<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
- --- ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended March 28, 1997
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
- --- EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from_________________ to _________________
Commission file number 1-8526
McDONALD & COMPANY INVESTMENTS, INC.
------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Delaware 34-1391950
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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
- ---------------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (216) 443-2300
----------------
Securities Registered Pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
Common Stock, par value $1.00 per share New York Stock Exchange
Series A Junior Preferred Stock New York Stock Exchange
Purchase Rights
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
---- ----
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. Yes X No
---- ----
As of May 30, 1997, 9,018,938 shares of Common Stock, par value $1.00
per share, were outstanding, and the aggregate market value of the shares of
Common Stock of the Registrant held by non-affiliates (based upon the closing
price of the Registrant's shares on the New York Stock Exchange on May 30, 1997,
which was $38.375 per share) was $294,816,820. For purposes of this information,
the outstanding shares of Common Stock which were owned by all Directors and
executive officers of the Registrant, were deemed to be the shares of Common
Stock held by affiliates.
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement to be used in
connection with its Annual Meeting of Stockholders to be held on July 30, 1997
are incorporated by reference into Part III of this Report.
Except as otherwise stated, the information contained in this Report on
Form 10-K is as of March 28, 1997.
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PART I
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ITEM 1. BUSINESS.
(a) GENERAL DEVELOPMENT OF BUSINESS
McDonald & Company Investments, Inc. is a holding company which was
incorporated under the laws of the State of Delaware on May 20, 1983. As used in
this Report, the "Company" refers, unless the context requires otherwise, to
McDonald & Company Investments, Inc. and its subsidiaries. McDonald & Company
Investments, Inc. conducts substantially all of its business through its
principal subsidiary, McDonald & Company Securities, Inc. ("McDonald
Securities"), which operates a regional investment banking, investment advisory
and brokerage business. The Company also provides personal trust services
through its wholly-owned subsidiary, McDonald Trust Company.
Effective October 4, 1991, the Company entered into an agreement of
Merger with Gradison & Company Incorporated, ("Gradison"). Gradison operated as
a full-service regional brokerage and investment advisory firm headquartered in
Cincinnati, Ohio with a primary market of southwestern Ohio and northern
Kentucky. Subsequent to the merger, Gradison operates as a division of McDonald
Securities. The merger allowed the Company to increase the size of its retail
sales force and its customer base and gave the Company a strong presence in
southwestern Ohio. Gradison also added significant asset management capabilities
to the Company.
The Company's executive offices are located at McDonald Investment
Center, 800 Superior Avenue, Cleveland, Ohio 44ll4-2603 and its telephone number
is (216) 443-2300. The Company has 22 other offices in Ohio (including the
Gradison Division in Cincinnati, Ohio and the S. J. Wolfe Division in Dayton,
Ohio) and 19 additional offices in 10 other states.
(b) INDUSTRY SEGMENT DATA
The Company is engaged in one line of business, that of a securities
broker-dealer, which is comprised of several classes of products or services
including underwriting and investment banking, principal and agency
transactions, and investment advisory services.
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ITEM 1. BUSINESS--Continued
(c) NARRATIVE DESCRIPTION OF BUSINESS
GENERAL
- -------
The Company, through its principal subsidiary, McDonald Securities,
operates a regional investment banking and brokerage business. The Company's
activities include the origination, underwriting, distribution, trading and
brokerage of fixed income and equity securities, investment advisory services,
and investment research and other related services. On July 20, 1983, the
Company succeeded to the business of McDonald & Company, a partnership, which
was established in 1927. The Company has expanded to its present size primarily
through internal growth rather than by acquisition, except for the merger with
Gradison.
The Company serves institutional customers which are located throughout
the United States and in Canada, Europe, and the Far East. The Company's retail
(individual) customers are primarily located in the tri-state region of Ohio,
Michigan and Indiana. For the fiscal year ended March 28, 1997, approximately
53% of total revenues were derived from retail customers, 21% from institutional
customers, 18% from non-customer related principal transactions, investment
banking fees and other activities and 8% from interest and dividend income.
