter ended February
29, 1996.
10.6 Guaranty dated as of March 1, 1996 by and between Incorporated by reference to Exhibit 10.14 to NDB
Johnson & Higgins and NY Broad Holdings, Inc. Group's Form 10-K for Fiscal Year ended May 31,
1996.
10.7 Lease Agreement dated as of November 30, 1994 Incorporated by reference to Exhibit 10.2 to NDB
between S.P.N.W. Management Associates Limited Group's Form 10-Q for the quarter ended November
Partnership and Sherwood Securities Corp. 30, 1994.
10.8 The Sherwood Group, Inc. 1996 CEO Bonus Plan. Incorporated by reference to Exhibit A to NDB
Group's Proxy Statement dated September 10, 1996.
10.9 Settlement Agreement. Incorporated by reference to Exhibit 10(a) to NDB
Group's Form 10-Q for the quarter ended February
28, 1997.
10.10 Amended Settlement Agreement. Incorporated by reference to Exhibit 10.23 to NDB
Group's Form 10-K for Fiscal Year ended May 31,
1997.
10.11 The Sherwood Group, Inc. 1995 Stock Option Plan, Incorporated by reference to Exhibit 4.1 to NDB
as amended. Group's December 1997 Form S-8.
10.12 Stock Purchase Agreement dated as of February 13, Incorporated by reference to Exhibit 10 to NDB
1998 between MXNet, Inc., NDB Group and IPC Group's Form 10-Q for the quarter ended February
Information Systems, Inc. 28, 1998.
10.13 Employment Agreement dated as of April 1, 1999 Incorporated by reference to Exhibit 10.3 to NDB
between Frank E. Lawatsch, Jr. and NDB Group Group's Form 10-Q for the quarter ended February
28, 1999.
10.14 Change of Control Agreement dated as of April 1, Incorporated by reference to Exhibit 10.4 to NDB
1999 between Frank E. Lawatsch, Jr. and NDB Group Group's From 10-Q for the quarter ended February
28, 1999.
2
<PAGE>
10.15 Amended and Restated Purchase Agreement dated as Incorporated by reference to Exhibit 2 to NDB
of June 11, 1999 among Spear, Leeds & Kellogg Group's Form 8-K dated June 15, 1999.
Specialists LLC, the Selling Members listed on the
Signature Pages thereto and the Members'
Representative relating to the purchase and sale
of 100% of the Membership Interests in Equitrade
Partners L.L.C. dated June 21, 1999 (with
schedules and Exhibits which NDB Group agrees to
provide to the staff of the Commission at its
request)
10.16 Amended Lease at 90 Hudson Street, Jersey City, Incorporated by reference to Exhibit 10 (a) to NDB
New Jersey Group's Form 8-K dated June 15, 1999.
10.17 National Discount Brokers Group, Inc. 1999 Stock Incorporated by reference to Exhibit 10 (a) to NDB
Option Plan Group's Form 8-K dated May 1, 1999.
10.18 National Discount Brokers Group, Inc. 1999 Stock Filed herewith.
Option Plan, as amended and restated
10.19 Amendments to Lease at 10 Exchange Place Centre Incorporated by reference to Exhibit 10.38 to NDB
Group's Form 10-K for the fiscal year ended May
31, 1999.
10.20 Securities Purchase Agreement between NDB Group Incorporated by reference to Exhibit 10 (a) to NDB
and DB U.S. Financial Markets Holding Corporation Group's Form 8-K dated May 18, 2000.
dated as of May 15, 2000.
10.21 Amendment to the National Discount Brokers Group, Incorporated by reference to Exhibit 10 (a) to NDB
Inc. 1999 Non-Qualified Stock Option Plan. Group's Form 10-Q-A for the quarter ended February
29, 2000.
10.22 Letter of NDB Group exercising its option under Incorporated by reference to Exhibit 10 (b) to NDB
the Employment Agreement dated as of May 31, Group's Form 10-Q-A for the quarter ended February
1997 by and between Arthur Kontos and NDB Group. 29, 2000.
10.23 Employment Agreement dated as of November 8, 1999 Incorporated by reference to Exhibit 10 (a) to NDB
between Daniel Fishbane and NDB Group Group's Form 10-Q for the quarter ended November
30, 1999.
10.24 2000 National Discount Brokers Group, Inc. Incorporated by reference to Exhibit A to NDB
Compensation Plan. Group's Proxy Statement dated September 9, 1999.
3
<PAGE>
10.25 Schedule 2.1 to the Stockholder Agreement between Incorporated by reference to Exhibit 4 to NDB
NDB Group and Deutsche Bank AG dated as of Group's Form 8-K dated as of June 15, 2000.
June 15, 2000.
10.26 Agreement between NDB Group and Deutsche Bank AG Filed herewith.
regarding initial public offerings dated as of
June 15, 2000.
10.27 Securities Research Agreement between National Filed herewith.
Discount Brokers Corporation and Deutsche Bank AG
dated as of June 15, 2000.
10.28 European Joint Venture Term Sheet between NDB Filed herewith
Group and Deutsche Bank AG dated as of June
15, 2000.
10.29 Worldwide Joint Venture Term Sheet between NDB Filed herewith.
Group and Deutsche Bank AG dated as of June 15,
2000.
10.30 Waiver of Bonus by Arthur Kontos Filed herewith.
10.31 Deferred Compensation Agreement between NDB Group Filed herewith.
and Thomas W. Neumann
11. Statement re: computation of per share earnings. Filed herewith.
16. Letter from KPMG LLP Filed herewith.
21. Subsidiaries of NDB Group Filed herewith.
23.1 Consent of Independent Public Accountants. Filed herewith.
23.2 Consent of Independent Public Accountant Filed herewith.
27. Financial Data Schedule. Filed herewith.
99.1 Form of Indemnification Agreement to be entered Incorporated by reference to Exhibit 99.1 to
into between NDB Group and each of certain of its NDB Group's Form 8-K dated September 18, 1995.
executive officers and directors.
</TABLE>
4
<PAGE>
EXHIBIT 10.18
NATIONAL DISCOUNT BROKERS GROUP, INC.
1999 NON-QUALIFIED STOCK OPTION PLAN, AS AMENDED
SECTION 1. PURPOSE
The purpose of National Discount Brokers Group, Inc. 1999 Stock Option
Plan (the "Plan") is to provide an additional incentive to employees,
independent contractors, agents and consultants of National Discount Brokers
Group, Inc. (the "Company") and its subsidiaries, to aid in attracting and
retaining employees, independent contractors, agents and consultants, and to
closely align their interests with those of shareholders. The Plan also provides
for the granting of additional incentives to members of the Board of Directors
of the Company who are not Employees.
SECTION 2. DEFINITIONS
Unless the context clearly indicates otherwise, the following terms,
when used in the Plan, shall have the meanings set forth in this Section 2.
(a) "Board" shall mean the Board of Directors of the Company.
(b) "Change in Control". A change in control of the Company shall be
deemed to have occurred if, over the initial opposition of the then-incumbent
Board (whether or not such Board ultimately acquiesces therein), (i) any person
or group of persons shall acquire, directly or indirectly, stock of the Company
having at least 25% of the combined voting power of the Company's
then-outstanding securities, or (ii) any shareholder or group of shareholders
shall elect a majority of the members of the Board in each case after January 1,
1999.
(c) "Code" shall mean the Internal Revenue Code of 1986 and the rules
and regulations thereunder, as it or they may be amended from time to time.
(d) "Committee" shall mean the Compensation Committee of the Board or
such other committee as may be designated by the Board. The Committee shall
consist of two or more members of the Board who are Non-Employee Directors as
such term is defined in Rule 16b-3 of the Exchange Act.
(e) "Date of Exercise" shall mean the earlier of the date on which written
notice of exercise, together with payment in full, is received at the office of
the Secretary of the Company or the date on which such notice and payment are
mailed to the Secretary of the Company at its principal office by certified or
registered mail.
(f) "Employee" shall mean any employee or any officer of the Company or any
of its Subsidiaries, or any other person, who is an independent contractor,
agent or consultant of the Company or any of its Subsidiaries, and excluding any
director of the Company who is not otherwise an employee of the Company.
(g)"Exchange Act" shall mean the Securities and Exchange Act of 1934, as
amended.
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<PAGE>
(h) "Fair Market Value" shall mean for any day the mean of the highest
and lowest selling prices of the Stock as reported on the Composite Tape for
securities traded on the New York Stock Exchange.
(i) "Grantee" shall mean an Employee or an Independent Director granted a
Stock Option.
(j) "Granting Date" shall mean the date on which the Committee in the case of an
Employee or the Plan in the case of an Independent Director authorizes the
issuance of a Stock Option for a specified number of shares of Stock to a
specified Employee or Independent Director.
(k) "Nonqualified Stock Option" shall mean a Stock Option granted
within the Plan which is not an incentive stock option, under Section 422 of the
Code or otherwise qualified under similar tax provisions.
(l) "Progressive Stock Options" shall mean Nonqualified Stock Options
granted pursuant to Section 5(h) of this Plan.
(m) "Stock" shall mean the Common Stock, as par value $.01 per share, of
the Company.
(n) "Stock Option" shall mean a Nonqualified Stock Option granted
pursuant to the Plan to purchase shares of Stock.
(o) "Subsidiary" shall mean any subsidiary corporation as defined in
Section 424 of the Code.
(p) "Independent Director" means a member of the Board who is not an
Employee at the time of the Granting Date or within two years prior thereto.
SECTION 3. SHARES OF STOCK SUBJECT TO THE PLAN
Subject to adjustment pursuant to Section 8, 1,000,000 shares of Stock
shall be reserved for issuance upon the exercise of Stock Options granted
pursuant to the Plan. Shares delivered under the Plan may be authorized and
unissued shares or issued shares held by the Company in its treasury. If any
Stock Options expire or terminate without having been exercised, the shares of
Stock covered by such Stock Option shall become available again for the grant of
Stock Options hereunder. Shares of Stock covered by Stock Options surrendered
for Stock pursuant to Section 6, however, shall not become available again for
the grant of Stock Options hereunder.
SECTION 4. ADMINISTRATION OF THE PLAN
(a) The Plan shall be administered by the Committee. Subject to the
express provisions of the Plan, the Committee shall have authority to interpret
the Plan, to prescribe, amend and rescind rules and regulations relating to it,
to determine the terms and provisions of Stock Option grants, and to make all
other determinations necessary or advisable for the administration of the Plan.
(b) It is intended that the Plan and any transaction hereunder meet all
of the requirements of Rule 16b-3 promulgated by the Securities and Exchange
Commission, as such rule is currently in effect or as hereafter modified or
amended, and all other applicable laws. If any provision of the Plan or any
transaction would disqualify the Plan or such transaction under, or would not
comply with, Rule 16b-3 or other applicable laws, such provision or transaction
shall be construed or deemed amended to conform to Rule 16b-3 or such other
applicable laws or otherwise shall be deemed to be null and void, in each case
to the extent permitted by law and deemed advisable by the Committee.
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<PAGE>
(c) Any controversy or claim arising out of or related to the Plan shall be
determined unilaterally by and at the sole discretion of the Committee.
SECTION 5. GRANTING OF STOCK OPTIONS
(a) Except as provided in Subsection 5 (i), only Employees shall be
eligible to receive Stock Options under the Plan. Except as provided in
Subsection 5 (i), Directors of the Company who are not also employees of the
Company or one of its Subsidiaries shall not be eligible for Stock Options.
(b) Except as provided in Subsection 5 (i), the option price of each
share of Stock subject to a Nonqualified Stock Option shall be 100% of the Fair
Market Value of a share of the Stock on the Granting Date, or such other price
either greater than or less than the Fair Market Value (but in no event less
than the par value of the Stock) as the Committee shall determine appropriate to
the purposes of the Plan and to the Company's total compensation program.
(c) The Committee shall determine and designate from time to time those
Employees who are to be granted Stock Options and shall also specify the number
of shares covered by and the option price per share of each Stock Option. Each
Stock Option granted under the Plan shall be clearly identified as to its status
as a Nonqualified Stock Option.
(d) A Stock Option shall be exercisable during such period or periods
and in such installments as shall be fixed by the Committee at the time the
Stock Option is granted or in any amendment thereto, but each Stock Option shall
expire not later than ten years from the Granting Date.
(e) The Committee shall have the authority to grant both transferable
Stock Options and nontransferable Stock Options, and to amend outstanding
nontransferable Stock Options to provide for transferability. Each
nontransferable Stock Option intended to qualify under Rule 16b-3 or otherwise
shall provide by its terms that it is not transferable otherwise than by will or
the laws of descent and distribution and is exercisable, during the Grantee's
lifetime, only by the Grantee. Each transferable Stock Option may provide for
such limitations on transferability and exercisability as the Committee may
designate at the time a Stock Option is granted or is otherwise amended to
provide for transferability.
(f) Stock Options may be granted to an Employee who has previously
received Stock Options or other options whether such prior Stock Options or
other options are still outstanding, have previously been exercised or
surrendered in whole or in part, or are canceled in connection with the issuance
of new Stock Options.
(g) Subject to adjustment pursuant to Section 8, the aggregate number
of shares of Stock subject to Stock Options granted to an Employee or Director
under the Plan shall not exceed 125,000 shares (as such number is adjusted
pursuant to Section 8).
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<PAGE>
(h) Subject to Section 5 (g), without in any way limiting the authority
of the Committee to make grants of Stock Options under the Plan, and in order to
induce Employees to retain ownership of Stock, the Committee shall have the
authority (but not the obligation) to include within any agreement reflecting a
Stock Option a provision entitling the Grantee of such Stock Option to a further
Stock Option (a "Progressive Stock Option") in the event the Grantee exercises
such Nonqualified Stock Option evidenced by such agreement, in whole or in part,
by surrendering other shares of Stock in accordance with this Plan and the terms
and conditions of such agreement. Any such Progressive Stock Option shall be for
a number of shares of Stock equal to the number of surrendered shares, shall
become exerciseable no sooner than six months after the Granting Date of the
Stock Option or such longer period as the Committee may establish, shall have an
option price per share equal to one hundred percent (100%) of the Fair Market
Value of a share of Stock on the Granting Date of the Progressive Stock Option,
and shall be subject to such other terms and conditions as the Committee may
determine.
(i) Notwithstanding any provision of the Plan to the contrary, each Independent
Director shall receive (I) a one time grant of a Stock Option covering 5,000
shares of stock (adjusted as provided in Section 8) on the date when the
Independent Director first joins the Board after July 28, 1999 or on July 28,
1999 in the case of any Independent Director serving on the Board on July 28,
1999 and (II) each Independent Director elected after January 19, 2000 shall
receive the grant of a Stock Option covering 5,000 shares of stock (adjusted as
provided in Section 8) on each date the Independent Director is elected to the
Board after the first such election. The Stock Option will have an Exercise
Price equal to Fair Market Value at the Granting Date, have a term of 9 years
and 364 days from the Granting Date, vest six months after the Granting Date for
the Stock Option, be transferable to the extent permitted by the Committee for
Employees, not be subject to the benefits of Subsection 5(h) and 6(c), and
otherwise be subject to the terms and conditions of the Plan except that the
Stock Option awarded to an Independent Director shall not expire when the
Independent Director leaves the Board but shall continue until the earlier of
two years from the date the Director leaves the Board or the date the Stock
Option expires. Notwithstanding the foregoing no Independent Director shall be
entitled to receive a Stock Option under this subsection 5(i) if the number of
shares of Stock received as a result of the conversion of, or to be received
upon exercise of, Stock Options would exceed one percent of the shares of stock
then outstanding or one per cent of the voting power of securities of the
Company then outstanding.
SECTION 6. EXERCISE OF STOCK OPTIONS
(a) Except for the Stock Option granted to an Independent Director and
except as provided in Section 7, no Stock Option may be exercised at any time
unless the Grantee is an Employee on the Date of Exercise.
(b) The Grantee shall pay the option price in full on the Date of
Exercise of a Stock Option in cash, by check, or by delivery of full shares of
Stock of the Company, duly endorsed for transfer to the Company with signature
guaranteed, or by any combination thereof. Stock will be accepted at its Fair
Market Value on the Date of Exercise.
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(c) Subject to the approval of the Committee, or of such person to whom
the Committee may delegate such authority ("its designee"), the Company may loan
to the Grantee a sum equal to an amount which is not in excess of 100% of the
purchase price of the shares of Stock acquired upon exercise of a Stock Option,
such loan to be evidenced by the execution and delivery of a promissory note.
Interest shall be paid on the unpaid balance of the promissory note at such
times and at such rate as shall be determined by the Committee or its designee.
