<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 29, 1996
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
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Commission file number 1-8526
McDONALD & COMPANY INVESTMENTS, INC.
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(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
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(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:
Name of each exchange on
Title of each class which registered
------------------- ------------------------
Common Stock, par value $1.00 per share New York Stock Exchange
Series A Junior Preferred Stock Purchase Rights 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, 1996 8,953,462 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,
1996, which was $19.25 per share) was $142,366,051. 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 7, 1996
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 29, 1996.
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PART I
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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. As used
in this Report, the "Company" refers, unless the context requires otherwise, to
McDonald & Company Investments, Inc. and its subsidiaries. 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. The Company also provides personal trust services
through its wholly-owned subsidiary, McDonald Trust Company.
Effective October 4, 1991, the Company entered into an agreement of
Merger with Gradison & Company Incorporated, ("Gradison"). 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 McDonald Investment
Center, 800 Superior Avenue, Cleveland, Ohio 44114-2603 and its telephone
number is (216) 443-2300. The Company has 22 other offices in Ohio (including
the Gradison Division in Cincinnati, Ohio and the S. J. Wolfe Division in
Dayton, Ohio) and 19 additional offices in 11 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
- -------
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 29, 1996, approximately
54% of total revenues were derived from retail customers, 23% from
institutional customers, 15% from non-customer related principal transactions,
investment banking fees and other activities and 8% 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 42 offices in 12 states, all of which
offices are leased. The Company has approximately 1,200 employees, of whom 374
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
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March 29, 1996 March 31, 1995 March 25, 1994
----------------- ----------------- -----------------
(Dollar amounts in thousands)
Amount % Amount % Amount %
------ -- ------ -- ------- --
<S> <C> <C> <C> <C> <C> <C>
Underwriting and
investment banking:
Corporate $ 45,672 20% $ 30,045 17% $ 50,791 25%
Municipal 5,826 3 7,906 4 10,981 5
Direct participation
investments 4,161 2 4,000 2 2,236 1
-------- --- --------- --- -------- ---
55,659 25 41,951 23 64,008 31
Principal transactions:
Unlisted stocks 21,457 9 16,340 9 17,920 9
Corporate bonds
and preferred stocks 10,914 5 11,073 7 11,656 6
Mortgage-backed
securities 6,180 3 5,479 3 8,431 4
Government bonds 6,470 3 5,768 3 9,091 4
Government bond arbitrage -- (17) (3,718) (2)
Municipal bonds 9,001 4 7,346 4 7,831 4
Other 79 1 (106) (1) 558 1
-------- --- --------- --- -------- ---
54,101 25 45,883 25 51,769 26
Commissions:
Listed stocks 33,860 15 26,388 15 27,903 14
Mutual funds and money
market funds 19,588 8 13,914 8 15,449 7
Unlisted stocks 8,411 4 4,867 2 5,245 2
Annuities 3,510 2 3,963 2 3,718 2
Options 1,129 1 922 1 990 1
-------- --- --------- --- -------- ---
66,498 30 50,054 29 53,305 26
Investment management fees:
Mutual funds and
money market funds 9,509 4 9,026 5 8,782 4
Investment advisory fees 10,333 5 6,935 4 5,760 3
-------- --- --------- --- -------- ---
19,842 9 15,961 9 14,542 7
Interest and dividends 17,170 8 19,197 11 15,330 7
Other 7,351 3 4,680 3 5,726 3
-------- --- --------- --- -------- ---
Total revenues $220,621 100% $ 177,726 100% $204,680 100%
======== === ========= === ======== ====
</TABLE>
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<PAGE> 6
ITEM 1. BUSINESS--Continued
UNDERWRITING AND INVESTMENT BANKING
- -----------------------------------
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, including
qualified low-income housing tax credit funds, 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
- ----------------------
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, government bonds, mortgage-backed securities,
common stocks and preferred 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
29, 1996, McDonald Securities made markets in the common stock or other equity
securities of approximately 300 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.
McDonald Securities is a dealer in corporate mortgage-backed and
government fixed income securities which are carried in inventory primarily for
distribution to individual and institutional customers. McDonald Securities
buys, sells and positions mortgage-derivative securities and structured notes.
Holdings of high-yield securities are not material. McDonald Securities may
enter into short positions in United States Treasury securities in order to
hedge its interest rate risk related to fixed income securities.
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.
Prior to March 26, 1994, 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. Subsequent to
March 25, 1994, the Company eliminated fixed income arbitrage activities.
COMMISSIONS
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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.
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<PAGE> 8
ITEM 1. BUSINESS--Continued
INVESTMENT MANAGEMENT FEES (cont.)
- ----------------------------------
As of March 29, 1996, McDonald Securities is the investment advisor to
and the 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 Municipal Custodian Trust, which is
composed of two portfolios, Gradison-McDonald Ohio Tax-Free Income Fund ("GMO",
a double tax-free income fund for Ohio investors), and Gradison-McDonald
Intermediate Municipal Income Fund ("IMI", an intermediate term municipal
income fund), Gradison Growth Trust, which is composed of four portfolios,
Gradison-McDonald Established Value Fund ("EST", a common stock fund investing
in large, established companies), Gradison-McDonald Opportunity Value Fund
("OPP", a common stock fund investing in small companies), Gradison McDonald
Growth & Income Fund ("GRI", a common stock fund seeking long-term growth of
capital, current income and growth of income) and Gradison-McDonald
International Fund ("INT", a common stock fund investing in non-United States
companies). INT was established during the fiscal year ended March 29, 1996.
All of these funds are diversified, open-end management investment companies.
The following summarizes the number of accounts and the size of
each of the Funds as of March 29, 1996 and March 31, 1995:
<TABLE>
<CAPTION>
March 29, 1996 March 31, 1995
--------------------- -----------------------
Funds Accounts $ Accounts $
- ----- --------- ------ ---------- -----
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
Gradison-McDonald U.S. Government
Reserves 85,080 1,414,256 79,496 1,069,178
Gradison-McDonald Municipal Custodian Trust:
Ohio Tax-Free Income Fund 1,578 72,100 1,739 71,352
Intermediate Municipal Income Fund 272 13,594 296 14,091
Gradison Growth Trust:
Established Value Fund 13,859 363,005 13,182 274,218
Opportunity Value Fund 6,151 99,636 6,301 83,176
Growth & Income Fund 876 11,591 148 692
International Fund 1,196 14,067
Gradison-McDonald Government
Income Fund 5,337 180,652 5,926 184,219
------- --------- ------- ---------
Total 114,349 2,168,901 107,088 1,696,926
======= ========= ======= =========
</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 29, 1996 from individual managed
accounts represented approximately 52% of total revenues from investment
management fees.
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<PAGE> 9
ITEM 1. BUSINESS--Continued
INTEREST AND DIVIDENDS
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Approximately 38% of the Company's interest and dividend income is
generated from securities owned. Approximately 55% of interest and dividend
income represents 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.
OTHER
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During the fiscal year ended March 29, 1996, approximately 27% of other
income represents service fees, IRA administration fees, and other
retail-related revenues compared to 37% and 30%, respectively, for the fiscal
years ended in March 1995 and 1994. Approximately 36% of other income
represents transfer agent fees and other fees derived from the Company's money
market and mutual funds compared to 49% and 29%, respectively, for the fiscal
1995 and 1994 years. For the fiscal year ended March 29, 1996, 24% of other
income represented revenues related to certain venture capital investments,
compared to 2% in fiscal 1995 and 33% in fiscal 1994. The Company periodically
invests in venture capital and other investments in the form of limited
partnerships, general partnerships and equity positions. Miscellaneous income
represented 13%, 12% and 8% of other income, respectively, in the fiscal years
ended March 1996, 1995 and 1994.
RETAIL BUSINESS
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During the fiscal year ended March 29, 1996, approximately 70% of the
Company's total revenues from customers were from individuals. During the
fiscal year ended March 29, 1996, approximately 29% of the revenues from
individual accounts were derived from agency transactions in listed and
unlisted securities. 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.
Approximately 27% of revenues from individual customers were derived from
propriety and nonpropriety mutual funds. These revenues include sales charges,
fees received from the funds under Section 12(b)(1), and advisory fees and
other fee income related to the propriety mutual funds. Approximately 22% of
retail-related revenues are derived from principal transactions in equity and
debt securities. The remaining 22% of retail-related revenues include revenues
from the sale of investment banking products and revenues from the sale of
annuities, life insurance and other products.
INSTITUTIONAL BUSINESS
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During the fiscal year ended March 29, 1996, approximately 30% 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 29,
1996, approximately 56% of the revenues from institutional accounts were
derived from principal transactions, 16% 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.
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ITEM 1. BUSINESS--Continued
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.
RESEARCH SERVICES
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McDonald Securities maintains a research staff which concentrates its
efforts on regional equity research and services both retail and institutional
customers. McDonald Securities employs 22 analysts who cover approximately 250
companies, a majority of which maintain their headquarters in the Midwest. Nine
of the 22 analysts are Chartered Financial Analysts.
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.
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ITEM 1. BUSINESS--Continued
COMPETITIVE FACTORS (cont.)
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Fixed minimum commissions for securities transactions were eliminated in
1975. This 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, and Travelers Corporation, have acquired large securities firms.
Additionally, certain bank holding companies, such as J. P. Morgan and
Citicorp, have affiliates which are authorized to 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 1,189 employees, of whom 19 have senior managerial
responsibilities, 374 are full-time investment brokers, 222 are engaged in
other production areas, including trading, research, investment banking, and
investment advisory, and 574 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.
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<PAGE> 12
ITEM 1. BUSINESS--Continued
REGULATION (cont.)
- ------------------
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.
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 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 $100,000 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.
- 12 -
<PAGE> 13
ITEM 1. BUSINESS--Continued
NET CAPITAL REQUIREMENTS (cont.)
- --------------------------------
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 29, 1996, McDonald Securities' net capital was $79,020,000 which
was 35% of its aggregate debit balances and $74,553,000 in excess of the
minimum required net capital.
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.
- 13 -
<PAGE> 14
ITEM 2. PROPERTIES.
The Company has a total of 42 offices in 12 states, all of which are
leased under lease agreements expiring from 1996 to 2009. 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:
<TABLE>
<S> <C> <C>
HEADQUARTERS Mansfield (4) KENTUCKY
------------ Pepper Pike (22) Crestview Hills (4)
Cleveland (59) Rocky River (17)
Sandusky (2) MASSACHUSETTS
DIVISIONS Strongsville (7) Boston (4)
--------- Toledo (3)
Gradison Division Willoughby Hills (10) MICHIGAN
Cincinnati, Ohio Youngstown (4) Ann Arbor (7)
S. J. Wolfe Division Battle Creek (3)
Dayton, Ohio CALIFORNIA Birmingham (15)
Los Angeles (6) East Lansing (4)
BRANCHES Grand Rapids (18)
-------- FLORIDA Grosse Pointe Woods (4)
OHIO Naples (7)
Akron (11) NEW JERSEY
Canfield (2) GEORGIA Jersey City (16)
Canton (6) Atlanta (4)
Chillicothe (1) SOUTH CAROLINA
Cincinnati (48) ILLINOIS Hilton Head Island (1)
Columbus (6) Chicago (5)
Dayton (11) TEXAS
Dublin (4) INDIANA Dallas (5)
Elyria (7) Elkhart (6)
Findlay (5) Fort Wayne (4)
Hudson (4) Indianapolis (7)
Kenwood (10) Indianapolis North (5)
Lancaster (3)
Lima (3)
</TABLE>
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 140,000 square feet
of space, is operated under a lease expiring in 2009. The Gradison Division of
McDonald Securities is located in Cincinnati, Ohio. The Gradison Division
office, which occupies approximately 48,000 square feet of space, is operating
under a lease expiring in 2008. 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.
- 14 -
<PAGE> 15
McDonald Securities, is a defendant in STEPHANIE TUBBS JONES ET. AL.
V. MCDONALD & CO. SECURITIES, INC., ET. AL., ("the Jones litigation") a
lawsuit currently pending in Cuyahoga County Common Pleas Court. The action
arose out of losses allegedly incurred by Cuyahoga County's Secured Assets Fund
Earnings Program ("SAFE"). McDonald Securities and six other defendants have
been named in the lawsuit. The complaint alleges that, in breach of various
legal duties allegedly owed to the plaintiff, McDonald Securities and/or the
other defendants enabled, facilitated and/or assisted the County's investment
staff to engage in unsuitable and inappropriate investment and trading
activities and practices. The complaint contains allegations of fraud and
negligent misrepresentation against McDonald Securities and another defendant
arising out of their respective roles as underwriters of two issuances of tax
and current revenue anticipation notes ("TANS/CRANS") during 1993 and 1994. The
plaintiff seeks to hold each of the defendants liable for an unspecified amount
of compensatory and consequential damages. In addition, the plaintiff seeks to
hold McDonald Securities and the other defendant that participated as an
underwriter of the TANS/CRANS offerings liable for an unspecified amount of
compensatory, consequential and punitive damages. In February 1996, the Ohio
Supreme Court disqualified all Cuyahoga County Common Pleas judges from hearing
the Jones litigation and appointed an out-of-county judge to hear the case.
In June 1996, the court denied motions to dismiss the plaintiff's claims filed
by McDonald Securities and various other defendants. Only limited discovery
has been made to date and no trial date has been set. Based on the facts known
to date, the Company believes that the plaintiff's claims against McDonald
Securities are without merit, and intends to contest vigorously the allegations
in the complaint.
On February 29, 1996, McDonald Securities entered a plea of no contest
in the Common Pleas Court of Franklin County, Ohio, with respect to a fourth
degree misdemeanor charge arising out of its failure to report certain
honorarium payments made to state legislators in a timely fashion. Under Ohio
criminal procedure a plea of no contest is not an admission of guilt,
but is considered only to be an admission of the truth of the facts alleged in
the indictment. McDonald Securities was found to have violated Section
101.41(C) of the Ohio Revised Code by failing to accurately report expenditures
(i.e., payments of honoraria for speaking at meetings sponsored by McDonald
Securities) by McDonald Securities to state legislators during the period of
May through August 1993, and was fined $2,000. Payment of honoraria to state
legislators for speaking engagements was permissible under Ohio law at all
relevant times. No person associated with the Company was charged with any
wrong-doing.
On February 29, 1996, McDonald Securities filed an application with the
Securities and Exchange Commission pursuant to Section 9(c) of the Investment
Company Act of 1940 (the "Investment Company Act") for a Temporary Order and a
Permanent Order exempting it from the provisions of Section 9(a)(1) of the
Investment Company Act. That section prohibits, among other things, any person
convicted of a misdemeanor arising out of such person's conduct as a
broker-dealer from serving as an investment advisor to, or principal
underwriter for, any registered investment company. McDonald Securities has
been granted temporary exemptions by the SEC, and its application for a
Permanent Order exempting it from Section 9(a)(1) is currently pending. Based
upon its discussions with the staff of the SEC and the treatment of similarly
situated persons in prior proceedings, McDonald Securities has no reason to
believe that its application for a permanent exemption will not be granted.
In view of the number and diversity of claims against the Company and
the inherent difficulty of predicting the outcome of litigation and other
claims, the Company cannot state with certainty what the eventual outcome of
pending litigation or other claims will be. The Company provides for costs
relating to these matters when a loss is probable and the amount can be
reasonably estimated. The effect of the outcome of these matters on the
Company's future results of operations cannot be predicted because any such
effect depends on future results of operations and the amount and timing of the
resolution of such matters. While it is not possible to predict with certainty,
management believes that the ultimate resolution of such matters will not have
a material adverse effect on the consolidated financial position, liquidity, or
results of operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
- 15 -
<PAGE> 16
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 is a Director of McDonald
Securities.
<TABLE>
<CAPTION>
NAME AGE PRINCIPAL OCCUPATION
---- --- -------------------------------------
<S> <C> <C>
Thomas M. O'Donnell 60 Chairman of the Company since April 1, 1989; Director of the Company
since June 7, 1983; Chairman of McDonald Securities from April 1,
1989 to August 1, 1995; 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. 46 Director of the Company since June 7, 1983; Chief Executive Officer
of the Company and McDonald Securities since January 1, 1994;
President of the Company since April 1, 1989; Chairman of McDonald
Securities since August 2, 1995; President of McDonald Securities
from April 1, 1989 to August 1, 1995; 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.
Robert T. Clutterbuck 45 President and Chief Operating Officer of McDonald Securities since
August 2, 1995; Treasurer of the Company since January 1, 1994; Chief
Financial Officer of McDonald Securities from January 1, 1994 to June
14, 1996; Executive Managing Director of McDonald Securities from
January 1, 1994 to August 1, 1995; 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.
Daniel F. Austin 44 Vice Chairman of McDonald Securities since August 2, 1995; Senior
Managing Director (Corporate and Public Finance) of McDonald
Securities from June 1, 1992 to August 1, 1995; 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 55 Managing Director (Resident Manager - Jersey City, New Jersey) of
McDonald Securities since May 1, 1988; Senior Vice President from May
1, 1986 to April 30, 1988; First Vice President from June 7, 1983 to
April 30, 1986; Partner from 1977 to 1990.
</TABLE>
- 16 -
<PAGE> 17
EXECUTIVE OFFICERS OF THE REGISTRANT (cont.)
<TABLE>
<CAPTION>
NAME AGE PRINCIPAL OCCUPATION
---- --- -------------------------------------
<S> <C> <C>
Eugene H. Bosart III 53 Senior Managing Director (Regional Sales Manager - Michigan) of
McDonald Securities since June 15, 1996; Managing Director from May
1, 1987 to June 14, 1996; Senior Vice President from June 7, 1983 to
April 30, 1987; Partner from 1972 to 1990.
Thomas G. Clevidence 46 Senior Managing Director (Human Resources and Community Affairs)
since June 15, 1996. Managing Director (Human Resources and
Community Affairs) from January 2, 1996 to June 14, 1996; Managing
Director (Human Resources) from July 1, 1992 to June 14, 1996; Vice
President - Corporate Employment, Society Corporation/Ameritrust
Corporation, from October 1989 to June 30, 1992; Senior Manager,
Ernst & Young, from 1982 to October 1989.
Dennis J. Donnelly 46 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 40 Managing Director (Gradison-McDonald Asset Management) Gradison
Division, since June 15, 1996; Senior Vice President, Gradison
Division, from October 4, 1991 to June 14, 1996; 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.
Patricia J. Jamieson 41 Managing Director (Financial Administration) and Chief Financial
Officer of McDonald Securties since June 15, 1996. Chief Accounting
Officer of McDonald Securities from August 2, 1995 to June 14, 1996;
Senior Vice President since June 1, 1991; First Vice President from
May 1, 1985 to May 31, 1991; Vice President from August 15, 1984 to
April 30, 1985; Associate Vice President from October 3, 1983 to
August 14, 1984.
David W. Knall 51 Senior Managing Director (Resident Manager - Indianapolis, Indiana)
of McDonald Securities since June 15, 1996; Managing Director from
June 7, 1983 to June 14, 1996; Partner from 1973 to 1990.
Thomas M. McDonald 49 Managing Director (Private Client Group) of McDonald Securities since
June 1, 1993; Senior Vice President from September 27, 1991 to May
31, 1993; Senior Vice President of Prescott Ball & Turben, a division
of Kemper Securities Group, Inc. from February 1988 to September 26,
1991.
Lawrence T. Oakar 61 Managing Director (Retail Sales) of McDonald Securities since June
15, 1996; Senior Vice President from May 1, 1986 to June 14, 1996;
First Vice President from July 20, 1983 to April 30, 1986; Partner
from 1979 to 1990.
</TABLE>
- 17 -
<PAGE> 18
EXECUTIVE OFFICERS OF THE REGISTRANT (cont.)
<TABLE>
<CAPTION>
NAME AGE PRINCIPAL OCCUPATION
---- --- -------------------------------------
<S> <C> <C>
John F. O'Brien 59 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.
James C. Redinger 59 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.
David D. Sutcliffe 35 Managing Director (Fixed Income Sales) of McDonald Securities since
June 15, 1996; Senior Vice President from May 1, 1989 to June 14,
1996; First Vice President from May 1, 1987 to April 30, 1989; Vice
President from 1984 to April 30, 1987.
Francis S. Tobias 47 Senior Managing Director (Fixed Income Sales and Trading) of McDonald
Securities since June 15, 1996; Managing Director from January 1,
1994 to June 14, 1996; Senior Managing Director 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.
Bradley E. Turner 37 Senior Managing Director (Gradison-McDonald Asset Management) of
McDonald Securities since June 15, 1996; Managing Director
(Gradison-McDonald Asset Management) of McDonald Securities from June
1, 1995 to June 14, 1996; Senior Vice President (Portfolio Strategies
Group) from June 1, 1992 to May 31, 1995; First Vice President
(Portfolio Strategies Group) from June 1, 1990 to May 31, 1992; Vice
President from May 1, 1988 to May 31, 1990; Associate Vice President
from May 1, 1986 to April 30, 1988.
Donald E. Weston 61 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 7,
1996 (the "1996 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 1996 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 1996 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 1996 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 and other information are filed
as part of this Form 10-K Annual Report herein at Exhibit 99(d).
