January 13, 1999
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: National Discount Brokers Group, Inc.
Report on Form 10-Q for the Three and Six Months Ended November 30, 1999
Gentlemen:
Enclosed please find the following material submitted on behalf of National
Discount Brokers Group, Inc.("Company"):
One complete copy of the Company's report on Form 10-Q for the Three and Six
Months Ended November 30, 1999 including financial statements and exhibits.
Thank you for your attention to this matter.
Very truly yours,
/s/ Daniel Fishbane
Daniel Fishbane
Chief Financial Officer and
Principal Accounting Officer
<PAGE>
CONFORMED
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended November 30, 1999
OR
[ ] Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the transition period from to
----------- -------------
Commission file number 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
No.)
10 Exchange Place Centre, Jersey City, New Jersey 07302
----------------------------------------------------------------------------
(Address of principal executive offices) (Zip
code)
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d)of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
---- ----
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
16,988,757 shares of Common Stock, par value $.01 per share,
were outstanding on December 31, 1999.
<PAGE>
NATIONAL DISCOUNT BROKERS GROUP, INC.
AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PAGE
<S> <C>
Part I - Financial Information
Item 1. - Financial Statements
Condensed Consolidated Statements of Financial Condition -
November 30, 1999 (Unaudited) and May 31, 1999...............................................................3
Condensed Consolidated Statements of Income and Comprehensive Income (Unaudited) -
Three and Six Months Ended November 30, 1999 and 1998........................................................4
Condensed Consolidated Statements of Cash Flows (Unaudited) -
Six Months Ended November 30, 1999 and 1998..................................................................6
Notes to Condensed Consolidated Financial Statements (Unaudited) -
November 30, 1999............................................................................................8
Item 2. - Management's Discussion and Analysis of
Financial Condition and Results of Operations........................................................12
Item 3. - Quantitative and Qualitative Disclosures About Risk....................................................19
Part II - Other Information
Item 1. - Legal Proceedings......................................................................................20
Item 4. - Submission of Matters to a Vote of Security Holders....................................................20
Item 6. - Exhibits and Reports on Form 8-K.......................................................................21
Signatures.......................................................................................................22
</TABLE>
Forward Looking Statements
Statements regarding the Company's expectations as to its future operations
and financial condition and certain other information contained in this Form
10-Q or in documents incorporated herein by reference constitute forward looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. Although the Company believes that its expectations are based on
reasonable assumptions within the bounds of its knowledge of its business and
operation, there can be no assurance that actual results will not differ
materially from its expectations. Factors which could cause actual results to
differ from expectations include a general downturn in the economy, changes in
the level of activity of securities markets in which the Company participates,
changes in government policy or regulation and unforeseen costs and other
effects related to legal proceedings or investigations of governmental and
self-regulatory organizations.
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
NATIONAL DISCOUNT BROKERS GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
November 30,
1999 May 31,
ASSETS (Unaudited) 1999
-----------------------------------
<S> <C> <C>
Cash and cash equivalents $ 24,249,689 $ 411,629
Receivables:
Clearing brokers 107,635,769 86,509,122
Other 2,513,492 2,901,799
Securities owned, at market value 69,360,004 38,048,489
U.S. Treasury Obligations ($954,940 and $8,418,260 held
as collateral at November 30, 1999 and May 31, 1999,
respectively) 103,675,588 8,418,260
Securities not readily marketable, at fair value 600,000 500,000
Investment in discontinued operations - 28,341,746
Loans and notes receivable 193,728 1,094,989
Furniture, fixtures, equipment and leasehold improvements -
at cost, net of accumulated depreciation and
amortization of $16,800,490 at November 30, 1999 and
$15,304,535 at May 31, 1999 18,903,121 14,837,114
Computer software - at cost, net of accumulated
amortization of $4,375,940 at November 30, 1999 and
$3,624,381 at May 31, 1999 8,246,884 4,996,223
Exchange membership (market value $1,520,000 at
May 31, 1999) - 351,496
Secured demand notes receivable - 27,000,000
Deferred tax asset, net of valuation allowance of
$294,909 at November 30, 1999) 1,101,164 825,797
Other (primarily deposits on leasehold improvements
at November 30, 1999) 10,607,444 3,054,144
----------------- ----------------
Total assets $ 347,086,883 $ 217,290,808
----------------- ----------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Securities sold, not yet purchased, at market value $ 40,752,576 $ 11,723,172
Accrued compensation, accounts payable
and accrued expenses 41,943,945 46,296,949
Loan payable - 15,000,000
Income taxes payable 5,438,726 2,275,481
----------------- ----------------
Total liabilities 88,135,247 75,295,602
----------------- ----------------
Commitments and contingencies
Stockholders' equity:
Preferred stock - $.01 par value;
authorized 1,000,000 shares; none issued - -
Common stock - $.01 par value; authorized
50,000,000 shares; issued 17,333,201 shares at
November 30, 1999 and 14,343,201 at May 31, 1999 173,332 143,432
Additional paid-in capital 157,403,873 65,828,938
Retained earnings 105,526,436 80,181,611
----------------- ----------------
263,103,641 146,153,981
Less: Treasury stock - at cost, 347,710 shares
at November 30, 1999 and 348,277 shares at
May 31, 1999 (4,152,005) (4,158,775)
----------------- ----------------
Total stockholders' equity 258,951,636 141,995,206
----------------- ----------------
Total liabilites and stockholders' equity $ 347,086,883 $ 217,290,808
----------------- ----------------
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
3
<PAGE>
NATIONAL DISCOUNT BROKERS GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended November 30, Six Months Ended November 30,
----------------------------------- --------------------------------
1999 1998 1999 1998
----------------- ---------------- -------------- --------------
Revenue:
<S> <C> <C> <C> <C>
Firm securities transactions, net $ 50,794,610 $ 31,233,445 $ 85,269,761 $ 50,789,416
Commission income 13,753,615 9,555,198 26,068,794 18,399,292
Interest and dividends 4,794,407 2,254,992 9,546,498 4,517,945
Fee income 1,474,833 999,479 2,808,718 1,894,139
Other 37,112 1,335,228 182,954 1,525,704
----------------- ---------------- -------------- --------------
Total revenue 70,854,577 45,378,342 123,876,725 77,126,496
----------------- ---------------- -------------- --------------
Expenses:
Compensation and benefits 26,655,094 15,903,960 45,004,103 28,525,291
Clearing and related brokerage charges 13,244,239 10,586,296 25,241,887 19,986,404
Communications 4,484,951 3,578,586 8,365,834 7,333,388
Selling and marketing:
Advertising and marketing costs 7,281,586 1,184,366 14,082,695 2,593,251
Sales-related travel and entertainment 583,691 327,663 1,357,786 717,874
Technology development and other related costs:
Depreciation and amortization 2,809,292 1,802,553 6,686,814 3,487,414
Equipment rental 677,830 135,831 1,210,480 261,597
Technology consulting 1,666,142 351,534 2,824,229 570,623
Repairs and maintenance 1,027,975 545,493 1,613,786 1,123,824
Other:
Professional fees 613,402 1,203,157 1,113,810 1,920,367
Occupancy costs 1,683,736 661,199 3,421,430 1,269,476
Other 1,981,246 1,336,814 4,007,440 2,310,785
----------------- ---------------- -------------- --------------
Total expenses 62,709,184 37,617,452 114,930,294 70,100,294
----------------- ---------------- -------------- --------------
Income from continuing operations
before income taxes 8,145,393 7,760,890 8,946,431 7,026,202
Income taxes (benefit):
Federal, currently payable 2,034,304 2,288,752 2,299,864 2,146,335
State and local, currently payable 1,965,730 1,097,614 2,176,072 1,209,959
----------------- ---------------- -------------- --------------
Total current income tax expense 4,000,034 3,386,366 4,475,936 3,356,294
----------------- ---------------- -------------- --------------
Federal, deferred 217,591 (38,077) 193,624 (76,409)
State and local, deferred (383,151) (20,283) (468,991) (36,125)
----------------- ---------------- -------------- --------------
Total deferred income tax benefit (165,560) (58,360) (275,367) (112,534)
----------------- ---------------- -------------- --------------
Total income taxes from continuing operations 3,834,474 3,328,006 4,200,569 3,243,760
----------------- ---------------- -------------- --------------
Net income from continuing operations 4,310,919 4,432,884 4,745,862 3,782,442
----------------- ---------------- -------------- --------------
Discontinued operations:
Income from discontinued operations,
net of taxes - 1,450,529 82,994 765,648
Gain on sale of discontinued operations,
net of taxes 461,182 - 20,515,969 -
----------------- ---------------- -------------- --------------
461,182 1,450,529 20,598,963 765,648
----------------- ---------------- -------------- --------------
Net income $ 4,772,101 $ 5,883,413 $ 25,344,825 $ 4,548,090
----------------- ---------------- -------------- --------------
</TABLE>
(Continued)
4
<PAGE>
NATIONAL DISCOUNT BROKERS GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Unaudited)
(Continued)
<TABLE>
<CAPTION>
Three Months Ended November 30, Six Months Ended November 30,
----------------------------------- --------------------------------
1999 1998 1999 1998
----------------- ---------------- -------------- --------------
<S> <C> <C> <C> <C>
Other comprehensive income (loss), before tax:
Unrealized (gain) loss on investment securities
available for sale:
Unrealized holding gains (losses) arising
during period $ - $ 482,815 $ - $ (409,023)
Less: reclassification adjustment for gains
included in net income - (1,428,865) - (1,428,865)
----------------- ---------------- -------------- --------------
Other comprehensive loss before tax - (946,050) - (1,837,888)
Income tax benefit related to items of other
comprehensive income (loss) - (416,262) - (719,487)
----------------- ---------------- -------------- --------------
Other comprehensive income loss, net of tax - (529,788) - (1,118,401)
----------------- ---------------- -------------- --------------
Comprehensive income $ 4,772,101 $ 5,353,625 $ 25,344,825 $ 3,429,689
----------------- ---------------- -------------- --------------
Net income per common and potential
common share (a)
Basic:
Net income from continuing operations $ 0.25 $ 0.32 $ 0.29 $ 0.27
Net income from discontinued operations,
net of taxes 0.00 0.10 0.00 0.05
Gain on sale of discontinued operations,
net of taxes 0.00 1.24 0.00
----------------- ---------------- -------------- --------------
Net income $ 0.28 $ 0.42 $ 1.53 $ 0.32
----------------- ---------------- -------------- --------------
Weighted average common shares outstanding 16,985,288 13,991,923 16,593,030 14,041,304
----------------- ---------------- -------------- --------------
Diluted:
Net income from continuing operations $ 0.25 $ 0.32 $ 0.28 $ 0.27
Net income from discontinued operations,
net of taxes 0.00 0.10 0.00 0.05
Gain on sale of discontinued operations,
net of taxes 0.00 1.22 0.00
----------------- ---------------- -------------- --------------
Net income $ 0.28 $ 0.42 $ 1.50 $ 0.32
----------------- ---------------- -------------- --------------
Weighted average common shares outstanding 17,217,926 13,994,535 16,852,766 14,049,294
----------------- ---------------- -------------- --------------
<FN>
(a) The sum of the individual quarters' earnings per common share does not
equal the total amount for the six months ended November 30, 1999 or
November 30, 1998 due to the effect of averaging the number of shares of
potential common stock throughout the year.
