<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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 June 27, 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.
- --------------------------------------------------------------------------------
(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)
McDonald Investment Center, 800 Superior Avenue, Cleveland, Ohio 44114-2603
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area
code (216) 443-2300
---------------------------------------------------------------------------
Not Applicable
- --------------------------------------------------------------------------------
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: 9,083,998 shares of Common
Stock, par value $1.00 per share, were outstanding on July 30, 1997.
(1)
<PAGE> 2
<TABLE>
<CAPTION>
McDONALD & COMPANY INVESTMENTS, INC.
INDEX
Page
----
PART I - FINANCIAL INFORMATION
- ------------------------------
<S> <C>
Item 1. Financial Statements -
Consolidated statements of financial condition (unaudited) -
June 27, 1997 and March 28, 1997.......................................................... 3
Consolidated statements of income (unaudited) -
Fiscal three months ended June 27, 1997
and June 28, 1996......................................................................... 4
Consolidated statements of cash flows (unaudited)
Fiscal three months ended June 27, 1997
and June 28, 1996......................................................................... 5
Notes to consolidated financial statements (unaudited) -
June 27, 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 5. Other Information.......................................................................... 13
Item 6. Exhibits and Reports on Form 8-K........................................................... 13
SIGNATURES ................................................................................................... 14
EXHIBIT INDEX ................................................................................................ 15
</TABLE>
(2)
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
MCDONALD & COMPANY INVESTMENTS, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (UNAUDITED)
(In thousands, except for share amount)
June 27, 1997 March 28, 1997
------------- --------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 12,136 $ 8,907
Receivable from customers 183,210 179,606
Receivable from brokers and dealers 51,557 37,500
Securities purchased under agreements
to resell 87,233 43,943
Securities owned 169,837 127,632
Other receivables 34,804 42,597
Furniture, equipment and leasehold
improvements, at cost, less accumulated
depreciation and amortization 19,222 19,562
Other assets 43,747 42,221
========= =========
$ 601,746 $ 501,968
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Short-term borrowings $ 43,185 $ 46,285
Payable to customers 70,321 55,656
Payable to brokers and dealers 49,233 44,476
Securities sold under agreements to repurchase 108,058 67,151
Securities sold but not yet purchased 97,319 48,350
Accrued compensation 18,191 33,548
Accounts payable, accrued expenses and
other liabilities 29,074 27,380
Long-term borrowings 25,000 25,000
========= =========
$ 440,381 $ 347,846
========= =========
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
(11,866,680 and 11,801,620 shares
issued respectively) 11,867 11,802
Additional paid-in capital 58,248 55,868
Retained earnings 119,964 115,189
Less treasury stock, at cost (2,782,682 and
2,784,936 shares, respectively) (28,714) (28,737)
--------- ---------
161,365 154,122
========= =========
$ 601,746 $ 501,968
========= =========
</TABLE>
See Notes to consolidated financial statements (unaudited).
(3)
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MCDONALD & COMPANY INVESTMENTS, INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
Fiscal Three Months Ended
-------------------------
(In thousands, except for share and per share amounts)
June 27, 1997 June 28, 1996
(13 weeks) (13 weeks)
-------------- ----------
<S> <C> <C>
Revenues:
Underwriting and investment banking $ 10,472 $ 21,246
Principal transactions 16,943 15,237
Commissions 22,139 19,101
Investment management fees 7,464 5,576
Interest and dividends 5,681 4,658
Other 1,863 1,514
---------- ----------
$ 64,562 $ 67,332
---------- ----------
Expenses:
Employee compensation and benefits $ 37,130 $ 39,960
Interest 2,422 2,200
Communications 3,602 3,649
Occupancy and equipment 5,021 4,337
Promotion and development 2,528 2,440
Floor brokerage and clearance 678 593
Taxes, other than income taxes 2,134 1,836
Other operating expenses 2,126 2,259
---------- ----------
$ 55,641 $ 57,274
---------- ----------
Income before income taxes $ 8,921 $ 10,058
Provision for income taxes 3,300 3,600
---------- ----------
Net income $ 5,621 $ 6,458
========== ==========
Net income per share $ 0.61 $ 0.71
========== ==========
Dividends per share $ .09375 $ .085
========== ==========
Average number of shares and share
equivalents outstanding 9,188,000 9,135,000
========== ==========
</TABLE>
See Notes to consolidated financial statements (unaudited).
