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 February 29, 2000
OR
[ ] Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the transition period from to
-------------- -------------
Commission file number 1-9480
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National Discount Brokers Group, Inc.
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(Exact name of Registrant as specified in its charter)
Delaware 22-2394480
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10 Exchange Place Centre, Jersey City, New Jersey 07302
----------------------------------------------------------------------------
(Address of principal executive offices) (Zip code)
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(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
---- ----
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
17,626,993 shares of Common Stock, par value $.01 per share,
were outstanding on March 31, 2000.
<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 -
February 29, 2000 (Unaudited) and May 31, 1999............................................................................... 3
Condensed Consolidated Statements of Income and Comprehensive Income (Unaudited) -
Three and Nine Months Ended February 29, 2000 and February 28, 1999...........................................................4
Condensed Consolidated Statements of Cash Flows (Unaudited) -
Nine Months Ended February 29, 2000 and February 28, 1999.....................................................................6
Notes to Condensed Consolidated Financial Statements (Unaudited) -
February 29, 2000.............................................................................................................8
Item 2. - Management's Discussion and Analysis of
Financial Condition and Results of Operations...................................................................12
Item 3. - Quantitative and Qualitative Disclosures About Risk.....................................................................20
Part II - Other Information
Item 1. - Legal Proceedings.......................................................................................................22
Item 2. - Changes in Securities and Use of Proceeds...............................................................................22
Item 6. - Exhibits and Reports on Form 8-K........................................................................................23
Signatures........................................................................................................................24
</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 customer growth, unplanned expenses increases, 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
(Unaudited)
<TABLE>
<CAPTION>
February 29, May 31,
ASSETS 2000 1999
----------------- ----------------
<S> <C> <C>
Cash and cash equivalents $ 67,321,583 $ 411,629
Receivables:
Clearing brokers 148,869,483 86,509,122
Other 3,767,545 2,901,799
Securities owned, at market value 76,095,811 38,048,489
U.S. Treasury obligations ($914,617 and $8,418,260
held as collateral at February 29, 2000 and
May 31, 1999, respectively) 50,900,617 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 $20,774,611
at February 29, 2000 and $15,304,535 at May 31, 1999 16,275,791 14,837,114
Computer software - at cost, net of accumulated
amortization of $5,506,731 at February 29, 2000
and $3,624,381 at May 31, 1999 7,627,097 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
$243,992 at February 29, 2000) 1,522,958 825,797
Deposits 23,881,228 2,328,380
Other 4,963,531 725,764
----------------- ----------------
Total assets $ 402,019,372 $ 217,290,808
----------------- ----------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Securities sold, not yet purchased,
at market value $ 27,451,053 $ 11,723,172
Accrued compensation, accounts payable
and accrued expenses 75,253,863 46,296,949
Loan payable - 15,000,000
Income taxes payable 7,523,042 2,275,481
----------------- ----------------
Total liabilities 110,227,958 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 17,833,201 shares at
February 29, 2000 and 14,343,201 at May 31, 1999 178,331 143,432
Additional paid-in capital 170,945,112 65,828,938
Retained earnings 124,757,399 80,181,611
----------------- ----------------
295,880,842 146,153,981
Less: Treasury stock - at cost, 342,469 shares
at February 29, 2000 and 348,277 shares
at May 31, 1999 (4,089,428) (4,158,775)
----------------- ----------------
Total stockholders' equity 291,791,414 141,995,206
----------------- ----------------
Total liabilites and stockholders' equity $ 402,019,372 $ 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 Nine Months Ended
------------------------------------- ----------------------------------
February 29, 2000 February 28, 1999 February 29, 2000 February 28, 1999
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Firm securities transactions, net $ 111,562,702 $ 46,403,425 $ 196,832,463 $ 97,192,841
Commission income 21,894,280 12,593,098 47,963,074 30,992,390
Interest and dividends 6,046,455 2,511,806 15,592,953 7,029,751
Fee income 1,685,284 1,148,465 4,494,002 3,042,604
Other 24,374 1,215,523 207,328 2,741,227
----------------- ---------------- --------------- --------------
Total revenue 141,213,095 63,872,317 265,089,820 140,998,813
----------------- ---------------- --------------- --------------
Expenses:
Compensation and benefits 60,241,366 24,213,932 105,245,469 52,739,223
Clearing and related brokerage charges 21,785,445 12,314,508 47,027,332 32,300,912
Communications 5,481,488 4,022,593 13,847,322 11,355,981
Selling and marketing:
Advertising and marketing costs 5,492,180 1,323,879 19,574,875 3,917,130
Sales-related travel and entertainment 867,199 384,177 2,224,985 1,102,051
Technology development and other related costs:
Depreciation and amortization 5,104,912 2,687,453 11,791,726 6,174,867
Equipment rental 739,286 158,547 1,949,766 420,144
Technology consulting 1,019,889 840,027 3,844,118 1,410,650
Repairs and maintenance 1,017,454 546,295 2,631,240 1,670,119
Other:
Professional fees 467,749 855,864 1,581,559 2,776,231
Occupancy costs 1,677,338 626,135 5,098,768 1,895,611
Other 2,113,121 1,409,330 6,120,561 3,720,115
----------------- ---------------- --------------- --------------
Total expenses 106,007,427 49,382,740 220,937,721 119,483,034
----------------- ---------------- --------------- --------------
Income from continuing operations
before income taxes 35,205,668 14,489,577 44,152,099 21,515,779
Income taxes (benefit):
Federal, currently payable 11,223,301 4,636,960 13,523,165 6,783,295
State and local, currently payable 5,173,198 2,415,400 7,349,270 3,625,359
----------------- ---------------- --------------- --------------
Total current income tax expense 16,396,499 7,052,360 20,872,435 10,408,654
----------------- ---------------- --------------- --------------
Federal, deferred (392,079) (225,625) (198,455) (302,034)
State and local, deferred (29,715) (86,457) (498,706) (122,582)
----------------- ---------------- --------------- --------------
Total deferred income tax benefit (421,794) (312,082) (697,161) (424,616)