The Company has formulated a comprehensive strategic plan, which is
periodically reviewed and revised as business conditions dictate. The plan
emphasizes the Company's historical roots as a regional brokerage and investment
banking firm. The Company has focused on the Ohio, Michigan and Indiana area by
increasing the number of investment brokers covering individual investors, as
well as increasing investment banking activities in the region. The merger with
Gradison has enabled the Company to expand its retail sales force and its
customer base in southwestern Ohio and northern Kentucky, and has added
significantly to the Company's asset management capabilities.
McDonald Securities is a member of the New York Stock Exchange, Inc.
(the "NYSE"), the American Stock Exchange, Inc. (Associate), the Midwest Stock
Exchange, Inc., the Philadelphia Stock Exchange, Inc. and the National
Association of Securities Dealers, Inc. (the "NASD"). The Company is also a
member of the Securities Investor Protection Corporation ("SIPC").
The Company has a total of 42 offices in 11 states, all of which offices
are leased. The Company has approximately 1,300 employees, of whom 322 are
full-time retail investment consultants and 81 are full time institutional
investment consultants.
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ITEM 1. BUSINESS--Continued
REVENUES BY SOURCE
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The following table sets forth the revenues of the Company on a comparative
basis for the three most recent fiscal years.
<TABLE>
<CAPTION>
McDonald & Company Investments, Inc.
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Fiscal Year Ended
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March 28, 1997 March 29, 1996 March 31, 1995
--------------- --------------- ---------------
(Dollar amounts in thousands)
Amount % Amount % Amount %
------------- --------- ----------- --------- ------------- --------
<S> <C> <C> <C> <C> <C> <C>
Underwriting and
investment banking:
Corporate $ 60,651 23% $ 45,672 20% $ 30,045 17%
Limited partnership
investments 9,043 3 4,161 2 4,000 2
Municipal 3,917 1 5,826 3 7,906 4
-------- ------ -------- ------ --------- ----
73,611 27 55,659 25 41,951 23
Principal transactions:
Unlisted stocks 22,411 9 21,457 9 16,340 9
Corporate bonds
and preferred stocks 11,303 4 10,914 5 11,073 7
Municipal bonds 10,128 4 9,001 4 7,346 4
Government bonds 6,130 2 6,470 3 5,768 3
Mortgage-backed
securities 5,270 2 6,180 3 5,479 3
Other 143 1 79 1 (123) (1)
-------- ------ -------- ------ --------- ----
55,385 22 54,101 25 45,883 25
Commissions:
Listed stocks 37,426 14 33,860 15 26,388 15
Mutual funds and
money market funds 25,210 9 19,588 8 13,914 8
Unlisted stocks 10,618 4 8,411 4 4,867 3
Annuities 5,356 2 3,510 2 3,963 2
Options 1,297 1 1,129 1 922 1
-------- ------ -------- ------ --------- ----
79,907 30 66,498 30 50,054 29
Investment management fees:
Investment advisory fees 14,717 6 10,333 5 6,935 4
Mutual funds and money
market funds 10,419 4 9,509 4 9,026 5
-------- ------ -------- ------ --------- ----
25,136 10 19,842 9 15,961 9
Interest and dividends 20,406 8 17,170 8 19,197 11
Other 7,052 3 7,351 3 4,680 3
-------- ------ -------- ------ --------- ----
Total revenues $261,497 100% $220,621 100% $ 177,726 100%
======== ====== ======== ====== ========= ====
</TABLE>
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ITEM 1. BUSINESS--Continued
UNDERWRITING AND INVESTMENT BANKING
- -----------------------------------
McDonald Securities participates in corporate and municipal securities
distributions as a manager or co-manager of an underwriting syndicate or as a
member thereof, or as a member of a selling group. Municipal securities are
obligations issued by state and local governments, hospitals, public utility
systems and industrial development authorities.
Revenues from underwriting and investment banking activities are highly
dependent on general market conditions for such business activities. Market
conditions for underwriting and investment banking services can be affected by
political and economic events both in the United States and abroad. To the
extent future events are unpredictable, uncertainty will be a factor in the
level of McDonald's business activity. Also, competitive pressure from other
investment bankers has an effect on the success of McDonald Securities in
obtaining such business and on the prices which can be charged for investment
banking and underwriting services. The management of McDonald Securities
believes it can compete effectively in this segment of its business activities.