(4)
<PAGE> 5
MCDONALD & COMPANY INVESTMENTS, INC.
------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
-------------------------------------------------
(In thousands)
<TABLE>
<CAPTION>
Fiscal Three Months Ended
-------------------------
June 27, 1997 June 28, 1996
------------- -------------
OPERATING ACTIVITIES:
- --------------------
<S> <C> <C>
Net Income $ 5,621 $ 6,458
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,920 1,878
Deferred compensation 73 256
Deferred income taxes (409) (358)
(Increase) decrease in receivable from customers (3,604) 1,799
(Increase) decrease in receivable from brokers and dealers (14,057) 10,784
Increase in securities owned (42,205) (42,458)
Decrease (increase) in other receivables 7,793 (14,585)
Increase (decrease) in payable to customers 14,665 (9,959)
Increase (decrease) in payable to brokers and dealers 4,757 (5,625)
Increase in securities sold but not yet purchased 48,969 76,966
Decrease in accrued compensation (12,903) (4,852)
Increase in accounts payable, accrued expenses and other 1,621 2,383
-------- --------
Net cash provided by operating activities $ 12,241 $ 22,687
======== ========
INVESTING ACTIVITIES:
- --------------------
Purchase of furniture, equipment and leaseholds $ (1,416) $ (3,396)
Increase in other assets (1,281) (1,941)
======== ========
Net cash used for investing activities $ (2,697) $ (5337)
======== ========
FINANCING ACTIVITIES:
- --------------------
Increase in securities purchased under agreement to sell $(43,290) (71,231)
(Decrease) increase in short-term borrowings (3,100) 11,762
Increase in securities sold under agreements to repurchase 40,907 35,729
Cash dividends (846) (760)
Purchase of treasury stock -- (420)
Proceeds from issuance of treasury stock 14 215
-------- --------
Net cash used for financing activities $ (6,315) $(24,705)
-------- --------
Increase (decrease) in cash and cash equivalents 3,229 (7,355)
Cash and cash equivalents at beginning of period 8,907 12,376
-------- --------
Cash and cash equivalents at end of period $ 12,136 $ 5,021
======== ========
</TABLE>
See Notes to consolidated financial statements (unaudited)
(5)
<PAGE> 6
McDONALD & COMPANY INVESTMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 27, 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.
NOTE D - SUBSEQUENT EVENT
- -------------------------
On July 30, 1997, the Company declared a 100% stock dividend, which will be
distributed on September 15, 1997, to shareholders of record on August 25, 1997.
The financial statements do not reflect the effect of the stock dividend.
Future financial statements will be retroactively adjusted to reflect this
stock dividend.
NOTE E - 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)
June 27, 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, legislastion
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
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 June 27, 1997. These assets are
financed by a number of sources, including the Company's capital and short-term
borrowings.
At June 27, 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 $330,000,000, of which $297,663,000 was unused at June 27,
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.
(8)
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
---------------------------------------------------------------
RESULTS OF OPERATIONS (continued)
---------------------------------
LIQUIDITY AND CAPITAL RESOURCES (cont.)
- ---------------------------------------
Certain minimum amounts of capital must be maintained by the Company's principa
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 June 27, 1997, McDonald Securities was in compliance with the
Uniform Net Capital Rules and had net capital of $71,010,000, which was
$66,707,000 in excess of the minimum required.