----------------- ---------------- --------------- --------------
Total income taxes from continuing operations 15,974,705 6,740,278 20,175,274 9,984,038
----------------- ---------------- --------------- --------------
Net income from continuing operations 19,230,963 7,749,299 23,976,825 11,531,741
----------------- ---------------- --------------- --------------
Discontinued operations:
Income from discontinued operations,
net of taxes - 422,350 82,994 1,187,998
Gain on sale of discontinued operations,
net of taxes - - 20,515,969 -
----------------- ---------------- --------------- --------------
- 422,350 20,598,963 1,187,998
----------------- ---------------- --------------- --------------
Net income $ 19,230,963 $ 8,171,649 $ 44,575,788 $ 12,719,739
----------------- ---------------- --------------- --------------
</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 Nine Months Ended
------------------------------------ ----------------------------------
February 29, 2000 February 28, 1999 February 29, 2000 February 28, 1999
----------------- ---------------- --------------- -------------------
<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 $ - $ 249,577 $ - $ (159,446)
Less: reclassification adjustment for gains
included in net-income - (744,652) - (2,173,517)
---------------- ---------------- --------------- --------------
Other comprehensive loss before tax - (495,075) - (2,332,963)
Income tax benefit related to items of other
comprehensive income (loss) - (353,676) - (1,073,163)
----------------- ---------------- --------------- --------------
Other comprehensive income (loss), net of tax - (141,399) - (1,259,800)
----------------- ---------------- --------------- --------------
Comprehensive income $ 19,230,963 $ 8,030,250 $ 44,575,788 $ 11,459,939
----------------- ---------------- --------------- --------------
Net income per common and potential
common share (a)
Basic:
Net income from continuing operations $ 1.12 $ 0.55 $ 1.43 $ 0.82
Net income from discontinued operations,
net of taxes 0.00 0.03 0.00 0.09
Gain on sale of discontinued operations,
net of taxes 0.00 0.00 1.23 0.00
----------------- ---------------- --------------- --------------
Net income $ 1.12 $ 0.58 $ 2.66 $ 0.91
----------------- ---------------- --------------- --------------
Weighted average common shares outstanding 17,115,134 14,001,718 16,766,429 14,028,253
----------------- ---------------- --------------- --------------
Diluted:
Net income from continuing operations $ 1.10 $ 0.55 $ 1.41 $ 0.82
Net income from discontinued operations,
net of taxes 0.00 0.03 0.00 0.08
Gain on sale of discontinued operations,
net of taxes 0.00 0.00 1.21 0.00
----------------- ---------------- --------------- --------------
Net income $ 1.10 $ 0.58 $ 2.62 $ 0.90
----------------- ---------------- --------------- --------------
Weighted average common shares outstanding 17,410,172 14,204,529 17,037,933 14,101,184
----------------- ---------------- --------------- --------------
<FN>
(a) The sum of the individual quarters' earnings per common share does not
equal the total amount for the nine months ended February 29, 2000 or
February 28, 1999 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
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
------------------------------------------
February 29, 2000 February 28, 1999
------------------- -------------------
Cash flows from operating activities:
<S> <C> <C>
Net income from continuing operations $ 23,976,825 $ 11,531,741
Net income from discontinued operations 82,994 1,187,998
Gain on sale of discontinued operations, net of
taxes 20,515,969 -
Non-cash items included in net income:
Depreciation and amortization 11,791,726 6,761,554
Gain on sale of securities available for sale - (2,173,517)
Gain on sale of securities not readily marketable - 419,967
Loss of Equitrade allocated to minority partners - 122,574
Provision for deferred taxes (697,161) (424,615)
Provision for losses on notes receivable - 102,865
(Increase) decrease in operating assets:
Receivables:
Clearing brokers (62,360,361) (36,120,318)
Other (865,746) (440,253)
Securities owned, at market value (38,047,322) (8,934,558)
Other assets (2,086,447) 72,335
Increase (decrease) in operating liabilities:
Securities sold, not yet purchased, at market value 15,727,881 9,322,287
Accrued compensation, accounts payable and accrued
expenses 28,956,914 12,284,124
Income taxes payable 5,210,838 2,055,277
(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 (used in) operating activities 30,899,352 (4,232,539)
----------------- ----------------
Cash flows from investing activities:
Net purchases of U.S. Treasury obligations (42,482,357) (34,824)
Proceeds from sale of securities available for sale - 2,173,517
Purchase of investment securities not readily marketable (100,000) - -
Proceeds from sale of securities not readily marketable - 80,033
Notes issued (160,000) (906,000)
Principal collected on notes receivable 1,061,261 464,890
Net purchases of furniture, fixtures,
equipment and leasehold improvements (10,183,711) (1,573,104)
Deposits made on furniture, fixtures, equipment,
leasehold improvements and computer software (23,704,168) (5,000)
Purchases of computer software (5,677,566) (2,453,332)
Payment for purchase of intangible asset - (450,000)
Issuance of subordinated notes receivable - (3,500,000)
Principal collected on subordinated notes receivable 27,000,000 897,938
----------------- ----------------
Net cash used in investing activities $ (54,246,541) $ (5,305,882)
----------------- ----------------
</TABLE>
(Continued)
6
<PAGE>
NATIONAL DISCOUNT BROKERS GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Continued)
<TABLE>
<CAPTION>
Nine Months Ended
----------------------------------
February 29, 2000 February 28, 1999
----------------- ----------------
<S> <C> <C>
Cash flows from financing activities:
Proceeds from loan payable $ - $ 15,000,000
Repayment of loan (15,000,000) -
Proceeds from issuance of common stock 105,103,949 -
Proceeds from exercise of options 153,194 606,978
Purchase of treasury stock - (3,231,647)
Capital contributions by minority interest - 362,527
Capital withdrawals by minority interest - (2,263,057)
----------------- ----------------
Net cash provided by financing activities 90,257,143 10,474,801
----------------- ----------------
Net increase in cash and cash equivalents 66,909,954 936,380
Cash and cash equivalents at beginning of period 411,629 1,039,121
----------------- ----------------
Cash and cash equivalents at end of period $ 67,321,583 $ 1,975,501
----------------- ----------------
</TABLE>
Supplemental disclosure of non-cash operating, investing and financing
activities:
Between July 1999 and February 2000, various employees of the Company exercised
an aggregate of 5,808 options for the purchase of 5,808 shares of the Company's
common stock with exercise prices ranging from $13.50 per share to $22.50 per
share. In connection with these exercises, the Company has estimated an income
tax benefit of $36,723, which has been utilized to reduce the Company's current
liability for income taxes.
