<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ----- EXCHANGE ACT OF 1934
For the quarterly period ended September 26, 1997
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OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ----- EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 1-8526
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McDonald & Company Investments, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 34-1391950
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
McDonald Investment Center, 800 Superior Avenue, Cleveland, Ohio 44114-2603
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area
code (216) 443-2300
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Not Applicable
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Former name, former address and former fiscal year, if changed since last report
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 18,214,128 of Common Stock, par
value $1.00 per share, were outstanding on October 30, 1997.
(1)
<PAGE> 2
McDONALD & COMPANY INVESTMENTS, INC.
INDEX
<TABLE>
<CAPTION>
Page
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<S> <C>
PART I - FINANCIAL INFORMATION
- ------------------------------
Item 1. Financial Statements -
Consolidated statements of financial condition (unaudited) -
September 26, 1997 and March 28, 1997................................................ 3
Consolidated statements of income (unaudited) Fiscal three and six
months ended September 26, 1997
and September 27, 1996............................................................... 4
Consolidated statements of cash flows (unaudited) Fiscal six months
ended September 26, 1997 and
September 27, 1996................................................................... 5
Notes to consolidated financial statements (unaudited) -
September 26, 1997................................................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operation ...................................................................... 8
PART II - OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings..................................................................... 12
Item 4. Submission of Matters to a Vote of Security Holders................................... 13
Item 5. Other Information..................................................................... 14
Item 6. Exhibits and Reports on Form 8-K...................................................... 14
SIGNATURES .............................................................................................. 15
EXHIBIT INDEX ........................................................................................... 16
</TABLE>
(2)
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MCDONALD & COMPANY INVESTMENTS, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (UNAUDITED)
<TABLE>
<CAPTION>
(In thousands, except for share amount)
Sept. 26, 1997 March 28, 1997
-------------- --------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 25,929 $ 8,907
Receivable from customers 200,621 179,606
Receivable from brokers and dealers 56,608 37,500
Securities purchased under agreements
to resell 34,436 43,943
Securities owned 114,923 127,632
Other receivables 33,759 42,597
Furniture, equipment and leasehold
improvements, at cost, less accumulated
depreciation and amortization 18,971 19,562
Other assets 45,147 42,221
--------- ---------
$ 530,394 $ 501,968
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Short-term borrowings $ 60,890 $ 46,285
Payable to customers 69,015 55,656
Payable to brokers and dealers 50,857 44,476
Securities sold under agreements to repurchase 47,445 67,151
Securities sold but not yet purchased 48,495 48,350
Accrued compensation 29,437 33,548
Accounts payable, accrued expenses and
other liabilities 31,948 27,380
Long-term borrowings 25,000 25,000
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$ 363,087 $ 347,846
========= =========
Stockholders' equity
Preferred Stock, without par value;
200,000 shares authorized; none issued
Common Stock, par value $1.00 per share;
50,000,000 shares authorized
(23,733,360 and 23,603,240 shares
issued respectively) 23,733 11,802
Additional paid-in capital 46,315 55,868
Retained earnings 125,735 115,189
Less treasury stock, at cost (5,519,232 and
5,569,872 shares, respectively) (28,476) (28,737)
--------- ---------
167,307 154,122
========= =========
$ 530,394 $ 501,968
========= =========
</TABLE>
See Notes to consolidated financial statements (unaudited).
(3)
<PAGE> 4
MCDONALD & COMPANY INVESTMENTS, INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
Fiscal Three Months Ended Fiscal Six Months Ended
------------------------- -----------------------
Sept. 26, 1997 Sept. 27, 1996 Sept. 26, 1997 Sept. 27, 1996
(13 weeks) (13 weeks) (26 weeks) (26 weeks)
-------------- --------------- -------------- ---------------
<S> <C> <C> <C> <C>
(In thousands, except for share and per share amounts)
Revenues:
Underwriting and investment banking $ 18,363 $ 15,946 $ 28,835 $ 37,192
Principal transactions 13,784 13,967 30,727 29,204
Commissions 25,432 17,533 47,571 36,634
Investment management fees 8,330 6,025 15,794 11,601
Interest and dividends 5,905 4,616 11,586 9,274
Other 1,756 1,530 3,619 3,044
----------- ----------- ----------- -----------
$ 73,570 $ 59,617 $ 138,132 $ 126,949
----------- ----------- ----------- -----------
Expenses:
Employee compensation and benefits $ 42,879 $ 33,985 $ 80,009 $ 73,945
Interest 2,575 2,149 4,997 4,349
Communications 4,175 3,835 7,777 7,484
Occupancy and equipment 5,441 4,330 10,462 8,667
Promotion and development 2,621 2,256 5,149 4,696
Floor brokerage and clearance 745 680 1,423 1,273
Taxes, other than income taxes 2,162 1,806 4,296 3,642
Other operating expenses 2,385 2,303 4,511 4,562
----------- ----------- ----------- -----------
$ 62,983 $ 51,344 $ 118,624 $ 108,618
----------- ----------- ----------- -----------
Income before income taxes $ 10,587 $ 8,273 $ 19,508 $ 18,331
Provision for income taxes 3,680 3,000 6,980 6,600
----------- ----------- ----------- -----------
Net income $ 6,907 $ 5,273 $ 12,528 $ 11,731
=========== =========== =========== ===========
Net income per share $ .37 $ .29 $ .68 $ .65
=========== =========== =========== ===========
Dividends per share $ .0625 $ .0469 $ .1094 $ .0894
=========== =========== =========== ===========
Average number of shares and share equivalents
outstanding 18,483,000 18,170,000 18,430,000 18,220,000
=========== =========== =========== ===========
</TABLE>
See Notes to consolidated financial statements (unaudited).
(4)
<PAGE> 5
MCDONALD & COMPANY INVESTMENTS, INC.
------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
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<TABLE>
<CAPTION>
(In thousands)
Fiscal Six Months Ended
-----------------------
Sept. 26, 1997 Sept. 27, 1996
--------------- ---------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net Income $ 12,528 $ 11,731
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 3,935 3,535
Deferred compensation 1,146 328
Deferred income taxes (491) (434)
Increase in receivable from customers (21,015) (2,028)
Increase (decrease) in receivable from brokers and dealers (19,108) 6,090
Decrease (increase) in securities owned 12,709 (45,679)
Decrease (increase) in other receivables 8,838 (5,752)
Increase (decrease) in payable to customers 13,359 (12,093)
Increase (decrease) in payable to brokers and dealers 6,381 (7,544)
Increase in securities sold but not yet purchased 145 77,745
(Decrease) increase in accrued compensation (1,657) 2,296
Increase (decrease) in accounts payable, accrued expenses and other 3,422 (1,173)
-------- --------
Net cash provided by operating activities $ 20,192 $ 27,022
======== ========
INVESTING ACTIVITIES:
Purchase of furniture, equipment and leaseholds $ (3,016) $ (6,053)
Increase in other assets (2,763) (3,157)
-------- --------
Net cash used for investing activities $ (5,779) $ (9,210)
======== ========
FINANCING ACTIVITIES:
Decrease (increase) in securities purchased under agreement to resell $ 9,507 $(71,825)
Decrease (increase) in short-term borrowings 14,605 (4,213)
Decrease (increase) in securities sold under agreements to repurchase (19,706) 54,983
Cash dividends (1,982) (1,597)
Purchase of treasury stock --- (3,314)
Proceeds from issuance of treasury stock 185 400
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Net cash provided by (used for) financing activities $ 2,609 $(25,566)
-------- --------
Increase (decrease) in cash and cash equivalents 17,022 (7,754)
Cash and cash equivalents at beginning of period 8,907 12,376
-------- --------
Cash and cash equivalents at end of period $ 25,929 $ 4,622
======== ========
</TABLE>
See Notes to consolidated financial statements (unaudited).