</FN>
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
5
<PAGE>
NATIONAL DISCOUNT BROKERS GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended November 30,
-----------------------------------
1999 1998
----------------- ----------------
Cash flows from operating activities:
<S> <C> <C>
Net income from continuing operations $ 4,745,862 $ 3,782,442
Net income from discontinued operations 8765,648
Gain on sale of discontinued operations, net of taxes 20,515,969 -
Non-cash items included in net income:
Depreciation and amortization 6,686,814 3,809,363
Gain on sale of securities available for sale - (1,348,984)
Gain on sale of securities not readily marketable - (79,881)
Loss of Equitrade allocated to minority partners - 142,280
Provision for deferred taxes (275,367) (112,535)
(Increase) decrease in operating assets:
Receivables:
Clearing brokers (21,126,647) (11,715,082)
Other 388,307 (151,540)
Securities owned, at market value (31,311,515) 4,835,845
Other assets (net of deposits made on furniture,
fixtures, equipment, leasehold improvements
and computer software) 1,450,060 487,056
Increase (decrease) in operating liabilities:
Securities sold, not yet purchased, at market value 29,029,404 1,766,889
Accrued compensation, accounts payable and
accrued expense (4,353,004) 4,349,582
Income taxes payable 3,163,245 1,777,641
(Increase) decrease in operating assets due to sale
of Equitrade:
Investment in discontinued operations 28,341,746 -
Exchange membership 351,496 -
----------------- ----------------
Net cash provided by operating activities 37,689,364 8,308,724
----------------- ----------------
Cash flows from investing activities:
Net purchases of U.S. Treasury obligations (95,257,328) (234,018)
Proceeds from sale of securities available for sale - 1,348,984
Proceeds from sale of securities not readily marketable - 79,881
Notes issued (160,000) (900,000)
Principal collected on notes receivable 1,061,261 57,822
Net purchases of furniture, fixtures,
equipment and leasehold improvements (8,836,921) (308,242)
Deposits made on furniture, fixtures, equipment,
leasehold improvements and computer software (9,003,360) (1,040,736)
Purchases of computer software (5,166,561) (796,277)
Payment for purchase of intangible asset - (450,000)
Purchase of investment securities not readily marketable (100,000) -
Issuance of subordinated notes receivable - (2,500,000)
Principal collected on subordinated notes receivable 27,000,000 -
Repayment of loan (15,000,000) -
----------------- ----------------
Net cash used in investing activities $ (105,462,909) $ (4,742,586)
----------------- ----------------
</TABLE>
(Continued)
6
<PAGE>
NATIONAL DISCOUNT BROKERS GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Continued)
<TABLE>
<CAPTION>
Six Months Ended November 30,
-----------------------------------
1999 1998
----------------- ----------------
Cash flows from financing activities:
<S> <C> <C>
Proceeds from issuance of common stock $ 91,603,950 $ -
Proceeds from exercise of options 7,655 -
Purchase of treasury stock - (2,018,144)
Capital withdrawals by minority interest - (1,747,784)
----------------- ----------------
Net cash provided by (used in) financing activities 91,611,605 (3,765,928)
----------------- ----------------
Net increase (decrease) in cash and cash equivalents 23,838,060 (199,790)
Cash and cash equivalents at beginning of period 411,629 1,039,121
----------------- ----------------
Cash and cash equivalents at end of period $ 24,249,689 $ 839,331
----------------- ----------------
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
7
<PAGE>
NATIONAL DISCOUNT BROKERS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
November 30, 1999
Note 1 - Business and organization
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 Sherwood Securities
Corp. ("Sherwood Securities"). 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 Group and another wholly owned subsidiary, SHD Corporation ("SHD"),
also owned membership interests in Equitrade Partners, L.L.C., a Delaware
limited liability company ("Equitrade"). Equitrade was a registered specialist
on the New York Stock Exchange ("NYSE"). On June 18, 1999, the Company sold its
46.845% membership interest in Equitrade to a subsidiary of Spear Leeds &
Kellogg, L. P. for cash. See Note 7, "Discontinued Operations".
Note 2 - Basis of presentation
The accompanying unaudited condensed consolidated financial statements do
not include all of the information and notes required by generally accepted
accounting principles for complete consolidated financial statements. In the
opinion of management, all adjustments considered necessary for a fair
presentation of condensed consolidated financial condition and results of
operations for the periods presented have been included. All adjustments are of
a normal and recurring nature. It is suggested that these condensed consolidated
financial statements be read in conjunction with the audited consolidated
financial statements and the related notes included in the Company's 1999 Annual
Report on Form 10-K. Certain prior year amounts have been reclassified to
conform to the three and six months ended November 30, 1999 presentations.
Note 3 - Net income per common share
Net income per common share is computed using the weighted average number
of shares of common stock and potential common stock outstanding. Potential
common stock comprises stock issuable under stock options. The treasury stock
method of accounting was used in computing potential common stock for the
computation of diluted earnings per common share.
Note 4 - Commitments and contingencies
Certain significant legal proceedings and matters were previously disclosed
in Item 3, Legal Proceedings, of the Company's Annual Report on Form 10-K for
the year ended May 31, 1999, and the disclosures regarding such matters are
incorporated herein by reference. Many aspects of the business of the Company
involve substantial risks of potential liability. In recent years, there has
been an increasing incidence of litigation involving the securities industry,
including class action suits that generally seek substantial damages. Companies
engaged in the underwriting and distribution of securities are exposed to
substantial liability under federal and state securities laws. The Company is,
from time to time, involved in proceedings with, and investigations by,
governmental and self-regulatory agencies.
The Company has been named as a defendant in a number of lawsuits and
arbitrations and is the subject of investigations that allege, among other
things, violations of Federal and state securities laws and other laws. A
substantial settlement or judgement in any of these cases could have a material
adverse effect on the Company. Except as described in Item 3 to the Company's
Form 10-K for the year ended May 31, 1999 and this Form 10-Q, 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.
8
<PAGE>
In connection with the NASD arbitration action against Sherwood Securities
by Weiss, Peck & Greer, L.L.C. ("WPG") reported in Item 3 to the Company's Form
10-K for the fiscal year ended May 31, 1999, WPG and Sherwood Securities agreed
to non-binding mediation by the NASD. A mediation session was held on September
24, 1999. The attempted mediation was not successful. Sherwood Securities, after
consultation with counsel, believes it has valid defenses to the claims made by
WPG and intends to vigorously contest the claims.
Note 5 - Net capital requirements
As registered broker-dealers, Sherwood Securities and NDB.com are subject
to the Securities Exchange Act of 1934 Uniform Net Capital Rule 15c3-1 (the
"Rule"). As of November 30, 1999, the net capital of Sherwood Securities and
NDB.com exceeded their required net capital under the Rule by $59,343,000 and
$16,491,000, respectively.
The Rule also provides that equity capital may not be withdrawn or cash
dividends be paid if the resulting net capital would be less than the amount
required under the Rule. Accordingly, at November 30, 1999, the payment of
dividends and advances to the Company by Sherwood Securities and NDB.com is
limited to $59,143,000 and $16,441,000, respectively, under the most restrictive
of these requirements.
Note 6 - Segments
Under the provisions of Statement of Financial Accounting Standards No.
131, "Disclosures about Segments of an Enterprise and Related Information", 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. Sherwood Securities
represents the Company's market making segment, which derives its firm
securities transaction revenues either 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 securities available for sale.
Revenue from the transactions with other segments within the Company
(referred to as intersegment revenues) is recorded at market value, as if the
transactions were with third parties.
The Company evaluates the performance of its segments based on profit or
loss from operations before income taxes. No single customer accounted for more
than 10% of the Company's condensed 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,
Equitrade.
<TABLE>
<CAPTION>
Three Months Ended November 30, 1999
Discount Market
Brokerage Making All Other Total
<S> <C> <C> <C> <C>
Revenue from external sources $16,735,000 $52,330,000 $ 1,790,000 $70,855,000
Intersegment revenue 2,061,000 - 106,000 2,167,000
------------- ----------- ------------- -----------
Total revenue $18,796,000 $52,330,000 $ 1,896,000 $73,022,000
----------- ----------- ----------- -----------
Profit (loss) before income taxes $(3,219,000) $11,149,000 $ 215,000 $ 8,145,000
Capital expenditures (1) $ 6,651,000 $ 1,783,000 $ 6,212,000 $14,646,000
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended November 30, 1998
Discount Market
Brokerage Making All Other Total
<S> <C> <C> <C> <C>
Revenue from external sources $11,678,000 $32,192,000 $1,508,000 $45,378,000
Intersegment revenue 1,484,000 26,000 588,000 2,098,000
------------- ------------ ------------- -------------
Total revenue $13,162,000 $32,218,000 $2,096,000 $47,476,000
----------- ----------- ------------ -----------
Profit (loss) before income taxes $(1,141,000) $ 8,031,000 $ 871,000 $ 7,761,000
Capital expenditures (1) $ 449,000 $ 1,124,000 $ - $ 1,573,000
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended November 30, 1999
Discount Market
Brokerage Making All Other Total
<S> <C> <C> <C> <C>
Revenue from external sources $ 32,133,000 $88,219,000 $ 3,525,000 $123,877,000
Intersegment revenue 3,814,000 5,000 322,000 4,141,000
-------------- ----------- ------------- ------------
Total revenue $ 35,947,000 $88,224,000 $ 3,847,000 $128,018,000
------------ ----------- ----------- ------------
Profit (loss) before income taxes $(10,495,000) $18,249,000 $ 1,192,000 $ 8,946,000
Capital expenditures (1) $ 11,225,000 $ 5,067,000 $ 6,715,000 $ 23,007,000
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended November 30, 1998
Discount Market
Brokerage Making All Other Total
<S> <C> <C> <C> <C>
Revenue from external sources $22,596,000 $52,789,000 $1,741,000 $77,126,000
Intersegment revenue 2,836,000 68,000 1,187,000 4,091,000
------------- ------------ ------------ -----------
Total revenue $25,432,000 $52,857,000 $2,928,000 $81,217,000
----------- ----------- ------------ -----------
Profit (loss) before income taxes $(2,524,000) $ 8,045,000 $ 1,505,000 $ 7,026,000
Capital expenditures (1) $ 1,185,000 $ 1,356,000 $ 54,000 $ 2,595,000
<FN>
(1) - includes deposits made on assets not yet placed in service.