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)
February 29, 2000
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 nine months ended February 29, 2000 presentations.
Note 3 - Net income per common share
SFAS No. 128, Earnings Per Share, requires a dual presentation of basic and
diluted earnings per share ("EPS"). Basic EPS excludes dilution and is computed
by dividing net income by the weighted-average number of common shares
outstanding for the period. Diluted EPS reflects the potential reduction in EPS
that could occur if securities or other contracts to issue common stock were
exercised or converted into common stock. The treasury stock method of
accounting was used in computing potential common stock for the computation of
diluted earnings per common share.
Note 4 - Sale of Common Stock
On February 7, 2000, NDB Group sold an aggregate of 500,000 shares of its
common stock in a private offering to Go2Net, Inc. ("Go2Net") and Vulcan
Ventures Incorporated ("Vulcan") for $13,500,000.
Note 5 - 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.
8
<PAGE>
The Company has been named as a defendant in a number of lawsuits and
arbitrations and is the subject of investigations that allege, among other
things, violations of Federal and state securities laws and other laws. A
substantial settlement or judgement in any of these cases could have a material
adverse effect on the Company. Except as described 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.
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. A three person arbitration
panel has been appointed and the parties have exchanged discovery requests and
responses. 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 6 - 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 February 29, 2000, the net capital of Sherwood Securities and
NDB.com exceeded their required net capital under the Rule by $104,117,000 and
$8,857,000, 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 February 29, 2000, the payment of
dividends and advances to the Company by Sherwood Securities and NDB.com is
limited to $103,917,000 and $8,807,000, respectively, under the most restrictive
of these requirements.
Note 7 - 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, as well as gains recognized
from proprietary trading positions. 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.
9
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended February 29, 2000
Discount Market
Brokerage Making All Other Total
<S> <C> <C> <C> <C>
Revenue from external sources $29,993,000 $109,807,000 $ 1,413,000 $141,213,000
Intersegment revenue 1,415,000 - 110,000 1,525,000
----------- ------------ ----------- ------------
Total revenue $31,408,000 $109,807,000 $ 1,523,000 $142,738,000
----------- ------------ ----------- ------------
Profit (loss) before income taxes $ 2,493,000 $ 34,166,000 $(1,454,000) $ 35,205,000
Capital expenditures (1) $11,025,000 $ 499,000 $ 5,035,000 $ 16,559,000
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended February 28, 1999
Discount Market
Brokerage Making All Other Total
<S> <C> <C> <C> <C>
Revenue from external sources $14,790,000 $48,073,000 $ 1,009,000 $63,872,000
Intersegment revenue 1,974,000 25,000 775,000 2,774,000
------------ ------------ -------------- ------------
Total revenue $16,764,000 $48,098,000 $ 1,784,000 $66,646,000
----------- ----------- ------------- -----------
Profit (loss) before income taxes $ 1,333,000 $16,869,000 $ (3,713,000) $14,489,000
Capital expenditures (1) $ 1,430,000 $ 728,000 $ (272,000) $ 1,886,000
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended February 29, 2000
Discount Market
Brokerage Making All Other Total
<S> <C> <C> <C> <C>
Revenue from external sources $ 62,126,000 $198,026,000 $ 4,938,000 $265,090,000
Intersegment revenue 5,229,000 5,000 432,000 5,666,000
-------------- ------------- -------------- ------------
Total revenue $ 67,355,000 $198,031,000 $ 5,370,000 $270,756,000
------------ ------------ ------------ ------------
Profit (loss) before income taxes $ (8,003,000) $ 52,415,000 $ (260,000) $ 44,152,000
Capital expenditures (1) $ 22,250,000 $ 5,566,000 $ 11,750,000 $ 39,566,000
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended February 28, 1999
Discount Market
Brokerage Making All Other Total
<S> <C> <C> <C> <C>
Revenue from external sources $37,386,000 $100,862,000 $ 2,751,000 $140,999,000
Intersegment revenue 4,810,000 93,000 1,962,000 6,865,000
----------- ------------ ----------- ------------
Total revenue $42,196,000 $100,955,000 $ 4,713,000 $147,864,000
----------- ------------ ------------ ------------
Profit (loss) before income taxes $(1,191,000) $ 24,914,000 $(2,207,000) $ 21,516,000
Capital expenditures (1) $ 2,615,000 $ 2,084,000 $ (218,000) $ 4,481,000
<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 Nine Months Ended
February 29, February 28, February 29, February 28,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Total profit before income taxes
for reportable segments $ 36,659,000 $ 18,202,000 $ 44,412,000 $ 23,723,000
Other loss (1,454,000) (3,713,000) (260,000) (2,207,000)
------------- ------------- ------------- ---------------
Total consolidated profit before
income taxes $ 35,205,000 $ 14,489,000 $ 44,152,000 $ 21,516,000
------------ -------------- ------------ --------------
</TABLE>
10
<PAGE>
Note 8 - 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
nine months ended February 29, 2000 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 nine months
ended February 28, 1999 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.
Note 9 - Subsequent Events
During March 2000, warrants to purchase an aggregate of 500,000 shares of
NDB Group's common stock were exercised by Go2Net and Vulcan. NDB Group issued
130,000 shares of its common stock to Go2Net at $33 per share upon such
exercise. Vulcan's exercise of its warrants covering 370,000 shares of NDB Group
common stock is subject to review under the Hart-Scott-Rodino Antitrust
Improvements Act. Vulcan's warrant is exercisable for $12,210,000.
Effective March 27, 2000, Sherwood Securities Corp. changed its name to
NDB Capital Markets Corporation.
On March 28, 2000, the Company announced that it had entered into a
non-binding letter of intent (the "Letter") with Deutsche Bank Americas Holding
Corporation ("DB") pursuant to which the Company would sell 3,000,000 shares of
its common stock to DB or one of its designated affiliates for $45.31 per share
(the "Investment").