(5)
<PAGE> 6
McDONALD & COMPANY INVESTMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
September 26, 1997
NOTE A - BASIS OF PRESENTATION
- ------ ---------------------
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 accompanying unaudited consolidated financial statements do not include all
of the information and notes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments, consisting only of normal and recurring adjustments, considered
necessary for a fair presentation of the financial condition and results of
operations for the periods presented have been included.
NOTE B - LONG-TERM BORROWINGS
- ------ --------------------
McDonald & Company Securities, Inc., ("McDonald Securities") has outstanding
$25,000,000 in aggregate principal amount of 8.24% Subordinated Notes due
January 15, 2002. McDonald Securities is required to prepay principal amounts of
$5,000,000 on January 15 in each year beginning in 1998. The notes are
subordinated in right of payment to all senior indebtedness of McDonald
Securities. The principal amount of the notes has been approved by the New York
Stock Exchange, Inc. for inclusion in the regulatory capital of McDonald
Securities.
NOTE C - NET INCOME PER SHARE
- ------ --------------------
Net income per share is based on the average number of share and share
equivalents outstanding during the periods. Share equivalents represent the
effect of shares issuable under the Company's stock option plans. On July 30,
1997, the Company declared a 100% stock dividend, which was distributed on
September 15, 1997, to shareholders of record on August 25, 1997. Share and per
share information have been restated to reflect the effect of the stock dividend
as if it had occurred at the beginning of each period presented.
NOTE D - CONTINGENCIES
- ------ -------------
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.
(6)
<PAGE> 7
McDONALD & COMPANY INVESTMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
September 26, 1997
CONTINGENCIES (cont.)
- ---------------------
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, Ohio, Court of Common Pleas. 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 plaintiffs, 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 plaintiffs seek to hold each of the defendants liable for
compensatory and consequential damages. In addition, 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 plaintiffs seek to hold McDonald Securities liable for
compensatory, consequential and punitive damages as a result of its role as an
underwriter of the TANS/CRANS offerings. In June 1996, the court denied motions
to dismiss the plaintiffs' claims filed by McDonald Securities and various other
defendants. In February 1997, the court granted defendants' motion to disqualify
the Cuyahoga County Prosecutor's Office from the case. That ruling is currently
being appealed by the plaintiffs. In April 1997, pursuant to a stipulation
entered into between the plaintiffs and McDonald Securities' co-defendant in the
allegations related to the TANS/CRANS offerings, the plaintiffs dismissed their
TANS/CRANS claims against the co-defendant, without prejudice.
On December 23, 1996, McDonald Securities filed an answer denying the
allegations of liability made by the plaintiffs and raising a number of
affirmative defenses to the plaintiffs' allegations. McDonald Securities also
filed counterclaims against one of the plaintiffs, the Cuyahoga County Board of
Commissioners (the "Board"). McDonald Securities' counterclaims consist of a
breach of contract claim arising out of representations and warranties made by
the Board concerning the absence of material misstatements or omissions in the
Official Statements for the TANS/CRANS offerings, and an estoppel claim arising
out of McDonald Securities' justifiable reliance on assurance provided by the
Board concerning, among other things, the investment experience of the Board's
agents, the authorizations of the transactions in question by the Board's
Investment Committee and the conformity of such transactions with the County's
investment policies and procedures. The case is currently in the discovery stage
and no trial date has been set. Based on the facts known to date, the Company
believes that the plaintiffs' claims against McDonald are without merit, and
intends to contest vigorously the allegations in the complaint.
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, including the Jones' Litigation,
will not have a material adverse effect on the consolidated financial position,
liquidity, or results of operations of the Company.
(7)
<PAGE> 8
ITEM 2. 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. In that regard, the Federal Reserve Board has increased the
percentage of a bank holding company's revenue that may be derived from the
securities activities of non-bank affiliates, including underwriting, and
eliminated or refined a number of "firewall" provisions that historically
separated banks from their securities subsidiaries. In addition, legislation
designed to further ease the restrictions on banks' ability to underwrite
securities and to reduce barriers to competition between banks and securities
firms is under consideration by the United States Congress. The Company also
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 effect
on the Company's business.
The Company has formulated a comprehensive strategic plan which is periodically
reviewed and revised. The plan emphasizes the Company's historical roots as a
regional brokerage and investment banking firm. The Company has focused on the
Ohio, Michigan and Indiana markets by increasing the number of sales
representatives covering individual investors, as well as increasing investment
banking activities in this region. The Company's institutional equity and fixed
income sales departments cover accounts throughout the United States and
internationally.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The majority of the Company's assets are highly liquid and short-term in nature.
Cash and liquid assets, principally receivables from customers, brokers and
dealers, securities purchased under agreements to resell, and securities owned
approximate 90% of the Company's assets at September 26, 1997. These assets are
financed by a number of sources, including the Company's capital and short-term
borrowings.
At September 26, 1997, McDonald Securities had outstanding $25,000,000 in
aggregate principal amount of 8.24% Subordinated Notes due January 15, 2002.
McDonald Securities is required to pay principal amounts of $5,000,000 on
January 15 in 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 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 $325,000,000, of which $275,928,000 was unused at September
26, 1997. Management believes that funds from operations, available lines of
credit, and long-term borrowings provide sufficient resources to meet present
and anticipated financial needs.
Certain minimum amounts of capital must be maintained by the Company's principal
broker/dealer subsidiary, McDonald Securities, to satisfy the regulatory
requirements of the Securities and Exchange Commission and the New York Stock
Exchange. The regulatory requirements represent Uniform Net Capital Rules
designed to measure the general financial integrity and liquidity of registered
broker/dealers and provide minimum acceptable net capital levels to meet
continuing commitments to customers. Net capital, as defined, changes from day
to day. At September 26, 1997, McDonald Securities was in compliance with the
Uniform Net Capital Rules and had net capital of $86,364,000, which was
$81,605,000 in excess of the minimum required.
(8)
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
----------------------------------------------------------------
RESULTS OF OPERATIONS (continued)
---------------------------------
FISCAL THREE AND SIX MONTH PERIODS ENDED SEPTEMBER 26, 1997 AND SEPTEMBER 27,
- -----------------------------------------------------------------------------
1996
- ----
Total revenues for the fiscal quarter ended September 26, 1997 were $73,570,000,
an increase of $13,953,000, or 23%, from revenues of $59,617,000 for the fiscal
quarter ended September 27, 1996.
