<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
(MARK ONE)
/ X / ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended March 25, 1994
OR
/___/ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ____________________ to ______________________
Commission file number 1-8526
McDONALD & COMPANY INVESTMENTS, INC.
--------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Delaware 34-1391950
- - - - - ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
800 Superior Avenue, Cleveland, Ohio 44114
- - - - - ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (216) 443-2300
--------------
Securities Registered Pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
Common Stock, par value $1.00 per share New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
----
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. Yes X No
----- -----
As of June 10, 1994 9,198,411 shares of Common Stock, par value $1.00
per share, were outstanding, and the aggregate market value of the shares of
Common Stock of the Registrant held by non-affiliates (based upon the closing
price of the Registrant's shares on the New York Stock Exchange on June 10,
1994, which was $13.375 per share) was $102,247,996. For purposes of this
information, the outstanding shares of Common Stock which were owned by all
Directors and executive officers of the Registrant, were deemed to be the
shares of Common Stock held by affiliates.
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement to be used in
connection with its Annual Meeting of Stockholders to be held on August 3, 1994
are incorporated by reference into Part III of this Report.
Except as otherwise stated, the information contained in this Report on
Form 10-K is as of March 25, 1994.
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PART I
------
ITEM 1. BUSINESS.
(a) GENERAL DEVELOPMENT OF BUSINESS
McDonald & Company Investments, Inc. is a holding company which was
incorporated under the laws of the State of Delaware on May 20, 1983. McDonald
& Company Investments, Inc. conducts substantially all of its business through
its principal subsidiary, McDonald & Company Securities, Inc. ("McDonald
Securities"), which operates a regional investment banking, investment advisory
and brokerage business. As used in this Report, the "Company" refers, unless
the context requires otherwise, to McDonald & Company Investments, Inc. and its
subsidiaries, and also includes the predecessor business activities of McDonald
& Company, a partnership (the "Partnership"). On July 20, 1983, when the
Company made its initial public offering, the Company succeeded to the business
of the Partnership, which was established in 1927.
As of December 14, 1990, McDonald Securities acquired certain assets of
S. J. Wolfe & Co., a Dayton, Ohio stock brokerage firm. The firm currently
operates as the S. J. Wolfe Division of McDonald Securities. The assets
acquired consisted primarily of marketable securities and furniture and
equipment. The consideration paid for the assets acquired, arrived at through
arms-length negotiations, was $276,000.
On July 24, 1991, the Company entered into an agreement of Merger (the
"Merger Agreement") with Gradison & Company Incorporated, ("Gradison")
providing for the merger of Gradison with and into McDonald Securities. The
Merger Agreement was amended on September 11, 1991 and was approved by the
Stockholders of the Company and Gradison on October 4, 1991. Pursuant to the
Merger Agreement, stockholders of Gradison received a total of $22,723,000
consisting of 1,871,242 shares of Common Stock of the Company valued at
approximately $14,203,000, and cash of $8,520,000. The difference between the
cost and the fair value of the net assets acquired, plus expenses related to
the merger, was $14,040,000 and is being amortized on a straight-line basis
over a period of 25 years. Additional cash consideration of approximately
$3,200,000 will be paid in the third fiscal quarter of 1994 if certain
performance criteria are met. The merger was accounted for as a purchase, and
therefore, the results of operations of Gradison were included in the financial
statements of the Company subsequent to October 4, 1991.
Gradison operated as a full-service regional brokerage and investment
advisory firm headquartered in Cincinnati, Ohio with a primary market of
southwestern Ohio and northern Kentucky. Subsequent to the merger, Gradison
operates as a division of McDonald Securities. The merger allowed the Company
to increase the size of its retail sales force and its customer base and gave
the Company a strong presence in southwestern Ohio. Gradison also added
significant asset management capabilities to the Company.
The Company's executive offices are located at 800 Superior Ave., Suite
2100, Cleveland, Ohio 44ll4 and its telephone number is (216) 443-2300. The
Company has 19 other offices in Ohio (including the Gradison Division in
Cincinnati, Ohio and the S. J. Wolfe Division in Dayton, Ohio) and 16
additional offices in 9 other states.
(b) INDUSTRY SEGMENT DATA
The Company is engaged in one line of business, that of a securities
broker-dealer, which is comprised of several classes of products or services
including underwriting and investment banking, principal and agency
transactions, and investment advisory services.
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(c) NARRATIVE DESCRIPTION OF BUSINESS
GENERAL
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The Company, through its principal subsidiary, McDonald Securities,
operates a regional investment banking and brokerage business. The Company's
activities include the origination, underwriting, distribution, trading and
brokerage of fixed income and equity securities, investment advisory services,
and investment research and other related services. On July 20, 1983, the
Company succeeded to the business of the Partnership, which was established in
1927. The Company has expanded to its present size primarily through internal
growth rather than by acquisition, except for the merger with Gradison.
The Company serves institutional customers which are located throughout
the United States and in Canada, Europe, and the Far East. The Company's
retail (individual) customers are primarily located in the tri-state region of
Ohio, Michigan and Indiana. For the fiscal year ended March 25, 1994,
approximately 51% of total revenues were derived from retail customers, 28%
from institutional customers, 14% from non-customer related principal
transactions, investment banking fees and other activities and 7% from interest
and dividend income.
The Company has formulated a comprehensive strategic plan, which is
periodically reviewed and revised as business conditions dictate. The plan
emphasizes the Company's historical roots as a regional brokerage and
investment banking firm. The Company has focused on the Ohio, Michigan and
Indiana area by increasing the number of investment brokers covering individual
investors, as well as increasing investment banking activities in the region.
The merger with Gradison has enabled the Company to expand its retail sales
force and its customer base in southwestern Ohio and northern Kentucky, and has
added significantly to the Company's asset management capabilities.
McDonald Securities is a member of the New York Stock Exchange, Inc.
(the "NYSE"), the American Stock Exchange, Inc. (Associate), the Midwest Stock
Exchange, Inc., the Philadelphia Stock Exchange, Inc. and the National
Association of Securities Dealers, Inc. (the "NASD"). The Company is also a
member of the Securities Investor Protection Corporation ("SIPC").
The Company has a total of 36 offices in 10 states, all of which
offices are leased. The Company has approximately 1,030 employees, of whom 348
are full-time investment brokers.
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ITEM 1. BUSINESS--Continued
REVENUES BY SOURCE
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The following table sets forth the revenues of the Company on a
comparative basis for the three most recent fiscal years.
<TABLE>
<CAPTION>
McDonald & Company Investments, Inc.
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Fiscal Year Ended
----------------------------------------------------------------------
March 25, 1994 March 26, 1993 March 27, 1992
--------------- --------------- ---------------
(In thousands)
Amount % Amount % Amount %
------ - ------ - ------ -
<S> <C> <C> <C> <C> <C> <C>
Underwriting and
investment banking:
Corporate $ 50,791 25% $ 28,174 16% $ 20,356 16%
Municipal 10,981 5 13,270 8 7,982 6
Direct participation
investments 2,236 1 1,287 1 1,286 1
-------- --- -------- --- -------- ---
64,008 31 42,731 25 29,624 23
Principal transactions:
Unlisted stocks 17,920 9 11,823 7 8,907 7
Corporate bonds
and preferred stocks 11,656 6 16,870 9 13,977 11
Mortgage-backed
securities 8,431 4 14,757 8 11,399 9
Government bonds 9,091 4 7,478 4 4,356 3
Government bond arbitrage (3,718) (2) 1,125 1 (611) (1)
Municipal bonds 7,831 4 6,209 4 5,248 4
Other 558 1 1,322 1 1,096 1
-------- --- -------- --- -------- ---
51,769 26 59,584 34 44,372 34
Commissions:
Listed stocks 27,903 14 21,952 13 17,989 14
Mutual funds and money
market funds 15,449 7 11,041 6 7,101 6
Unlisted stocks 5,245 2 3,753 2 2,957 2
Annuities 3,718 2 2,608 1 1,675 1
Options 990 1 830 1 655 1
-------- --- -------- --- -------- ---
53,305 26 40,184 23 30,377 24
Investment management fees:
Mutual funds and
money market funds 8,782 4 8,026 5 4,776 4
Investment advisory fees 5,760 3 4,294 2 2,285 2
------- --- -------- --- -------- ---
14,542 7 12,320 7 7,061 6
Interest and dividends 15,330 7 13,850 8 14,817 12
Other 5,726 3 5,148 3 1,812 1
-------- --- -------- --- -------- ---
Total revenues $204,680 100% $173,817 100% $128,063 100%
======== === ======== === ======== ===
</TABLE>
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ITEM 1. BUSINESS--Continued
UNDERWRITING AND INVESTMENT BANKING
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McDonald Securities participates in municipal and corporate securities
distributions as a manager or co-manager of an underwriting syndicate or as a
member thereof, or as a member of a selling group. Municipal securities are
obligations issued by state and local governments, hospitals, public utility
systems and industrial development authorities.
Revenues from underwriting and investment banking activities are highly
dependent on general market conditions for such business activities. Market
conditions for underwriting and investment banking services can be affected by
political and economic events both in the United States and abroad. To the
extent future events are unpredictable, uncertainty will be a factor in the
level of McDonald's business activity. Also, competitive pressure from other
investment bankers has an effect on the success of McDonald Securities in
obtaining such business and on the prices which can be charged for investment
banking and underwriting services. The management of McDonald Securities
believes it can compete effectively in this segment of its business activities.
Participation in an underwriting syndicate or selling group involves
both economic and regulatory risks. An underwriter or selling group member may
incur losses if it is forced to resell the securities it is committed to
purchase at less than the agreed purchase price. In addition, under the
federal securities laws, other statutes and court decisions with respect to
underwriters' liabilities and limitations on indemnification of underwriters by
issuers, an underwriter is subject to substantial potential liability for
material misstatements or omissions in prospectuses and other communications
with respect to underwritten offerings. Further, underwriting or selling
commitments constitute a charge against net capital, and the Company's
underwriting or selling commitments may be limited by the requirement that it
must at all times be in compliance with the net capital rule. See "Net Capital
Requirements."
In addition to its underwriting and selling group activities, McDonald
Securities engages in structuring, managing and marketing private offerings of
corporate and municipal securities, and assists in arranging mergers,
acquisitions, divestitures, lease financing and venture capital financing. The
Company provides valuation and financial consulting services for gift and
estate tax purposes, employee stock ownership trusts, mergers, acquisitions,
stock purchase agreements, and other corporate purposes, as well as valuations
for public companies in the process of going private.
McDonald Securities also markets investments in real estate, oil and
gas drilling and similar ventures. These investments generally are in the form
of limited partnership interests, although McDonald Securities also offers
interests in direct participation programs and similar investment vehicles. In
most cases McDonald Securities originates such programs, and in certain cases
other subsidiaries of the Company may act as a general partner.
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ITEM 1. BUSINESS--Continued
PRINCIPAL TRANSACTIONS
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McDonald Securities actively engages in trading as principal in various
phases of the over-the-counter securities business. To facilitate trading by
its customers, McDonald Securities buys, sells and maintains inventories of
municipal bonds, corporate bonds and preferred stocks, government bonds and
mortgage-backed securities and common stocks in order to "make markets" in
those securities. Revenues from principal transactions depend upon the general
trend of prices and level of activity in the securities market, the skill of
employees in market-making areas and the size of the inventories. Activities
in trading as a principal require the commitment of capital and create an
opportunity for profit and risk of loss due to market fluctuations. As of
March 25, 1994, McDonald Securities made markets in the common stock or other
equity securities of approximately 210 NASDAQ-quoted corporations, as well as
other corporations with less actively traded securities. McDonald Securities
has acted as a managing underwriter for and provides research coverage of
certain of these corporations.
In executing customers' orders to buy or sell in the over-the-counter
market in a security in which it makes a market, McDonald Securities sells to
or purchases from its customers at a price which is approximately equal to the
current inter-dealer market price, plus or minus a markup or markdown.
Alternatively, McDonald Securities may act as agent and execute a customer's
purchase or sale order with another broker-dealer which acts as a market-maker
at the best inter-dealer market price available and charge a commission.
Prior to August 31, 1993 the Company engaged in equity arbitrage
activities for its own account. Revenues from equity arbitrage activities for
the fiscal years ended March 25, 1994, March 26, 1993 and March 27, 1992 were
$464,000, $1,346,000 and $1,084,000, respectively. Revenues from equity
arbitrage activities are included in Principal transactions - Other. These
arbitrage activities can be divided into classical arbitrage and risk
arbitrage. In classical arbitrage transactions, the Company attempted to
benefit from temporary price discrepancies which may occur when a convertible
security is trading at a price which is different from the security into which
it can be converted. The risk arbitrage activities of the Company involved
purchasing securities which may increase in value if certain anticipated
transactions occurred, such as mergers, recapitalizations, or tender or
exchange offers.
The Company held certain high yield securities and certain
non-investment grade securities for its own account in connection with its
arbitrage activities.
The Company engaged in government bond arbitrage ("fixed income
arbitrage") activities for its own account. The fixed income arbitrage
activities consisted primarily of proprietary positions in United States
government and Eurodollar securities and related derivative securities.
Profits or losses were recognized due to the market fluctuations in these
interest-rate sensitive securities. For the fiscal year ended March 25, 1994,
the fixed income arbitrage area recognized a loss of $3,718,000, or
approximately 2% of total revenues for the fiscal year. The loss for the
fiscal year ended March 25, 1994 was due to a trading loss of $5,600,000
experienced in the months of February and March, 1994. This loss was due to
the rapid deterioration of the fixed income markets during those months.
For the fiscal year ended March 26, 1993 revenues from fixed income
arbitrage were $1,125,000, or approximately 1% of total revenues. For the
fiscal year ended March 27, 1992, the fixed income arbitrage area experienced a
loss of $611,000, or approximately 1% of total revenues.
Subsequent to March 25, 1994, the Company eliminated fixed income
arbitrage activities.
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ITEM 1. BUSINESS--Continued
PRINCIPAL TRANSACTIONS (cont.)
- - - - - ------------------------------
The Company's securities positions are subject to fluctuations in
market value and liquidity. The Company seeks to minimize the risks associated
with owning securities by monitoring its security positions on an ongoing
basis. The Company marks its securities to market daily. In addition, each
trading department adheres to a risk limit and a capital commitment limit
determined by senior management. Senior management regularly reviews the
Company's securities positions to ensure that these limits are not exceeded.
COMMISSIONS
- - - - - -----------
In executing customers' orders to buy or sell listed securities and
unlisted stocks and bonds in which it does not make a market, McDonald
Securities generally acts as an agent and charges a commission which is
competitive within the industry.
INVESTMENT MANAGEMENT FEES
- - - - - --------------------------
Revenues from investment management fees include advisory fees from
the Company's mutual funds and money market funds and investment advisory fees
earned related to individual managed accounts.
As of March 25, 1994, McDonald Securities is the investment advisor to
and sole distributor of the following mutual funds: Gradison-McDonald U.S.
Government Reserves ("GMU", a money market fund investing in U.S. Government
Securities), Gradison-McDonald Government Income Fund ("GIF", a U.S. Government
Securities income fund), Gradison-McDonald Ohio Tax-Free Income Fund ("GMO", a
double tax-free income fund for Ohio investors), and Gradison Growth Trust,
which is composed of two portfolios, Gradison-McDonald Established Value Fund
("EST", a common stock fund investing in large, established companies) and
Gradison-McDonald Opportunity Value Fund ("OPP", a common stock fund investing
in small companies). All of these funds are diversified, open-end management
investment companies.
As of March 26, 1993 McDonald Securities was also the investment
advisor to and sole distributor of the following money market funds: McDonald
Money Market Fund, Inc. ("MMF"), McDonald Tax-Exempt Money Market Fund, Inc.
("MTE"), McDonald U.S. Government Money Market Fund, Inc. ("MUS"), Gradison
Cash Reserves ("GCR"), and Gradison U.S. Government Trust ("GUS"). All of
these funds were also diversified, open-end management investment companies.
Effective with the start of business on September 27, 1993 (the
"Reorganization Date") all of the outstanding shares of GCR, GUS, MMF and MUS
(collectively the "Acquired Funds") were merged into a new fund, GMU. Pursuant
to Agreements and Plans of Reorganization and Liquidation approved by
shareholders of the Acquired Funds, GMU acquired substantially all of the
assets and liabilities of the Acquired Funds whereby each shareholder of the
Acquired Funds received an equal number of shares of GMU as of the
Reorganization Date.
MTE was dissolved on September 27, 1993 and shares were exchanged into
Municipal Cash Series, a tax-free money market fund whose investment advisor is
Federated Advisers.
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<PAGE> 9
ITEM 1. BUSINESS--Continued
INVESTMENT MANAGEMENT FEES (cont.)
- - - - - ----------------------------------
The following summarizes the number of accounts and the size of each of
the Funds as of March 25, 1994 and March 26, 1993:
<TABLE>
<CAPTION>
March 25, 1994 March 26, 1993
---------------------- ----------------------
Funds Accounts $ Accounts $
- - - - - ----- -------- --------- -------- ---------
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
McDonald Money Market Fund, Inc. -0- -0- 28,005 289,616
McDonald U.S. Government Money
Market Fund, Inc. -0- -0- 8,030 179,256
Gradison Cash Reserves -0- -0- 32,744 510,479
Gradison U.S. Government Trust -0- -0- 1,147 25,916
Gradison-McDonald U.S. Government
Reserves 72,690 1,014,376 -0- -0-
McDonald Tax-Exempt Money Market
Fund, Inc. -0- -0- 3,827 144,763
Gradison-McDonald Ohio Tax-Free
Income Fund 1,954 80,057 1,466 50,147
Gradison Growth Trust:
Established Value Fund 12,892 258,062 11,404 201,763
Opportunity Value Fund 6,378 84,947 5,517 64,660
Gradison-McDonald Government
Income Fund 6,885 260,396 6,249 230,679
------- --------- ------ ---------
Total 100,799 1,697,838 98,389 1,697,279
======= ========= ====== =========
</TABLE>
The investment advisory fees received from these funds are directly
related to the amounts invested in the funds. Accordingly, McDonald
Securities' investment advisory fees from the investment companies would be
reduced in the future if the amounts invested in the funds decrease.
McDonald Securities also receives reimbursements from the Gradison Funds
for providing such funds with data processing, shareholder services and other
miscellaneous services.
Under asset management programs, the Company provides investment advisory
services to individual, corporate and employee benefit plan clients.