The Letter, in addition, provides that DB and the Company propose the
following actions: (i) the negotiation and execution of a definitive agreement
relating to the Investment, (ii) coincident with the Investment, the negotiation
of the principal terms (and binding agreement with respect to exclusivity and
non-competition) with respect to a joint venture to be owned 25% by the Company
and 75% by DB or one or more of its affiliates with respect to the offering of
on-line discount equity brokerage in Western Europe; (iii) coincident with the
Investment, the negotiation of the principal terms (and binding agreement with
respect to mutual exclusively and non-competition) with respect to a worldwide
joint venture (excluding Western Europe and the United State) 50% owned by the
Company and 50% owned by DB or one or more of its affiliates (subject to certain
conditions) with respect to the offering of on-line discount equity brokerage;
(iv) coincident with the Investment, the negotiation and execution of a
definitive agreement with respect to the Company or one of its affiliates being
a distributor of initial public offerings of equity securities in the U.S. if DB
or one of its affiliates is an underwriter of the securities and wishes to use
the internet as a distribution channel, and (v) coincident with the Investment,
the negotiation and execution of a definitive agreement for the distribution of
certain research prepared by DB to customers of the Company or its subsidiaries
in the United States.
The transactions are subject to several conditions including, but not
limited to, the approval of the Board of Directors of DB, the Board of Managing
Directors of Deutsche Bank AG and the Board of Directors of the Company,
regulatory approvals and filings and other matters.
DB would be subject to certain standstill provisions regarding purchasing
additional voting stock of the Company, conducting proxy contests and the voting
of its shares of the Company and would have certain registration, antidilution
and veto rights described in the Letter.
The parties to the Letter have agreed to certain limitations on
negotiations and other matters with third parties regarding alternative
transactions until the execution of a definitive agreement regarding the
Investment.
The foregoing is a summary of the Letter and is not complete. There can be
no assurance that the transactions contemplated by the Letter will be
consummated.
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, 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 nine
months ended February 29, 2000 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, but not
limited to, 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, the
mix of products sold by our brokerage operations, 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 nine months
ended February 29, 2000, 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 Company's consolidated net income from continuing operations for the
quarter ended February 29, 2000 was $19,231,000 compared to $7,749,000 for the
quarter ended February 28, 1999, an increase of $11,482,000 or 148%. For the
three months ended February 29, 2000, Sherwood Securities had net income of
$18,808,000 compared to net income of $9,277,000 for the three months ended
February 28, 1999. NDB.com had net income of $1,436,000 for the quarter ended
February 29, 2000, compared to net income of $786,000 for the quarter ended
February 28, 1999.
12
<PAGE>
The Company's consolidated net income from continuing operations for the
nine months ended February 29, 2000 was $23,977,000 compared to $11,532,000 for
the nine months ended February 28, 1999, an increase of $12,445,000 or 108%. For
the nine months ended February 29, 2000, Sherwood Securities had net income of
$28,661,000 compared to net income of $13,746,000 for the nine months ended
February 28, 1999. NDB.com had a net loss of $4,607,000 for the nine months
ended February 29, 2000, compared to a net loss of $763,000 for the nine months
ended February 28, 1999.
Total revenue from continuing operations of the Company increased by
$77,341,000, or 121%, for the three months ended February 29, 2000, as compared
with the quarter ended February 28, 1999, and increased $124,091,000, or 88%,
for the nine months ended February 29, 2000, as compared with the nine months
ended February 28, 1999. Total revenue for Sherwood Securities was $109,807,000
(or $23.29 per trade) and $198,031,000 (or $19.89 per trade) for the three and
nine months ended February 29, 2000, respectively, as compared to $48,098,000
(or $28.03 per trade) and $100,955,000 (or $24.41 per trade) for the three and
nine months ended February 28, 1999, respectively. Total revenue for NDB.com
(before elimination of the rebate received from Sherwood Securities for order
flow) was $31,408,000 (or $31.70 per trade) and $67,355,000 (or $31.31 per
trade) for the three and nine months ended February 29, 2000, respectively, as
compared to $16,764,000 (or $30.12 per trade) and $42,196,000 (or $31.31 per
trade) for the three and nine months ended February 28, 1999, respectively. The
reasons for the changes in total revenues are set forth below.
Revenue from firm securities transactions, primarily generated by Sherwood
Securities, increased by $65,159,000, or 140%, and by $99,640,000, or 103%, for
the three and nine months ended February 29, 2000, respectively, as compared
with the equivalent periods in fiscal 1999. The increased activity in the equity
markets, particularly trading volume in internet, high technology and biotech
related stocks, resulted in increases in Sherwood Securities' ticket and share
volume, respectively, for the quarter and nine months ended February 29, 2000 as
compared to the same periods a year ago. Sherwood Securities market share in
terms of share volume increased over the prior year periods, as well, and in
fact, Sherwood Securities was ranked as the sixth largest NASDAQ/OTC market
maker by AutEx in terms of share volume for the three months ended February 29,
2000. These increases in ticket and share volume were more than enough to make
up for decreases in the trading profits per ticket.
<TABLE>
<CAPTION>
Three Months Ended
February 29, February 28, Percentage
2000 1999 Change
---- ---- ------
<S> <C> <C> <C>
Trading profit per ticket $22.82 $27.33 (17%)
Average daily batched trades 76,100 28,600 166%
Share volume (billions) 5.7 2.2 159%
Average number of shares per
ticket 1,200 1,200 0%
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended
February 29, February 28, Percentage
2000 1999 Change
---- ---- ------
<S> <C> <C> <C>
Trading profit per ticket $19.37 $23.63 (18%)
Average daily batched trades 52,400 22,000 138%
Share volume (billions) 11.2 5.3 111%
Average number of shares per
ticket 1,120 1,280 (13%)
</TABLE>
In addition to the above, NDB.com recognized approximately $4,000,000 in
revenue from firm securities transactions during the quarter ended February 29,
2000 reflecting gains from proprietary trading positions.
The Company's commission income, primarily generated by NDB.com, includes
commissions received from customers, as well as rebates received for order flow
from other broker-dealers. Commissions increased by $9,301,000, or 74%, and by
$16,971,000, or 55%, for the three and nine months ended February 29, 2000,
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
commissionable 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.