For the fiscal six months ended September 26, 1997, total revenues were
$138,132,000 compared to $126,949,000 for the first six months of fiscal 1997,
an increase of $11,183,000, or 9%.
Net income for the fiscal quarter ended September 26, 1997 was $6,907,000, or
$.37 per share, compared with net income of $5,273,000, or $.29 per share, for
the fiscal quarter ended September 27, 1996, which represents an increase in net
income of 31%.
For the fiscal six months ended September 26, 1997, net income was $12,528,000
or $.68 per share, compared to $11,731,000 or $.65 per share, for the fiscal six
months ended September 27, 1996, an increase in net income of 7%.
The average number of shares and share equivalents outstanding were 18,483,000
and 18,430,000, respectively, for the fiscal three and six month period ended
September 26, 1997 compared to 18,170,000 and 18,220,000, respectively, for the
fiscal three and six months ended September 27, 1996.
On July 30, 1997, the Company declared a 100% stock dividend, which was
distributed on September 15, 1997, to shareholders of record on August 25, 1997.
Share and per share information have been restated to reflect the effect of the
stock dividend as if it had occurred at the beginning of each period presented.
Revenues from underwriting and investment banking increased $2,417,000, or 15%,
for the quarter and decreased $8,357,000, or 22%, for the six months ended
September 26, 1997 when compared to the same periods in the prior fiscal year.
Revenues from corporate underwriting and investment banking increased
$2,880,000, or 19%, for the second quarter and decreased $8,137,000, or 23%, for
the six month period. The increase for the quarter is primarily due to increased
revenues from equity and debt public offerings of $3,657,000, or 57%. This
increase was partially offset by decreased revenues from equity syndicate
participations of $1,015,000, or 56%, for the quarter. The decrease for the six
month period is primarily due to decreased revenues from private placements of
$11,035,000, or 98%, and decreased revenues from equity syndicate participations
of $1,824,000, or 55%. Included in private placement revenues during the first
six months of fiscal 1997 were fees of $9,336,000 from a single $500 million
private placement of debt and equity securities. These decreases were partially
offset by increased revenue from equity and debt public offerings of $3,829,000,
or 31% for the six month period. The increase in revenues from equity and debt
public offerings for both the quarter and six month period reflects improved
market conditions for the public offerings of securities. The decrease in
revenues from equity syndicate participations for both the quarter and six month
period reflects the continuing trend of lead managers decreasing the allocation
of underwriting participations to regional firms. Revenues from municipal
finance decreased $463,000, or 39%, for the quarter and decreased $220,000, or
12%, for the six months ended September 26, 1997 when compared to the same
periods in the prior fiscal year.
Revenues from underwriting and investment banking activities are highly
dependent on general market conditions for such business activities. Market
conditions for underwriting and investment banking services can be affected by
political and economic events both in the United States and abroad. To the
extent future events are unpredictable, uncertainty will be a factor in the
level of McDonald Securities' business activity. Also, competitive pressure from
other investment banking firms can and will have 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.
Revenues from principal transactions decreased $183,000, or 1%, for the second
quarter of fiscal 1998 and increased $1,523,000, or 5%, for the first six months
when compared to the same periods in the prior fiscal year. Revenues from
principal transactions in equity securities increased $715,000, or 14%, for the
second quarter and increased $2,018,000, or 17%, for the first six months
primarily due to a strong NASDAQ market and the continued
(9)
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
---------------------------------------------------------------
RESULTS OF OPERATIONS (continued)
---------------------------------
FISCAL THREE AND SIX MONTH PERIODS ENDED SEPTEMBER 26, 1997 AND SEPTEMBER 27,
- -----------------------------------------------------------------------------
1996 (cont.)
- ------------
expansion of the Company's sales force. Revenues from trading taxable
fixed-income securities, including corporate bonds, United States government
bonds and mortgage-backed securities, decreased $513,000, or 8%, for the second
quarter and $403,000, or 3%, for the first six months of fiscal 1998. Revenues
from trading municipal bonds decreased $385,000, or 15%, for the second quarter
and $92,000, or 2%, for the first six months.
Commissions revenue increased $7,899,000, or 45%, in the current quarter and
$10,937,000, or 30%, in the first six months when compared to the same periods
in fiscal 1997. Commissions revenues from agency transactions in listed stocks
increased $4,724,000, or 59%, for the quarter and $6,821,000, or 39%, for the
six month period primarily due to improved market conditions. Commissions
revenues from agency transactions in NASDAQ stocks increased $581,000, or 26%,
for the quarter and decreased $38,000, or 1% for the six month period.
Commissions revenue from non-proprietary mutual funds increased $1,658,000, or
42%, for the first quarter and $2,475,000, or 30%, for the first six months.
Commissions revenue from proprietary mutual funds increased $291,000, or 17%,
for the quarter and $426,000, or 12% for the first six months. The increase in
commissions revenue for both non-proprietary and proprietary mutual funds is due
to the increased popularity of mutual fund investments with individual
investors. Commissions revenue from annuity and life insurance products
increased $645,000 or 51%, for the quarter and $1,253,000, or 57%, for the first
six months primarily due to increased marketing efforts for the sale of these
products.
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 individually managed accounts. Revenues from investment
management fees increased $2,305,000, or 38%, and $4,193,000, or 36% for the
fiscal quarter and six month periods ended September 26, 1997 when compared to
the comparable fiscal 1997 periods. Of these amounts, revenues from advisory
fees related to individually managed accounts represented $1,704,000, or 74%,
and $3,183,000, or 76%, respectively, of the total increase for the fiscal three
and six month periods.
Interest and dividend income increased $1,289,000, or 28%, and $2,312,000, or
25%, for the fiscal three and six month periods ended September 26, 1997 when
compared to the same periods in the prior fiscal year. The increase was due
primarily to a higher level of customer margin loans and securities owned in the
current periods when compared to the same periods in the prior fiscal year.
Other income increased $226,000, or 15%, for the current quarter and $575,000,
or 19%, for the six month period ended September 26, 1997. Of these amounts,
increased income from venture capital investments represented $81,000, or 36%,
and $433,000, or 75% respectively, of the total increase for the fiscal three
and six month periods. The remaining increase represents additional revenue from
service fees and other retail revenues related to the continued expansion of the
retail sales force.
Operating expenses (total expenses before interest) increased $11,213,000, or
23%, for the second quarter and $9,358,000, or 9%, for the first six months of
fiscal 1998, when compared to the same period in the prior fiscal year.