Investment advisory fees for the fiscal year ended March 25, 1994 from
individual managed accounts represented approximately 40% of total revenues
from investment management fees.
INTEREST AND DIVIDENDS
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Approximately 62% of the Company's interest and dividend income is
generated from securities owned. Approximately 34% of interest and dividend
income is represented by interest charged to customers on the amount borrowed
to finance margin transactions. The rate of interest charged to customers is
based on the broker's call money rate (the interest rate on bank loans to
brokers secured by firm and customers' margin account securities) to which an
additional amount, up to 2.5%, is added depending on the size of the debit
balance. The amount of interest and dividend income is directly impacted by
the level of securities owned and customer margin account balances, and by
general fluctuations in interest rates.
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ITEM 1. BUSINESS--Continued
OTHER
- - - - - -----
Approximately 33% of other income represents revenues related to certain
venture capital investments. The Company periodically invests in venture
capital and other investments in the form of limited partnerships, general
partnerships, and equity positions. Approximately 30% of other income
represents service fees, IRA administration fees, and other retail-related
revenues. Approximately 29% of other income represents transfer agent fees and
other fees derived from the Company's money market and mutual funds. The
remaining 8% represents miscellaneous income.
RETAIL BUSINESS
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During the fiscal year ended March 25, 1994, approximately 64% of the
Company's total revenues from customers were from individuals. During the
fiscal year ended March 25, 1994, approximately 21% of the revenues from
individual accounts were derived from principal transactions, 28% from agency
transactions, 17% from investment banking, and 34% from other retail products.
Other sources of retail revenues include revenues from the sale of the
Company's money market and mutual funds, other mutual funds, annuities, and
investment advisory services. Individual commission rates on agency
transactions are based upon a schedule which is competitive within the
securities industry. Discounts from the schedule may be granted to retail
customers on large trades.
INSTITUTIONAL BUSINESS
- - - - - ----------------------
During the fiscal year ended March 25, 1994, approximately 36% of the
Company's total revenues from customers were from institutions. Institutional
customers include banks, insurance companies, thrift institutions, pension
funds, mutual funds and money managers. During the fiscal year ended March 25,
1994, approximately 62% of the revenues from institutional accounts were
derived from principal transactions, 10% from agency transactions, and 28% from
investment banking. Commissions charged on agency transactions on behalf of
institutional customers are on a negotiated basis and represent a significant
discount from the Company's retail commission schedule.
MARGIN ACCOUNTS
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Customers' transactions in securities are effected on either a cash or
margin basis. In a margin account, the customer pays a portion of the cost of
securities purchased and the broker-dealer makes a loan for the balance,
secured by the securities purchased or other securities owned by the investor.
The amount of the loan is subject to the margin regulations (Regulation T) of
the Board of Governors of the Federal Reserve System, NYSE margin requirements
and McDonald Securities' internal policies, which in some instances are more
stringent than Regulation T or NYSE margin requirements. Currently, in most
transactions Regulation T limits the amount loaned to a customer for the
purchase of a particular security to 50% of the purchase price. In the event
of a decline in the market value of the securities in a customer's margin
account, a member firm, under NYSE rules, is required to have the customer
deposit cash or additional securities so that the loan to the customer is no
greater than 75% of the value of collateral securities in the account. In
permitting customers to purchase securities on margin, McDonald Securities is
subject to the risk of a market decline which could reduce the value of its
collateral below the customers' indebtedness.
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<PAGE> 11
ITEM 1. BUSINESS--Continued
RESEARCH SERVICES
- - - - - -----------------
McDonald Securities maintains a research staff which concentrates its
efforts on regional equity research and services both retail and institutional
customers. McDonald Securities employs 16 analysts who cover approximately 185
companies, a majority of which maintain their headquarters in the Midwest.
Seven of the 16 analysts are Chartered Financial Analysts (CFAs), including one
who has a doctorate in economics and serves on an exclusive consulting basis as
the Company's economist and investment strategist.
Research services are made available generally without charge to
customers. Research services include the review and analysis of the economy,
general market conditions, industries and specific companies; recommendation of
specific action with regard to industries and specific companies; review of
customer portfolios; the furnishing of information to retail and institutional
customers; and responses to inquiries from customers and investment brokers.
McDonald Securities also provides a computerized portfolio analysis service for
individual accounts upon request. In addition, McDonald Securities purchases
several outside research services which provide its customers with research
more national in scope.
Management believes that a significant portion of its institutional equity
business is attributable to research services. McDonald Securities provides
services to a nationwide institutional base as well as to institutional clients
in Canada, England, Scotland, Germany, Switzerland and the Far East.
COMPETITIVE FACTORS
- - - - - -------------------
Considerable consolidation has occurred in the securities industry as
numerous securities firms have either ceased operation or been acquired by
other securities firms, in many cases resulting in firms with greater financial
resources than firms such as McDonald Securities. In addition, a number of
substantial companies not previously engaged in the securities business have
made investments in and acquired securities firms. These developments have
resulted in significant additional competition for McDonald Securities.
Increasing competitive pressures in the securities industry are requiring
regional firms such as McDonald Securities to offer to their customers many of
the financial services which are provided by much larger securities firms that
have substantially greater resources and may have greater operating
efficiencies than McDonald Securities.
Fixed minimum commissions for securities transactions were eliminated in
1975. This has resulted in substantial discounts of commissions earned from
institutional customers and in the establishment of an increasing number of
firms, including affiliates of banks and thrift institutions, which offer
discount brokerage services to retail customers. These firms generally effect
transactions at lower commission rates on an "execution only" basis, without
offering other services such as investment advice and research which are
provided by "full-service" brokerage firms such as McDonald Securities. In
addition, some discount brokerage firms have increased the range of services
which they offer. The existence of and anticipated continued increase in the
number of discount brokerage firms and services provided by such firms may
adversely affect the Company.
Certain institutions, notably commercial banks and thrift institutions,
have become a competitive factor by offering certain investment banking and
corporate and individual financial services traditionally provided only by
securities firms. Also, major corporations such as Equitable Life Assurance
Society, Travelers Corporation, General Electric Company and Kemper Insurance,
Inc. have acquired large securities firms. Additionally, certain bank holding
companies, such as J. P. Morgan and Citicorp, have affiliates which are
authorized to
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<PAGE> 12
ITEM 1. BUSINESS--Continued
COMPETITIVE FACTORS (cont.)
- - - - - ---------------------------
engage in the investment banking business, including corporate underwritings.
While it is presently not possible to predict the type and extent of
competitive services which banks and other institutions ultimately may offer or
the extent to which administrative or legislative barriers will be repealed or
modified, to the extent that such services are offered on a large scale,
securities firms such as McDonald Securities may be adversely affected.
EMPLOYEES
- - - - - ---------
The Company has approximately 1,030 employees, of whom 17 have senior
managerial responsibilities, 348 are full-time investment brokers, 194 are
engaged in other production areas, including trading, research, investment
banking, and investment advisory, and 471 are employed in processing
securities transactions, accounting, management information systems, mutual
fund services, personnel and other administrative services.
The Company recognizes the importance of hiring, training and retaining
investment brokers. The Company trains new investment brokers who are required
to take examinations given by the NYSE, the NASD and various states in order to
be registered and qualified. The Company also provides ongoing training
programs for investment brokers. There is intense competition among securities
firms for investment brokers with good sales production records and other key
personnel. The Company has experienced a relatively low rate of turnover of
investment brokers. From time to time, however, the Company experiences the
loss of valuable personnel.
The Company considers its employee relations to be good and believes that
its compensation and employee benefits, which include medical, life and
disability insurance, and a 401(k) defined contribution and profit-sharing
plan, are competitive with those offered by other securities firms. None of
the Company's employees is covered by a collective bargaining agreement.
REGULATION
- - - - - ----------
The securities industry in the United States is subject to extensive
regulation under federal and state laws. The Securities and Exchange
Commission (the "Commission") is the federal agency charged with administration
of the federal securities laws. Much of the regulation of broker-dealers,
however, has been delegated to self-regulatory organizations, principally the
NASD and the national securities exchanges. These self-regulatory
organizations adopt rules (which are subject to approval by the Commission)
which govern the industry and conduct periodic examinations of member
broker-dealers. Securities firms are also subject to examination by state
securities commissions in the states in which they are registered. McDonald
Securities is currently registered as a broker-dealer in all states. In
addition, McDonald Securities is registered as a broker-dealer with the
Commission.
The regulations to which broker-dealers are subject cover all aspects of
the securities business, including sales methods, trade practices among
broker-dealers, capital structure of securities firms, record-keeping and the
conduct of directors, officers and employees. Additional legislation, changes
in rules promulgated by the Commission and by self-regulatory organizations, or
changes in the interpretation or enforcement of existing laws and rules often
directly affect the method of operation and profitability of broker-dealers.
The Commission and the self-regulatory organizations may conduct administrative
proceedings which can result in censure, fine, suspension or expulsion of a
broker-dealer, its officers or employees. The principal purpose of regulation
and discipline of broker-dealers is the protection of customers and the
securities market rather than protection of creditors and stockholders of
broker-dealers.
- 12 -
<PAGE> 13
ITEM 1. BUSINESS--Continued
REGULATION (cont.)
- - - - - ------------------
The Company anticipates regulation of the securities industry to increase
and for compliance with regulations to become more difficult. At present the
Company is unable to predict the extent of changes that may be enacted, or the
effect on the Company's business.
McDonald Securities' Compliance Committee has the responsibility of
performing reviews to provide reasonable assurance that the officers,
directors, and employees comply with the regulatory requirements of the
Commission, self-regulatory agencies, and McDonald Securities' internal
requirements.
McDonald Securities is required by federal law to belong to the SIPC.
When the SIPC fund falls below a certain minimum amount, members are required
to pay annual assessments, currently .054%, of their adjusted gross revenues
(as defined) to restore the fund. The SIPC fund provides protection for
securities held in customer accounts up to $500,000 per customer, with a
limitation of $l00,000 on claims for cash balances.
NET CAPITAL REQUIREMENTS
- - - - - ------------------------
As a broker-dealer and member of the NYSE, McDonald Securities is subject
to the Uniform Net Capital Rule promulgated by the Commission (Rule 15c3-1)
which provides that a broker-dealer doing business with the public shall not
permit its aggregate indebtedness (as defined) to exceed 15 times its net
capital (as defined) or, alternatively, that its net capital shall not be less
than 2% of aggregate debit balances (primarily receivables from customers)
computed in accordance with Rule 15c3-3. The Rule is designed to measure the
general financial integrity and liquidity of a broker-dealer and the minimum
net capital deemed necessary to meet the broker-dealer's continuing commitments
to its customers. Management believes that the alternative method is more
directly related to the level of customer business, therefore McDonald
Securities computes its net capital under the alternative method.
A broker-dealer may be required to reduce its business if its net capital
is less than 4% of aggregate debit balances and may be prohibited from
expanding its business or declaring cash dividends if its net capital is less
than 5% of aggregate debit balances. In addition, a broker-dealer may be
subject to disciplinary action by the Commission and self-regulatory agencies,
such as the NYSE, including fines, censure, suspension or expulsion.
Under Rule 15c3-1 a broker-dealer is required to provide advance written
notice to the Commission of any loan, unsecured advance, or withdrawal of
equity capital which exceeds, in any 30 day period, 30% of excess net capital.
Additionally, written notice must be given to the Commission of any loan,
unsecured advance, or withdrawal of equity capital which exceeds, in any 30 day
period, 20% of excess net capital, within two business days subsequent to the
transaction.
In computing net capital, various adjustments are made to net worth with a
view to excluding assets which are not readily convertible into cash and to a
conservative statement of the other assets such as a firm's position in
securities. Compliance with the Uniform Net Capital Rule may limit those
operations of a firm which require the use of its capital for purposes of
maintaining the inventory required for trading in securities, underwriting
securities and financing customer margin account balances. A significant
operating loss or an extraordinary charge against net capital could adversely
affect the ability of a broker-dealer to expand or even maintain its present
level of business. Net capital and aggregate debit balances change from day to
day. At March 25, 1994, McDonald Securities' net capital was $64,840,000 which
was 51% of its aggregate debit balances and $62,305,000 in excess of the
minimum required net capital.
- 13 -
<PAGE> 14
ITEM 1. BUSINESS--Continued
NET CAPITAL REQUIREMENTS (cont.)
- - - - - --------------------------------
McDonald Securities has outstanding $25,000,000 in aggregate principal
amount of 8.24% Subordinated Notes due January 15, 2002. McDonald Securities
is required to prepay principal amounts of $5,000,000 on January 15 in each
year beginning in 1998. The notes are subordinated in right of payment to all
senior indebtedness and general creditors of McDonald Securities. The
principal amount of the notes has been approved by the New York Stock Exchange
Inc. for inclusion in the regulatory capital of McDonald Securities.
(d) FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT
SALES
Not Applicable.
- 14 -
<PAGE> 15
ITEM 2. PROPERTIES.
The Company has a total of 36 offices in 10 states, all of which are
leased under lease agreements expiring from 1994 to 2002. Certain of these
leases have renewal options. The table below sets forth the location of each
of the Company's offices and the number of full-time investment brokers in each
office:
HEADQUARTERS Elyria (8) Fort Wayne (4)
Cleveland (61) Findlay (5) Indianapolis (9)
Kenwood (10)
Lancaster (3) MASSACHUSETTS
DIVISIONS Lima (3) Boston (4)
Gradison Divison Mansfield (3)
Cincinnati, Ohio Pepper Pike (23) MICHIGAN
S. J. Wolfe Division Rocky River (18) Ann Arbor (5)
Dayton, Ohio Toledo (5) Battle Creek (2)
Willoughby Hills (9) Birmingham (16)
Youngstown (5) East Lansing (10)
BRANCHES Grand Rapids (14)
OHIO CALIFORNIA Grosse Pointe Woods (2)
Akron (8) Los Angeles (2)
Canfield (1) NEW JERSEY
Canton (5) GEORGIA Jersey City (10)
Chillicothe (2) Atlanta (4)
Cincinnati (55) PENNSYLVANIA
Columbus (9) ILLINOIS Ligonier (1)
Dayton (11) Chicago (5)
Dublin (6) TEXAS
INDIANA Dallas (7)
Elkhart (3)
The Company's executive office and largest sales office is located in
Cleveland, Ohio. The Company's order entry, trading, investment banking,
research, operations and accounting activities are primarily centralized in the
Cleveland office. The office, which occupies approximately 90,000 square feet
of space, is operated under a lease expiring in 1995. The Company has signed a
letter of intent to enter into a fifteen year lease on the headquarters office
covering approximately 130,000 square feet. The current lease will terminate
upon the execution of the new lease. The Gradison Division of McDonald
Securities is located in Cincinnati, Ohio. The Gradison Division office, which
occupies approximately 38,000 square feet of space, is operating under a lease
expiring in 1998. Personnel at the Gradison Division are primarily involved in
the mutual fund and investment advisory operations, retail sales, management,
and also certain accounting and administrative functions. The S. J. Wolfe
Division was opened in December, 1990 when the Company acquired certain assets
and the business of S. J. Wolfe & Co., a stock brokerage firm. The S. J.
Wolfe Division has an over-the-counter trading operation.
The Company believes that at the present time its administrative and
sales office space is adequate and is suitably utilized.
ITEM 3. LEGAL PROCEEDINGS.
As is the case with many firms in the securities industry, McDonald
Securities is a defendant or co-defendant in a number of lawsuits alleging
damages, which are ordinary and routine litigation, incidental to the
securities and investment banking business. The Company is contesting the
allegations of the complaints in these cases and believes that there are
meritorious defenses in each of these lawsuits. Some of the proceedings relate
to public underwritings of securities in which McDonald Securities participated
as a member of the underwriting syndicate. The Company is also aware of
litigation against certain underwriters of offerings in which McDonald
Securities was a participant, but where McDonald Securities is not now a
defendant. In these latter cases, it is possible that McDonald Securities may
be called upon to contribute to settlements or judgments.
Although it is impossible to predict the outcome of the outstanding
litigation, in the opinion of management, the outcome will not have a material
adverse effect on the financial condition of the Company.
- 15 -
<PAGE> 16
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
EXECUTIVE OFFICERS OF THE REGISTRANT.
(Included pursuant to Instruction 3 to Item 401(b) of Regulation S-K)
The following table sets forth the executive officers of the Company who are
not also Directors of the Company and certain other information with respect to
each individual, including the years certain individuals were partners in the
Partnership, the predecessor to the Company's business. Except for Mr. Weston,
each of the executive officers listed below are Directors of McDonald
Securities.
<TABLE>
<CAPTION>
NAME AGE PRINCIPAL OCCUPATION
---- --- ------------------------------------------------
<S> <C> <C>
Thomas M. O'Donnell 58 Director of the Company since June 7, 1983;
Chairman of the Company and McDonald Securities
since April 1, 1989; Chief Executive Officer of
the Company from April 1, 1989 to January 1,
1994; President of the Company and McDonald
Securities from July 23, 1984 to April 1, 1989;
Secretary of the Company from June 7, 1983 to
July 23, 1984; Managing Director (Corporate
Finance and Special Products) and Secretary of
McDonald Securities from June 7, 1983 to July 23,
1984; Partner from 1968 to 1990 and Managing
Partner from 1989 to 1990.
William B. Summers, Jr. 44 Director of the Company since June 7, 1983; Chief
Executive Officer of the Company since January 1,
1994; President of the Company and McDonald
Securities since April 1, 1989; Executive Vice
President of the Company and McDonald Securities
from November 1, 1988 to April 1, 1989; Managing
Director (Fixed Income Institutional Sales) of
McDonald Securities from June 7, 1983 to November
1, 1988; Partner from 1975 to 1990.
Daniel F. Austin 42 Senior Managing Director (Corporate and Public
Finance) of McDonald Securities since June 1,
1992; Managing Director from January 4, 1991 to
May 31, 1992; Senior Vice President from May 1,
1986 to January 3, 1991; First Vice President
from May 1, 1985 to April 30, 1986.
Jack N. Aydin 53 Managing Director (Resident Manager - Jersey
City, New Jersey) of McDonald Securities since
May l, l988; Senior Vice President from May l,
l986 to April 30, l988; First Vice President from
June 7, l983 to April 30, l986; Partner from l977
to 1990.