McDonald & Company Investments, Inc. and Subsidiaries:
- -----------------------------------------------------
(i) Consolidated Statements of Income--fiscal years ended
March 29, 1996, March 31, 1995 and March 25, 1994
(ii) Consolidated Statements of Financial Condition--March
29, 1996 and March 31, 1995
(iii) Consolidated Statements of Changes in Stockholders'
Equity-- fiscal years ended March 29, 1996, March 31,
1995 and March 25, 1994
(iv) Consolidated Statements of Cash Flows--fiscal years
ended March 29, 1996, March 31, 1995 and March 25, 1994
(v) Notes to Consolidated Financial Statements--March 29,
1996
(vi) Report of Independent Auditors
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(a).
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:
<TABLE>
<CAPTION>
Exhibit Sequential Page
------- ---------------
<S> <C>
10(o) Documents reflecting line of credit with Star Bank ($10,000,000) .................. 27
11 Statement Re: Computation of Per Share Earnings ................................... 74
21 Subsidiaries of the Registrant..................................................... 75
23 Consent of Independent Auditors.................................................... 77
27 Financial Data Schedule BD
99(a) Supplementary Financial Data - Quarterly Data
(Unaudited)...................................................................... 78
99(b) Selected Financial Data............................................................ 79
99(c) Management's Discussion and Analysis of Results of
Operations and Financial Condition............................................... 80
99(d) Consolidated Financial Statements of the Company and Independent Auditors'
Report thereon listed under Item 14(a)(1)........................................ 90
</TABLE>
(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)
- 22 -
<PAGE> 23
ITEM 14(a) DOCUMENT LIST -- Continued
10(a): 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(b): 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(c): 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(d): 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(e): Documents reflecting lines of credit with Bankers Trust Company
($50,000,000), 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(f): 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(g): 1993 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(h): 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(i): 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)*
10(j): Documents reflecting lines of credit with Bank of New York
($90,000,000) (Incorporated by reference to Exhibit 10(m) to the
Company's Form 10-K for the fiscal year ended March 25, 1994)
10(k): Lease Agreement dated July 21, 1994 for the Company's executive
offices, which became effective April 1, 1994 (incorporated by
reference to Exhibit 10(k) to the Company's Form 10-K for the fiscal
year ended March 31, 1995)
10(l): 1995 Stock Bonus Plan (incorporated by reference to the
Company's Definitive Proxy Statement for its Annual Meeting held on
August 2, 1995)*
10(m): 1995 Key Employees Stock Option Plan (incorporated by reference
to the Company's Definitive Proxy Statement for its Annual Meeting
held on August 2, 1995)*
10(n): 1995 Stock Option Plan for Non-Officer Directors (incorporated
by reference to the Company's Definitive Proxy Statement for its
Annual Meeting to be held on August 7, 1996)*
* 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 29, 1996.
OTHER
- -----
On February 9, 1995, the Company announced the continuation of an open
market repurchase program originally instituted in July 1987. The current
program allows the Company to purchase up to 1,000,000 shares of its Common
Stock at an aggregate price not to exceed $15,000,000. Treasury shares may be
used to satisfy options exercised under the Company's stock option plans and
shares awarded under the Company's 1995 Stock Bonus Plan.
During the fiscal year ended March 29, 1996 the Company purchased
249,854 shares of the Company's Common Stock at an average price of $16.794 per
share. During the fiscal year ended March 29, 1996, the Company utilized 39,894
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 20th day of June, 1996.
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 20, 1996.
<TABLE>
<CAPTION>
Signature Title:
- --------- ------
<S> <C>
/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/ Rena J. Blumberg Director
- -------------------------------
Rena J. Blumberg
/s/ Jeanette Grasselli Brown Director
- -------------------------------
Jeanette Grasselli Brown
/s/ Willard E. Carmel Director
- -------------------------------
Willard E. Carmel
- ------------------------------- Director
Edward Fruchtenbaum
/s/ James A. Karman Director
- -------------------------------
James A. Karman
/s/ Frederick R. Nance Director
- -------------------------------
Frederick R. Nance
/s/ Donald E. Weston Director
- -----------------------------
Donald E. Weston
</TABLE>
- 25 -
<PAGE> 26
McDonald & Company Investments, Inc.
Report on FORM 10-K for the Fiscal Year ended March 29, 1996
EXHIBIT INDEX
-------------
<TABLE>
<CAPTION>
Exhibit No. Description Sequential Page
- ------------- ------------- ---------------
<S> <C> <C>
10(o) Documents reflecting line of credit with Star Bank ($10,000,000)......... 27
11 Statement Re: Computation of
Per Share Earnings....................................................... 74
21 Subsidiaries of the Registrant........................................... 75
23 Consent of Independent
Auditors............................................................... 77
27 Financial Data Schedule BD
99(a) Supplementary Financial Data
Quarterly Data (Unaudited)............................................. 78
99(b) Selected Financial Data.................................................. 79
99(c) Management's Discussion and
Analysis of Results of Operations
and Financial Condition................................................ 80
99(d) Consolidated Financial Statements of the Company and Independent
Auditors' Report thereon listed under Item 14(a)(1).................... 90
</TABLE>
- 26 -
<PAGE> 1
Exhibit 10(o)
CREDIT AGREEMENT
BY AND AMONG
MCD PROPERTY ADVISORS, INC.
and
McDONALD CORPORATE TAX CREDIT FUND - 1995
LIMITED PARTNERSHIP
as Borrowers
and
STAR BANK, NATIONAL ASSOCIATION
as Bank
October 10, 1995
27
<PAGE> 2
CREDIT AGREEMENT
----------------
THIS CREDIT AGREEMENT (the "Credit Agreement" or "Agreement"), dated as
of the 10th day of October, 1995, by and between MCD PROPERTY ADVISORS, INC., an
Ohio corporation ("Property Advisors") and McDONALD CORPORATE TAX CREDIT FUND -
1995 LIMITED PARTNERSHIP ("Fund"; Property Advisors and Fund being referred to
collectively as the "Borrowers") and STAR BANK, NATIONAL ASSOCIATION (the
"Bank").
WITNESSETH:
-----------
WHEREAS, the Borrowers desire to obtain from the Bank a secured
revolving credit facility (the "Credit Facility") in a principal amount not to
exceed TEN MILLION DOLLARS ($10,000,000) including both (i) advances that may be
borrowed and from time to time repaid and (ii) standby letters of credit, all
upon the terms and conditions set forth hereafter.
NOW, THEREFORE, in consideration of the mutual covenants herein
contained, the parties hereto agree as follows:
In addition to terms defined elsewhere in this Credit Agreement,
certain terms used herein are defined in Section 1.01.
ARTICLE I
---------
DEFINITIONS; ACCOUNTING TERMS; AMENDMENTS
-----------------------------------------
Section 1.01 DEFINITIONS. As used herein and in the Revolving Note and
the other Loan Documents, the following terms shall have the following meanings:
"Acceptable Marketable Securities" means securities that are direct
obligations of the United States of America or any agency thereof, or
certificates of deposit issued by the Bank, or any other money-market investment
if it carries the highest quality rating of any nationally-recognized rating
agency, provided that no such security shall mature more than ninety (90) days
after the date when made.
"Account Officer" means that officer of the Bank who at the time in
question is designated by the Bank as the officer having the primary
responsibility for giving consideration to the Borrowers' requests for credit
or, in that officer's absence, that
28
<PAGE> 3
officer's immediate superior or any other officer who reports directly to that
superior officer.
"Acquisition Cost" means the purchase price of a Permitted Investment.
"Advances" means advances of cash proceeds obtained by the Borrowers in
respect of the Revolving Loan.
"Affiliate" means any director or principal officer of the Borrowers or
the Guarantor or shareholder owning more than five percent (5%) of any class of
outstanding securities of the Guarantor, or any corporation, partnership or
other business enterprise directly or indirectly controlled by, or under direct,
indirect or common control with, any one or more of such Persons and/or the
Borrowers.
"Authorized Officers" means the chief executive officer, chief
financial officer, chief accounting officer, president or treasurer of the
Guarantor or Property Advisors.
"Available Rates" shall have the meaning given to it in Section 2.05.
"Borrowing" means a series of the Revolving Loan obtained by the
Borrowers and includes, without limitation, an Advance or LC (as hereinafter
defined) part of the Revolving Loan the proceeds of which represent new money to
the Borrowers and part of the Revolving Loan the proceeds of which are applied
to any Advance bearing interest at an Overall Libor Rate at the end of the
applicable Libor Rate Period; to the extent that the term "borrowed money" is
used in this Agreement, it is used as a generic term and is not derived solely
from "Borrowing".
"Business Day" means any day on which dealings in United States Dollar
deposits in the London inter-bank market are carried out and which is not a
Saturday, Sunday or other day on which banks in Cincinnati, Ohio are authorized
or required to close.
"Capital Expenditures" means any and all amounts invested, expended or
incurred (including by reason of Capitalized Lease Obligations) in respect of
the purchase, acquisition, improvement, renovation or expansion of any
properties or assets of the Borrowers, including, without limitation,
expenditures required to be capitalized in accordance with GAAP, but excluding
in all cases Permitted Investments.
"Capitalized Lease Obligations" means, as to any Person, the
obligations of such Person to pay rent or other amounts under leases of, or
other agreements conveying the right to use real and/or personal property, which
obligations are required to be classified
29
<PAGE> 4
and accounted for as capital leases on a balance sheet of such Person, prepared
in accordance with GAAP (including the Financial Accounting Standards Board).
"Closing Date" means the date that the first Borrowing is made by the
Borrowers under this Credit Agreement.
"Code" means the Internal Revenue Code of 1986, as amended from time to
time, and any successor statute, and the rules and regulations promulgated
thereunder.
"Collateral Security Documents" shall have the meaning set forth in
Section 3.06.
"Commitment" means the commitment of the Bank to extend credit to the
Borrowers pursuant to Section 2.01 of this Agreement and upon the terms, subject
to the conditions and in accordance with other provisions of this Agreement.
"Companies" means the Guarantor and its Subsidiaries.
"Conclusive" means that the calculation, determination or other matter
referred to is presumed for all purposes to be true and correct and absolutely
binding on the Borrowers except to the extent of manifest or obvious error (e.g.
arithmetic error or misplacement of decimal points).
"Consolidated" means on a consolidated basis for the Guarantor and all
of its Subsidiaries, as determined in accordance with GAAP.
"Construction Loan Liens" shall have the meaning given to such term in
Section 7.02(ii).
"Corporate Tax Funds" means a Fund Entity organized to make Permitted
Investments and in which corporate investors primarily invest.
"Credit Exposure" means the aggregate at the time in question of (a)
the unpaid principal of all Advances plus (b) the undrawn balance of the LCs
then outstanding.
"Distribution" means any payment or distribution or transfer to,
redemption, acquisition or purchase from, or exchange with (directly or
indirectly), the Guarantor made in respect of its Equity Interest, of any
property, including, without limitation, cash, whether or not the same shall be
made from earnings of Property Advisors a redemption of such Equity Interest,
but, excluding in all cases, any of the foregoing made by Property
30
<PAGE> 5
Advisors to the Guarantor or stock dividends or splits of the capital stock of
the Guarantor.
"Dollars" and "$" means United States dollars or such coin or currency
of the United States of America as at the time of payment shall be legal tender
for the payment of public and private debts in the United States.
"Due Date" shall have the meaning set forth in Section 2.17.
"Effective Date" means the date on which the Bank makes an Advance,
issues on LC or the election by the Borrowers of any Interest Option becomes
effective.
"Environmental" means relating to pollution of the environment,
including air, soil, water and groundwater, and the effects of hazardous
substances or toxic and solid wastes.
"Environmental Matters" means (a) any injury to person or property
resulting or allegedly resulting from Environmental claims, (b) any suits,
investigations, notices, orders, decrees or proceedings and other acts and
actions arising under any existing or future environmental laws, rules,
regulations, orders, permits, decrees, notices of violation and other
environmental claims and (c) any compliance required under existing or future
environmental laws, orders, permits, decrees, notices of violations and other
Environmental claims.
"Equity Interests" means all capital stock and options, warrants and
rights to acquire or convert to capital stock of Property Advisors.
"ERISA" means the Employee Retirement Income Security Act of 1974 and
the regulations thereunder, each as amended from time to time.
"ERISA Affiliate" means, as applied to any Person, any trade or
business (whether or not incorporated) that would be aggregated with the
Companies for any purpose relevant to ERISA or the Code relating to any Plan.
"Event of Default" shall have the meaning specified in Article X of
this Credit Agreement.
"Execution Date" means the date of this Credit Agreement first written
above.
"Exhibits" and "Schedules" means and refers collectively to the
documents attached to this Credit Agreement and labeled as Exhibits or Schedules
hereto.
31
<PAGE> 6
"federal", "state", or "local" means and relates to the United States,
its political division of states, and the respective political subdivisions and
equivalents of such states.
"Fiscal Year" means a period consisting of four Quarters ending on the
last day in March that is a day that the New York Stock Exchange is open for
business, in the case of the Guarantor and Property Advisors, and December 31,
in the case of the Fund.
"Fixed or Capital Assets" means and includes all assets which are
defined or classified as fixed or capital assets in accordance with GAAP, but
excluding any Permitted Investments.
"Fund Entity" means an entity organized by Guarantor or a Subsidiary
for the purpose of acquiring Permitted Investments.
"GAAP" means generally accepted accounting principles as consistently
applied in the United States from time to time.
"Governing Documents" means the Fund's Confidential Private Placement
Memorandum dated April 15, 1995, the Fund's Limited Partnership Agreement dated
April 1, 1995 and the Fund's Certificate of Limited Partnership filed with the
Delaware Secretary of State on April 13, 1995.
"Guaranteed" or to "Guarantee" as applied to an obligation shall mean
and include (a) a guarantee or guaranty (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), directly or
indirectly, in any manner, of any part or all of such obligation and (b) an
agreement, direct or indirect, contingent or otherwise, and whether or not
constituting a guaranty, the practical effect of which is to assure the payment
or performance (or payment of damages in the event of non-performance) of any
part or all of such obligation whether by (i) the purchase of securities or
obligations, (ii) the purchase, sale or lease (as lessee or lessor) of property
or the purchase or sale of services primarily for the purpose of enabling the
obligor with respect to such obligation to make any payment or performance (or
payment of damages in the event of nonperformance) of or on account of any part
or all of such obligation, or to assure the owner of such obligation against
loss, (iii) the supplying of funds to or in any other manner investing in the
obligor with respect to such obligation, (iv) repayment of amounts drawn down by
beneficiaries of letters of credit or (v) the supplying of funds to or investing
in a Person on account of all or any part of such Person's obligation under a
Guarantee of any obligation or indemnifying or holding harmless, in any way such
Person against any part or all of such obligation.
32
<PAGE> 7
"Guarantor" means McDonald & Company Investments, Inc., a Delaware
corporation.
"Guaranty" means that certain Guaranty Agreement dated the date hereof
executed and delivered by the Guarantor in favor of the Bank and guaranteeing
repayment of the obligations.
"Indebtedness for Borrowed Money" of any Person means at any date,
without duplication, (i) all obligations of such Person for borrowed money,
including, without limitation, all borrowings under insurance policies, (ii) all
obligations of such Person evidenced by bonds, debentures, notes or other
similar instruments, (iii) all obligations of such Person to pay the deferred
purchase price for property or services, except accounts payable arising in the
ordinary course of business, (iv) all Capitalized Lease Obligations of such
Person, (v) all Indebtedness for Borrowed Money of others secured by a Lien on
any asset of such Person, whether or not such Indebtedness for Borrowed Money is
assumed by such Person and (vi) all Indebtedness for Borrowed Money of others
Guaranteed by such Person.
"Indemnified Liabilities" shall have the meaning given to it in Section
13.01.
"Interest Option" means any one or more of the Prime Rate or the
Overall Libor Rate.
"Investment" means any advance, extension of credit (excluding accounts
receivable arising in the ordinary course of business and endorsements of
negotiable instruments for collection in the ordinary course of business) or
contribution of capital to any Person or purchase or other acquisition of the
stock or any notes, debentures or other securities of, or any equity interest
in, any other person.
"LCs" means any letter of credit issued by the Bank for the account of
the Borrowers.
"Liabilities" as applied to the Borrowers, means:
(i) All items which in accordance with GAAP applied on a
consistent basis would be included in determining total liabilities as
shown on the liability side of a balance sheet of a Borrower as of the
date on which Liabilities are to be determined, regardless whether such
items are recourse indebtedness or otherwise; and
33
<PAGE> 8
(ii) All liabilities of others within the meaning of (i) above
which a Borrower have directly or indirectly Guaranteed, endorsed
(otherwise than for collection or deposit in the ordinary course of
business), discounted with recourse or agreed (contingently or
otherwise) to purchase or repurchase or otherwise acquire or become
liable for, or in respect of which a Borrower have entered into any
agreement for the purchase or other acquisition of any product,
materials, or supplies, or for the making of shipments, or for the
payment for services, if in any such case payment therefor is to be
made regardless of the nondelivery of the product, materials, or
supplies or the nonfurnishing of the transportation or services.
"Libor Rate" means, with respect to any Effective Date, a rate per
annum equal to the quotient obtained (rounded upwards, if necessary, to the next
highest 1/100 of 1%) by dividing (i) the rate of interest determined by the Bank
three (3) Business Days prior to such Effective Date that it would have to pay
on such Effective Date in the London inter-bank market for inter-bank deposits
of United States Dollars with a maturity equal (or as nearly equal as possible)
to the Libor Rate Period selected by the Representative and in an amount equal
to such amount of the Revolving Loan on which interest will be determined by the
Libor Rate by (ii) 1.00 minus for the day the rate of interest is determined by
the Bank that percentage (expressed as a decimal) which is in effect on such
day, as prescribed by the Board of Governors of the Federal Reserve System (or
any successor) for determining the reserve requirement for the Bank in respect
of "Eurocurrency liabilities" (or in respect of any other category of
liabilities which includes deposits by reference to which the Libor Rate is
determined or any category of extensions of credit or other assets which
includes loans by a non-United States office of the Bank to United States
residents). The Libor Rate will be increased by such amount as provided in
Section 2.09 to compensate the Bank for the changes in circumstances described
in Section 2.09 and if such changes in circumstances are no longer applicable or
are otherwise modified so that such increase is no longer required in whole or
in part, then the Libor Rate will be decreased on an equivalent basis (in whole
or in part), in each case, without duplication.
"Libor Rate Period" means the period for which an Overall Libor Rate is
in effect for the purpose of determining the rate of interest on all or any part
of the Revolving Loan.
"Lien" as applied to the property of any Person means: (a) any
mortgage, lien, pledge, charge, lease constituting a Capitalized Lease
Obligation, conditional sale or other title retention agreement, or other
security interest or encumbrance of any kind in respect of any property of such
Person, or upon the income or profits therefrom; (b) any arrangement, express or
implied, under which any property of such Person is transferred,
34
<PAGE> 9
sequestered or otherwise identified for the purpose of subjecting the same to
the payment of Indebtedness for Borrowed Money in priority to the payment of the
general, unsecured creditors of such Person; (c) any Liabilities which are
unpaid more than 60 days after the same shall have become due and payable and
which if unpaid would by law (including, but not limited to, bankruptcy and
insolvency laws), or otherwise, be given any priority whatsoever over general
unsecured creditors of such Person; and (d) the filing of, or any agreement to
give, any financing statement under the Uniform Commercial Code or its
equivalent of any jurisdiction in respect of Indebtedness for Borrowed Money.
"Loan Documents" means and includes this Credit Agreement, the
Revolving Note, the Guaranty and the Collateral Security Documents.
"MCD Securities" means McDonald & Company Securities, Inc., an Ohio
corporation.
"Material Adverse Effect" means a materially adverse effect on the
business, properties, operations or condition (financial or otherwise) of either
Borrower, or the Guarantor, except in the case of the Guarantor, determined on a
Consolidated basis, as applicable as determined by the context when used.
"Net Proceeds" means, with respect to the sale or disposition of any
asset, including but not limited to any Permitted Investment, the total proceeds
received in cash (from time to time, including, without limitation, any
installment, rental or other deferred payments) upon such sale or disposition
minus (i) any reasonable out-of-pocket expenses directly arising out of such
sale or disposition and (ii) Taxes payable in respect of such proceeds.
"Note Purchase Agreement" means that certain Note Purchase Agreement
dated as of January 15, 1993 executed and delivered by MCD Securities in favor
of the purchasers named therein and relating to MCD Securities' 8.24%
Subordinated Notes due January 15, 2002 issued in the original principal amount
of $25,000,000.
"Obligations" shall have the meaning given to such term in Section
4.02.
"Operating Entity" means an entity organized to construct, renovate,
acquire, operate or maintain housing projects that will qualify for tax credits
under the Code as historic or low income housing property and in which a
Borrower makes a Permitted Investment.
"Ordinary Course Liabilities" shall have the meaning given to such term
in Section 2.01(ii).
35
<PAGE> 10
"Outstanding Amount" means the sum of (i) the outstanding unpaid
principal of the Revolving Loan plus (ii) the outstanding stated amount of any
LCs.
"Overall Libor Rate" means the Libor Rate plus Seventy-Five (75) basis
points.
"Overall Libor Rate Indemnity" shall have the meaning specified in
Section 2.13 in respect of a Loan to the extent bearing interest at an Overall
Libor Rate.
"PBGC" shall mean the Pension Benefit Guaranty Corporation and any
successor thereto.