Employee compensation and benefits increased $8,894,000, or 26%, for the second
quarter and $6,064,000, or 8%, for the first six months. Commission and other
sales compensation expense increased $4,745,000, or 26%, for the quarter and
$6,487,000, or 18% for the first six months, primarily because of increased
revenues from commissions and changes in the business mix and product mix which
affect sales compensation. Other clerical and administrative expenses increased
$1,649,000, or 16%, for the quarter and $2,777,000, or 13% for the first six
month period. The increase in other clerical and administrative expenses
represents compensation and employee benefit costs related to an increase in the
professional and support staff in the current periods when compared to the same
periods in the prior fiscal year. The remaining increase in employee
compensation and benefits of $2,500,000, or 48%, for the second quarter
represents increases in incentive compensation and profit sharing accruals
resulting
(10)
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
---------------------------------------------------------------
RESULTS OF OPERATIONS (continued)
---------------------------------
FISCAL THREE AND SIX MONTH PERIODS ENDED SEPTEMBER 26, 1997 AND SEPTEMBER 27,
- -----------------------------------------------------------------------------
1996 (cont.)
- ------------
from an increase in pretax income before incentive compensation expense. The
incentive compensation expense was also impacted by the change in business and
product mix. For the six months ending September 26, 1997, the remaining
decrease in employee compensation and benefits of $3,200,000, or 20%, represents
decreases in incentive compensation and profit sharing accruals resulting from a
decrease in pretax income before incentive compensation expense. The lower level
of incentive compensation expense also reflects the lower level of investment
banking revenues when compared to the same period of the prior fiscal year.
All other operating expenses increased $2,319,000, or 15%, for the first quarter
and $3,294,000, or 11%, for the first six months of fiscal 1998 when compared to
fiscal 1997. Communications expense increased $340,000, or 9%, for the current
quarter and $293,000, or 4% for the first six months of the current fiscal year.
The remaining increase is primarily due to the continued expansion of the
Company's business and branch network. Occupancy and equipment costs increased
$1,111,000, or 26%, for the current quarter and $1,795,000, or 21%, for the
first six months of the current fiscal year. Of this increase, approximately
$350,000 for the quarter and $785,000 for the six month period represents
expenses related to the renovation of the Company's headquarters office. The
remaining increase is primarily due to the continued expansion of the Company's
business and branch network. Promotional and business development expenses
increased $365,000, or 16%, for the current quarter and $453,000, or 10%, for
the first six month period, due to increased promotional, travel and business
entertainment expenses resulting from the continued expansion of the Company's
business. The category of other operating expenses increased $82,000, or 4%, for
the current quarter and decreased $51,000, or 1%, for the first six month
period.
Interest expense increased $426,000, or 20%, and $648,000, or 15%, for the
fiscal three and six month periods in the current fiscal year when compared to
the same periods in fiscal 1997. The increase in interest expense is due to
higher levels of short-term borrowings which increased primarily as a result of
higher customer margin loans and a higher level of securities owned.
Income before income taxes for the fiscal quarter and fiscal six months ended
September 26, 1997 was $10,587,000 and $19,508,000, resulting in pre-tax return
on revenues of 14.4% and 14.1% respectively. For the fiscal quarter and fiscal
six months ended September 27, 1996, income before income taxes was $8,273,000
and $18,331,000, resulting in pre-tax revenues of 13.9% and 14.4% respectively.
(11)
<PAGE> 12
PART II. OTHER INFORMATION
Item 1. 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.
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, Ohio, Court of Common Pleas. 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 plaintiffs, 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 plaintiffs seek to hold each of the defendants liable for
compensatory and consequential damages. In addition, 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 plaintiffs seek to hold McDonald Securities liable for
compensatory, consequential and punitive damages as a result of its role as an
underwriter of the TANS/CRANS offerings. In June 1996, the court denied motions
to dismiss the plaintiffs' claims filed by McDonald Securities and various other
defendants. In February 1997, the court granted defendants' motion to disqualify
the Cuyahoga County Prosecutor's Office from the case. That ruling is currently
being appealed by the plaintiffs. In April 1997, pursuant to a stipulation
entered into between the plaintiff and McDonald Securities' co-defendant in the
allegations related to the TANS/CRANS offerings, the plaintiff dismissed their
TANS/CRANS claims against the co-defendant, without prejudice.
On December 23, 1996, McDonald Securities filed an answer denying the
allegations of liability made by the plaintiffs and raising a number of
affirmative defenses to the plaintiffs' allegations. McDonald Securities also
filed counterclaims against one of the plaintiffs, the Cuyahoga County Board of
Commissioners (the "Board"). McDonald Securities' counterclaims consist of a
breach of contract claim arising out of representations and warranties made by
the Board concerning the absence of material misstatements or omissions in the
Official Statements for the TANS/CRANS offerings, and an estoppel claim arising
out of McDonald Securities' justifiable reliance on assurance provided by the
Board concerning, among other things, the investment experience of the Board's
agents, the authorizations of the transactions in question by the Board's
Investment Committee and the conformity of such transactions with the County's
investment policies and procedures. The case is currently in the discovery stage
and no trial date has been set. Based on the facts known to date, the Company
believes that the plaintiffs' claims against McDonald Securities are without
merit, and intends to contest vigorously the allegations in the complaint.
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
(12)
<PAGE> 13
Item 1. Legal Proceedings (cont)
------------------------
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
---------------------------------------------------
The Annual Meeting of Stockholders of the Company was held on July 30, 1997. The
following matters were voted on at the meeting.
1. Election of Thomas M. O'Donnell, Donald E. Weston and Edward Fruchtenbaum as
Directors of the Company. The nominees were elected as Directors with the
following votes:
Thomas M. O'Donnell
- -------------------
For 7,362,626
Withheld 193,425
Broker non-votes 0
Donald E. Weston
- ----------------
For 7,362,025
Withheld 194,026
Broker non-votes 0
Edward Fruchtenbaum
- -------------------
For 7,276,597
Withheld 279,454
Broker non-votes 0
2. Approval and adoption of an Amendment to the Certificate of Incorporation to
Increase the Number of Shares of Outstanding Common Stock from 15,000,000 to
50,000,000:
For 6,290,458
Against 1,236,136
Abstain 29,456
Broker non-votes 0
3. Approval and adoption of an Amendment to the McDonald & Company Investments,
Inc. 1995 Stock Bonus Plan:
For 7,341,955
Against 171,548
Abstain 37,280
Broker non-votes 5,268
For information on how votes for the above matters have been tabulated, see the
Company's definitive Proxy Statement used in connection with the Annual Meeting
of Stockholders held on July 30, 1997.
(13)
<PAGE> 14
Item 5. Other Information
-----------------
On August 7, 1996, 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 $25,000,000. 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 quarter ended September 26, 1997 the Company utilized 46,132
of the Company's Common Stock held in treasury to satisfy options exercised
under the Stock Option Plan for employees.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
<TABLE>
<CAPTION>
Sequential
(a.) The following exhibit is filed as part of this report: Page Number
-----------
<S> <C> <C>
Exhibit 10(s) Documents Reflecting Line of Credit with Star Bank 17
Exhibit 11 Statement re: Computation of Per Share Earnings 29
Exhibit 27 Financial Data Schedule BD
</TABLE>
(b.) Reports on Form 8-K:
The Company did not file a Report on Form 8-K during the fiscal
quarter ended September 26, 1997
* Exhibit 27 is Furnished for Securities and Exchange Commission Purposes Only.