Such promissory note shall be secured by the pledge to the Company of shares of
Stock having an aggregate purchase price on the date of purchase equal to or
greater than the amount of such note. A Grantee shall have, as to such pledged
shares of Stock, all rights of ownership including the right to vote such shares
of Stock and to receive dividends paid on such shares of Stock, subject to the
security interest of the Company. Such shares of Stock shall not be released by
the Company from the pledge unless the proportionate amount of the note secured
thereby has been repaid to the Company; provided, however that shares of Stock
subject to a pledge may be used to pay all or part of the purchase price of any
other option granted hereunder or under any other stock incentive plan of the
Company under the terms of which the purchase price of an option may be paid by
the surrender of shares of Stock, subject to the terms and conditions of the
Plan relating to the surrender of shares of Stock in payment of the exercise
price of an option. In such event, that number of the newly purchased shares of
Stock equal to the shares of Stock previously pledged shall be immediately
pledged as substitute security for the pre-existing debt of the Grantee to the
Company, and thereupon shall be subject to the provisions hereof relating to
pledged shares of Stock. All notes executed hereunder shall be payable at such
times and in such amounts and shall contain such other terms as shall be
specified by the Committee or its designee or stated in the option agreement;
provided, however, that such terms shall conform to requirements contained in
any applicable regulations which are issued by any governmental authority.
SECTION 7. TERMINATION OF EMPLOYMENT
Except as otherwise provided by the Committee at the time the Stock
Option is granted or any amendment thereto, if a Grantee ceases to be an
Employee then:
(a) if termination of employment is voluntary or involuntary without
cause, the Grantee may exercise each Stock Option held by the Grantee within
three months after such termination (but not after the expiration date of the
Stock Option) to the extent of the number of shares subject to the Stock Option
which are purchasable pursuant to its terms at the date of termination;
(b) if termination is for cause, all Stock Options held by the Grantee
shall be canceled as of the date of termination;
(c) subject to the provisions of Section 7(d), if termination is (i) by
reason of retirement at a time when the Grantee is entitled to the current
receipt of benefits under any retirement plan maintained by the Company or any
Subsidiary, or (ii) by reason of disability, each Stock Option held by the
Grantee may be exercised by the Grantee at any time (but not after the
expiration date of the Stock Option) to the extent of the number of shares
subject to the Stock Option which were purchasable pursuant to its terms at the
date of termination;
(d) if termination is by reason of the death of the Grantee, or if the
Grantee dies after retirement or disability as referred to in Section 7(c), each
Stock Option held by the Grantee may be exercised by the Grantee's estate, or by
any person who acquires the right to exercise the Stock Option by reason of the
Grantee's death, at any time within a period of three years after death (but not
after the expiration date of the Stock Option) to the extent of the total number
of shares subject to the Stock Option which were purchasable pursuant to its
terms at the date of termination; or
(e) if the Grantee should die within three months after voluntary
termination of employment or involuntary termination without cause, as
contemplated in Section 7(a), each Stock Option held by the Grantee may be
exercised by the Grantee's estate, or by any person who acquires the right to
exercise by reason of the Grantee's death, at any time within a period of one
year after death (but not after the expiration date of the Stock Option) to the
extent of the number of shares subject to the Stock Option which were
purchasable pursuant to its terms at the date of termination.
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SECTION 8. ADJUSTMENTS
In the event of any merger, consolidation, reorganization,
recapitalization, stock dividend, stock split or other change in the corporate
structure or capitalization affecting the Stock, there shall be an appropriate
adjustment made by the Board in the number and kind of shares that may be
granted in the aggregate and to individual Employees or Independent Directors
under the Plan, the number and kind of shares subject to each outstanding Stock
Option and the option prices. In the event of a transaction involving (i) the
liquidation or dissolution of the Company, (ii) a merger or consolidation in
which the Company is not the surviving corporation or (iii) the sale or
disposition of all or substantially all of the Company's assets, provision shall
be made in connection with such transaction for the assumption of Stock Options
theretofore granted under the Plan, or the substitution for such Stock Options
of new options of the successor corporation, with appropriate adjustment as to
the number and kind of stock and the purchase price for stock thereunder, or, in
the discretion of the Committee, the Plan and the Stock Options issued hereunder
shall terminate on the effective date of such transaction if appropriate
provision is made for payment to the Grantee of an amount in cash equal to the
fair market value of a share of stock multiplied by the number of shares of
stock subject to the Stock Options (to the extent such Stock Options have not
been exercised) less the exercise price for such Stock Options (to the extent
such Stock Options have not been exercised); provided, however, that in no event
shall the Committee take any action or make any determination under this Section
8 which would prevent a transaction described in clause (ii) or (iii) above from
being treated as a pooling of interests under generally accepted accounting
principles.
SECTION 9. TENDER OFFER; CHANGE IN CONTROL
A Stock Option shall become immediately exercisable to the extent of
the total number of shares subject to the Stock Option in the event of (i) a
tender offer by a person or persons other than the Company for all or any part
of the outstanding Stock if, upon consummation of the purchases contemplated,
the offeror or offerors would own, beneficially or of record, an aggregate of
more than 25% of the outstanding Stock, or (ii) a Change in Control of the
Company.
SECTION 10. GENERAL PROVISIONS
(a) Each Stock Option shall be evidenced by a written instrument
containing such terms and conditions, not inconsistent with this Plan, as the
Committee shall approve.
(b) The granting of a Stock Option in any year shall not give the
Grantee any right to similar grants in future years or any right to be retained
in the employ of the Company or any Subsidiary or interfere in any way with the
right of the Company or such Subsidiary to terminate an Employee's employment at
any time.
(c) Notwithstanding any other provision of the Plan, the Company shall
not be required to issue or deliver any certificate or certificates for shares
of Stock under the Plan prior to fulfillment of all of the following conditions:
(i)The listing, or approval for listing upon notice of issuance, of such
shares on the New York Stock Exchange;
(ii) Any registration or other qualification of such shares
under any state or federal law or regulation, or the maintaining in effect of
any such registration or other qualification which the Committee may, in its
discretion upon the advice of counsel, deem necessary or advisable; and
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(iii) The obtaining of any other consent, approval or permit
from any state or federal governmental agency which the Committee may, in its
discretion upon the advice of counsel, determine to be necessary or advisable.
(d) The Company shall have the right to deduct from any payment or
distribution under the Plan any federal, state or local taxes of any kind
required by law to be withheld with respect to such payments or to take such
other action as may be necessary to satisfy all obligations for the payment of
such taxes. In case distributions are made in shares of Stock, the Company shall
have the right to retain the value of sufficient shares of Stock to equal the
amount of tax to be withheld for such distributions or require a recipient to
pay the Company for any such taxes required to be withheld on such terms and
conditions prescribed by the Committee.
(e) No Grantee shall have any of the rights of a shareholder by reason of a
Stock Option until it is exercised.
(f) The Plan shall be construed and enforced in accordance with the
laws of the State of Delaware (without regard to the legislative or judicial
conflict of laws rules of any state), except to the extent superseded by federal
law.
SECTION 11. AMENDMENT AND TERMINATION
(a) The Plan shall terminate on April 1, 2008 and no Stock Option shall
be granted hereunder after that date, provided that the Board may terminate the
Plan at any time prior thereto.
(b) The Board may amend the Plan at any time without notice.
(c) No termination or amendment of the Plan may, without the consent of
a Grantee to whom a Stock Option shall theretofore have been granted, adversely
affect the rights of such Grantee under such Stock Option.
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EXHIBIT 10.26
CONFORMED COPY
NATIONAL DISCOUNT BROKERS GROUP, INC
10 Exchange Place Centre
Jersey City, New Jersey 07302
June 15, 2000
Deutsche Bank AG
Taunusanlage 12
60325 Frankfurt
Germany
Ladies and Gentlemen:
We are writing to memorialize our understanding concerning the involvement by
National Discount Brokers Group, Inc. or any of its broker-dealer subsidiaries
(collectively, "NDB") in underwritten offerings of common stock for which you or
any of your Affiliates (collectively, "DB") shall serve as book-running or a
joint book-running managing underwriter. Any capitalized term used but not
otherwise defined in this letter agreement (this "Letter Agreement") shall have
the meaning set forth in the Stockholder Agreement, dated as of the date hereof,
between NDB and DB (collectively, the "Parties"). It is an express condition to
the consummation of the Securities Purchase Agreement that the Parties enter
into this Letter Agreement and the transactions contemplated hereby.
1. Participation in Qualified Offerings. (a) If DB (the "Managing Affiliate") is
the book-running or a joint book-running managing underwriter in an initial
public offering of equity securities in the United States, and seeks to
distribute in the United States through a U.S. On-Line Discount Broker all or
any portion of such equity securities (a "Qualified Exclusive Offering"), then
DB shall invite NDB (an "Invitation") to participate, subject to applicable law,
in such Qualified Exclusive Offering as a member of the underwriting syndicate
or the selling group, as determined by the Managing Affiliate in its sole
discretion.
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(b) For purposes of this Letter Agreement, "U.S. On-Line Discount Broker" means
a securities brokerage firm that (i) is either located within or otherwise doing
business in the United States; (ii) is duly licensed as a broker-dealer with the
U.S. Securities and Exchange Commission and is a member of the National
Association of Securities Dealers, Inc.; (iii) does not employ account
executives or registered representatives who (A) are assigned to, and
responsible for maintaining relationships with, customers for the purpose of
providing advised brokerage and trade execution services (whether provided in
person or electronically and whether general or trade-specific) or (B) are
compensated with a portion of the commissions earned for any trade execution
services performed for such customers; (iv) offers its customers the ability to
execute securities trades directly through computerized on-line or other
electronic or wireless execution systems, including, without limitation, the
Internet and IVR, without the direct assistance or recommendation of any account
executive or registered representative; and (v) generally charges its customers
a lower cost for its services than is customarily charged in the relevant market
for brokerage services by full service advised brokerage firms taking into
account commission charges, account investment advisory fees and such other
charges and fees and minimum balance requirements. The term "U.S. On-Line
Discount Broker" shall include, without limitation, any entity listed on a
schedule to be prepared from time to time by the Parties, as amended from time
to time by mutual consent of the Parties. Such schedule shall not include DB
Alex. Brown LLC or Deutsche Bank Securities, Inc. or any of their respective
successors.
(c) The Managing Affiliate shall not allocate shares in any Qualified Exclusive
Offering to any U.S. On-Line Discount Broker other than NDB; provided, that the
foregoing limitation shall not apply to (i) any allocation by a joint
book-running managing underwriter (other than the Managing Affiliate) for such
Qualified Exclusive Offering to a U.S. On-Line Discount Broker other than NDB;
and (ii) any allocation by the Managing Affiliate to (A) any U.S. On-Line
Discount Broker that is an Affiliate of any co-managing underwriter (other than
the Managing Affiliate); (B) any U.S. On-Line Discount Broker other than NDB, if
the issuer so directs the Managing Affiliate; or (C) any broker-dealer other
than a U.S.On-Line Discount Broker, including any such broker-dealer that uses
computerized on-line or other electronic execution systems, without prejudice in
each case specified in clauses (A), (B) and (C) above to NDB's right hereunder
to participate in such Qualified Exclusive Offering.
(d) The Managing Affiliate shall, in good faith, consider inviting NDB to
participate in any equity offering that has a retail component (other than a
Qualified Exclusive Offering) where the Managing Affiliate is a book-running or
joint book-running managing underwriter and seeks to distribute in the United
States through a U.S. On-Line Discount Broker all or any portion of such equity
securities (a "Qualified Good Faith Offering" and, collectively with a Qualified
Exclusive Offering, a "Qualified Offering").
(e) Notwithstanding paragraph (a), (c) or (d) above, the Managing Affiliate
shall not be obligated to extend an Invitation to NDB in the event the issuer
objects to the inclusion of NDB in such offering. The Managing Affiliate shall
notify NDB of such objection promptly.
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(f) Each Invitation shall take the form of a terms telex customary in form and
scope to similar communications used for the purpose of forming underwriting
syndicates or selling groups (as the case may be) in similar offerings and shall
be extended to NDB as and when extended to each other proposed members of the
underwriting syndicate or selling group (as the case may be) in the related
Qualified Offering.
(g) The Managing Affiliate shall circulate to NDB copies, in Adobe Acrobat
(".pdf") or equivalent "read only" electronic format, of each preliminary
prospectus, final prospectus and amendments or supplements thereto to be used in
connection with each Qualified Offering in which NDB agrees to participate. Such
documents shall be provided to NDB at such times as they are made available in
written or electronic format to other members of the underwriting syndicate or
selling group (as the case may be). Subject to the terms of any agreement among
underwriters, underwriting agreement or selling group agreement applicable to
such Qualified Offering, NDB shall have complete discretion concerning NDB
customer accounts to which shares in the Qualified Offering are sold and the
number of shares sold to a particular NDB account and not be required to divulge
to the Managing Affiliate or any underwriting syndicate member information
relating to any individual customer's participation in the Qualified Offering or
any other proprietary customer or technological information; provided, however,
that NDB shall promptly upon request by the Managing Affiliate provide such
information with respect to NDB's participation in any Qualified Offering,
including customer account information, to the extent (and only to the extent)
as is necessary for purposes of complying with any law, regulation or request of
the issuer or of any Governmental Entity, including for these purposes the NASD,
the New York Stock Exchange, Inc. and any U.S. or foreign exchange on which any
equity securities distributed as part of a Qualified Offering may be listed;
provided, however, that any such request contemplated hereby shall be subject to
any and all customary confidentiality agreements that may exist between NDB (or
any of its Affiliates) and a customer of NDB (or any of its Affiliates) prior to
the date of such request.
(h) This Letter Agreement shall not in any way restrict NDB from participating
as an underwriter or selling group member in any offering regardless of whether
DB is the book-running or a joint book-running managing underwriter or
otherwise. Except as expressly required hereunder, DB shall not be prohibited
from participating as an underwriter or selling group member in any offering in
which NDB is neither an underwriter nor a selling group member.
2. Disclaimer. This Letter Agreement is being entered into in order to outline
the Parties' working relationship for any Qualified Offering in general, and
therefore does not evidence an obligation of the Parties to purchase, sell or
underwrite securities for any particular issuer or offering. Neither NDB nor any
of NDB's accounts has offered to purchase or has agreed to purchase any
particular security in connection with this Letter Agreement. The Parties agree
that, subject to the terms of this Letter Agreement and each Invitation, to the
extent NDB accepts any such Invitation, NDB's obligation to underwrite
securities and right to derive compensation in connection with any Qualified
Offering shall be consistent with the terms applicable to the other underwriters
or selling group members in such Qualified Offering as such terms are specified
in the final prospectus and terms telex concerning the Qualified Offering and in
the underwriting agreement, agreement among underwriters and selected dealers
agreement applicable to such Qualified Offering.
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3. Publicity. NDB and DB shall jointly advertise or market the arrangements
relating to this Letter Agreement and their participation in a Qualified
Offering. Notwithstanding the foregoing, the Parties understand and agree that
DB's private presentation materials for its issuer clients do not require
pre-clearance from NDB, except as they pertain to NDB. DB and NDB agree not to
disclose this Letter Agreement in any manner and further agree not to make
copies available to any third party without the prior written consent of the
other Party to this Letter Agreement, except as required by law. In the event
that either Party is requested pursuant to, or required by, applicable law or
regulation or by legal process to disclose this Letter Agreement it shall
promptly inform the other Party of such request or requirement in order to
enable the Parties jointly to seek an appropriate protective order or other
remedy, or to resist or narrow the scope of such request or legal process. In
any such event, each Party agrees to use its reasonable best efforts to obtain
from the Party to whom disclosure is made written assurances that this Letter
Agreement will be accorded confidential treatment.
4. Termination. (a) Either Party may terminate this Letter Agreement by written
notice to the other Party (i) upon the occurrence of a For Cause Termination
Event with respect to the other Party; or (ii) upon the giving of a notice of
termination, by any party, of any of the other Joint Venture Agreements
delivered not less than 30 days prior to the effective date of termination set
forth in such notice; provided that the rights and obligations set forth in
Sections 2, 3 and 4 shall survive termination of this Agreement; and provided
further, that no such termination shall relieve NDB or DB of liability it may
have incurred hereunder prior to such termination. Except as otherwise provided
in this Letter Agreement, upon termination or expiration of this Letter
Agreement for any reason, all rights of NDB hereunder shall terminate and NDB
shall delete or destroy any and all materials, as contemplated by Paragraph 1(g)
above, in NDB's possession, custody or control and provide written confirmation
of such deletion or destruction to DB within 30 days of such termination or
expiration and NDB shall not use such material for any purpose. The rights of
each Party under this Section 4 are without prejudice to any other rights of the
parties pursuant to this Letter Agreement or otherwise and shall not be affected
by any dispute between the parties with respect to this Letter Agreement or any
other matter.
(b) For purposes of this Letter Agreement, "For Cause Termination Event" means,
with respect to any Party, (i) a material breach by such Party or any of its
Affiliates of any covenant contained in this Agreement, which breach shall not
have been cured within 90 days following delivery of a notice in writing to the
breaching party that specifies in detail the matter constituting such breach and
such action as may be reasonably required to effect its cure; (ii) an Insolvency
Event of the non-terminating Party; and (iii) a Change in Control of the
non-terminating Party.