Eugene H. Bosart III 51 Managing Director (Regional Sales Manager -
Michigan) of McDonald Securities since May 1,
1987; Senior Vice President from June 7, 1983 to
April 30, 1987; Partner from 1972 to 1990.
Thomas G. Clevidence 44 Managing Director (Human Resources) since July 1,
1992; Vice President - Corporate Employment,
Society Corporation/Ameritrust Corporation, from
October 1989 to June 30, 1992; Senior Manager,
Ernst & Young, from 1982 to October 1989.
</TABLE>
- 16 -
<PAGE> 17
EXECUTIVE OFFICERS OF THE REGISTRANT (cont.)
<TABLE>
<CAPTION>
NAME AGE PRINCIPAL OCCUPATION
---- --- ------------------------------------------------
<S> <C> <C>
Robert T. Clutterbuck 43 Treasurer of the Company and Executive Managing
Director and Chief Financial Officer of McDonald
Securities since January 1, 1994; Senior Managing
Director (Municipal Bond Trading and
Underwriting) from June 1, 1992 to December 31,
1993; Managing Director from May 1, 1987 to May 31,
1992; Senior Vice President from May 1, 1984 to
April 30, 1987; First Vice President from June 7,
1983 to April 30, 1984; Partner from 1978 to 1990.
Dennis J. Donnelly 44 Senior Managing Director (Operations) since June 1,
1992; Managing Director from May 1, 1987 to May 31,
1992; Senior Vice President from May 1, 1984 to
April 30, 1987; First Vice President from June
7, 1983 to April 30, 1984; Partner from 1980 to
1990.
David W. Ellis, III 38 Senior Vice President, (Fixed Income Asset Management)
Gradison Division, since October 4, 1991; Director of
Gradison & Company Incorporated from January 1, 1987
to October 3, 1991; Senior Vice President, Gradison
& Company Incorporated from September 1, 1988 to
October 3, 1991; Vice President from September 1,
1980 to August 31, 1988.
David W. Knall 49 Managing Director (Resident Manager - Indianapolis,
Indiana) of McDonald Securities since June 7, 1983;
Partner from 1973 to 1990.
Lawrence T. Oakar 59 Senior Vice President (Retail Sales) of McDonald
Securities since May 1, 1986; First Vice President
from July 20, 1983 to April 30, 1986; Partner from
1979 to 1990.
John F. O'Brien 57 Senior Managing Director (Private Client Group) of
McDonald Securities since June 1, 1992; Managing
Director from June 17, 1983 to May 31, 1992;
Partner from 1971 to 1990.
Gordon A. Price 46 Managing Director and Treasurer of McDonald Securities
since January 1, 1994; Treasurer of the Company from
July 28, 1988 to January 1, 1994; Chief Financial
Officer of McDonald Securities from July l, l987 to
December 31, 1993; Senior Managing Director (Financial
Administration) of McDonald Securities from June 1,
1992 to December 31, 1993; Managing Director from May
1, 1987 to May 31, 1992; Senior Vice President from
May 1, 1984 to April 30, 1987; First Vice President
from June 7, 1983 to April 30, 1984; Partner from 1980
to 1990.
James C. Redinger 57 Senior Managing Director (Equity Institutional Sales and
Trading) of McDonald Securities since June 1, 1992;
Managing Director from May 1, 1987 to May 31, 1992;
Senior Vice President from May 1, 1984 to April 30,
1987; First Vice President from June 7, 1983 to April
30, 1984; Partner from 1980 to 1990.
</TABLE>
- 17 -
<PAGE> 18
EXECUTIVE OFFICERS OF THE REGISTRANT (cont.)
<TABLE>
<CAPTION>
NAME AGE PRINCIPAL OCCUPATION
---- --- ------------------------------------------------
<S> <C> <C>
David D. Sutcliffe 33 Senior Vice President (Fixed Income Sales) of
McDonald Securities since May 1, 1989; First
Vice President (Fixed Income Sales from May 1,
1987 to April 30, 1989; Vice President (Fixed
Income Sales) from 1984 to April 30, 1987.
Francis S. Tobias 45 Managing Director (Fixed Income Sales and Trading)
of McDonald Securities since January 1, 1994;
Senior Managing Director (Fixed Income Sales and
Trading) from June 1, 1992 to January 1, 1994;
Managing Director from July 1, 1990 to May 31,
1992; Manager of Fixed Income Sales and Trading,
Prescott Ball & Turben, a division of Kemper
Securities Group, Inc. from 1985 to June 30, 1990.
Donald E. Weston 59 Director of the Company since October 4, 1991;
Chairman and Chief Executive Officer of the
Gradison Division of McDonald Securities since
October 4, 1991; Chairman of the Board and
Chief Executive Officer of Gradison & Company
Incorporated from January, 1982 to October 4,
1991; Trustee and Chairman of the Board of the
Gradison-McDonald U.S. Government Trust since
January, 1982; of the Gradison Growth Trust
since August, 1983, of the Gradison-McDonald
Government Income Fund since September, 1987
and of the Gradison-McDonald Municipal Custodian
Trust since September, 1992.
</TABLE>
- 18 -
<PAGE> 19
PART II
-------
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS.
The information required by this item is included herein at Exhibit
99(a) to this Form 10-K Annual Report set forth under the caption
"Supplementary Financial Data - Quarterly Data (Unaudited)".
ITEM 6. SELECTED FINANCIAL DATA.
The information required by this item is included herein at Exhibit
99(b) to this Form 10-K Annual Report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The information required by this item is included herein at Exhibit
99(c) to this Form 10-K Annual Report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information required by this item is included herein at Exhibit
99(d) to this Form 10-K Annual Report.
ITEM 9. DISAGREEMENTS WITH ACCOUNTANTS ON FINANCIAL DISCLOSURE.
None.
- 19 -
<PAGE> 20
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information regarding Directors appearing under the caption of
"Election of Directors" in the registrant's definitive Proxy Statement to be
used in connection with Annual Meeting of Stockholders to be held on August 3,
1994 (the "1994 Proxy Statement") is incorporated herein by reference.
Information regarding executive officers of the registrant is set forth in Part
I of this Form 10-K Annual Report.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item is incorporated herein by
reference to "Executive Compensation" in the 1994 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this item is incorporated by reference to
"Stock Ownership of Principal Holders and Management" in the 1994 Proxy
Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this item is incorporated herein by
reference to "Certain Transactions" in the 1994 Proxy Statement.
- 20 -
<PAGE> 21
PART IV
-------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) DOCUMENT LIST
1. Financial Statements
The following financial statements are filed as part of this Form
10-K Annual Report herein at Exhibit 99(4).
McDonald & Company Investments, Inc. and Subsidiaries:
- - - - - -----------------------------------------------------
(i) Consolidated Statements of Income--fiscal years ended
March 25, 1994, March 26, 1993 and March 27, 1992
(ii) Consolidated Statements of Financial Condition--March 25,
1994 and March 26, 1993
(iii) Consolidated Statements of Changes in Stockholders'
Equity--fiscal years ended March 25, 1994, March 26,
1993 and March 27, 1992
(iv) Consolidated Statements of Cash Flows--fiscal years ended
March 25, 1994, March 26, 1993 and March 27, 1992
(v) Notes to Consolidated Financial Statements--March 25, 1994
2. Supplementary Data and Financial Statement Schedules
(i) Supplementary data entitled "Supplementary Financial
Data-Quarterly Data (Unaudited)" is filed as part of
this Form 10-K Annual Report herein at Exhibit 99(1).
(ii) The following financial statement schedules and other
information are filed as a part of this Report:
Sequential Page
---------------
Report of Independent Auditors. . . . . . . . . . . . . . . . 27
Schedule I - Marketable Securities - Other Investments. . . . 28
Schedule II - Amounts Receivable from Related Parties
and Underwriters, Promoters and Employees Other than
Related Parties . . . . . . . . . . . . . . . . . . . . . . 29
Schedule IX--Short-Term Borrowings. . . . . . . . . . . . . . 30
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable, and therefore have
been omitted.
- 21 -
<PAGE> 22
ITEM 14(a) DOCUMENT LIST -- Continued
3. Exhibits Required by Securities and Exchange Commission
Regulation S-K
(a) The following exhibits are filed as part of this Report:
Exhibit Sequential Page
------- ---------------
10(m) Document reflecting line of credit with Bank of
New York ($90,000,000) . . . . . . . . . . . . . . 33
10(n) Document reflecting Letter of Intent related to
proposed lease agreement . . . . . . . . . . . . . 34
11 Statement Re: Computation of Per Share Earnings . . . 44
21 Subsidiaries of the Registrant . . . . . . . . . . . 45
23 Consent of Independent Auditors . . . . . . . . . . . 47
99(a) Supplementary Financial Data - Quarterly Data
(Unaudited) . . . . . . . . . . . . . . . . . . . . 48
99(b) Selected Financial Data . . . . . . . . . . . . . . . 49
99(c) Management's Discussion and Analysis of Results of
Operations and Financial Condition . . . . . . . . 50
99(d) Consolidated Financial Statements of the Company
listed under Item 14(a)(1) . . . . . . . . . . . . 57
(b) The following exhibits are incorporated herein by reference:
2(a): Agreement and Plan of Reorganization dated as of July 24, 1991 by
and among the Registrant, McDonald & Company Securities, Inc. and
Gradison & Company Incorporated (incorporated by reference to Exhibit
2.1 to the Company's Amendment No. 1 to Form S-4 Registration Statement
(Reg. No. 33-42566) which became effective on September 13, 1991)
2(b): Form of First Amendment to the Agreement and Plan of
Reorganization by and among the Registrant, McDonald & Company
Securities, Inc. and Gradison & Company Incorporated (Incorporated by
reference to Exhibit 2.2 to the Company's Amendment No. 1 to Form S-4
Registration Statement (Reg. No. 33-42566) which became effective on
September 13, 1991)
2(c): Form of Agreement of Merger by and among the Registrant, McDonald
& Company Securities, Inc. and Gradison & Company Incorporated
(incorporated by reference to Exhibit 2.3 to the Company's Amendment
No. 1 to Form S-4 Registration Statement (Reg. No. 33-42566) which
became effective on September 13, 1991)
3(a): Certificate of Incorporation of the Company (incorporated by
reference to Exhibit 4(a) to the Company's Form S-8 Registration
Statement (Reg. No. 33-11335), which became effective on February 2,
1987)
3(b): By-Laws of the Company (incorporated by reference to Exhibit 4(b)
to the Company's Form S-8 Registration Statement (Reg. No. 33-11335),
which became effective on February 2, 1987)
3(c): Certificate of Amendment to the Company's Certificate of
Incorporation (incorporated by reference to Exhibit 3(c) to the
Company's Form 10-K for the fiscal year ended March 26, 1993)
4(a): Specimen Stock Certificate (incorporated by reference to Exhibit
4 to the Company's Form S-1 Registration Statement (Reg. No. 2-84300),
which became effective on July 20, 1983)
4(b): Form of Indenture, including form of Debenture (incorporated by
reference to Exhibit 4(a) to the Company's Form S-1 Registration
Statement (Reg. No. 33-2994), which became effective on February 6,
1986)
10(a): Lease Agreement dated November 1, 1982, for a portion of the
Company's executive offices (incorporated by reference to Exhibit 10(b)
to the Company's Form S-1 Registration Statement (Reg. No. 2-84300),
which became effective on July 20, 1983)
- 22 -
<PAGE> 23
ITEM 14(a) DOCUMENT LIST -- Continued
10(b): Sublease dated May 1, 1985, for a portion of the Company's
executive offices (incorporated by reference to Exhibit 10(c) to the
Company's Form S-1 Registration Statement (Reg. No. 33-2994), which
became effective on February 6, 1986)
10(c): Stock Option Plan (incorporated by reference to Exhibit 4(b) to
the Company's Form S-8 Registration Statement (Reg. No. 33-11335),
which became effective on February 2, 1987)*
10(d): 1990 Stock Option Plan for Outside Directors (incorporated by
reference to Exhibit 4.4 to the Company's Form S-8 Registration
Statement (Reg. No. 33-37603), which became effective on November 5,
1990)*
10(e): Tandem System Maintenance Agreement (incorporated by reference
to Exhibit 28(a) to the Company's Form 10-Q for the fiscal quarter
ended September 26, 1986)
10(f): Documents reflecting lines of credit with First National Bank of
Chicago ($25,000,000), and the Bank of Tokyo ($45,000,000),
(incorporated by reference to Exhibit 10(p) to the Company's Form 10-K
for the fiscal year ended March 27, 1992)
10(g): Documents reflecting line of credit with The Northern Trust
Company ($10,000,000) (incorporated by reference to Exhibit 10(p) to
the Company's Form 10-K for the fiscal year ended March 29, 1991)
10(h): Documents reflecting lines of credit with Bankers Trust Company
($50,000,000), State Street Bank and Trust Company ($28,000,000) and
Huntington National Bank ($25,000,000), (incorporated by reference to
Exhibit 10(p) to the Company's Form 10-K for the fiscal year ended
March 26, 1993)
10(i): Documents reflecting lines of credit with National City Bank
($25,000,000) and Star Bank ($20,000,000), (incorporated by reference
to Exhibit 10(m) to the Company's Form 10-Q for the fiscal quarter
ended September 24, 1993)
10(j): 1992 Restricted Stock Bonus Plan (incorporated herein by
reference to the Company's Definitive Proxy Statement for its Annual
Meeting held on July 27, 1993)*
10(k): Form of Note Purchase Agreement between McDonald & Company
Securities, Inc. and the Purchasers listed therein, dated as of January
15, 1993, relating to $25,000,000 principal amount of 8.24%
Subordinated Notes (incorporated by reference to Exhibit 10 of the
Company's Form 8-K filed with the Securities and Exchange Commission on
February 5, 1993)
10(l): McDonald & Company Securities, Inc. Retirement Savings Trust and
Plan, (incorporated by reference to Exhibit 10(n) to the Company's Form
10-Q for the fiscal quarter ended September 24, 1993)*
* Management contract or compensatory plan or arrangement identified pursuant
to Item 14(c) of this Form 10-K
- 23 -
<PAGE> 24
ITEM 14(b). REPORTS ON FORM 8-K.
The Company did not File a current Report on Form 8-K during the fiscal
quarter ended March 25, 1994.
OTHER
- - - - - -----
On July 27, 1993, the Company announced the continuation of an open
market repurchase program originally instituted in July 1987. The current
program, which expires July 31, 1996, allows the Company to purchase up to
1,000,000 shares of its Common Stock at an aggregate price not to exceed
$20,000,000. Treasury shares may be used to satisfy options exercised under
the Company's stock option plans and shares awarded under the Company's 1993
Stock Bonus Plan.
During the fiscal year ended March 25, 1994 the Company purchased
496,509 shares of the Company's Common Stock at an average price of $14.62 per
share. During the fiscal year ended March 25, 1994, the Company sold 140,230
shares of the Company's Common Stock held in treasury to satisfy options
exercised under the Company's stock option plans.
- 24 -
<PAGE> 25
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized at Cleveland, Ohio
on this 16th day of June, 1994.
McDONALD AND COMPANY INVESTMENTS, INC.
By: /s/ William B. Summers, Jr.
----------------------------------
William B. Summers, Jr., President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on June 16, 1994.
Signature Title:
- - - - - --------- -----
/s/ William B. Summers, Jr. President and Director
- - - - - ------------------------------- (Principal Executive Officer)
William B. Summers, Jr.
/s/ Robert T. Clutterbuck Treasurer (Principal Financial
- - - - - ------------------------------- and Accounting Officer)
Robert T. Clutterbuck
/s/ Thomas M. O'Donnell Chairman and Director
- - - - - -------------------------------
Thomas M. O'Donnell
/s/ Bennett E. Bidwell Director
- - - - - -------------------------------
Bennett E. Bidwell
/s/ Rena J. Blumberg Director
- - - - - -------------------------------
Rena J. Blumberg
/s/ Willard E. Carmel Director
- - - - - -------------------------------
Willard E. Carmel
/s/ James A. Karman Director
- - - - - -------------------------------
James A. Karman
/s/ Frederick R. Nance Director
- - - - - -------------------------------
Frederick R. Nance
/s/ Donald E. Weston Director
- - - - - -------------------------------
Donald E. Weston
- 25 -
<PAGE> 26
McDonald & Company Investments, Inc.
Report on FORM 10-K for the Fiscal Year ended March 25, 1994
FINANCIAL STATEMENT SCHEDULE INDEX
----------------------------------
Sequential Page
---------------
Report of Independent Auditors . . . . . . . . . . . . . . . . . . . 27
McDonald & Company Investments, Inc.:
- - - - - -------------------------------------
Schedule I Marketable Securities--Other Investments . . . . 28
Schedule II Amounts Receivable from Related Parties
and Underwriters, Promoters and
Employees Other than Related Parties . . . . . 29
Schedule IX Short-Term Borrowings . . . . . . . . . . . . . . 30
- 26 -
<PAGE> 27
REPORT OF ERNST & YOUNG, INDEPENDENT AUDITORS
Shareholders and Board of Directors
McDonald & Company Investments, Inc.
We have audited the consolidated financial statements of McDonald &
Company Investments, Inc. and subsidiaries listed in the accompanying index to
financial statements Item 14(a)1. Our audits also included the financial
statement schedules listed in the Index at 14(a)2. These financial statements
and schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of McDonald & Company Investments, Inc. and subsidiaries at March 25, 1994 and
March 26, 1993 and the consolidated results of their operations and their cash
flows for each of the three fiscal years in the period ended March 25, 1994, in
conformity with generally accepted accounting principles. Also, in our
opinion, the related financial statement schedules when considered in relation
to the basic financial statements taken as a whole, present fairly in all
material respects the information set forth therein.
Ernst & Young
/s/ Ernst & Young
Cleveland, Ohio
April 29, 1994
- 27 -
<PAGE> 28
<TABLE>
SCHEDULE I - MARKETABLE SECURITIES -- OTHER INVESTMENTS
McDONALD & COMPANY INVESTMENTS, INC.