(14)
<PAGE> 15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
McDonald & Company Investments, Inc.
------------------------------------
(Registrant)
Date: October 30, 1997 By: /s/William B. Summers, Jr.
---------------- -----------------------------------------
William B. Summers, Jr.
President and Chief Executive Officer
(Principal Executive Officer)
Date: October 30, 1997 By: /s/Robert T. Clutterbuck
---------------- -----------------------------------
Robert T. Clutterbuck
Treasurer
(Principal Financial Officer)
(15)
<PAGE> 16
McDonald & Company Investments, Inc.
Report on FORM 10-Q for the Fiscal Quarter ended September 26, 1997
EXHIBIT INDEX
-------------
<TABLE>
<CAPTION>
Exhibit No. Description Sequential Page
- ----------- ----------- ---------------
<S> <C> <C>
10(s) Document Reflecting Line of Credit with Star Bank 17
11 Statement re: Computation of Per Share Earnings 29
27 Financial Data Schedule
</TABLE>
*Exhibit 27 is Furnished for Securities and Exchange Commission Purposes Only
(16)
<PAGE> 1
EXECUTION COPY
October 19, 1995
McDonald & Company Securities, Inc.
McDonald Investment Center
800 Superior Avenue
Cleveland OH 44114
Attention: Mr. George Brooks, Senior Vice President/Credit Manager
Ladies and Gentlemen:
This loan agreement dated October 19, 1995 (the "Loan Agreement"),
together with the related documents referred to herein, sets forth the terms
under which Star Bank, National Association ("Bank") will extend loans to
McDonald & Company Securities, Inc., an Ohio corporation ("Borrower").
1. Loans.
------
1.1 REVOLVING LOAN. Subject to the terms of this Loan
Agreement and that either a Clearing Period and/or Event of Default (both as
hereinafter defined) does not then exist, or would arise by reason of Borrower
receiving a loan from Bank hereunder, Bank agrees to lend and relend to
Borrower, on an overnight basis, during the period from this date to the earlier
of (a) August 29, 1996 or (b) the date that an Event of Default occurs (the
earlier of such dates is known as the "Termination Date"), such amounts (but in
any event not less than $1,000,000 per each request) as Borrower may from time
to time request (the "Revolving Loan"). The proceeds of the Revolving Loan are
to be used by Borrower for working capital purposes. In no event will the
outstanding principal balance of the Revolving Loan exceed at any time
$20,000,000 (the "Maximum Amount"). If the Revolving Loan ever exceeds the
Maximum Amount, Borrower will immediately repay such principal amount of the
Revolving Loan such that the outstanding balance of the Revolving Loan does not
exceed the Maximum Amount. The Revolving Loan shall mature and be payable in
full on August 29, 1996 or on any earlier Termination Date.
1.2 INTEREST. Each borrowing of the Revolving Loan will bear
interest at the per annum rate(s) offered by Bank in its sole discretion to
Borrower. Interest on the Revolving Loan is payable in arrears by Borrower to
Bank upon the due date for each amount borrowed, or on demand, and when the
Revolving Loan is due and payable (whether by stated maturity, acceleration or
otherwise). A "Clearing Period" is a period of three consecutive business days
commencing on the day immediately after that the principal balance of the
Revolving Loan has been reduced to zero and the Revolving Loan was secured by
Collateral (as hereinafter defined) on the date it was reduced to zero.
17
<PAGE> 2
1.3 REVOLVING NOTE. The Revolving Loan will be evidenced by a
Revolving Promissory Note, in the form of EXHIBIT A attached hereto, of even
date herewith, the obligations and terms of which are incorporated herein by
reference (said Promissory Note, as amended, restated, supplemented and/or
renewed from time to time, is known as the "Revolving Note").
1.4 COLLATERAL. In the event that there is an outstanding
principal balance of the Revolving Loan for a period of seven consecutive days,
then on the next following business day Borrower will deliver to Bank Acceptable
Marketable Securities having a Market Value (both as hereinafter defined) equal
to the aggregate of (i) the outstanding principal amount of the Revolving Loan
plus (ii) the Required Margin (as hereinafter defined) to secure the repayment
of all amounts owing in respect of the Revolving Loan, including the principal
thereof and interest thereon. Acceptable Marketable Securities (and all
substitutions therefor or replacements thereof and proceeds thereof) delivered
to the Bank pursuant to this Section 1.4 shall be referred to as the
"Collateral". Delivery to Bank of Acceptable Marketable Securities will be
deemed to have occurred in the case of Acceptable Marketable Securities issued
as certificated securities, by the physical delivery of the certificates
representing such Acceptable Marketable Securities, and in the case of
Acceptable Marketable Securities issued in book entry or uncertificated form, by
such appropriate notifications to and consequent transfers by the custodians or
depositories thereof such that Bank is deemed to be in possession of such
Acceptable Marketable Securities. All Collateral will be pledged and delivered
to Bank will be owned by Borrower free and clear of all liens, security
interests encumbrances or adverse interests. "Acceptable Marketable Securities"
means cash or securities that are direct obligations of the United States of
America or any agency thereof, or other readily marketable securities acceptable
to the Bank in its sole discretion, but excluding in all cases, "margin
securities" as within the meaning of such term within Regulations G, T, U and X
of the Federal Reserve Board. "Market Value" means, in the case of cash, the
amount thereof, and , in the case of securities, the fair market value of the
security involved, as determined by Bank in its sole discretion. "Required
Margin" means an amount equal to a percentage, determined by the Bank in its
sole discretion from time to time, of the outstanding principal amount of the
Revolving Loan, as such percentage may be increased or decreased from time to
time by the Bank in its sole discretion.
The Borrower will execute and deliver a Pledge Agreement to further
evidence the pledge of, and grant of a security interest in, the Acceptable
Marketable Securities delivered from time to time. Borrower agrees to execute or
cause to be executed and delivered to Bank all additional documentation
requested by Bank to evidence or assure the protection, perfection and
enforceability of the Collateral. The provisions of the various documents
providing or relating to the Collateral and of the Loan Documents supplement and
are in addition to those of this Loan Agreement and any inconsistent provisions
shall be interpreted in all respects in favor of Bank.
2. REPRESENTATIONS AND WARRANTIES. To induce Bank to agree to make the
loans described in Section 1, Borrower represents and warrants:
2.1 CORPORATE EXISTENCE AND QUALIFICATION. Borrower is duly
organized, validly existing and in good standing under the laws of Ohio, is
qualified to do business in all states where it is required to do so, and has
all necessary authority to carry on its business as it is now being conducted.
Borrower is a wholly-owned subsidiary of McDonald & Company Investments, Inc.
(the "Parent").
18
<PAGE> 3
2.2 AUTHORIZATION. The execution, delivery and performance by
Borrower of this Loan Agreement and the other documents and instruments executed
in connection with this Loan Agreement and the Revolving Loan (this Loan
Agreement and such other documents and instruments, as amended, restated,
supplemented and/or renewed from time to time, are known collectively as the
"Loan Documents") have been duly authorized and will not violate any law,
organizational or corporate documents of Borrower, or agreement binding on
Borrower.