Participation in an underwriting syndicate or selling group involves
both economic and regulatory risks. An underwriter or selling group member may
incur losses if it is forced to resell the securities it is committed to
purchase at less than the agreed purchase price. In addition, under the federal
securities laws, other statutes and court decisions with respect to
underwriters' liabilities and limitations on indemnification of underwriters by
issuers, an underwriter is subject to substantial potential liability for
material misstatements or omissions in prospectuses and other communications
with respect to underwritten offerings. Further, underwriting or selling
commitments constitute a charge against net capital, and the Company's
underwriting or selling commitments may be limited by the requirement that it
must at all times be in compliance with the net capital rule. See "Net Capital
Requirements."
In addition to its underwriting and selling group activities, McDonald
Securities engages in structuring, managing and marketing private offerings of
corporate and municipal securities, and assists in arranging mergers,
acquisitions, divestitures, lease financing and venture capital financing. The
Company provides valuation and financial consulting services for gift and estate
tax purposes, employee stock ownership trusts, mergers, acquisitions, stock
purchase agreements, and other corporate purposes, as well as valuations for
public companies in the process of going private.
McDonald Securities also markets investments in real estate, primarily
qualified low-income housing tax credit funds, and similar ventures. These
investments generally are in the form of limited partnership interests, which
are primarily marketed to institutional investors. In most cases McDonald
Securities originates such programs, and other subsidiaries of the Company may
act as a general partner.
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ITEM 1. BUSINESS--Continued
PRINCIPAL TRANSACTIONS
- ----------------------
McDonald Securities actively engages in trading as principal in various
phases of the over-the-counter securities business. To facilitate trading by its
customers, McDonald Securities buys, sells and maintains inventories of
municipal bonds, corporate bonds, government bonds, mortgage-backed securities,
common stocks and preferred stocks in order to "make markets" in those
securities. Revenues from principal transactions depend upon the general trend
of prices and level of activity in the securities market, the skill of employees
in market-making areas and the size of the inventories. Activities in trading as
a principal require the commitment of capital and create an opportunity for
profit and risk of loss due to market fluctuations. As of March 28, 1997,
McDonald Securities made markets in the common stock or other equity securities
of approximately 300 NASDAQ-quoted corporations, as well as other corporations
with less actively traded securities. McDonald Securities has acted as a
managing underwriter for and provides research coverage of certain of these
corporations.
In executing customers' orders to buy or sell in the over-the-counter
market in a security in which it makes a market, McDonald Securities sells to or
purchases from its customers at a price which is approximately equal to the
current inter-dealer market price, plus or minus a markup or markdown.
Alternatively, McDonald Securities may act as agent and execute a customer's
purchase or sale order with another broker-dealer which acts as a market-maker
at the best inter-dealer market price available and charge a commission.
The Securities and Exchange Commission has recently adopted significant
market structure rules under the Securities and Exchange Act of 1934 involving
the handling and execution of customer limit orders. A market maker in
over-the-counter securities is now required to display in their quote the price
and full size of customer limit orders. In addition, market makers are also
required to display in their quote any better priced orders that the market
maker places into an electronic network such as Selectnet or Instinet, unless an
alternative provided by the rule is available. The effect of these rules will be
to narrow spreads on NASDAQ trades and to reduce the potential for trading
profit on dealer to dealer trades. Approximately 20% of the NASDAQ-quoted
companies in which McDonald Securities makes a market are currently subject to
these rules. Eventually, 100% of these companies will be subject to these rules.
As more companies become subject to these rules, McDonald Securities'
profitability from trading NASDAQ-quoted companies will be reduced.
McDonald Securities is a dealer in corporate, mortgage-backed, and
government fixed income securities which are carried in inventory primarily for
distribution to individual and institutional customers. McDonald Securities
buys, sells and positions mortgage-derivative securities and structured notes.
Holdings of high-yield securities are not material. McDonald Securities may
enter into short positions in United States Treasury securities in order to
hedge its interest rate risk related to fixed income securities.