MARCH 25, 1994
<CAPTION>
Amount at Which
Each Portfolio of
Equity Security
Number of Shares Market Value Issues and Each
or Units of Each Issue Other Security Issue
Principal Amount Cost of at Balance Carried in the
Name of Issuer and Title of Each Issue of Bonds & Notes Each Issue (1) Sheet Date Balance Sheet (1)
- - - - - ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
State and Municipal obligations:
State obligations 37 issues N/A $ 3,367,000 $ 3,367,000
Obligations of political subdivisions
of states 67 issues 6,430,000 6,430,000
Industrial development bonds 14 issues 1,020,000 1,020,000
------------ ----------
$ 10,817,000 $ 10,817,000
Corporate stocks 228 issues $ 11,278,000 $ 11,278,000
Corporate obligations:
General Electric Capital 2 issues $ 11,946,000 $ 11,946,000
Other 77 issues 70,891,000 70,891,000
------------ -----------
$ 82,837,000 $ 82,837,000
U.S. Government obligations and
Mortgage-backed Securities 69 issues $ 47,550,000 $ 47,550,000
Other 10 issues $ 208,000 $ 208,000
------------ ----------
$152,690,000 $152,690,000
============ ============
<FN>
(1) The Company marks its trading securities to market. Profits and losses from such revaluations are recognized in
the Company's results of operations. As a result of this practice, cost information is not maintained.
</TABLE>
- 28 -
<PAGE> 29
<TABLE>
SCHEDULE II - AMOUNTS RECEIVABLE FROM RELATED PARTIES
AND UNDERWRITERS, PROMOTERS, AND EMPLOYEES
OTHER THAN RELATED PARTIES
McDONALD & COMPANY INVESTMENTS, INC.
<CAPTION>
DEDUCTIONS
Balance at ------------------------ BALANCE AT END OF PERIOD
Beginning Amounts Amounts ---------------------------
Name of Debtor of Period Additions (1) Collected Written Off Current (1) Not Current
- - - - - ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Fiscal year ended March 25, 1994 --- --- --- --- --- ---
Fiscal year ended March 26, 1993:
McDonald & Company Investments, Inc.
Employee Stock Ownership Trust
and Plan (the "Plan") $128,811 $ --- $128,811 --- $ ---
Fiscal year ended March 27, 1992:
McDonald & Company Investments, Inc.
Employee Stock Ownership Trust
and Plan (the "Plan") $260,442 $ 11,369 $143,000 --- $128,811
<FN>
(1) The note receivable was payable to the Company on demand. Interest was calculated at the prime rate and was
payable on March 31 each year, and upon any repayment or prepayment of principal. The proceeds from the notes
were used to purchase common stock of McDonald & Company Investments, Inc. The notes were repaid through
contributions from the Company to the Plan. In the event of a default in the Plan's obligation to pay principal
and interest, the Company had recourse to the Plan assets to the extent that such assets had not been allocated
to participants in the Plan.
</TABLE>
- 29 -
<PAGE> 30
<TABLE>
SCHEDULE IX - SHORT-TERM BORROWINGS
McDONALD & COMPANY INVESTMENTS, INC.
<CAPTION>
CATEGORY OF AGGREGATE BALANCE WEIGHTED MAXIMUM AMOUNT AVERAGE AMOUNT WEIGHTED AVERAGE
SHORT-TERM AT END OF AVERAGE OUTSTANDING DURING OUTSTANDING DURING INTEREST RATE
BORROWINGS (1)(2) THE PERIOD INTEREST RATE THE PERIOD THE PERIOD (3) DURING THE PERIOD(4)
- - - - - --------------------- ------------ --------------- ------------------ ------------------- --------------------
<S> <C> <C> <C> <C> <C>
Fiscal year ended
March 25, 1994:
Amounts payable to
banks for borrowings $ 90,731,000 4.34% $192,191,000 $125,663,000 3.85%
Securities sold under
agreements to
repurchase 198,730,000 3.29% $417,247,000 $224,583,000 2.89%
Fiscal year ended
March 26, 1993:
Amounts payable to
banks for borrowings $ 98,053,000 3.67% $163,983,000 $ 94,804,000 4.35%
Securities sold under
agreements to
repurchase $206,537,000 2.84% $333,146,000 $121,587,000 2.88%
Fiscal year ended
March 27, 1992:
Amounts payable to
banks for borrowings $113,471,000 4.78% $124,195,000 $ 75,497,000 5.80%
Securities sold under
agreements to
repurchase $ 42,405,000 3.39% $133,566,000 $ 70,350,000 4.93%
<FN>
(1) Amounts payable to banks for borrowings include secured and unsecured demand loans, at fluctuating interest
rates. The secured borrowings are collateralized by firm-owned or customer-owned securities.
(2) Securities sold under agreements to repurchase represent short-term financing transactions collateralized by
firm-owned securities or securities purchased under agreements to resell.
(3) The average amounts payable to banks for borrowings and securities sold under agreements to repurchase were
computed by dividing the total of the daily borrowings by the number of days in the period.
(4) The weighted average interest rates for amounts payable to banks for borrowings and securities sold under
agreements to repurchase were computed by dividing the total of the annualized daily interest expense by the
total of the daily borrowings.
</TABLE>
- 30 -
<PAGE> 31
McDonald & Company Investments, Inc.
Report on FORM 10-K for the Fiscal Year ended March 25, 1994
EXHIBIT INDEX
-------------
Exhibit No. Description Sequential Page
- - - - - -------------- ----------- ---------------
10(m) Document reflecting line of credit with
Bank of New York ($90,000,000) . . . . . . . 33
10(n) Document reflecting Letter of Intent
related to proposed lease agreement . . . . . 34
11 Statement Re: Computation of
Per Share Earnings . . . . . . . . . . . . . 44
21 Subsidiaries of the Registrant . . . . . . . . 45
23 Consent of Independent
Auditors . . . . . . . . . . . . . . . . . . 47
99(a) Supplementary Financial Data
Quarterly Data (Unaudited) . . . . . . . . . 48
99(b) Selected Financial Data . . . . . . . . . . . . 49
99(c) Management's Discussion and
Analysis of Results of Operations
and Financial Condition . . . . . . . . . . . 50
99(d) Consolidated Financial Statements
of the Company listed under
Item 14(a)(1) . . . . . . . . . . . . . . . . 57
- 31 -
<PAGE> 32
STOCKHOLDER INFORMATION
The 1994 Annual Meeting of Stockholders will be held at The National City Bank
Auditorium, Fourth Floor, Atrium Building, 1900 East Ninth St., Cleveland,
Ohio, on Wednesday, August 3, 1994, at 9:30 a.m.
The Form 10-K Annual Report to the Securities and Exchange Commission,
providing further details on the Company's business, is available at no charge
from the Treasurer, McDonald & Company Investments, Inc., 800 Superior Avenue,
Cleveland, Ohio 44114.
McDonald & Company Securities, Inc., is a member firm of the New York Stock
Exchange, Inc., The American Stock Exchange (Associate), the Midwest Stock
Exchange, the Philadelphia Stock Exchange, and the National Association of
Securities Dealers.
CORPORATE HEADQUARTERS GRADISON DIVISION
800 Superior Avenue 580 Walnut Street
Suite 2100 Cincinnati, Ohio 45202
Cleveland, Ohio 44114 513/579-5000
216/443-2300
S.J. WOLFE DIVISION
CORPORATE OFFICE One Citizens Federal Centre
1105 North Market Street, Suite 1300 Dayton, Ohio 45402
P.O. Box 8985 513/223-1256
Wilmington, Delaware 19899
INDEPENDENT AUDITORS
GENERAL COUNSEL Ernst & Young
Calfee, Halter & Griswold Cleveland, Ohio 44115
Cleveland, Ohio 44114
TRANSFER AGENT AND REGISTRAR
National City Bank
Cleveland, Ohio 44114
- 32 -
<PAGE> 1
Exhibit 10(m)
[THE BANK OF NEW YORK LETTERHEAD]
October 26, 1993
Mr. Joseph N. Minadeo
Senior Vice President
Treasurer
McDonald & Co. Securities, Inc.
800 Superior Avenue, Suite 2100
Cleveland, Ohio 33114
Dear Mr. Minadeo:
I wish to confirm to your auditors that The Bank of New York in its sole
discretion on an uncommitted basis extends credit in the regular course of
business of $75MM on a secured basis and $15MM on an unsecured basis to
McDonald & Co. Securities, Inc. from time to time on mutually agreed terms.
Sincerely yours,
Mark T. Lancaster
-----------------------------------
Mark T. Lancaster
Assistant Vice President
Securities Industry
Banking Division
MTL:ac
- 33 -
<PAGE> 1
Exhibit 10(n)
AGREEMENT
This Agreement, made and entered into as of the 14TH day of February,
1994, by and between Ninth Street-Superior Limited Partnership, a Delaware
limited partnership ("Owner") and McDonald & Company Securities, Inc., a
DELAWARE corporation ("McDonald").
In consideration of the mutual agreements hereinafter set forth, the
parties hereto agree as follows:
1. AGREEMENT TO LEASE. Owner and McDonald hereby agree to enter into
an office lease upon and subject to the terms and conditions set forth in
Paragraph 3 hereof (the "Lease"). The parties acknowledge that the Lease shall
contain terms and conditions in addition to those set forth in Paragraph 3.
Owner and McDonald shall proceed expeditiously and in good faith to finalize
the form and content of the Lease, and execute and deliver the Lease as
landlord and tenant, respectively. Owner and McDonald shall act reasonably to
finalize all provisions of the Lease which shall be in addition to or in
clarification of the terms set forth in Paragraph 3 hereof. This Agreement
does not constitute a lease, and the provisions of Paragraphs 2 and 3 hereof
shall be binding upon the parties only upon execution and delivery of the Lease.
2. CALFEE LEASE. McDonald and Owner acknowledge that Owner has
reached agreement with Calfee, Halter & Griswold ("Calfee") on the key terms of
a new lease for office space in the Building (hereinafter defined). If the new
Calfee lease contains provisions more favorable to Calfee than the
corresponding provisions set forth in this Agreement dealing with the following
subjects, McDonald shall have the benefit of Calfee's more favorable
provisions: the rates to be charged by Owner for after-hours HVAC service and
extraordinary sewer and water usage; any adjustments to real estate taxes for
the purpose of determining the recoverable amount of real estate taxes; and
the sharing of "profits" and "losses" resulting from subletting of office
space. If the new Calfee lease contains provisions more favorable to Calfee
than the corresponding provisions set forth in the Lease pertaining to subjects
not addressed in this Agreement, Owner agrees to enter into an amendment to the
Lease to provide McDonald with provisions comparable to those contained in the
new Calfee lease on such subjects.
3. LEASE TERMS, PROVISIONS AND CONDITIONS.
--------------------------------------
A. THE PROPERTY.
------------
(1) THE BUILDING. The 800 Superior Building (the "Building") is
located at 800 Superior Avenue in Cleveland, Ohio. The Building
is comprised of 21 rentable floors and a connected parking
garage. Upon execution of a lease with McDonald, the Building
shall be renamed the "McDonald Building" or such other name
featuring McDonald's name as may be approved by McDonald and
Owner. Owner recognizes the importance to McDonald of the
design, approval and implementation of an acceptable Building
signage program consisting of exterior signage as well as
interior signage featuring McDonald's name. Owner shall develop
McDonald's exterior and interior signage program for McDonald's
reasonable approval, and the Lease shall be conditioned on
McDonald's approval. Following approval by McDonald, Owner and
McDonald shall
- 34 -
<PAGE> 2
jointly seek all necessary governmental approvals for the
exterior Building signage program. Owner shall be responsible for
the design, fabrication and installation of all interior and
exterior Building signage, up to a maximum cost of $125,000.
McDonald shall be responsible for all such costs associated with
signage at the top of the Building.
(2) THE PREMISES. McDonald shall lease office space comprising the
entire 17th through 21st floors, which the parties agree is
112,272 rentable square feet (the "Office Space"), together with
Suite C10 on the concourse level which the parties agree is 3,166
usable square feet (the "Print Shop Space"), and storage space
located on the garage roof which the parties agree is 4,925 usable
square feet (the "Storage Space") (the Office Space, Print Shop Space
and Storage Space are collectively referred to as the "Premises").
McDonald shall have an option, exercisable by written notice to
Owner given no later than July 1, 1994, to lease office space
comprising approximately half of the 16th floor, which the parties
agree is 11,037 rentable square feet (the "16th Floor Option"). If
the 16th Floor Option is exercised, the term "Office Space" shall
include the additional rentable square feet so leased. McDonald
shall also lease, on a temporary basis, office space which the
parties agree is 10,804 rentable square feet now occupied by
McDonald on the 15th floor, and so much of the office space on the
16th floor not included in the Office Space as McDonald requires
(the "Temporary Office Space"), for such period as McDonald requires
during the build out of the Office Space.
The "usable area" of the Premises shall be determined as follows:
(a) For any area of the Premises located on a floor
fully occupied by McDonald, the usable area shall be the usable
area of such floor as determined in accordance with the Standard
Method for Measuring Floor Area in Office Buildings published by
the American National Standard Institute as ANSI Z65.1-1980
(Reaffirmed 1989) (the "ANSI Standard").
(b) For any area of the Premises located on a multi-tenant
floor, the usable area shall be the usable area of the Premises
on such floor as determined in accordance with the ANSI
Standard.
The "rentable area" of the Premises shall be determined as follows:
(c) For any area of the Premises located on a floor fully occupied by
McDonald, the rentable area shall be equal to the product of
the rentable area as determined in accordance with the ANSI
Standard, multiplied by a factor of 1.10.
(d) For any area of the Premises located on a multi-tenant
floor, the rentable area shall be equal to the product of the
usable area multiplied by a factor of 1.22.
(3) USE OF PREMISES. McDonald shall use the Premises for its
headquarters executive offices, and may use the Premises for the
operation of an executive investment banking and brokerage office
and related support functions and, subject to the prior reasonable
approval of Owner, any other lawful business in which McDonald is
from time to time engaged. McDonald shall continuously occupy not
less than 25% of the Office Space
- 35 -
<PAGE> 3
(exclusive of Office Space sublet pursuant to Paragraph E(3) below). In
the event that McDonald fails to continuously occupy at least 75% of the
Office Space (exclusive of Office sublet pursuant to Paragraph E(3) below),
Landlord shall have the option of taking back the naming rights to the
Building.
B. THE INITIAL TERM. The initial term of the lease shall be a period of fifteen
years commencing on April 1, 1994. McDonald's existing lease for space in
the Building shall be terminated effective March 31, 1994.
C. RENT, ESCALATIONS AND UTILITIES.
(1) BASE RENT. Annual Base Rent for the Premises shall be paid monthly in
advance at the following rates:
<TABLE>
<CAPTION>
LEASE YEARS
---------------------------------------------
1-5 6-10 11-15
---------- ---------- ----------
<S> <C> <C> <C>
Office Space $15.00/rsf $18.00/rsf $23.00/rsf
Print Shop Space $10.00/usf $11.00/usf $13.00/usf
Storage Space $ 6.00/usf $ 7.00/usf $ 8.50/usf
</TABLE>
Base Rent includes standard Building services, including common area
maintenance, security, five nights per week cleaning of the Premises, and
HVAC service during regular Building hours. Base rent excludes, however,
certain operating expenses described in Paragraphs C(2) and C(3) below.
Effective April 1, 1994, Base Rent shall commence for the Office Space on
the 19th, 20th and 21st floors, and the Temporary Office Space on the 15th
floor, in accordance with the above schedule. No Base Rent shall be payable
for Temporary Office Space on the 16th floor.
During such time as portions of the Premises now occupied by McDonald
(i.e., floors 19, 20 and 21) are unavailable for occupancy due to work by
Owner or McDonald's contractor, rent will be abated on a floor-by-floor
basis for such areas for periods commencing on the date each such floor is
vacated by McDonald and ending on the date eight months after the first to
occur of (a) the date each such floor is ready for occupancy following
completion of McDonald's tenant improvement work, or (b) 180 days following
delivery of each such floor to McDonald in shell condition for commencement
of McDonald's tenant improvement work.
Base Rent for portions of the Office Space not previously occupied
by McDonald (i.e., floors 17 and 18, and if the 16th Floor Option is
exercised, floor 16) shall be similarly abated so that Base Rent in
accordance with the above schedule shall commence on the date
- 36 -
2/14/94
<PAGE> 4
following completion of McDonald's tenant improvement work, or (b) 18 days
following delivery of each such floor to McDonald in shell conditio for
commencement of McDonald's tenant improvement work.
(2) ESCALATIONS. Operating expenses, exclusive of such expenses incurred by
reason of the operation of the parking garage ("Operating Expenses") in
excess of Operating Expenses incurred in calendar year 1994 (the "Base
Year") shall be passed through to McDonald based on the ratio that the
aggregate rentable square footage of Office Space bears to the total
rentable area of the Building. The rentable area of the Building will be
fixed for the term of the Lease. The Print Shop and Storage Space will be
exempt from the operation of this Paragraph C(2). Operating Expenses shall
be adjusted to 100% of occupancy to ensure fairness. For each of calendar
years 1995 through 1998, inclusive, annual increases in Operating Expenses
recoverable from McDonald shall not exceed 4% of the actual Operating
Expenses for the immediately preceding calendar year. For calendar year
1999 through the end of the initial lease term, annual increases in
Operating Expenses recoverable from McDonald shall not exceed the greater
of (a) 4% of actual Operating Expenses for the immediately preceding
calendar year, or (b) the percentage increase in the Consumer Price Index
or other appropriate index over the immediately preceding calendar year.
Owner shall provide McDonald an annual statement of Operating Expenses,
which McDonald may audit at its expense under reasonable terms and
conditions to be defined in the Lease. Operating Expenses shall be
determined in accordance with generally accepted accounting principles, and
shall exclude the cost of capital improvements, determined in accordance
with generally accepted accounting principles applicable to office
buildings, to the extent reasonably agreed in the Lease.
Real estate tax expenses, exclusive of such expenses attributable to the
parking garage ("Tax Expenses"), in excess of Tax Expenses incurred in the
Base Year shall be passed through to McDonald based on the ratio that the
aggregate rentable square footage of Office Space bears to the total
rentable area of the Building. If the market value used for computing
assessed value for the Base Year, as finally determined, is less than the
"Agreed Amount" hereinafter defined, then McDonald's share of increases in
Tax Expenses which are attributable to increases in the market valuation
over the market valuation for the Base Year shall be reduced (but not below
zero) by McDonald's share of the amount determined by subtracting the Base
Year market value from the Agreed Amount, converting the difference to
assessed value, and computing real estate taxes on the resulting assessed
value figure using the Base Year tax rate and credits. The "Agreed Amount"
shall be the higher of the following values: (i) $37.5 million; or (ii) the
Cuyahoga County Auditor's market value for the Base Year, as finally
determined, plus $7 million. If the Building real estate tax bill does not
state a separate value for the parking garage, then real estate tax
expenses attributable to the parking garage shall be deemed to be 5.91% of
total real estate tax expenses.