FISCAL THREE MONTH PERIOD ENDED JUNE 27, 1997
- ---------------------------------------------
Total revenues for the fiscal quarter ended June 27, 1997 were $64,562,000, a
decrease of $2,770,000, or 4%, from revenues of $67,332,000 for the fiscal
quarter ended June 28, 1996.
Net income for the fiscal quarter ended June 27, 1997 was $5,621,000, or $0.61
per share, compared with net income of $6,458,000, or $.71, per share, for the
fiscal quarter ended June 28, 1996, which represents a decrease in net income of
13%.
The average number of shares and share equivalents outstanding were 9,188,000,
for the fiscal three month period ended June 27, 1997 compared to 9,135,000, for
the fiscal three months ended June 28, 1996.
Revenues from underwriting and investment banking decreased $10,774,000, or
51%, for the quarter when compared to the same period in the prior fiscal year.
Revenues from corporate underwriting and investment banking decreased
$11,017,000, or 53%, for the first quarter. The decrease in revenues from
corporate underwriting and investment banking for the three month period is due
primarily to decreased revenues from private placements of $9,837,000
for the first quarter. Included in private placement revenues during the first
three months of the prior fiscal year were fees of $9,336,000 from a single $500
million private placement of debt and equity securities. In addition, revenues
from participations in equity syndicates decreased $809,000, or 54%, for the
first quarter when compared to the same period in the prior fiscal year due to
a lower level of equity offerings in which the Company participated in.
Revenues from municipal finance increased $243,000, or 41%, for the quarter
when compared to the same period 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 increased $1,706,000, or 11%, for the first
quarter of fiscal 1998 when compared to the same period in the prior fiscal
year. Revenues from principal transactions in equity securities increased
$1,303,000, or 20%, due primarily to unrealized gains on certain NASDAQ stocks
held in inventory. Revenues from trading taxable fixed-income securities,
including corporate bonds, United States government bonds and mortgage-backed
securities, increased $110,000, or 2%, for the first quarter of fiscal 1998.
Revenues from trading municipal bonds increased $293,000, or 11%, for the first
quarter.
(9)
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
---------------------------------------------------------------
RESULTS OF OPERATIONS (continued)
---------------------------------
FISCAL THREE MONTH PERIOD ENDED JUNE 27, 1997 (cont.)
- -----------------------------------------------------
Commissions revenue increased $3,038,000, or 16%, in the current
quarter compared to the same period in fiscal 1997. Of these amounts,
commissions revenues from agency transactions in listed stocks increased
$2,097,000, or 23% for the quarter. Commissions revenues from agency
transactions in NASDAQ stocks decreased $619,000, or 21%. Commissions revenue
from non-proprietary mutual funds increased $817,000, or 20%, for the first
quarter of fiscal 1998. Commissions revenue from proprietary mutual
funds increased $135,000, or 8%, for the quarter. The increase in commissions
revenue from both non-proprietary and proprietary mutual funds is due to the
continued popularity of mutual fund investments with individual investors.
Commissions revenue from annuity and life insurance products increased
$608,000, or 65%, for the quarter 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 $1,888,000, or 34%, for the fiscal quarter when
compared to the comparable fiscal 1997 period. Of these amounts, revenues from
advisory fees related to individually managed accounts increased $1,479,000, or
48%, and revenues from advisory fees from proprietary mutual funds increased
$409,000, or 16%.
Interest and dividend income increased $1,023,000, or 22%, for the fiscal three
month period ended June 27, 1997 when compared to the same period in the prior
fiscal year. The increase was due primarily to a higher level of customer margin
loans and securities owned in the current period when compared to the same
period in the prior fiscal year.
Other income increased $349,000, or 23%, for the current quarter. The increase
for the current quarter is due primarily to a $271,000, or 150%, increase in
income from certain venture capital and other investments. The remaining
increase for the fiscal three months 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) decreased $1,855,000, or 3%,
for the first quarter of fiscal 1998, when compared to the same period in the
prior fiscal year.