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(c) For purposes of this Letter Agreement, "Insolvency Event" means with respect
to any Person, any of the following: (i) such Person is dissolved, (ii) an order
for relief against such Person is entered, if in the United States, under
Chapter 11 of the federal bankruptcy law or, if not in the United States, under
any applicable statute providing generally for relief comparable to that
provided by the United States federal bankruptcy law ("Foreign Bankruptcy Law"),
(iii) such Person makes a general assignment for the benefit of creditors or
other marshaling of assets and liabilities of such Person, (iv) such Person
files a voluntary petition under the federal bankruptcy law or Foreign
Bankruptcy Law, (v) such Person files a petition or answer seeking for such
Person any reorganization, arrangement, composition, readjustment, liquidation,
dissolution, other winding up or similar relief under any statute, law, or
regulation, whether or not involving insolvency or bankruptcy, (vi) such Person
files an answer or other pleading admitting or failing to contest the material
allegations of a petition filed against such Person in any proceeding of this
nature, (vii) such Person seeks, consents to, or acquiesces in the appointment
of a trustee, receiver or liquidator of such Person or of all or any substantial
part of such Person's assets and properties, (viii) within 60 days after the
commencement of any proceeding against such Person seeking reorganization,
arrangement, composition, readjustment, liquidation, dissolution, other winding
up or similar relief under any statute, law or regulation, whether or not
involving insolvency or bankruptcy, such proceeding has not been dismissed or
(ix) within 60 days after the appointment without such Person's consent or
acquiescence of a trustee, receiver or liquidator of such Person or of all or
any substantial part of such Person's properties, such appointment is not
vacated or stayed, or within 60 days after the expiration of any such stay, the
appointment is not vacated.
5. Assignment. Neither Party shall assign this Letter Agreement without the
other Party's prior written consent, which consent may be withheld in the other
Party's sole discretion. Any purported assignment in violation of this Paragraph
5 shall be null and void.
6. Miscellaneous. (a) The notice provisions of the Securities Purchase
Agreement shall apply to this Letter Agreement.
(b) Nothing contained herein shall make the Parties partners or render any of
them liable to make payments not expressly identified or referred to in this
Letter Agreement.
(c) The Parties hereby agree that this Letter Agreement, and the respective
rights, duties and obligations of the parties hereunder, shall be governed by
and construed in accordance with the laws of the State of New York, without
giving effect to principles of conflicts of laws thereunder.
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(d) If any provision of this Letter Agreement is held invalid or otherwise
unenforceable, the enforceability of the remaining provisions shall not be
impaired thereby.
(e) The failure by any Party to exercise any right provided for herein shall not
be deemed a waiver of any right hereunder.
(f) Each Party agrees to bear its own expenses in connection with this Letter
Agreement and the transactions contemplated hereby.
(g) This Letter Agreement sets forth the entire understanding of the Parties as
to its subject matter and may not be modified except in a writing executed by
both Parties. In particular, this Letter Agreement supersedes the letter of
intent, dated March 27, 2000, between NDB and Deutsche Bank Americas Holding
Corporation, with respect to the subject matter hereof, among other matters.
(h) No waiver by either Party of a breach of any provision of this Letter
Agreement by the other Party shall operate or be construed as a waiver of any
subsequent breach.
(i) This Letter Agreement and any exhibit hereto may be executed in multiple
counterparts, each of which shall constitute an original but all of which shall
constitute but one and the same instrument. One or more counterparts of this
Letter Agreement or any exhibit hereto may be delivered via telecopier, with the
intention that they shall have the same effect as an original counterpart
hereof.
Sincerely,
National Discount Brokers Group, Inc.
By: /s/ Arthur Kontos
Name: Arthur Kontos
Title: President and Chief Executive Officer
Agreed and acknowledged as of the date set forth above:
Deutsche Bank AG
By: /s/ Thomas A. Curtis
Name: Thomas A. Curtis
Title: Attorney-In-Fact
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EXHIBIT 10.27
CONFORMED COPY
SECURITIES RESEARCH AGREEMENT
National Discount Brokers Corporation, a New York corporation (the
"Company") and Deutsche Bank AG ("DB" and together with the Company, the
"Parties") enter into this Agreement as of the June 15, 2000 to memorialize the
Parties' understanding concerning the Company's license to the Research
Material. Any capitalized term used herein without definition shall have the
meaning assigned to such term in the Stockholder Agreement.
W I T N E S S E T H
WHEREAS, DB U.S. Financial Markets Holding Corporation and National
Discount Brokers Group, Inc. ("NDBG") have entered into the Securities Purchase
Agreement (the "Securities Purchase Agreement"), dated as of May 15, 2000; and
WHEREAS, it is an express condition to the purchase and sale of Common
Stock of NDBG thereunder that the Parties enter into this Agreement and the
strategic relationship contemplated hereby;
NOW, THEREFORE, in consideration of the premises and the mutual
covenants contained herein and for other good and valuable consideration, and
agreements herein contained, the Parties hereto covenant and agree as follows:
Section 1. DEFINITIONS.
As used in this Agreement, the following terms shall have the
respective meanings assigned to them below:
(a) "Agreement" means this Agreement, together with all Exhibits and Schedules
hereto, as the same may be amended from time to time. References in this
Agreement to "herein," "hereunder" and words of similar import shall be
references to this Agreement, together with all Exhibits and Schedules, as
the same may be amended from time to time.
(b) "Click Agreement" means an electronic agreement between the Company and a
user, in a form to be agreed between the Parties, as may be amended from
time to time by the mutual agreement of the Parties, that is designed to be
executed by such user by selecting a button or other similar user-prompt.
(c) "Click Agreement Page" means a Page on the NDB Sites on which the Click
Agreement appears, which shall be designed in accordance with Section 2(f).
(d) "DB IP Rights" means DB's and its Affiliates' (including any DB Research
Affiliate's) Intellectual Property Rights in and to the Research Material
and DB Marks, whether owned or licensed by DB or its Affiliates.
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(e) "DB Marks" means any of DB's or its Affiliates' (including any DB Research
Affiliate's) trademarks, trade names, service marks, logos and other
designations of origin included on or associated with Research Material.
(f) "DB Research Affiliate" means any Affiliate of DB that produces the
Research Material licensed hereunder to the Company.
(g) "DBSI" means Deutsche Bank Securities, Inc., a broker-dealer registered
with the Securities and Exchange Commission and a member of the New York
Stock Exchange and the National Association of Securities Dealers, or any
of its successors hereunder.
(h) "Delivery Provider" means any Person identified in accordance with Section
4(c)(ii) hereof.
(i) "Distribute" means to reproduce, make available, provide, display,
transmit, promote or otherwise distribute through a secure Internet
website, or wireless, cable or other electronic means of communication.
(j) "Frame" means, with respect to a Page, the simultaneous display of such
Page within an Internet browser or other similar application with one or
more other Pages (or portion thereof) set off by a constant visible border
or frame.
(k) "GCI" means the Global Corporates & Institutions Division of DB (or any
successor division or entity), which prepares substantially all of the
equity research distributed to retail customers of DB and its Affiliates.
(l) "Inline" (or "Inlining") means, with respect to a Page, the simultaneous
display of such Page within an Internet browser or other similar
application with one or more other Pages (or portion thereof) without a
constant visible border or frame.
(m) "Intellectual Property Rights" means all intellectual property and similar
proprietary rights in any jurisdiction, including all such rights in and to
(i) original works of authorship, copyrights and moral rights; (ii) issued
patents, patent applications, divisions, continuations and
continuations-in-part, reissues, patents of additions, utility models,
inventors' certificates and invention disclosures; (iii) trademarks,
service marks, brand names, certification marks, trade dress, assumed
names, trade names and other indications of origin; (iv) confidential and
proprietary know-how and trade secrets; and (v) computer software or
hardware, whether or not copyrightable, including all source code, object
code, programs, applications, tables, models, databases, repositories,
specifications and documentation, including in the case of each of the
foregoing property and rights, all goodwill associated therewith and all
registrations thereof, and applications to register, such property or
rights.
(n) "Knowledge" shall mean the actual knowledge of any member of the Board of
Managing Directors or any executive officer of DB after due inquiry and an
investigation of the books and records of DB and DBSI.
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(o) "Legends" means copyright and other proprietary notices, disclaimers,
credit-lines, date-lines and other legends that (i) are placed by DB or a
DB Research Affiliate on the Research Material; or (ii) which the Company
is required or permitted to place on the Research Material or in close
proximity thereto under this Agreement or applicable law.
(p) "Licensed DB Page" means a Page on which any Research Material or portion
thereof (including the title thereof) is displayed in accordance with this
Agreement.
(q) "Login Page" means an interactive Page on the NDB Sites that (i) prompts a
user to provide (A) a unique user identification name or number and (B) a
secure password; and (ii) when such information is validly and properly
entered, permits such user to access a Licensed DB Page.
(r) "NDB Group" means NDBG and any Person of which NDBG owns a majority of the
outstanding voting securities and all majority owned subsidiaries and all
of their respective employees, officers, directors and agents.
(s) "NDB Research Recipients" means all Persons that maintain retail brokerage
accounts in the United States with the Company.
(t) "NDB Site" means any of (i) the Company's website at "ndb.com" (or any
successor website); or (ii) any other Internet website, or wireless, cable
or other electronic means of communication, owned, operated or controlled
by the Company, as selected or developed by the Company in its sole
discretion from time to time.
(u) "Page" means a single computer terminal display page of an Internet
website.
(v) "Representative" means, as to any Person, such Person's Affiliates and its
and their directors, officers, employees, agents, advisors (including,
without limitation, financial advisors, counsel and accountants) and
controlling Persons.
(w) "Research Material" means all of the following materials created,
generated, compiled or otherwise developed by GCI for general distribution
to retail customers in the United States that are required to be reviewed
by a supervisory analyst under New York Stock Exchange Rule 472: (i) all
narrative, statistical, analytical, illustrative and other data concerning
issuer, industry and market analyses, commentary and recommendations
(daily, weekly and monthly, as the case may be) contained in AM/PM daily
calls (video and audio), call summaries, brief intraday research bulletins
relating to equity securities and industry/company reports, and (ii) all
updates, supplements, amendments, analyses and statistical information
related to the matter referred to in clause (i) above. Research Material
also includes all DB Marks appearing on the information, reports and other
materials described in the preceding sentence.
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(x) "Transaction Documents" means the Securities Purchase Agreement, the
definitive agreement with respect to the U.S. Underwriting Agreement, this
Agreement and any other agreements, instruments and documents that may be
entered into between the Parties or their Affiliates relating to the
European Joint Venture and the Worldwide Joint Venture.
(y) "U.S. On-Line Discount Broker" means a securities brokerage firm that (i)
is either located within or otherwise doing business in the United States;
(ii) is duly licensed as a broker-dealer with the U.S. Securities and
Exchange Commission and is a member of the National Association of
Securities Dealers, Inc.; (iii) does not employ account executives or
registered representatives who (A) are assigned to, and responsible for
maintaining relationships with, customers for the purpose of providing
advised brokerage and trade execution services (whether provided in person
or electronically and whether general or trade-specific) or (B) are
compensated with a portion of the commissions earned for any trade
execution services performed for such customers; (iv) offers its customers
the ability to execute securities trades directly through computerized
on-line or other electronic or wireless execution systems, including,
without limitation, the Internet and IVR, without the direct assistance or
recommendation of any account executive or registered representative; and
(v) generally charges its customers a lower cost for its services than is
customarily charged in the relevant market for brokerage services by full
service advised brokerage firms taking into account commission charges,
account investment advisory fees and such other charges and fees and
minimum balance requirements. The term "U.S. On-Line Discount Broker" shall
include, without limitation, any entity listed on a schedule to be prepared
from time to time by the Parties, as amended from time to time by mutual
consent of the Parties. Such schedule shall not include DB Alex. Brown LLC
or DBSI or any of their respective successors.
Section 2. LICENSE TO THE RESEARCH MATERIAL.
(a) DB hereby grants and will ensure that each DB Research Affiliate grants to
the Company, during the term of this Agreement without charge, a
non-exclusive (except as expressly provided in this Agreement),
non-transferable, non-sublicenseable, royalty-free license to Distribute
the Research Material to the NDB Research Recipients through any NDB Site,
subject to the terms set forth in this Agreement.
(b) In the event that DB Distributes any of the Research Material to third
parties in the United States without restriction, DB hereby consents to the
Company Distributing such Research Material on any NDB Site, without
restriction.
(c) DB hereby grants and will ensure that each DB Research Affiliate grants to
the Company the right to include certain references to the Research
Material on the Company's promotional material, all NDB Sites and any other
media which the Company or NDBG may use from time to time in its business
and the right to use the DB Marks solely in connection with such
references; provided, however, that (i) DB shall have a reasonable
opportunity to review any such references and use of the DB Marks prior to
publication; and (ii) the Company shall promptly make any changes to such
references and use of the DB Marks as may be reasonably requested by DB. DB
agrees to conduct any such review in a prompt manner.
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(d) Except as expressly set forth in this Agreement, the Company shall have no
other right to use, copy, display or redistribute in any form the Research
Materials, in whole or in part, without the prior written consent of DB.
(e) The Company shall design, operate and maintain the NDB Sites such that (i)
the Research Material or any portion thereof (including the title thereof)
is displayed exclusively on a Licensed DB Page; (ii) each Licensed DB Page
may be accessed only by an NDB Research Recipient, and only after
successfully processing a Login Page by entering (A) a valid user
identification name or number; and (B) a valid password; (iii) no Person
may identify and/or gain access to any Licensed DB Page through the use of
any Internet search engine, a hypertext link on a website other than the
NDB Sites, or any similar means; and (iv) the Company shall have the
ability to terminate any NDB Research Recipient's access to the Licensed DB
Reports if such NDB Research Recipient has acted in a manner that is
detrimental to DB's rights in the Research Materials and/or upon receipt of
a notice from DB pursuant to Section 8(c) hereof.
(f) The Company shall design each NDB Site such that, as a condition to access
by any NDB Research Recipient to Research Material, such NDB Research
Recipient must access a Click Agreement Page and execute a Click Agreement.
The Click Agreement Page shall be designed such that (i) the entire text of
the Click Agreement appears on a single Page, in an internal scrollable
window or otherwise; (ii) the button or similar user prompt by which the
user executes the Click Agreement contains the text "I Agree" and is
located immediately proximate to the bottom of the text of the Click
Agreement; and (iii) the title(s) of the Research Material(s) that the NDB
Research Recipient has requested appear(s) immediately below or is
otherwise connected to the Click Agreement such that it is apparent to the
Research Recipient that the provisions of the Click Agreement relate to
such Research Material(s).
(g) Except as expressly provided herein, the Company shall display the Research
Material on the Licensed DB Pages verbatim as received and shall not edit,
modify or use any portion of Research Material to create any translation,
summary, abstract, adaptation or other derivative works from the Research
Material in any way, or make any additions thereto or deletions therefrom;
provided, however, that the Company shall be permitted to modify the layout
of Research Material to the extent necessary to comply with any requirement
of any Governmental Entity. The Company shall not (i) sell, lease, assign,
sublicense or otherwise transfer or provide the Research Material (or any
part thereof or rights therein), directly or indirectly, to any Person or
permit any Person, directly or indirectly, to use, view, copy, download,
Distribute or otherwise have access to the Research Material, except as
otherwise permitted herein; or (ii) copy or reproduce the Research Material
in whole or in part in any form or medium, except as required in connection
with the Company's permitted use of the Research Material as provided
herein.
(h) In no event shall the Company display any Research Material received more
than twenty-four (24) hours earlier under any heading labeled "New",
"Today's News", "Current", or under any other heading of similar
significance.
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(i) The Company shall display each Research Material on the Licensed DB Pages
only for so long as DB permits third parties in the United States to
Distribute such Research Material. After such period, upon notice from DB
the Company shall promptly remove each such Research Material from the
Licensed DB Pages.
(j) DB or the applicable DB Research Affiliate shall at all times retain
exclusive and complete editorial control over the Research Materials with
respect to both form and content, and the Company shall comply with all of
DB's editorial instructions respecting the Research Material. Without
limiting the foregoing, in the event that DB or any DB Research Affiliate
issues and transmits to the Company any retraction, correction or
alteration of any Research Material, the Company shall promptly display
such retraction, correction or alteration on the Licensed DB Pages in such
manner as DB or such DB Research Affiliate shall reasonably request. DB
also reserves the right, upon written notice to the Company, to require the
Company to remove immediately any Research Material or a category of
Research Material from the NDB Sites to the extent that DB or any DB
Research Affiliate takes comparable steps, in comparable circumstances, to
cease Distributing or making such Research Material available generally.
(k) Display of Research Materials
(i) Format. The Company shall post the Research Materials on the NDB Sites
exclusively (A) in Adobe Acrobat (".pdf") format; (B) upon the prior
written consent of DB, which shall not be unreasonably withheld, in another
equivalent "read-only" format; or (C) upon the prior written consent of DB,
which shall be at DB's sole discretion, in any other format in which DB is
at that time displaying the Research Material in comparable circumstances.