(3) UTILITIES. McDonald shall be submetered separately as if measured through
one meter for electricity and water consumed for other than normal domestic
purposes within the Premises and the Temporary Office Space. Owner shall
charge McDonald for such utilities at the rate McDonald otherwise would pay
if McDonald purchased such utility services directly from the public
utility serving the Building.
- 37 -
2/14/94
<PAGE> 5
D. DESIGN AND CONSTRUCTION.
-----------------------
(1) RESPONSIBILITIES OF OWNER. Owner shall undertake the demolition of
the Office Space, the removal of all asbestos-containing
materials, the fireproofing of the Office Space, and all other work
necessary to put the Office Space in shell condition for delivery to
McDonald for construction of tenant improvements. The foregoing
work by Owner shall not be performed for that portion of the 19th
floor presently used by McDonald as its computer room. Owner shall
also undertake renovation and remodeling of restrooms within the
Premises to Building standards and in compliance with current ADA
requirements. Owner and McDonald shall mutually establish a
schedule for the phasing of completion of Owner's work and delivery
of the Office Space for McDonald's work which minimizes the
disruption of McDonald's continuing operations and permits the
completion of work to be performed by both McDonald and Owner in a
cost-effective manner, taking into account Calfee's schedule for
vacating the 16th, 17th and 18th floors of the Building. Owner
shall upgrade the Building elevators, including the installation of
an Otis Elevonic 411 computerized traffic control system which will
result in faster elevator response to actual traffic demands.
Subject to extension for delays outside of Owner's control, the
elevator upgrade work shall be completed by September 1, 1994.
(2) RESPONSIBILITIES OF MCDONALD. McDonald will be responsible
for preparing architectural plans, MEP drawings and
construction documents for its tenant improvement work, as well as
construction of tenant improvement work in the Office Space. The
architectural design, building materials and specifications will
meet or exceed Owner's Building standards. All plans, documents and
work will be subject to Owner's approval, which will be neither
unreasonably withheld nor delayed.
McDonald may select its own architects, engineers and
contractors, subject to Owner's approval which will be neither
unreasonably withheld nor delayed. Owner will not charge a fee for
construction coordination services performed by Owner.
(3) CONTRIBUTIONS AND ALLOWANCES. Owner shall contribute an improvement
allowance to reimburse McDonald for actual costs incurred in
designing and constructing tenant improvements, excluding the cost
of systems furniture or other personal property purchased by
McDonald. The improvement allowance shall not exceed $53.00 per
usable square foot of Office Space which the parties agree is 102,065
usable square feet if the 16th Floor Option is not exercised, or
111,112 usable square feet of the 16th Floor Option is exercised.
McDonald may make periodic applications for payment of the
improvement allowance during the course of construction, but no more
frequently than every 60 days. Each such application shall be
accompanied by appropriate certifications of completion, lien
waivers and such other documentation as Owner may reasonably
require, and evidence of payment by McDonald of tenant improvement
design and construction costs not covered by the improvement
allowance, which amounts McDonald shall pay pari passu with Owner's
release of the improvement allowance. Upon approval of each payment
application and accompanying documentation, Owner shall promptly pay
to McDonald the portion of the improvement allowance due McDonald
for reimbursement of the costs described above.
- 38 -
2/14/94
<PAGE> 6
(4) LOBBY IMPROVEMENTS. Owner shall consult with McDonald regarding
future lobby alterations; however, McDonald shall have no approval
rights with respect to such improvements.
E. OPTIONS.
(1) RENEWAL. McDonald shall have the option with 18 months of prior written
notice to renew the Lease for the Office Space, the Print Shop Space, the
Storage Space and any area leased pursuant to Paragraph E(2) below for
three additional terms of five years each. Base rent for each option term
shall be 95% of the then-current effective market rent of comparable
office space for a comparable term, including free rent, tenant
improvements and such other concessions or expenses paid by the Owner
on the tenant's behalf as are being given in the market to major anchor
tenants comparable to McDonald for comparable office space at the
time of commencement of the applicable option term. Effective market rent,
as described above, shall be determined by agreement between Owner and
McDonald; if the parties fail to agree, a panel of three MAI appraisers,
one appointed by Owner, one appointed by McDonald, and one appointed by the
other appraisers, shall determine effective market rent, as described
above, utilizing a procedure to be agreed upon in the Lease.
(2) EXPANSION. McDonald shall have a right of first refusal with respect to
space which Owner proposes to lease on floors 2 through 16 of the Building
during the initial term of the Lease and any renewal term. The foregoing
right of first refusal shall not apply to leases entered into during the
initial retenanting of the Building on a lease by lease basis, or renewal
options or expansion rights contained in such leases; however, the right
of first refusal shall have priority over any expansion rights contained in
such leases for the initial retenanting of the Building to the extent such
expansion rights exceed 20% of the rentable area originally leased to such
tenants, and the right of first refusal shall apply to renewal and
replacement leases proposed for the period after the terms of leases
entered into for the initial retenanting of the Building, including any
renewal options, have expired, or such leases have been terminated. In any
event, the right of first refusal will be extinguished at such time as
McDonald has added 50,000 rentable square feet of office space to the
Premises pursuant to this right.
McDonald shall also have the right of first offer during the initial term
of the Lease to lease additional Office Space on floors 2 through 16 of the
Building, to the extent space is then available, at 100% of the then-
current effective market rent for such space, including an improvement
allowance for the purposes described in Paragraph D(3) above, at a rate per
usable square foot determined by multiplying $53 (or such lesser amount
determined by subtracting from $53 the value of ceiling and above-ceiling
improvements in such additional Office Space which are reusable pursuant to
McDonald's plans, but in no event less than $43) by a fraction, the
numerator of which shall be the number of full lease years remaining in the
initial term of the Lease, and the denominator of which shall be 15. The
effective market rent shall take into account the improvement allowance and
any concessions normally given in the market, and shall be determined in
the manner described above in Paragraph E(1). The term for the expansion
space shall be coterminous with the term of the Lease. If McDonald
exercises its right of first offer for less than a full floor, the
configuration of such space shall be subject to mutual approval.
- 39 -
<PAGE> 7
(3) ASSIGNMENT AND SUBLETTING. McDonald shall not be permitted to assign the
Lease. McDonald will be permitted to sublet a maximum of one floor of
Office Space, subject to Owner's right to receive half of any rent payable
by sublessees in excess of McDonald's rent, including escalations, after
deduction of reasonable out-of-pocket costs and expenses paid by McDonald
for improvements for the sublessee, broker commissions paid for the
sublease, and fees paid to outside legal counsel for preparation of
sublease documents.
F. SERVICES AND AMENITIES.
(1) ACCESS TO PREMISES. McDonald will have 24 hours per day, 7 days per week,
52 weeks per year access to each floor of the Premises. The freight
elevator shall be available for the use of tenants and Building management.
(2) HVAC SERVICE. Standard HVAC system operating hours shall be from 8:00 a.m.
to 6:00 p.m. weekdays and 8:00 a.m. to 1:00 p.m. on Saturday. After-hour
HVAC service shall be available upon 24 hours prior notice at a current
rate of $125.00 per hour per floor, subject to adjustment based on changes
in Owner's costs.
(3) PARKING. McDonald shall be entitled to lease 125 spaces in the Building
parking garage, at an initial rate of $90.00 per month per space. Rate
increases shall not exceed the lesser of the percentage increase in the
Consumer Price Index (or other appropriate index) or 3% per year
thereafter. When occupancy in the Building reaches 75%, the parking rate
for McDonald's spaces may be increased to $110.00 per space per month. Any
further increases thereafter shall be limited to the lesser of the
percentage increase in the Consumer Price Index (or other appropriate
index) or 3% per year.
(4) FITNESS CENTER. Owner shall design and construct a fitness center
(including showers) at a location selected by Owner within the Building.
Owner shall not be required to staff the fitness center. The fitness center
shall be available to all Building tenants. The terms under which
McDonald's employees may use the fitness center shall be agreed upon in the
Lease. Users of the fitness center will be required to waive any and all
claims against Owner, its management company and other affiliates arising
out of the use of the fitness center.
(5) STORAGE SPACE. Storage space within the Building shall be available on a
first come, first served basis at Owner's then-current rent rate for such
space, which rate shall not exceed the rate payable for the Print Shop
Space for the same period of time. McDonald shall have the right to
terminate its storage space agreement following 60 days' notice.
(6) BUILDING DIRECTORY. Space shall be allocated to McDonald on each of the
Building directories in the ratio that the rentable square footage of the
Premises bears to the total rentable square footage of the Building.
(7) SIGNAGE. In addition to providing exterior and interior Building signage,
for McDonald as provided in Paragraph 3.A(1) above, Owner shall identify,
at its expense, McDonald on the elevator lobby directory of any
multi-tenant floor on which any portion of the Premises is located.
McDonald may display its name on the door of its suite and within the
elevator
- 40 -
2/14/94
<PAGE> 8
lobby of any full floor occupied by McDonald, subject only to Owner's
reasonable approval of the design.
G. NON-DISTURBANCE AGREEMENT. The Lease will be contingent upon McDonald and
Owner's lender entering into a Subordination, Non-Disturbance and Attornment
Agreement in a form acceptable to McDonald and Owner's lender.
4. MISCELLANEOUS.
A. AUTHORITY. The persons executing this Agreement on behalf of Owner and
McDonald warrant and represent that they are authorized to enter into this
Agreement on behalf of the entities for which they have executed this
Agreement, and that upon such execution and delivery hereof, this Agreement
shall be binding upon the parties hereto, their successors and assigns.
B. ASSIGNMENT; SUCCESSORS AND ASSIGNS. This Agreement shall not be assigned by
McDonald. Without limiting the foregoing, this Agreement shall be binding
upon and inure to the benefit of the successors and assigns of the parties
hereto.
C. NOTICES. Any notice permitted or required to be given in this Agreement
shall be in writing and shall be sent to the parties at their respective
addresses set forth below by courier or certified mail, return receipt
requested, delivery or postage charges prepaid, and shall be effective upon
receipt or refusal.
To McDonald:
McDonald & Company Securities, Inc.
800 Superior Avenue
Cleveland, Ohio 44114
Attention: Robert W. Green
with a copy to:
Calfee, Halter & Griswold
800 Superior Avenue
Cleveland, Ohio 44114
Attention: _______________
To Owner:
Ninth Street-Superior Limited Partnership
c/o The Richard & David Jacobs Group, Inc.
25425 Center Ridge Road
Cleveland, Ohio 44145
Attention: President
- 41 -
2/14/94
<PAGE> 9
with a copy to:
The Richard & David Jacobs Group, Inc.
25425 Center Ridge Road
Cleveland, Ohio 44145
Attention: General Counsel
D. COUNTERPARTS. This Agreement may be executed in several counterparts,
each of which shall be deemed an original, and the signature by either
party of any counterpart shall be deemed to execution of this Agreement
and may be appended to any other counterpart.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
McDONALD & COMPANY SECURITIES, INC.
By /s/ Robert W. Green
---------------------------------
Name: Robert W. Green
Title: Senior Vice President
NINTH STREET-SUPERIOR LIMITED
PARTNERSHIP
By Ninth Street-Superior Corp.
By: /s/ Martin J. Cleary
--------------------------------
Martin J. Cleary, President
2/14/94 - 42 -
<PAGE> 10
feb 14 '94 11:38AM THE JACOBS GROUP LEGAL P.9/9
STATE OHIO )
)SS:
COUNTY OF CUYAHOGA)
BEFORE ME, a Notary Public in and for said County and State,
personally appeared Martin J. Cleary, the President of Ninth Street-Superior
Corp., the Corporation which executed the foregoing instrument, who
acknowledged that he did sign and seal the foregoing instrument for and on
behalf of said Corporation, being thereunto duly authorized by its Board of
Directors; that the same is his free act and deed as such officer and the free
act and deed of said Corporation.
IN TESTIMONY WHEREOF, I have hereunder set my hand and official seal
at Cleveland, Ohio, this 14th day of February, 1994.
/s/ Sharon A. Dietz
_________________________
Notary Public
My Commission Expires:
SHARON A. DIETZ
Notary Public -- State of Ohio
My Commission Expires 9/24/96
STATE OHIO )
)SS:
COUNTY OF CUYAHOGA)
BEFORE ME, a Notary Public in and for said County and State,
personally appeared Robert W. Green, the Senior VP of McDonald & Company
Securities, Inc., the Corporation which executed the foregoing instrument, who
acknowledged that he did sign and seal the foregoing instrument for and on
behalf of said Corporation, being thereunto duly authorized by its Board of
Directors; that the same is his free act and deed as such officer and the free
act and deed of said Corporation.
IN TESTIMONY WHEREOF, I have hereunder set my hand and official seal
at Cleveland, Ohio, this 14th day of February, 1994.
/s/ Angela R. Bruck
_________________________
Notary Public
My Commission Expires:
ANGELA R. BRUCK
Notary Public -- State of Ohio
My Commission Expires Sept. 25, 1995
- 43 -
2/14/94
<PAGE> 1
<TABLE>
Exhibit 11
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
-----------------------------------------------
<CAPTION>
Fiscal year ended
----------------------------------------------------------------------------
March 25, 1994 March 26, 1993 March 27, 1992
---------------- ---------------- --------------
PRIMARY
- - - - - -------
<S> <C> <C> <C>
Average shares outstanding 8,870,000 8,218,000 7,271,000
Net effect of dilutive stock
options - based on the
treasury stock method using
average market price 206,000 159,000 110,000
----------- ----------- -----------
TOTAL 9,076,000 8,377,000 7,381,000
----------- ----------- -----------
Net income $21,588,000 $16,050,000 $10,896,000
----------- ----------- -----------
Net income per share $ 2.38 $ 1.92 $ 1.48
=========== =========== ===========
FULLY DILUTED
- - - - - -------------
Average shares outstanding 8,870,000 8,218,000 7,271,000
Net effect of dilutive stock
options - based on the
treasury stock method using greater
of year-end or average market price 215,000 232,000 186,000
Assumed conversion of 8% convertible
subordinated debentures 505,000 1,080,000 1,080,000
----------- ----------- -----------
TOTAL 9,590,000 9,530,000 8,537,000
----------- ----------- -----------
Net income $21,588,000 $16,050,000 $10,896,000
Add 8% convertible subordinated
debenture interest, net of
federal tax effect 265,000 689,000 689,000
----------- ----------- -----------
TOTAL $21,853,000 $16,739,000 $11,585,000
----------- ----------- -----------
Net income per share $ 2.28 $ 1.76 $ 1.36
=========== =========== ===========
</TABLE>
- 44 -
<PAGE> 1
SUBSIDIARIES OF THE REGISTRANT
- - - - - ------------------------------ Exhibit 21
The following is a list of the subsidiaries of the Company:
1. McDonald & Company Securities, Inc.
-----------------------------------
McDonald & Company Securities, Inc., an Ohio corporation, is a
wholly owned subsidiary of the Company.
2. MCD Oil & Gas Co., Inc.
-----------------------
MCD Oil & Gas Co., Inc., an Ohio corporation, is a wholly owned
subsidiary of the Company.
3. MCD Real Estate, Inc.
---------------------
MCD Real Estate, Inc., an Ohio corporation, is a wholly owned
subsidiary of the Company.
4. MCD-Gradison Agency, Inc.
-------------------------
The Company owns all of the issued and outstanding shares of
preferred stock of MCD-Gradison Agency, Inc., an Ohio corporation.
All of the issued and outstanding shares of Common Stock are held
by three officers of the Company.
5. McDonald Financial Services, Inc.
---------------------------------
McDonald Financial Services, Inc., an Ohio corporation, is a wholly
owned subsidiary of the Company.
6. McDonald & Company Venture Capital, Inc.
----------------------------------------
McDonald & Company Venture Capital, Inc., an Ohio corporation, is a
wholly owned subsidiary of the Company.
7. McDonald & Company Venture Capital, Inc. II
-------------------------------------------
McDonald & Company Venture Capital, Inc. II, an Ohio corporation,
is a wholly owned subsidiary of the Company.
8. McDonald Capital Management, Inc.
---------------------------------
McDonald Capital Management, Inc., an Ohio corporation, is a wholly
owned subsidiary of the Company.
9. McD-SCG, Inc.
-------------
McD-SCG, Inc., an Ohio corporation, is a wholly owned subsidiary of
the Company.
10. McD Erie, Inc.
--------------
McD Erie, Inc., an Ohio corporation, is a wholly owned subsidiary
of the Company.
11. Gradvantage, Inc.
-----------------
Gradvantage, Inc., an Ohio Corporation, is a wholly owned
subsidiary of the Company.
- 45 -
<PAGE> 2
SUBSIDIARIES OF THE REGISTRANT (cont.)
- - - - - --------------------------------------
12. Gradison Insurance Agency, Inc.
-------------------------------
Gradison Insurance Agency, Inc., an Ohio corporation, is a
wholly-owned subsidiary of the Company.
13. McD Property Advisors, Inc.
---------------------------
McD Property Advisors, Inc., an Ohio Corporation, is a wholly-owned
subsidiary of the Company.
14. Bond Lease Corporation V
------------------------
Bond Lease Corporation V., an Ohio Corporation, is a wholly-owned
subsidiary of the Company.
15. Bond Lease Corporation VI
-------------------------
Bond Lease Corporation VI., an Ohio Corporation, is a wholly-owned
subsidiary of the Company.
16. Bond Lease Corporation VII
--------------------------
Bond Lease Corporation VII., an Ohio Corporation, is a wholly-owned
subsidiary of the Company.
17. Gradison & Company, Inc.
------------------------
Gradison & Company, Inc., an Ohio Corporation, is a wholly-owned
subsidiary of the Company.
18. Secured Lease Finance Corp.
---------------------------
Second Lease Finance Corp., an Ohio Corporation, is a wholly-owned
subsidiary of the Company.
- 46 -
<PAGE> 1
Exhibit 23
Consent of Independent Auditors
-------------------------------
We consent to the incorporation by reference in the Registration
Statement (Form S-8 Number 33-11335) pertaining to the McDonald & Company
Investment, Inc. Stock Option Plan and Registration Statement (Form S-8 Number
33-37603) pertaining to the McDonald & Company Investments, Inc. 1990 Stock
Option Plan for Outside Directors of our report dated April 29, 1994, with
respect to the consolidated financial statements and schedules of McDonald &
Company Investments, Inc. included in this Annual Report (Form 10-K) for the
fiscal year ended March 25, 1994.