The Company's securities positions are subject to fluctuations in market
value and liquidity. The Company seeks to minimize the risks associated with
owning securities by monitoring its security positions on an ongoing basis. The
Company marks its securities to market daily. In addition, each trading
department adheres to a risk limit and a capital commitment limit determined by
senior management. Senior management regularly reviews the Company's securities
positions to ensure that these limits are not exceeded.
COMMISSIONS
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In executing customers' orders to buy or sell listed securities and
unlisted stocks and bonds in which it does not make a market, McDonald
Securities generally acts as an agent and charges a commission which is
competitive within the industry.
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ITEM 1. BUSINESS--Continued
INVESTMENT MANAGEMENT FEES
- --------------------------
Revenues from investment management fees include advisory fees from the
Company's mutual funds and money market funds and investment advisory fees
earned related to individual managed accounts.
Under asset management programs, the Company provides investment
advisory services to individual, corporate and employee benefit plan clients.
Investment advisory fees for the fiscal year ended March 28, 1997 from
individual managed accounts represented approximately 58% of total revenues from
investment management fees.
As of March 28, 1997, McDonald Securities is the investment advisor to
and the distributor of the following mutual funds: Gradison-McDonald Cash
Reserve Trust, which is comprised of one portfolio, Gradison U.S. Government
Reserves ("GMU", a money market fund investing in U.S. Government Securities),
Gradison Custodian Trust, which is comprised of one portfolio, Gradison
Government Income Fund ("GIF", a U.S. Government Securities income fund),
Gradison-McDonald Municipal Custodian Trust, which is comprised of one
portfolio, Gradison Ohio Tax-Free Income Fund ("GMO", a double tax-free income
fund for Ohio investors), Gradison Growth Trust, which is comprised of four
portfolios, Gradison Established Value Fund ("EST", a common stock fund
investing in large, established companies), Gradison Opportunity Value Fund
("OPP", a common stock fund investing in small companies), Gradison Growth &
Income Fund ("GRI", a common stock fund seeking long-term growth of capital,
current income and growth of income) and Gradison International Fund ("INT", a
common stock fund investing in non-United States companies). INT was established
during the fiscal year ended March 29, 1996. All of these funds are diversified,
open-end management investment companies.
As of March 29, 1996, McDonald Securities was also the investment
advisor to and sole distributor of Gradison-McDonald Intermediate Municipal
Income Fund ("IMI," an intermediate term municipal income fund), a portfolio in
the Gradison-McDonald Municipal Custodian Trust. IMI, a diversified, open-ended
management investment company, was liquidated on August 16, 1996.
The following summarizes the number of accounts and the size of each of
the Funds as of March 28, 1997 and March 29, 1996:
<TABLE>
<CAPTION>
March 28, 1997 March 29, 1996
----------------------------- -------------------------------
Funds Accounts $ Accounts $
- ----- -------------- ------------- ------------- -------------
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
Gradison-McDonald Cash Reserve Trust
U.S. Government Reserves 91,036 1,555,308 85,080 1,414,256
Gradison Custodian Trust
Government Income Fund 4,744 155,799 5,337 180,652
Gradison-McDonald Municipal Custodian Trust:
Ohio Tax-Free Income Fund 1,464 76,336 1,578 72,100
Intermediate Municipal Income Fund -- -- 272 13,594
Gradison Growth Trust:
Established Value Fund 15,049 443,385 13,859 363,005
Opportunity Value Fund 6,340 117,469 6,151 99,636
Growth & Income Fund 1,783 26,007 876 11,591
International Fund 1,881 24,372 1,196 14,067
------- --------- ------- ---------
Total 122,297 2,398,676 114,349 2,168,901
======= ========= ======= =========
</TABLE>
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<PAGE> 9
ITEM 1. BUSINESS--Continued
INVESTMENT MANAGEMENT FEES (cont.)
- ----------------------------------
The investment advisory fees received from these funds are directly
related to the amounts invested in the funds. Accordingly, McDonald Securities'
investment advisory fees from the investment companies would be reduced in the
future if the amounts invested in the funds decrease.
McDonald Securities also receives reimbursements from the Gradison Funds
for providing such funds with data processing, shareholder services and other
miscellaneous services.