13
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended
February 29, February 28, Percentage
2000 1999 Change
---- ---- ------
<S> <C> <C> <C>
Average daily commissionable trades 16,000 9,300 72%
Average number of customers 193,200 121,700 59%
Average trades per customer 5.1 4.6 11%
Percentage of trades on-line 77% 60% 28%
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended
February 29, February 28, Percentage
2000 1999 Change
---- ---- ------
<S> <C> <C> <C>
Average daily commissionable trades 11,300 7,200 57%
Average number of customers 174,500 113,400 54%
Average trades per customer 12.3 11.9 3%
Percentage of trades on-line 75% 58% 29%
</TABLE>
Interest and dividend income increased by $3,535,000, or 141%, and
$8,563,000, or 122%, for the three and nine months ended February 29, 2000,
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
aggregate cash of approximately $190,000,000 in connection with the underwritten
public offering of its common stock that closed on June 25, 1999, the sale of
its membership interests in Equitrade on June 18, 1999 and the private placement
of 500,000 shares of its common stock on February 7, 2000, net of capital
expenditure cash outflows. In addition, the average customer debit and credit
balances that are held with NDB.com's clearing broker continued to rise.
Fee income generated by NDB.com increased by $537,000, or 47%, and
$1,452,000, or 48%, for the three and nine months ended February 29, 2000,
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 February 29, 2000 increased
approximately $56,624,000, or 115%, from $49,383,000 in the quarter ended
February 28, 1999 to $106,007,000 during the quarter ended February 29, 2000.
Total expenses for the nine months ended February 29, 2000 increased
approximately $101,455,000, or 85%, from $119,483,000 during the nine months
ended February 28, 1999 to $220,938,000 during the current year. The reasons for
the changes in expenses are set forth below.
Compensation and benefits increased by $36,027,000, or 149%, and
$52,506,000, or 100%, for the three and nine months ended February 29, 2000,
respectively, as compared to the equivalent periods in the prior year. As a
percentage of revenue, employee compensation and benefits was 43% and 40% for
the three and nine months ended February 29, 2000, respectively, versus 38% 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. Further, Sherwood Securities' traders are
compensated based on a tiered commission rate schedule, wherein they earn higher
rates of commissions as the profits they generate increase. Thus, the large
increase in trading profits in the current period versus in the prior year
period led, in large part, to the increase in compensation and benefits as a
percentage of revenue. Similarly, based on the increasing profitability of the
Company, management and employee bonuses have increased. Finally, the number of
employees increased to 737 for the Company as of February 29, 2000, from 552 as
of February 28, 1999. 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 and trading activity.
14
<PAGE>
Clearing and related brokerage charges increased by $9,471,000, or 77%, and
$14,726,000, or 46%, for the three and nine months ended February 29, 2000,
respectively, as compared to same periods in the prior year. As a percentage of
revenue, clearing and related brokerage charges decreased to 15% and 18% for the
three and nine months ended February 29, 2000, respectively, from 19% and 23%
for the comparable periods in fiscal 1999. The increase in clearing and related
charges for the three and nine months ended February 29, 2000 was mainly due to
increases in Sherwood Securities' and NDB.com's ticket counts of 175% and 78%,
respectively, for the quarter ended February 29, 2000 and 140% and 60%,
respectively, for the nine months ended February 29, 2000 over the amounts in
the comparable periods during the prior year. 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 $1,459,000, or 36%, and $2,491,000, or 22%, for
the three and nine months ended February 29, 2000, respectively, as compared to
the same periods in the prior year. The increases are mainly due to a rise in
the aggregate expense associated with obtaining market data and quotation
services. Usage of such services has increased as the number of users has risen
since the prior fiscal year.
Advertising costs increased by $4,168,000, or 315%, and $15,658,000, or
400%, for the three and nine months ended February 29, 2000, respectively, as
compared to the comparable periods in the prior year. The Company advertises in
order to attract retail accounts directly to NDB.com as well as institutional
and broker-dealer order flow directly to Sherwood Securities. The increases are
due to additional media buys and the costs to produce new lines of
advertisements designed to strengthen NDB.com brand awareness and to put a focus
on its products and services. The Company uses a combination of network and
cable television, local radio and print media to attract new customers. NDB.com
also attains new customers through its affinity and business-to-business
relationship programs. Acquisition costs per customer account for NDB.com were
$187 and $294 for the three and nine months ended February 29, 2000 as compared
to $112 and $137 for the three and nine months ended February 28, 1999 based on
total advertising expenses for the Company. Increased media spending by NDB.com,
and by its competitors in the online brokerage industry, has led to the overall
increases in the average cost to acquire an account. NDB.com continues to focus
on attracting further affinity and business-to-business partnerships to help
abate these escalating acquisition costs.
Sales-related travel and entertainment increased by $483,000, or 126%, and
$1,123,000, or 102%, for the three and nine months ended February 29, 2000,
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 $2,418,000, or 90%, and
$5,617,000, or 91%, for the three and nine months ended February 29, 2000,
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. NDB.com also
wrote off $2,225,000 (of an expected total write-off of $4,500,000) in net book
value of equipment, software and leasehold improvement costs of assets it
expects to abandon when it moves its headquarters from New York City to Jersey
City during the quarter ended May 31, 2000. Also contributing to the increase is
depreciation and amortization incurred on additional fixed assets, leasehold
improvements and computer software purchased by Sherwood Securities and NDB.com
aggregating approximately $5,423,000 and $9,881,000, respectively, during the
period from June 1999 through February 2000.
Equipment rental costs increased by $580,000, or 366%, and $1,530,000, or
364%, for the three and nine months ended February 29, 2000, 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 $180,000, or 21%, and
$2,433,000, or 173%, for the three and nine months ended February 29, 2000,
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.
15
<PAGE>
Repairs and maintenance costs increased by $471,000, or 86%, and $961,000,
or 58%, for the three and nine months ended February 29, 2000, respectively, as
compared to the same periods in the prior year. These increases, primarily for
NDB.com, are mainly due to maintenance service contract fees paid for new
equipment and in association with maintaining existing infrastructures as the
original warranties on the various systems continue to expire.