/s/Ernst & Young
Cleveland, Ohio
June 17, 1994
- 47 -
<PAGE> 1
Exhibit 99(A)
SUPPLEMENTARY FINANCIAL DATA
QUARTERLY DATA (UNAUDITED)
<TABLE>
<CAPTION>
COMMON STOCK**
---------------------------
PRIMARY DIVIDENDS PRICE RANGE***
(In thousands, except INCOME BEFORE NET NET INCOME PAID PER ---------------
per share amounts) REVENUES INCOME TAXES INCOME* PER SHARE*** SHARE*** HIGH LOW
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
FISCAL 1994
First quarter (13 weeks) $ 47,717 $ 8,111 $ 5,111 $ .59 $ .063 $13.96 $12.40
Second quarter (13 weeks) 48,020 7,832 4,832 .56 .062 15.00 12.39
Third quarter (14 weeks) 61,917 12,151 7,551 .80 .075 16.00 13.38
Fourth quarter (12 weeks) 47,026 6,594 4,094 .43 .075 16.88 14.50
-------------------------------------------------------------------
Total Year $ 204,680 $ 34,688 $ 21,588 $ 2.38 $ .275
===================================================================
FISCAL 1993
First quarter (13 weeks) $ 37,892 $ 5,813 $ 3,713 $ .45 $ .126 $ 9.90 $ 8.12
Second quarter (13 weeks) 43,874 6,609 4,039 .48 .062 9.58 8.33
Third quarter (14 weeks) 43,928 5,921 3,858 .46 .062 12.29 8.95
Fourth quarter (13 weeks) 48,123 6,357 4,440 .53 .062 12.50 11.04
-------------------------------------------------------------------
Total Year $ 173,817 $ 24,700 $ 16,050 $ 1.92 $ .312
===================================================================
<FN>
* Net income for the fourth quarter of the fiscal year ended March 26, 1993,
was reduced by approximately $1,000,000 or $.12 per share, because of an
increase in reserves related to litigation expenses.
** The Common Stock of McDonald & Company Investments, Inc., is listed on the
New York Stock Exchange. The trading symbol is MDD. At April 29, 1994,
the approximate number of stockholders of record was 1,004.
*** All income per share, dividends paid per share, and price range
information have been restated to reflect the effect of the 20% stock
dividend paid during the fiscal year ended March 25, 1994. (See Note G to
the Consolidated Financial Statements.)
</TABLE>
- 48 -
<PAGE> 1
<TABLE>
Exhibit 99(b)
SELECTED FINANCIAL DATA
<CAPTION>
(In thousands, except per share amounts)
FISCAL YEAR ENDED
----------------------------------------------------------------------------------
MARCH 25, 1994 MARCH 26, 1993 MARCH 27, 1992 MARCH 29, 1991 MARCH 30, 1990
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
OPERATIONS:
Revenues $ 204,680 $ 173,817 $ 128,063 $ 81,033 $ 75,419
Income before income taxes
and extraordinary item 34,688 24,700 17,076 3,706 3,313
Income before extraordinary item 21,588 16,050 10,896 2,706 2,773
Net income 21,588 16,050 10,896 3,918 3,321
Primary net income per share*
Before extraordinary item 2.38 1.92 1.48 .42 .40
Net income 2.38 1.92 1.48 .60 .48
Cash dividends per share* .275 .312 .167 .167 .167
FINANCIAL POSITION AS OF: MARCH 25, 1994 MARCH 26, 1993 MARCH 27, 1992 MARCH 29, 1991 MARCH 30, 1990
----------------------------------------------------------------------------------
Total assets $ 590,578 $ 528,942 $ 322,029 $ 201,177 $ 224,537
Long-term borrowings 25,000 38,055 13,055 13,055 19,380
Stockholders' equity 107,405 77,927 62,923 38,512 38,811
<FN>
* All income per share and cash dividends per share information has been
adjusted for the 20% stock dividend paid during the fiscal year ended March 25,
1994. (See Note G to the Consolidated Financial Statements.)
</TABLE>
- 49 -
<PAGE> 1
Exhibit 99(c)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
BUSINESS ENVIRONMENT
McDonald & Company Investments, Inc. ("the Company"), operates a full-service,
regional investment banking, investment advisory and brokerage business through
its principal subsidiary, McDonald & Company Securities, Inc. ("McDonald
Securities"). The Company is involved in the origination, underwriting,
distribution, trading, and brokerage of fixed income and equity securities, and
provides investment advisory services.
The profitability of the Company is sensitive to many factors, including the
level of securities trading volume and the volatility and general level of
market prices. Many of its activities have high operating costs which do not
decrease with reduced levels of activity. Sustained periods of reduced volume,
or loss of clients, could have adverse effects upon profitability.
The Company faces increasing competition from commercial banks and thrift
institutions as these institutions offer certain investment banking and
corporate and individual financial services traditionally provided only by
securities firms. The Company anticipates regulation of the securities
industry to increase and that compliance with regulations may become more
difficult. At present, the Company is unable to predict the extent of changes
that may be enacted, or the effect on the Company's business.
The Company has formulated a comprehensive strategic plan which is periodically
reviewed and revised as business conditions dictate. The plan emphasizes the
Company's historical roots as a regional brokerage and investment banking firm.
The Company has focused on the Ohio, Michigan, and Indiana markets by
increasing the number of sales representatives covering individual investors,
as well as increasing investment banking activities in this region. The
Company's institutional equity and fixed income sales departments cover
accounts throughout the United States and internationally.
On October 4, 1991, Gradison & Company Incorporated ("Gradison"), merged with
McDonald Securities. In connection with the merger, stockholders of Gradison
received a combination of shares of Common Stock and cash having an aggregate
value of approximately $22,723,000. Additional cash consideration of
approximately $3,200,000 will be paid in 1994 if certain performance criteria
are met. Gradison operated as a full-service regional brokerage and investment
advisory firm headquartered in Cincinnati, Ohio, with a primary market of
Southwestern Ohio and Northern Kentucky. Subsequent to the merger, Gradison is
operating as a division of McDonald Securities.
The merger allowed the Company to increase the size of its retail sales force
and its customer base and gave the Company a strong presence in Southwestern
Ohio, and also added significant asset management capabilities.
LIQUIDITY AND CAPITAL RESOURCES
The majority of the Company's assets are highly liquid and short-term in
nature. Cash and liquid assets, principally receivables from customers,
brokers and dealers, securities purchased under agreements to resell, and
securities owned, represented approximately 92% of the Company's assets at
March 25, 1994. These assets are financed by a number of sources, including
the Company's subordinated debt, capital and short-term borrowings, and
securities sold under agreements to repurchase.
At March 25, 1994, McDonald Securities had outstanding $25,000,000 in
aggregate principal amount of 8.24% Subordinated Notes due January 15, 2002.
McDonald Securities is required to pay principal amounts of $5,000,000 on
January 15 of each year beginning in 1998. The notes are subordinated in right
of payment to all senior indebtedness and general creditors of McDonald
Securities. In addition to providing additional long-term
- 50 -
<PAGE> 2
financing, the notes have been approved by the New York Stock Exchange, Inc.,
for inclusion in McDonald Securities' regulatory capital.
On September 17, 1993, the Company announced that it would redeem all
$12,205,000 in outstanding principal amount of its 8% Convertible Subordinated
Debentures due March 1, 2011, on October 29, 1993, at a price of 102.4%, plus
accrued interest. (See Note E to the Consolidated Financial Statements.) In
light of the market level of interest rates, the Company felt that this was an
appropriate opportunity to reduce its total debt and to reduce interest costs.
On October 29, 1993, a total of $12,008,000 principal amount of the debentures
was converted into shares of common stock, and as a result, 993,694 shares were
issued with cash paid in lieu of fractional shares. The remaining $197,000 par
value of debentures were redeemed at 102.4% of par value plus accrued interest
to October 29, 1993, for a total cash payment of $204,310.
Changes in the levels of securities owned and in customer and broker
receivables directly affect the Company's financing arrangements. The Company
has available lines of credit of $318,000,000, of which $237,525,000 was unused
as of March 25, 1994. Management believes that funds from operations, available
lines of credit and long-term borrowings provide sufficient resources to meet
present and anticipated financial needs.
Certain minimum amounts of capital must be maintained by the Company's
principal broker/dealer subsidiary, McDonald Securities, to satisfy the
regulatory requirements of the Securities and Exchange Commission and the New
York Stock Exchange. The regulatory requirements represent Uniform Net Capital
Rules designed to measure the general financial integrity and liquidity of
registered broker/dealers and to provide minimum acceptable net capital levels
to meet the continuing commitments to customers. Net capital, as defined,
changes from day to day. At March 25, 1994, McDonald Securities was in
compliance with the Uniform Net Capital Rules and had net capital of
$64,840,000, which was $62,305,000 in excess of the minimum required.
RESULTS OF OPERATIONS
The following table summarizes the changes in the major categories of revenues
and expenses for the fiscal years ended March 25, 1994, March 26, 1993, and
March 27, 1992.
<TABLE>
<CAPTION>
FISCAL 1994 FISCAL 1993
VERSUS VERSUS
(In thousands) FISCAL 1993 FISCAL 1992
------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUES
Underwriting and Investment Banking . . $ 21,277 50% $ 13,107 44%
Principal Transactions . . . . . . . . . (7,815) (13) 15,212 34
Commissions . . . . . . . . . . . . . . 13,121 33 9,807 32
Investment Management Fees . . . . . . . 2,222 18 5,259 74
Interest and Dividends . . . . . . . . . 1,480 11 (967) (7)
Other . . . . . . . . . . . . . . . . . 578 11 3,336 184
------------------------------------------------------------
$ 30,863 18% $ 45,754 36%
============================================================
EXPENSES
Employee Compensation and Benefits . . . $ 17,307 17% $ 28,936 41%
Interest . . . . . . . . . . . . . . . . 1,598 21 (1,846) (19)
Communications . . . . . . . . . . . . . 1,215 13 1,894 24
Occupancy and Equipment . . . . . . . . 1,773 18 2,250 30
Promotional and Development . . . . . . 616 9 2,527 60
Floor Brokerage and Clearance . . . . . 78 3 337 14
Taxes, Other than Income Taxes . . . . . 818 19 709 20
Other Operating Expenses . . . . . . . . (2,530) (29) 3,323 63
-------------------------------------------------------------
$ 20,875 14% $ 38,130 34%
=============================================================
</TABLE> - 51 -
<PAGE> 3
FISCAL 1994 COMPARED WITH FISCAL 1993
Total revenues for the fiscal year ended March 25, 1994, were $204,680,000, an
increase of $30,863,000, or 18%, from the revenues of $173,817,000 for the
fiscal year ended March 26, 1993.
Net income for the fiscal year ended March 25, 1994, was $21,588,000, or $2.38
per share, compared to $16,050,000, or $1.92 per share, for the fiscal year
ended March 26, 1993, an increase in net income of 35%.
The average number of shares and share equivalents outstanding was 9,076,000
for the fiscal year ended March 25, 1994, compared with 8,377,000 for the
fiscal year ended March 26, 1993.
On July 27, 1993, the Company declared a 20% stock dividend payable August 20,
1993, to shareholders of record August 10, 1993. Share and per share
information has been adjusted for the stock dividend as if it had occurred at
the beginning of each period presented.
Revenues from Underwriting and Investment Banking increased $21,277,000, or
50%, for the fiscal year ended March 25, 1994, when compared to the fiscal year
ended March 26, 1993. Revenues from corporate underwriting and investment
banking increased $22,764,000, or 83%, for the fiscal year ended March 25,
1994, when compared to the prior fiscal year. This was caused by increases in
managed and co-managed originations, participation in syndicate groups and
private placements of equity and taxable debt securities in the current fiscal
year. These increases are attributable primarily to continued favorable market
conditions for such offerings. Partially offsetting the increase, revenues
from public finance decreased $2,289,000, or 17%, for the fiscal year ended
March 25, 1994, when compared to the prior fiscal year. Public finance revenues
were very strong in the prior fiscal year caused by favorable market
conditions. Revenues from mergers and acquisitions and other financial
advisory fees increased $802,000, or 37%, for the fiscal year ended March 25,
1994, when compared to the prior fiscal year.
Revenues from Underwriting and Investment Banking activities are highly
dependent on general market conditions for such business activities. Market
conditions for underwriting and investment banking services can be affected by
political and economic events, both in the United States and abroad. To the
extent future events are unpredictable, uncertainty will be a factor in the
level of McDonald Securities' business activity. Also, competitive pressure
from other entities providing investment banking services can and will have an
effect on the success of the Company in obtaining such business and on the
prices which can be charged for investment banking and underwriting services.
The management of the Company believes it can compete effectively in this
segment of its business activities.
Revenues from Principal Transactions decreased $7,815,000, or 13%, for the
fiscal year ended March 25, 1994, when compared to the prior fiscal year.
Revenues from trading taxable fixed-income securities, including corporate
bonds, United States government bonds and mortgage-backed securities, decreased
$14,770,000, or 37%. This decrease in revenues from principal transactions in
taxable fixed-income securities was caused by less favorable market conditions
in the current fiscal year.
For the fiscal year ended March 25, 1994, revenues from trading corporate bonds
declined $5,214,000, or 31%, and revenues from mortgage-backed securities
declined $6,326,000, or 43%. These declines were generally attributable to a
less favorable market environment for taxable fixed income securities.
Investor interest in fixed income securities has declined over the current
fiscal year because of the recent rises in interest rates and uncertainties
related to the level of interest rates in the near future. During the fiscal
year ended March 25, 1994, revenues from the Company's fixed income arbitrage
area declined $4,843,000 from revenues of $1,125,000 for the fiscal year ended
March 26, 1993, to a loss of $3,718,000 for the fiscal year ended March 25,
1994. The loss for the fiscal year ended March 25, 1994, of $3,718,000 was
caused by a trading loss of $5,600,000 experienced in the months of February
and March, 1994. This loss was caused by the rapid deterioration of the fixed
income markets during those months. The Company has since eliminated fixed
income arbitrage activities.
Revenues from trading municipal bonds increased $1,622,000, or 26%, for
the current fiscal year, primarily because of improved market conditions.
- 52 -
<PAGE> 4
Revenues from principal transactions in equity securities increased $5,333,000,
or 41%, for the fiscal year ended March 25, 1994, when compared to the prior
fiscal year. Substantially all of the increase was attributable to an increase
in revenues from trading unlisted equity securities because of investor demand
for such products and expansion of the retail sales force.
Commissions revenue increased $13,121,000, or 33%, for the fiscal year
ended March 25, 1994, when compared to the fiscal year ended March 26, 1993.
The increase in commission revenue reflects higher volume resulting from both
improved market conditions and the increase in the size of the retail sales
force. During the current fiscal year, low interest rates and a strong stock
market encouraged investor participation in the equity markets. The increase
in commission revenue was comprised primarily of increases in revenues from
listed and over-the-counter agency commissions of $7,603,000, or 29%, for the
current fiscal year, and an increase in revenues from mutual fund sales of
$4,408,000, or 40%, for the current fiscal year.
Revenues from Investment Management Fees include advisory fees from the
Company's mutual funds, money market funds, and investment management fees
earned related to individual managed accounts. Revenues from investment
management fees increased $2,222,000, or 18%, for the fiscal year ended March
25, 1994, when compared to the prior fiscal year. Advisory fees from the
Company's mutual funds and money market funds increased $756,000, or 9%, and
revenues from investment management fees related to individual managed accounts
increased $1,466,000 or 34%. These increases were caused by an increase in
assets under management.
Interest and Dividend income increased $1,480,000, or 11%, for the fiscal year
ended March 25, 1994, when compared to the prior fiscal year. The increase was
caused primarily by a higher level of customer margin loans and securities
owned in the current fiscal year.
Other income increased $578,000, or 11%, for the fiscal year ended March 25,
1994, when compared to the prior fiscal year. The increase was primarily
caused by increases in service fees and other fee income related to the
expansion of the retail business.
Operating expenses (total expenses before interest) increased $19,277,000, or
14%, for the fiscal year ended March 25, 1994, when compared to the prior
fiscal year. Employee Compensation and Benefits increased $17,307,000, or 17%,
for the current fiscal year. Commission and other sales compensation expense
increased $10,306,000, or 20%, for the current fiscal year, primarily as a
result of the increase in revenues. Other clerical and administrative expenses
increased $4,251,000, or 15%, for the current fiscal year. The increase in
other clerical and administrative expense represents compensation and employee
benefits costs related to an increase in the professional and support staff
during the current fiscal year. The remaining $2,750,000 increase in employee
compensation represents increases in incentive compensation and profit sharing
accruals, which are directly related to the significant improvement in
profitability.
All other operating expenses increased $1,970,000, or 5%, for the fiscal year
ended March 25, 1994, when compared to the fiscal year ended March 26, 1993.
The increase in all other operating costs reflects the communications,
occupancy and equipment, promotional, and other operating costs related to the
expansion of the Company's business.
For the fiscal year ended March 25, 1994, Communications expenses increased
$1,215,000, or 13%, primarily because of increased volume and the effect of the
expansion of the business, including costs related to opening new branches.
For the fiscal year ended March 25, 1994, Occupancy and Equipment costs
increased $1,773,000, or 18%, reflecting increases in rent, equipment, and
other occupancy costs in the Company's administrative office, and in the branch
system.
Promotional and Development expenses increased $616,000, or 9%, for the fiscal
year ended March 25, 1994, when compared to the prior fiscal year. The
increase reflects increases in media advertising and other business development
expenses.
- 53 -
<PAGE> 5
Taxes Other Than Income Taxes increased $818,000, or 19%, primarily because of
an increase in payroll taxes caused by higher levels of compensation and the
increase in the number of employees.
Other Operating Expenses decreased $2,530,000, or 29%, for the fiscal
year ended March 25, 1994, when compared to the prior fiscal year. The
decrease results primarily from a decrease in litigation expenses of
approximately $2,956,000.
Interest expense increased $1,598,000, or 21%, for the fiscal year ended March
25, 1994, when compared to the fiscal year ended March 26, 1993. This increase
reflects a higher level of average short-term borrowings because of an increase
in the level of securities owned and customer margin accounts. Additionally,
the average rate on borrowings increased because of the issuance in January
1993, by McDonald Securities, of $25,000,000 in 8.24% Subordinated Notes.