Employee compensation and benefits decreased $2,830,000, or 7%, for the first
quarter. Incentive compensation and profit sharing accruals decreased
$5,700,000, or 52%, for the quarter, resulting primarily from a decrease in
compensation in the investment banking areas due to the decrease in investment
banking revenues for the quarter when compared to the same period in the prior
fiscal year. Commission and other sales compensation expense increased
$1,742,000, or 9%, for the quarter, primarily because of increased revenues from
commissions and principal sales credits. Other clerical and administrative
expenses increased $1,128,000, or 11%, for the quarter. 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.
All other operating expenses increased $975,000, or 6%, for the first
quarter of fiscal 1998 when compared to the first quarter of fiscal 1997.
Communications expense decreased $47,000, or 1%, for the current quarter.
Occupancy and equipment costs increased $684,000, or 16%, for the current
quarter primarily due to increased rent expense of $442,000, or 28%, resulting
from the expansion of the Company's headquarters office and branch network.
Promotional and business development expenses increased $88,000, or 4%, for the
current quarter primarily 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 decreased $133,000, or 6%,
for the current quarter.
(10)
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
---------------------------------------------------------------
RESULTS OF OPERATIONS (continued)
---------------------------------
FISCAL THREE MONTH PERIOD ENDED JUNE 27, 1997 (cont.)
- -----------------------------------------------------
Interest expense increased $222,000, or 10%, for the fiscal three month period
in the current fiscal year when compared to the same period 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 borrowings and
higher level of securities owned.
Income before income taxes for the fiscal quarter ended June 27, 1997, was
$8,921,000, resulting in pre-tax return on revenues of 13.8%. For the fiscal
quarter ended June 28, 1996, income before income taxes was $10,058,000,
resulting in a pre-tax return on revenues of 14.9%.
(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 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.
(12)
<PAGE> 13
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 June 27, 1997 the Company utilized 2,254 shares
of the Company's Common Stock held in treasury to satisfy options exercised
under the Stock Option Plan for employees.
<TABLE>
<CAPTION>
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
Sequential
(a.) The following exhibit is filed as part of this report: Page Number
-----------
<S> <C>
Exhibit 10(r) Documents Reflecting Line of Credit with
Harris Trust and Savings Bank .......................................... 16
Exhibit 11 Statement re: Computation of Per Share Earnings............................ 19
Exhibit 27 Financial Data Schedule BD .................................................
(b.) Reports on Form 8-K:
The Company did not file a Report on Form 8-K during the fiscal
quarter ended June 27, 1997.
</TABLE>
* Exhibit 27 is Furnished for Securities and Exchange Commission Purposes Only.
(13)
<PAGE> 14
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: July 30, 1997 By: /s/ William B. Summers, Jr.
------------- ----------------------------------------
William B. Summers, Jr.
President and Chief Executive Officer
(Principal Executive Officer)
Date: July 30, 1997 By: /s/ Robert T. Clutterbuck
------------- ----------------------------------------
Robert T. Clutterbuck
Treasurer
(Principal Financial Officer)
(14)
<PAGE> 15
McDonald & Company Investments, Inc.
Report on FORM 10-Q for the Fiscal Quarter ended June 27, 1997
EXHIBIT INDEX
-------------
Exhibit No. Description Sequential Page
- ---------- ------------ ---------------
10(r) Document Reflecting Line of Credit with
Harris Trust and Savings Bank............ 16
11 Statement re: Computation of
Per Share Earnings ...................... 19
27 Financial Data Schedule ......................
* Exhibit 27 is Furnished for Securities and Exchange Commission Purposes Only
(15)
<PAGE> 1
Exhibit 10(r)
FLOATING RATE LOAN - PROCEDURES LETTER
--------------------------------------
Harris Trust and Savings Bank
111 West Monroe Street
Chicago, Illinois 60690
Gentlemen:
McDONALD & COMPANY SECURITIES, INC., an Ohio corporation (the
"Company") hereby requests that borrowings under its $20,000,000 uncommitted
revolving loan facility from Harris Trust and Savings Bank be made and
documented upon the following terms and conditions. You agree until further
notice that upon oral advice by telephone received by you from time to time
from authorized persons listed in this letter that we wish to borrow money, you
will, if you elect to approve the requested loan, disburse the proceeds of same
according to the following instructions:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- -------------------------------------------------------------------------------.