Professional fees decreased by $388,000, or 45%, and $1,195,000, or 43%,
for the three and nine months ended February 29, 2000, respectively, as compared
to the equivalent periods in the prior year, primarily due to a decrease in
legal fees.
Occupancy costs increased by $1,051,000, or 168%, and $3,203,000, or 169%,
for the three and nine months ended February 29, 2000, 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 $704,000, or 50%, and $2,400,000, or 65%, for
the three and nine months ended February 29, 2000, 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 training 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.
The Company's effective tax rate was approximately 45% for the three month
period ended February 29, 2000 as compared to 47% for the three months ended
February 28, 1999 and was approximately 46% for both the nine month period ended
February 29, 2000 and the nine months ended February 28, 1999.
For the three and nine months ended February 29, 2000, included in income
tax expense are deferred tax benefits of approximately $422,000 and $697,000,
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 $244,000 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.
Liquidity
The Company's tangible assets are highly liquid, but subject to market
price fluctuation, with more than 85% 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
sales of its common stock in both seasoned public and private offerings and its
interest in Equitrade.
From time to time, the Company has borrowed funds on a secured basis 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
February 29, 2000, Sherwood Securities and NDB.com had approximately
$104,117,000 and $8,857,000, 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.
16
<PAGE>
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, NDB Group closed an underwritten seasoned 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.
On February 7, 2000, NDB Group sold an aggregate of 500,000 shares of its
common stock in a private offering to Go2Net, Inc. ("Go2Net") and Vulcan
Ventures Incorporated ("Vulcan") for $13,500,000.
The Company's capital expenditures were $39.6 million and $4.5 million
during the nine months ended February 29, 2000 and February 28, 1999,
respectively, including deposits made on assets not yet placed in service.
Capital expenditures during the first nine 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 for
NDB.com and Millennium Clearing Company, L.L.C., 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 $10.9 million
during the last quarter of fiscal year 2000 in capital expenditures for its new
facilities (including the data center) at 90 Hudson Street for a total of $34.4
million. Approximately half 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,
representing leasehold improvements, will be amortized over the 15-year term of
the 90 Hudson Street facilities lease. Moreover, the Company expects to spend an
additional $4-$6 million in capital expenditures on ongoing technological
improvements and product enhancements during the remaining quarter and intends
to finance these upgrades, as it did during the nine months ended February 29,
2000, 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 fourth fiscal quarter 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. NDB.com's
relocation to its new facilities at 90 Hudson Street has commenced and is
expected to be completed 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. Approximately $2.25 million of the
aforementioned assets were already written off during the quarter ended February
29, 2000 with the remainder to be written off during the quarter ended May 31,
2000.
The Company expects to incur advertising expense (included in selling and
marketing expenses) for the fiscal year ending May 31, 2000 of approximately $32
million, inclusive of next quarter's portion of amortized commitments related to
the Go2Net and Yahoo! marketing associations, but absent any new
business-to-business marketing associations. In March 2000, the Company
commenced its second multi-media (television, radio and print) advertising
campaign this year, featuring the tagline "We Take You Under Our Wing", and
emphasizing NDB.com's role in assisting and educating all levels of investors to
become self-directed investors through the various products and services NDB.com
offers, such as NDB University and StockFinder. NDB.com also continues to look
for alternative methods of account acquisition through additional
business-to-business alliances. The Company expects account acquisition costs to
be approximately $300 to $400 per account for the fiscal year ending May 31,
2000 in connection with its multi-media marketing campaigns which commenced in
June 1999.
17
<PAGE>
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 was affected by the rollover of the two-digit year value to
00. The issue was whether computer systems would properly recognize date
sensitive information when the year changed to 2000. Systems that would not
properly recognize such information could generate erroneous data or cause a
system to fail. 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 relied on the use of such 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 December 31, 1999. Renovation, which had
also been completed as of December 31, 1999, included the conversion of year
2000 non-compliant systems into year 2000 compliant systems. Internal software
and hardware identified as non-compliant were made compliant or replaced, in all
material respects, as of December 31, 1999 and the Company internally verified
compliance of its new NDB.com WebstationTM. Validation comprised the testing of
all systems by using test data with dates that included the year 2000. This was
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 has not experienced
any year 2000 problems with its production systems through the date of this
report.
Costs. Through February 29, 2000, the Company spent approximately $488,000
for software modifications, hardware and testing related to year 2000 of which
$55,000 was incurred during the quarter ended February 29, 2000. The Company
does not track internal costs related to year 2000 issues, which consisted
primarily of payroll expenses and, as a result, the foregoing actual
expenditures do not include such internal costs.
Contingency Plan. Although the Company has formulated contingency plans
should internal systems, vendors or customers have failed to become compliant or
have failed to operate as a result of year 2000 problems, the Company did not
experience such occurrences.
18
<PAGE>
Looking Ahead
The Company expects that it will spend an additional $10.9 million during
the remaining quarter of fiscal year 2000 in capital expenditures for its new
facilities (including the data center) at 90 Hudson Street for a total of $34.4
million. Moreover, the Company expects to spend an additional $4-$6 million in
capital expenditures on ongoing technological improvements and product
enhancements during the remaining quarter. NDB.com's relocation to its new space
at 90 Hudson Street has commenced and is expected to be completed by
mid-calendar year 2000.
The Company expects to incur advertising expense (included in selling and
marketing expenses) of approximately $12.5 million for the fourth quarter of
fiscal year ending May 31, 2000, inclusive of next quarter's portion of
amortized commitments related to the Go2Net and Yahoo! marketing associations,
but absent any new business-to-business marketing associations. For the year
ended May 31, 1999, the Company incurred approximately $5,876,000 in advertising
expense. In March 2000, the Company commenced its second multi-media
(television, radio and print) advertising campaign this year, featuring the
tagline "We Take You Under Our Wing", and emphasizing NDB.com's role in
assisting and educating all levels of investors to become self-directed
investors through the various products and services NDB.com offers, such as NDB
University and StockFinder. NDB.com also continues to look for alternative
methods of account acquisition through additional business-to-business
alliances. The Company expects account acquisition costs to be approximately
$300 to $400 per account for the fiscal year ending May 31, 2000 in connection
with its multi-media marketing campaigns which commenced in June 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. 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 624 at May 31, 1999 to 737 at February
29, 2000. 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. The Company also anticipates expanding NDB.com's customer service
and trade execution representatives, by 80-120 employees over the next six
months, an increase of approximately 50% to 75%.