(ii)Inlining Prohibited. The Company shall not Inline, but may Frame, any
Research Materials. If the Company becomes aware that a third party is
Inlining or Framing the Research Material, the Company will cooperate with
DB to cause such third party to cease and desist from such Inlining or
Framing.
(iii)Co-Branding Confusion. The Company shall not display any third party's
name, logo, trademark, service mark or other identifier on an NDB Site
(including, without limitation, by Framing) in such way as to give a viewer
the impression that such third party is a publisher, distributor, author,
owner or sponsor of the Research Materials or an Affiliate of DB, including
any DB Research Affiliate.
(iv) Content. The Company shall not, without DB's prior written consent, Frame
any Research Material with, or display with any Research Material or on any
Licensed DB Page, any NDB or third party content, including, without
limitation, news, research, analytics and commentary.
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(v) Advertising. The Company shall not display any advertising on any Licensed
DB Page that falsely implies that the advertiser is a publisher,
distributor, author, owner or sponsor of the Research Material or an
Affiliate of DB, including any DB Research Affiliate. DB also reserves the
right, in the exercise of its reasonable discretion and upon written notice
to the Company (setting forth in reasonable detail the reasons for such
requirement), to require the Company to remove immediately any advertising
from the Licensed DB Pages. In exercising its reasonable discretion, DB may
take into consideration, among other factors, its determination regarding
legal and compliance risks, reputational concerns and the Company's
compliance with the provisions of this Agreement. The Company shall
promptly give DB written notice confirming any such removal.
(vi) Legends.
(A) The Company shall display and shall not
remove or conceal any Legend affixed by DB
or any DB Research Affiliate to the Research
Materials. To the extent not already
present, the Company shall insert on each
Licensed DB Page that contains Research
Material or any portion thereof and in close
proximity to such Research Materials or
portion thereof the following Legend:
Copyright (Year) [Deutsche Bank]. All Rights
Reserved. "[DEUTSCHE BANK]" is a service
mark of [Deutsche Bank].
(B) In connection with any Research Material
prepared by a Person relying on the
exemption from broker-dealer registration
afforded by Rule 15a-6 of the
Exchange Act, including the so-called
"Research Interpretation" described in
Exchange Act Release No. 27017 (July 11,
1989), 43 SEC Docket 2079, (A) DBSI
shall be the U.S. broker-dealer accepting
responsibility for the content of
such Research Material; and (B) such
Research Material shall contain a Legend
to such effect to the extent required
by Rule 15a-6 and the Research
Interpretation.
(C) The Company shall add such additional
Legends relating to the Research Materials
to the Licensed DB Pages as (I) may be
required by applicable law; (II) as it may
deem necessary or appropriate in its
reasonable discretion, provided that the
Company shall give DB timely prior notice of
any such additional Legends and reasonable
opportunity to comment thereon; and (III) DB
shall require from time to time in its
reasonable discretion, upon prior written
notice to the Company.
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Section 3. DELIVERY AND ARCHIVAL RESPONSIBILITIES.
(a) Throughout the term of this Agreement, DB shall, without charge, deliver
the Research Material to the Company or a Delivery Provider in the format
described in Section 2(k)(i) above, or in such format as the Parties may
agree, concurrently with the time DB first makes the Research Material
available (i) publicly, (ii) to retail customers in the United States
(including through First Call Corporation, Multex Systems, Inc. or a
similar third party), or (iii) to any DB customer; provided that (x) the
delivery by DB of the Research Material outside of the United States or to
institutional customers, whether in the United States or otherwise, shall
not give rise to any obligation to deliver such Research Material to the
Company under this Section 3(a); (y) any delivery to the Company shall be
subject to any embargo specified by DB in its sole discretion in connection
with its publication, dissemination or distribution of the Research
Material generally; and (z) DB shall not be required to deliver Research
Material if it would cause DB to violate any Law, rule or regulation of any
Governmental Entity.
(b) DB, for the benefit of and upon request by the Company, shall, without
charge: (i) provide access to the Research Material archived for the three
years immediately preceding the date of such request but in no event prior
to January 1, 2000; and; (ii) promptly, upon such request, deliver to the
Company or Delivery Provider such archived material in such format as
contemplated by Section 2(k)(i) and (iii) maintain and make available,
promptly on request, a copy of each item of such archived material and any
other Research Material made available to the Company hereunder for a
period of three years following termination of this Agreement (in such
format as contemplated by section 2(k)(i)) for use by the Company
exclusively to satisfy any recordkeeping or related requirements to which
the Company may be subject under applicable Laws, orders, rules and
regulations and not for purposes of commercial exploitation; provided,
however, that after the termination of this Agreement, the Company may only
request copies of Research Material that was produced prior to the
termination of this Agreement and is maintained by DB pursuant to any
recordkeeping or related requirements to which it is subject or otherwise.
(c) Nothing herein shall require DB or any DB Research Affiliate to create
Research Material. Except as provided in this Agreement, DB and each DB
Research Affiliate shall have no obligation to deliver Research Material to
the Company or provide to the Company any additional information,
materials, services or support pursuant to this Agreement. In the event
that DB provides any additional information or materials to the Company,
unless DB otherwise agrees in writing, DB's obligations respecting such
additional information and materials shall be in accordance with its
obligations hereunder respecting Research Material.
(d) Neither DB nor any DB Research Affiliate shall have any obligation to
provide assistance or training to the Company with respect to the
Distribution of the Research Material on the NDB Sites.
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Section 4. REPRESENTATIONS, WARRANTIES, COVENANTS AND AGREEMENTS.
(a) DB hereby represents, warrants and covenants to the Company as follows:
(i) DB or one or more of the DB Research Affiliates, as the case may be, is the
exclusive owner of the Research Material or otherwise has obtained all
required third party consents or the right (including Intellectual Property
Rights) to permit DB to grant to the Company the license to the Research
Material and the DB IP Rights as set forth in this Agreement throughout the
term of this Agreement. The use by the Company of the Research Material and
the DB IP Rights owned by DB or the DB Research Affiliates, and to the
Knowledge of DB the DB IP Rights licensed to DB or the DB Research
Affiliates, in accordance with this Agreement will not breach, violate,
infringe or constitute misappropriation of any Intellectual Property Rights
of any other Person. DB's execution, delivery and performance of this
Agreement does not and will not give rise to any rights of a Person, other
than DB, to request, demand or claim a right to compensation or payment by
the Company with respect to the Company's license of the Research Material
and the DB IP Rights owned by DB or the DB Research Affiliates, and to the
Knowledge of DB the DB IP Rights licensed to DB or the DB Research
Affiliates, in conformity with this Agreement, and there is no actual or,
to the knowledge of DB, threat of, demand, claim, investigation or other
proceeding brought by any third party with respect to the Research Material
and the DB IP Rights based on an alleged right to compensation or violation
of any right or agreement involving DB or a DB Research Affiliate.
(ii) The Research Material will be prepared, reviewed, and Distributed by DB
and/or DBSI pursuant to this Agreement in accordance with all applicable
requirements, rules and regulations of the Securities and Exchange
Commission, any stock exchange (including the New York Stock Exchange,
Inc.) and any self-regulatory organization (including the National
Association of Securities Dealers, Inc.) having jurisdiction.
(iii)DBSI is duly licensed as a broker-dealer and in good standing with the
Securities and Exchange Commission and each of DB and/or DBSI is duly
licensed as a broker-dealer or other regulated financial institution, as
applicable, in any other jurisdiction where the conduct of its business
requires such licensing, except where the failure to have such a license
would not be reasonably likely to have a Material Adverse Effect on the
business of DB and its Subsidiaries taken as a whole. DBSI is a member firm
in good standing of the National Association of Securities Dealers, Inc. or
the New York Stock Exchange, Inc., and the Securities Industry Protection
Corporation. Each of DB and DBSI has all permits, licenses and
authorizations required by applicable regulatory authorities or
governmental entities to conduct the transactions contemplated by this
Agreement.
(iv) DB is exempt from the registration requirements of Section 15(a)(1) and
15B(a)(1) of the Exchange Act because of the exemption pursuant to Rule
15a-6 under the Exchange Act and has complied with and performed its
obligations in accordance with Rule 15a-6(a)(1)-(3) under the Exchange Act.
(v) Each DB Research Affiliate is either (A) duly licensed as a broker-dealer
and in good standing with the Securities and Exchange Commission and a
member firm in good standing of the National Association of Securities
Dealers, Inc. or the New York Stock Exchange, Inc., and the Securities
Industry Protection Corporation; or (B) with respect to the Distribution of
Research Material, exempt from the registrations of Section 15(a)(1) and
15B(a)(1) of the Exchange Act because of the exemption pursuant to Rule
15a-6 under the Exchange Act and has complied with and performed its
obligations in accordance with Rule 15a-6(a)(1)-(3) under the Exchange Act.
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<PAGE>
(vi) During the term of this Agreement, without the Company's prior consent, DB
shall not directly Distribute the Research Material to any U.S. On-Line
Discount Broker, other than the Company for purposes of reDistribution to
retail investors in the United States. The foregoing shall not prohibit or
restrict DB's existing agreements with First Call Corporation and Multex
Systems, Inc.
(b) The Company hereby represents, warrants and covenants that (i) the Company
takes full responsibility for any suitability obligations it may have in
connection with making the Research Material available, and the
Distribution of the Research Material, to individual NDB Research
Recipients; (ii) Research Material will not be made available in a
commingled format with research items prepared by any other broker-dealer;
and (iii) it shall comply with all Laws, orders, rules and regulations
applicable to its use of any of the Research Material, including, without
limitation, any such Laws, orders, rules or regulations of any Governmental
Entity (including for these purposes the NASD) having jurisdiction over the
Company's business activities.
(c) Each of the Parties, except as otherwise contemplated by this Agreement,
acknowledges and agrees that the Research Material may be made available on
a secure basis to the Company and the NDB Research Recipients (i) through
any NDB Site; or (ii) through a service provider or providers selected by
the Company at any time during the term of this Agreement and subject to
DB's consent, such consent not to be unreasonably withheld (a "Delivery
Provider").
Section 5. ADDITIONAL INTELLECTUAL PROPERTY RIGHTS.
(a) The Company hereby acknowledges and agrees that (i) as between DB and the
Company, DB or each applicable DB Research Affiliate owns or has a license
to all right, title and interest in and to the Research Material and DB IP
Rights; (ii) as between DB and the Company, the Research Material and DB IP
Rights, and the goodwill therein, constitute the valuable property of DB
and each applicable DB Research Affiliate; and (iii) except as expressly
provided herein, this Agreement transfers no title, ownership right or
Intellectual Property Rights to the Company with respect to the Research
Material or DB IP Rights. All rights with respect to the Research Material
and DB IP Rights, whether now existing or hereafter arising, that are not
expressly granted to the Company herein are reserved to DB and each
applicable DB Research Affiliate. Any goodwill generated through the
Company's use of the Research Material and DB IP Rights shall inure solely
to the benefit of DB and each applicable DB Research Affiliate. The Company
also covenants not to challenge DB's ownership of the Research Material and
the DB IP Rights licensed hereunder in any form or manner.
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<PAGE>
(b) The Company, in connection with the licensed use of the DB Marks, shall
maintain the quality control standards provided by DB to the Company in
writing from time to time that DB maintains with respect to its use of the
DB Marks generally.
(c) Except as expressly provided in this Agreement, the Company shall have no
other rights with respect to any of the Research Material as a result of
this Agreement.
(d) DB shall have the exclusive right to prosecute and maintain any
registrations of any of the DB IP Rights and to defend any claim of
infringement related thereto. The Company shall execute such documents and
provide such reasonable cooperation to DB, at DB's expense, as DB may
reasonably request in order to perfect, evidence, protect or secure such
rights and to conduct such prosecution, registration or defense.
(e) The Company shall promptly notify DB of any threat, warning or notice in
writing of any claim or action adverse to any of DB IP Rights that the
Company may receive from time to time. In the event that an NDB Research
Recipient engages in any activity that is adverse to the DB IP Rights, upon
the reasonable request of DB, the Company shall cooperate with DB in taking
action to protect DB's rights, including terminating such NDB Research
Recipient's access to the Research Material on the NDB Sites.
(f) The Company shall take no action inconsistent with the acknowledgements,
agreements and assignments set forth in this Section. In particular, the
Company shall not at any time undertake to copyright or trademark (or apply
for a copyright or trademark registration) or apply for a patent with
respect to any of the Research Material or DB IP Rights or any portion
thereof. The Company shall not at any time during the term of this
Agreement or at any time after termination or expiration of this Agreement
(i) use the Research Material or DB IP Rights in any way that may tend to
impair the validity of DB's or any DB Research Affiliate's rights therein;
or (ii) take any other action that could disparage, or jeopardize or impair
DB's or any DB Research Affiliate's rights in, the Research Material or DB
IP Rights (including the goodwill associated with the DB Marks) or their
validity or enforceability.
Section 6. CONFIDENTIALITY.
(a) The Company acknowledges that it may, during the term of this Agreement
acquire information, other than the Research Material, which is proprietary
or confidential to DB or its clients or customers or to a third party to
whom DB has an obligation of confidentiality (collectively, the "DB
Proprietary Information"). The DB Proprietary Information does not include
information which (i) is or becomes generally available to the public other
than as a result of a prohibited disclosure by the Company or the Company's
Representatives; (ii) was available to the Company on a nonconfidential
basis prior to its disclosure by DB or DB's Representatives; (iii) becomes
available to the Company on a nonconfidential basis from a Person other
than DB or DB's Representatives who is not otherwise bound by a
confidentiality agreement with DB or any Representative of DB, or is
otherwise not under an obligation to DB or any Representative of DB not to
transmit the information to the Company; or (iv) is independently developed
by the Company. Except as required by law, the Company agrees to hold and
to cause its employees and agents to hold the DB Proprietary Information in
strict confidence, and not to copy for use by Persons other than the
Company, reproduce, sell, assign, license, market, transfer or otherwise
dispose of the DB Proprietary Information or to give or disclose the DB
Proprietary Information to third parties. In the event that the Company is
requested pursuant to, or required by, applicable Law, regulation or legal
process or is requested by any court, regulatory agency or any
self-regulatory authority to disclose any DB Proprietary Information or any
other information concerning DB, the Company agrees to provide DB with
prompt notice of such request or requirement in order to enable DB to seek
an appropriate protective order or other remedy, to consult with the
Company with respect to DB taking steps to resist or narrow the scope of
such request or legal process, or to waive compliance, in whole or in part,
with the terms of this provision. In any such event, the Company will use
its commercially reasonable efforts to obtain from the party to whom
disclosure is made written assurances that all DB Proprietary Information
and other information that is so disclosed will be accorded confidential
treatment.
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<PAGE>
(b) DB acknowledges that it may, during the term of this Agreement acquire
information which is proprietary or confidential to the Company or its
clients or customers or to a third party to whom the Company has an
obligation of confidentiality (collectively, the "Company Proprietary
Information"). The Company Proprietary Information does not include
information which (i) is or becomes generally available to the public other
than as a result of a prohibited disclosure by DB or DB's Representatives;
(ii) was available to DB on a nonconfidential basis prior to its disclosure
by the Company or the Company's Representatives; (iii) becomes available to
DB on a nonconfidential basis from a Person other than the Company or the
Company's Representatives who is not otherwise bound by a confidentiality
agreement with the Company or any Representative of the Company, or is
otherwise not under an obligation to the Company or any Representative of
the Company not to transmit the information to; or (iv) is independently
developed by DB. Except as required by law, DB agrees to hold and to cause
its employees and agents to hold the Company Proprietary Information in
strict confidence, and not to copy for use by Persons other than DB,
reproduce, sell, assign, license, market, transfer or otherwise dispose of
the Company Proprietary Information or to give or disclose the Company
Proprietary Information to third parties. In the event that DB is requested
pursuant to, or required by, applicable Law, regulation or legal process or
is requested by any court, regulatory agency or any self-regulatory
authority to disclose any Company Proprietary Information or any other
information concerning DB, DB agrees to provide the Company with prompt
notice of such request or requirement in order to enable the Company to
seek an appropriate protective order or other remedy, to consult with DB
with respect to the Company taking steps to resist or narrow the scope of
such request or legal process, or to waive compliance, in whole or in part,
with the terms of this provision. In any such event, DB will use its
commercially reasonable efforts to obtain from the party to whom disclosure
is made written assurances that all Company Proprietary Information and
other information that is so disclosed will be accorded confidential
treatment.
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Section 7. PUBLICITY.