</FN>
</TABLE>
The following table is a reconciliation of reportable profit (loss) before
income taxes to the Company's consolidated totals.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
November 30, November 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Total profit before income taxes
for reportable segments $ 7,930,000 $ 6,890,000 $ 7,754,000 $ 5,521,000
Other profit 215,000 871,000 1,192,000 1,505,000
-------------- ------------ ------------- ---------------
Total consolidated profit before
income taxes $ 8,145,000 $ 7,761,000 $ 8,946,000 $ 7,026,000
------------ -------------- ------------ ---------------
</TABLE>
Note 7 - Discontinued Operation
On June 18, 1999, the Company sold its 46.845% membership interest in
Equitrade. As such, the operations of Equitrade have been reflected in
discontinued operations for all periods reported. Revenue and expenses for the
six months ended November 30, 1999 applicable to this discontinued operation,
prior to the allocation of minority interest and income taxes, were
approximately $1,728,000 and $1,570,000, respectively, and for the six months
ended November 30, 1998 were approximately $6,898,000 and $5,311,000,
respectively. The gain on the sale was approximately $20,516,000, net of taxes
and other expenses directly related to the sale.
10
<PAGE>
Note 8 - Subsequent Event
Subsequent to November 30, 1999, the Company decided that in connection
with the move to 90 Hudson Street from New York City, the Company expects, by
fiscal year end, to abandon and write-off approximately $3 million in net book
value of equipment and related software that will be incompatible with the new
network and production platform established at 90 Hudson Street and write-off
approximately $1.5 million in net book value of leasehold improvement costs at
its current locations in New York City. Accordingly, the estimated useful lives
of these assets have been reduced such that their book value will fully
depreciate/amortize as of the end of the current fiscal year.
11
<PAGE>
Item - 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Description of Business
National Discount Brokers Group, Inc. ("NDB Group") and its subsidiaries
(collectively, the "Company") are primarily engaged in the securities business
and in providing related financial services. National Discount Brokers
Corporation (formerly Triak Services Corp.), doing business as NDB.com
("NDB.com"), is an on-line deep discount brokerage firm specializing in trade
execution for individual investors. Sherwood Securities Corp. ("Sherwood
Securities") is primarily engaged in the securities business as a wholesale
market maker in Nasdaq National Market System and other over-the-counter
securities.
Results of Operations
The results of continuing operations of the Company for the three and six
months ended November 30, 1999 reflect primarily the activities of NDB.com and
Sherwood Securities.
We have experienced and expect to continue to experience, fluctuations in
quarterly operating results due to a variety of factors, including the value of
our market-making securities positions, the volume of our market-making
activities, volatility in the securities markets, our ability to attract and
retain personnel, overhead and other expenses, the amount of revenue derived
from limit orders as a percentage of net trading revenues, changes in payments
for order flow, clearing costs, the addition or loss of sales and trading
professionals, regulatory changes, the amount and timing of capital and
advertising expenditures and general economic conditions. If demand for our
market making and discount brokerage services declines either due to changing
market conditions or to competitive pressures, and we are unable to adjust our
cost structure on a timely basis, our operating results could be materially and
adversely affected. We have experienced, and may experience in the future, some
seasonality in our business.
Due to all of the foregoing factors, period-to-period comparisons of our
revenues and operating results are not necessarily meaningful and such
comparisons cannot be relied upon as indicators of future performance. There
also can be no assurance that we will be able to sustain the rates of revenue
growth that we have experienced in the past, that we will be able to improve our
operating results or that we will be able to sustain our profitability on a
quarterly basis.
On June 18, 1999, NDB Group and its wholly owned subsidiary, SHD Corp.,
sold their 46.845% aggregate membership interests in Equitrade Partners, L.L.C
("Equitrade"). As a result, the results of operations of Equitrade have been
segregated and reflected as discontinued operations in the Condensed
Consolidated Statements of Income and Comprehensive Income. For the six months
ended November 30, 1999, the Company has recognized a gain on the sale of
Equitrade of $20,516,000, net of taxes and other expenses directly related to
the sale. The gain on sale of discontinued operations of $461,000 for the
quarter ended November 30, 1999 represents an adjustment to the taxes estimated
to be owed on the sale of Equitrade.
The Company's consolidated net income from continuing operations for the
quarter ended November 30, 1999 was $4,311,000 compared to $4,433,000 for the
quarter ended November 30, 1998, a decrease of $122,000 or 3%. For the three
months ended November 30, 1999, Sherwood Securities had net income of $6,075,000
compared to net income of $4,516,000 for the three months ended November 30,
1998. NDB.com had a net loss of $1,794,000 for the quarter ended November 30,
1999, compared to a net loss of $635,000 for the quarter ended November 30,
1998.
The Company's consolidated net income from continuing operations for the
six months ended November 30, 1999 was $4,746,000 compared to $3,782,000 for the
six months ended November 30, 1998, an increase of $964,000 or 25%. For the six
months ended November 30, 1999, Sherwood Securities had net income of $9,853,000
compared to net income of $4,469,000 for the six months ended November 30, 1998.
NDB.com had a net loss of $6,043,000 for the six months ended November 30, 1999,
compared to a net loss of $1,550,000 for the six months ended November 30, 1998.
12
<PAGE>
Total revenue from continuing operations of the Company increased by
$25,476,000, or 56%, for the three months ended November 30, 1999, as compared
with the quarter ended November 30, 1998, and increased $46,750,000, or 61%, for
the six months ended November 30, 1999, as compared with the six months ended
November 30, 1998. Total revenue for Sherwood Securities was $52,330,000 (or
$17.36 per trade) and $88,224,000 (or $16.83 per trade) for the three and six
months ended November 30, 1999, respectively, as compared to $32,218,000 (or
$25.61 per trade) and $52,857,000 (or $21.85 per trade) for the three and six
months ended November 30, 1998, respectively. Total revenue for NDB.com (before
elimination of the rebate received from Sherwood Securities for order flow) was
$18,796,000 (or $29.89 per trade) and $35,947,000 (or $30.98 per trade) for the
three and six months ended November 30, 1999, respectively, as compared to
$13,163,000 (or $31.99 per trade) and $25,432,000 (or $32.15 per trade) for the
three and six months ended November 30, 1998, respectively. The reasons for the
changes in total revenues are set forth below.
Revenue from firm securities transactions generated by Sherwood Securities
increased by $19,561,000, or 63%, and by $34,480,000, or 68%, for the three and
six months ended November 30, 1999, respectively, as compared with the
equivalent periods in 1998. The increased activity in the equity markets,
particularly trading volume in internet and high technology related stocks,
resulted in increases in Sherwood Securities' ticket and share volume,
respectively, for the quarter and six months ended November 30, 1999 as compared
to the same periods a year ago. These increases in ticket and share volume were
more than enough to make up for the decrease in the trading profits per ticket.
<TABLE>
<CAPTION>
Three Months Ended November 30,
Percentage
1999 1998 Change
---- ---- ------
<S> <C> <C> <C>
Trading profit per ticket $16.85 $24.83 (33%)
Average daily trades 47,800 20,000 139%
Share volume (billions) 3.1 1.6 94%
Average number of shares
per ticket 1,030 1,300 (21%)
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended November 30,
Percentage
1999 1998 Change
---- ---- ------
<S> <C> <C> <C>
Trading profit per ticket $16.27 $21.00 (23%)
Average daily trades 41,000 18,900 117%
Share volume (billions) 5.5 3.2 72%
Average number of shares
per ticket 1,050 1,350 (22%)
</TABLE>
The Company's commission income, primarily generated by NDB.com, increased
by $4,198,000, or 44%, and by $7,670,000, or 42%, for the three and six months
ended November 30, 1999, respectively, when compared with the same periods in
the prior year. These increases occurred primarily due to a rise in NDB.com's
average daily ticket count. Increases in the volume of transactions for the U.S.
equity markets and an increase in the number of NDB.com's customer accounts led
to the rise in NDB.com's ticket count. The percentage increases in average daily
ticket count outpaced the percentage increases in commission income, however,
because a larger portion of NDB.com's transactions were performed via its lower
costing website, rather than utilizing higher costing live representatives.
<TABLE>
<CAPTION>
Three Months Ended November 30,
Percentage
1999 1998 Change
---- ---- ------
<S> <C> <C> <C>
Average daily tickets 10,000 6,500 54%
Average number of customers 168,800 110,200 53%
Average trades per customer 3.7 3.7 0%
Percentage of trades on-line 76% 59% 29%
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
Six Months Ended November 30,
Percentage
1999 1998 Change
---- ---- ------
<S> <C> <C> <C>
Average daily tickets 9,100 6,200 47%
Average number of customers 159,800 107,500 49%
Average trades per customer 7.3 7.4 (1%)
Percentage of trades on-line 74% 56% 32%
</TABLE>
Interest and dividend income increased by $2,539,000, or 113%, and
$5,029,000, or 111%, for the three and six months ended November 30, 1999,
respectively, as compared to the same periods in the prior year. These increases
are 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
cash of approximately $177,000,000 in connection with the underwritten public
offering of its common stock that closed on June 25, 1999 and the sale of its
membership interests in Equitrade on June 18, 1999. In addition, the average
customer debit and credit balances that are held with NDB.com's clearing broker
continued to rise.
Fee income generated by NDB.com increased by $475,000, or 48%, and
$915,000, or 48%, for the three and six months ended November 30, 1999,
respectively, as compared to the same periods in the prior year. The increases
are principally due to NDB.com receiving higher distribution assistance fees
from money market funds, as customers' balances in those funds have increased
since the prior year.
Total expenses for the three months ended November 30, 1999 increased
approximately $25,092,000, or 67%, from $37,617,000 in the quarter ended
November 30, 1998 to $62,709,000 during the quarter ended November 30, 1999.
Total expenses for the six months ended November 30, 1999 increased
approximately $44,830,000, or 64%, from $70,100,000 during the six months ended
November 30, 1998 to $114,930,000 during the current year. The reasons for the
changes in expenses are set forth below.