INTEREST AND DIVIDENDS
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A significant portion of the Company's pretax income is derived from
interest income net of interest expense. The amount of interest and dividend
income is directly impacted by the level of securities owned and customer margin
account balances, and by general fluctuations in interest rates. Approximately
57% of interest and dividend income represents interest charged to customers on
the amount borrowed to finance margin transactions. The rate of interest charged
to customers is based on the broker's call money rate (the interest rate on bank
loans to brokers secured by firm and customers' margin account securities) to
which an additional amount, up to 2.5%, is added depending on the size of the
debit balance. Approximately 33% of the Company's interest and dividend income
is generated from securities owned. Of the remaining 10% of the Company's
interest and dividend income, approximately 8%, is generated from securities
borrowed and approximately 2% represents dividend income.
OTHER
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During the fiscal year ended March 28, 1997, approximately 29% of other
income represents service fees, IRA administration fees, and other
retail-related revenues compared to 27% and 37%, respectively, for the fiscal
years ended in March 1996 and 1995. Approximately 44% of other income represents
transfer agent fees and other fees derived from the Company's money market and
mutual funds compared to 36% and 49%, respectively, for the fiscal 1996 and 1995
years. For the fiscal year ended March 28, 1997, 17% of other income represented
revenues related to certain venture capital investments, compared to 24% in
fiscal 1996 and 6% in fiscal 1995. The Company periodically invests in venture
capital and other investments in the form of limited partnerships, general
partnerships and equity positions. Miscellaneous income represented 10%, 13% and
8% of other income, respectively, in the fiscal years ended March 1997, 1996 and
1995.
RETAIL BUSINESS
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During the fiscal year ended March 28, 1997, approximately 72% of the
Company's total revenues from customers were from individuals. During the fiscal
year ended March 28, 1997, approximately 28% of the revenues from individual
accounts were derived from agency transactions in listed and unlisted
securities. Individual commission rates on agency transactions are based upon a
schedule which is competitive within the securities industry. Discounts from the
schedule may be granted to retail customers on large trades.
Approximately 29% of revenues from individual customers were derived
from propriety and nonpropriety mutual funds. These revenues include sales
charges, fees received from the funds under Section 12(b)(1), and advisory fees
and other fee income related to the propriety mutual funds. Approximately 20% of
retail-related revenues are derived from principal transactions in equity and
debt securities. The remaining 23% of retail-related revenues include revenues
from the sale of investment banking products and revenues from the sale of
annuities, life insurance and other products.
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<PAGE> 10
ITEM 1. BUSINESS--Continued
INSTITUTIONAL BUSINESS
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During the fiscal year ended March 28, 1997, approximately 28% of the
Company's total revenues from customers were from institutions. Institutional
customers include banks, insurance companies, thrift institutions, pension
funds, mutual funds and money managers. During the fiscal year ended March 28,
1997, approximately 50% of the revenues from institutional accounts were derived
from principal transactions, 31% from investment banking and 19% from agency
transactions. Commissions charged on agency transactions on behalf of
institutional customers are on a negotiated basis and represent a significant
discount from the Company's retail commission schedule.
MARGIN ACCOUNTS
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Customers' transactions in securities are effected on either a cash or
margin basis. Purchases and sales on a cash basis require full payment or
delivery of securities by the designated settlement date, generally the third
business day following the transaction date. McDonald Securities is at risk in
the event a customer fails to settle a trade and the value of the securities
declines, for a customer purchase or increases, for a customer sale, subsequent
to the transaction date. In a margin account, the customer pays a portion of the
cost of securities purchased and the broker-dealer makes a loan for the balance,
secured by the securities purchased or other securities owned by the investor.
The amount of the loan is subject to the margin regulations (Regulation T) of
the Board of Governors of the Federal Reserve System, NYSE margin requirements
and McDonald Securities' internal policies, which in some instances are more
stringent than Regulation T or NYSE margin requirements. Currently, in most
transactions Regulation T limits the amount loaned to a customer for the
purchase of a particular security to 50% of the purchase price. In the event of
a decline in the market value of the securities in a customer's margin account,
a member firm, under NYSE rules, is required to have the customer deposit cash
or additional securities so that the loan to the customer is no greater than 75%
of the value of collateral securities in the account. In permitting customers to
purchase securities on margin, McDonald Securities is subject to the risk of a
market decline which could reduce the value of its collateral below the
customers' indebtedness.