DB acknowledges and agrees that the Company may Distribute the Research
Material as contemplated by this Agreement. Each of the Parties agrees
that the other shall be entitled to advertise and market the existence
and the availability of the Research Material to the NDB Research
Recipients and others, but not the terms of this Agreement; provided,
however, that (a) each of the Parties shall have had reasonable
opportunity to review any advertising or marketing materials prepared
by the other Party prior to use of such advertisement or marketing
initiative; and (b) each Party shall make any changes to such materials
as may reasonably be requested by the other Party. DB and the Company
agree not to disclose this Agreement in any manner nor make copies
available to any third party without the prior written consent of the
other Party hereto, except as required by law. In the event that either
Party is requested pursuant to, or required by, applicable law or
regulation or by legal process to disclose this Agreement it shall
promptly inform the other Party of such request or requirement in order
to enable the Parties to jointly seek an appropriate protective order
or other remedy, or to resist or narrow the scope of such request or
legal process. In any such event, each Party agrees to use its
commercially reasonable efforts to obtain from the third party to whom
disclosure is made written assurances that this Agreement will be
accorded confidential treatment.
Section 8. AUDIT RIGHTS; RECORD-KEEPING.
(a) DB shall have the right to conduct, from time to time, reasonable audits of
the Company for the purpose of confirming the compliance of the Company
with the terms of Section 2. To facilitate such audits, the Company shall,
on DB's reasonable request, give DB free access during normal business
hours to the NDB Sites, including to all Licensed DB Pages. In the event
that DB reasonably determines that the Company has breached the terms of
Section 2, in addition to the other rights granted to DB under this
Agreement, DB shall have the right to reasonably limit the categories of
the Research Materials provided to the Company, by providing written notice
to the Company (setting forth in reasonable detail the reasons for such
termination or limitation); provided, however, that, (i) the Company shall
have a reasonable opportunity to cure any breach that was not intentional
and that is capable of being cured, and (ii) upon request by the Company,
DB shall in good faith discuss with the Company the reasons for such
termination and, if possible, any alternatives thereto. In exercising its
right to limit the license grant, DB may take into consideration, among
other factors, its determination regarding legal and compliance risks,
reputational concerns and the Company's compliance with the provisions of
this Agreement.
(b) (i) The Company shall maintain a log of the total number of
times the Licensed DB Pages are accessed by users of the NDB
Sites. Upon DB's request, the Company shall provide a complete
copy of such log to DB at no additional cost to DB.
(ii) The Company shall maintain a log of the names of all NDB
Research Recipients as well as their user identification names
or numbers and passwords.
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(c) DB shall at all times have the right, in its reasonable business discretion
to direct the Company to exclude any particular NDB Research Recipient from
accessing the Research Materials. In exercising such right, DB may take
into consideration factors affected by such NDB Research Recipient's access
to the Research Materials, including legal and compliance risks,
reputational concerns and such NDB Research Recipient's compliance with the
provisions of the relevant Click Agreement. For purposes of this Section,
"reputational concerns" means that the particular NDB Research Recipient's
access to the Research Material would be reasonably likely to impugn or
besmirch the reputation and value of DB and/or the DB Marks.
Section 9. LIMITATION OF WARRANTIES AND LIABILITIES.
(a) EXCEPT AS OTHERWISE PROVIDED IN THIS AGREEMENT, THE RESEARCH MATERIAL IS
PROVIDED TO THE COMPANY HEREUNDER STRICTLY ON AN "AS IS" BASIS, AND NO
WARRANTIES, EXPRESS OR IMPLIED, REPRESENTATIONS OR PROMISES HAVE BEEN MADE
OR ARE GIVEN BY DB OR ANY AFFILIATE OF DB TO THE COMPANY OR ANY OTHER
PERSON (INCLUDING ANY NDB RESEARCH RECIPIENT) REGARDING THE ACCURACY,
TIMELINESS ORIGINALITY, MERCHANTABILITY, SUITABILITY OR FITNESS FOR A
PARTICULAR PURPOSE OF THE RESEARCH MATERIAL OR ANY OTHER MATTER AND NO
WARRANTY IS GIVEN THAT THE RESEARCH MATERIAL WILL CONFORM TO ANY
DESCRIPTION THEREOF OR BE FREE OF DEFECTS.
(b) EXCEPT AS PROVIDED IN SECTION 13 HEREOF, IN NO EVENT SHALL EITHER PARTY,
THEIR RESPECTIVE AFFILIATES OR THEIR RESPECTIVE REPRESENTATIVES HAVE ANY
LIABILITY TO THE OTHER PARTY OR ANY OTHER PERSON (INCLUDING ANY NDB
RESEARCH RECIPIENT) FOR ANY CONSEQUENTIAL, INCIDENTAL, PUNITIVE, EXEMPLARY
OR SPECIAL DAMAGES (INCLUDING LOST PROFITS AND REVENUES) ARISING OUT OF OR
IN ANY MANNER IN CONNECTION WITH THIS AGREEMENT, THE PERFORMANCE OR BREACH
HEREOF, THE SUBJECT MATTER HEREOF OR THE PARTIES' OR ANY OTHER PERSON'S USE
OF, OR INABILITY TO USE, THE RESEARCH MATERIAL REGARDLESS OF THE FORM OF
ACTION (INCLUDING NEGLIGENCE OR STRICT LIABILITY) AND WHETHER OR NOT THE
OTHER PARTY HAS BEEN ADVISED OF, OR OTHERWISE MIGHT HAVE ANTICIPATED THE
POSSIBILITY OF, SUCH DAMAGES. SUBJECT TO SECTIONS 4(a) AND 13 HEREOF, BY
USING THE RESEARCH MATERIAL, THE COMPANY AGREES TO ASSUME THE ENTIRE RISK
OF SUCH USE.
Section 10. DB'S PROPRIETARY NOTICES.
DB shall have the right to require that the Research Material released and
Distributed to the NDB Research Recipients or as otherwise contemplated by
this Agreement bear the DB Marks inserted therein, and made a part thereof
by DB or any DB Research Affiliate, as the case may be.
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Section 11. THE COMPANY AS A PRIVILEGED DB RESEARCH CUSTOMER.
With regard to the Company's license of the Research Material under
this Agreement and such third-party access to the Research Material as
is permitted by this Agreement with respect to certain third parties
other than the Company ("Permitted Purchasers"), DB agrees to treat the
Company as a privileged customer with respect to the Distribution of
the Research Material. DB represents that all of the indemnities
provided to the Company hereunder are or will be comparable to or
better than those provided by DB to Permitted Purchasers with respect
to the Distribution of the Research Material. If, during the term of
this Agreement, DB enters into an agreement with any Permitted
Purchaser with respect to the Distribution of the Research Material
with any indemnities more favorable to such Permitted Purchaser in the
aggregate, then DB shall so notify the Company and promptly take all
steps necessary to effect an appropriate amendment to this Agreement.
Section 12. ASSIGNMENT.
This Agreement may be assigned by either Party to an Affiliate, as part
of the sale of its securities brokerage business or, in the case of DB,
the sale of GCI, or pursuant to any merger, consolidation or other
reorganization, without the other Party's consent, upon prior written
notice to the other Party. Except as provided in the preceding
sentence, neither Party shall assign this Agreement without the other
Party's prior written consent, which consent shall not be unreasonably
withheld. An assignee of either Party, if authorized hereunder, shall
have all of the rights and obligations of the assigning Party set forth
in this Agreement. Any purported assignment in violation of this
Section 12 shall be null and void for all purposes.
Section 13. INDEMNITY.
(a) DB hereby agrees to indemnify, defend and hold harmless the Company and
each of its employees, officers, directors, agents and Affiliates (and each
of their employees, officers, directors, agents and Affiliates) from and
against any and all losses, claims, damages or liabilities (including
without limitation reasonable legal fees and other expenses) (collectively,
"Losses") arising out of or related to any claim, demand, action, suit or
proceeding of any nature (collectively, a "Proceeding") asserted by any
third party which, if true, would constitute (i) an infringement, breach,
violation or misappropriation of any copyright, patent, trademark (or other
indication of origin), know how or trade secret of such third party based
on the use of the Research Material; (ii) libel related to the contents of
the Research Material; and (iii) a breach, or alleged breach, of any
representation or warranty set forth in Section 4(a)(ii), except to the
extent any such Proceeding results from any gross negligence or willful
misconduct on the part of the Company or any modification by the Company of
the Research Material.
(b) The Company hereby agrees to indemnify, defend and hold harmless DB and
each of its employees, officers, directors, agents and Affiliates (and each
of their employees, officers, directors, agents and Affiliates) from and
against any and all Losses arising out of or related to any Proceeding
asserted by any third party based on (i) any inaccurate, untimely or
incomplete transmission of Research Material caused by the Company or any
Delivery Provider, and (ii) any use by the Company or any Delivery Provider
of Research Material in a manner not authorized under this Agreement,
except to the extent any such Proceeding results from a Loss subject to
Section 13(a).
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(c) In the event that a Proceeding is asserted or commenced against a Person
for which such Person is entitled to indemnification under this Agreement,
the indemnified Person ("Indemnified Party") shall give the indemnifying
Person ("Indemnifying Party") prompt written notice of such Proceeding. The
failure of the Indemnified Party to give such notice shall not relieve the
Indemnifying Party of its obligations under this Section 13 except to the
extent that the Indemnifying Party is actually and materially prejudiced by
the failure to give such notice. In case any such Proceeding shall be
brought against the Indemnified Party and it shall notify the Indemnifying
Party thereof, the Indemnifying Party shall be entitled to participate in,
and, to the extent that it shall wish, to assume the defense thereof,
including appeals, with counsel reasonably satisfactory to the Indemnified
Party, and after notice from the Indemnifying Party to the Indemnified
Party of its election so to assume the defense thereof, the Indemnifying
Party shall not be liable to such Indemnified Party for any legal or other
expenses subsequently incurred by the Indemnified Party after the date such
notice is given to the Indemnified Party in connection with the defense
thereof. The Indemnified Party shall have the right, but not the
obligation, to participate at its own cost and expense in such defense by
counsel of its own choice. In the event that the Indemnifying Party and the
Indemnified Party are named parties in or are subject to such Proceeding
and either such party determines with the advice of counsel that there may
be one or more legal defenses available to it that are different from or
additional to those available to the other party or that a material
conflict of interest between such parties may exist in respect of such
Proceeding, the Indemnified Party may retain the defense of such Proceeding
on its own behalf and in such case the Indemnifying Party shall be required
to pay any legal or other expenses, including, without limitation,
reasonable attorneys' fees and disbursements, incurred by the Indemnified
Party in such defense. If the Indemnifying Party shall assume the defense
of any such Proceeding, the Indemnified Party shall cooperate with it and
the Indemnifying Party shall not, without the consent of the Indemnified
Party consent, settle, compromise, consent to the entry of any judgment in
or otherwise seek to terminate such Proceeding (whether or not any
Indemnified Party is a party thereto) unless such settlement, compromise,
consent or termination includes a release (i) of the Indemnified Party from
any liabilities arising out of such Proceeding, (ii) which does not
constitute an admission of wrongdoing by the Indemnified Party, (iii) which
does not restrict in any manner the activities of the Indemnified Party and
(iv) which if it provides for the payment of money such payment is
satisfied in full by the Indemnifying Party. No Indemnified Party seeking
indemnification, reimbursement or contribution under this Agreement will,
without the Indemnifying Party's prior written consent, settle, compromise,
consent to the entry of any judgment in or otherwise seek to terminate any
Proceeding referred to in Paragraph (a) except as permitted in the
following sentence. Provided the proper notice has been duly given, if the
Indemnifying Party shall decide not to assume the defense of any
Proceeding, the Indemnified Party may respond to, contest and defend
against such Proceeding and make in good faith any compromise or settlement
with respect thereto , subject to the Indemnifying Party's written consent
in the event that the proposed compromise or settlement materially affects
the Indemnifying Party, which consent shall not be unreasonably withheld or
delayed, and recover any reasonable Losses incurred as a result of such
response, contest or defense of such Proceeding or the settlement or
compromise thereof from the Indemnifying Party.
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(d) If the indemnification provided for in Section 13(a) is judicially
determined to be unavailable to an Indemnified Party in respect of any
Losses indemnified hereunder, in lieu of indemnifying such Indemnified
Party hereunder, the Indemnifying Party shall contribute to the amount paid
or payable by such Indemnified Party as a result of such Losses in such
proportion as is appropriate to reflect the relative fault of the
Indemnified Party and the Indemnifying Party, as well as any other relevant
equitable considerations.
Section 14. NOTICE.
All notices required or permitted to be given by one Party to the other
under this Agreement shall be sufficient if sent by e-mail, fax,
overnight express delivery or certified mail, return receipt requested,
to such Party at the address set forth below or to such other address
as the Parties entitled to receive the notice has designated by notice
hereunder to the other Party.
If to DB, to:
Deutsche Bank AG, New York Branch
31 West 52nd Street
New York, NY 10019
Attention: General Counsel
Tel. No.: (212) 469-8200
If to the Company, to:
National Discount Brokers Corporation
90 Hudson Street
Jersey City, NJ 07302
Attention: Executive Vice President &
General Counsel
Tel. No.: 201-209-7050
Fax No.: 201-209-6914
E-mail: [email protected]
Section 15. TERMINATION.
(a) Either Party may terminate this Agreement in its sole discretion by
providing written notice to the other Party (i) upon the occurrence of a
For Cause Termination Event with respect to the other Party; or (ii) upon
the giving of a notice of termination, by any party, of any of the other
Joint Venture Agreements. Notwithstanding any termination effected pursuant
to this Section 15, the rights and obligations set forth in Sections 5, 6,
7, 9, 11, 13, 14, 15, 16 and 17 shall survive any termination of this
Agreement, and no such termination shall relieve any Party of liability it
may have incurred hereunder prior to such termination.
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(b) Upon termination or expiration of this Agreement for any reason, all rights
of the Company with respect to the Research Material licensed hereunder
shall terminate and the Company shall delete or destroy all Research
Material in the Company's possession, custody or control and provide
written confirmation of such deletion or destruction to DB within 30 days
of such termination or expiration and the Company shall not use such
Research Material for any purpose. The rights of each Party under this
Section 15(b) are without prejudice to any other rights of the Parties
pursuant to this Agreement and shall not be affected by any dispute between
the Parties with respect to this Agreement or any other matter.
(c) For purposes of this Agreement, "For Cause Termination Event" means, with
respect to any Party, (i) a material breach by such Party or any of its
Affiliates of any covenant or warranty contained in this Agreement, which
breach shall not have been cured within 90 days following delivery of a
notice in writing by the non-breaching Party to the breaching Party that
specifies in detail the matter constituting such breach and such action as
may be reasonably required to effect its cure; (ii) an Insolvency Event of
the non-terminating Party; and (iii) a Change in Control of the
non-terminating Party.
Section 16. REMEDIES.
Each of the Parties acknowledges and agrees that the benefits to be
obtained by the other Party from this Agreement are unique, and each
Party acknowledges and agrees that the other Party shall be entitled to
seek all available remedies in the event of any breach by it of any
representation, warranty or agreement contained herein, including
specific performance and/or injunctive remedies. In addition, in the
event that any Party breaches any provision of this Agreement, the
other Party may exercise all remedies available under this Agreement or
applicable law.
Section 17. MISCELLANEOUS.
(a) Nothing contained herein shall make the Parties partners or render any of
them liable to make payments not expressly identified or referred to in
this Agreement.
(b) The Parties hereby agree that this Agreement, and the respective rights,
duties and obligations of the parties hereunder, shall be governed by and
construed in accordance with the Laws of the State of New York, without
giving effect to principles of conflicts of Laws thereunder. To the fullest
extent permitted by applicable Law, each of the Parties hereby (i)
irrevocably consents and agrees that any legal or equitable action or
proceeding arising under or in connection with this Agreement shall be
brought exclusively in the state and federal courts having jurisdiction in
New York County, New York; and (ii) by execution and delivery of this
Agreement, irrevocably submits to and accepts, with respect to any such
action or proceeding, for itself and in respect of its properties and
assets, for purposes of this Agreement, the jurisdiction of the aforesaid
courts, and irrevocably waives any objection to venue in such courts.
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(c) Each of the Parties hereby expressly waives its rights to a jury trial of
any claim or cause of action based upon or arising out of this Agreement.
Each of the Parties also waives any bond or surety of security upon such
bond which might but for this waiver, be required of any Party. The scope
of this waiver is intended to be all encompassing of any and all disputes
that may be filed in any court and that relate to the subject matter of
this Agreement, including, without limitation, contract claims, tort
claims, breach of duty claims, and all other common law and statutory
claims. The Parties further warrant and represent that each of them has
reviewed this waiver with its legal counsel, and that each voluntarily
waives its jury trial rights following consultation with legal counsel.
This waiver is irrevocable and may only be modified by written amendment to
this Agreement. In the event of litigation, this Agreement may be filed as
a written consent to a trial (without a jury) by the court.
(d) If any provision of this Agreement is held invalid or otherwise
unenforceable, the enforceability of the remaining provisions shall not be
impaired thereby.
(e) The failure by any party to exercise any right provided for herein shall
not be deemed a waiver of any right hereunder.
(f) Each Party agrees to bear its own expenses in connection with this
Agreement and the transactions contemplated hereby.