Compensation and benefits increased by $10,751,000, or 68%, and $16,479,000,
or 58%, for the three and six months ended November 30, 1999, respectively, as
compared to the equivalent periods in the prior year. As a percentage of
revenue, employee compensation and benefits was 38% and 36% for the three and
six months ended November 30, 1999, respectively, versus 35% and 37% for the
comparable periods in the prior fiscal year. The increases in this expense were
primarily due to a rise in compensation to Sherwood Securities' traders and
salesmen resultant from the increase in Sherwood Securities' net trading revenue
and profitability. Similarly, based on the increasing profitability of the
Company, management and employee bonuses have increased. Finally, the number of
employees increased to 399 for Sherwood Securities and 340 for NDB.com as of
November 30, 1999, from 291 and 219, respectively, as of November 30, 1998. The
increase in employees was necessitated by the significant increase in trade
volume and technological needs that the Company has experienced over the last
year. The Company expects compensation and benefits expense to continue to
increase in support of expected increases in customer accounts, customer assets
and trades.
Clearing and related brokerage charges increased by $2,658,000, or 25%, and
$5,255,000, or 26%, for the three and six months ended November 30, 1999,
respectively, as compared to same periods in the prior year. As a percentage of
revenue, clearing and related brokerage charges decreased to 19% and 20% for the
three and six months ended November 30, 1999, respectively, from 23% and 26% for
the comparable periods in fiscal 1998. The increase in clearing and related
charges for the three and six months ended November 30, 1999 was mainly due to
increases in Sherwood Securities' and NDB.com's ticket counts of 131% and 53%,
respectively, for the quarter ended November 30, 1999 and 117% and 47%,
respectively, for the six months ended November 30, 1999. Partially offsetting
these increases, and leading to the decrease in clearing and related brokerage
charges as a percentage of revenue, were decreases in per ticket rates
negotiated with NDB.com's clearing broker as of February 1999.
Communications increased by $906,000, or 25%, and $1,032,000, or 14%, for
the three and six months ended November 30, 1999, respectively, as compared to
the same periods in the prior year. The increases are mainly due to a rise in
the cost 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.
14
<PAGE>
Advertising costs increased by $6,097,000, or 515%, and $11,489,000, or
443%, for the three and six months ended November 30, 1999, respectively, as
compared to the comparable periods in the prior year. The increases are due to
additional media buys and the costs to produce a new line 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 and print media to attract new customers. NDB.com also
attains new customers through its affinity relationship program. Acquisition
costs per customer account for NDB.com were $379 and $378 for the three and six
months ended November 30, 1999 as compared to $107 and $156 for the three and
six months ended November 30, 1998. 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 partnerships to help abate these escalating
acquisition costs.
Sales-related travel and entertainment increased by $256,000, or 78%, and
$640,000, or 89%, for the three and six months ended November 30, 1999,
respectively, as compared to the same periods in the prior year. The increases
are due mainly to an increase in the number of Sherwood Securities'
institutional and broker-dealer sales personnel and additional efforts by this
sales force to attract new customers and maintain existing relationships.
Depreciation and amortization increased by $1,007,000, or 56%, and
$3,199,000, or 92%, for the three and six months ended November 30, 1999,
respectively, as compared to the equivalent periods in the prior year. These
increases can be attributed to two main factors. NDB.com and Sherwood Securities
incurred additional charges for the write-off of obsolete computer equipment and
software in connection with upgrades of their brokerage operations. Also
contributing to the increase is depreciation and amortization incurred on fixed
asset, leasehold improvement and computer software additions by Sherwood
Securities and NDB.com aggregating approximately $5,018,000 and $9,050,000,
respectively, during the period from June 1999 through November 1999.
Equipment rental costs increased by $542,000, or 399%, and $949,000, or
363%, for the three and six months ended November 30, 1999, respectively, as
compared to the same periods in the prior year. The Company has begun to lease a
larger portion of the equipment used in connection with NDB.com's WebstationTM
and Sherwood Securities' trading operations as the useful lives for much of this
equipment has decreased due to the rapidly changing technologies involved.
Technology consulting expense increased by $1,314,000, or 374%, and
$2,254,000, or 395%, for the three and six months ended November 30, 1999,
respectively, as compared to the comparable periods in the prior year. The
increases are primarily due to rising fees paid to consultants in order to test
and maintain NDB.com's website and Sherwood Securities' proprietary trading
system.
Repairs and maintenance costs increased by $482,000, or 88%, and $490,000,
or 44%, for the three and six months ended November 30, 1999, respectively, as
compared to the same periods in the prior year. These increases, primarily for
NDB.com, are 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 decreased by $590,000, or 49%, and $807,000, or 42%, for
the three and six months ended November 30, 1999, respectively, as compared to
the equivalent periods in the prior year, primarily due to a decrease in legal
fees.
Occupancy costs increased by $1,023,000, or 155%, and $2,152,000, or 170%,
for the three and six months ended November 30, 1999, respectively, as compared
to the same periods in the prior year. The increases are 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 by $643,000, or 48%, and $1,613,000, or 70%, for
the three and six months ended November 30, 1999, respectively, as compared to
the equivalent periods in the prior year. The increases are due primarily to an
increase in fees paid to employment agencies for the placement of new and
temporary employees, and fees for tuition and conferences for employees of
Sherwood Securities and NDB.com. The remainder of the increases in other
expenses is due to the overall growth in the volume of business and the increase
in staff size.
15
<PAGE>
The Company's effective tax rate was approximately 47% for the three month
period ended November 30, 1999 as compared to 43% for the three months ended
November 30, 1998 and was approximately 47% for the six month period ended
November 30, 1999 as compared to 46% for the six months ended November 30, 1998.
For the three and six months ended November 30, 1999, included in income tax
expense are deferred tax benefits of approximately $166,000 and $275,000,
respectively. These deferred tax benefits relate to the future taxability of
certain temporary book to tax basis differences and to the carryforward of
NDB.com's taxable loss to future periods for certain tax jurisdictions. In
conjunction with the deferred tax asset, the Company has recorded a valuation
allowance of $295,000 because, in management's judgment, it was concluded that
it was more likely than not that a portion of the benefit may not be realized.
Absent this valuation allowance, the Company's effective tax rate would have
been approximately 43% and 44% for the three and six months ended November 30,
1999, respectively.
Liquidity
The Company's tangible assets are highly liquid, but subject to market
price fluctuation, with more than 87% 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 the proceeds from the
sale of its common stock and its interest in Equitrade.
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.
NDB Group's broker-dealer subsidiaries, Sherwood Securities and NDB.com, are
subject to the SEC's minimum net capital requirement, which is designed to
measure the general financial soundness and liquidity of broker-dealers. As of
November 30, 1999, Sherwood Securities and NDB.com had approximately $59,343,000
and $16,491,000, respectively, in excess of the SEC required minimum net
capital. The net capital rule imposes financial restrictions upon Sherwood
Securities' and NDB.com's businesses, which are more severe than those imposed
on most other businesses.
Cash flows from operations will vary on a daily basis as the Company's
portfolio of marketable securities changes. The Company's ability to convert
marketable securities owned into cash is determined by the depth of the market
and the size of the Company's securities positions in relation to the market as
a whole. The portfolio mix also affects the regulatory capital requirements
imposed on Sherwood Securities and NDB.com, which directly affects the amount of
funds available for operating, investing and financing activities.
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 gain of approximately $42,000,000 (before a bonus to the Company's chief
executive officer), 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, the Company closed an underwritten public offering of
2,990,000 shares of its common stock, which resulted in its receipt of
approximately $91,600,000 in proceeds, net of underwriters' discounts and
commissions and expenses related to the offering.
The Company's capital expenditures were $23.0 million and $2.1 million
during the six months ended November 30, 1999 and 1998, respectively, including
deposits made on assets not yet placed in service. Capital expenditures during
the first six months of fiscal 2000 were primarily related to the expansion of
Sherwood Securities' trading floor and offices and the build out of the new
facilities at 90 Hudson Street in Jersey City, as well as for the continued
upgrading of the Company's information technology systems and telecommunications
equipment. The Company expects that it will spend an additional $25 million
during the remaining two quarters of fiscal year 2000 in capital expenditures
for its new facilities (including the data center) at 90 Hudson Street for a
16
<PAGE>
total of $35 million. 65% of these assets are expected to be leased/depreciated
over an average life of 24 to 36 months in accordance with the Company's leasing
or, if purchased, depreciation policies. The remainder will be depreciated over
the 15-year term of the 90 Hudson Street facilities lease. Moreover, the Company
expects to spend an additional $5-$7 million in capital expenditures on ongoing
technological improvements and product enhancements during the remaining two
quarters and intends to finance these upgrades, as it did during the six months
ended November 30, 1999, with funds received from the underwritten public
offering of its common stock that closed on June 25, 1999 and the sale of
Equitrade. As NDB.com expends money on new technology during the third and
fourth fiscal quarters of fiscal year 2000, maintenance costs (estimated at
about 16% to 18% annually of the hardware costs incurred) will increase in
proportion to these capital expenditures. The new space at 90 Hudson Street is
currently expected to be placed in operation by mid-calendar year 2000. In
connection with the move to 90 Hudson Street from New York City, the Company
expects to abandon and write-off approximately $3 million in net book value of
equipment and related software that will be incompatible with the new network
and production platform established at 90 Hudson Street and write-off
approximately $1.5 million in net book value of leasehold improvement costs at
its current locations in New York City.
The Company expects to spend approximately $16,000,000 on advertising
during the two remaining fiscal quarters of fiscal year 2000. NDB.com is
currently concentrating its advertising campaign on branding with some potential
for direct account acquisition. With the continued increase in marketing
spending by its competitors, NDB.com also continues to look for alternative
methods of account acquisition through business to business associations.
NDB.com, however, expects account acquisition costs to remain at approximately
$300 to $400 per account during the remainder of fiscal 2000, absent any new
business to business associations.
Cash flows from the Company's investment activities are directly related to
market conditions.
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.
Year 2000 Compliance
This material is subject to the Year 2000 Information and Readiness
Disclosure Act of 1998.
State of Readiness. 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 will be affected by the rollover of the two-digit year value
to 00. The issue is whether computer systems will properly recognize date
sensitive information when the year changes to 2000. Systems that do not
properly recognize such information could generate erroneous data or cause a
system to fail. The Company's plan to deal with the year 2000 issue was a
five-step plan, which included both information technology ("IT") and
non-information technology ("non-IT") systems. IT systems include the Company's
trading system, the Company's accounting software and the NDB.com WebstationTM.
Non-IT systems include the Company's headquarters' water, sprinkler and elevator
systems. The five steps were awareness, assessment, renovation, validation and
implementation. Awareness required the notification to all employees,
particularly senior management, of the potential year 2000 problem. Assessment
included taking inventory of every product or service produced or used by the
Company that relies on the use of dates. The date could be used to store,
search, retrieve or calculate information. The awareness and assessment phases
of the plan were 100% complete as of November 30, 1999. Renovation, which had
also been substantially completed as of November 30, 1999, included the
17
<PAGE>
conversion of year 2000 non-compliant systems into year 2000 compliant systems.