"Permitted Investment" means an equity interest (which may be capital
stock, a limited or general partnership interest or a membership interest in a
limited liability company) in an Operating Entity.
"Permitted Liabilities" shall have the meaning given to such term in
Section 7.01.
"Permitted Liens" shall have the meaning given to such term in Section
7.02.
"Person" includes a corporation, an association, a partnership, an
organization, a trust or business trust, an individual, a government or
political subdivision thereof or a governmental agency or other entity.
"Plan" means any pension plan which is covered by Title IV of ERISA in
respect of which any of the Companies or any ERISA Affiliate is an "employer" as
defined in Section 3(5) of ERISA.
"Possible Default" means an event or condition which, after notice or
lapse of time, or both, would constitute an Event of Default.
"Post-Default Rate" means a per annum rate of interest equal to four
percent (4%) over the Available Rates.
"Quarter" means one of the four periods comprising a Fiscal Year.
"Reportable Event" means any of the events set forth in Section 4043(b)
of ERISA or the regulations thereunder, in each case where reporting
requirements have not been waived and which event could or would give rise to
the termination of any Plan, the appointment of a trustee for such Plan or
otherwise impose any liability on any of the
36
<PAGE> 11
Companies, taken on a Consolidated basis, including, without limitation, as
described in Department of Labor Regulations sections 2615.11, 2615.12 or
2615.15 through 2615.17.
"Representative" shall have the meaning given to such term in Section
1.03.
"Revolving Note" means the promissory note executed jointly and
severally by the Borrowers in favor of the Bank to evidence the Borrowers'
indebtedness pursuant to the Credit Facility.
"Revolving Period" shall have the meaning given to such term in Section
2.04.
"Subsidiaries" means and includes any corporation, association, or
other business entity, the majority (by number of votes) of the stock of any
class or classes of which is at the time owned or controlled directly or
indirectly by the Borrowers, if the holders of the stock of such class or
classes (i) are ordinarily, in the absence of contingencies, entitled to vote
for the election of a majority of the directors (or persons performing similar
functions) of the issuer thereof, even though the right so to vote has been
suspended by the happening of any contingency, or (ii) are at the time entitled,
as such holders, to vote for the election of a majority of the directors (or
persons performing similar functions) of the issuer thereof, whether or not the
right so to vote exists by reason of the happening of a contingency, but
excluding any Permitted Investment.
"Taxes" means all federal, state and local or foreign income, payroll,
withholding, excise, sales, use, real and personal property, use and occupancy,
business and occupation, mercantile, real estate, capital stock and franchise or
other taxes, including interest and penalties thereon, and including estimated
taxes thereof.
"Unfunded Liability" means, with regard to any Plan, the excess of the
present value of accrued benefits under the plan over the current value of the
Plan's assets. Whenever this Agreement requires the amount of any Unfunded
Liability to be determined, it shall be determined as of the beginning of the
most recent Plan year on the final actuarial valuation prepared for the Plan for
funding purposes.
Whenever any agreement, mortgage, deed of trust, assignment of lease,
promissory note, subordination agreement, pledge agreement, intercreditor
agreement, or other instrument or document is defined in this Credit Agreement,
such definition shall be deemed to mean and include, from and after the date of
an amendment, restatement, or modification thereof, such agreement, mortgage,
subordination agreement, pledge agreement, assignment of sublease, promissory
note or other instrument or document as amended, restated or modified. To the
extent that the plural of any term defined herein
37
<PAGE> 12
is not defined in this Credit Agreement, that usage of the plural in this Credit
Agreement shall mean the plural of the singular term so defined and if the
defined term is plural, usage of the singular of such term shall mean the
singular thereof, in each case as the context so requires. The words "hereof",
"herein" or similar words shall refer to this Credit Agreement and references to
Sections or Articles shall mean Sections or Articles of this Credit Agreement.
Section 1.02 ACCOUNTING TERMS. Any accounting terms used herein and not
defined herein shall have the meaning ascribed to them by, and be determined in
accordance with, GAAP. All computations made pursuant to this Agreement shall be
made in accordance with GAAP consistently applied and all balance sheets and
other financial statements shall be prepared in accordance with GAAP
consistently applied except, with respect to interim financial statements, for
normal recurring year-end adjustments.
Section 1.03 APPOINTMENT OF PROPERTY ADVISORS AS REPRESENTATIVE. Each
of the Borrowers, jointly and severally, hereby appoints Property Advisors as
their respective agent and representative (the "Representative") for the purpose
of giving and receiving notice relating to this Credit Agreement, to receive the
proceeds of any advance of Loan, making any election of any Interest Option and
to do other things that either of the Borrowers may do under this Credit
Agreement. All references to the Representative and to Property Advisors in this
Credit Agreement when the context so indicates that it is acting as agent and
Representative for itself and the other Borrower shall be deemed to be a
reference to all of the Borrowers. Each of the Borrowers, jointly and severally,
agrees that each shall be bound and obligated by the acts of the Representative
relating to this Credit Agreement and hereby confirm and ratify any acts the
Representative shall make in such capacity. No revocation or modification of the
foregoing appointment of Property Advisors as Representative, the revocation or
acceptance of such appointment by Property Advisors as the Representative and
the effect thereof, shall be effective as to the Bank without the prior written
consent of the Bank thereto.
ARTICLE II
----------
CREDIT FACILITY
---------------
Section 2.01 Amounts. The Bank hereby establishes its commitment (the
"Commitment") in respect of the Credit Facility. The aggregate amount of the
Commitment shall be TEN MILLION DOLLARS ($10,000,000), but that amount may be
38
<PAGE> 13
reduced from time to time pursuant to Section 2.02 and the Commitment may be
terminated pursuant to Article 11.
Section 2.02 REDUCTION. The Borrowers shall have the right at all times
to permanently and irrevocably reduce the Commitment in whole or in part by
giving written notice of the reduction to the Bank at least one (1) Business Day
prior to the reduction, each such reduction to be equal to at least $1,000,000.
Concurrently with each reduction, the Borrowers shall prepay the amount, if any,
together with interest thereon, by which the Outstanding Amount exceeds the
Commitment as so reduced. Section 2.11 shall apply to each such prepayment.
Section 2.03 SINGLE LOAN. The Outstanding Amount borrowed by the
Borrowers from the Bank under the Commitment shall constitute a single loan from
the Bank regardless of how many Advances have been borrowed or repaid or LCs
have been issued or are outstanding.
Section 2.04 ADVANCES; LCS; REVOLVING PERIOD. The Borrowers may obtain
Borrowings consisting of (i) Advances in respect of the Revolving Loan or (ii)
LCs during a period (the "Revolving Period") commencing as of the Closing Date
until (i) the termination of the Commitment pursuant to any provision hereof or
(ii) September 15, 1997, whichever shall first occur, whereupon the Commitment
shall be terminated and no longer be in effect. All Borrowings shall be repaid
in accordance with Section 2.17. Each Borrowing shall be made solely to make
Permitted Investments as set forth in Section 2.26. Each Borrowing shall be in
an amount of not less than $250,000 nor more than the lesser of (i) $5,000,000
or (ii) one hundred percent (100%) of the Acquisition Cost of the Permitted
Investment. The Representative shall give the Bank notice on or before 12:00
noon Cleveland time on the date of a Borrowing, subject to Section 2.08. Subject
to the other provisions hereof, during the Revolving Period, Borrowings may be
borrowed and repaid (in accordance with Section 2.11) and new Borrowings
borrowed so long as the Outstanding Amount outstanding at any one time does not
exceed the Commitment.
Section 2.05 INTEREST ON THE REVOLVING LOAN. The Borrowers shall pay
interest on the Revolving Loan at the rate per annum determined on the basis of
either the (i) Prime Rate and/or (ii) the Overall Libor Rate, as applicable in
accordance with the other provisions of this Agreement (the "Available Rates").
Section 2.06 ELECTION OF OVERALL LIBOR RATE FOR REVOLVING LOAN. (i)
Subject to the terms and conditions stated in this Section 2.06 and otherwise in
this Article II, the Borrowers may elect to have interest on an Advance to be
determined on the basis of an
39
<PAGE> 14
Overall Libor Rate. In no event shall more than twenty Overall Libor Rates be in
effect for the Revolving Loan at any time. If no election is made by the
Borrowers as to the Interest Option for determination of interest on an Advance,
interest thereon will be determined at the Prime Rate.
(ii) The minimum principal amount of an Advance initially upon which
interest may be determined on an Overall Libor Rate shall be $250,000 and in
multiples of $100,000 in excess thereof. The Libor Rate Periods which the
Representative may elect for interest to be determined on an Overall Libor Rate
are approximately seven, fourteen or twenty-one days and one month, two month,
or three months. No Libor Rate Period shall end on a date after the due date of
the Advance for which an Overall Libor Rate is in effect. The Borrowers shall
have no right to elect the use of an Overall Libor Rate if any Event of Default
or Possible Default shall exist at the time of election or immediately upon the
effectiveness thereof.
(iii) Each election of an Overall Libor Rate shall be made by written
or telephonic notice (if telephonic, then promptly confirmed in writing) to the
Bank received by it not later than 11:00 a.m. Cleveland time three (3) Business
Days before the date the Representative desires to select as the Effective Date
for such Overall Libor Rate. The Representative, by giving a notice of election,
expressly accepts the particular Overall Libor Rate elected regardless of any
change in financial conditions or markets that may have affected such Overall
Libor Rate after the giving of notice but prior to the Effective Date thereof.
Each notice of election shall specify the principal amount of such Revolving
Loan to which such Overall Libor Rate is applicable and the period for which
such Overall Libor Rate shall be effective.
Section 2.07 [Omitted]
Section 2.08 Limits on Overall Libor Rate Elections. The right of the
Borrowers to elect the use of an Overall Libor Rate for the purposes of
determining interest on the Revolving Loan shall at all times be subject to the
following:
(I) availability of funding or its functional equivalent
to the Bank to allow the election of such Overall
Libor Rate;
(II) that the basis for determining such Overall Libor
Rate will adequately and fairly reflect the cost to
the Bank of maintaining or funding the Overall Libor
Rate so elected; and
40
<PAGE> 15
(III) the Bank does not reasonably believe that it is
prohibited from or otherwise restricted by applicable
law or regulatory requirement in allowing the Bank to
elect such Overall Libor Rate.
Section 2.09 COMPENSATION; ILLEGALITY. (a) If, after the date hereof,
there shall be introduced or changed any treaty, statute, law, regulation or
other governmental requirement, or there shall be any change in the
interpretation or administration thereof by any governmental authority charged
with the administration or interpretation thereof, or there shall be made any
request from any central bank or other lawful governmental authority having
jurisdiction over the Bank, this Credit Agreement, the Revolving Loan or the
Revolving Note, which introduction, change or compliance shall, upon becoming
effective, (i) impose, modify or deem applicable any reserve or special deposit
or other requirements against assets held by or deposits in or loans by the Bank
or (ii) subject the Bank to any tax, duty, fee, deduction or withholding or
(iii) change the basis of taxation of payments due from the Borrowers (otherwise
than by a change in taxation of the overall net income of the Bank) or (iv)
impose on the Bank any penalty in respect of any maintaining the Revolving Loan,
and any such event increases the cost to the Bank to maintain the Revolving Loan
or reduces the amount of principal or interest received by the Bank in respect
of this Credit Agreement or the Revolving Loan, then upon the Bank's demand, the
Borrowers shall pay to the Bank from time to time such additional amounts as
will compensate and reimburse the Bank for such increased cost or reduced
amount. Each demand for compensation shall be accompanied by the Bank's
certificate setting forth in reasonable detail the amount to be paid by the
Borrowers and the computations used in determining the amount, which certificate
shall be Conclusive. In determining any such amount, the Bank may use any
reasonable averaging and attribution methods.
(b) In the event that any applicable law treaty, rule or regulation
(whether domestic or foreign) now or hereafter in effect and whether or not
presently applicable to the Bank or any interpretation or administration thereof
by any governmental authority charged with the interpretation or administration
thereof, or compliance by the Bank with any guideline, request or directive of
any such authority (whether or not having the force of law), affects or would
affect the amount of capital required or expected to be maintained by the Bank
or any corporation controlling the Bank, as the case may be, and the Bank
determines that the amount of such capital is increased by or based upon the
existence of the Bank's obligations under this Agreement and such increase has
the effect of reducing the rate of return on the Bank's or such controlling
corporation's capital as a consequence of its obligations hereunder to a level
below that which the Bank or such controlling corporation could have achieved
but for such circumstances (taking into consideration its policies with respect
to capital adequacy) by an amount deemed by the Bank to be material, then the
Borrower shall pay to the Bank, from time to time, upon request by the Bank
additional
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amounts sufficient to compensate the Bank for any increase in the amount of
capital and reduced rate of return which the Bank reasonably determines to be
allocable to the existence of the Bank's obligations hereunder.
(c) In the event that any applicable law, treaty, rule or regulation
(whether domestic or foreign) now or hereafter in effect and whether or not
presently applicable to the Bank, or any interpretation or administration
thereof by any governmental authority charged with the interpretation or
administration thereof, or compliance by the Bank with any guideline, request or
directive of such authority (whether or not having the force of law), including,
without limitation, exchange controls, shall make it unlawful for the Bank to
maintain or offer the Revolving Loan under this Credit Agreement, the Bank may,
upon the occurrence of such an event, refuse to offer the Revolving Loan to the
Borrowers or to maintain the Revolving Loan and, in the event that the part of
the Revolving Loan that it is unlawful to maintain are only those Advances at an
Overall Libor Rate, the Borrower may convert such Advances to bear interest at
the Prime Rate subject to the provisions of Section 2.13.
Section 2.10 INTEREST PAYMENT DATES. Interest on the Advances that is
being determined by an Overall Libor Rate shall be paid in arrears to the Agent
at the end of each Libor Rate Period and on the Due Date. If any Libor Rate
Period for an Overall Libor Rate would end on a date that is not a Business Day
then such Libor Rate Period shall end on the next succeeding Business Day unless
such next succeeding Business Day would occur in the next succeeding calendar
month in which case the Libor Rate Period will end on the immediately preceding
Business Day. Interest on the Revolving Loan that is being determined on the
Prime Rate shall be paid in arrears to the Bank on the first day of each month
or the next succeeding Business Day if such date is not a Business Day, prior to
the payment in full of the Revolving Loan. All unpaid and accrued interest shall
be due and payable on the respective final maturity or acceleration of the
Revolving Loan.
Section 2.11 VOLUNTARY PREPAYMENTS. Subject to the provisions contained
in this Section 2.11, the Borrowers, at their option, may prepay without premium
or penalty all or any part of the Revolving Loan upon which interest is being
determined at Prime Rate. Upon any prepayment of any Advance (or any part
thereof) upon which interest is being determined in accordance with an Overall
Libor Rate, the Borrowers will pay to the Bank the Overall Libor Rate Indemnity.
The Borrower shall give the Bank notice on or before 1:00 p.m. Cleveland time
not less than one (1) Business Day prior to any voluntary prepayment of the
Revolving Loan. Any notice of payment or payment made after 1:00 p.m. Cleveland
time will be deemed made as of the next following Business Day.
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Section 2.12 APPLICATION OF PAYMENTS TO REVOLVING LOAN. The payments
of principal required on the Revolving Loan will be applied in the following
order of priority:
(A) to the principal amount of each Advance upon which
interest is determined in accordance with an Overall Libor Rate having
a Libor Rate Period ending on the date such payment of principal is
due;
(B) to the principal amount of each Advance upon which
interest is being determined in accordance with the Prime Rate; and
(C) lastly, any remaining amount shall be applied as a
prepayment to the principal amounts of Advances upon which interest is
being determined in accordance with an Overall Libor Rate that is in
excess of the amounts specified in clause (A) above.
Section 2.13 OVERALL LIBOR RATE INDEMNITY. The Borrowers shall
compensate and pay to the Bank any costs and expenses (whether internal or
external) (an "Overall Libor Rate Indemnity"), as determined by the Bank in its
sole discretion (including, without limitation, loss of profit, any interest
paid by the Bank to lenders of funds borrowed by it to fund and carry the
portion of the Revolving Loan upon which interest is being determined on an
Overall Libor Rate and any loss sustained by the Bank in connection with the
reemployment of such funds), which the Bank may sustain if: (1) any payment or
prepayment of any Advance bearing interest at the Overall Libor Rate (including,
without limitation, as a consequence of any conversion of an Advance bearing
interest at an Overall Libor Rate to an Advance bearing interest at an Prime
Rate or any Event of Default or Possible Default under this Agreement) occurs on
a date which is not the last day of a Libor Rate Period applicable thereto or
(2) any repayment of an Advance is not made on the Due Date or any date
specified in a notice of repayment given by the Borrowers.
Section 2.14 INTEREST CALCULATIONS. All of the interest payable on the
Revolving Loan shall be computed on a 360-day-per-year basis for the actual
number of days elapsed. All payments to be made by the Borrower under this
Credit Agreement and the Revolving Note shall be made in immediately available
funds by 1:00 p.m., Cincinnati time, to the Bank and any payment received after
such time shall be deemed received on the next following Business Day. Except as
set forth in Section 2.10 above, whenever any payment under this Credit
Agreement and the Revolving Note shall be due on any day that is not a Business
Day, the date for payment thereof shall be extended to the next succeeding
Business Day. If the due date for any such payment is so extended or
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extended for any other reason, including operation of law, or any payment is
received after a due date, interest shall accrue and be payable on demand for
such extended time.
Section 2.15 LATE CHARGE; POST-DEFAULT RATE. In the event that any
payment of principal or interest on the Revolving Loan, including but not
limited to any Advance is not paid on the Due Date or the maturity date
(including any applicable grace period), the Borrowers agree to pay a late
charge of $500. After the occurrence and during the continuance of any Event of
Default, the Revolving Loan shall bear interest at a rate equal to the
Post-Default Rate from and after the date of such Event of Default, which
interest shall be due on demand but paid not less frequently than monthly on the
first day of each calendar month.
Section 2.16 COMMITMENT FEE.The Borrowers shall pay to the Bank a
commitment fee for the Commitment as follows:
(i) the commitment fee will be based upon the average daily
difference between (A) the Outstanding Amount and (B) the Commitment in
effect;
(ii) the commitment fee will be computed at the rate of 1/4 of
1% per annum (computed on the basis of a 360 day year and the actual
number of days elapsed); and
(iii) the commitment fee will be paid monthly in arrears
commencing on October 31, 1995, thereafter on the last day of each
month and on the termination of the Commitment.
Section 2.17 REPAYMENT OF BORROWINGS; REPAYMENT OF THE REVOLVING LOAN;
THE REVOLVING NOTES. Each Borrowing may remain outstanding for a maximum period
of three hundred (300) days after the date (the "Due Date") the Borrowing is
obtained (the "Maximum Borrowing Term"). Each Borrowing shall be repaid, in the
case of Advances or any drawing made on an LC with respect to any LC issued in
respect of a Borrowing, on or prior to the conclusion of the Maximum Borrowing
Term applicable thereto. LC shall be surrendered or otherwise unavailable for
drawing on the conclusion of the Maximum Borrowing Term applicable thereto. In
no event shall any Maximum Borrowing Term conclude after the end of the
Revolving Period. The unpaid principal balance of the Revolving Loan shall be
due and payable on the last day of the Revolving Period. In addition, at any
time and from time to time, the Borrowers shall no later than the next following
Business Day repay the Revolving Loan to the extent that the Outstanding Amount
exceeds the Commitment. The obligation of the Borrowers to pay the principal of
and interest on the Revolving Loan to the Bank shall also be evidenced
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by the Revolving Note to be issued to the Bank and which shall be dated the
Execution Date. The unpaid principal balance of and interest accrued on the
Revolving Loan shall be determined by the ledgers and records of the Bank as
accurately maintained in accordance with the Bank's ordinary practices to
reflect Borrowings and under this Credit Agreement and shall be Conclusive.
Section 2.18 LETTERS OF CREDIT. The Bank agrees that so long as all of
the Commitment remain in effect, issue such letters of credit (each, an "LC")
for the account of the Borrowers, as it may from time to time request subject,
however, to the conditions of this Agreement.
Section 2.19 [OMITTED]
Section 2.20 MAXIMUM. The Bank shall not issue any LC if, after giving
effect thereto, the aggregate undrawn balance of all then outstanding LCs and
unpaid Advances would exceed Ten Million Dollars ($10,000,000).
Section 2.21 TERM. Each LC shall have a stated expiration date that is
not in excess of five (5) days fewer than the Maximum Borrowing Term applicable
thereto. No LC shall permit any draft to be drawn thereunder on a date that is
later than 290 days after the date of the LC nor later than the third (3rd)
banking day immediately preceding the end of the Revolving Period.
Section 2.22 FORM. Each LC shall be issued in such form as Bank may
reasonably require and shall be a standby letter of credit issued to acquire a
Permitted Investment.
Section 2.23 STANDARD FEES. The Borrowers agree, in respect of each LC
and the drafts thereunder, to pay the Bank such issuance, amendment,
negotiation, cancellation, draw, acceptance, telex and similar transactional
fees as are generally charged by the Bank under its standard fee schedule as in
effect from time to time.
Section 2.24 COMMISSIONS. The Borrowers agree, in respect of each LC
and the drafts thereunder, to pay the Bank a commission which shall be based on
the stated face amount, shall be computed at the rate of three-quarters percent
(.75%) per annum and shall be paid in advance on the date of issuance and shall
be non-refundable.