(g) This Agreement sets forth the entire understanding of the Parties as to its
subject matter and may not be modified except in a writing executed by both
Parties. In particular, this Agreement supersedes the letter of intent,
dated March 27, 2000, between NDB and Deutsche Bank Americas Holding
Corporation, with respect to the subject matter hereof, among other
matters.
(h) No waiver by either Party of a breach of any provision of this Agreement by
the other party shall operate or be construed as a waiver of any subsequent
breach.
(i) Except with respect to any obligations to make payments when due, neither
Party shall be liable to the other Party hereto for any failure or delay in
the performance of its obligations under this Agreement to the extent such
failure or delay is caused by a Force Majeure Event (as defined below),
provided, however, that this Agreement may be terminated by the Party whose
performance is not affected by the Force Majeure Event if the Force Majeure
Event continues for a period of more than thirty (30) days. The Party whose
performance is affected by a Force Majeure Event shall use reasonable
efforts to: (i) avoid, remove, or minimize the impact of such event on its
performance and other obligations; and (ii) recommence performance of its
obligations at the required level as soon as possible. If either Party is,
or anticipates it is likely to be, delayed or prevented from performing its
obligations in connection with a Force Majeure Event, such Party shall
promptly notify the other Party by telephone with confirmation in writing
within two (2) business days after the inception of such delay. As used
herein, the term "Force Majeure Event" refers to fire, flood, earthquake,
the elements, other casualties, riot, civil disorder, rebellion, war,
revolution, states of belligerency or acts of the public enemy, labor
disputes, or any other cause beyond the reasonable control of the Party
whose performance is delayed or otherwise affected by such event.
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(j) This Agreement may be executed in multiple counterparts, each of which
shall constitute an original but all of which shall constitute but one and
the same instrument. One or more counterparts of this Agreement may be
delivered via telecopier, with the intention that they shall have the same
effect as an original counterpart hereof.
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IN WITNESS WHEREOF, the Parties have executed this agreement
on the date first set forth above.
DEUTSCHE BANK AG
By: /s/ Thomas A. Curtis
Name: Thomas A. Curtis
Title: Attorney-In-Fact
NATIONAL DISCOUNT BROKERS CORPORATION
By: /s/ Dennis Marino
Name: Dennis Marino
Title: Chairman
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EXHIBIT 10.28
CONFORMED COPY
European Joint Venture ("EJV")
Summary of Principal Terms
This memorandum dated as of June 15, 2000 between Deutsche Bank AG
("DB") and National Discount Brokers Group, Inc. ("NDB") (each, a "Party" and
together, the "Parties") sets forth certain terms, conditions and understandings
upon which the Parties intend to use their good faith efforts to negotiate and
enter into definitive agreements and other related documents as set forth below.
Such terms, conditions and understandings are not exhaustive and shall be
supplemented in the definitive agreements by such other terms, conditions and
understandings as are customary in joint venture and related transactions of the
type contemplated and as shall be mutually agreed by the Parties. Terms used but
not defined herein have the meanings assigned in the Stockholder Agreement
between DB and NDB, dated as of the date hereof.
Object of the EJV: Except as indicated below, the EJV will be the exclusive
vehicle whereby DB's Global Corporates and Institutions Division as it is
currently constituted or may be expanded and any successor division
(together, "GCI"), on the one hand, and NDB and its controlled Affiliates,
on the other hand, provide On-Line Discount Brokerage for Equity Securities
to Retail Investors within the Territory. Each Party may, in its
discretion, additionally offer for distribution through the EJV (i) On-Line
Discount Brokerage for Other Products; and (ii) On-Line Incidental
Services, in each case which the Party currently offers to, or may
subsequently develop for, Retail Investors within the Territory, subject to
regulatory requirements, prior commitments to third parties and internal
strategic and resource allocation priorities, and on such terms as such
Party and the EJV may mutually agree.
NDB acknowledges that DB currently offers and may in the future offer On-
Line Discount Brokerage for Equity Securities to Retail Investors in the
Territory, outside of GCI, including without limitation through Brokerage
24, DBNet 24 and DB's branches in the Territory (collectively, the "Non-GCI
On-Line Businesses"). DB may in the future centralize ownership of the
various Non-GCI On-Line Businesses in one or more holding companies, but
shall have no obligation to do so. If DB creates one or more such holding
companies, it may, but shall not be obligated to, offer the EJV the
opportunity to acquire an equity interest in one or more of such holding
companies in exchange for the contribution of the EJV's business and assets
to such holding company. The amount of such equity interest will be based
on relative fair market values at the time of contribution.
On-Line Discount Brokerage: The execution of securities trades for customers by
an entity that (i) does not employ account executives or registered
representatives who (A) are assigned to, and responsible for maintaining
relationships with, customers for the purpose of providing advised
brokerage and trade execution services (whether provided in person or
electronically and whether general or trade-specific) or (B) are
compensated with a portion of the commissions earned for any trade
execution services performed for such customers, (ii) offers its customers
the ability to execute securities trades directly through computerized
on-line or other electronic or wireless execution systems, including,
without limitation, the Internet and IVR, without the direct assistance or
recommendation of any account executive or registered representative, and
(iii) generally charges its customers a lower cost for its services than is
customarily charged in the relevant market for brokerage services by
brokerage firms or banks offering traditional advised brokerage taking into
account commission charges, account investment advisory fees and such other
charges and fees and minimum balance requirements. On-Line Discount
Brokerage does not include the provision of On-Line Incidental Services.
<PAGE>
On-Line Incidental Services: On-line services, other than On-Line Discount
Brokerage, including without limitation the preparation and distribution of
research or other commentary, the provision of private banking or
commercial banking services, margin lending, custody, investment advisory
management or supervisory services, including through financial or other
models developed internally or by third parties, and customer message
boards or discussion forums, in each case whether with respect to Equity
Securities or Other Products.
Territory: Austria, Belgium, Denmark, Finland, France, Germany, Greece, Iceland,
Ireland, Italy, Liechtenstein, Luxembourg, Monaco, the Netherlands, Norway,
Portugal, Spain, Sweden, Switzerland and the United Kingdom (the
"Territory").
Equity Securities: Capital stock of European and U.S. issuers, including shares
of exchange-listed, closed end mutual funds holding such capital stock, but
not including options on or warrants to purchase equity securities of such
issuers or securities exchangeable for or convertible into equity
securities of such issuers.
OtherProducts: All securities and instruments, such as options, warrants, fixed
income securities, convertibles, foreign exchange, commodity options and
commodity futures, and other derivatives, other than Equity Securities.
Retail Investors: Natural persons, including without limitation any natural
persons who are the primary beneficiaries of services organized by any
institution primarily for their benefit (e.g, NDB's Netlink program).
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Initial Business Plan: Prior to the closing of the EJV, the Parties will adopt
an Initial Business Plan (the "Initial Business Plan") describing the EJV's
projected funding needs and operations during the period through December
31, 2004.
LegalStructure: To be determined in consultation with tax and other counsel,
but the structure shall, to the extent possible, permit treatment of the
EJV as a partnership for U.S. tax purposes.
Ownership: The EJV will be conducted through a separate legal entity in which
voting control and economic interests are both owned directly or indirectly
75% by DB and 25% by NDB or a direct or indirect wholly-owned subsidiary of
NDB.
The Parties will have preemptive rights in respect of all issuances by the EJV
of stock or other capital securities after the initial issuance, in
proportion to their then existing ownership interests.
Tax Matters: To be determined in consultation with tax counsel; provided that
the entity shall to the extent possible be treated as a partnership for
U.S. tax purposes.
Global Strategic Oversight Committee: DB and NDB will form a joint committee
(the "Global Strategic Oversight Committee") to consider and discuss the
overall strategic direction and coordination of the EJV, the contemplated
worldwide joint venture and any other ventures that DB and NDB might
undertake from time to time. The Global Strategic Oversight Committee will
have no formal constitution or formal authority to direct the operations of
the EJV or any other venture of the Parties. The membership of the Global
Strategic Oversight Committee will be shared equally by representatives of
DB and NDB.
Boardof Directors: The overall management and control of the EJV will be vested
in its board of directors (the "Board"). The decisions of the Board shall
be binding on the EJV.
Membership: 8 members, each member having one vote.
Appointment: DB appoints six members; NDB appoints two members. Appointment
initiated by written notice from one Party to the other.
Removal: Each Party may remove or change its representatives on the Board at any
time and from time to time by written notice.
Voting Requirements: Board decisions will be by majority vote of the
participating directors, except as provided under "Veto Rights" below. The
Board may also act in writing as permitted by applicable law so long as
both parties have an opportunity to consent.
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Veto Rights: Board resolutions relating to the following will require, in order
to be adopted, the affirmative vote of at least one representative of each
Party: (i) any amendment to the basic joint venture and other constituent
documents or the Initial Business Plan that would adversely affect a
Party's rights or obligations (except to the extent any such amendment is
necessary to effect a capital increase as provided under " Initial Capital
Contributions" or "Additional Capital Contributions" below) ; (ii) the
entry into or material amendment or termination of any transaction with a
Party or its affiliate that is not in the ordinary course of the EJV's
business, at arm's length and on commercially reasonable terms; (iii) the
issuance of any equity securities, or of rights to acquire equity
securities, of the EJV to a third party; (iv) a change in the tax status of
the EJV that is adverse to a Party; (v) any proposal by the EJV to engage
in any line of business other than On-Line Discount Brokerage or On-Line
Incidental Services; and (vi) any repurchase or redemption of any capital
interest of the EJV other than on a pro rata basis.
Quorum: Majority of members of the entire Board, who may be present in person or
over an open phone line but including at least one representative of each
Party, except where a Party has missed more than two consecutive proposed
meetings immediately prior thereto.
Special Meetings: Chairman or any two directors can call a special meeting by
not less than five business days' notice delivered to all directors.
Appointment of Chairman: Chairman nominated by the EJV Board members and
selection approved by a majority of the EJV Board.
Powers and Duties of the Chairman: The Chairman will consult regularly with the
Global Strategic Oversight Committee and monitor the activities of the CEO
to ensure the business of the EJV is conducted in accordance with the
policies set by the Board.
Appointment and Removal of CEO: CEO to be nominated by DB and subject to
confirmation or removal by the affirmative vote of a majority of the Board.
Powers and Duties of the CEO: The powers and duties of the CEO will be as
determined by the Board from time to time.
Initial Capital Contributions: DB and NDB will commit an initial amount of cash
to be agreed between the Parties, pro rata in accordance with their
respective ownership interests in the EJV to be used as the initial
regulatory and working capital by the EJV.
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Additional Capital Contributions: In addition, the Parties shall make additional
capital and other contributions to the EJV in the aggregate amounts and at
such stages as provided in the Initial Business Plan and to be made by the
Parties pro rata in accordance with their respective ownership interests in
the EJV.
Except as provided in the preceding paragraph, a Party shall not be
obligated to provide additional funding to the EJV. If the Board of the EJV
concludes that additional equity financing is reasonably advisable or
necessary for the EJV's growth and operations and NDB does not wish to
contribute its pro rata share of such equity financing, DB shall have the
right, but no obligation, to provide all (or a disproportionate share) of
such equity financing in the form of common stock, preferred stock and/or
other securities that provide DB with an appropriate and customary equity
return for the investment in question, all as requested by the Board of the
EJV. If the EJV's Board concludes that common stock would be the most
appropriate form of such additional equity financing and NDB does not
contribute its pro rata share of such financing, additional shares of
common stock will be issued to DB and NDB's equity interest will be diluted
on the basis of the EJV's Fair Value (as defined below) at the time of
issuance of such additional shares. NDB's representatives on the Board
shall have no veto right regarding any amendment of the EJV's constituent
documents needed to issue such common stock, preferred stock and/or other
securities to DB as provided above.
Neither NDB, DB nor their respective Affiliates shall have any obligation
to provide any credit or other financing to the EJV, and any such extension
of credit or other financing shall be in each Party's sole discretion and
at arm's length.
Affiliate Transactions: DB and NDB may make available to the EJV such products
and services as the EJV reasonably requires and DB and NDB are in a
position to supply, all on such terms as may be mutually agreed. The EJV
will deal with DB and NDB on an arm's-length basis. All products and
services to be supplied by either Party will be documented through
appropriate written service or other agreements.
Services Agreement: Initially and until such date as the Board determines, DB
will provide administrative support services (such as legal, human
resources, tax, payroll, controlling and compliance services) to the EJV
pursuant to an administrative services agreement (the "Services
Agreement"), in consideration for which the EJV will pay to DB a service
fee to be negotiated on an arm's-length basis.
DB Research: DB will enter into a non-exclusive agreement with the EJV to
provide the EJV, on terms to be determined, with research prepared by DB
for distribution to Retail Investors in the Territory.
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Intellectual Property: Each of the Parties owns or has rights to use certain
confidential and proprietary know-how and trade secrets, computer software,
source code, designs, algorithms, specifications, formulas, plans, models,
data, technical information, processes, practices, systems and similar
intellectual and proprietary property (collectively, the "Intellectual
Property") that will be required or useful for the operation of the EJV.
With respect to any Intellectual Property owned by a Party, such Party will
enter into a non-exclusive, non-transferable license with the EJV, for so
long as the EJV continues with such Party as an equityholder, to use such
Intellectual Property for the purpose of providing On-Line Discount
Brokerage and On-Line Incidental Services in the Territory. With respect to
any Intellectual Property licensed by a Party from third parties, such
Party will use commercially reasonable efforts to negotiate new licenses on
commercially reasonable terms at the expense of the EJV to permit the EJV
to use such Intellectual Property. Each Party will make available to the
EJV a reasonable number of qualified personnel at the expense of the EJV
for a reasonable period of time to effect the transfer of such Party's
Intellectual Property, all on terms to be mutually agreed between the Party
concerned and the EJV.
Upon termination of the EJV, the above licenses of Intellectual Property
will automatically continue as perpetual, non-exclusive, non-transferable
licenses to use such Intellectual Property for the purpose of providing
On-Line Discount Brokerage and On-Line Incidental Services in the
Territory.
Transfer Restrictions and Right of First Refusal: Until the first anniversary of
the execution of a definitive agreement relating to the EJV, no Party will
have the right to transfer any ownership interest in the EJV, other than to
a wholly-owned affiliate of such Party, without the prior written approval
of the other Party. Thereafter, all proposed transfers by any Party, other
than to a wholly-owned affiliate, will be subject to a right of first
refusal on the same terms by the other Party.
Transferee's Rights and Obligations: A third party that acquires an interest in
the EJV in a permitted transfer shall assume the obligations and, unless
otherwise agreed by the transferee, acquire the rights of the transferring
party with respect to the interest that it acquires.
Tag Along Rights: Upon any proposed sale by DB of any of its interest in the
EJV as to which NDB does not elect to exercise its right of first refusal,
NDB shall be entitled to sell a pro rata share of its interest to the
purchaser on the same terms.
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Term and Termination: The EJV will continue until terminated as described below.
The EJV may be terminated, at the option of either Party, upon written
notice to the other Party given (i) at any time after the second
anniversary of the execution of a definitive agreement relating to the EJV;
(ii) upon a Change in Control of the other Party; (iii) upon the material
failure of the other Party to perform or observe any covenant or agreement
relating to the EJV, which failure is continuing for a period of 90 days
after notice thereof has been given to the defaulting Party by the
terminating Party; (iv) upon an Insolvency Event (as defined in the U.S.
Underwriting Agreement) of the other Party; (v) upon the termination of any
of the Worldwide Joint Venture, the U.S. Research Venture or the U.S.
Underwriting Venture, or (vi) except for a contribution to a holding
company for Non-GCI On-Line Businesses as contemplated under "Object of the
EJV" above , any merger, consolidation, or sale of substantially all the
assets of the EJV. Notice of termination shall become effective 30 days
following the date of such notice. Any termination of the EJV pursuant to
clause (ii), (iii) or (iv) shall constitute termination "for cause".
If the EJV is terminated, then DB will have the right to purchase NDB's
interest in the EJV, and NDB will have the right to require DB to purchase
NDB's interest in the EJV, in each case for a purchase price equal to the
greater of (i) NDB's proportionate share of the Fair Value of the business
of the EJV as a going concern and (ii) NDB's cash capital contribution to
the equity of the EJV; provided, however, that clause (ii) shall apply only
if (1) such termination occurs on or prior to the second anniversary of the
execution of the definitive agreement regarding the EJV and (2) either (a)
DB terminates the EJV pursuant to clauses (ii) or (v) above or (b) NDB
terminates the EJV pursuant clause (iii) above.
"Fair Value" means, with respect to the business of the EJV (i) a valuation
made by the unanimous determination of the Board; or (ii) failing such
determination of the Board within the 30-day period following notice of
exercise of the above rights by DB or NDB, the valuation determined by a
leading international investment bank jointly selected by the Parties
within 15 days of the end of such 30-day period (or, failing agreement on
an investment bank, selected by the ICC), as follows: immediately upon
designation of such investment bank, each Party shall notify such
investment bank and each other in writing of its estimate for Fair Value.