SECURITY REPURCHASE ACTIVITIES
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McDonald Securities acts as principal in the purchase and sale to its
customers of securities of the United States Government and its agencies,
including repurchase agreements in such securities. McDonald Securities may
match purchases and sales of these securities and is at risk to the extent that
it does not properly match the contracts or their customers are unable to meet
their obligations, especially during periods of rapidly changing interest rates
and fluctuations in market conditions. All positions are collateralized.
McDonald Securities generally takes physical possession of securities purchased
under agreements to resell. Such agreements provide McDonald Securities with the
right to maintain the relationship between the market value of the collateral
and the receivable. Typically, these contracts are entered into only with
clients of substantial size and credit-worthiness. McDonald Securities also
utilizes securities sold under repurchase agreements as a means of financing
portions of its trading inventories and facilitating hedging transactions.
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<PAGE> 11
ITEM 1. BUSINESS--Continued
SECURITIES BORROWING AND LENDING ACTIVITIES
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McDonald Securities borrows securities from other brokers and dealers to
facilitate short sales and clearance and delivery of securities that have been
sold by their customers when such customers fail to deliver securities prior to
settlement date. McDonald Securities also borrows securities to cover short
positions in NASDAQ securities in the ordinary course of business in its
over-the-counter trading operations. McDonald Securities pays to the lending
broker a cash deposit generally equal to 102 percent of the market value of the
securities borrowed and receives interest on the cash deposit. McDonald
Securities is at risk to the extent that the securities it borrows decline in
value and the loaning broker fails to return McDonald Securities' cash deposit.
When engaging in securities lending activities, McDonald Securities
lends excess customer margin securities to the borrowing broker and collects
cash deposits that collateralize the securities loaned. In securities lending
transactions, McDonald Securities is at risk to the extent that it does not
maintain the relationship between the market value of securities loaned and the
value of the cash deposit held.
RESEARCH SERVICES
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McDonald Securities maintains both an equity and fixed income research
staff which concentrates its efforts on regional research services for both
retail and institutional customers. McDonald Securities employs 26 equity
analysts who cover approximately 250 companies, a majority of which maintain
their headquarters in the Midwest. 9 of the 26 analysts are Chartered Financial
Analysts.
Research services are made available generally without charge to
customers. Research services include the review and analysis of the economy,
general market conditions, industries and specific companies; recommendation of
specific action with regard to industries and specific companies; review of
customer portfolios; the furnishing of information to retail and institutional
customers; and responses to inquiries from customers and investment brokers. In
addition, McDonald Securities purchases several outside research services which
provide its customers with research more national in scope.
Management believes that a significant portion of its institutional
equity business is attributable to research services. McDonald Securities
provides services to a nationwide institutional base as well as to institutional
clients in Canada, England, Scotland, Germany, Switzerland and the Far East.
COMPETITIVE FACTORS
- -------------------
Considerable consolidation has occurred in the securities industry as
numerous securities firms have either ceased operation or been acquired by other
securities firms, in many cases resulting in firms with greater financial
resources than firms such as McDonald Securities. In addition, a number of
substantial companies (mostly commercial banks) not previously engaged in the
securities business have made investments in and acquired securities firms.
These developments have resulted in significant additional competition for
McDonald Securities. Increasing competitive pressures in the securities industry
are requiring regional firms such as McDonald Securities to offer to their
customers many of the financial services which are provided by much larger
securities firms that have substantially greater resources and may have greater
operating efficiencies than McDonald Securities.
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<PAGE> 12
ITEM 1. BUSINESS--Continued
COMPETITIVE FACTORS (cont.)
- ---------------------------
McDonald Securities competes with other securities firms and with banks,
insurance companies, and other financial institutions principally on the basis
of service, product selection, price, location and reputation in local markets.