Section 2.25 REIMBURSEMENT. The Borrowers agree that whenever the Bank
pays any draft or other item pursuant to or otherwise in respect of any LC, the
Borrowers will reimburse the Bank for the amount so paid immediately. In the
event that any such reimbursement is not made, then the Borrowers shall be
deemed to have made a
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Borrowing of a Revolving Loan in a principal amount equal to the amount to be
reimbursed, subject to the terms and conditions of this Agreement, including,
but not limited to, the Due Date for such Borrowing being the Due Date
originally applicable to such LC. Prior to such Due Date, interest on such
Borrowing will be determined on the basis of the Prime Rate, and thereafter of
the Post-Default Rate.
Section 2.26 PURPOSE OF THE REVOLVING LOAN. The Revolving Loan, and
each Borrowing thereunder (whether an Advance or an LC), shall be used solely
and exclusively to acquire Permitted Investments and for no other purpose. Each
Borrowing shall be in an amount not in excess of the Acquisition Cost of a
Permitted Investment, and in no event not in excess of Five Million Dollars
($5,000,000). Each Borrowing will be reasonably concurrent with the acquisition
of the Permitted Investment for which such Borrowing is being used to pay the
Acquisition Cost. If such Permitted Investment is not acquired for any reason,
any Borrowing made in respect thereof shall be repaid immediately. All
conditions to Borrowing set forth in Section 5 shall have been complied with by
the Borrowers on or prior to the Effective Date.
Section 2.27 EVENT OF DEFAULT OR POSSIBLE DEFAULT. The Borrowers shall
not be entitled to obtain any Advances or LC, or elect an Overall Libor Rate if,
at the time of so obtaining or requesting such Advance or LC or electing any
Overall Libor Rate, an Event of Default or Possible Default shall then exist or
immediately thereafter exist. Receipt by the Borrowers of any Advances or LC, or
election by the Borrowers of an Overall Libor Rate shall, each in and of itself,
constitute a continuing representation and warranty by the Borrowers that the
representations and warranties in Article IV continue (except to the extent
given as of and limited to a specific date) to be accurate in all material
respects and that the Borrowers then are entitled under this Credit Agreement to
obtain the Advances or elect an Overall Libor Rate, as the case may be.
ARTICLE III
-----------
COLLATERAL SECURITY
-------------------
Section 3.01 COLLATERAL FOR BANK'S BENEFIT. All Collateral assigned,
pledged or otherwise granted under or in connection with this Credit Agreement
shall be granted to and/or held by, as the case may be, the Bank for its sole
benefit and not in trust or for the benefit for the Borrowers, any Affiliate or
any other Person.
Section 3.02 DEBT SECURED. All collateral and property assigned,
mortgaged, pledged or otherwise granted under or in connection with this Credit
Agreement shall secure:
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(i) the payment of all principal of and interest owing or
outstanding on any of the Revolving Note or the Revolving Loan,
including, without limitation, future advances made by the Bank which
are or may be evidenced by said Revolving Note, regardless of whether
the Bank was obligated to make such advances;
(ii) the payment of all amounts from time to time owing to the
Bank under or in connection with this Credit Agreement or any of the
Collateral Security Documents;
(iii) the payment by the Borrowers of all reasonable costs and
expenses (including attorneys' fees) incurred by the Bank in the
collection of the Revolving Loan or any of the Revolving Note or in the
enforcement of its rights under this Credit Agreement or the other Loan
Documents;
(iv) the payment by the Borrowers of all sums expended or
advanced by the Bank pursuant to the terms of this Credit Agreement,
any Collateral Security Document or any other Loan Document;
(v) the performance by the Borrowers of all their obligations
under this Credit Agreement, the Revolving Note, the Collateral
Security Documents and the other Loan Documents;
(vi) the performance by the Guarantor of all its obligations
under the Guaranty; and
(vii) the payment of any and all other indebtedness (including
principal, interest or fees, if any) of any kind or description now or
hereafter owing by the Borrowers to the Bank, including, without
limitation, overdrafts, amounts owing under other notes, bonds,
debentures, letters of credit, interest rate protection arrangements or
other evidences of indebtedness and contingent obligations.
All of the debt, liabilities and obligations described in clauses (i)
through (vii) above shall be sometimes hereinafter referred to as the
"Obligations."
Section 3.03 Collateral. The Borrowers hereby grant and agree to grant
to the Bank a security interest and/or other lien in, and pledge and assignment
of, all Permitted Investments, whether now owned or existing or hereafter
acquired or arising (collectively the "Collateral") which security interests,
liens, pledges and assignments shall have a first priority subject only to
Construction Loan Liens. Upon the request of the Bank at any time or from time
to time, the Borrowers agree, (A) to promptly execute and deliver all
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such agreements, documents and instruments as the Bank shall from time to time
reasonably request and (B) to take such other actions (including, without
limitation, delivering to the Bank stock certificates, securities, chattel paper
and other instruments or documents in their possession or control) and to give
such further assurances as the Bank shall from time to time reasonably request
to evidence, obtain and/or to perfect the security interests, liens, pledges and
assignments of such Permitted Investments.
Upon the request of the Bank, the Borrowers will furnish to the Bank a
signed opinion of counsel (reasonably satisfactory to the Bank) licensed to
practice in the state where the real estate which is the subject of the
Permitted Investment is located as to: (1) the Bank's security interest in the
Permitted Investment is the legal, valid and binding obligation of the
Borrowers, enforceable in accordance with its terms, subject to such
assumptions, limitations and qualifications as counsel to the Bank may
reasonably approve, (2) the Bank is not required to qualify to do business in
such state or province solely as a result of such security interest or the
exercise of any remedies provided therein, (3) the Bank shall not be subject to
any taxes levied in such state or any political subdivision thereof solely by
reason of such security interest, (4) the Bank will not be barred from enforcing
such security interest because a tax, assessment or charge has not been paid,
and other matters as the Bank shall reasonably request.
Section 3.04 COSTS. The Borrowers shall pay, to the fullest extent
permitted by law, on demand all costs, fees and expenses incurred by the Bank
and paid to third Persons in connection with the taking and/or perfection of the
Bank's security interest in the Collateral, including, without limitation:
(i) fees and expenses incurred in preparing Collateral
Security Documents from time to time (including,
without limitation, reasonable attorneys' fees
incurred in connection with preparing such
Collateral Security Documents);
(ii) all filing, recording and/or records search fees;
(iii) reasonable lawyers' fees in connection with all legal
opinions required pursuant to the terms of this
Agreement;
(iv) appraisal costs;
(v) all costs and expenses incurred in connection with
compliance with paragraph (1) of Section 3.03; and
(vi) all other related costs, fees and expenses.
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Section 3.05 INCONSISTENT PROVISIONS. In the event that the provisions
of any Collateral Security Document directly conflict with any provisions of
this Credit Agreement, the provision of this Credit Agreement shall govern.
Section 3.06 COLLATERAL SECURITY DOCUMENTS. Each mortgage, security
agreement, pledge agreement, collateral assignment, other agreement, document or
instrument executed and/or delivered in connection with any of the foregoing
shall be referred to collectively as the "Collateral Security Documents" and
singly as a "Collateral Security Document."
ARTICLE IV
----------
REPRESENTATIONS AND WARRANTIES OF THE BORROWER
----------------------------------------------
The Borrowers represent and warrant to the Bank as follows:
Section 4.01 ORGANIZATION OF THE COMPANIES; BUSINESS AND PROPERTY.
Property Advisors is duly organized and validly existing corporation in good
standing under the laws of the State of Ohio. Fund is duly organized and validly
existing as a limited partnership in good standing under the laws of the State
of Delaware. The Borrowers have all requisite power and authority to execute and
deliver the Loan Documents executed or to be executed by it and to carry out the
provisions thereof. The Borrowers have full power, authority, and legal right to
own and operate their respective properties and to carry on the business in
which they engage and intend to engage. The Borrowers are qualified or otherwise
entitled to do business and are in good standing in the State of Ohio and each
other state where such qualification is required by reason of the Borrowers'
business, activities, or ownership of property, other than such jurisdictions in
which the failure to qualify would not have a Material Adverse Effect.
Section 4.02 AUTHORIZATION; VALIDITY. The Borrowers have taken all
action necessary to authorize the execution, delivery and performance by them of
the Loan Documents executed and to be executed by them. This Credit Agreement
is, and each of the other Loan Documents when executed and delivered will be,
legal, valid and binding upon the Borrowers and enforceable against the
Borrowers in accordance with their respective terms. No consent, approval, or
authorization of, or registration or declaration with, any governmental
authority or other Person is required in connection with the execution, delivery
and performance by the Borrowers of any of the Loan Documents.
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Section 4.03 PERMITS. The Borrowers require no permits, licenses or
authorizations from any federal, state or local governmental authority (a
"Governmental Authority") to conduct their business as it is presently conducted
or intend to be conducted and no default exists under any such permit, license
or authorization, which, either the failure of other Borrowers to have or the
default under, would have a Material Adverse Effect. No Borrower is subject to
any outstanding or, to the knowledge of the Borrowers, threatened citation by
any Governmental Authority which would have a Material Adverse Effect.
Section 4.04 FINANCIAL STATEMENTS. The Consolidated balance sheet of
the Guarantor as of June 30, 1995 and the related statements of revenues and
expenses and changes in financial position for the periods then ended and the
auditors' reports with respect to the fiscal year ended March 31, 1995, copies
of which have heretofore been furnished to the Bank, are complete and correct
and fairly present the Consolidated financial condition, changes in financial
position and results of operations of the Guarantor at such dates and for such
period, and were prepared in accordance with GAAP.
Section 4.05 FINANCIAL CONDITION. Except for Liabilities created
pursuant to this Credit Agreement and other Permitted Liabilities, the Borrowers
have no Liabilities, contingent or otherwise, whether or not required to be
reflected in accordance with GAAP, nor any outstanding or existing commitments
for the purchase of land, buildings, equipment, materials, or supplies, or any
contracts for services, except, in the case of Property Advisors, for its
obligations as the general partner and the manager of the Corporate Tax Funds.
Section 4.06 NO ADVERSE CHANGES. Since June 30, 1995, there has been no
Material Adverse Effect in the condition, financial or otherwise, of the
Borrowers or the Guarantor.
Section 4.07 TITLE TO PROPERTIES. The Borrowers will have at the time
of acquisition thereof good and marketable title to all Permitted Investments.
The Borrowers will not own any other properties and assets except, in the case
of Property Advisors, its interest as general partner and manager of the
Corporate Tax Funds. Except for Permitted Exceptions, there are no Liens of any
nature whatsoever on any of the properties or assets of the Borrowers.
Section 4.08 LITIGATION. There are no outstanding judgments against,
or actions, suits or proceedings pending, or to the best knowledge of the
Borrowers, threatened against or affecting any of the Companies, at law or in
equity or before or by any federal, state, local or other governmental
department, commission, board, bureau, agency or instrumentality, which, if
adversely determined, involves the possibility of any judgment
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or liability not fully covered by insurance or which may result in any Material
Adverse Effect.
Section 4.09 NATURE OF BUSINESS OF BORROWER. Property Advisors has been
organized solely for the purposes of acting as general partner and manager of
the Corporate Tax Funds and to acquire Permitted Investments for ultimate
transfer to Fund Entities. Property Advisors is the sole general partner of
Fund. Fund has been organized solely for purposes of investing in Permitted
Investments and being invested in primarily by corporate investors. The
Borrowers do not, and have no intention, to conduct any other business or
activities. The Borrowers have no employees. The Borrowers do not maintain any
Plans. Any and all business activities conducted by the Borrowers are undertaken
by employees of the Guarantor or its other Subsidiaries, for which the Borrowers
reimburse them as Ordinary Course Liabilities. The Borrowers have delivered
true, correct and complete copies of the Governing Documents to the Bank.
Section 4.10 COMPLIANCE WITH OTHER INSTRUMENTS. None of the Companies
is in material default in the performance, observance, or fulfillment of any of
the material obligations, covenants, or conditions contained in (i) any evidence
of Indebtedness for Borrowed Money, or (ii) any agreement, document, lease or
other instrument which a default under, violation of which or a failure to
perform on the part of the Companies would have a Material Adverse Effect.
Neither the execution and delivery of this Credit Agreement or the other Loan
Documents by the Borrowers or the Guarantor, nor the consummation of the
transactions contemplated thereby, nor will compliance with the terms and
provisions thereof violate the provisions of any applicable law or of any
material applicable order or regulations of any governmental authority having
jurisdiction of the Companies or, except where no Material Adverse Effect would
result therefrom, conflict with or result in a breach of any agreement or
instrument to which any of the Companies is now a party, or, except where no
Material Adverse Effect would result therefrom, will constitute a default
thereunder, or will result in the creation or imposition of any lien, charge, or
encumbrance of any nature whatsoever upon any of the properties or assets of any
of the Companies except in favor of the Bank.
Section 4.11 MATERIAL RESTRICTIONS. Except for the Loan Documents and
the Governing Documents, the Borrowers are not a party to any agreement or other
instrument or subject to any other restriction which causes a Material Adverse
Effect.
Section 4.12 CORRECTNESS OF DATA FURNISHED. This Credit Agreement and
all Schedules and Exhibits hereto do not contain any untrue statement of a
material fact or omit a material fact necessary to make the statements contained
therein or herein not
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misleading; and there is no fact not otherwise disclosed in writing to the Bank
which, to the knowledge of the Borrowers, would cause a Material Adverse Effect.
Section 4.13 REGULATION U, ETC. The Borrowers do not and will not own,
nor do they have any intention of acquiring, any "margin stock" within the
meaning of Regulation U (12 CFR Part 221) of the Board of Governors of the
Federal Reserve System (herein called "margin stock"). None of the proceeds of
any of the Revolving Loan will be used, directly or indirectly, by the Borrowers
for the purpose of purchasing or carrying, or for the purpose of reducing or
retiring any indebtedness or other liability which was originally incurred to
purchase or carry, any margin stock or for any other purpose which might cause
the transactions contemplated hereby to be considered a "purpose credit" within
the meaning of said Regulation U, or which might cause this Credit Agreement to
violate Regulation G, Regulation U, Regulation T, Regulation X, or other
regulation of the Board of Governors of the Federal Reserve System or the
Securities Exchange Act of 1934. Upon request, the Borrower will promptly
furnish the Bank with a statement in conformity with the requirements a Federal
Reserve Form U-I referred to in said Regulation U.
Section 4.14 SECURITIES ACT, ETC. Neither the registration of any
security under the Securities Act of 1933, as amended, or any other federal,
state, or local securities laws, nor the qualification of the Loan Documents, as
amended, is required in connection with the Revolving Loan or the issuance and
delivery of the Revolving Note pursuant hereto.
Section 4.15 NO DEFAULT. No Possible Default or Event of Default has
occurred and is continuing.
Section 4.16 PRINCIPAL PLACE OF BUSINESS. The principal places of
business and chief executive offices of the Borrowers are and will be at all
times located in Cuyahoga County, Ohio. The books and records of the Borrowers
and all records of Permitted Investments of the Borrowers are housed at such
chief executive offices.
Section 4.17 BROKERS, ETC. The Borrowers have not caused the Bank to be
under any obligation to pay any broker's fees, finder's fee or commission in
connection with the Revolving Loan or the transactions contemplated by the
Credit Agreement.
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ARTICLE V
---------
CONDITIONS TO BORROWING
-----------------------
Part I
CONDITIONS PRECEDENT TO EFFECTIVENESS OF THE REVOLVING LOAN. The
obligation of the Bank to make the first Advance or issue the first LC shall be
subject to the satisfaction of the following conditions prior to or concurrently
therewith.
Section 5.01 REPRESENTATIONS AND WARRANTIES. The representations and
warranties contained in Article IV shall be true in all material respects on and
as of the time of the first Advance hereunder, with the same effect as if made
on and as of such date unless stated as of a specific date.
Section 5.02 NO DEFAULTS. There shall exist no condition or event
constituting an Event of Default or Possible Default.
Section 5.03 PERFORMANCE. The Borrowers shall have performed and
complied with all agreements and conditions contained herein required to be
performed or complied with by it prior to or at the time of the first Advance.
Section 5.04 CLOSING CERTIFICATE. The Borrowers shall have delivered to
the Bank a certificate dated the date of the first Advance and signed by an
Authorized Officer, certifying to the matters covered by the conditions
specified in Sections 5.01, 5.02 and 5.03.
Section 5.05 REVOLVING NOTE; GUARANTY. The Bank shall have received the
Revolving Note and the Guaranty, accompanied by all documents and instruments
required thereunder, duly executed and delivered by the parties thereto.
Section 5.06 DISBURSEMENT INSTRUCTIONS; FUNDING DOCUMENTATION. The Bank
shall have received disbursement instructions and Funding documentation
described in Part III of this Article V from the Borrowers evidencing that the
first Borrowing is being used in accordance with Section 2.26 and otherwise
satisfies the conditions for funding.
Section 5.07 OPINIONS OF COUNSEL FOR THE BORROWERS. The Bank shall have
received the favorable opinion of Henry Kerr, general counsel of the Guarantor,
as counsel for the Borrowers, in form attached as SCHEDULE 5.07.
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Section 5.08 CORPORATE PROCEEDINGS. The Borrowers and the Guarantor
shall have delivered to the Bank, all dated as of the Closing Date (or as of a
date recent to the Closing Date):
(i) a copy of its articles or certificate of incorporation,
or partnership certificate certified by an authorized public officer of
the state of its incorporation/organization;
(ii) certificates of good standing from the state of its
incorporation;
(iii) a copy of its by-laws or Code of Regulations certified
by its secretary;
(iv) a copy of the Governing Documents certified by the
Secretary of the General Partner;
(v) resolutions of its Board of Directors and General Partner
authorizing the execution, delivery and performance of the Loan
Documents to which it is a party and the consummation of the
transactions contemplated thereby, certified by its secretary; and
(vi) an incumbency certificate certifying the names of its
officers and their signatures, certified by its secretary.
Section 5.09 PAYMENT OF EXPENSES. The Borrowers shall have paid the
fees and expenses of Kahn, Kleinman, Yanowitz & Arnson Co., L.P.A.
Section 5.10 AMENDMENT OF GOVERNING DOCUMENTS. The Borrowers shall have
amended the Governing Documents to permit the Fund to be a Borrower under this
Credit Agreement and to make Borrowings for the purpose of acquiring Permitted
Investments, all in form and substance satisfactory to the Bank.
Section 5.11 GUARANTY FEE. The Borrowers shall have confirmed in
writing their agreement to pay the Guarantor an annual fee of $50,000 in
consideration of the Guarantor's execution and delivery of the Guaranty.
Section 5.12 OTHER DOCUMENTS. The Bank shall have received such other
certificates, opinions, agreements and documents as it shall reasonably request
and the Bank, in its sole discretion, shall be satisfied with the condition,
financial and otherwise, of the Borrowers.
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Part II
CONDITIONS PRECEDENT TO THE SUBSEQUENT ADVANCES OR OVERALL LIBOR RATE
ELECTION. Subsequent to the first Advance, the obligation of the Bank to make
additional Advances, issue an LC or implement the election of an Overall Libor
Rate shall be subject to the satisfaction of the following conditions prior to
or concurrently with such action:
Section 5.11 NO DEFAULTS. There shall exist no condition or event
constituting an Event of Default or Possible Default.
Section 5.12 PERFORMANCE. The Borrowers shall have performed and
complied with all material agreements and conditions contained herein required
to be performed or complied with by it prior to or at the time of such action.
Section 5.13 REPRESENTATIONS AND WARRANTIES. The representations and
warranties contained in Article IV shall be true in all material respects on and
as of the time of such action, with the same effect as if made on and as of such
date, unless stated as of a specific date, after giving effect to such updated
information, reflecting transactions not prohibited by the terms of this Credit
Agreement, as is necessary to make such representations and warranties true in
all material respects as of such date.
Section 5.14 CERTIFICATE. If requested by the Bank, the Borrowers shall
have delivered to the Bank a certificate dated the date of such action and
signed by an Authorized Officer, certifying to the matters covered by the
conditions specified in Sections 5.11, 5.12 and 5.13.
Section 5.15 DISBURSEMENT INSTRUCTIONS; FUNDING DOCUMENTATION. The Bank
shall have received disbursement instructions and documentation described in
Part III of this Article V from the Borrowers evidencing that the Borrowing is
being used in accordance with Section 2.26 and otherwise satisfies the
conditions for funding.
Part III
Funding Documentation for Purchases of Permitted Investments.
-------------------------------------------------------------
Section 5.16 DOCUMENTATION RELATING TO OPERATING ENTITIES. The
Borrowers shall deliver to the Bank the organizational documents (including but
not limited to partnership or operating agreement, management agreement and
similar documents) of each Operating Entity in which a Borrower is making a
Permitted Investment along with all documentation (including but not limited to
a duly completed subscription agreement)
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evidencing such Permitted Investment. The Borrowers shall also deliver to the
Bank a description of the project being undertaken by the Operating Entity and
any projections or analysis thereof prepared by the Operating Entity or the
Borrowers.
Section 5.17 CONSTRUCTION LOAN. If and when any construction loan is
being incurred by any Operating Entity, the Borrowers shall deliver to the Bank
a summary of the terms thereof, and to the extent that a Construction Loan Lien
is granted by the Borrowers to the Lender, then the Borrowers shall deliver to
the Bank a copy of all of the loan documents relating to such construction loan.