2.3 FINANCIAL STATEMENT. Borrower's financial statements dated
March 31, 1995, which have been furnished to Bank, have been prepared in
conformity with generally accepted accounting principles consistently applied
("GAAP") and fairly present the financial condition and operations of Borrower.
Since the date of such statements there has been no material adverse change in
Borrower's financial condition. The consolidated balance sheet of the Parent 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 Parent at such dates and for such period, and were prepared in
accordance with GAAP.
2.4 NO ADVERSE CHANGES. Since June 30, 1995, there has been no
material adverse change in the condition, financial or otherwise, of the
Borrower or the Parent.
2.5 LITIGATION. There are no outstanding judgments against, or
actions, suits or proceedings pending, or to the best knowledge of the Borrower,
threatened against or affecting it, 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 or liability not fully covered by insurance or which
may result a material adverse change in the business, operations, properties or
condition (financial or otherwise) of the Borrower, except as disclosed in the
financial statements referred to in Section 2.3
2.6 CORRECTNESS OF DATA FURNISHED. This agreement and all of
the other Loan Documents 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 misleading; and there is no fact not otherwise disclosed
in writing to the Bank which, to the knowledge of the Borrower, would have a
material adverse effect on the business, operations, properties or condition
(financial or otherwise) of the Borrower.
2.7 NOT A "PURPOSE CREDIT". None of the proceeds of the
Revolving Loan will be used, directly or indirectly, by the Borrower 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" within the meaning of Regulations G, T, U or X of the
Board of Governors of the Federal Reserve System or for any other purpose which
might cause the transactions contemplated hereby to be considered a "purpose
credit" within the meaning of said Regulations, or which might cause this
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.
19
<PAGE> 4
2.8 LIENS. None of the material assets of Borrower is subject
to any lien or encumbrance other than those liens noted in the financial
statements referred to above. No default (or event which, with notice or passage
of time, would constitute a default) exists under any obligation of Borrower for
borrowed money or under which any property of Borrower is encumbered.
2.9 PURPOSE AND USE OF LOAN PROCEEDS. The loan proceeds will
be used by the Borrower solely for working capital purposes.
2.10 INCORPORATION OF REPRESENTATIONS FROM NOTE PURCHASE
AGREEMENT. The representations and warranties of Borrower contained in Sections
2.7, 2.10, 2.11, 2.12, 2.13, 2.14, 2.15, 2.16, 2.17, 2.18, 2.19 (referring to
the Loan Documents in place of the Notes referred to therein) and 2.22(b) of
that certain Note Purchase Agreement, dated as of January 15, 1993 (the "Note
Purchase Agreement"), each of which, including all defined terms used therein
and all schedules attached to such Note Purchase Agreement and referred to in
such sections, is incorporated herein by this reference as if fully rewritten at
length herein, and are hereby made by Borrower to Bank. It is further agreed
that no amendment with respect to the such incorporated sections (or the defined
terms used therein) of the Note Purchase Agreement shall be effective as to this
Agreement until specifically agreed to in writing by the Bank.
3. Affirmative Covenants.
----------------------
3.1 PAYMENT. Borrower will pay when due all amounts owed under
this Loan Agreement and the other Loan Documents (collectively, the
"Obligations"), and will comply with all of the terms of this Loan Agreement and
the other Loan Documents.
3.2 INCORPORATED COVENANTS. The Borrower will observe, perform
and comply with each and every covenant, term and provision contained in
Sections 7.1, 7.2, 7.8, 7.9, 7.10, 7.11, 7.12, 8.1, 8.2, 8.3 and 8.4 of the Note
Purchase Agreement (the "Incorporated Provisions"), each of which, including all
defined terms used therein, is incorporated herein by this reference as if fully
rewritten at length herein, such covenants, terms and provisions to continue in
full force and effect with respect to this agreement so long as it is in effect
and until all of the Obligations are paid in full and the Loan Documents are
terminated, regardless of whether the Note Purchase Agreement remains in effect.
For purposes of Borrower's compliance with the Incorporated Provisions, Bank
will be deemed to be one of the Purchasers as referred to in the Note Purchase
Agreement. It is further agreed that no waiver or amendment with respect to the
Incorporated Provisions (or the defined terms used therein) of the Note Purchase
Agreement shall be effective as to this Agreement until specifically agreed to
in writing by the Bank.
4. NEGATIVE COVENANTS. From this date until the Obligations
are repaid and the Loan Documents are terminated:
4.1 LIMITATION ON LIENS. Borrower will not permit to exist any
lien or encumbrance on any securities purchased using the proceeds of the
Revolving Loan or any other properties and will not acquire any property subject
to any retained security interest, except that the foregoing does not prohibit
20
<PAGE> 5
liens in favor of Bank or purchase money security interest created in connection
with Borrower's acquisition of property after the date of this Loan Agreement
which attach only to the specific property acquired.
5. CONDITIONS TO THE LOANS. As conditions to Bank's making any loans
under this agreement, at Bank's election, the following shall be satisfied:
5.1 CORPORATE PROCEEDINGS. The Borrower shall have delivered
to the Bank, all dated as of a recent date:
(i) a copy of its articles of incorporation certified by the
Secretary of State of Ohio;
(ii) certificate of good standing from the Secretary of State
of Ohio;
(iii) a copy of its Code of Regulations certified by its
secretary;
(iv) resolutions of its Board of Directors 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
(v) an incumbency certificate certifying the names of its
officers and their signatures, certified by its secretary.
5.2 OPINION OF COUNSEL FOR THE BORROWER. The Bank shall have
received the favorable opinion of Henry Kerr, general counsel of the Borrower,
as to the Borrower's representations contained in Section 2.1, 2.2, 2.5, 2.7 and
2.10 (as to Sections 2.13, 2.17 and 2.22(b) of the Note Purchase Agreement).
5.3 NO DEFAULT; WARRANTIES. Before and after giving effect to
the Revolving Loan or any portion thereof, no Event of Default or any event
which, with the passage of time or the giving of notice, might mature into an
Event of Default, shall have occurred and be continuing and the representations
and warranties in Section 2 hereof shall be true and correct as though made on
the date of the Revolving Loan or portion thereof.
5.4 OTHER DOCUMENTS. Borrower shall have delivered to Bank
such other documents and instruments as Bank may reasonably request.