The Company estimates that it will begin self-clearing NDB.com and Sherwood
Securities transactions by the end of calendar year 2000 through the Company's
wholly owned subsidiary, Millennium Clearing Company, L.L.C. As a broker-dealer,
Millennium will be subject to the SEC's minimum net capital requirements. The
Company intends to fund this required capital through internally generated
funds. Over the long term, this self-clearing operation is expected to reduce
clearing charges per ticket incurred by both NDB.com and Sherwood Securities and
increase the interest spreads the Company earns on certain customer balances.
On March 28, 2000, the Company announced that it had entered into a
non-binding letter of intent (the "Letter") with Deutsche Bank Americas Holding
Corporation ("DB") pursuant to which the Company would sell 3,000,000 shares of
its common stock to DB or one of its designated affiliates for $45.31 per share
(the "Investment"). A copy of the press release announcing the transaction is
incorporated by reference to this Form 10-Q, as is the Letter.
The Letter, in addition, provides that DB and the Company propose the
following actions: (i) the negotiation and execution of a definitive agreement
relating to the Investment, (ii) coincident with the Investment, the negotiation
of the principal terms (and binding agreement with respect to exclusivity and
non-competition) with respect to a joint venture to be owned 25% by the Company
and 75% by DB or one or more of its affiliates with respect to the offering of
on-line discount equity brokerage in Western Europe; (iii) coincident with the
19
<PAGE>
Investment, the negotiation of the principal terms (and binding agreement with
respect to mutual exclusively and non-competition) with respect to a worldwide
joint venture (excluding Western Europe and the United State) 50% owned by the
Company and 50% owned by DB or one or more of its affiliates (subject to certain
conditions) with respect to the offering of on-line discount equity brokerage;
(iv) coincident with the Investment, the negotiation and execution of a
definitive agreement with respect to the Company or one of its affiliates being
a distributor of initial public offerings of equity securities in the U.S. if DB
or one of its affiliates is an underwriter of the securities and wishes to use
the internet as a distribution channel, and (v) coincident with the Investment,
the negotiation and execution of a definitive agreement for the distribution of
certain research prepared by DB to customers of the Company or its subsidiaries
in the United States.
The transactions are subject to several conditions including, but not
limited to, the approval of the Board of Directors of DB, the Board of Managing
Directors of Deutsche Bank AG and the Board of Directors of the Company,
regulatory approvals and filings and other matters.
DB would be subject to certain standstill provisions regarding purchasing
additional voting stock of the Company, conducting proxy contests and the voting
of its shares of the Company and would have certain registration, antidilution
and veto rights described in the Letter.
The parties to the Letter have agreed to certain limitations on
negotiations and other matters with third parties regarding alternative
transactions until the execution of a definitive agreement regarding the
Investment.
The foregoing is a summary of the Letter and is not complete. There can be
no assurance that the transactions contemplated by the Letter will be
consummated.
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, but are
not limited to, credit risk, legal risk, operating risk and market risk.
Credit risk is the potential for loss due to a customer or counterparty
failing to perform its contractual obligations. The Company clears its
securities transactions through unaffiliated clearing agents. Under the terms of
its clearing agent agreements, the Company's clearing agents have the right to
charge it for losses that result from its customers' failure to fulfill their
contractual obligations. In order to mitigate risk, the Company's policy is to
monitor the credit standing of its customers and maintain collateral to support
margin loans and short sales. Further, a significant portion of the Company's
and its customer assets are held at one or more clearing agents. Therefore, 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.
20
<PAGE>
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
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 February 29, 2000 was $76.1 million in long
positions and $27.5 million in short positions. The potential loss in fair
value, using a hypothetical 10% decline in prices, is estimated to be $4.9
million as of February 29, 2000. 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 February 29, 2000, 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 February 29, 2000.
21
<PAGE>
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 quarters
ended August 31, 1999 and November 30, 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.
In the matter of Weiss, Peck & Greer, L.L.C. v. Sherwood Securities Corp.,
NASD Arbitration No. 99-01368, an unsuccessful mediation session was held on
September 24, 1999. Subsequently, a three-person arbitration panel was appointed
and the parties have exchanged discovery requests and responses. A hearing on
the merits is currently scheduled for the last two weeks of September 2000.
Item 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS
On February 5, 2000, NDB Group issued 500,000 shares of its common stock
and warrants convertible into an additional 500,000 shares of its common stock
in a private placement pursuant to Section 4(2) of the Securities Act of 1933,
as amended, and Rule 506 of Regulation D, thereunder. The offer and sale of the
common stock and the warrants were to two "accredited investors" (as such term
is defined in Rule 501 of Regulation D). The proceeds from the sale were
$13,500,000. Go2Net purchased 130,000 share of NDB Group common stock and a
warrant to purchase 130,000 shares of NDB Group common stock at $33.00 per
share. Vulcan purchased 370,000 shares of NDB Group common stock and a warrant
to purchase 370,000 shares of NDB Group common stock at $33.00 per share. The
warrants may be exercised at any time prior to February 5, 2003 except the
warrants terminate sooner if NDB Group notifies the holders of the warrants that
the "market price" (as defined in the warrants) for NDB Group common stock
equals or exceeds $33.00 for 18 of 21 consecutive trading days. NDB Group
provided this notice to warrant holders on March 23, 2000. Upon notice from NDB
Group, the warrants terminate ten days after receipt by the holders of the
warrants of the notice provided the termination of the warrant would be delayed
if the exercise of the warrant requires filings under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended (the "HSR Act"). Such a filing is
required by Vulcan but not by Go2Net. On March 28, 2000, Go2Net exercised its
warrant. By letter dated March 23, 2000, Vulcan notified NDB Group it
irrevocably exercised its warrant subject to the waiting period under the HSR
Act being terminated or expiring.