The Company believes that internal software and hardware identified as
non-compliant have been made compliant or replaced, in all material respects, as
of the date of this report. The Company has internally verified compliance of
its new NDB.com WebstationTM. Validation comprises the testing of all systems by
using test data with dates that include the year 2000. This is the certification
phase of the Company's production platforms. Implementation was a final review
of all year 2000 production systems, IT and non-IT, in service. The Company
completed, in all material respects, the validation and implementation phases.
The Company is dependent upon services rendered by third parties, such as
telecommunications, electric and clearance, which may have a material effect on
operations. These essential service providers indicated to the Company that they
were year 2000 compliant. The Company did not experience any year 2000 problems
with its production systems through the date of this report.
Costs. Through November 30, 1999, the Company spent approximately $434,000
for software modifications, hardware and testing related to year 2000 of which
$91,000 was incurred during the quarter ended November 30, 1999. The Company
does not track internal costs related to year 2000 issues, which consist
primarily of payroll expenses and, as a result, the foregoing estimate and
actual expenditures do not include such internal costs. The Company has assessed
that business interruption is the most reasonably likely worst case year 2000
scenario, although the effect upon the Company's results of operations,
liquidity and financial condition is unknown.
Contingency Plan. The Company formulated contingency plans should internal
systems, vendors or customers fail to become compliant or fail to operate as a
result of year 2000 problems.
Looking Ahead
The Company expects that it will spend an additional $25 million during the
remaining two quarters of fiscal year 2000 in capital expenditures for its new
facilities (including the data center) at 90 Hudson Street for a total of $35
million. Moreover, the Company expects to spend an additional $5-$7 million in
capital expenditures on ongoing technological improvements and product
enhancements during the remaining two quarters. The new space at 90 Hudson
Street is currently expected to be placed in operation by mid-calendar year.
The Company expects to spend approximately $16,000,000 on advertising
during the two remaining fiscal quarters of fiscal year 2000. NDB.com is
currently concentrating its advertising campaign on branding with some potential
for direct account acquisition. With the continued increase in marketing
spending by its competitors, NDB.com also continues to look for alternative
methods of account acquisition through business to business associations.
During the fiscal year ending May 31, 2000, Sherwood Securities has added
and is expected to add an aggregate of approximately 60 new trading and sales
positions to its facilities nationwide, bringing the total number to
approximately 310 nationwide. It is also expected that the upcoming change to
decimalization in the NASDAQ trading market will further narrow the spread
between "bid" and "ask" prices on the stocks in which Sherwood Securities makes
markets and may adversely affect profitability per ticket. Management believes,
however, that Sherwood will be able to capitalize on the increased volatility
and liquidity in the markets that decimalization may bring about.
In connection with the growth of both Sherwood Securities and NDB.com, the
Company's employee count has grown from 702 at August 31, 1999 to 739 at
November 30, 1999. During the fiscal year ending May 31, 2000, Sherwood
Securities has added and is expected to add an aggregate of approximately 60 new
trading and sales positions to its facilities nationwide, bringing the total
number to approximately 310 nationwide. The Company intends to continue to
expand its workforce during the remainder of the current fiscal year and
believes competition for employees in the brokerage and technology fields will
put upward pressure on average employee compensation. Separately, the Company
estimates that it will begin self-clearing NDB.com and Sherwood Securities at
the end of calendar year 2000.
18
<PAGE>
Item 3 - 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 credit
risk, legal risk, operating risk and market risk.
Credit risk is the potential for loss due to a customer or counterparty
failing to perform its contractual obligations. The Company clears its
securities transactions through unaffiliated clearing agents. Under the terms of
its clearing agent agreements, the Company's clearing agents have the right to
charge it for losses that result from its customers' failure to fulfill their
contractual obligations. In order to mitigate risk, the Company's policy is to
monitor the credit standing of its customers and maintain collateral to support
margin loans to customers. Further, a significant portion of the Company's and
its customer assets are held at one or more clearing agents. Therefore, it would
incur substantial losses if one of the Company's clearing agents were to become
insolvent or otherwise unable to meet its financial obligations.
Operating risk is the potential for loss due to deficiencies in control
processes or computer and technological systems. The Company relies heavily on
various computer and communications systems to operate its business, including
NDB.com's web site. The Company relies particularly on third parties such as
Nasdaq, telephone companies, online service providers, 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 Part
II, Item 1, below). 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 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
19
<PAGE>
its capital to significant equity price risk. To mitigate this risk, senior
management monitors profits and losses on a real-time basis throughout the
trading day. Further, from the Company's system-generated reports, senior
management reviews positions, mark-to-market valuations, and daily profits and
losses on individual security positions. Additionally, traders are required to
maintain positions meeting a specified potential profit/loss ratio, which is
monitored by management.
The Company maintains inventories for trading purposes in exchange-listed,
Nasdaq and other over-the-counter securities on both a long and short basis. The
fair value of these securities at November 30, 1999 was $69.4 million in long
positions and $40.8 million in short positions. The potential loss in fair
value, using a hypothetical 10% decline in prices, is estimated to be $2.9
million as of November 30, 1999. 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 three
privately held corporations. These investments were valued at their fair value,
$600,000 at November 30, 1999, 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 $60,000 as of November 30, 1999.
PART II - OTHER INFORMATION
Item 1 - LEGAL PROCEEDINGS
Certain significant legal proceedings and matters were previously disclosed
in Item 3, Legal Proceedings, of the Company's Annual Report on Form 10-K for
the year ended May 31, 1999, and the disclosures regarding such matters are
incorporated herein by reference. Many aspects of the business of the Company
involve substantial risks of potential liability. In recent years, there has
been an increasing incidence of litigation involving the securities industry,
including class action suits that generally seek substantial damages. Companies
engaged in the underwriting and distribution of securities are exposed to
substantial liability under federal and state securities laws. The Company is,
from time to time, involved in proceedings with, and investigations by,
governmental and self-regulatory agencies.
The Company has been named as a defendant in a number of lawsuits and
arbitrations and is the subject of investigations that allege, among other
things, violations of Federal and state securities laws and other laws. A
substantial settlement or judgment in any of these cases could have a material
adverse effect on the Company. Except as described disclosed in Item 3 to the
Company's Form 10-K for the year ended May 31, 1999, Form 10-Q for the quarter
ended August 31, 1999 and this Form 10-Q, 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 November 8, 1999, the settlement agreement in the case In Re: Nasdaq
Market Makers Antitrust Litigation became final when an application for an
extension of time to petition for certiorari was denied by a justice of the
United States Supreme Court.
Item 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Company held an Annual Meeting of its Stockholders on October 20, 1999.
(b) (i) The following persons were elected directors for a term of
three years:
20
<PAGE>
<TABLE>
<CAPTION>
Votes Votes
For Withheld
<S> <C> <C>
John P. Duffy 13,788,448 153,422
Thomas W. Neumann 13,788,448 153,422
Charles Kirkland Kellogg 13,788,348 153,522
The following persons continued as directors:
Arthur Kontos, James H. Lynch, Jr., Dennis Marino and Ralph N. Del Deo.
</TABLE>
<TABLE>
<CAPTION>
(ii) The shareholders ratified the 2000 National Discount Brokers Group, Inc. Compensation Plan.
The following was the shareholder vote on this matter:
<S> <C>
For: 12,695,869
Against: 1,179,192
Withheld: 66,809
Broker Non-Vote: 0
</TABLE>
<TABLE>
<CAPTION>
(iii) The shareholders ratified the appointment of
PricewaterhouseCoopers LLP as the Company's independent auditors for the fiscal
year ending May 31, 2000. The following was the shareholder vote on this matter:
<S> <C>
For: 13,841,401
Against: 48,070
Withheld: 52,399
Broker Non-Vote: 0
</TABLE>
Item 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit 10(a) - Employment Agreement dated as of
November 8, 1999 between Daniel
Fishbane and the Company
Exhibit 10(b) - 2000 National Discount Brokers Group,
Inc. Compensation Plan incorporated
by reference to Exhibit A to the National
Discount Brokers Group, Inc. Proxy
Statement dated September 9, 1999
Exhibit 11 - Computation of Net Income Per Common Share
Exhibit 27 - Financial Data Schedule
(b) The Company filed no reports on Form 8-K during the quarter ended November
30, 1999.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
National Discount Brokers Group, Inc.
-------------------------------------
Date: January 11, 2000 By: Arthur Kontos
---------------------- -------------------------------------
Arthur Kontos
Chief Executive Officer
Date: January 11, 2000 By: Daniel Fishbane
---------------------- -------------------------------------
Daniel Fishbane
Chief Financial Officer and
Principal Accounting Officer
<PAGE>
EXHIBIT 10(a)
EMPLOYMENT AGREEMENT
AGREEMENT dated November 8, 1999 effective as of January 1, 2000 by and
between NATIONAL DISCOUNT BROKERS GROUP, INC., a Delaware corporation, with its
principal offices located at Ten Exchange Place Centre, Jersey City, New Jersey
07302 (the "Company"), and Daniel Fishbane, with an address at 18 Lakeside Road,
Mt Kisco, New York 10549 ("Employee");
R E C I T A L S:
WHEREAS, the Company desires to employ Employee and Employee desires to
accept employment on the terms and conditions hereinafter set forth;
NOW, THEREFORE, it is agreed as follows:
1. DEFINITIONS
As used in this Agreement, the following terms shall have the meanings
set forth below:
1.1 "Affiliate" with respect to a person shall mean a corporation,
partnership or limited liability company which, directly or indirectly,
controls, is controlled by or is under common control with such person, and for
purposes hereof, "control" shall mean the ownership of 20% or more of the Voting
Stock of the entity in question or a trust with respect to which such person is
the sole trustee.
1.2 "Basic Salary" shall have the meaning assigned to that term in
Section 5.1 of this Agreement.
1.3 "Board" shall mean the Board of Directors of the Company as duly
constituted from time to time. Any action of the Board hereunder with respect to
this Agreement shall require the approval of a majority of the whole Board of
Directors of the Company.
1.4 "Business" shall mean the business conducted by the Company or any
Subsidiary, directly or indirectly.
1.5 "Cause" shall mean any of the following:
(a) The conviction of Employee for a felony, or the willful
commission by Employee of a criminal act or other act that in the reasonable
judgment of the Board causes or will likely cause substantial economic damage to
the Company or substantial injury to the business reputation of the Company;
(b) The commission by Employee of an act of fraud in the
performance of Employee's duties on behalf of the Company;
(c) The continuing willful failure of Employee to perform the
substantive duties of Employee to the Company (other than any such failure
resulting from Employee's incapacity due to physical or mental illness) after
written notice thereof (specifying the particulars thereof in reasonable detail)
and a reasonable opportunity to be heard and cure such failure are given to
Employee by the compensation committee of the Board;
(d) the loss of, or suspension by, a regulatory body or court
of competent jurisdiction of Employee's right to serve as the financial
principal for any subsidiary of the Company which is a broker dealer; or
(e) the order of a federal or state regulatory agency or a
court of competent jurisdiction requiring the termination of Employee's
employment.