6. EVENTS OF DEFAULT; COLLATERAL REALIZATION. The occurrence of any of
the following events shall be an "Event of Default" hereunder and under the Loan
Documents:
(a) Borrower does not pay or repay to Bank any obligation of
Borrower to Bank when due;
21
<PAGE> 6
(b) Borrower violates any other agreement contained herein, in
any of the other Loan Documents, or in any other agreement or instrument running
to the benefit of Bank to which Borrower is or becomes a party;
(c) Borrower does not repay when due any other borrowed money
obligation, or the holder of any such obligation declares, or may declare, such
obligation due prior to its stated maturity because of Borrower's default
thereunder;
(d) Borrower does not perform its obligations under any other
agreement with respect to its business and the other party to such agreement
declares, or may declare, such agreement in default;
(e) Any representation or warranty made by Borrower herein or
by Borrower in any of the other Loan Documents, any writings furnished to Bank
in connection with this Loan Agreement or in any other agreement or instrument
is false, or the Borrower or any Guarantor breaches the terms of any covenant
contained herein, in any of the other Loan Documents, or in any agreement or
instrument running to the benefit of the Bank to which the Borrower is or
becomes a party;
(f) Borrower is unable to pay its business debts as they
become due or borrower's financial statements indicate insolvency or a deficit
net worth;
(g) Borrower makes an assignment for the benefit of creditors
generally;
(h) Borrower applies for the appointment of a trustee or
receiver for all or part of its assets or commences any proceedings under any
bankruptcy, reorganization, arrangement, insolvency, dissolution or other
liquidation law of any jurisdiction; or any such application is filed, or any
such proceedings are commenced, against Borrower and Borrower indicates its
approval, consent or acquiescence thereto; or an order is entered appointing
such trustee or receiver, or adjudicating Borrower bankrupt or insolvent, or
approving the petition in any such proceedings, and such order remains in effect
for thirty (30) days;
(i) any final judgment in excess of confirmed insurance
coverage satisfactory to Bank which, together with other outstanding judgments
against Borrower, causes the aggregate of such judgments to exceed $5,000,000,
shall be rendered against Borrower; or
(j) there shall have been an adverse change in the financial
affairs of Borrower, in the operating condition of Borrower, or in the value of
the Collateral which, in the reasonable judgment of Bank, imperils Borrower's
ability to repay its obligations to Bank or Bank's ability to realize adequately
on the security therefor.
The above recitation of Events of Default supplement and are in
addition to any defaults specified in any of the other Loan Documents. To the
extent any cure period is provided, Bank may nevertheless, at its option pending
completion of such cure, suspend its obligations, if any, to make further
advances of the Revolving Loan.
22
<PAGE> 7
If any Event of Default occurs, Bank may, without further notice or
demand, accelerate the Obligations and any other obligations of Borrower to Bank
and thereupon all such obligations shall be immediately due and payable, and
Bank shall have all rights provided herein or in any of the other Loan Documents
or otherwise provided by law to realize on the Collateral, and to the extent
that Borrower has not borrowed the Maximum Amount otherwise available to it
under the Revolving Loan, Bank may elect to make no further funds available to
Borrower. After maturity, whether by acceleration or otherwise, the Revolving
Loan will bear interest (computed and adjusted in the same manner, and with the
same effect, as interest on the Revolving Loan prior to maturity) payable on
demand at a rate or rates otherwise borne by the Revolving Loan plus 3 % per
annum, in all cases until paid and whether before or after the entry of any
judgment thereon.
7. Miscellaneous.
--------------
7.1 EXPENSES; INDEMNITY. Borrower agrees to defend, indemnify
and hold Bank harmless from all liabilities and expenses arising from third
party claims with respect to the validity and the enforceability of the Loan
Documents and actions of Borrower thereunder. Such reimbursement and indemnity
rights shall survive the termination of this loan arrangement.
7.2 AMENDMENT. This Loan Agreement may not be amended except
in a written agreement signed by authorized officers of Borrower and Bank. Any
variance from the terms of this Loan Agreement and the other Loan Documents is
permitted only with the prior written consent of an authorized officer of Bank.
7.3 DEFINED TERMS. All financial terms used herein shall have
the meanings given them under GAAP.
7.4 LAW; JURISDICTION; VENUE. This Loan Agreement is deemed to
be made in Ohio, and all the rights and obligations of Borrower and Bank
hereunder shall in all respects be governed by and construed in accordance with
the laws of the State of Ohio, including all matters of construction, validity
and performance. Without limitation on the ability of Bank to exercise all its
rights to initiate and prosecute in any applicable jurisdiction matters related
to loan repayment, the Obligations, the Collateral and other security for the
Obligations, Borrower and Bank agree that any action or proceeding commenced by
or on behalf of the parties arising out of or relating to the Obligations and/or
the Loan Documents, the Collateral and/or any other security for the
Obligations, shall, at Bank's option, be commenced and maintained in the
district court of the United States for the Southern District of Ohio or any
other court of applicable jurisdiction located in Ohio. All terms of the loans
negotiated with Borrower are, in part, related to the aforesaid provisions on
jurisdiction and venue, which Bank deems a vital part of this loan arrangement.
7.5 JURY WAIVER. BORROWER AND BANK EACH WAIVES TRIAL BY JURY
WITH RESPECT TO ANY ACTION, CLAIM, SUIT OR PROCEEDING IN RESPECT OF OR ARISING
OUT OF THIS LOAN AGREEMENT OR OTHER LOAN DOCUMENTS AND/OR THE CONDUCT OF THE
RELATIONSHIP BETWEEN BANK AND BORROWER.
23
<PAGE> 8
7.6 CUMULATIVE RIGHTS; WAIVER OF COUNTERCLAIM. 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 Loan Agreement shall be without regard to any counterclaim or right of
offset which the Borrower may have against the Bank and without regard to any
other obligation of any nature whatsoever which the Bank may have to the
Borrower, and no such counterclaim or offset shall be asserted by the Borrower
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 Loan Agreement, or any other Loan Documents.
7.7 ENTIRE AGREEMENT. This Loan Agreement, including all
exhibits hereto, embodies the entire agreement and understanding between the
Borrower and the Bank and supersedes all other prior agreements and
understandings relating to the subject matter hereof. The Borrower and the Bank
may enter into further and additional written agreements to amend or supplement
this Loan Agreement and the terms and provisions of such further and additional
written agreements shall be deemed a part of this Loan Agreement as though
incorporated herein. Except as provided herein, the Bank has no obligation to
make loans or advances to the Borrower.
7.8 DELAY. No delay, omission or forbearance on the part of
Bank in the exercise of any power or right shall operate as a waiver, nor shall
any single or partial delay, omission or forbearance limit the exercise of any
other power or right. The rights and remedies of Bank herein provided are
cumulative, shall be interpreted in all respects in favor of Bank, and are not
exclusive of any other rights or remedies provided by law.
7.9 PARTICIPATIONS. Borrower agrees and consents to Bank's
sale or transfer, whether now or later, of one or more participation interests
in the Revolving Loan to one or more purchasers, whether related or unrelated to
Bank, without prior notice to Borrower.
7.10 TIME IS OF THE ESSENCE. Time is of the essence in the
performance of this Loan Agreement and the Loan Documents.
Please indicate your agreement to the foregoing by executing
below and return it to the Bank along with the executed Loan Documents.
STAR BANK, NATIONAL ASSOCIATION
By:
----------------------------------------
Name: John D. Barrett
Title: Vice President
24
<PAGE> 9
ACCEPTED AND AGREED TO:
McDONALD & COMPANY SECURITIES, INC.
By:
----------------------------------------
Name: George Brooks
Title: Senior Vice President/Credit Manager
25
<PAGE> 10
October 1, 1997
McDonald & Company Securities, Inc.