Such investment bank shall be instructed to select one of the two proposed
estimates of Fair Value (and no other amount) within 30 days of
appointment. "Fair Value" shall be the estimate so selected by such
investment bank and shall be final and binding on the Parties. The fees and
expenses of the investment bank shall be paid by the Party whose estimate
was not selected.
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Non-Competition: Except as expressly agreed by the Parties, DB agrees that GCI
will not, and NDB agrees that it and its subsidiaries will not, offer or
seek to offer any On-Line Discount Brokerage for Equity Securities to
Retail Investors within the Territory, other than through the EJV; provided
that this restriction shall not apply to (i) services provided in the
Territory by NDB to employees of U.S.-based companies or groups in the
context of programs for the exercise of employee stock options or employee
stock purchase plans, (ii) 'private label' or co-branded services provided
by NDB to third parties whose principal business is outside the Territory
and whose business in the Territory is merely incidental to their business
outside the Territory, (iii) any Non-GCI On-Line Business, (iv) accounts
opened by NDB in the United States for US citizens or residents, (v)
accounts opened by NDB for members of the US Armed Forces or their
dependents stationed in the Territory, pursuant to referrals by Penn Fed,
or (vi) accounts of Retail Investors located in the Territory, that are on
the books of NDB on the date of the definitive EJV agreements,, provided
that NDB makes a reasonable effort to transfer these accounts in clause
(vi) once the EJV is operational.
Confidentiality: No persons other than the Parties and their subsidiaries, which
are agreed to by the Parties, may have access to proprietary or
confidential information with respect to the EJV, including, without
limitation, customer data; market and customer research; segmentation,
attitude or usage information; strategies and specific plans for
positioning, advertising, public relations, promotions, pricing, product
design, Website design and development, including content and trading,
customer service model, training recruitment and compensation programs.
Financial Statements: The EJV will prepare and distribute to the Parties monthly
financial statements of the EJV.
Accounting: Separate books of account maintained at the EJV's head office using
U.S. GAAP.
Inspection of Records: The records and reports of the EJV will also be kept in
the English language and are open to inspection by a Party or its
designated representative during business hours upon reasonable notice,
including tax returns and financial statements.
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Audit: Annual audit will be performed by a firm of independent certified public
accountants to be appointed by the Board.
Dispute Resolution: It is the objective of the Parties to use all reasonable
efforts to resolve disputes amicably through negotiation. This objective
will not limit any Party from seeking judicial redress as provided below.
All disputes that are not resolved by negotiation shall be resolved by the
federal or state courts located in the New York metropolitan area in the
state of New York, to whose exclusive jurisdiction the Parties will
irrevocably submit.
Governing Law: To be determined with respect to the EJV. The provisions under
the heading "Exclusivity" in this memorandum shall be governed by and
construed in accordance with the law of New York.
Exclusivity: During the period described under the heading "Effect of Term
Sheet" below, neither DB nor NDB nor any of their respective subsidiaries,
affiliates or representatives will, directly or indirectly, (i) solicit or
encourage any inquiries, discussions or proposals regarding, (ii) continue,
propose or enter into negotiations or discussions with respect to or (iii)
enter into any agreement or other understanding providing for, any
transaction involving a joint venture or alliance with any third party for
the provision of On-Line Discount Brokerage for Equity Securities to Retail
Investors within the Territory; nor shall any of such persons or entities
provide any information to any other person or entity for the purpose of
making, evaluating, or determining whether to make or pursue, any inquiries
or proposals with respect to, any such transaction; provided that this
restriction shall not apply to the extent that a Party is not subject to
the Non-Competition clause; and provided further that, in the case of DB,
the foregoing restrictions shall apply only to activities conducted by GCI.
Effect of Term Sheet: The Parties agree that this memorandum does not create
binding rights or obligations, other than the obligation of the Parties to
negotiate in good faith definitive agreements with respect to the EJV,
except that the provisions under the heading "Exclusivity" shall be binding
upon each of the Parties and their respective Affiliates, from and
including the date hereof to but not including the earlier of (i) the date
on which the Parties execute the definitive EJV agreements, and (ii) the
first anniversary of the closing of the Securities Purchase Agreement.
* * *
9
<PAGE>
NATIONAL DISCOUNT BROKERS GROUP, INC. DEUTSCHE BANK AG
By: /s/ Arthur Kontos By: /s/ Thomas A. Curtis
----------------- --------------------
Name: Arthur Kontos Name: Thomas A. Curtis
Title: President and Chief Executive Officer Title: Attorney-in-Fact
10
<PAGE>
EXHIBIT 10.29
CONFORMED COPY
Worldwide Joint Venture ("WJV")
Summary of Principal Terms
This memorandum dated as of June 15, 2000 between Deutsche Bank AG
("DB") and National Discount Brokers Group, Inc. ("NDB") (each, a "Party" and
together, the "Parties") sets forth certain terms, conditions and understandings
upon which the Parties intend to use their good faith efforts to negotiate and
enter into definitive agreements and other related documents as set forth below.
Such terms, conditions and understandings are not exhaustive and shall be
supplemented in the definitive agreements by such other terms, conditions and
understandings as are customary in joint venture and related transactions of the
type contemplated and as shall be mutually agreed by the Parties. Terms used but
not defined herein have the meanings assigned in the Stockholder Agreement
between DB and NDB, dated as of the date hereof.
Object of the WJV: DB's Global Corporates and Institutions Division as it is
currently constituted and any successor division (together, "GCI"), on the
one hand, and NDB and its controlled Affiliates, on the other hand, will
form the WJV to provide or participate in On-Line Discount Brokerage and
On-Line Incidental Services for Retail Investors in the Rest of World, as
provided herein. The WJV may engage or participate in such On-Line Discount
Brokerage and On-Line Incidental Services either directly or through
operating companies in various countries.
Each of NDB and GCI will offer the WJV an opportunity to invest in any
On-Line Brokerage for Equity Securities for Retail Investors in the Rest of
World that it may from time to time create or control, subject to
commitments to third parties, overall financing needs, regulatory
requirements and other considerations, all on such terms as the WJV and
the Party concerned may mutually agree.
Definitions
On-Line Discount Brokerage: The execution of securities trades for customers by
an entity that (i) does not employ account executives or registered
representatives who (A) are assigned to, and responsible for maintaining
relationships with, customers for the purpose of providing advised
brokerage and trade execution services (whether provided in person or
electronically and whether general or trade-specific) or (B) are
compensated with a portion of the commissions earned for any trade
execution services performed for such customers, (ii) offers its customers
the ability to execute securities trades directly through computerized
on-line or other electronic or wireless execution systems, including,
without limitation, the Internet and IVR, without the direct assistance or
recommendation of any account executive or registered representative and
(iii) generally charges its customers a lower cost for its services than is
customarily charged in the relevant market for brokerage services by full
service advised brokerage firms or banks offering full service advised
brokerage taking into account commission charges, account investment
advisory fees and such other charges and fees and minimum balance
requirements. On-Line Discount Brokerage does not include the provision of
On-Line Incidental Services.
<PAGE>
On-Line Incidental Services: On-line services, other than On-Line Discount
Brokerage, including without limitation the preparation and distribution of
research or other commentary, the provision of private banking or
commercial banking services, margin lending, custody, investment advisory
management or supervisory services, including through financial or other
models developed internally or by third parties, and customer message
boards or discussion forums, in each case whether with respect to Equity
Securities or Other Products.
Territory: Austria, Belgium, Denmark, Finland, France, Germany, Greece, Iceland,
Ireland, Italy, Liechtenstein, Luxembourg, Monaco, the Netherlands, Norway,
Portugal, Spain, Sweden, Switzerland and the United Kingdom (the
"Territory").
Rest of World: All countries of the world other than the United States of
America, its territories and possessions and the countries located in the
Territory.
Equity Securities: Capital stock, including shares of exchange-listed, closed
end mutual funds holding capital stock, but not including options on or
warrants to purchase equity securities or securities exchangeable for or
convertible into equity securities.
OtherProducts: All securities and instruments, such as options, warrants, fixed
income securities, convertibles, foreign exchange, commodity options and
commodity futures, and other derivatives, other than Equity Securities.
Retail Investors: Natural persons, excluding any natural persons who are the
primary beneficiaries of services organized by any US institution with NDB
primarily for their benefit (e.g., Netlink or a similar program).
Global Strategic Oversight Committee: DB and NDB will form a joint committee
(the "Global Strategic Oversight Committee") to consider and discuss the
overall strategic direction and coordination of the WJV, the contemplated
European joint venture and any other ventures that DB and NDB might
undertake from time to time. The Global Strategic Oversight Committee will
have no formal constitution or formal authority to direct the operations of
the WJV or any other venture of the Parties. The membership of the Global
Strategic Oversight Committee will be shared equally by representatives of
DB and NDB.
2
<PAGE>
Initial Business Plan: Prior to the closing of the WJV, the Parties will adopt
an Initial Business Plan (the "Initial Business Plan") describing the WJV's
projected funding needs and operations during an initial period to be
agreed by the Parties.
WJV Coordinating Company: The activities of the WJV will be coordinated by the
WJV Coordinating Company, whose legal form and place of organization will
be determined by the Parties based on tax, management and other
considerations; provided that the structure shall, to the extent possible,
permit treatment of the WJV Coordinating Company as a partnership for U.S.
tax purposes.
Powers and Responsibilitie: The WJV Coordinating Company's powers and
responsibilities will consist primarily of the following:
(1) coordination and planning of the
WJV's participation in On-Line
Discount Brokerage and On-Line
Incidental Services in the Rest of
World;
(2) determination of the Rest
of World countries in which the WJV
will operate or participate and
those in which NDB and GCI may
operate independently;
(3) joint development, and direct
or indirect holding, of intellectual
property rights for the WJV; and
(4) holding equity and other
investments in one or more WJV
Operating Companies (as defined
below).
Ownership: Initially, each of NDB and GCI will hold 50% of the equity in the WJV
Coordinating Company.
Capital Contributions:
Initial Capital Contributions: DB and NDB will commit an initial amount of cash
to be agreed between the Parties, pro rata in accordance with their
respective ownership interests in the WJV, to be used as initial working
capital by the WJV.
Additional Capital Contributions: In addition, the Parties shall make additional
capital and other contributions to the WJV in the aggregate amounts and at
such stages as provided in the Initial Business Plan, and to be made by the
Parties pro rata in accordance with their respective ownership interests in
the WJV.
3
<PAGE>
Except as provided in the preceding paragraph, a Party shall not be
obligated to provide additional funding to the WJV Coordinating Company.
Neither NDB, DB, nor their respective affiliates shall have any obligation
to provide any credit or other financing to the WJV Coordinating Company or
any WJV Operating Company, and any such extension of credit or other
financing shall be in each party's sole discretion and at arm's length.
The Parties will have preemptive rights in respect of all issuances by the
WJV Coordinating Company of stock or other capital securities after the
initial issuance, in proportion to their then existing ownership interests.
Management: The WJV Coordinating Company shall be managed by a board of
directors (or comparable body for the legal entity concerned) on which NDB
and GCI will have equal representation. A quorum for meetings will be a
majority of the members of the entire board (who may be present in person
or over an open phone line), and board decisions will be by majority vote
of the members participating in a meeting (which majority must include at
least one member nominated by each of NDB and GCI).
Planning and Right to Invest: If either NDB or GCI so requests, the WJV
Coordinating Company will consider the Rest of World countries in which it
expects to organize the provision of On-Line Discount Brokerage. If either
NDB or GCI wishes to organize the provision of On-Line Discount Brokerage
in a particular country that is not already being served by a WJV Operating
Company, the Party concerned shall so notify the WJV Coordinating Company
indicating the country and the proposed terms on which such On-Line
Discount Brokerage would be organized.
Affirmative Decision: If the WJV Coordinating Company decides to organize the
provision of On-Line Discount Brokerage in a particular country or group of
countries, it shall proceed to facilitate such organization and make such
equity investment(s), if any, in the WJV Operating Company or Companies as
its board (or equivalent body) shall determine. Depending on tax and other
considerations, NDB and GCI may elect to make such equity investments
either through the WJV Coordinating Company or directly in the WJV
Operating Company(ies) concerned.
4
<PAGE>
If any WJV Operating Company(ies) reasonably require more capital investment
than the WJV Coordinating Company (or NDB and GCI together) are able or
willing to provide on an equal basis, NDB, GCI or their respective
affiliates may unilaterally provide such additional capital investment
outside the WJV Coordinating Company, on customary and reasonable terms
(including for the issuance of common stock); provided that each of NDB and
GCI shall always have the right, but not the obligation, to invest equally
and on equal terms in any WJV Operating Company.
No Affirmative Decision: If the WJV Coordinating Company is unable for a
period of two months to reach a decision on whether to organize the
provision of an On-Line Discount Brokerage in a particular country or group
of countries or on a material aspect of such organization (whether before
or after activities regarding any such organization have commenced), the
party proposing such organization (NDB or GCI, as the case may be) may
proceed unilaterally to organize (or to complete the organization of) the
On-Line Discount Brokerage concerned substantially on the terms proposed to
the WJV Coordinating Company, without using the facilities or resources of
the WJV, except that the On-Line Discount Brokerage concerned will have the
right to obtain a non-exclusive, non-transferable license of WJV
Intellectual Property from the WJV Coordinating Company on arm's length and
commercially reasonable royalty and other terms.
If the WJV Coordinating Company and such On-Line Discount Brokerage are
unable to agree on arm's length and commercially reasonable royalty and
other terms for a license of WJV Intellectual Property, such royalty and
other terms will be finally determined by "baseball arbitration" (as
described below under "Fair Value").
WJV Operating Companies: Operations of the WJV in individual countries or
groups of countries will be conducted through individual WJV Operating
Companies in the particular countries or groups of countries concerned. The
legal form of such WJV Operating Companies will depend on tax and other
considerations in the countries concerned.
Ownership: Depending on its needs for capital, available resources of the WJV
Coordinating Company and the Parties, and competitive conditions in the
market concerned, ownership interests in each WJV Operating Company may be
held by the WJV Coordinating Company, the Parties or their affiliates
independently of the WJV Coordinating Company, or third party investors.
Capital Contributions: As needed, based on regulatory requirements and each WJV
Operating Company's business plan.
The WJV Coordinating Company will always have the right, but not the
obligation, to invest in the equity of a WJV Operating Company, and each of
NDB and GCI shall always have the right, but not the obligation, to invest
equally and on equal terms in any WJV Operating Company.
5
<PAGE>
Management: Management rights and representation on boards of directors or
equivalent bodies will be in proportion to capital investment, except as
may otherwise be agreed between the Parties or with a third party investor.
Affiliate Transactions: DB and NDB may make available to the WJV such products
and services as the WJV reasonably requires and DB and NDB are in a
position to supply, all on such terms as may be mutually agreed. The WJV
will deal with DB and NDB on an arm's-length basis. All products and
services to be supplied by either Party will be documented through
appropriate written service or other agreements.
DB Research: DB will enter into a non-exclusive agreement with the WJV to
provide the WJV, on terms to be determined, with research prepared by DB
for distribution to Retail Investors in the Rest of World.
Intellectual Property:
Intellectual Property: Each of the Parties owns or has rights to use certain
confidential and proprietary know-how and trade secrets, computer software,
source code, designs, algorithms, specifications, formulas, plans, models,
data, technical information, processes, practices, systems and similar
intellectual and proprietary property (collectively, the " Intellectual
Property") that will be required or useful for the operation of the WJV.
With respect to any Intellectual Property owned by a Party, such Party will
enter into a non-exclusive, non-transferable license with the WJV
Coordinating Company or its wholly-owned subsidiary to use such
Intellectual Property for the purpose of providing On-Line Discount
Brokerage or On-Line Incidental Services in the Rest of World and with a
right to sub-license such Intellectual Property to WJV Operating Companies
and to other Affiliates of the Parties as provided above. With respect to
any Intellectual Property licensed by a Party from third parties, such
Party will use commercially reasonable efforts to negotiate new licenses on
commercially reasonable terms at the expense of the WJV to permit the WJV
to use such Intellectual Property. Each Party will make available to the
WJV a reasonable number of qualified personnel at the expense of the WJV
for a reasonable period of time to effect the transfer of such Party's
Intellectual Property to the WJV, all on terms to be mutually agreed
between the Party concerned and the WJV.
Upon termination of the WJV, the above licenses of Intellectual Property
will automatically continue as perpetual, non-exclusive, non-transferable
licenses of the Intellectual Property for the purpose of providing On Line
Discount Brokerage and On-Line Incidental Services in the Rest of the
World.
6
<PAGE>
WJV Intellectual Property: The WJV Coordinating Company shall be responsible
for developing new intellectual property and/or adapting existing
Intellectual Property or other intellectual property for use in the WJV,
all as provided in the Initial Business Plan or otherwise agreed by the
Parties.