For purposes of this subparagraph 1.5, no act, or failure to
act, on Employee's part shall be considered "willful" unless done, or omitted to
be done, by him not in good faith and without reasonable belief that his action
or omission was in the best interests of the Company or a Subsidiary.
1.6 "Change of Control" shall mean:
(A) any "person" (as such term is used in Sections 13(d) and 14(d) of
the Securities Exchange Act of 1934, as amended (the "Act")), other than a
trustee or other fiduciary holding securities under an employee benefit plan of
the Company, Mr. Arthur Kontos and any Affiliate of Mr. Kontos, or a person
engaging in a transaction of the type described in clause (C) of this subsection
but which does not constitute a change in control under such clause, is or
becomes the "beneficial owner" (as defined in Rule 13d-3 under the Act),
directly or indirectly, of securities of the Company representing 30% or more of
the combined voting power of the Company's then outstanding securities entitled
to vote in the election of directors;
(B) during any period of two consecutive years during the term of this
Agreement, individuals who at the beginning of such period constitute the Board
and any new director (other than a director designated by a person who has
entered into as agreement with the Company to effect a transaction described in
clauses (A), (C) or (D) of this subsection) whose election by the Board or
nomination for election by the Company shareholders was approved by a vote of at
least two-thirds of the directors then still in office who either were directors
at the beginning of the period or whose election or nomination for election was
previously so approved, cease for any reason to constitute a majority thereof;
(C) the shareholders of the Company approve, or if no shareholder
approval is required or obtained, the Company or a subsidiary of the Company
completes a merger, consolidation or similar transaction of the Company or a
subsidiary of the Company with or into any other corporation, or a binding share
exchange involving the Company's securities occurs, other than any such
transaction which would result in the voting securities of the Company
outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into voting securities of the
surviving entity) at least 51% of the combined voting power of the voting
securities of the Company or such surviving entity outstanding immediately after
such transaction; or
(D) the shareholders of the Company approve a plan of complete
liquidation of the Company or an agreement for the sale or disposition by the
Company of all or substantially all the Company's assets.
1.7 "Code" shall mean the Internal Revenue Code of 1986, as amended, and
the rules, regulations and interpretations issued thereunder.
1.8 "Commencement Date" shall be January 1, 2000.
1.9 "Confidential Information" shall include, without limitation by
reason of specification, any information, including, without limitation, trade
secrets, operational methods, methods of doing business, technical processes,
formulae, designs and design projects, inventions, research projects, strategic
plans, possible acquisition information and other business affairs of the
Company or its Affiliates, which (i) is or are designed to be used in, or are or
may be useful in connection with, the Business of the Company, any Subsidiary or
any Affiliate of any thereof, or which, in the case of any of these entities,
results from any of the research or development activities of any such entity,
or (ii) is private or confidential in that it is not generally known or
available to the public, except as the result of unauthorized disclosure by or
information supplied by Employee, or (iii) gives the Company or a Subsidiary or
any Affiliate an opportunity or the possibility of obtaining an advantage over
competitors who may not know or use such information or who are not lawfully
permitted to use the same.
1.10 "Date of Termination" shall mean the Term Date, or any date upon
which this Agreement shall terminate pursuant to Section 7 hereof.
1.11 "Disability" shall mean the inability of Employee to perform
Employee's duties of employment for the Company, if employed by the Company or a
Subsidiary, pursuant to the terms of this Agreement and by-laws of the Company
as hereinafter provided, because of physical or mental disability, where such
disability shall have existed for a period of more than 180 consecutive days or
an aggregate of 270 days in any 365 day period. The existence of a Disability
means that Employee's mental and/or physical condition substantially interferes
with Employee's performance of his substantive duties for the Company and/or its
Subsidiaries as specified in this Agreement. The fact of whether or not a
Disability exists hereunder shall be determined by professionally qualified
medical experts selected by the Board and reasonably acceptable to Employee or
his agent.
1.12 "Dispute" shall have the meaning assigned to that term in Section
7.8 of this Agreement.
1.13 "Duties" shall have the meaning assigned to that term in Section
2.1 of this Agreement.
1.14 "Employment Year" shall mean each twelve-month period, or part
thereof, during which Employee is employed hereunder, commencing on the
Commencement Date and on the same day of the subsequent calendar year and each
consecutive 12 month period thereafter.
1.15 "Good Reason" shall have the meaning given such term in Section
7.6.
1.16 "Normal Retirement Date" shall mean the month in which Employee turns age
62.
1.17 "Panel" shall have the meaning given such terms in Section 8.
1.18 "Person" shall mean any individual, sole proprietorship,
partnership, joint venture, trust, unincorporated organization, association,
corporation, limited liability company, institution, public benefit corporation,
entity or government (whether federal, state, county, city, municipal or
otherwise, including, without limitation, any instrumentality, division, agency,
body or department thereof).
1.19 "Subsidiary" shall mean a corporation, partnership, or limited
liability company of which 50% or more of the Voting Stock is owned, directly or
indirectly, by the Company.
1.20 "Term" shall mean the term of employment of Employee under this
Agreement.
1.21 "Term Date" shall have the meaning assigned to that term in
Section 3 of this Agreement.
1.22 "Voting Stock" shall mean in case of a corporation, capital stock
of a corporation or in the case of a limited liability company, a membership
interest or in the case of a partnership, an interest in a partnership which in
case of capital stock gives the holder the right to vote in the election of
directors for such corporation in the ordinary course of business and not as the
result of, or contingent upon, the happening of any event, or in the case of a
limited liability company, the right to elect persons serving in the same
capacity as a director of a corporation or performing such functions, or in the
case of a partnership, the right to participate in the management of the
partnership or select the persons who perform such functions.
Wherever from the context it appears appropriate, each word or phrase
stated in either the singular or the plural shall include the singular and the
plural, and each pronoun stated in the masculine, feminine or neuter gender
shall include the masculine, feminine and neuter.
2. EMPLOYMENT AND DUTIES OF EMPLOYEE
2.1 Employment; Title; Duties. The Company hereby employs Employee, and
Employee hereby accepts appointment, as Senior Vice President, and Chief
Financial Officer of the Company. The duties of Employee shall be to have
general supervisory authority over the preparation of financial statements of
the Company and its Subsidiaries, those responsibilities assigned to him by the
Board or the Chief Executive Officer of the Company, and to render services as
are necessary and desirable to protect and to advance the best interests of the
Company and its Subsidiaries (collectively, the "Duties"), acting, in all
instances, under the supervision of and in accordance with the policies set by
the Board or the Chief Executive Officer of the Company.
2.2 Performance of Duties. Employee shall devote substantially all his
working time to perform the Duties as an executive of the Company and for the
performance of such other executive duties as are assigned to him from
time-to-time by the Board or the Chief Executive Officer of the Company. During
the Term, Employee: (i) shall comply with all laws, statutes, ordinances, rules
and regulations relating to the Business, and (ii) shall not engage in or become
employed, directly or indirectly, in any business, without the prior written
consent of the Board or the Chief Executive Officer of the Company, nor shall he
act as a consultant to or provide any services to, whether on a remunerative
basis or otherwise, the commercial or professional business of any other Person,
without such prior written consent, which, in both instances, may be given or
withheld by the Board or the Chief Executive Officer of the Company in its or
his absolute discretion.
3. TERM OF EMPLOYMENT
The term of this Agreement shall commence as of the Commencement Date
and shall end two years thereafter, unless Employee's employment by the Company
is terminated sooner pursuant to Section 7 (the "Term Date").
4. COMPENSATION AND BENEFITS
The Company shall pay Employee, as compensation for all of the services
to be rendered by him hereunder during the Term, and in consideration of the
various restrictions imposed upon Employee during the Term and the Restricted
Period, and otherwise under this Agreement, the Basic Salary and other benefits
as provided for and determined pursuant to Sections 5 and 6, inclusive, of this
Agreement; provided, however, that no compensation shall be paid to Employee
under this Agreement for any period subsequent to the termination of employment
of Employee for any reason whatsoever, except as provided in Section 7.
5. BASIC SALARY/BONUS
5.1 Basic Salary. The Company shall pay Employee, as compensation for
all of the services to be rendered by him hereunder for the Company during each
Employment Year, a salary of $275,000 per Employment Year (as adjusted upward by
the Board from time to time) (the "Basic Salary"), payable in substantially
equal bi-weekly payments, less such deductions or amounts as are required to be
deducted or withheld by applicable laws or regulations, deductions for employee
contributions to welfare benefits provided by the Company to Employee and such
other deductions or amounts, if any, as are authorized by Employee. The Basic
Salary shall be prorated for the month in which employment by the Company or a
Subsidiary commences or terminates, and for any Employment Year which is less
than twelve (12) months in duration. The Basic Salary may be increased from
time-to-time by the Board and, once increased, shall not thereafter be reduced.
The Basic Salary shall be reviewed at least once in every Employment Year by a
committee of the Board responsible for determining compensation of senior
management of the Company, each of the members of which is a
"non-employee-director" as defined in Rule 16b-3 of the Securities and Exchange
Commission under the Act (the "Committee"). Any increase in Basic Salary shall
not serve to offset or reduce any other obligation to Employee under this
Agreement.
5.2 Bonus. Employee will be awarded and, unless deferred by Employee,
paid a cash bonus (the "Bonus") for each Employment Year within ninety days
after the close of the Employment Year in an amount determined in accordance
with the Company's then-current bonus or incentive compensation plan in an
amount appropriate for the chief financial officer of the Company, but not less
than $125,000 (pro rated for any portion of an Employment Year of less than 12
months). It shall be a condition to the payment of the first Bonus to Employee
that he be actively employed by the Company at the end of the twelfth month
after the Commencement Date.
5.3 Equity Participation. The Company hereby grants to Employee a stock
option in the form attached as Exhibit A hereto for 10,000 shares of common
stock of the Company as adjusted for recapitalizations of the Company between
the date of signing of this Agreement and the Commencement Date.
6. ADDITIONAL BENEFITS AND REIMBURSEMENT FOR EXPENSES
6.1 Additional Benefits. The Company shall provide the following
additional benefits to Employee during the Term:
(i) provision of a comprehensive medical indemnity policy for
Employee and his family having terms no less favorable than the coverage made
available to other executives of the Company;
(ii) a comprehensive disability policy for Employee having terms
no less favorable than coverage made available to other executives of the
Company;
(iv) twenty working days of paid vacation; and
(v) such other benefits as the Board shall lawfully adopt and
approve for Employee.