ARTICLE VI
----------
AFFIRMATIVE COVENANTS OF THE BORROWERS
--------------------------------------
Until all principal of and interest on the Revolving Loan and the
Revolving Note and all other obligations, liabilities and indebtedness of the
Borrowers to the Bank under this Credit Agreement have been paid in full,
including, without limitation, reimburse any drawing made or that may be made on
any LC, and the Commitment has expired:
Section 6.01 PAYMENT OF AMOUNTS DUE. The Borrowers will make all
payments of the principal of and interest on the Revolving Loan and the
Revolving Note promptly as the same become due under this Credit Agreement
and/or the Revolving Note.
Section 6.02 EXISTENCE, BUSINESS, ETC. The Borrowers will cause to be
done all things necessary to preserve and to keep in full force and effect its
corporate existence and rights. The Borrowers will comply in all material
respects with all federal, state, and local laws and regulations material to
their business now in effect or hereafter promulgated by any properly
constituted governmental authority having jurisdiction except to the extent that
compliance therewith is being contested in good faith by appropriate proceedings
or where the failure to comply would not have a Material Adverse Effect.
Section 6.03 CONDUCT OF BUSINESS. The Borrowers will at all times
comply with the representations and warranties set forth in Section 4.09. Prior
to making any material change in the Governing Documents or any organizational
document governing any Fund Entity or creating any new Fund Entity, Property
Advisors will give the Bank reasonably timely written notice thereof to allow
the Bank to determine the effect, if any, thereof on the Borrowers' obligations
under this Agreement and the other Loan Documents. If the Bank determines, in
good faith, that such proposed change will adversely affect the repayment of
the Revolving Loan, the Borrowers' ability to perform its obligations hereunder
or under any other Loan Document, the Bank's consent to such change shall be
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required prior to the effectiveness thereof. Neither Borrower will change the
nature of its business or the manner in which either one conducts its business.
Section 6.04 PAYMENT OF TAXES, ETC. The Borrowers will pay and
discharge all lawful Taxes, assessments, and governmental charges or levies
imposed upon them, or upon their respective income or profits, or upon any of
their respective properties, before the same shall become in default, as well as
all lawful claims for labor, materials, and supplies which, if unpaid, might
become a lien or charge upon such properties or any part thereof; provided,
however, the Borrowers shall not be required to pay and discharge any such tax,
assessment, charge, levy, or claim so long as the validity thereof shall be
contested in good faith by appropriate proceedings and there shall be set aside
on their respective books such reserves with respect thereto as are required by
GAAP. The Borrowers will in all events pay such tax, assessment, charge, levy or
claim before the property subject thereto shall be sold to satisfy any lien
which has attached thereto. Without limiting the foregoing, each of the
Borrowers will (a) timely file all returns required to be filed by it with
respect to all Taxes, (b) pay all Taxes shown to have become due pursuant to
such returns, and (c) pay all other Taxes for which a notice of assessment or
demand for payment has been received by the Borrowers, in each case the failure
of which would have a Material Adverse Effect; provided, however, the Borrowers
shall not be required to pay and discharge any such tax, assessment, charge,
levy, or claim so long as the validity thereof shall be contested in good faith
by appropriate proceedings and there shall be set aside on its respective books
such reserves with respect thereto as are required by GAAP. The Borrowers will
not (i) file any consent or agreement under Section 341(f) of the Code, (ii)
execute a waiver or consent extending any statute of limitations for any Tax
liability which remains outstanding, (iii) enter into a closing agreement with
any taxing authority, or (vi) file an election under 338(g) or Section
338(h)(10) of the Code or caused or permitted a deemed election under Section
338(e) thereof to occur, which, in any case, would have a Material Adverse
Effect.
Section 6.05 ACCOUNTS AND REPORTS OF THE BORROWERS. The Borrowers will
maintain a standard system of accounting in accordance with GAAP and furnish to
the Bank the following reports:
(i) As soon as available, and in any event within ninety
(90) days after the end of each Fiscal Year a
complete audited accountant's report with respect to
the Fund only, including without limitation, all
financial statements of the Fund, together with all
notes thereto, prepared in reasonable detail and
certified, without qualification, by Hausser +
Taylor or other independent certified public
accountants that are one of the "Big 6" national
firms (the "Accountant"), and
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with respect to Property Advisors, unaudited financial
statements (x) a balance sheet and (y) a statement of income
and expense, certified by an Authorized Officer. The
Borrowers shall also deliver or cause delivery to the Bank
of copies of any "management letters" issued by the
Accountant to the Borrowers, as soon as available, and in
any event within one hundred fifty (150) days after the end
of any Fiscal Year;
(ii) As soon as available, and in any event within forty-five
(45) days after the end of each Quarter, an unaudited report
for the most recently concluded Quarter, certified by an
Authorized Officer, which report shall contain (v) a balance
sheet of each Borrower as at the end of such Quarter, (w) an
income and expense statement of each Borrower for such
Quarter, including a year to date income and expense
statement, all prepared in accordance with GAAP subject to
normal recurring year-end adjustments, (x) a statement that
the review made in preparing and certifying such report has
not disclosed the existence of any condition or event which
constitutes an Event of Default or Possible Default, or, if
such a condition or event exists, specifying the nature
thereof, (y) a report of all Permitted Investments purchased
and/or sold during such Quarter and an estimate of Permitted
Investments that are to be purchased or sold during the next
following Quarter,
(iii) Immediately after a Borrower knows of, or shall have
knowledge of, the occurrence of any condition or event which
constitutes an Event of Default or Possible Default, notice
of such condition or event and the action which the Borrower
proposes to take with respect thereto;
(iv) Copies of all financial statements, audits, and public
reports which any of the Companies may have made of or
concerning their accounts, books, or records, and which they
have provided to any non-affiliated third party, but
excluding such items furnished solely to an Affiliate;
(v) Promptly upon request, such other information respecting the
business, properties, operations or condition (financial or
otherwise) of the Borrowers as the Bank may from time to
time reasonably request (all such information to be in such
form and detail as the Bank shall reasonably request).
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Section 6.06 INFORMATION AND INSPECTION. The Borrowers will furnish to
the Bank, from time to time, upon the request of the Bank, full information
pertinent to any covenant, provision, or condition of this Credit Agreement or
of any other loan document or to any matter in connection with their activities
and business, and at all reasonable times and, prior to the occurrence of a
Possible Default or Event of Default, upon not less than one Business Day's
notice but with no prior notice after the occurrence of a Possible Default or
Event of Default, and as often as the Bank may reasonably request, permit any
authorized representative designated by the Bank to visit and inspect (which
visits and inspections shall be at the Borrowers' sole expense after the
occurrence and during the continuance of any Possible Default or Event of
Default and at the Bank's sole expense at any other time) during normal business
hours any of their properties, including their books (and to take extracts
therefrom) and to discuss their affairs, finances, and accounts with their
officers and employees.
Section 6.07 NOTICE OF LITIGATION. The Borrowers will promptly notify
the Bank in writing of any litigation, legal proceeding or threat of legal
proceeding (i) with any Person, including, without limitation, the Governmental
Authorities and any member of the staff or any representative of any such
Person, involving the Borrowers, any Fund Entity or any Permitted Investment,
unless fully covered by insurance without reservation with deductibles of less
than Ten Thousand Dollars ($10,000).
Section 6.08 BANK AS PRIMARY DEPOSITORY. The Borrowers will maintain
all their respective accounts and other banking relationships (including,
without limitation, all operating accounts, demand and time deposit accounts,
certificate of deposit accounts, and safekeeping accounts) at the Bank.
Section 6.09 PAYMENT OF GUARANTY FEE. The Borrowers will pay to the
Guarantor the annual fee of $50,000 in consideration of its execution and
delivery of the Guaranty, and will provide evidence thereof to the Bank.
Section 6.10 FURTHER ASSURANCES. The Borrowers agree to execute and
deliver to the Bank any agreements, documents and instruments, including,
without limitation, additional Revolving Notes as replacement or substitutions
as may be required by the Bank, and to take such other actions as reasonably
requested by the Bank to effect the transactions contemplated hereby.
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ARTICLE VII
-----------
NEGATIVE COVENANTS OF THE BORROWERS
-----------------------------------
Until all principal of and interest on the Revolving Loan and the
Revolving Note and all other obligations, liabilities, and indebtedness of the
Borrowers to the Bank under this Credit Agreement have been paid in full
including, without limitation, reimburse any drawing made or that may be made on
any LC, and the Commitment has expired:
Section 7.01 LIMITATION OF LIABILITIES. The Borrowers will not create,
incur, assume, become or be liable in any manner in respect of, any Liabilities
except:
(i) Liabilities in respect of the Credit Facility;
(ii) unsecured current Liabilities ("Ordinary Course
Liabilities") to reimburse the Guarantor for services
used by the Borrowers incurred in the ordinary course
of its business (excluding Indebtedness for Borrowed
Money or represented by bonds, notes, or other
securities);
(iii) unsecured Liabilities for the purchase of Permitted
Investments; provided, however, that the aggregate
purchase price thereof is not in excess of the
aggregate of (1) the amount of the Revolving Loan
that is available for Borrowing, (2) Net Proceeds
from the sale of Permitted Investments that are in
excess of the amount of any Borrowing made in respect
of such Permitted Investment and (3) equity
contributions (or commitments for such contributions)
made by investors in the Fund;
(iv) unsecured current Liabilities to the Corporate Tax
Funds arising solely as a result of the Borrowers'
obligations as general partner and manager of the
Corporate Tax Funds;
(v) Liabilities for Taxes, to the extent that payment
thereof shall not yet be due or if the obligation to
pay is being contested in good faith by appropriate
proceedings and adequate reserves with respect
thereto shall have been set aside on the books of the
Borrowers but in any event only so long as the sale
of property is not imminent by reason of non-payment;
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Each of the foregoing types of indebtedness and liability
being referred to collectively as the "Permitted Liabilities."
Section 7.02 LIMITATION ON LIENS. The Borrowers will not create, incur,
assume, or suffer to be created, or incurred, or assumed, or to exist, any Lien
of any kind on any of its properties or assets, or own or acquire, or agree to
acquire any property of any character subject to or upon any mortgage,
conditional sale agreement, or other title retention agreement, except:
(i) any Lien granted to the Bank; and
(ii) a lien or security interest in the Permitted Investment made
in an Operating Entity that is borrowing a construction loan
to construct the project for which such Permitted Investment
is being made with such lien or security interest being
granted to the lender of such construction loan (a
"Construction Loan Lien") and such Construction Loan Lien is
limited to the specific Permitted Investment in the
Operating Entity receiving such construction loan and
securing an amount not in excess of such construction loan.
Each of the foregoing Liens being referred to collectively as the
"Permitted Liens".
Section 7.03 GUARANTEES. Except for Permitted Indebtedness and LCs
issued in connection with a Permitted Investment permitted pursuant to Section
7.05, the Borrowers will not Guarantee, or otherwise become surety in respect of
the obligations of, or lend its credit to, any other person, or enter into any
working capital maintenance or similar agreement.
Section 7.04 INVESTMENTS, REVOLVING LOAN, AND ADVANCES. The Borrowers
will not purchase or otherwise acquire, hold or make any Investment, or enter
into any arrangement for the purpose of making any Investment, except for
Permitted Investments and the endorsement of a check or other medium of payment
for deposit or collection, or any similar transaction in the normal course of
business.
Section 7.05 ASSIGNMENT OR SALE OF ASSETS. The Borrowers will not
assign, sell, discount, or otherwise dispose of any assets, including without
limitation, Permitted Investments except for transfer of Permitted Investments
to Fund Entities for consideration equal to the greater of the Acquisition Cost
for such Permitted Investment or the outstanding principal balance (or stated
amount in the case of an LC) of the Borrowing made in respect of the purchase of
such Permitted Investment.
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Section 7.06 LIQUIDATION, MERGER, OR CONSOLIDATION. The Borrowers will
not dissolve or liquidate, or consolidate with or merge with or into any person,
firm, corporation or entity or otherwise effect any business combination, joint
venture or partnership with any person, firm, corporation or entity except for
purchasing Permitted Investments.
Section 7.07 AMENDMENT OF ARTICLES OF INCORPORATION AND/OR CODE OF
REGULATIONS. Property Advisors will not materially amend, modify, or supplement
its Articles of Incorporation and/or its Code of Regulations. The Borrowers will
not materially amend, modify or supplement the Governing Documents, except in
complete compliance with Section 6.03.
Section 7.08 DISTRIBUTIONS; PURCHASES OR REDEMPTION OF STOCK;
DIVIDENDS. Property Advisors will not make or pay (or obligate itself to make or
pay) any dividend, Distribution or any other payment in respect of any of the
shares of its capital stock, or redeem, purchase, otherwise acquire for any
consideration (directly or indirectly) any of the shares of its capital stock.
Section 7.09 FISCAL YEAR. The Guarantor will not change its Fiscal
Year except as required by law.
Section 7.10 REGULATION U. The Borrowers shall not, directly or
indirectly, (a) apply any part of the proceeds of the Revolving Loan to the
purchasing or carrying of any "margin stock" within the meaning of Regulations
G, T, U or X of the Federal Reserve Board, or any regulations, interpretations
or rulings thereunder, (b) extend credit to others for the purpose of purchasing
or carrying any such margin stock, or (c) retire indebtedness which was incurred
to purchase or carry any such margin stock.
Section 7.11 TRANSACTIONS WITH AFFILIATES. The Borrowers shall not,
directly or indirectly, pay (excluding in all cases salary, bonuses and other
similar compensation) any funds to or for the account of, make any Investment
in, purchase, acquire or lease any property from, or sell, transfer or lease any
property to, or otherwise deal with, in the ordinary course of business or
otherwise, any Affiliate except for selling or purchasing Permitted Investments
as otherwise permitted pursuant to this Agreement and reimbursing the Guarantor
for services rendered to the Borrowers in the ordinary course of its business
and on terms that are no less favorable to the Borrowers than those terms which
might be obtained at the time from unrelated third parties.
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ARTICLE VIII
------------
WAIVERS
-------
Any of the acts which the Borrowers are required or prohibited from
doing by any of the provisions of this Credit Agreement may, notwithstanding
such provisions, be omitted or done, as the case may be, only if consented to in
writing by the Bank.
ARTICLE IX
----------
DEFAULTS
--------
Each of the following events shall be termed "Events of Default":
Section 9.01 PRINCIPAL DEFAULT. Default shall be made in the payment
of any principal of any of the Revolving Note or the Revolving Loan when and as
the same shall become due and payable, whether at maturity or otherwise; or
Section 9.02 INTEREST DEFAULT. Default shall be made in the payment of
any interest on or with respect to the Revolving Note or the Revolving Loan when
the same shall become due and payable and such default shall continue for two
(2) consecutive Business Days; or
Section 9.03 OTHER PAYMENT DEFAULTS. Default shall be made in the
payment of any other amount when and as the same shall become due and payable
under this Credit Agreement or any of the Loan Documents and such default shall
continue for five (5) consecutive Business Days; or
Section 9.04 CERTAIN ARTICLE VI AND VII. Default shall be made in the
due observance or performance of any covenant, agreement, or provision contained
in Section 6.01, 6.03 or 6.08 or any provision of Article VII; or
Section 9.05 DEFAULTS UNDER ARTICLE VI. Default shall be made in the
due observance or performance of any covenant, agreement, or provision contained
in Sections 6.02, 6.04, 6.05, 6.06, 6.07, 6.09 or 6.10, and such default shall
continue for ten (10) consecutive Business Days unless the Borrowers are
diligently pursuing a cure thereof and has advised the Bank of such cure and
only to the extent that such default has been cured within thirty (30)
consecutive days thereafter; or
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Section 9.06 OTHER PROVISION DEFAULT. Default shall be made in the due
observance or performance of any other covenant, agreement, or provision of this
Credit Agreement, the Revolving Note or any other Loan Document to be performed
or observed by the Borrowers and such default shall not be corrected or cured
within twenty (20) consecutive calendar days; or
Section 9.07 REPRESENTATION AND WARRANTY. Any material representation
or warranty made by the Borrowers under this Credit Agreement or in any
certificate, report, instrument, financial statement or other document furnished
pursuant to this Credit Agreement shall prove to have been false or incorrect in
any material respect as of the date on which made; or
Section 9.08 COLLATERAL SECURITY DOCUMENT OR OTHER LOAN DOCUMENT
DEFAULT. Default shall be made in the due observance or performance of any
covenant, agreement, or provision of any Collateral Security Document or other
Loan Document (other than as provided elsewhere in this Section 10) to be
performed or observed by the Borrower and such default shall not be corrected or
cured within ten (10) consecutive Business Days; or
Section 9.09 COLLATERAL SECURITY DOCUMENT REPRESENTATION AND WARRANTY.
Any representation or warranty made by the Borrowers under any Collateral
Security Document, or in any certificate, report, instrument, financial
statement or other document furnished pursuant to any of the foregoing shall
prove to have been false or incorrect in any material respect as of the date on
which made and such representation or warranty shall continue to be material; or
Section 9.10 GUARANTY DEFAULT. Default shall be made in the due
observance or performance of any covenant, agreement, or provision of the
Guaranty (other than as provided elsewhere in this Section 9) to be performed or
observed by the Guarantor; or
Section 9.11 GUARANTY REPRESENTATION AND WARRANTY. Any representation
or warranty made by the Guarantor under the Guaranty, or in any certificate,
report, instrument, financial statement or other document furnished pursuant
thereto shall prove to have been false or incorrect in any material respect as
of the date on which made; or
Section 9.12 FINANCIAL DIFFICULTIES. Any of the following events
evidencing the financial difficulties of any Borrower or Company shall occur:
(i) any admission in writing of inability to pay debts as they
become due or the failure to pay debts generally as such
debts become due; or
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(ii) the entry of an order for relief in the name of such
Borrower or Company under Title 11 of the United States Code
or similar provisions of foreign law; or
(iii) such Borrower or Company shall make an assignment for the
benefit of creditors; or
(iv) such Borrower or Company shall consent to the appointment of
a trustee or receiver for all or a major part of its
property; or
(v) the commencement of a case by such Borrower or Company under
Title 11 of the United States Code or similar provisions of
foreign law; or
(vi) the commencement of a case under Title 11 of the United
States Code or similar provisions of foreign law against
such Borrower or Company, which case shall not be dismissed
within 60 days from the date of commencement; or
(vii) the entry of a court order appointing a receiver or a
trustee for all or a major part of such Borrower or
Company's property without consent, which order shall not be
vacated, denied, set aside, or stayed within 60 calendar
days from the date of entry; or
Section 9.13 ERISA TERMINATION. Any employee pension benefit plan of
any Company whose current value of benefits which are guaranteed by PBGC under
Title IV of ERISA (determined on the basis of assumptions prescribed by the
PBGC) exceeds the then current value of such plan's assets by more than
$500,000: (i) shall be terminated under Section 4041 of ERISA (unless the plan
is restored under Section 4047 of ERISA within ten (10) days of its
termination), (ii) shall be terminated under Section 4042 of ERISA, or (iii)
shall have a trustee appointed under Section 4042 of ERISA to administer the
Plan; or
Section 9.14 ACCUMULATED FUNDING DEFICIENCY. Any employee pension
benefit plan of any Company which is a single employer plan shall have an
accumulated funding deficiency of more than $500,000, except as set forth on
SCHEDULE 5.13 attached hereto (as defined in Section 302 of ERISA and Section
412 of the Code), as of the last day of any plan year (determined after the
period during which employer contributions may be deemed to have been made on
such last day under Section 302(c)(10) of ERISA and Section 412(c)(10) of the
Code); or
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Section 9.15 OWNERSHIP. (i) If any "person" or "group" shall become the
"beneficial owner" (as those terms are respectively used in the Securities and
Exchange Act of 1934, as amended, and the rules and regulations thereunder) of
more than fifty percent (50%) of the outstanding voting stock of the Guarantor
or shall otherwise require the power (whether by contract, by proxy or
otherwise) to elect a majority of the Guarantor's board of directors; provided,
that this Section 9.15 shall not apply to any transaction receiving the prior
approval by a majority of the then members of the Guarantor's board of
directors, (ii) the Guarantor shall cease to own one hundred percent (100%) of
the capital stock (and any and all rights or options to acquire such capital
stock) of both MCD Securities and Property Advisors, or any agreement shall have
been entered into by Guarantor with regard to the sale or disposition thereof,
or (iii) Property Advisors shall cease to be the sole general partner of Fund;
or
Section 9.16 BORROWER CROSS-DEFAULT. Default, after the expiration of
all applicable grace periods, if any, shall be made by a Borrower in the payment
when due of Liabilities, singly or in the aggregate in the amount of $50,000 or
more (whether principal, interest or premium) now or hereafter owing by it
(other than to the Bank under this Credit Agreement) or default shall be made by
a Borrower in the performance of any covenant or other obligation contained in
any agreement, indenture, lease or other instrument or document relating to,
evidencing, or securing such Liabilities if the effect of the default is to
permit the holder of such Liabilities (with or without the giving of notice or
the lapse of time or both) to accelerate the maturity thereof; or
Section 9.17 COMPANY CROSS-DEFAULT. Default, after the expiration of
all applicable grace periods, if any, shall be made by any Company in the
payment when due of Liabilities, singly or in the aggregate in the amount of
$250,000 or more (whether principal, interest or premium) now or hereafter owing
by it (other than accounts payable to trade creditors for amounts incurred in
the ordinary course of business and not evidenced by promissory notes, bonds or
similar instruments) or default shall be made by any Company in the performance
of any covenant or other obligation contained in any agreement, indenture, lease
or other instrument or document relating to, evidencing, or securing such
Liabilities if the effect of the default is to permit the holder of such
Liabilities (with or without the giving of notice or the lapse of time or both)
to accelerate the maturity thereof; or
Section 9.18 JUDGMENTS. Entry of a final judgment (a final judgment
being one from which all available appeals have been exhausted or the time for
taking such appeal has lapsed) against a Borrower in the amount of $250,000 or
more which is not fully covered by insurance (subject to normal deductibles)
without reservation of rights and the
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same is not discharged or satisfied within thirty (30) consecutive calendar days
from the date of entry; or
Section 9.19 MATERIAL ADVERSE CHANGE. A Material Adverse Effect in the
Consolidated business, operations, management, or financial condition of the
Guarantor, as reasonably determined by the Bank in good faith, shall have
occurred; or
Section 9.20 RESTRAINT ON BUSINESS. Any court or administrative or
regulatory agency shall have issued an injunction or order that materially
restricts or enjoins the Borrowers from conducting any material part of their
respective business as proposed to be conducted on the Closing Date.