Transfer Restrictions and Right of First Refusal: Until the first anniversary of
the execution of a definitive agreement relating to the WJV, no Party will
have the right to transfer any ownership interest in the WJV Coordinating
Company, other than to a wholly-owned affiliate of such Party, without the
prior written approval of the other Party. Thereafter, all proposed
transfers by any Party, other than to a wholly-owned affiliate, will be
subject to a right of first refusal on the same terms by the other Party.
Transferee's Rights and Obligations: A third party that acquires an interest in
the WJV Coordinating Company in a permitted transfer shall assume the
obligations and, unless otherwise agreed by the transferee, acquire the
rights of the transferring party with respect to the interest that it
acquires.
Term and Termination: The WJV will continue until terminated as described below.
The WJV may be terminated, at the option of either Party, upon written
notice to the other Party given (i) at any time after the second
anniversary of the execution of a definitive agreement relating to the WJV;
(ii) upon a Change in Control of the other Party; (iii) upon the material
failure of the other Party to perform or observe any covenant or agreement
relating to the WJV, which failure is continuing for a period of 90 days
after notice thereof has been given to the defaulting Party by the
terminating Party; (iv) upon the Insolvency Event (as defined in the
U.S. Underwriting Agreement) of the other Party; or (v) upon the
termination of any of the European Joint Venture, the U.S. Research Venture
or the U.S. Underwriting Venture. Notice of termination shall become
effective 30 days following the date of such notice. Any termination of
the WJV pursuant to clause (ii), (iii) or (iv) shall constitute termination
"for cause".
If the WJV is terminated, then DB will have the right to purchase
NDB's interest in the WJV Coordinating Company and each WJV Operating
Company, and NDB will have the right to require DB to purchase NDB's
interest in the WJV Coordinating Company and each WJV Operating Company, in
each case for a purchase price equal to to the greater of (i) NDB's
proportionate share of the Fair Value of the business of the WJV
Coordinating Company and each WJV Operating Company as a going concern and
(ii) NDB's cash capital contribution to the equity of the WJV; provided,
however, that clause (ii) shall apply only if (1) such termination occurs
on or prior to the second anniversary of the execution of the definitive
agreement regarding the WJV and (2) either (a) DB terminates the WJV
pursuant to clauses (ii) or (v) above or (b) NDB terminates the WJV
pursuant clause (iii) above.
7
<PAGE>
"FairValue" means, with respect to the business of the WJV (i) a valuation
made by the unanimous determination of the Board; or (ii) failing such
determination of the Board within the 30-day period following notice of
exercise of the above rights by DB or NDB, the valuation determined by a
leading international investment bank jointly selected by the Parties
within 15 days of the end of such 30-day period (or, failing agreement on
an investment bank, selected by the ICC), as follows: immediately upon
designation of such investment bank , each Party shall notify such
investment bank and each other in writing of its estimate of Fair Value.
Such investment bank shall be instructed to select one of the two proposed
estimates of Fair Value (and no other amount) within 30 days of
appointment. "Fair Value" shall be the estimate so selected by such
investment bank and shall be final and binding on the Parties. The fees and
expenses of the investment bank shall be paid by the Party whose estimate
was not selected. Confidentiality: No persons other than the Parties and
their subsidiaries which are agreed to by the Parties may have access to
proprietary or confidential information with respect to the WJV, including,
without limitation, customer data; market and customer research;
segmentation, attitude or usage information; strategies and specific plans
for positioning, advertising, public relations, promotions, pricing,
product design, Website design and development, including content and
trading, customer service model, training recruitment and compensation
programs.
Financial Statements: The WJV will prepare and distribute to the Parties monthly
financial statements of the WJV.
Accounting: Separate books of account maintained at the WJV's head office using
U.S. GAAP.
Inspection of Records: The records and reports of the WJV will also be kept in
the English language and are open to inspection by a Party or its
designated representative during business hours upon reasonable notice,
including tax returns and financial statements.
Audit: Annual audit will be performed by a firm of independent certified public
accountants to be appointed by the Board.
8
<PAGE>
Dispute Resolution: It is the objective of the Parties to use all reasonable
efforts to resolve disputes amicably through negotiation. This objective
will not limit any Party from seeking judicial redress as provided below.
All disputes that are not resolved by negotiation shall be resolved by the
federal or state courts located in the New York metropolitan area in the
State of New York, to whose exclusive jurisdiction the Parties will
irrevocably submit.
Governing Law: To be determined with respect to the WJV. The provisions under
the heading "Exclusivity" in this memorandum shall be governed by and
construed in accordance with the law of New York.
Exclusivity: During the period described under the heading "Effect of Term
Sheet" below, neither DB nor NDB nor any of their respective subsidiaries,
affiliates or representatives will, directly or indirectly, (i) solicit or
encourage any inquiries, discussions or proposals regarding, (ii) continue,
propose or enter into negotiations or discussions with respect to or (iii)
enter into any agreement or other understanding providing for, any
transaction involving a worldwide joint venture or alliance with any third
party for the provision of On-Line Discount Brokerage for Equity Securities
to Retail Investors within the Rest of World on terms similar to those
contemplated for the WJV; nor shall any of such persons or entities provide
any information to any other person or entity for the purpose of making,
evaluating, or determining whether to make or pursue, any inquiries or
proposals with respect to, any such transaction; provided that, in the case
of DB, the foregoing restrictions shall apply only to activities conducted
by GCI.
Effect of Term Sheet: The Parties agree that this memorandum does not create
binding rights or obligations, other than the obligation of the Parties to
negotiate in good faith definitive agreements with respect to the WJV,
except that the provisions under the heading "Exclusivity" shall be binding
upon each of the Parties and their respective Affiliates, from and
including the date hereof to but not including the earlier of (i) the date
on which the Parties execute the definitive WJV agreements, and (ii) the
first anniversary of the closing of the Securities Purchase Agreement.
* * *
9
<PAGE>
NATIONAL DISCOUNT BROKERS GROUP, INC. DEUTSCHE BANK AG
By: /s/ Arthur Kontos By: /s/ Thomas A. Curtis
----------------- --------------------
Name: Arthur Kontos Name: Thomas A. Curtis
Title: President and Chief Executive Officer Title: Attorney-in-Fact
10
<PAGE>
EXHIBIT 10.30
WAIVER OF BONUS
WHEREAS, NATIONAL DISCOUNT BROKERS GROUP, INC., a Delaware
corporation (the "Company"), and ARTHUR KONTOS (the "Executive"), entered
into an Employment Agreement dated as of May 31, 1997 (the "Employment
Agreement");
WHEREAS, Section 4 of the Employment Agreement provides that the
Executive shall receive a bonus (the "Bonus"), pursuant to The Sherwood Group,
Inc. 1996 CEO Bonus Plan (the "Plan"); and
WHEREAS, for good and valuable consideration the receipt of which the
Executive acknowledges, the Executive wishes irrevocably to waive a portion of
the Bonus under the Employment Agreement to which he may be entitled for the
fiscal year of the Company ended May 31, 2000 specified below,
NOW, THEREFORE,
The Executive hereby irrevocably waives to the fullest extent permitted
by law the portion of the Bonus for the fiscal year which ended on May 31, 2000
equal to $2,400,000.
The Company by acknowledging this Waiver covenants and agrees that
except as specifically waived by this Waiver the provisions of the Employment
Agreement and the Plan remain in full force and effect.
IN WITNESS WHEREOF, the Executive has duly executed this Waiver as of
this 31st day of May, 2000.
--------------------------
Arthur Kontos
Acknowledged:
NATIONAL DISCOUNT BROKERS GROUP, INC.
By: ______________________
James H. Lynch, Jr.
Chairman of the Board of Directors
<PAGE>
EXHIBIT 10.31
AGREEMENT TO DEFER COMPENSATION
THIS AGREEMENT is made effective as of May 31, 2000 by and among NDB
CAPITAL MARKETS CORPORATION, a Delaware corporation, with its principal office
at 10 Exchange Place Centre, 15th Floor, Jersey City, New Jersey 07302-3913
("NDB"); NATIONAL DISCOUNT BROKERS GROUP, INC., a Delaware Corporation, with its
principal office at 10 Exchange Place Centre, 15th Floor, Jersey City, New
Jersey 07302-3913 ("NDBG"); and THOMAS W. NEUMANN, Chief Executive Officer of
NDB, with an office at NDB, 10 Exchange Place Centre, 15th Floor, Jersey City,
New Jersey 07302-3913 ("Neumann").
WHEREAS, Neumann, under his existing compensation arrangements, has
earned but unpaid compensation of $3,000,000, the due date for the payment of
which has not occurred (the "Compensation"); and
WHEREAS, NDB, NDBG, and Neumann wish to defer Neumann's receipt of the
Compensation.
NOW, THEREFORE, it is agreed as follows:
1. NDB, NDBG, and Neumann shall defer NDB's and NDBG's payment, and
Neumann's receipt, of the Compensation. NDB or NDBG shall pay Neumann or his
Beneficiary $1,000,000 of the Compensation on January 1, 2001; $1,000,000 of
the Compensation on January 1, 2002; and $1,000,000 of the Compensation on
January 1, 2003. All deferred payments of the Compensation shall accrue
interest at the ninety (90) day United States Treasury bill rate beginning
as of the date the Compensation would otherwise have been paid and as of
<PAGE>
each ninety-first (91st) day thereafter as published in The Wall Street Journal.
All accrued and unpaid interest shall be payable on each date that NDB or NDBG
makes a payment of the Compensation to Neumann or his Beneficiary.
2. Within thirty (30) days after the date of a Change of Control, NDB
or NDBG shall pay Neumann or his Beneficiary all remaining unpaid amounts of
Compensation and accrued interest thereon in a single lump sum payment. Upon
this payment, this Agreement terminates. For purposes of this Agreement, a
Change of Control occurs if, (a) any person or group of persons acquires,
directly or indirectly, stock of NDBG having at least fifty (50%) percent of the
combined voting power of NDBG's then outstanding securities, or (b) a person,
other than NDBG, or a person wholly owned directly or indirectly by NDBG, shall
directly or indirectly own more than fifty (50%) percent of the combined voting
power of NDB's then outstanding securities, or (c) the shareholders of NDBG
approve or NDBG completes a merger, consolidation or similar transaction of NDBG
or a subsidiary of NDBG with or into any other corporation, or a binding share
exchange involving NDBG's securities occurs in which the NDBG securities
outstanding immediately prior to such event do not represent 66-2/3% of the
combined voting power of voting securities after such event, or (d) the
shareholders of NDBG approve a plan of complete liquidation of NDBG or an
agreement for the sale or disposition by NDBG of all or substantially all of
NDBG's assets, or (e) any shareholder or group of shareholders over the
objection of the Board of Directors of NDBG elects after the date hereof a
majority of the members of the NDBG Board of Directors, in each case of (a),
(b), (c), (d) or (e) after the effective date of this Agreement.
2
<PAGE>
3. Upon the death of Neumann, NDB or NDBG shall pay the remaining
unpaid amounts of Compensation and the accrued interest thereon in accordance
with the schedule set forth in Section 1 or Section 2; provided, however, that
NDB or NDBG may, in its exclusive discretion, pay the entire remaining unpaid
amounts of Compensation and accrued interest thereon in a single lump sum
payment to the estate of Neumann at any time.
4. NDB and NDBG shall not segregate any of its assets for payment of
the Compensation and accrued interest thereon, and Neumann and his Beneficiary
do not have any right, title, or interest in any asset of NDB and NDBG. Neumann
and his Beneficiary have only the rights of a general unsecured creditor of NDB
and NDBG.
5. The payments under this Agreement are not subject to alienation,
assignment, encumbrance, pledge, sale, or transfer prior to receipt by Neumann
or his Beneficiary. NDB and NDBG are not liable for or subject to the
liabilities and obligations of Neumann or his Beneficiary.
6. NDB or NDBG shall deduct from all payments under this Agreement all
federal, state, and local employment, excise, payroll, and withholding taxes
reasonably determined by NDB and NDBG as required by law to be withheld. NDB or
NDBG shall timely pay the amounts withheld to the appropriate taxing
authorities.
7. This Agreement is not a contract of employment nor a consulting
agreement by and among NDB, NDBG, and Neumann or his Beneficiary.
8. This Agreement may be executed in any number of counterparts, each
of which is deemed to be an original, but all of which together constitute one
Agreement.
9. This Agreement shall be governed and construed in accordance with
the laws of the State of New Jersey.
3
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
31st day of May, 2000 effective as of the date first above written.
NDB CAPITAL MARKETS CORPORATION
By:
NATIONAL DISCOUNT BROKERS GROUP, INC.
By:
THOMAS W. NEUMANN
4
<PAGE>
EXHIBIT 11
NATIONAL DISCOUNT BROKERS GROUP, INC.
AND SUBSIDIARIES
Computation of Earnings Per Common Share
Years ended May 31, 2000, 1999 and 1998
<TABLE>
<CAPTION>
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Net income from continuing operations $ 32,629,011 $ 18,219,407 $ 5,998,458
Discontinued operations (net) 20,829,266 2,786,052 5,961,861
------------- --------------- ------------
Net income $ 53,458,277 $ 21,005,459 $ 11,960,319
============= =============== ============
Net income per common share Basic:
Net income from continuing operations $1.92 $1.30 $.45
Discontinued operations (net) 1.22 .20 .44
---- ----- ----
Net income $3.14 $1.50 $.89
==== ====== ===
Diluted:
Net income from continuing operations $1.86 $1.29 $.45
Discontinued operations (net) 1.19 .20 .44
---- ---- ---
Net income $3.05 $1.49 $.89
===== ===== ===
Historical:
Weighted average number of
common stock and common stock
equivalents outstanding:
Basic 17,021,113 14,018,257 13,432,726
============ ============= ==========
Diluted 17,525,126 14,143,240 13,501,346
========== ============= ===========
</TABLE>
<PAGE>
EXHIBIT 16
August 15, 2000
Office of the Chief Accountant
Securities and Exchange Commission
SECPS Letter Files
Mail Stops 9-5
450 Fifth Street, N.W.
Washington, D.C. 20549
Ladies and Gentlemen:
We were previously principal accountants for National Discount Brokers Group,
Inc., and under the date of July 15, 1998, we reported on the consolidated
financial statements of National Discount Brokers Group, Inc. and subsidiaries
as of and for the years ended May 31, 1998 and 1997. On February 12, 1999, we
resigned. We have read National Discount Brokers Group, Inc. statements included
under Item 9 of its Form 10-K for the year ended May 31, 2000, and we agree with
such statements, except for the statements relating to PricewaterhouseCoopers
LLP as we have no basis to confirm such statements.
Very truly yours,
s/KPMG LLP
New York, New York
Cc: C. Goldstein - National Discount Brokers Group, Inc.
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF NATIONAL DISCOUNT BROKERS GROUP, INC.
A) NDB CAPITAL MARKETS CORPORATION (formerly Sherwood Securities Corp.),
incorporated under the laws of the State of Delaware.
B) SHERWOOD CAPITAL, INC., incorporated under the laws of the State of
New Jersey.
C) SHERWOOD PROPERTIES CORP., incorporated under the laws of the State of
Delaware.
D) NDB INSURANCE AGENCY CORP., incorporated under the laws of the State of
Delaware.
E) THE EBERCOM COMPANY., incorporated under the laws of the State of Delaware.
F) SIMCON CORPORATION, incorporated under the laws of the State of Delaware.
G) SHERWOOD MANAGEMENT CORP., incorporated under the laws of the State of
Delaware.
H) NATIONAL DISCOUNT BROKERS CORPORATION (formerly Triak Services Corp.),
incorporated under the laws of the State of New York.
I) SHD CORPORATION, incorporated under the laws of the State of Delaware.
J) MILLENNIUM CLEARING COMPANY LLC, incorporated under the laws of the State of
Delaware.
K) NDB CAPITAL MARKETS, L.P., formed under the laws of the State of Delaware.
L) NDBCM CALIFORNIA CORPORATION, incorporated under the laws of the State of
Delaware.
<PAGE>
EXHIBIT 23.1
Consent of Independent Accountants
The Board of Directors
National Discount Brokers Group, Inc.:
We consent to incorporation by reference in the registration statement on
Form S-8 of National Discount Brokers Group, Inc. of our report dated July 15,
1998, relating to the consolidated statements of income and comprehensive
income, changes in stockholders' equity, and cash flows of National Discount
Brokers Group, Inc. for the year ended May 31, 1998, which report appears in the
May 31, 2000 annual report on Form 10-K of National Discount Brokers Group, Inc.
KPMG LLP
New York, New York
August 15, 2000
<PAGE>
EXHIBIT 23.2
Consent of Independent Accountants
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (No. 333-41819, No. 033-64571, No. 33-72790, No.
333-88865 and No. 333-31888) of National Discount Brokers Group, Inc. of our
report dated July 20, 2000 relating to the financial statements and financial
statement schedules, which appears in this Form 10-K.
PricewaterhouseCoopers LLP
August 16, 2000
New York, NY