6.2 Reimbursement for Expenses. The Company shall pay or reimburse
Employee for all reasonable expenses actually incurred or paid by him during the
Term in the performance of his services under this Agreement, upon presentation
of such bills, expense statements, vouchers or such other supporting information
as the Board may reasonably require. In the event the Company requires Employee
to travel on business during the Term, Employee shall be reimbursed for any
travel expenses in accordance with this Section 6.2.
7. TERMINATION OF EMPLOYMENT
7.1 Death. If Employee dies during the Term, this Agreement shall
terminate, except that the Company shall pay accrued and unpaid Bonus for any
completed Employment Year, the Bonus for the Employment Year in which Employee
dies pro rated to the date of death, and provide for the payment of the life
insurance benefit provided to him by the Company.
7.2 Disability. If, during the Term, Employee has a Disability, the
Company may, at any time after Employee has a Disability, terminate Employee's
employment by written notice to him. In the event that Employee's employment is
terminated because Employee has a Disability, this Agreement shall terminate
except that the Company shall pay accrued and unpaid Bonus for any completed
Employment Year, pay the Bonus for the Employment Year in which Employee becomes
Disabled pro rated to the Date of Termination, and pay or provide for the
payment of the disability benefit provided for him as provided by disability
plans of the Company.
7.3 Voluntary Termination. This Agreement may be terminated by Employee
at any time with or without cause upon sixty (60) days prior written notice to
the Company. After such sixty day period, the Company shall have no further
liability to make payments hereunder except those required by law.
7.4 Termination for Cause. The Company may terminate Employee's
employment hereunder for Cause at any time by written notice given to Employee
by the Board. Upon such termination Employee shall not have any right to receive
any further payments hereunder except as provided in Section 7.8.
7.5 Termination Without Cause. Employee's employment by the Company may
be terminated by the Company without Cause. If his employment is terminated by
the Company without Cause, Employee shall be entitled to continued payment of
the Basic Salary for the balance of the stated Term of this Agreement as if this
Agreement had not been terminated or one year whichever is less and to receive
the benefits described in Section 6.1 for lesser of the balance of the then
stated Term as if this Agreement had not been terminated or one year.
7.6 Termination for Good Reason. In the event Employee terminates his
employment with the Company for Good Reason, Employee shall receive the same
payments and benefits as he would have received if his employment by the Company
were terminated without Cause pursuant to Section 7.5. Good Reason for purposes
of this Agreement means:
(a) (i) The assignment by the Company to Employee of duties
which are materially different than those of the chief financial officer of the
Company as described in this Agreement, (ii) the removal of Employee from, or
any failure to reappoint or reelect Employee to, the highest title held by
Employee, except in connection with a termination of Employee's employment by
the Company for Cause, or by reason of Employee's death or Disability;
(b) A reduction or non-payment of Employee's Basic Salary or
failure to review Employee's Basic Salary as required in this Agreement or
failure to pay the Bonus;
(c) A breach by the Company of this Agreement which is not cured
within thirty (30) days after written notice thereof to the Board by Employee;
(d) Requiring Employee to be based anywhere other than the
Company's then current principal executive office except for required travel on
the Company's business or relocation of the Company's principal executive office
outside northern New Jersey or the Borough of Manhattan, City of New York;
(e) The failure by the Company to provide Employee with
substantially the same welfare benefits (which for purposes of this Agreement
shall mean benefits under all welfare plans as that term is defined in Section
3(1) of Employee Retirement Income Security Act of 1974, as amended) in which
executives of the Company of comparable title and salary participate, or with a
package of welfare benefits that, though one or more of such benefits may vary
from those, is substantially comparable in all material respects to such welfare
benefits taken as a whole;
(f) The failure of the Company to obtain the express written
assumption of and agreement to perform this Agreement by any successor as
contemplated in Section 13 hereof; or
(h) A Change of Control shall occur.
7.7 Notice of Termination. Any purported termination of Employee's
employment by the Company by reason of Employee's Disability or for Cause, or by
Employee for Good Reason shall be communicated by written Notice of Termination
to the other party hereto. For purposes of this Agreement, a "Notice of
Termination" shall mean a notice given by Employee or the Company, which shall
indicate the specific basis for termination of employment and shall set forth in
reasonable detail the facts and circumstances claimed to provide a basis for
determination of any payments under this Agreement.
7.8 Date of Termination. For purposes of this Agreement, "Date of
Termination" shall mean the date of termination of employment specified in the
Notice of Termination, which shall not be more than ninety (90) days after such
Notice of Termination is given, as such date may be modified pursuant to the
following two sentences. If within thirty (30) days after any Notice of
Termination is given, the party who receives such Notice of Termination notifies
the other party that a Dispute exists (a "Notice of Dispute"), the Date of
Termination shall be the date on which the Dispute is finally determined, either
by mutual written agreement of the parties, by the Panel, or by a final
judgment, order or decree of a court of competent jurisdiction (the time for
appeal therefrom having expired and no appeal having been perfected); provided
that the Date of Termination shall be extended by a Notice of Dispute only if
such notice is given in good faith and the party giving such notice pursues the
resolution of such Dispute with reasonable diligence, and provided further that
pending the resolution of any such Dispute, the Company shall continue to pay
Employee the same Basic Salary and to provide Employee with the same or
substantially comparable welfare benefits to the extent then so available at the
date of such determination, and provided to the extent that such continued
participation is possible under the general terms and provisions of such
benefits but in no event beyond the Term Date; provided however that the Basic
Salary payment shall be reduced by any compensation earned by Employee after he
ceased employment by the Company until the Date of Termination. Should a Dispute
ultimately be determined in favor of the Company, then all sums (net of tax
withholdings by the Company from such sums) paid by the Company to Employee from
the Date of Termination specified in the Notice of Termination until final
resolution of the Dispute pursuant to this paragraph shall be repaid promptly by
Employee to the Company. Employee shall not be obligated to pay to the Company
the cost of providing Employee with welfare benefits for such period, unless the
final judgment, order or decree of a court arbitration panel or other body
resolving the Dispute determines that Employee acted in bad faith in giving a
Notice of Dispute. Should a Dispute ultimately be determined in favor of
Employee, then Employee shall be entitled to retain all sums paid to Employee
under this subparagraph pending resolution of the Dispute and shall be entitled
to receive, in addition, the payments and other benefits provided for in Section
7 to the extent not previously paid hereunder and the payment of Employee's
reasonable legal fees incurred as a result of such Dispute upon submission to
the Company of a detailed statement of fees from Employee's attorneys. The term
"Dispute" means that the Company finds that Employee may be dismissed for Cause
or Disability and Employee disputes such finding or Employee finds that Good
Reason exists and the Company disputes such finding.
8. ARBITRATION
Except as otherwise provided herein, the parties hereby agree that any
Dispute or any dispute regarding the rights and obligations of any party under
this Agreement or under any law governing the relationship created by this
Agreement, including without limitation Employee's challenge of a purported
termination for Cause or Disability, must be resolved pursuant to this Section
8. Within seven (7) days of either party's written notice to the other of his or
its desire to submit any Dispute or arbitrable matter as set forth herein to
arbitration, the parties will meet to attempt to amicably resolve their
differences and, failing such resolution, either or both of the parties may
submit the matter to mandatory and binding arbitration with the Center for
Public Resources ("CPR"). The issue(s) in dispute shall be settled by
arbitration in accordance with the Center for Public Resources Rules for
Non-Administered Arbitration of Business Disputes, by a panel of three
arbitrators (the "Panel"). The only issue(s) to be determined by the Panel will
be those issues specifically submitted to the Panel. The Panel will not extend,
modify or suspend any of the terms of this Agreement. The arbitration shall be
governed by the United States Arbitration Act, 9 U.S.C. ss.1-16, and judgment
upon the award rendered by the Panel may be entered by any court having
jurisdiction thereof. A determination of the Panel shall be by majority vote.
Promptly following receipt of the request for arbitration, CPR shall
convene the parties in person or by telephone to attempt to select the
arbitrators by agreement of the parties. If agreement is not reached, the
Company shall select one arbitrator and Employee shall select one other
arbitrator. These two arbitrators shall select a third arbitrator. If these two
arbitrators are unable to select the third arbitrator by mutual agreement, CPR
shall submit to the parties a list of not less than eleven (11) candidates. Such
list shall include a brief statement of each candidate's qualifications. Each
party shall number the candidates in order of preference, shall note any
objection they may have to any candidate, and shall deliver the list so marked
back to CPR. Any party failing without good cause to return the candidate list
so marked within ten (10) days after receipt shall be deemed to have assented to
all candidates listed thereon. CPR shall designate the arbitrator willing to
serve for whom the parties collectively have indicated the highest preference
and who does not appear to have a conflict of interest. If a tie should result
between two candidates, CPR may designate either candidate.
This agreement to arbitrate is specifically enforceable. Judgment upon
any award rendered by the Panel may be entered in any court having jurisdiction.
The decision of the Panel within the scope of the submission is final and
binding on all parties, and any right to judicial action on any matter subject
to arbitration hereunder hereby is waived (unless otherwise provided by
applicable law), except suit to enforce this arbitration award or in the event
arbitration is not available for any reason or in the event the Company shall
seek equitable relief to enforce Section 9 of this Agreement. If the rules of
the CPR differ from those of this Section 8, the provisions of this Section 8
will control. The Company shall pay all the costs of arbitration including the
fees of the arbitrators, and the arbitrators shall award reasonable legal fees
to Employee, unless the arbitrators or a judicial forum shall finally determine
that Employee acted in bad faith. In no event is the Panel empowered to make a
punitive damage award to any party hereto or to make an award of consequential
damages to any party hereto.
9. CONFIDENTIAL INFORMATION AND PROPRIETARY INTERESTS
9.1 Acknowledgment of Confidentiality. Employee understands and
acknowledges that he may obtain Confidential Information during the course of
his employment by the Company. Accordingly, Employee agrees that he shall not,
either during the Term or at any time within one year after the Date of
Termination (the "Restricted Period"), (i) use or disclose any such Confidential
Information outside the Company, its Subsidiaries and Affiliates; or (ii) except
as required in the proper performance of his services hereunder, remove or aid
in the removal of any Confidential Information or any property or material
relating thereto from the premises of the Company or any of its Subsidiaries or
Affiliates.
The foregoing confidentiality provisions shall cease to be applicable to
any Confidential Information which becomes generally available to the public
(except by reason of or as a consequence of a breach by Employee of his
obligations under this Section 9).
In the event Employee is required by law or a court order to disclose
any such Confidential Information, he shall promptly notify the Company of such
requirement and provide the Company with a copy of any court order or of any law
which in his opinion requires such disclosure and, if the Company so elects, to
the extent that he is legally able, permit the Company an adequate opportunity,
at its own expense, to contest such law or court order.