It is understood that any sums of money borrowed by telephone on advice of an
authorized person or a person purporting to be an authorized person in
accordance with the foregoing arrangement shall be transferred pursuant to the
above referenced instructions, and we shall be obligated to repay to you the
sums so borrowed at the time and with the interest set forth in this letter.
All such borrowings shall be repaid by us upon your demand, but they
may, at our election in any instance, be repaid at any time upon telephonic
advice to you.
All borrowings made by us from you under the subject facility shall bear
interest prior to maturity at a rate per annum which is agreed upon between us.
Interest shall be computed on the basis of a year of 360 days and actual days
elapsed and shall be payable on the last day of each month and upon demand.
All borrowings hereunder shall be made against and evidenced by a
promissory note of the Company payable to your order in the aggregate principal
amount of $20,000,000, such note to mature as set forth in, and to be otherwise
in the form of Exhibit A attached hereto (the "Note"). You agree that
notwithstanding the fact that the Note is in the principal amount of
$20,000,000, it shall evidence only the actual principal amount of borrowings
made by us from time to time under the subject facility and you agree that if
you transfer or assign the Note you will stamp thereon a statement of the
actual principal amount evidenced thereby at the time of transfer. We agree
that in any action or proceeding instituted to collect or enforce collection of
the Note, the amount shown as owing you on your records shall be prima facie
evidence of the unpaid balance of principal and interest on the Note.
From time to time we will designate in writing the persons authorized
to give you telephonic instructions to lend money and repay borrowings. In
accepting telephonic advices from any of such officers and/or employees in
accordance with the terms of this Agreement, you shall be entitled to rely on
advices given by any person purporting to be any one of such officers and shall
have no liability to us on account of any action taken by you pursuant to such
telephonic advices provided you have acted in good faith in
(16)
<PAGE> 2
connection therewith. You are, of course, authorized to lend money to us upon
the written instructions of any officers and/or employees authorized to borrow
funds by telephonic advice.
This Agreement and the arrangements and authorizations herein
contemplated shall remain in full force and effect, and shall be applicable to
any renewals of, or replacements or substitutions for, our present loan
facility, unless and until you have received written notice from the Company of
the termination or modification of this Agreement at your office in Chicago,
Illinois or unless and until the Company has received such a notice at its
address as shown on your records from you; provided that no such termination or
modification by the Company shall affect any transaction which occurred prior
to the receipt of such notice by you nor shall any such termination or
modification become effective without your written consent unless and until all
amounts which shall have been borrowed hereunder shall have been repaid in
full. This Agreement and your acceptance of this Agreement as hereinafter
contemplated do not constitute any commitment on your part to make any credit
available to the Company, it being understood that this Agreement is only
intended to set forth the procedures which shall be applicable to such loans as
the Bank may in its discretion elect to make available to the Company from time
to time. This Agreement and the rights and remedies of the parties hereto shall
be governed by the laws of Illinois.
If you are in agreement with the foregoing, please sign in the
appropriate place on the enclosed counterpart and return such counterpart to
us, whereupon this letter shall become a binding agreement between you and us.
Dated this 9th day of April, 1997.
Very truly yours,
MCDONALD & COMPANY SECURITIES, INC.
By: /s/ George H. Brooks
------------------------------
Its: Senior Vice President
-------------------------
Accepted as of the date last above written.