ARTICLE X
---------
REMEDIES
--------
Section 10.01 ACCELERATION. Upon (i) the occurrence of any Event of
Default described in Article IX, excluding Section 9.12, the Bank may, at any
time (unless all Events of Default shall theretofore have been remedied or
waived in accordance with the terms of this Credit Agreement), terminate the
Commitment and the right of the Borrowers to obtain Advances in respect of the
Revolving Loan and/or to obtain LCs, and/or declare the unpaid principal amount
of any or all of the Revolving Loan and/or Revolving Note, all interest accrued
thereon and all other amounts owing by the Borrowers to the Bank to be
immediately due and payable and (ii) upon the occurrence of any Event of Default
under Section 9.12, without further action by the Bank, the right of the
Borrowers to obtain Advances in respect of the Revolving Loan and/or LCs, and
the Commitment shall be immediately terminated and the Outstanding Amount,
including the unpaid principal of the Revolving Loan and/or Revolving Note and
interest accrued thereon and all other amounts owing by the Borrowers to the
Bank shall be immediately due and payable and, in either case, such principal,
interest and other amounts shall thereupon be immediately due and payable,
without presentment, demand, protest, notice of protest, or other notice of any
kind, all of which are hereby expressly waived by the Borrowers.
Section 10.02 RECOVERY OF AMOUNTS. In case any one or more Events of
Default shall happen and be continuing, the Bank shall be entitled to recover
judgment against the Borrowers for the amount due either before, or after, or
during the pendency of any proceedings for the enforcement of any security
therefor, and, in the event of realization of any funds from any security and
application thereof to the partial payment of the amounts due, the Bank shall be
entitled to enforce payment of and recover judgment for
67
<PAGE> 42
all amounts then remaining due and unpaid. In case any one or more Events of
Default shall happen and be continuing the Bank may proceed to protect and
enforce their rights by suit in equity, action at law, and/or by any other
appropriate proceeding, including, without limitation, for the specific
performance of any covenant or agreement or in aid of the exercise of any power
granted to the Bank, or may proceed to enforce payment of the Revolving Note or
to enforce any other legal or equitable right.
Section 10.03 LCS. If the maturity of the Revolving Loan shall be
accelerated pursuant to Section 10.01, the Borrowers shall immediately deposit
with the Bank, as security for the Borrowers' obligation to reimburse the Bank
for any then outstanding LC, cash or Acceptable Marketable Securities having a
fair cash value equal to the sum of the aggregate undrawn balance of any then
outstanding LCs.
Section 10.04 REMEDIES CUMULATIVE. Upon acceleration of the Obligations
pursuant to Section 11.01, the Bank may pursue its rights or remedies under the
Revolving Note, this Credit Agreement, the Guaranty or the other Loan Documents,
independently or concurrently. All rights, remedies, or powers herein conferred
upon the Bank shall, to the extent not prohibited by law, be deemed cumulative
and not exclusive of any other rights, remedies, or powers available to the
Bank. Without limiting the foregoing, the rights and remedies of the Bank under
this Credit Agreement, the Revolving Note and the other Loan Documents are
cumulative, may be exercised simultaneously or in such order and at such times
as the Bank may elect and are in addition to its rights and remedies at law or
equity. No delay or omission of the Bank to exercise any right, remedy, or power
shall impair the same or be construed to be a waiver of any Event of Default or
an acquiescence therein. No waiver of any Event of Default shall extend to or
affect any subsequent Event of Default or shall impair any rights, remedies, or
powers available to the Bank. No single or partial exercise of any right,
remedy, or power shall preclude other or further exercise thereof by the Bank.
Section 10.05 COST OF COLLECTION. The Borrowers agree that upon and
during the continuance of an Event of Default, they will pay to the Bank such
additional amount as shall be sufficient to cover the cost and expenses of
collection, including attorneys' fees, and any expenses or liabilities incurred
by the Bank in the collection thereof.
Section 10.06 NO ADVANCES, ETC. The Bank shall not be required to make
any Advances or issue any LC under this Credit Agreement if a Possible Default
or an Event of Default has occurred and is continuing.
Section 10.07 MANAGEMENT OF COLLATERAL AFTER EVENT OF DEFAULT. Upon the
occurrence and during the continuance of an Event of Default, the Bank may at
any time
68
<PAGE> 43
and from time to time employ and maintain in the premises of the Borrower
custodians selected by the Bank who shall have full authority to do all acts
necessary to protect the Bank's interests and to report to the Bank thereon. The
Borrowers hereby agree to cooperate with any much custodians and to do whatever
the Bank may reasonably request to preserve the Collateral. All reasonable
expenses incurred by the Bank by reason of the employment of the custodian shall
be charged to the Borrowers' account and added to the Obligations.
ARTICLE XI
----------
MISCELLANEOUS
-------------
Section 11.01 PAYMENT OF EXPENSES. If Taxes shall be payable, or ruled
to be payable, to any state, province or Federal authority, with respect to the
execution and delivery of this Credit Agreement or, the Revolving Note or any
Collateral Security Document, or other Loan Document by reason of any existing
or hereafter enacted Federal or state statutes, the Borrowers will pay all such
taxes in accordance with such statutes, including interest and penalties
thereon, excluding Taxes solely on income of the Bank if any, and will indemnify
and hold the Bank harmless against any liability in connection therewith. The
Borrowers will also reimburse the Bank the fees and disbursements incurred by
Messrs. Kahn, Kleinman, Yanowitz & Arnson Co., L.P.A. for their services to the
Bank in preparing, reviewing, closing, or enforcing this Credit Agreement and
the other documents executed in connection herewith, and will reimburse the Bank
for any out-of-pocket expenses incurred in connection therewith. The Borrowers
shall at all times protect, indemnify, defend and save harmless the Bank from
and against any and all claims, actions, suits and other legal proceedings and
liabilities, damages, costs, interest, charges, reasonable counsel fees and
other expenses and penalties but, prior to the occurrence of and during the
continuance of an Event of Default, excluding the Bank's ordinary course of
business internal and out of pocket costs and expenses (the "Indemnified
Liabilities"), which the Bank may, at any time, sustain or incur by reason or in
consequence of or arising out of the execution and delivery of this Credit
Agreement and the consummation of the transactions contemplated hereby except
for any such Indemnified Liabilities resulting from the gross negligence or
willful misconduct of the Bank. The Borrowers acknowledge that it is the
intention of the parties hereto that this Agreement shall be construed and
applied to protect and indemnify the Bank against any and all risks involved in
the execution and delivery of this Credit Agreement and the consummation of the
transactions contemplated hereby, all of which risks are hereby assumed by the
Borrowers, including, without limitation, any and all risks of the acts or
omissions, whether rightful or wrongful, or any present or future, DE JURE or DE
FACTO government or governmental authority. All amounts payable or reimbursable
by the
69
<PAGE> 44
Borrower under this Section 11.01 shall be due and payable on demand. The
obligations imposed upon the Borrowers by this Section 11.01 shall survive the
payment of the Revolving Loan and the Revolving Note.
Section 11.02 NOTICES. Any notice to or demand upon the Borrowers shall
be deemed to have been sufficiently given or served for all purposes hereof one
day after being sent by overnight express courier, three days after being
mailed, certified mail, return receipt requested or, when received during normal
business hours, by electronic facsimile (confirmed by subsequent delivery of
"hard copy"), addressed to the Representative at McDonald Investment Center, 800
Superior Avenue, Cleveland, Ohio 44114 Attn: President, or to such other address
as may be furnished in writing to the Bank for such purpose by the Borrowers.
Any notice to or demand upon the Bank shall be deemed to have been sufficiently
given or served for all purposes hereof one day after being sent by overnight
express courier or hand delivered to the Account Officer of the Bank at 1350
Euclid Avenue, Cleveland, Ohio 44115, Attn: John D. Barrett, Vice President, or
to such other address as may be furnished in writing to the Borrowers for such
purpose by the Bank.
Section 11.03 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All
representations and warranties contained herein shall survive the execution and
delivery of this Credit Agreement, any investigation at any time made by the
Bank, and the execution and delivery of the Revolving Note and shall continue in
full force and effect so long as the Revolving Note is outstanding and unpaid.
Section 11.04 ENTIRE AGREEMENT; AMENDMENT. This Credit Agreement,
including all exhibits hereto, embodies the entire agreement and understanding
between the Borrowers and the Bank and supersedes all other prior agreements and
understandings relating to the subject matter hereof. The Borrowers and the Bank
may enter into further and additional written agreements to amend or supplement
this Credit Agreement and the terms and provisions of such further and
additional written agreements shall be deemed a part of this Credit Agreement as
though incorporated herein. Except as provided herein, the Bank has no
obligation to make loans or advances to the Borrowers.
Section 11.05 PARTIES IN INTEREST; BANK'S PURPOSE. All the terms and
provisions of this Credit Agreement shall inure to the benefit of and be binding
upon and be enforceable by the respective successors and assigns of the parties
hereto, whether so expressed or not and, in particular, shall inure to the
benefit of and be enforceable by any holder of the Revolving Note. The Borrowers
shall not assign their rights under this Credit Agreement without the prior
written consent of the Bank. The Bank, without the prior written consent of the
Borrowers, may assign, or sell participations in, all or part of the Revolving
70
<PAGE> 45
Loan and its rights under the Credit Agreement and the other Loan Documents. The
Bank agrees that it will give the Borrowers prompt written notice of any
assignment of all or part of the Revolving Loan.
Section 11.06 WAIVER OF ASSERTION OF COUNTERCLAIMS; WAIVER OF JURY
TRIAL. Each and every right granted to the Bank hereunder or under any other
document delivered hereunder or in connection herewith, or allowed it by law or
equity, shall be cumulative and may be exercised from time to time. No failure
on the part of the Bank or any holder of the Revolving Note to exercise, and no
delay in exercising, any right shall operate as a waiver thereof nor shall any
single or partial exercise of any right preclude any other or future exercise
thereof or the exercise of any other right. The due payment and performance of
the Borrowers' indebtedness, liabilities and obligations under the Revolving
Note and this Credit Agreement shall be without regard to any counterclaim or
right of offset which the Borrowers may have against the Bank and without regard
to any other obligation of any nature whatsoever which the Bank may have to the
Borrowers, and no such counterclaim or offset shall be asserted by the Borrowers
in any action, suit or proceeding instituted by the Bank for payment or
performance of the Borrowers' indebtedness, liabilities or obligations under the
Revolving Note, this Credit Agreement, the Collateral Security Documents, or any
other Loan Documents.
THE BORROWERS AND THE BANK HEREBY WAIVE THEIR RIGHT TO TRIAL BY JURY IN
ANY ACTION OR PROCEEDING IN CONNECTION WITH THIS CREDIT AGREEMENT, THE REVOLVING
NOTE OR ANY OTHER LOAN DOCUMENT OR THE TRANSACTIONS RELATED THERETO.
Section 11.07 SET-OFF PROVISION. As security for the due payment and
performance of all the Obligations, the Borrowers hereby grant to the Bank a
lien on and security interest in any and all deposits or other sums at any time
credited by or due from the Bank to the Borrowers, whether in regular or special
depository accounts or otherwise, and any and all monies, securities and other
property of the Borrowers, and the proceeds thereof, now or hereinafter held or
received by or in transit to the Bank from or for the Borrowers, whether for
safekeeping, custody, pledge, transmission, collection or otherwise, and any
such deposits, sums, monies, securities and other property, may at any time
after the occurrence and during the continuance of any Event of Default be
set-off, appropriated and applied by the Bank against any of the Obligations,
whether or not any of such Obligations is then due or is secured by any
collateral, or, if it is so secured, whether or not the collateral held by the
Bank is considered to be adequate.
Section 11.08 SEVERABILITY OF PROVISIONS. Any provision of this Credit
Agreement which is prohibited or unenforceable in any jurisdiction shall, as to
such jurisdiction, be
71
<PAGE> 46
ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions of this Agreement or affecting the
validity or enforceability of such provision in any other jurisdiction.
Section 11.09 HEADINGS. Article and Section headings used in this
Credit Agreement are for convenience of reference only and are not a part of
this Agreement for any other purpose.
Section 11.10 CONSENT TO JURISDICTION. The Borrowers agree that any
action or proceeding to enforce or arising out of this Credit Agreement or any
of the other Loan Documents may be commenced in the Common Pleas Court of
Cuyahoga County, Ohio or in the District Court of the United States for the
Northern District of Ohio sitting in Cleveland, and the Borrowers waive personal
service of process and agree that a summons and complaint commencing an action
or proceeding in any such court shall be properly served and shall confer
personal jurisdiction if served to the persons and addresses listed in Section
11.02 in accordance with the provisions of this Section 11.10, or as otherwise
provided by the laws of the State of Ohio or the United States.
Section 11.11 GOVERNING LAW. This Credit Agreement, the Revolving Note
and each other Loan Document are and will be contracts made under the laws of
the State of Ohio (without regard to the laws regarding conflicts of laws) and
together with the rights and obligations of the parties hereunder shall be
construed and enforced in accordance with and governed by the laws of such
State.
Section 11.12 NATURE OF THE BORROWERS' OBLIGATIONS AND MODIFICATION
THEREOF. THE OBLIGATIONS OF THE BORROWERS UNDER THIS CREDIT AGREEMENT, THE
REVOLVING NOTE AND THE OTHER LOAN DOCUMENTS ARE JOINT AND SEVERAL. The
obligations of the Borrowers Group under this Credit Agreement are absolute and
unconditional and shall be irrevocable. The Borrowers agree that their
obligations hereunder shall not be impaired, modified, changed, released or
limited in any manner whatsoever by any impairment, modification, change,
release or limitation of the liability of any of the Borrowers by any bankruptcy
case or by any stay or other legal impediment in or arising from the operation
of any present or future provision of the Bankruptcy Code or other similar state
or federal statute, or from the decision of any court or any perfection or
failure to perfect any Lien upon any property of any of the Borrowers. The
Borrowers agree that the Bank may, in its discretion, (i) release, discharge,
compromise or settle with, or grant indulgences to, refuse to proceed or take
action against, any of the Borrowers with respect to its respective
obligations under this Credit Agreement, (ii) release, surrender, modify,
impair, exchange, substitute or extend the period or duration of time for the
performance, discharge or payment of, refuse to
72
<PAGE> 47
enforce, compromise or settle its respective lien, security interest, pledge
or assignment against, any and all deposits and other property or assets on
which the Bank may have a lien, security interest, pledge or assignment or
which secures any of the obligations of the Borrowers under this Credit
Agreement, and (iii) amend, modify, alter or restate, in accordance with their
respective terms, this Credit Agreement or any of the Loan Documents or
otherwise, accept deposits or other property from, or enter into transactions
of any kind or nature with, the Borrowers. Each of the Borrowers confirms that
it will be directly or indirectly benefitted by the Revolving Loan and any and
all other advances under this Credit Agreement or any of the Loan Documents.
Section 11.13 COUNTERPARTS. This Credit Agreement may be executed in
any number of counterparts and by different parties hereto in separate
counterparts, each of which when so executed and delivered shall be deemed to be
an original and all of which taken together shall constitute but one and the
same agreement.
IN WITNESS WHEREOF, the parties have caused this Credit Agreement to be
executed as of the date first above written by their respective representatives
thereunto duly authorized.
MCD PROPERTY ADVISORS, INC.
By: /s/ illegible
-----------------------------
President
McDONALD CORPORATE TAX CREDIT
FUND - 1995 LIMITED PARTNERSHIP
By: MCD PROPERTY ADVISORS, INC.,
General Partner
By: /s/ illegible
-----------------------------
President
STAR BANK, NATIONAL ASSOCIATION
By: /s/ John D. Barrett
-----------------------------
Vice President
73
<PAGE> 1
EXHIBIT 11
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
-----------------------------------------------
<TABLE>
<CAPTION>
Fiscal year ended
--------------------------------------------------------------------------
March 29, 1996 March 31, 1995 March 25, 1994
------------------ ------------------ ---------------
PRIMARY
- -------
<S> <C> <C> <C>
Average shares outstanding 8,930,000 9,150,000 8,870,000
Net effect of dilutive stock
options - based on the
treasury stock method using
average market price 142,000 153,000 206,000
----------- ---------- ----------
TOTAL 9,072,000 9,303,000 9,076,000
----------- ---------- ----------
Net income $19,766,000 $13,684,000 $21,588,000
----------- ---------- ----------
Net income per share $ 2.18 $ 1.47 $ 2.38
=========== =========== ===========
FULLY DILUTED
- -------------
Average shares outstanding 8,930,000 9,150,000 8,870,000
Net effect of dilutive stock
options - based on the
treasury stock method using greater
of year-end or average market price 155,000 153,000 215,000
Assumed conversion of 8% convertible
subordinated debentures --- --- 1,505,000
----------- ---------- ----------
TOTAL 9,085,000 9,303,000 9,590,000
----------- ---------- ----------
Net income $19,766,000 $13,684,000 $21,588,000
Add 8% convertible subordinated
debenture interest, net of
federal tax effect --- --- 265,000
----------- ---------- ----------
TOTAL $19,766,000 $13,684,000 $21,853,000
----------- ---------- ----------
Net income per share $ 2.18 $ 1.47 $ 2.28
=========== =========== ===========
</TABLE>
74
<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 Real Estate, Inc.
---------------------
MCD Real Estate, Inc., an Ohio corporation, is a wholly owned
subsidiary of the Company.
3. 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.
4. McDonald Financial Services, Inc.
---------------------------------
McDonald Financial Services, Inc., an Ohio corporation, is a
wholly owned subsidiary of the Company.
5. McDonald & Company Venture Capital, Inc.
----------------------------------------
McDonald & Company Venture Capital, Inc., an Ohio corporation, is
a wholly owned subsidiary of the Company.
6. McDonald & Company Venture Capital, Inc. II
--------------------------------------------
McDonald & Company Venture Capital, Inc. II, an Ohio corporation,
is a wholly owned subsidiary of the Company.
7. Gradvantage, Inc.
-----------------
Gradvantage, Inc., an Ohio corporation, is a wholly owned
subsidiary of the Company.
8. Gradison Insurance Agency, Inc.
-------------------------------
The Company owns all the issued and outstanding shares of Class B
Common Stock of Gradison Insurance Agency, Inc., an Ohio
corporation. All the issued and outstanding shares of Class A
Common Stock are held by an officer of the Company.
9. McD Property Advisors, Inc.
---------------------------
McD Property Advisors, Inc., an Ohio corporation, is a
wholly-owned subsidiary of the Company.
10. Bond Lease Corporation V
------------------------
Bond Lease Corporation V, an Ohio corporation, is a wholly-owned
subsidiary of the Company.
75
<PAGE> 2
SUBSIDIARIES OF THE REGISTRANT (cont.)
- --------------------------------------
11. Bond Lease Corporation VI
-------------------------
Bond Lease Corporation VI, an Ohio corporation, is a wholly-owned
subsidiary of the Company.
12. Bond Lease Corporation VII
--------------------------
Bond Lease Corporation VII, an Ohio corporation, is a wholly-owned
subsidiary of the Company.
13. Gradison & Company, Inc.
------------------------
Gradison & Company, Inc., an Ohio corporation, is a wholly-owned
subsidiary of the Company.
14. Secured Lease Finance Corp.
---------------------------
Secured Lease Finance Corp., an Ohio corporation, is a
wholly-owned subsidiary of the Company.
15. Secured Lease Finance Corp. II
------------------------------
Secured Lease Finance Corp. II, an Ohio corporation, is a
wholly-owned subsidiary of the Company.
16. McDonald Mortgage Pass-Through Corp.
------------------------------------
McDonald Mortgage Pass-Through Corp., an Ohio corporation, is a
wholly-owned subsidiary of the Company.
17. The McDonald Trust Company
--------------------------
The McDonald Trust Company, an Indiana corporation, is a
wholly-owned subsidiary of the Company.
18. McD Freedom Advisors, Inc.
--------------------------
McD Freedom Advisors, Inc., an Ohio corporation, is a wholly-owned
subsidiary of the Company.