Income before income taxes for the fiscal year ended March 25, 1994, was
$34,688,000, resulting in a pre-tax return on revenues of 16.9%. For the
fiscal year ended March 26, 1993, income before income taxes was $24,700,000,
resulting in a pre-tax return on revenues of 14.2%.
FISCAL 1993 COMPARED WITH FISCAL 1992
Total revenues for the fiscal year ended March 26, 1993, were $173,817,000, an
increase of $45,754,000, or 36%, from revenues of $128,063,000 for the fiscal
year ended March 27, 1992.
Net income for the fiscal year ended March 26, 1993, was $16,050,000, or $1.92
per share, compared to $10,896,000, or $1.48 per share, for the fiscal year
ended March 27, 1992, an increase in net income of 47%.
The average number of shares and share equivalents outstanding was 8,377,000
for the fiscal year ended March 26, 1993, compared with 7,381,000 for the
fiscal year ended March 27, 1992.
Revenues from Underwriting and Investment Banking increased $13,107,000, or
44%, for the fiscal year ended March 26, 1993, when compared to the fiscal year
ended March 27, 1992. Revenues from corporate underwriting and investment
banking increased $7,193,000, or 36%, for the fiscal year ended March 26, 1993,
when compared to the prior fiscal year. This was caused by increases in
managed and co-managed originations, participation in syndicate groups and
private placements of equity and taxable debt securities in the current fiscal
year. These increases are attributable primarily to continued favorable market
conditions for such offerings. Revenues from municipal finance increased
$5,288,000, or 66%, for the fiscal year ended March 26, 1993, when compared to
the prior fiscal year. Favorable market conditions, primarily the result of low
interest rates, resulted in an increase in new municipal bond issues and
refinancings. Revenues from mergers and acquisitions and other financial
advisory fees increased $626,000, or 40%, for the fiscal year ended March 26,
1993, when compared to the prior fiscal year.
Revenues from Principal Transactions increased $15,212,000, or 34%, for
the fiscal year ended March 26, 1993, when compared to the prior fiscal year.
Revenues from trading taxable fixed-income securities, including corporate
bonds, United States government bonds, and mortgage-backed securities,
increased $11,109,000, or 38%. This significant increase in revenues from
principal transactions in taxable fixed-income securities was caused by
favorable market conditions. Revenues from trading municipal bonds increased
$961,000, or 18%, for the current fiscal year, primarily because of improved
market conditions. Revenues from principal transactions in equity securities
increased $3,142,000, or 31%, for the fiscal year ended March 26, 1993, when
compared to the prior fiscal year. Substantially all of the increase was
attributable to an increase in revenues from trading unlisted equity securities
because of investor demand for such products and expansion of the retail sales
force. The Company from time to time held positions in certain high-yield and
non-investment-grade securities in connection with arbitrage activities.
Commissions revenue increased $9,807,000, or 32%, for the fiscal year ended
March 26, 1993, when compared to the fiscal year ended March 27, 1992. The
increase in commission revenue reflects higher volume resulting from
- 54 -
<PAGE> 6
both improved market conditions and the increase in the size of the retail
sales force. During the fiscal year ended March 26, 1993, low interest rates
and a strong stock market encouraged investor participation in the equity
markets. The increase in commission revenue was comprised primarily of
increases in revenues from listed and over-the-counter agency commissions of
$4,934,000, or 23%, for the fiscal year ended March 26, 1993, and an increase
in revenues from mutual fund sales of $3,940,000, or 55%, for the fiscal year
ended March 26, 1993. For the fiscal year ended March 26, 1993, commissions
from mutual fund sales were positively impacted by the effect of commissions
from sales of the Gradison mutual funds, which accounted for 59% of the
increase for the fiscal year.
Revenues from Investment Management Fees include advisory fees from the
Company's mutual fund and money market funds and investment management fees
earned related to individual managed accounts. Revenues from investment
management fees increased $5,259,000, or 74%, for the fiscal year ended March
26, 1993, when compared to the prior fiscal year. Revenues from the Gradison
division represented 95% of the increase in such revenues for the fiscal year
ended March 26, 1993.
The decrease in Interest and Dividend income of $967,000, or 7%, for the fiscal
year ended March 26, 1993, when compared to the prior fiscal year, was caused
primarily by a lower return on interest-earning assets and lower interest
rates.
Other income increased $3,336,000, or 184%, for the fiscal year ended
March 26, 1993, when compared to the prior fiscal year. Approximately
$2,100,000 of the increase relates to net gains on certain venture capital
investments. The remainder of the increase represents primarily increases in
service fees and other fee income related to the expansion of the retail
business.
Operating expenses (total expenses before interest) increased $39,976,000, or
39%, for the fiscal year ended March 26, 1993, when compared to the prior
fiscal year. Employee Compensation and Benefits increased $28,936,000, or 41%,
for the fiscal year ended March 26, 1993. Commissions and other sales
compensation expense increased $15,506,000, or 43%, for the fiscal year ended
March 26, 1993, related primarily to the increase in revenues. Other clerical
and administrative expenses increased $6,730,000, or 32%, for the fiscal year
ended March 26, 1993. The increase in other clerical and administrative
expense represents compensation and employee benefits costs related to an
increase in the professional and support staff during the fiscal year ended
March 26, 1993, which resulted in part from the addition of Gradison division
employees at the time of the acquisition. The remaining increase in employee
compensation of $6,700,000 represents increases in incentive compensation and
profit-sharing accruals, which are related directly to the significant
improvement in profitability.
All other operating expenses increased $11,040,000, or 36%, for the fiscal year
ended March 26, 1993, when compared to the fiscal year ended March 27, 1992.
The increase in all other operating costs reflects the communications,
occupancy and equipment, promotional, and other operating costs related to the
expansion of the Company's business, including the acquisition of the Gradison
Division, which impacted expenses effective from October 4, 1991.
For the fiscal year ended March 26, 1993, Communications expenses increased
$1,894,000, or 24%, primarily because of increased volume and the effect of the
expansion of the business, including costs related to opening new branches and
the acquisition of the Gradison Division on October 4, 1991.
For the fiscal year ended March 26, 1993, Occupancy and Equipment costs
increased $2,250,000, or 30%, reflecting increases in rent, equipment and other
occupancy costs in the Company's administrative office and in the branch
system, and the effect of the acquisition of the Gradison Division.
Promotional and Development expenses increased $2,527,000, or 60%, for the
fiscal year ended March 26, 1993, when compared to the prior fiscal year. The
increase reflects a planned increase in media advertising and other business
development expenses.
- 55 -
<PAGE> 7
reflecting higher levels of compensation, and the increase in the number of
employees which resulted primarily from the acquisition of Gradison.
Other Operating Expenses increased $3,323,000, or 63%, for the fiscal year
ended March 26, 1993, when compared to the prior fiscal year. The increase was
caused by an increase in litigation expenses of approximately $2,730,000.
Interest expense decreased $1,846,000, or 19%, for the fiscal year ended March
26, 1993, when compared to the fiscal year ended March 27, 1992, because of a
decrease in the interest rate on short-term borrowings, and a lower level of
average short-term borrowings resulting from a higher capital base and a higher
level of non-interest bearing accruals.
Income before income taxes for the fiscal year ended March 26, 1993, was
$24,700,000, resulting in a pre-tax return on revenues of 14.2%. For the
fiscal year ended March 27, 1992, income before income taxes was $17,076,000,
resulting in a pre-tax return on revenues of 13.3%.
- 56 -
<PAGE> 1
<TABLE>
Exhibit 99(d)
CONSOLIDATED STATEMENTS OF INCOME
<CAPTION>
FISCAL YEAR ENDED
------------------------------------------------------
MARCH 25, 1994 MARCH 26, 1993 MARCH 27, 1992
(In thousands, except share and per share amounts)
<S> <C> <C> <C>
REVENUES
Underwriting and investment banking . . . . . . . . $ 64,008 $ 42,731 $ 29,624
Principal transactions . . . . . . . . . . . . . . 51,769 59,584 44,372
Commissions . . . . . . . . . . . . . . . . . . . . 53,305 40,184 30,377
Investment management fees . . . . . . . . . . . . 14,542 12,320 7,061
Interest and dividends . . . . . . . . . . . . . . 15,330 13,850 14,817
Other . . . . . . . . . . . . . . . . . . . . . . . 5,726 5,148 1,812
----------------------------------------------------
204,680 173,817 128,063
----------------------------------------------------
EXPENSES
Employee compensation and benefits . . . . . . . . 116,832 99,525 70,589
Interest . . . . . . . . . . . . . . . . . . . . . 9,297 7,699 9,545
Communications . . . . . . . . . . . . . . . . . . 10,919 9,704 7,810
Occupancy and equipment . . . . . . . . . . . . . . 11,481 9,708 7,458
Promotion and development . . . . . . . . . . . . . 7,325 6,709 4,182
Floor brokerage and clearance . . . . . . . . . . . 2,904 2,826 2,489
Taxes, other than income taxes . . . . . . . . . . 5,134 4,316 3,607
Other operating expenses . . . . . . . . . . . . . 6,100 8,630 5,307
---------------------------------------------------
169,992 149,117 110,987
---------------------------------------------------
Income before income taxes . . . . . . . . . . . . 34,688 24,700 17,076
Provision for income taxes. . . . . . . . . . . . . 13,100 8,650 6,180
---------------------------------------------------
Net income. . . . . . . . . . . . . . . . . . . . . $ 21,588 $ 16,050 $ 10,896
===================================================
Income per share
Primary . . . . . . . . . . . . . . . . . . . . . . $ 2.38 $ 1.92 $ 1.48
Fully diluted . . . . . . . . . . . . . . . . . . $ 2.28 $ 1.76 $ 1.36
Average number of shares and share equivalents outstanding 9,076,000 8,377,000 7,381,000
<FN>
See Notes to Consolidated Financial Statements.
</TABLE>
- 57 -
<PAGE> 2
<TABLE>
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<CAPTION>
MARCH 25, 1994 MARCH 26, 1993
-----------------------------------------------------
(In thousands, except share and per share amounts)
<S> <C> <C>
ASSETS
Cash and cash equivalents.................................... $ 6,765 $ 7,482
Receivable from customers.................................... 124,294 84,235
Receivable from brokers and dealers.......................... 30,915 36,644
Securities purchased under agreements to resell.............. 216,263 185,149
Securities owned............................................. 152,690 161,921
Other receivables............................................ 12,087 11,628
Furniture, equipment, and leasehold improvements, at cost,...
less accumulated depreciation and amortization of $15,304..
at March 25, 1994, and $12,102 at March 26, 1993........... 9,987 10,274
Other assets................................................. 37,577 31,609
---------------------------------------------
$ 590,578 $ 528,942
==============================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Short-term borrowings........................................ $ 90,731 $ 98,053
Payable to customers......................................... 28,220 18,164
Payable to brokers and dealers............................... 23,527 6,509
Securities sold under agreements to repurchase............... 198,730 206,537
Securities sold but not yet purchased........................ 64,644 42,219
Accrued compensation and profit sharing contribution......... 24,586 21,050
Accounts payable, accrued expenses, and other liabilities.... 27,735 20,428
Long-term borrowings......................................... 25,000 38,055
-----------------------------------------------
483,173 451,015
Commitments and Contingencies
Stockholders' Equity
Preferred Stock, without par value; authorized 200,000 shares;
none issued
Common Stock, par value $1.00 per share; 15,000,000 shares
authorized; (11,176,129 and 9,841,897 shares issued, respectively) 11,176 8,202
Additional paid-in capital................................... 44,916 31,120
Retained earnings............................................ 66,239 47,199
-----------------------------------------------
122,331 86,521
Less treasury stock, at cost -
1,915,138 shares at March 25, 1994, and
1,558,859 shares at March 26, 1993......................... (14,926) (8,594)
-----------------------------------------------
107,405 77,927
-----------------------------------------------
$ 590,578 $ 528,942
===============================================
<FN>
See Notes to Consolidated Financial Statements.
</TABLE>
- 58 -
<PAGE> 3
<TABLE>
CONSOLIDATED STATEMENTS OF
CHANGES IN STOCKHOLDERS' EQUITY
<CAPTION>
ADDITIONAL
COMMON PAID-IN RETAINED TREASURY
STOCK CAPITAL EARNINGS STOCK
(In thousands, except share and per share amounts) -------------------------------------------
<S> <C> <C> <C> <C>
BALANCE AT MARCH 29, 1991 ............................................ $ 6,550 $17,174 $23,995 $ (9,207)
Net income for the fiscal year ....................................... 10,896
Purchase of 18,053 shares of treasury stock, at cost ................. (130)
Issuance of 77,051 shares of treasury stock
to satisfy exercise of stock options ............................. 202 423
Issuance of 1,871,242 shares of common stock
to shareholders of Gradison & Company, Incorporated .............. 1,559 12,644
Cash dividends, $.167 per share ...................................... (1,183)
------------------------------------------
BALANCE AT MARCH 27, 1992 ............................................ 8,109 30,020 33,708 (8,914)
Net income for the fiscal year ....................................... 16,050
Purchase of 2,400 shares of treasury stock, at cost .................. (28)
Issuance of 63,792 shares of treasury stock
to satisfy exercise of stock options ............................. 157 348
Issuance of 110,656 shares of common stock ........................... 93 943
Cash dividends, $.312 per share ...................................... (2,559)
------------------------------------------
BALANCE AT MARCH 26, 1993 ............................................ 8,202 31,120 47,199 (8,594)
Net income for the fiscal year ....................................... 21,588
Purchase of 496,509 shares of treasury stock, at cost ................ (7,259)
Issuance of 140,230 shares of treasury stock
to satisfy exercise of stock options ............................. 96 927
Issuance of 270,201 shares of common stock ........................... 241 3,838
Issuance of common stock to satisfy 20% stock dividend ............... 1,681 (1,681)
Issuance of 1,064,031 shares of common stock because of
conversion of 8% convertible subordinated debentures ............. 1,052 11,543
Cash dividends, $.275 per share ...................................... (2,548)
------------------------------------------
BALANCE AT MARCH 25, 1994 ............................................ $11,176 $44,916 $66,239 $(14,926)
==========================================
<FN>
See Notes to Consolidated Financial Statements.
</TABLE>
- 59 -
<PAGE> 4
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
FISCAL YEAR ENDED
--------------------------------------------------
(In thousands) MARCH 25, 1994 MARCH 26, 1993 MARCH 27, 1992
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net Income $ 21,588 $ 16,050 $ 10,896
Adjustments to reconcile net income to net cash
provided by (used for) operating activities:
Depreciation and amortization 4,083 3,506 2,455
Deferred compensation 298 205 293
Deferred income taxes (2,219) (1,569) (549)
Changes in operating assets and liabilities, net of
effects in fiscal 1992 from purchase of
Gradison & Company, Incorporated:
Increase in receivable from customers (40,059) (25,002) (21,915)
(Increase) decrease in receivable from brokers
and dealers 5,729 (13,715) 1,790
(Increase) decrease in securities owned 9,231 (19,973) (58,936)
Increase in other receivables (459) (2,894) (1,056)
Increase (decrease) in payable to customers 10,056 1,296 (6,025)
Increase (decrease) in payable to brokers and dealers 17,018 3,466 (5,980)
Increase in securities sold but not yet purchased 22,425 3,758 8,098
Increase in accrued compensation and profit sharing
contribution 7,353 2,710 9,736
Increase in accounts payable, accrued expenses
and other liabilities 7,009 7,033 869
---------------------------------------------
Net cash provided by (used for) operating activities 62,053 (25,129) (60,324)
INVESTING ACTIVITIES:
Purchase of furniture, equipment, and leasehold improvements (3,272) (5,118) (3,326)
(Increase) decrease in other assets (4,273) 1,755 3,194
Cash portion of purchase price of Gradison & Company,
Incorporated, net of cash acquired (3,596)
---------------------------------------------
Net cash provided by (used for) investing activities (7,545) (3,363) (3,728)
FINANCING ACTIVITIES:
Increase in securities purchased under agreements to resell (31,114) (138,096) (14,362)
Increase (decrease) in short-term borrowings (7,322) (15,418) 64,011
Increase (decrease) in securities sold under agreements
to repurchase (7,807) 164,132 16,087
Proceeds from issuance of subordinated notes 25,000
Cash dividends (2,548) (2,559) (1,183)
Purchase of treasury stock (7,259) (28) (130)
Proceeds from issuance of treasury stock 1,023 505 625
Redemption of convertible subordinated debentures (198)
---------------------------------------------
Net cash provided by (used for) financing activities (55,225) 33,536 65,048
Increase (decrease) in cash and cash equivalents (717) 5,044 996
Cash and cash equivalents at beginning of fiscal year 7,482 2,438 1,442
---------------------------------------------
Cash and cash equivalents at end of fiscal year $ 6,765 $ 7,482 $ 2,438
=============================================
<FN>
See Notes to Consolidated Financial Statements
</TABLE>
- 60 -
<PAGE> 5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements include the accounts of McDonald &
Company Investments, Inc., and its subsidiaries, collectively referred to as
the "Company." All significant intercompany accounts and transactions are
eliminated in consolidation.
The Company's fiscal year is the 52- or 53-week period ending on the last
Friday in March.
The Company, through its principal subsidiary, McDonald & Company Securities,
Inc. ("McDonald Securities"), is engaged in the business of a securities broker
and dealer, which is comprised of several classes of service, such as
underwriting and investment banking, principal and agency transactions, and
investment advisory services.
Substantially all of the Company's financial assets and liabilities are carried
at market value or at amounts which, because of the short-term nature of the
financial instruments, approximate current fair value. The market value of the
Company's long-term borrowings, estimated based on current interest rates, does
not differ significantly from the amount recorded at March 25, 1994.
Cash and cash equivalents represent cash in banks and excess cash invested with
banks overnight in short-term instruments.
Repurchase and resale agreements are treated as financing transactions and are
carried at the amounts at which the securities will be reacquired or resold as
specified in the respective agreements. It is the Company's policy to obtain
possession of collateral. Where considered necessary, the Company requires a
deposit of additional collateral or a reduction of securities positions.
Securities owned and securities sold, but not yet purchased, are carried at
market value, and unrealized gains and losses are included in revenues from
principal transactions.