McDonald Securities operates at a price disadvantage to discount brokerage firms
that do not offer equivalent services. These firms generally effect transactions
at lower commission rates on an "execution only" basis, without offering other
services such as investment advice and research which are provided by
"full-service" brokerage firms such as McDonald Securities. In addition, some
discount brokerage firms have increased the range of services which they offer.
The existence of and anticipated continued increase in the number of discount
brokerage firms and services provided by such firms may adversely affect the
Company.
Certain institutions, notably commercial banks and thrift institutions,
have become a competitive factor by offering certain investment banking and
corporate and individual financial services traditionally provided only by
securities firms. With the prior approval of the Federal Reserve, securities
subsidiaries of bank holding companies may now underwrite and deal in corporate
debt and equity securities, provided that they comply with certain firewalls and
that the revenues from such activities do not exceed 25 percent of the
securities subsidiary's total revenues. Legislative proposals currently under
consideration would eliminate this limit on such activities and would permit
banks, bank holding companies and their subsidiaries and affiliates to offer
additional services which have traditionally been provided only by securities
and money management firms. While it is presently not possible to predict the
type and extent of competitive services which banks and other institutions
ultimately may offer or the extent to which administrative or legislative
barriers will be repealed or modified, to the extent that such services are
offered on a large scale, securities firms such as McDonald Securities may be
adversely affected.
EMPLOYEES
- ---------
The Company has 1,291 employees, of whom 18 have senior managerial
responsibilities, 403 are full-time investment brokers, 250 are engaged in other
production areas, including trading, research, investment banking, and
investment advisory, and 620 are employed in processing securities transactions,
accounting, management information systems, mutual fund services, personnel and
other administrative services.
Competition among securities firms and other competitors for successful
investment brokers, securities traders, investment bankers and research analysts
is intense. The Company recognizes the importance of hiring, training and
retaining investment brokers. The Company trains new investment brokers who are
required to take examinations given by the NYSE, the NASD and various states in
order to be registered and qualified. The Company also provides ongoing training
programs for investment brokers. The Company has experienced a relatively low
rate of turnover of investment brokers. From time to time, however, the Company
experiences the loss of valuable personnel.
The Company considers its employee relations to be good and believes that
its compensation and employee benefits, which include medical, life and
disability insurance, and a 401(k) defined contribution and profit-sharing plan,
are competitive with those offered by other securities firms. None of the
Company's employees is covered by a collective bargaining agreement.
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<PAGE> 13
ITEM 1. BUSINESS--Continued
REGULATION
- ----------
The securities industry in the United States is subject to extensive
regulation under federal and state laws. The Securities and Exchange Commission
(the "Commission") is the federal agency charged with administration of the
federal securities laws. Much of the regulation of broker-dealers, however, has
been delegated to self-regulatory organizations, principally the NASD and the
national securities exchanges. These self-regulatory organizations adopt rules
(which are subject to approval by the Commission) which govern the industry and
conduct periodic examinations of member broker-dealers. Securities firms are
also subject to examination by state securities commissions in the states in
which they are registered. McDonald Securities is currently registered as a
broker-dealer in all states. In addition, McDonald Securities is registered as a
broker-dealer with the Commission.
The regulations to which broker-dealers are subject cover all aspects of
the securities business, including sales methods, trade practices among
broker-dealers, capital structure of securities firms, record-keeping and the
conduct of directors, officers and employees. Additional legislation, changes in
rules promulgated by the Commission and by self-regulatory organizations, or
changes in the interpretation or enforcement of existing laws and rules often
directly affect the method of operation and profitability of broker-dealers. The
Commission and the self-regulatory organizations may conduct administrative
proceedings which can result in censure, fine, suspension or expulsion of a
broker-dealer, its officers or employees. The principal purpose of regulation
and discipline of broker-dealers is the protection of customers and the
securities market rather than protection of creditors and stockholders of
broker-dealers.
The Company anticipates regulation of the securities industry to
increase and for compliance with regulations to become more difficult. At
present the Company is unable to predict the extent of changes that may be
enacted, or the effect on the Company's business.
McDonald Securities' Compliance Committee has the responsibility of
performing reviews to provide reasonable assurance that the officers, directors,
and employees comply with the regulatory requirements of the Commission,
self-regulatory agencies, and McDonald Securities' internal requirements.