19. McD Methane, Inc.
-----------------
McD Methane, Inc., a Delaware corporation, is a wholly-owned
subsidiary of the Company.
76
<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
Investments, Inc. Stock Option Plan, Registration Statement (Form S-8 Number
33-37603) pertaining to the McDonald & Company Investments, Inc. 1990 Stock
Option Plan for Outside Directors, Registration Statement (Form S-8 Number
33-54521) pertaining to the McDonald & Company Investments, Inc. 1993 Stock
Bonus Plan, Registration Statement (Form S-8 Number 33-65491) pertaining to the
McDonald & Company Investments, Inc. 1995 Stock Bonus Plan, and Registration
Statement (Form S-8 Number 33-65489) pertaining to the McDonald & Company
Investments, Inc. 1995 Key Employees Stock Option Plan, of our report dated
April 30, 1996, with respect to the consolidated financial statements of
McDonald & Company Investments, Inc. included in this Annual Report (Form 10-K)
for the fiscal year ended March 29, 1996.
/s/ Ernst & Young LLP
Cleveland, Ohio
June 24, 1996
77
<TABLE> <S> <C>
<ARTICLE> BD
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
STATEMENT OF FINANCIAL CONDITION MARCH 29, 1996 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-29-1996
<PERIOD-START> MAR-29-1995
<PERIOD-END> MAR-29-1996
<CASH> 12,376
<RECEIVABLES> 235,192
<SECURITIES-RESALE> 50,052
<SECURITIES-BORROWED> 0
<INSTRUMENTS-OWNED> 102,202
<PP&E> 15,719
<TOTAL-ASSETS> 471,101
<SHORT-TERM> 77,024
<PAYABLES> 87,269
<REPOS-SOLD> 67,135
<SECURITIES-LOANED> 0
<INSTRUMENTS-SOLD> 29,216
<LONG-TERM> 25,000
<COMMON> 11,621
0
0
<OTHER-SE> 119,202
<TOTAL-LIABILITY-AND-EQUITY> 471,101
<TRADING-REVENUE> 54,101
<INTEREST-DIVIDENDS> 17,170
<COMMISSIONS> 66,498
<INVESTMENT-BANKING-REVENUES> 55,659
<FEE-REVENUE> 19,842
<INTEREST-EXPENSE> 7,638
<COMPENSATION> 127,059
<INCOME-PRETAX> 30,766
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 19,766
<EPS-PRIMARY> 2.18
<EPS-DILUTED> 2.18
</TABLE>
<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 1996
First quarter (13 weeks) $ 49,988 $ 5,964 $ 3,764 $ .41 $ .080 $16.50 $14.38
Second quarter (13 weeks) 55,474 8,116 5,116 .56 .085 17.75 15.75
Third quarter (13 weeks) 53,421 7,236 4,896 .55 .085 18.38 16.75
Fourth quarter (13 weeks) 61,738 9,450 5,990 .66 .085 20.00 17.75
--------- --------- --------- ------- -------
Total Year $ 220,621 $ 30,766 $ 19,766 $ 2.18 $ .335
========= ========= ========= ======= =======
FISCAL 1995
First quarter (13 weeks) $ 40,815 $ 3,192 $ 1,942 $ .20 $ .075 $15.62 $13.00
Second quarter (14 weeks) 40,281 3,409 2,029 .22 .080 13.25 12.38
Third quarter (13 weeks) 47,316 6,387 4,067 .44 .080 13.00 11.12
Fourth quarter (13 weeks) 49,314 7,716 5,646 .61 .080 14.38 11.00
--------- --------- --------- ------- -------
Total Year $ 177,726 $ 20,704 $ 13,684 $ 1.47 $ .315
========= ========= ========= ======= =======
<FN>
* The Common Stock of McDonald & Company Investments, Inc., is listed on the
New York Stock Exchange. The trading symbol is MDD. At April 26, 1996, the
approximate number of stockholders of record was 1,046.
</TABLE>
78
<PAGE> 1
EXHIBIT 99(b)
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Fiscal Year Ended
MARCH 29, March 31, March 25, March 26, March 27,
(In thousands, except per share amounts) 1996 1995 1994* 1993* 1992*
--------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
OPERATIONS
Revenues $ 220,621 $ 177,726 $ 204,680 $ 173,817 $ 128,063
Income before income taxes 30,766 20,704 34,688 24,700 17,076
Net income 19,766 13,684 21,588 16,050 10,896
Primary net income per share 2.18 1.47 2.38 1.92 1.48
Cash dividends paid per share .335 .315 .288 .312 .167
<CAPTION>
MARCH 29, March 31, March 25, March 26, March 27,
FINANCIAL POSITION AS OF: 1996 1995 1994 1993 1992
---------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
Total assets $ 471,101 $ 401,332 $ 590,578 $ 528,942 $ 322,029
Long-term borrowings 25,000 25,000 25,000 38,055 13,055
Stockholders' equity 130,823 114,362 107,405 77,927 62,923
<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 F to the Consolidated Financial Statements).
</TABLE>
79
<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 their potential 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 institutional fixed income divisions cover accounts
throughout the United States and internationally.
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, receivables from
brokers and dealers, securities purchased under agreements to resell, and
securities owned represented approximately 89% of the Company's assets at March
29, 1996. These assets are financed by a number of sources, including short-term
borrowings and securities sold under agreements to repurchase, long-term
borrowings and equity capital.
McDonald Securities is a dealer in corporate, mortgage-backed and governmental
fixed income securities which are carried as securities owned primarily for
distribution to individual and institutional customers.
80
<PAGE> 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Periodically, McDonald Securities buys, sells, and positions mortgage-derivative
securities or structured notes. Holdings of high-yield securities are not
material. McDonald Securities may enter into short positions in United States
government bonds in order to manage the interest rate risk related to fixed
income trading positions. McDonald Securities maintains comprehensive risk
management policies, including position limits and credit requirements.
At March 29, 1996, 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 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 financing, the notes have been
approved by the New York Stock Exchange, Inc., for inclusion in McDonald
Securities' regulatory capital.
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 $300,000,000, of which $235,706,000 was unused as of March
29, 1996. 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 McDonald Securities to
satisfy the regulatory requirements of the Securities and Exchange Commission
and the New York Stock Exchange, Inc. 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 29, 1996, McDonald Securities was in
compliance with the Uniform Net Capital Rules and had net capital of
$79,020,000, which was $74,553,000 in excess of the minimum required.
81
<PAGE> 3
RESULTS OF OPERATIONS
The following table summarizes the changes in the major categories of revenues
and expenses for the fiscal years ended March 29, 1996, March 31, 1995, and
March 25, 1994.
<TABLE>
<CAPTION>
Fiscal 1996 Fiscal 1995
Versus Versus
Fiscal 1995 Fiscal 1994
----------- -----------
(In thousands) (In thousands)
<S> <C> <C> <C> <C>
REVENUES
Underwriting and investment banking $ 13,708 33% $(22,057) (34)%
Principal transactions 8,218 18 (5,886) (11)
Commissions 16,444 33 (3,251) (6)
Investment management fees 3,881 24 1,419 10
Interest and dividends (2,027) (11) 3,867 25
Other 2,671 57 (1,046) (18)
-------- -- -------- --
$ 42,895 24% $(26,954) (13)%
======== == ======== ==
EXPENSES
Employee compensation and benefits $ 24,502 24% $(14,275) (12)%
Interest 1,268 20 (2,927) (31)
Communications 1,088 9 1,574 14
Occupancy and equipment 2,126 16 1,580 14
Promotion and development 788 11 169 2
Floor brokerage and clearance (18) (1) (329) (11)
Taxes, other than income taxes 526 9 855 17
Other operating expenses 2,553 39 383 6
-------- -- -------- --
$ 32,833 21% $(12,970) (8)%
======== == ======== ==
</TABLE>
82
<PAGE> 4
FISCAL 1996 COMPARED WITH FISCAL 1995
Total revenues for the fiscal year ended March 29, 1996 were $220,621,000, an
increase of $42,895,000, or 24%, from revenues of $177,726,000 for the fiscal
year ended March 31, 1995.
Net income for the fiscal year ended March 29, 1996 was $19,766,000, or $2.18
per share, compared to $13,684,000, or $1.47 per share, for the fiscal year
ended March 31, 1995, an increase in net income of 44%.
The average number of shares and share equivalents outstanding was 9,072,000 for
the fiscal year ended March 29, 1996 compared with 9,303,000 for the fiscal year
ended March 31, 1995.
Revenues from underwriting and investment banking increased $13,708,000, or 33%,
for the fiscal year ended March 29, 1996, when compared to the fiscal year ended
March 31, 1995. Revenues from corporate underwriting and investment banking
increased $15,788,000, or 46%, for the fiscal year ended March 29, 1996, when
compared to the prior fiscal year. This resulted from increases in revenues from
managed and co-managed originations of $6,005,000, or 57%, increases in revenues
from participation in syndicate groups of $2,289,000, or 31%, and an increase in
revenues from private placements of debt and equity securities and limited
partnerships of $5,512,000, or 84%, in the current fiscal year. These increases
are attributable to favorable market conditions for public and private offerings
of debt and equity securities. Additionally, revenues from mergers and
acquisitions and other financial advisory fees increased $1,982,000, or 21%, due
to favorable market conditions for this type of activity. Revenues from public
finance decreased $2,080,000, or 26%, for the fiscal year ended March 29, 1996,
due to a lower level of public finance offerings in which McDonald Securities
participated.
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
economic and legislative events, both in the United States and abroad. To the
extent that 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. Management
believes that the Company can compete effectively in this segment of its
business activities.
83
<PAGE> 5
Revenues from principal transactions increased $8,218,000, or 18%, for the
fiscal year ended March 29, 1996, 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
$1,261,000, or 6%. This increase in revenues from principal transactions in
taxable fixed-income securities was due to a more stable interest rate
environment. Revenues from trading municipal bonds increased $1,655,000, or 23%,
for the current fiscal year, primarily reflecting a trading loss of $2,440,000
recorded in March 1995, related to certain municipal inventory positions.
Without regard to the fiscal year 1995 trading loss on certain municipal
positions, revenues from trading municipal bonds decreased $1,385,000, or 14%.
This decrease reflects a lower level of individual investor interest in
tax-exempt securities due to uncertainties caused by potential tax law changes.
Revenues from principal transactions in equity securities increased $5,302,000,
or 33%, for the fiscal year ended March 29, 1996, when compared to the prior
fiscal year. This increase is primarily due to a strong NASDAQ market and the
continued expansion of the Company's sales force and its institutional equity
capabilities.
Commissions revenue increased $16,444,000, or 33%, for the fiscal year ended
March 29, 1996, when compared to the fiscal year ended March 31, 1995. The
increase in commissions revenue reflects higher volume resulting from both
strong equity markets and the continued expansion of the Company's sales force.
The increase in commissions revenue was comprised primarily of increases in
revenues from listed and over-the-counter agency commissions of $11,223,000, or
35%, and an increase in revenues from mutual fund sales of $5,674,000, or 41%,
for the current fiscal year.
Revenues from investment management fees include advisory fees from the
Company's mutual funds and money market funds, and investment management fees
earned related to individual managed accounts. Revenues from investment
management fees increased $3,881,000, or 24%, for the fiscal year ended March
29, 1996 when compared to the prior fiscal year. Advisory fees from the
Company's mutual funds and money market funds increased $483,000, or 5%, and
revenues from investment management fees related to individual managed accounts
increased $3,398,000, or 49%. These increases were a result of an increase in
assets under management.
Interest and dividend income decreased $2,027,000, or 11%, for the fiscal year
ended March 29, 1996, when compared to the prior fiscal year. This decrease
resulted from a decrease in interest income from municipal bonds of $4,687,000,
or 79%, due primarily to a decrease in interest income from certain municipal
bond positions. The decrease in interest income from municipal bonds was
partially offset by an increase in interest income earned on customer margin
accounts of $1,690,000, or 22%, due to both a higher level of customer margin
accounts and higher interest rates. Interest income from securities owned other
than municipal bonds increased $475,000, or 10%.
84
<PAGE> 6
FISCAL 1996 COMPARED WITH FISCAL 1995
Other income increased $2,671,000, or 57%, for the fiscal year ended March 29,
1996, when compared to the prior fiscal year. The increase was due to an
increase of $1,464,000 in gains related to venture capital investments and an
increase of $1,207,000 in transfer agent, service and other fee income related
to the continued expansion of the retail business.
Operating expenses (total expenses before interest) increased $31,565,000, or
21%, for the fiscal year ended March 29, 1996, when compared to the prior fiscal
year.
Employee compensation and benefits increased $24,502,000, or 24%, for the
current fiscal year. Commission and other sales compensation expense increased
$13,855,000, or 27%, for the current fiscal year, primarily as a result of the
increase in revenues. Other clerical and administrative expenses increased
$2,097,000, or 6%, for the current fiscal year. The remaining $8,550,000
increase in employee compensation represents increases in incentive compensation
and profit sharing accruals, which are directly related to the increase in
profitability.
All other operating expenses increased $7,063,000, or 15%, for the fiscal year
ended March 29, 1996, when compared to the fiscal year ended March 31, 1995. The
increase in all other operating costs reflects the communications, occupancy and
equipment, and other operating costs related to the expansion of the Company's
business. For the fiscal year ended March 29, 1996, communications expenses
increased $1,088,000, or 9%, reflecting higher telecommunications, quotation and
information services costs due to both higher volume and higher employee
headcount. Occupancy and equipment costs increased $2,126,000, or 16%. Of this
increase, approximately $650,000 represented nonrecurring expenses related to
the Company's current technology renovation. Without regard to these items,
occupancy and equipment costs increased 11% reflecting recurring costs related
to the technology renovation and headcount increases. Taxes other than income
taxes increased $526,000, or 9%, reflecting primarily increased payroll taxes
due to increases in compensation expenses.
The category of other operating expenses increased $2,553,000, or 39%, for the
fiscal year ended March 29, 1996 when compared to the prior fiscal year. The
increase is due primarily to an increase in legal costs of $1,167,000 related to
pending litigation. Additionally, other professional fees increased $510,000 due
to expenses associated with consulting services related to the technology
renovation, and related to expansion of the Company's retail and investment
banking businesses. Contributions expense increased $367,000 due to the higher
level of profitability. The remaining expenses in this category increased
$509,000, or 14%, reflecting primarily costs related to higher volume.
85
<PAGE> 7
Interest expense increased $1,268,000, or 20%, for the fiscal year ended March
29, 1996, when compared to the fiscal year ended March 31, 1995 due to a higher
level of average short-term borrowings and an increase in short-term borrowing
rates.
Income before income taxes for the fiscal year ended March 29, 1996, was
$30,766,000, resulting in a pre-tax return on revenues of 13.9%. For the fiscal
year ended March 31, 1995, income before income taxes was $20,704,000, resulting
in a pre-tax return on revenues of 11.6%.
FISCAL 1995 COMPARED
WITH FISCAL 1994
Total revenues for the fiscal year ended March 31, 1995 were $177,726,000, a
decrease of $26,954,000, or 13%, from revenues of $204,680,000 for the fiscal
year ended March 25, 1994.
Net income for the fiscal year ended March 31, 1995 was $13,684,000, or $1.47
per share, compared to $21,588,000, or $2.38 per share, for the fiscal year
ended March 25, 1994, a decrease in net income of 37%.
The average number of shares and share equivalents outstanding was 9,303,000 for
the fiscal year ended March 31, 1995 compared with 9,076,000 for the fiscal year
ended March 25, 1994.
On July 27, 1993, the Company declared a 20% stock dividend payable August 20,
1993, to shareholders of record on August 10, 1993. Applicable share and per
share information has been adjusted for the stock dividend as if it had occurred
at the beginning of the fiscal 1994 period.
Revenues from underwriting and investment banking decreased $22,057,000, or 34%,
for the fiscal year ended March 31, 1995, when compared to the fiscal year ended
March 25, 1994. Revenues from corporate underwriting and investment banking
decreased $18,982,000, or 36%, for the fiscal year ended March 31, 1995, when
compared to the prior fiscal year. This resulted from decreases in revenues from
managed and co-managed originations of $13,645,000, or 56%, and decreases in
revenues from participation in syndicate groups of $9,866,000, or 57%, for the
fiscal year ended March 31, 1995. These declines were attributable to less
favorable market conditions for public offerings of equity securities and the
weakness in the taxable debt securities markets. These decreases were partially
offset by an increase of $3,166,000, or 49%, in mergers and acquisitions and
other financial advisory fees due to favorable market conditions for this type
of activity. Additionally, revenues from private placements of debt and
equity securities and limited partnerships increased $1,363,000, or 26%.
Revenues from public finance decreased $3,075,000, or 28%, for the fiscal year
ended March 31, 1995, due to a lower level of public finance offerings.
86
<PAGE> 8
Revenues from principal transactions decreased $5,886,000, or 11%, for the
fiscal year ended March 31, 1995, 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
$3,157,000, or 12%. For the fiscal year ended March 25, 1994 revenues from
principal transactions in taxable fixed-income securities were adversely
impacted by a net trading loss of $3,718,000 experienced in the Company's fixed
income arbitrage area. The fixed-income arbitrage trading area was eliminated as
of the beginning of the fiscal year ended March 31, 1995. Without giving effect
to this loss, revenues from principal transactions in taxable fixed-income
securities declined $6,875,000, or 24%, for the fiscal year ended March 31,
1995. This decrease in revenues from principal transactions in taxable
fixed-income securities was caused by less favorable conditions for the trading
of such securities with institutional investors.
For the fiscal year ended March 31, 1995, institutional revenues from trading
corporate bonds declined $3,252,000, or 45%, institutional revenues from trading
government bonds declined $3,323,000, or 37%, and institutional revenues from
trading mortgage-backed securities declined $2,952,000, or 35%. Institutional
investor interest in fixed-income securities declined over the fiscal year
because of uncertainties related to interest rates and the economy. These
decreases were partially offset by increased revenues from trading taxable
fixed-income securities with individual investors of $2,652,000, or 60%, for the
fiscal year ended March 31, 1995, when compared to the prior fiscal year. This
increase was attributable to the expansion of the retail sales force and
increased interest in taxable fixed-income products by individual investors due
to higher yields.
Revenues from trading municipal bonds decreased $485,000, or 6%, for the fiscal
year ended March 31, 1995 when compared to the prior fiscal year, primarily due
to a trading loss of $2,440,000 recorded in March 1995 related to certain
municipal inventory positions. This loss was partially offset by increased
revenues from trading municipal bonds due to increased individual investor
interest in tax-exempt securities. Without regard to the trading loss on certain
municipal positions, revenues from trading municipal bonds increased $1,955,000,
or 25%.
Revenues from principal transactions in equity securities decreased $2,244,000,
or 12%, for the fiscal year ended March 31, 1995, when compared to the prior
fiscal year. Revenues in this area were at record levels in the prior fiscal
year.
Commissions revenue decreased $3,251,000, or 6%, for the fiscal year ended March
31, 1995 when compared to the fiscal year ended March 25, 1994. The decrease in
commissions revenues resulted from decreased investor participation in the
equity markets due to higher interest rates. The decrease in commissions revenue
was comprised primarily of decreases in revenues from listed and
over-the-counter agency commissions of $1,961,000, or 6%, and a decrease in
revenues from mutual fund sales of $1,535,000, or 10%, for the 1995 fiscal year.
87
<PAGE> 9
Revenues from investment management fees include advisory fees from the
Company's mutual funds and money market funds, and investment management fees
earned related to individual managed accounts. Revenues from investment
management fees increased $1,419,000, or 10%, for the fiscal year ended March
31, 1995 when compared to the prior fiscal year. Advisory fees from the
Company's mutual funds and money market funds increased $244,000, or 3%, and
revenues from investment management fees related to individual managed accounts
increased $1,175,000, or 20%. These increases were a result of an increase in
assets under management.
Interest and dividend income increased $3,867,000, or 25%, for the fiscal year
ended March 31, 1995, when compared to the prior fiscal year. Of this amount,
$2,545,000 represented a 48% increase in interest income earned on customer
margin accounts due to both higher levels of customer margin accounts and higher
interest rates. The remaining increase in interest income of $1,322,000
represents primarily a 14% increase in interest income from securities owned. Of
this amount, $4,880,000 represents an increase in interest from municipal bonds
related to accrued interest on certain municipal positions. The remaining
decrease in interest income from securities owned of $3,558,000 represents a 43%
decrease in interest income from U.S. government bonds, corporate bonds and
mortgage-backed securities due to a decline in the average levels of securities
owned.
Other income decreased $1,046,000, or 18%, for the fiscal year ended March 31,
1995, when compared to the prior fiscal year. The decrease was primarily due to
a decrease of $1,750,000 in gains related to venture capital investments.
Transfer agent and other fee income related to proprietary mutual funds
increased $605,000, or 36%, for the fiscal year ended March 31, 1995 compared to
the 1994 fiscal year. This increase was due to both an increase in assets in the
funds and certain contractual changes.