HARRIS TRUST AND SAVINGS BANK
By: /s/ Scott M. Ferris
------------------------------
Its: Vice President
(17)
<PAGE> 3
UNSECURED
DEMAND NOTE
$20,000,000 April 9, 1997
ON DEMAND, for value received, the undersigned, McDONALD & COMPANY
SECURITIES, INC., an Ohio corporation (the "Company"), promises to pay to the
order of HARRIS TRUST AND SAVINGS BANK (the "Bank") at its offices at 111 West
Monroe Street, Chicago, Illinois, the principal sum of Twenty Million Dollars
($20,000,000) or, if less, the amount outstanding under the letter agreement
referred to below together with interest on the unpaid principal balance hereof
at the rate specified therefor in the letter agreement referred below and after
the maturity thereof until paid at the rate per annum of three percent (3%)
above the interest rate applicable to this Note (determined as aforesaid) at
such maturity. Interest shall be payable on the last day of each month and upon
demand.
This Note evidences borrowings by the Company under that certain Letter
Agreement dated as of even date herewith between the Company and the Bank and
this Note and the holder hereof are entitled to all the benefits provided for
under the Letter Agreement, to which reference is hereby made for a statement
thereof. The Company hereby waives presentment and notice of dishonor. The
Company agrees to pay to the holder hereof all expenses incurred or paid by
such holder, including attorney's fees and court costs, in connection with the
collection of this Note. It is agreed that this Note and the rights and
remedies of the holder hereof shall be construed in accordance with and
governed by the laws of Illinois.
McDONALD & COMPANY SECURITIES, INC.
By: /s/ George H. Brooks
-----------------------------------
Its: Senior Vice President
-------------------------------
(18)
<PAGE> 1
Exhibit 11
<TABLE>
<CAPTION>
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
- -----------------------------------------------
Fiscal Three Months Ended
----------------------------------
June 27, 1997 June 28, 1996
------------- -------------
<S> <C> <C>
PRIMARY
- -------
Average shares outstanding 9,040,000 8,977,000
Net effect of dilutive stock
options - based on the treasury
stock method using average
market price 148,000 158,000
---------- ----------
TOTAL 9,188,000 9,135,000
========== ==========
Net income $5,621,000 $6,458,000
========== ==========
Net income per share $ 0.61 $ 0.71
========== ==========
FULLY DILUTED
- -------------
Average shares outstanding 9,040,000 8,977,000
Net effect of dilutive stock
options - based on the treasury
stock method using greater of
average or period - end market
price 158,000 158,000
---------- ----------
TOTAL 9,198,000 9,135,000
========== ==========
Net income $5,621,000 $6,458,000
========== ==========
Net income per share $ 0.61 $ 0.71
========== ==========
</TABLE>
(19)
<TABLE> <S> <C>
<ARTICLE> BD
<LEGEND>
THIS SCHEDULE CONTAINS FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
STATEMENT OF FINANCIAL CONDITION - JUN-27-1997 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-27-1998
<PERIOD-START> MAR-31-1997
<PERIOD-END> JUN-27-1997
<CASH> 12,136
<RECEIVABLES> 234,767
<SECURITIES-RESALE> 87,223
<SECURITIES-BORROWED> 0
<INSTRUMENTS-OWNED> 169,837
<PP&E> 19,222
<TOTAL-ASSETS> 601,746
<SHORT-TERM> 43,185
<PAYABLES> 80,232
<REPOS-SOLD> 108,058
<SECURITIES-LOANED> 39,322
<INSTRUMENTS-SOLD> 97,319
<LONG-TERM> 25,000
<COMMON> 11,867
0
0
<OTHER-SE> 149,498
<TOTAL-LIABILITY-AND-EQUITY> 601,746
<TRADING-REVENUE> 16,943
<INTEREST-DIVIDENDS> 5,681
<COMMISSIONS> 22,139
<INVESTMENT-BANKING-REVENUES> 10,472
<FEE-REVENUE> 7,464
<INTEREST-EXPENSE> 2,422
<COMPENSATION> 37,130
<INCOME-PRETAX> 8,921
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,621
<EPS-PRIMARY> .61
<EPS-DILUTED> .61
</TABLE>