22
<PAGE>
Item 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit 4(a) - Press Release dated March 28, 2000 -
incorporated by reference to Exhibit 99(a)
to the Company's Form 8-K dated March 27,
2000.
Exhibit 4(b) - Letter of Intent dated March 27, 2000
between National Discount Brokers
Group, Inc. and Deutsche Bank Americas
Holding Corporation - incorporated by
reference to Exhibit 99(b) to the Company's
Form 8-K dated March 27, 2000.
Exhibit 11 - Computation of Net Income Per Common Share
Exhibit 27 - Financial Data Schedule
(b) The Company filed one report on Form 8-K during the quarter ended
February 29, 2000. The report, dated February 5, 2000, was filed in
regard to the Securities Purchase Agreement the Company entered into
with Go2Net and Vulcan.
23
<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: April 10, 2000 By: Arthur Kontos
---------------------------- -------------------------------------
Arthur Kontos
Chief Executive Officer
Date: April 10, 2000 By: Daniel Fishbane
----------------------------- -------------------------------------
Daniel Fishbane
Chief Financial Officer and
Principal Accounting Officer
24
<PAGE>
EXHIBIT 11
NATIONAL DISCOUNT BROKERS GROUP, INC. AND SUBSIDIARIES
COMPUTATION OF NET INCOME PER COMMON SHARE
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
------------------ ------------------
Basic Diluted
---------------------------------- -----------------------------------
February 29, 2000 February 28, 1999 February 29, 2000 February 28, 1999
----------------- ------------------ ----------------- ----------------
<S> <C> <C> <C> <C>
Common stock and potential common stock:
Average common stock outstanding 17,115,134 14,001,718 17,115,134 14,001,718
Average potential common stock
issuable under stock options - 295,038 - 202,811
----------------- ---------------- --------------- ----------------
Total average common stock and potential common
stock used for earnings per share computation 17,115,134 14,001,718 17,410,172 14,204,529
----------------- ---------------- --------------- - ---------------
Income:
Net income from continuing operations $ 19,230,963 $ 7,749,299 $ 19,230,963 $ 7,749,299
Net income from discontinued operations,
net of taxes - 422,350 - 422,350
Gain on sale of discontinued operations,
net of taxes - - - -
----------------- ---------------- --------------- ---------------
Net income $ 19,230,963 $ 8,171,649 $ 19,230,963 $ 8,171,649
----------------- ---------------- --------------- ---------------
Net income per common and potential common share:
Net income from continuing operations $ 1.12 $ 0.55 $ 1.10 $ 0.55
Net income from discontinued operations,
net of taxes 0.00 0.03 0.00 0.03
Gain on sale of discontinued operations,
net of taxes 0.00 0.00 0.00 0.00
----------------- ---------------- --------------- --------------
Net income $ 1.12 $ 0.58 $ 1.10 $ 0.58
----------------- ---------------- --------------- --------------
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended Nine Months Ended
----------------- -----------------
Basic Diluted
---------------------------------- ---------------------------------
February 29, 2000 February 28, 1999 February 29, 2000 February 28, 1999
-------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common stock and potential common stock:
Average common stock outstanding 16,766,429 14,028,253 16,766,429 14,028,253
Average potential common stock
issuable under stock options - - 271,504 72,931
----------------- ---------------- --------------- --------------
Total average common stock and potential common
stock used for earnings per share computation 16,766,429 14,028,253 17,037,933 14,101,184
----------------- ---------------- --------------- --------------
Income:
Net income from continuing operations $ 23,976,825 $ 11,531,741 $ 23,976,825 $ 11,531,741
Net income from discontinued operations,
net of taxes 82,994 1,187,998 82,994 1,187,998
Gain on sale of discontinued operations,
net of taxes 20,515,969 - 20,515,969 -
----------------- ---------------- --------------- --------------
Net income $ 44,575,788 $ 12,719,739 $ 44,575,788 $ 12,719,739
----------------- ---------------- --------------- --------------
Net income per common and potential common share (a):
Net income from continuing operations $ 1.43 $ 0.82 $ 1.41 $ 0.82
Net income from discontinued operations,
net of taxes 0.00 0.09 0.00 0.08
Gain on sale of discontinued operations,
net of taxes 1.23 0.00 1.21 0.00
----------------- ---------------- --------------- --------------
Net income $ 2.66 $ 0.91 $ 2.62 $ 0.90
----------------- ---------------- --------------- --------------
<FN>
(a) The sum of the individual quarters' earnings per common share does not
equal the total amount for the nine months ended February 29, 2000 or
February 28, 1999 due to the effect of averaging the number of shares of
potential common stock throughout the year.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> BD <LEGEND> This schedule contains summary financial information
extracted from the financial statements for the nine months ended February 29,
2000 and is qualified in its entirety by reference to such financial statements.
- --------------------------------------------------------------------------------
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> May-31-2000
<PERIOD-START> Jun-01-1999
<PERIOD-END> Feb-29-2000
<CASH> 67,321,583
<RECEIVABLES> 152,830,756
<SECURITIES-RESALE> 0
<SECURITIES-BORROWED> 0
<INSTRUMENTS-OWNED> 126,996,428
<PP&E> 16,275,791
<TOTAL-ASSETS> 402,019,372
<SHORT-TERM> 0
<PAYABLES> 82,776,903
<REPOS-SOLD> 0
<SECURITIES-LOANED> 0
<INSTRUMENTS-SOLD> 27,451,053
<LONG-TERM> 0
0
0
<COMMON> 178,331
<OTHER-SE> 291,613,085
<TOTAL-LIABILITY-AND-EQUITY> 402,019,372
<TRADING-REVENUE> 196,832,463
<INTEREST-DIVIDENDS> 15,592,953
<COMMISSIONS> 47,963,074
<INVESTMENT-BANKING-REVENUES> 0
<FEE-REVENUE> 4,494,002
<INTEREST-EXPENSE> 87,582
<COMPENSATION> 105,245,469
<INCOME-PRETAX> 44,152,099
<INCOME-PRE-EXTRAORDINARY> 44,575,788
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 44,575,788
<EPS-BASIC> 2.66
<EPS-DILUTED> 2.63
</TABLE>