Securities transactions and related commission revenue and expense are recorded
on the settlement date basis. Settlement date is generally the fifth business
day following the trade date. The effect on the financial statements of using
the settlement date basis, rather than the trade-date basis, is not material.
Investment banking revenue (other than underwriting revenue) and investment
management fees are recorded as the income is earned and the related services
are performed. Underwriting revenue is recorded upon completion of the
underwriting.
Furniture and equipment are depreciated on the straight-line method over their
estimated useful lives. Leasehold improvements are amortized on the
straight-line method over the life of the lease or the useful life of the
improvement, whichever is shorter.
RECENT ACCOUNTING PRONOUNCEMENTS
During the fiscal year ended March 25, 1994, the Company adopted Financial
Accounting Standards Board (FASB) Statement No. 109, "Accounting for Income
Taxes" (FAS No. 109). The cumulative effect of adopting FAS No. 109 was not
significant to the results of operations for the fiscal year ended March 25,
1994. Income tax expense for prior years' financial statements has not been
restated.
The Company provides certain health care benefits under its medical plan to
certain eligible retirees who elect to participate in the plan. During the
fiscal year ended March 25, 1994, the Company adopted FASB Statement No. 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions" (FAS
No. 106). The statement requires accrual of the expected cost of such benefits
during employee service periods. The initial transition obligation can be
immediately recognized, or alternatively, amortized over a maximum of 20 years.
The Company is
- 61 -
<PAGE> 6
amortizing its initial transition obligation of approximately $1,000,000 over a
period of 20 years. The adoption of FAS No. 106 was not material to the
Company's financial position or results of operations. The amount of the
expense recorded for FAS No. 106 was $188,000 in fiscal 1994.
In November 1992, the FASB issued statement No. 112, "Employers' Accounting for
Post-Employment Benefits Other than Pensions" (FAS No. 112). The Company
expects to adopt the provisions of FAS No. 112 for the Company's fiscal year
ending in March 1995, and does not expect the statement to have a significant
effect on the Company's financial position or results of operations.
NOTE B - MERGER
On October 4, 1991, the Company completed the merger with Gradison & Company,
Incorporated ("Gradison"), a regional, full-service brokerage and investment
advisory firm located in Cincinnati, Ohio. In connection with the merger,
shareholders of Gradison received 1,871,242 shares of Common Stock valued at
$14,203,000 and cash of $8,520,000. The difference between the cost and the
fair value of the net assets acquired was $14,040,000 and is being amortized on
the straight-line basis over a period of 25 years. The merger was accounted
for as a purchase and, therefore, the results of operations of Gradison were
included in the financial statements of the Company subsequent to October 4,
1991.
NOTE C - SECURITIES OWNED AND SECURITIES SOLD BUT NOT YET PURCHASED
Securities owned and securities sold, but not yet purchased, consist of the
following:
<TABLE>
<CAPTION>
MARCH 25, 1994 MARCH 26, 1993
(In thousands) ----------------------------------------
<S> <C> <C>
Securities owned
State and municipal obligations . . . . . . . . $ 10,817 $ 12,676
Corporate stocks . . . . . . . . . . . . . . . 11,278 19,226
Corporate obligations . . . . . . . . . . . . 82,837 73,645
U.S. Government obligations and
mortgage-backed securities . . . . . . . . 47,550 47,170
Other . . . . . . . . . . . . . . . . . . . 208 9,204
----------------------------------
$152,690 $161,921
==================================
Securities sold but not yet purchased
Corporate stocks . . . . . . . . . . . . . . . . $ 7,539 $ 15,335
U.S. Government obligations . . . . . . . . . 52,500 15,042
Other . . . . . . . . . . . . . . . . . . . . 4,605 11,842
----------------------------------
$ 64,644 $ 42,219
==================================
</TABLE>
- 62 -
<PAGE> 7
NOTE D - SHORT TERM BORROWINGS
<TABLE>
<CAPTION>
Short-term borrowings include the following:
MARCH 25, 1994 MARCH 26, 1993
----------------------------------
(In thousands)
<S> <C> <C>
Secured bank loans $ 33,815 $ 77,326
Unsecured bank loans 56,916 20,727
----------------------------------
$ 90,731 $ 98,053
==================================
</TABLE>
Short-term borrowings are bank loans payable on demand at rates ranging from
3.98% to 5.75% at March 25, 1994. The secured loans were collateralized by
customer-owned securities with a market value of $20,818,000 and firm-owned
securities with a market value of $83,364,000 at March 25, 1994. At March 26,
1993, the secured loans were collateralized by customer-owned securities with a
market value of $47,606,000 and firm-owned securities with a market value of
$62,253,000.
McDonald Securities had total lines of credit of $318,000,000 at
March 25, 1994, under which a maximum of $130,000,000 could be borrowed on an
unsecured basis. There were no compensating balance requirements associated
with these lines of credit.
Securities sold under agreements to repurchase bear interest at rates
ranging from 3.24% to 3.75% and are collateralized by firm-owned securities
with a market value of $34,263,000 and securities purchased under agreements to
resell with a market value of $162,319,000 at March 25, 1994.
NOTE E - LONG-TERM BORROWINGS
McDonald Securities has outstanding $25,000,000 in aggregate principal amount
of 8.24% Subordinated Notes due January 15, 2002. McDonald Securities is
required to prepay principal amounts of $5,000,000 on January 15 in each year
beginning in 1998. The notes are subordinated in right of payment to all
senior indebtedness of McDonald Securities. The principal amount of the notes
has been approved by the New York Stock Exchange, Inc., for inclusion in the
regulatory capital of McDonald Securities (See Note I).
As of March 26, 1993, the Company had outstanding $13,055,000 of 8% convertible
subordinated debentures ("debentures") due March 1, 2011. The debentures were
convertible at any time prior to maturity, unless previously redeemed, at a
conversion price of $12.08 per share. The debentures were redeemable at the
option of the Company at any time at 102.4% if redeemed prior to March 1, 1994,
and, thereafter, at prices declining to par on or after March 1, 1996, plus
accrued interest. During the fiscal year ended March 25, 1994, the Company
redeemed $197,000 aggregate principal amount of debentures at a price of 102.4%
of the principal amount, plus accrued interest for a total cash payment of
$204,310. During the fiscal year ended March 25, 1994, $12,858,000 principal
amount of debentures was converted into 1,064,031 shares of the Company's
Common Stock at a conversion price of $12.08 per share.
Total interest paid was $9,171,000 for the fiscal year ended March 25, 1994,
$7,470,000 for the fiscal year ended March 26, 1993, and $9,466,000 for the
fiscal year ended March 27, 1992.
- 63 -
<PAGE> 8
NOTE F - INCOME TAXES
<TABLE>
<CAPTION>
The provision for income taxes consists of the following:
FISCAL YEAR ENDED
--------------------------------------------------------
MARCH 25, 1994 MARCH 26, 1993 MARCH 27, 1992
(In thousands)
<S> <C> <C> <C>
Federal
Current . . . . . . . . . . . . . . . . . . . . . . $14,399 $ 9,769 $ 6,559
Deferred . . . . . . . . . . . . . . . . . . . . . . (2,219) (1,569) (549)
-------------------------------------------------
12,180 8,200 6,010
State and local . . . . . . . . . . . . . . . . . . 920 450 170
-------------------------------------------------
$13,100 $ 8,650 $ 6,180
=================================================
</TABLE>
<TABLE>
<CAPTION>
The deferred income tax benefit consists of the following:
FISCAL YEAR ENDED
--------------------------------------------------------
MARCH 25, 1994 MARCH 26, 1993 MARCH 27, 1992
(In thousands)
<S> <C> <C> <C>
Depreciation and amortization . . . . . . . . . . . . $ 57 $ 50 $ (57)
Employee compensation accruals . . . . . . . . . . (861) (396) 17
Litigation and other reserves . . . . . . . . . . . (1,090) (1,141) (502)
Other-net . . . . . . . . . . . . . . . . . . . . (325) (82) (7)
--------------------------------------------------
Total deferred income tax benefit . . . . . . . . . . $(2,219) $(1,569) $ (549)
==================================================
</TABLE>
<TABLE>
The provision for income taxes differs from the amount computed using the
federal statutory rates of 35% for the fiscal year ended March 25, 1994, and
34% for the fiscal years ended March 26, 1993, and March 27, 1992, as a result
of the following:
<CAPTION>
FISCAL YEAR ENDED
---------------------------------------------------------
MARCH 25, 1994 MARCH 26, 1993 MARCH 27, 1992
(In thousands)
<S> <C> <C> <C>
Expected tax provision at statutory rate . . . . . . . . $12,141 $ 8,398 $ 5,806
Effects of
Non-taxable interest income . . . . . . . . . . . (381) (572) (264)
Additional provision . . . . . . . . . . . . . . . 322 129 314
Other-net . . . . . . . . . . . . . . . . . . . . 1,018 695 324
------------------------------------------------------
$13,100 $ 8,650 $ 6,180
======================================================
</TABLE>
- 64 -
<PAGE> 9
Significant components of the Company's deferred tax assets and liabilities as
of March 25, 1994, are as follows:
<TABLE>
<CAPTION>
(In thousands)
<S> <C>
Deferred tax assets:
Amortization . . . . . . . . . . . . . . . . . . . . . $ 647
Employee compensation accruals . . . . . . . . . . . . 2,917
Litigation and other reserves . . . . . . . . . . . . 2,278
Other . . . . . . . . . . . . . . . . . . . . . . . . 1,125
------
Total deferred tax assets . . . . . . . . . . . . . . . $6,967
------
Deferred tax liabilities:
Depreciation . . . . . . . . . . . . . . . . . . . . . $ 724
Other . . . . . . . . . . . . . . . . . . . . . . . . 364
------
Total deferred tax liabilities . . . . . . . . . . . . $1,088
------
Net deferred tax assets . . . . . . . . . . . . . . . . $5,879
======
</TABLE>
Total income taxes paid were $14,070,000 for the fiscal year ended March 25,
1994, $10,780,000 for the fiscal year ended March 26, 1993, and $6,396,000 for
the fiscal year ended March 27, 1992.
NOTE G - INCOME PER SHARE
Primary income per share is based on the average number of shares and share
equivalents outstanding during the fiscal years. Share equivalents represent
the effect of shares issuable under the Company's stock option plans. Fully
diluted income per share includes, in addition to the above, the effect of the
conversion of the Company's 8% convertible subordinated debentures.
On July 27, 1993, the Company declared a 20% stock dividend payable August 20,
1993, to stockholders of record August 10, 1993. All share and per-share
information has been restated to reflect the effect of the stock dividend as if
it had occurred at the beginning of each period presented.
NOTE H - COMMITMENTS AND CONTINGENCIES
The Company has letters of credit for $3,000,000, which are being used to
satisfy clearing corporation deposit requirements which approximated $1,689,000
at March 25, 1994. The agreements expire in 1994 and the Company pays fees at
1% per annum.
The Company is a defendant in various lawsuits incidental to its securities
business, and in the opinion of management, liability, if any, resulting from
such litigation, will not have a material adverse effect on the Company's
financial position.
Aggregate commitments under operating leases for office space and equipment in
effect as of March 25, 1994, with initial or remaining noncancellable lease
terms in excess of one year are approximately $18,322,000 payable as follows:
1995-$5,346,000; 1996-$3,375,000; 1997-$2,923,000; 1998-$2,551,000;
1999-$1,607,000, and thereafter, $2,520,000. Certain of these leases have
escalation clauses, based on certain increases in costs incurred by the lessor,
and renewal options. The lease on the Company's headquarters office in
Cleveland, Ohio, expires April 30, 1995. The Company has signed a letter of
intent to enter into a 15-year lease on the headquarters office upon the
current lease expiration. Rental expense amounted to $5,429,000 for the fiscal
year ended March 25, 1994, $5,154,000 for the fiscal year ended March 26, 1993,
and $4,874,000 for the fiscal year ended March 27, 1992.
- 65 -
<PAGE> 10
NOTE I - NET CAPITAL REQUIREMENTS
McDonald Securities is subject to the Uniform Net Capital Rule (the "Rule") of
the Securities and Exchange Commission and the net capital rules of the New
York Stock Exchange, Inc. (the "Exchange"), of which McDonald Securities is a
member. McDonald Securities has elected to use the alternative method
permitted by the Rule which requires that it maintain minimum net capital, as
defined, equal to 2% of aggregate debit balances arising from customer
transactions, as defined. The Exchange may require a member firm to reduce its
business if its net capital is less than 4% of aggregate debit balances and may
prohibit a member firm from expanding its business or paying cash dividends if
resulting net capital would be less than 5% of aggregate debit balances.
Net capital and aggregate debit balances change from day to day. At March 25,
1994, McDonald Securities' net capital under the Rule was $64,840,000, or 51%
of aggregate debit balances, and $62,305,000 in excess of the minimum required
net capital.
NOTE J - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET AND CREDIT RISK
In the normal course of business, the Company's activities involve the
execution, settlement and financing of various securities transactions. These
activities may expose the Company to risk in the event the customer is unable
to fulfill its contractual obligations. The Company maintains cash and margin
accounts for its customers located throughout the United States, but primarily
in the Midwest.
The Company, as a part of its normal brokerage activities, assumes short
positions on securities and writes option contracts. The establishment of
short positions and written option contracts expose the Company to off-balance
sheet risk in the event prices change, as the Company may be obligated to cover
such positions at a loss. The Company manages its exposure to these
instruments by entering into offsetting or other positions in a variety of
financial instruments, including offsetting options and futures contracts. At
March 25, 1994, the Company had written option contracts outstanding with a
total contractual amount of approximately $1.1 billion, substantially all of
which were offset by futures and options contracts and United States government
securities owned. At March 25, 1994, the notional amount of futures contracts
to sell Eurodollar securities was $175 million. The Company typically settles
its positions by entering into equal, but opposite, contracts and, as such, the
contract amounts do not necessarily represent future cash requirements.
As a securities broker and dealer, a substantial portion of the Company's
transactions are collateralized. The Company's exposure to credit risk
associated with the nonperformance in fulfilling contractual obligations
pursuant to securities transactions can be impacted directly by volatile
trading markets, which may impair the customer's or contra party's ability to
satisfy their obligations to the Company. Where considered necessary, the
Company requires a deposit of additional collateral, or a reduction of
securities positions.
In the normal course of business, the Company enters into underwriting and
forward commitments. At March 25, 1994, the Company's commitments included
forward-purchase and sale contracts involving mortgage-backed securities and
collateralized mortgage obligations with market values of approximately $406
million and $406 million, respectively. Transactions relating to such
commitments, which were subsequently settled, had no material effect on
financial position.
- 66 -
<PAGE> 11
NOTE K - EMPLOYEE BENEFIT PLANS
Prior to January 1, 1993, the Company had profit sharing plans and an employee
stock ownership plan covering substantially all employees with at least one
year of service. The Company's contributions were determined annually, based
on the Company's performance. Effective January 1, 1993, the Company adopted
the McDonald & Company Securities, Inc., Retirement Savings Trust and Plan (the
McDonald RSP Plan), a 401(k) defined-contribution and profit-sharing plan
covering substantially all employees. The former profit sharing plans and the
employee stock ownership plan were merged into the McDonald RSP Plan as of
January 1, 1993. The Company's contribution expense related to the plans was
as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
--------------------------------------------------------
MARCH 25, 1994 MARCH 26, 1993 MARCH 27, 1992
<S> <C> <C> <C>
Profit Sharing and 401(k) Plans . . . . . . . . . $2,000,000 $2,196,000 $1,442,000
Employee Stock Ownership Plan . . . . . . . . . . -------- 500,000 583,000
-----------------------------------------------------
$2,000,000 $2,696,000 $2,025,000
=====================================================
</TABLE>
NOTE L - STOCK OPTION AND RESTRICTED STOCK PLANS
The Company had authorized 720,000 shares of Common Stock for issuance pursuant
to the Company's Stock Option Plan for employees ("the Plan"), which terminated
on June 6, 1993. Options outstanding at the time of termination of the Plan
continue according to the terms of the Plan. An additional 28,800 shares were
authorized for issuance under the Stock Option Plan for Outside Directors.
Stock option activity for the fiscal years ended March 25, 1994, March 26,
1993, and March 27, 1992, was as follows:
<TABLE>
<CAPTION>
STOCK OPTION PLAN
STOCK OPTION PLAN FOR OUTSIDE DIRECTORS
-------------------------- -----------------------
NUMBER OF PRICE NUMBER OF PRICE
OPTIONS RANGE OPTIONS RANGE
----------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding at March 29, 1991 579,774 $4.16-8.12 14,400 $4.90
Granted during fiscal 1992 29,400 $3.65-10.00 4,800 $9.69
Exercised (77,051) $3.65-8.12
Canceled (7,442) $6.15-8.12
------- -------
Outstanding at March 27, 1992 524,681 $3.65-10.00 19,200 $4.90-9.69
Granted during fiscal 1993 4,800 $8.85
Exercised (63,792) $4.17-8.12
Canceled (2,040) $5.83-7.32 (4,800) $4.90
------- -------
Outstanding at March 26, 1993 458,849 $3.65-10.00 19,200 $4.90-9.69
Granted during fiscal 1994 102,120 $12.60-12.71
Exercised (140,228) $5.00-8.12
Canceled (1,075) $6.14
-------- -------
Outstanding at March 25, 1994 419,666 $3.65-12.71 19,200 $4.90-9.69
======== =======
</TABLE>
- 67 -
<PAGE> 12
The options are exercisable over a five-year period from the date of grant and
expire 10 years from the date of grant. At March 25, 1994, options to purchase
309,430 shares were exercisable under the Plan. Under the Stock Option Plan
for Outside Directors, options to purchase 8,640 shares were exercisable and
options for a total of 9,600 shares were available for future grant at March
25, 1994. The Company purchases shares in the open market to provide for the
shares delivered pursuant to the exercise of options under the Plans.
The Company has authorized 960,000 shares of Common Stock for issuance pursuant
to the Company's 1992 Restricted Stock Bonus Plan. Under the Plan, restricted
stock awards may be granted to certain employees. Shares of Common Stock
granted under the Plan prior to April 1, 1993, were awarded subject to
forfeiture if the employee's employment terminated within two years from the
date of award. All shares granted under the Plan are restricted as to sale or
transfer for a period of two years from the date of grant. The Company has
approximately 380,814 shares of restricted stock included in Common Stock
outstanding, which were issued at the fair market value at the date of grant.
- 68 -