9.2 Delivery of Material. Employee shall promptly, and without charge,
deliver to the Company on the termination of his employment hereunder, or at any
other time the Company may so request, all memoranda, notes, records, reports,
manuals, computer disks, videotapes, drawings, blueprints and other documents
(and all copies thereof) relating to the Business of the Company, its
Subsidiaries and its Affiliates, and all property associated therewith, which he
may then possess or have under his control.
11. SURVIVAL
The provisions of Sections 7, 8, 9, 10 and 14 shall survive
termination of this Agreement and remain enforceable according to their terms.
11. SEVERABILITY
The invalidity or unenforceability of any provision of this Agreement
shall in no way affect the validity or enforceability of any other provisions
hereof.
12. NOTICES
All notices, demands and requests required or permitted to be given
under the provisions of this Agreement shall be deemed duly given if made in
writing and delivered personally or mailed by postage prepaid certified or
registered mail, return receipt requested, accompanied by a second copy sent by
ordinary mail, which notices shall be addressed as follows:
If to the Company:
National Discount Brokers Group, Inc.
10 Exchange Place Centre
15th Floor
Jersey City, New Jersey 07302
Attention: Frank E. Lawatsch, Jr.
If to Employee:
Daniel Fishbane
18 Lakeside Road
Mt. Kisco, New York 10549
By notifying the other parties in writing, given as aforesaid, any party
may from time-to-time change its address or the name of any person to whose
attention notice is to be given, or may add another person to whose attention
notice is to be given, in connection with notice to any party.
13. ASSIGNMENT AND SUCCESSORS
Neither this Agreement nor any of his rights or duties hereunder may be
assigned or delegated by Employee. This Agreement is not assignable by the
Company, including, without limitation, to any successor in interest which takes
over all or substantially all of the business of the Company, as it is conducted
at the time of such assignment, without the written consent of Employee. Any
corporation into or with which the Company is merged or consolidated or which
takes over all or substantially all of the business of the Company shall be
deemed to be a successor of the Company for purposes hereof and the Company
shall require as a condition thereof that such corporation assume this Agreement
in form and substance satisfactory to Employee. This Agreement shall be binding
upon and, except as aforesaid, shall inure to the benefit of the parties and
their respective successors and permitted assigns.
14. ENTIRE AGREEMENT, WAIVER AND OTHER
14.1. Integration. This Agreement contains the entire agreement of the
parties hereto on its subject matter and supersedes all previous agreements
between the parties hereto, written or oral, express or implied, covering the
subject matter hereof. No representations, inducements, promises or agreements,
oral or otherwise, not embodied herein, shall be of any force or effect.
14.2. No Waiver. No waiver or modification of any of the provisions of
this Agreement shall be valid unless in writing and signed by or on behalf of
the party granting such waiver or modification. No waiver by any party of any
breach or default hereunder shall be deemed a waiver of any repetition of such
breach or default or shall be deemed a waiver of any other breach or default,
nor shall it in any way affect any of the other terms or conditions of this
Agreement or the enforceability thereof. No failure of the Company to exercise
any power given it hereunder or to insist upon strict compliance by Employee
with any obligation hereunder, and no custom or practice at variance with the
terms hereof, shall constitute a waiver of the right of the Company to demand
strict compliance with the terms hereof.
Employee shall not have the right to sign any waiver or modification of
any provisions of this Agreement on behalf of the Company, nor shall any action
taken by Employee reduce his obligations under this Agreement.
This Agreement may not be supplemented or rescinded except by instrument
in writing signed by both of the parties hereto after the date hereof. Neither
this Agreement nor any of the rights of any of the parties hereunder may be
terminated except as provided herein.
15. MISCELLANEOUS
15.1 Governing Law. This Agreement shall be governed by and construed,
and the rights and obligations of the parties hereto enforced, in accordance
with the laws of the State of New Jersey.
15.2 Headings. The Section and Subsection headings contained herein are
for reference purposes only and shall not in any way affect the meaning or
interpretation of this Agreement.
15.3 Severability. The invalidity or unenforceability of any provision
of this Agreement shall in no way affect the validity or enforceability of any
other provisions hereof.
15.4 Obligations of Company. The Company's obligation to pay Employee
the compensation and to make the arrangements provided herein shall be absolute
and unconditional and shall not be affected by any circumstances, including,
without limitation, any setoff, counterclaim, recoupment, defense or other right
which the Company may have against Employee or anyone else. All amounts payable
by the Company hereunder shall be paid without notice or demand. Except as
expressly provided herein, the Company waives all rights which it may now have
or may hereafter have conferred upon it, by statute or otherwise, to terminate,
cancel or rescind this Agreement in whole or in part. Except as provided in
Section 7.8 herein, each and every payment made hereunder by the Company shall
be final and the Company will not seek to recover for any reason all or any part
of such payment from Employee or any person entitled thereto. Except as provided
in Section 7.8 Employee shall not be required to mitigate the amount of any
payment or other benefit provided for in this Agreement by seeking other
employment or otherwise.
15.5 Rights of Beneficiaries of Employee. This Agreement shall inure to
the benefit of, and be enforceable by, Employee's personal or legal
representatives, executors, administrators, successors, heirs, distributees,
devisees and legatees. If Employee should die while any amounts would still be
payable to Employee hereunder if he had continued to live, all such amounts,
unless otherwise provided herein, shall be paid in accordance with the terms of
this Agreement to Employee's devisee, legatee or other designee or, if there be
no such designee, to Employee's estate.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first written above, to be effective as of the Commencement Date.
National Discount Brokers Group, Inc.
By:
Name: Arthur Kontos
Title: President and Chief
Executive Officer
----------------------------------
Daniel Fishbane
<PAGE>
EXHIBIT 11
NATIONAL DISCOUNT BROKERS GROUP, INC. AND SUBSIDIARIES
COMPUTATION OF NET INCOME PER COMMON SHARE
<TABLE>
<CAPTION>
Three Months Ended November 30,
Basic Diluted
----------------------------------- --------------------------------
1999 1998 1999 1998
----------------- ---------------- -------------- ----------------
<S> <C> <C> <C> <C>
Common stock and potential common stock:
Average common stock outstanding 16,985,288 13,991,923 16,985,288 13,991,923
Average potential common stock
issuable under stock options - 232,638 - 2,612
----------------- ---------------- -------------- --------------
Total average common stock and potential common
stock used for earnings per share computation 16,985,288 13,991,923 17,217,926 13,994,535
----------------- ---------------- -------------- --------------
Income:
Net income from continuing operations $ 4,310,919 $ 4,432,884 $ 4,310,919 $ 4,432,884
Net income from discontinued operations,
net of taxes - 1,450,529 - 1,450,529
Gain on sale of discontinued operations,
net of taxes 461,182 - 461,182 -
----------------- ---------------- -------------- --------------
Net income $ 4,772,101 $ 5,883,413 $ 4,772,101 $ 5,883,413
----------------- ---------------- -------------- --------------
Net income per common and potential common share:
Net income from continuing operations $ 0.25 $ 0.32 $ 0.25 $ 0.32
Net income from discontinued operations,
net of taxes 0.00 0.10 0.00 0.10
Gain on sale of discontinued operations,
net of taxes 0.03 0.00 0.03 0.00
----------------- ---------------- -------------- --------------
Net income $ 0.28 $ 0.42 $ 0.28 $ 0.42
----------------- ---------------- -------------- --------------
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended November 30,
Basic Diluted
----------------------------------- ------------------------------
1999 1998 1999 1998
----------------- ---------------- -------------- --------------
<S> <C> <C> <C> <C>
Common stock and potential common stock:
Average common stock outstanding 16,593,030 14,041,304 16,593,030 14,041,304
Average potential common stock
issuable under stock options - 259,736 - 7,990
----------------- ---------------- -------------- --------------
Total average common stock and potential common
stock used for earnings per share computation 16,593,030 14,041,304 16,852,766 14,049,294
----------------- ---------------- -------------- --------------
Income:
Net income from continuing operations $ 4,745,862 $ 3,782,442 $ 4,745,862 $ 3,782,442
Net income from discontinued operations,
net of taxes 82,994 765,648 82,994 765,648
Gain on sale of discontinued operations,
net of taxes 20,515,969 - 20,515,969 -
----------------- ---------------- -------------- --------------
Net income $ 25,344,825 $ 4,548,090 $ 25,344,825 $ 4,548,090
----------------- ---------------- -------------- --------------
Net income per common and potential common share (a):
Net income from continuing operations $ 0.29 $ 0.27 $ 0.28 $ 0.27
Net income from discontinued operations,
net of taxes 0.00 0.05 0.00 0.05
Gain on sale of discontinued operations,
net of taxes 1.24 0.00 1.22 0.00
----------------- ---------------- -------------- --------------
Net income $ 1.53 $ 0.32 $ 1.50 $ 0.32
----------------- ---------------- -------------- --------------
<FN>
(a) The sum of the individual quarters' earnings per common share does not
equal the total amount for the six months ended November 30, 1999 or
November 30, 1998 due to the effect of averaging the number of shares of
potential common stock throughout the year.
</FN>
</TABLE>
<PAGE>
<TABLE> <S> <C>
<ARTICLE> BD
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements for the six months ended November 30, 1999 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-mos
<FISCAL-YEAR-END> May-31-2000
<PERIOD-START> Jun-01-1999
<PERIOD-END> Nov-30-1999
<CASH> 24,249,689
<RECEIVABLES> 110,342,989
<SECURITIES-RESALE> 0
<SECURITIES-BORROWED> 0
<INSTRUMENTS-OWNED> 173,035,592
<PP&E> 18,903,121
<TOTAL-ASSETS> 347,086,883
<SHORT-TERM> 0
<PAYABLES> 47,382,671
<REPOS-SOLD> 0
<SECURITIES-LOANED> 0
<INSTRUMENTS-SOLD> 40,752,576
<LONG-TERM> 0
0
0
<COMMON> 173,332
<OTHER-SE> 258,778,304
<TOTAL-LIABILITY-AND-EQUITY> 347,086,883
<TRADING-REVENUE> 85,269,761
<INTEREST-DIVIDENDS> 9,546,498
<COMMISSIONS> 26,068,794
<INVESTMENT-BANKING-REVENUES> 0
<FEE-REVENUE> 2,808,718
<INTEREST-EXPENSE> 87,130
<COMPENSATION> 45,004,103
<INCOME-PRETAX> 8,946,431
<INCOME-PRE-EXTRAORDINARY> 25,344,825
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 25,344,825
<EPS-BASIC> 1.53
<EPS-DILUTED> 1.50
</TABLE>