McDonald Investment Center
800 Superior Avenue
Cleveland, Ohio 44114
Re: Loan Agreement dated October 19, 1995 (the "Loan Agreement")
between Star Bank, National Association ("Bank") and McDonald &
Company Securities, Inc. ("Borrower").
Ladies and Gentlemen:
This letter will evidence the amendment of the Loan Agreement, including without
limitation the extension of the Termination Date (as defined below).
Section 1.1 of the Loan Agreement is hereby amended in its entirety and
replaced by the following:
1.1 Revolving Loan. In its sole discretion at any time, and from time
to time, Bank may lend and relend to Borrower, on an overnight basis, during the
period from this date to the earlier of (A) August 29, 1998, or (B) the date
that an Event of Default occurs (the earlier of such dates is known as the
"Termination Date"), such amounts (but in any event not less than $1,000,000.00
per each request) as Borrower may from time to time request (the "Revolving
Loan"), in all cases, subject to the terms of this Loan Agreement. In no event
will Bank make any Revolving Loan to Borrower in the event that either a
Clearing Period and/or Event of Default (both as hereinafter defined) then
exists, or would arise by reason of Borrower receiving a loan from Bank
hereunder. The proceeds of the Revolving Loan are to be used by Borrower for
working capital purposes. In no event will the outstanding principal balance of
the Revolving Loan exceed at any time $20,000,000.00 (the "Maximum Amount"). If
the Revolving Loan ever exceeds the Maximum Amount, Borrower will immediately
repay such principal amount of the Revolving Loan such that the outstanding
balance of the
26
<PAGE> 11
Revolving Loan does not exceed the Maximum Amount. The Revolving Loan shall
mature and be payable in full on August 29, 1998, or on any earlier Termination
Date.
All other terms and conditions of the Loan Agreement remain in full force and
effect without modification, except as expressly set forth herein.
Please confirm your agreement to this amendment by signing below in the space
provided.
STAR BANK, NATIONAL ASSOCIATION
By:
-------------------------------------------
John D. Barrett
Senior Vice President
ACCEPTED AND AGREED TO:
McDONALD & COMPANY SECURITIES, INC.
By:
-------------------------------------
27
<PAGE> 12
REVOLVING NOTE
--------------
(Replacement)
$20,000,000.00 Dated: ________________, 1997
FOR VALUE RECEIVED, the undersigned, McDONALD & COMPANY SECURITIES,
INC. (the "Borrower") hereby promises to pay to the order of STAR BANK, NATIONAL
ASSOCIATION (the "Lender") the principal amount of TWENTY MILLION DOLLARS
($20,000,000.00) on August 29, 1998, or, if less, the aggregate sum of all
amounts borrowed pursuant to the Loan Agreement (as hereinafter defined) and
unpaid, together with interest computed in the manner provided in the Loan
Agreement, with such borrowings and interest payable in accordance with the
provisions of the Loan Agreement.
Both principal and interest are payable to Lender at the place
specified by Lender, in immediately available funds.
This Revolving Note is the Revolving Note referred to in, and is
entitled to the benefits of the Loan Agreement dated as of October 19, 1995, as
amended (the "Loan Agreement"), between the Borrower and the Lender. This
Revolving Note replaces any Revolving Note previously issued in connection with
the Loan Agreement. The Loan Agreement, among other things, contains provisions
for acceleration of the maturity hereof upon the terms and conditions therein
specified. Reference is made to the Loan Agreement governing the making of loans
to the Borrower, rights of prepayment, and for other provisions to which this
Revolving Note is subject. This Revolving Note will be secured in accordance
with the terms of the Loan Agreement.
No delay or omission on the part of the Lender in exercising any right
hereunder shall operate as a waiver of such right or any other right under this
Revolving Note. A waiver on any one occasion shall not be construed as a bar to
or waiver of any such right or remedy on any future occasion. The Borrower
waives protest, presentment, demand, and notice of nonpayment.
This Revolving Note shall be governed by and construed and enforced in
accordance with the laws of the State of Ohio.
McDONALD & COMPANY SECURITIES, INC.
By:
------------------------------------------
Name Printed:
--------------------------------
Title:
---------------------------------------
28
<PAGE> 1
Exhibit 11
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
- -----------------------------------------------
<TABLE>
<CAPTION>
Fiscal Three Months Ended Fiscal Six Months Ended
------------------------------- --------------------------------
Sept. 26, 1997 Sept. 27, 1996 Sept. 26, 1997 Sept. 27, 1996
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
PRIMARY
- -------
Average shares outstanding 18,197,000 17,856,000 18,138,000 17,906,000
Net effect of dilutive stock
options - based on the treasury
stock method using average
market price 286,000 314,000 292,000 314,000
----------- ----------- ----------- -----------
TOTAL 18,483,000 18,170,000 18,430,000 18,220,000
=========== =========== =========== ===========
Net income $ 6,907,000 $ 5,273,000 $12,528,000 $11,731,000
=========== =========== =========== ===========
Net income per share $ .37 $ .29 $ .68 $ .65
=========== =========== =========== ===========
FULLY DILUTED
- -------------
Average shares outstanding 18,197,000 17,856,000 18,192,000 17,906,000
Net effect of dilutive stock
options - based on the treasury
stock method using greater of
average or period - end market
price 300,000 370,000 300,000 370,000
----------- ----------- ----------- -----------
TOTAL 18,497,000 18,226,000 18,492,000 18,276,000
=========== =========== =========== ===========
Net income $ 6,907,000 $ 5,273,000 $12,528,000 $11,731,000
=========== =========== =========== ===========
Net income per share $ .37 $ .29 $ .68 $ .65
=========== =========== =========== ===========
</TABLE>
29
<TABLE> <S> <C>
<ARTICLE> BD
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION - SEPT -26-1997 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-27-1998
<PERIOD-START> MAR-31-1997
<PERIOD-END> SEP-26-1997
<CASH> 25,929
<RECEIVABLES> 257,229
<SECURITIES-RESALE> 34,436
<SECURITIES-BORROWED> 0
<INSTRUMENTS-OWNED> 114,923
<PP&E> 18,971
<TOTAL-ASSETS> 530,394
<SHORT-TERM> 60,890
<PAYABLES> 119,872
<REPOS-SOLD> 47,445
<SECURITIES-LOANED> 0
<INSTRUMENTS-SOLD> 48,495
<LONG-TERM> 25,000
0
0
<COMMON> 23,733
<OTHER-SE> 143,574
<TOTAL-LIABILITY-AND-EQUITY> 530,394
<TRADING-REVENUE> 30,727
<INTEREST-DIVIDENDS> 11,586
<COMMISSIONS> 47,571
<INVESTMENT-BANKING-REVENUES> 28,835
<FEE-REVENUE> 15,794
<INTEREST-EXPENSE> 4,997
<COMPENSATION> 80,009
<INCOME-PRETAX> 19,508
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,528
<EPS-PRIMARY> .68
<EPS-DILUTED> .68
</TABLE>