FISCAL 1995 COMPARED WITH FISCAL 1994
Operating expenses (total expenses before interest) decreased $10,043,000, or
6%, for the fiscal year ended March 31, 1995, when compared to the prior fiscal
year. Employee compensation and benefits decreased $14,275,000, or 12%, for the
fiscal year ended March 31, 1995. Commission and other sales compensation
expense decreased $10,203,000, or 16%, for the fiscal year ended March 31, 1995,
primarily as a result of the decrease in revenues. Other clerical and
administrative expenses increased $2,628,000, or 8%, for the 1995 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 fiscal year. The remaining $6,700,000
decrease in employee compensation represents decreases in incentive compensation
and profit sharing accruals, which were directly related to the decline in
profitability.
88
<PAGE> 10
All other operating expenses increased $4,232,000, or 10%, for the fiscal year
ended March 31, 1995 when compared to the fiscal year ended March 25, 1994. The
increase in all other operating costs reflects the communications, occupancy and
equipment, and other operating costs related to the expansion of the Company's
business. For the fiscal year ended March 31, 1995, communications expenses
increased $1,574,000, or 14%, primarily due to the effect of the expansion of
the business, including costs related to opening new branches. Occupancy and
equipment costs increased $1,580,000, or 14%, reflecting increases in rent,
equipment, and other occupancy costs in the Company's administrative office, and
in the branch system. Taxes other than income taxes increased $855,000, or 17%,
primarily because of an increase in payroll taxes caused by an increase in the
number of employees.
Interest expense decreased $2,927,000, or 31%, for the fiscal year ended March
31, 1995, when compared to the fiscal year ended March 25, 1994. The decrease in
interest expense was due to lower average borrowings due to a decrease in the
average level of securities owned and the conversion of the Company's
convertible subordinated debentures during the fiscal year ended March 25, 1994.
The decrease in interest expense attributable to lower average borrowings was
partially offset by higher average short-term borrowing rates.
Income before income taxes for the fiscal year ended March 31, 1995, was
$20,704,000, resulting in a pre-tax return on revenues of 11.6%. For the fiscal
year ended March 25, 1994, income before income taxes was $34,688,000, resulting
in a pre-tax return on revenues of 16.9%.
89
<PAGE> 1
EXHIBIT 99(d)
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Fiscal Year Ended
--------- --------- ---------
MARCH 29, March 31, March 25,
1996 1995 1994
--------- --------- ---------
(In thousands, except share and per share amounts)
<S> <C> <C> <C>
REVENUES
Underwriting and investment banking $ 55,659 $ 41,951 $ 64,008
Principal transactions 54,101 45,883 51,769
Commissions 66,498 50,054 53,305
Investment management fees 19,842 15,961 14,542
Interest and dividends 17,170 19,197 15,330
Other 7,351 4,680 5,726
---------- ---------- ----------
220,621 177,726 204,680
========== ========== ==========
EXPENSES
Employee compensation and benefits 127,059 102,557 116,832
Interest 7,638 6,370 9,297
Communications 13,581 12,493 10,919
Occupancy and equipment 15,187 13,061 11,481
Promotion and development 8,282 7,494 7,325
Floor brokerage and clearance 2,557 2,575 2,904
Taxes, other than income taxes 6,515 5,989 5,134
Other operating expenses 9,036 6,483 6,100
---------- ---------- ----------
189,855 157,022 169,992
========== ========== ==========
Income before income taxes 30,766 20,704 34,688
Provision for income taxes 11,000 7,020 13,100
---------- ---------- ----------
Net income $ 19,766 $ 13,684 $ 21,588
========== ========== ==========
Income per share
Primary $ 2.18 $ 1.47 $ 2.38
Fully diluted $ 2.18 $ 1.47 $ 2.28
Average number of shares and share equivalents outstanding 9,072,000 9,303,000 9,076,000
</TABLE>
See Notes to Consolidated Financial Statements.
90
<PAGE> 2
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
MARCH 29, March 31,
1996 1995
--------- ---------
(In thousands, except share and per share amounts)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 12,376 $ 2,850
Receivable from customers 175,973 136,180
Receivable from brokers and dealers 59,219 18,281
Securities purchased under agreements to resell 50,052 88,869
Securities owned 102,202 95,184
Other receivables 18,368 16,368
Furniture, equipment, and leasehold improvements,
at cost, less accumulated depreciation and
amortization of $19,804 at March 29, 1996,
and $18,717 at March 31, 1995 15,719 11,286
Other assets 37,192 32,314
--------- ---------
$ 471,101 $ 401,332
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Short-term borrowings $ 77,024 $ 64,924
Payable to customers 71,722 35,380
Payable to brokers and dealers 15,547 20,786
Securities sold under agreements to repurchase 67,135 52,029
Securities sold but not yet purchased 29,216 47,701
Accrued compensation 28,665 20,282
Accounts payable, accrued expenses and other liabilities 25,969 20,868
Long-term borrowings 25,000 25,000
--------- ---------
340,278 286,970
Commitments and Contingencies
Stockholders' Equity
Preferred Stock, without par value; 200,000 shares
authorized; none issued
Common Stock, par value $1.00 per share;
15,000,000 shares authorized; (11,620,857 and
11,434,788 shares issued, respectively) 11,621 11,435
Additional paid-in capital 51,663 48,342
Retained earnings 93,808 77,034
--------- ---------
157,092 136,811
Less treasury stock, at cost -
2,691,495 shares at March 29, 1996 and
2,481,535 shares at March 31, 1995 (26,269) (22,449)
--------- ---------
130,823 114,362
--------- ---------
$ 471,101 $ 401,332
========= =========
</TABLE>
See Notes to Consolidated Financial Statements.
91
<PAGE> 3
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Additional Retained Treasury
(In thousands, except share and per share amounts) Stock Paid-In Capital Earnings Stock
------ --------------- -------- --------
<S> <C> <C> <C> <C>
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, $.288 per share (2,548)
--------- --------- --------- ---------
BALANCE AT MARCH 25, 1994 11,176 44,916 66,239 (14,926)
Net income for the fiscal year 13,684
Purchase of 674,377 shares of treasury stock, at cost (8,380)
Issuance of 107,980 shares of treasury stock
to satisfy exercise of stock options (127) 857
Issuance of 258,659 shares of common stock 259 3,553
Cash dividends, $.315 per share (2,889)
--------- --------- --------- ---------
BALANCE AT MARCH 31, 1995 11,435 48,342 77,034 (22,449)
Net income for the fiscal year 19,766
Purchase of 249,854 shares of treasury stock, at cost (4,196)
Issuance of 39,894 shares of treasury stock
to satisfy exercise of stock options 56 376
Issuance of 186,069 shares of common stock 186 3,265
Cash dividends, $.335 per share (2,992)
--------- --------- --------- ---------
BALANCE AT MARCH 29, 1996 $ 11,621 $ 51,663 $ 93,808 $ (26,269)
========= ========= ========= =========
</TABLE>
See Notes to Consolidated Financial Statements.
92
<PAGE> 4
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Fiscal Year Ended
MARCH 29, March 31, March 25,
(In thousands) 1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net Income $ 19,766 $ 13,684 $ 21,588
Adjustments to reconcile net income
to net cash (used for) provided by
operating activities:
Depreciation and amortization 5,485 4,973 4,083
Loss on disposal of furniture and equipment 670
Deferred compensation 393 609 298
Deferred income taxes 68 560 (2,219)
Increase in receivable from customers (39,793) (11,886) (40,059)
(Increase) decrease in receivable from brokers
and dealers (40,938) 12,634 5,729
(Increase) decrease in securities owned (7,018) 57,506 9,231
Increase in other receivables (2,000) (4,281) (459)
Increase in payable to customers 36,342 7,160 10,056
Increase (decrease) in payable to brokers and dealers (5,239) (2,741) 17,018
Increase (decrease) in securities sold but not yet
purchased (18,485) (16,943) 22,425
Increase (decrease) in accrued compensation 11,834 (492) 7,353
Increase (decrease) in accounts payable, accrued
expenses and other liabilities 4,708 (7,476) 7,009
-------- --------- --------
Net cash (used for) provided by operating activities (34,207) 53,307 62,053
INVESTING ACTIVITIES:
Purchase of furniture, equipment, and leasehold
improvements (9,993) (5,678) (3,272)
(Increase) decrease in other assets (5,541) 4,109 (4,273)
-------- --------- --------
Net cash (used for) investing activities (15,534) (1,569) (7,545)
FINANCING ACTIVITIES:
(Increase) decrease in securities purchased under
agreements to resell 38,817 127,394 (31,114)
Increase (decrease) in short-term borrowings 12,100 (25,807) (7,322)
Increase (decrease) in securities sold under
agreements to repurchase 15,106 (146,701) (7,807)
Cash dividends (2,992) (2,889) (2,548)
Purchase of treasury stock (4,196) (8,380) (7,259)
Proceeds from issuance of treasury stock 432 730 1,023
Redemption of convertible subordinated debentures (198)
-------- --------- --------
Net cash provided by (used for) financing activities 59,267 (55,653) (55,225)
======== ========= ========
Increase (decrease) in cash and cash equivalents 9,526 (3,915) (717)
Cash and cash equivalents at beginning of fiscal year 2,850 6,765 7,482
-------- --------- --------
Cash and cash equivalents at end of fiscal year $ 12,376 $ 2,850 $ 6,765
======== ========= ========
</TABLE>
See Notes to Consolidated Financial Statements.
93
<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 29, 1996.
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. The Company monitors the risk of loss by assessing the
market value of the underlying securities as compared to the related receivable
or payable, including accrued interest, and requires additional collateral where
deemed appropriate.
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 commissions revenue and expense are recorded
on the settlement date basis. 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.
The excess of the purchase price over net identifiable assets acquired
(goodwill) is included in other assets and is being amortized on the
straight-line basis over a period of 25 years.
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<PAGE> 6
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
NOTE B - 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 29, March 31,
(In thousands) 1996 1995
--------- ---------
<S> <C> <C>
SECURITIES OWNED
Corporate bonds $ 38,962 $42,416
Mortgage-backed securities 31,526 18,040
State and municipal bonds 14,993 18,715
Corporate stocks 13,273 11,740
U.S. government bonds 3,305 3,520
Other 143 753
-------- -------
$102,202 $95,184
======== =======
SECURITIES SOLD BUT NOT YET PURCHASED
U.S. government bonds $ 22,545 $40,799
Corporate stocks 6,512 6,727
Other 159 175
-------- -------
$ 29,216 $47,701
======== =======
</TABLE>
NOTE C - SHORT-TERM BORROWINGS
Short-term borrowings include the following:
<TABLE>
<CAPTION>
MARCH 29, March 31,
(In thousands) 1996 1995
---------- ----------
<S> <C> <C>
Secured bank loans $ 26,280 $ 33,383
Unsecured bank loans 50,744 31,541
--------- ---------
$ 77,024 $ 64,924
========= =========
</TABLE>
Short-term borrowings are bank loans payable on demand at rates ranging from
5.7% to 7.5% at March 29, 1996. The secured loans were collateralized by
customer-owned securities with a market value of $87,947,000 and firm-owned
securities with a market value of $14,807,000 at March 29, 1996. At March 31,
1995, the secured loans were collateralized by customer-owned securities with a
market value of $70,005,000 and firm-owned securities with a market value of
$37,641,000. For the fiscal years ended March 29, 1996 and March 31, 1995, the
weighted average interest rate on short-term borrowings was 6.40% and 5.56%,
respectively.
95
<PAGE> 7
The Company had total lines of credit of $300,000,000 at March 29, 1996, under
which a maximum of $140,000,000 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 5.35% to 6.025% and are collateralized by firm-owned securities with a
market value of $40,194,000 and securities purchased under agreements to resell
with a market value of $26,438,000 at March 29, 1996. For the fiscal years ended
March 29, 1996 and March 31, 1995, the weighted average interest rate on
repurchase agreements was 6.143% and 3.43%, respectively.
NOTE D - 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 pay 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 H).
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 $7,694,000 for the fiscal year ended March 29, 1996,
$6,412,000 for the fiscal year ended March 31, 1995, and $9,171,000 for the
fiscal year ended March 25, 1994.
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<PAGE> 8
NOTE E - INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
Fiscal Year Ended
MARCH 29, March 31, March 25,
(In thousands) 1996 1995 1994
------- ------- --------
<S> <C> <C> <C>
Federal
Current $10,582 $ 6,260 $ 14,399
Deferred 68 560 (2,219)
------- ------- --------
10,650 6,820 12,180
State and local 350 200 920
------- ------- --------
$11,000 $ 7,020 $ 13,100
======= ======= ========
</TABLE>
The provision for income taxes differs from the amount computed using the
federal statutory rates of 35% for the fiscal years ended March 29, 1996, March
31, 1995 and March 25, 1994, as a result of the following:
<TABLE>
<CAPTION>
Fiscal Year Ended
MARCH 29, March 31, March 25,
(In thousands) 1996 1995 1994
------- ------- --------
<S> <C> <C> <C>
Expected tax provision
at statutory rate $10,768 $ 7,246 $ 12,141
Effects of
Non-taxable interest
income (500) (813) (381)
Non-deductible business
meals and entertainment 389 378 142
Other-net 343 209 1,198
------- ------- --------
$11,000 $ 7,020 $ 13,100
======= ======= ========
</TABLE>
97
<PAGE> 9
Significant components of the Company's net deferred tax assets included in
Other assets in the statement of financial condition are as follows:
<TABLE>
<CAPTION>
MARCH 29, March 31,
(In thousands) 1996 1995
------- ---------
<S> <C> <C>
Deferred tax assets:
Employee compensation accruals $ 2,538 $ 2,790
Litigation and other reserves 2,410 1,810
Amortization 343 862
Other 1,010 963
------- ---------
Total deferred tax assets 6,301 6,425
======= =========
Deferred tax liabilities:
Depreciation 694 772
Other 356 334
------- ---------
Total deferred tax liabilities 1,050 1,106
------- ---------
Net deferred tax assets $ 5,251 $ 5,319
======= =========
</TABLE>
Total income taxes paid were $9,426,000 for the fiscal year ended March 29,
1996, $5,400,000 for the fiscal year ended March 31, 1995, and $14,070,000 for
the fiscal year ended March 25, 1994.
NOTE F - 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. For the fiscal
year ended March 25, 1994, 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 on August 10, 1993. Applicable 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 the fiscal 1994 period.
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<PAGE> 10
NOTE G - 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 $2,166,000 at March
29, 1996. The agreements expire in June 1996 and September 1996 and the Company
pays fees at 1% per annum.
The Company is a defendant in various lawsuits incidental to its securities
business. In view of the number and diversity of claims against the Company and
the inherent difficulty of predicting the outcome of litigation and other
claims, the Company cannot state with certainty what the eventual outcome of
pending litigation or other claims will be. The Company provides for costs
relating to these matters when a loss is probable and the amount can be
reasonably estimated. The effect of the outcome of these matters on the
Company's future results of operations cannot be predicted because any such
effect depends on future results of operations and the amount and timing of the
resolution of such matters. While it is not possible to predict with certainty,
management believes that the ultimate resolution of such matters will not have a
material adverse effect on the consolidated financial position, liquidity, or
results of operations of the Company.
Aggregate commitments under operating leases for office space and equipment in
effect as of March 29, 1996, with initial or remaining noncancelable lease terms
in excess of one year are approximately $55,953,000 payable as follows:
1997-$6,555,000; 1998-$6,633,000; 1999-$5,455,000; 2000-$5,052,000;
2001-$4,455,000, and thereafter-$27,803,000. Certain of these leases have
escalation clauses, based on certain increases in costs incurred by the lessor,
and renewal options. Rental expense amounted to $6,744,000 for the fiscal year
ended March 29, 1996, $6,025,000 for the fiscal year ended March 31, 1995, and
$5,429,000 for the fiscal year ended March 25, 1994.
NOTE H - 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 29,
1996, McDonald Securities' net capital under the Rule was $79,020,000 or 35% of
aggregate debit balances, and $74,553,000 in excess of the minimum required net
capital.
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<PAGE> 11
NOTE I - 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. The establishment of short positions exposes 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 enters into short
positions in United States government bonds in order to manage the interest rate
risk related to trading positions in corporate bonds, mortgage-backed securities
and United States government bonds. The Company enters into short positions in
corporate stocks in the ordinary course of operation related to its NASDAQ
trading activities.
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 directly impacted by volatile trading
markets, which may impair the customers' or contra parties' 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.
100
<PAGE> 12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In the normal course of business, the Company enters into underwriting and
forward commitments. At March 29, 1996, the Company's commitments included
forward purchase and sale contracts involving mortgage-backed securities with
market values of approximately $173 million and $173 million, respectively, and
collateralized mortgage obligations with market values of approximately $83
million and $76 million, respectively. At March 31, 1995, the Company's
commitments included forward purchase and sale contracts involving
mortgage-backed securities with market values of approximately $11 million and
$13 million, respectively, and collateralized mortgage obligations with market
values of approximately $37 million and $20 million, respectively. Transactions
relating to such commitments, which were subsequently settled, had no material
effect on financial position.
The average fair values of mortgage-backed securities and collateralized
mortgage obligations included in securities owned was $25,575,000 at March 29,
1996 and $20,359,000 at March 31, 1995.
The revenues from trading mortgage-backed securities and collateralized mortgage
obligations, including both forward and regular-way transactions, are included
in revenues from principal transactions and were $6,180,000, $5,479,000, and
$8,431,000, respectively for the fiscal years ended March 29, 1996, March 31,
1995 and March 25, 1994.
NOTE J - EMPLOYEE BENEFIT PLANS
Effective January 1, 1993, the Company adopted the McDonald & Company
Securities, Inc. Retirement Savings Trust and Plan, a 401(k)
defined-contribution and profit-sharing plan covering substantially all
employees. The Company's profit sharing contribution is determined annually,
based on the Company's performance. The Company's contribution expense related
to the plan was $2,000,000 for the fiscal year ended March 29, 1996, $1,532,000
for the fiscal year ended March 31, 1995, and $2,000,000 for the fiscal year
ended March 25, 1994.
NOTE K - STOCK OPTION AND RESTRICTED STOCK PLANS
The Company had authorized 720,000 shares of Common Stock for issuance under the
Company's Stock Option Plan for employees, which terminated on June 6, 1993. An
additional 28,800 shares were authorized for issuance under the 1990 Stock
Option Plan for Outside Directors. Options outstanding at the time of
termination of these plans continue according to the terms of these plans. The
Company has authorized 500,000 shares of common stock for issuance under the
1995 Key Employees Stock Option Plan. The Company also authorized 50,000 shares
of common stock for issuance under to the Company's 1995 Stock Option Plan for
Non-Officer Directors, subject to shareholder approval at the Annual Meeting of
Shareholders to be held in August, 1996. Stock option activity for the fiscal
years ended March 29, 1996, March 31, 1995, and March 25, 1994, was as follows:
101
<PAGE> 13
<TABLE>
<CAPTION>
1990 Stock Option Plan 1995 Stock Option Plan
Stock Option Plan for Outside Directors for Non-Officer Directors
----------------------------------------------------------------------------------
Number of Price Number of Price Number of Price
Options Range Options Range Options Range
--------- ----------- --------- ------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
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
Exercised (107,980) $3.65-8.12
Canceled (4,912) $6.15-7.32
--------- ----------- ------
Outstanding at March 31, 1995 306,774 $3.65-12.71 19,200 $4.90-9.69
Granted during fiscal 1996 5,000 $17.75-19.88
Exercised (37,014) $5.833-12.604 (2,880) $9.69
Canceled (1,200) $7.316 (1,920) $9.69
--------- ------------- ------ -----
Outstanding at March 29, 1996 268,560 $3.65-12.71 14,400 $4.90-8.85 5,000 $17.75-19.88
========= ============= ====== =====
Exercisable at March 29, 1996 207,946 12,480 -0-
Available for future grant
at March 29, 1996 45,000
</TABLE>
The options under the Company's Stock Option Plan and the 1990 Stock Option Plan
for Outside Directors become exercisable over a five-year period from the date
of grant and expire ten years from the date of grant. Under the 1995 Stock
Option Plan for Non-officer Directors, options become exercisable one year from
the date of grant and expire ten years from the date of grant. 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 2,000,000 shares of Common Stock for issuance
pursuant to the Company's 1995 Stock Bonus Plan (the "Bonus Plan"). Under the
Bonus Plan, restricted stock awards may be granted to certain employees.
Employees who are granted stock awards under the terms of the Bonus Plan may
elect to receive shares of stock which are restricted as to sale or transfer for
a period of two years from the June 1 following the date of grant. These shares
are issued at a discount of 5% from the current market value of the shares.
Alternatively, an employee may elect to receive shares which are subject to
forfeiture if the employee's employment terminates within three years from the
June 1 following the date of grant. These shares are issued at a discount of 15%
from the current market value.
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<PAGE> 14
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Stockholders and Board of Directors
McDonald & Company Investments, Inc.
We have audited the accompanying consolidated statements of financial condition
of McDonald & Company Investments, Inc., and subsidiaries as of March 29, 1996,
and March 31, 1995, and the related consolidated statements of income, changes
in stockholders' equity and cash flows for each of the three fiscal years in the
period ended March 29, 1996. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits 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 financial statements referred to above present fairly, in
all material respects, the consolidated financial position of McDonald & Company
Investments, Inc., and subsidiaries at March 29, 1996, and March 31, 1995, and
the consolidated results of their operations and their cash flows for each of
the three fiscal years in the period ended March 29, 1996, in conformity with
generally accepted accounting principles.
Ernst & Young LLP
Cleveland, Ohio
April 30, 1996
103