McDonald Securities is required by federal law to belong to the SIPC.
When the SIPC fund falls below a certain minimum amount, members are required to
pay annual assessments to restore the fund. The SIPC fund provides protection
for securities held in customer accounts up to $500,000 per customer, with a
limitation of $100,000 on claims for cash balances.
NET CAPITAL REQUIREMENTS
- ------------------------
As a broker-dealer and member of the NYSE, McDonald Securities is subject
to the Uniform Net Capital Rule promulgated by the Commission (Rule 15c3-1)
which provides that a broker-dealer doing business with the public shall not
permit its aggregate indebtedness (as defined) to exceed 15 times its net
capital (as defined) or, alternatively, that its net capital shall not be less
than 2% of aggregate debit balances (primarily receivables from customers)
computed in accordance with Rule 15c3-3. The Rule is designed to measure the
general financial integrity and liquidity of a broker-dealer and the minimum net
capital deemed necessary to meet the broker-dealer's continuing commitments to
its customers. Management believes that the alternative method is more directly
related to the level of customer business, therefore McDonald Securities
computes its net capital under the alternative method.
- 13 -
<PAGE> 14
ITEM 1. BUSINESS--Continued
NET CAPITAL REQUIREMENTS (cont.)
- --------------------------------
A broker-dealer may be required to reduce its business if its net
capital is less than 4% of aggregate debit balances and may be prohibited from
expanding its business or declaring cash dividends if its net capital is less
than 5% of aggregate debit balances. In addition, a broker-dealer may be subject
to disciplinary action by the Commission and self-regulatory agencies, such as
the NYSE, including fines, censure, suspension or expulsion.
Under Rule 15c3-1 a broker-dealer is required to provide advance written
notice to the Commission of any loan, unsecured advance, or withdrawal of equity
capital which exceeds, in any 30 day period, 30% of excess net capital.
Additionally, written notice must be given to the Commission of any loan,
unsecured advance, or withdrawal of equity capital which exceeds, in any 30 day
period, 20% of excess net capital, within two business days subsequent to the
transaction.
In computing net capital, various adjustments are made to net worth with a
view to excluding assets which are not readily convertible into cash and to a
conservative statement of the other assets such as a firm's position in
securities. Compliance with the Uniform Net Capital Rule may limit those
operations of a firm which require the use of its capital for purposes of
maintaining the inventory required for trading in securities, underwriting
securities and financing customer margin account balances. A significant
operating loss or an extraordinary charge against net capital could adversely
affect the ability of a broker-dealer to expand or even maintain its present
level of business. Net capital and aggregate debit balances change from day to
day. At March 28, 1997, McDonald Securities' net capital was $78,724,000 which
was 39% of its aggregate debit balances and $74,686,000 in excess of the minimum
required net capital.
McDonald Securities has outstanding $25,000,000 in aggregate principal
amount of 8.24% Subordinated Notes due January 15, 2002. McDonald Securities is
required to prepay principal amounts of $5,000,000 on January 15 in each year
beginning in 1998. The notes are subordinated in right of payment to all senior
indebtedness and general creditors of McDonald Securities. The principal amount
of the notes has been approved by the New York Stock Exchange Inc. for inclusion
in the regulatory capital of McDonald Securities.
(d) FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES
Not Applicable.
-14 -
<PAGE> 15
ITEM 2. PROPERTIES.
The Company has a total of 42 offices in 11 states, all of which are
leased under lease agreements expiring from 1997 to 2009. Certain of these
leases have renewal options. The table below sets forth the location of each of
the Company's offices and the number of full-time investment brokers in each
office:
<TABLE>
<S> <C> <C>
HEADQUARTERS Mansfield (4) KENTUCKY
- ------------ Pepper Pike (22) Crestview Hills (4)
Cleveland (55) Rocky River (19)
Sandusky (3) MASSACHUSETTS
Strongsville (5) Boston (4)
DIVISIONS Toledo (4)
- --------- Willoughby Hills (11)
Gradison Division
Cincinnati, Ohio
S. J. Wolfe Division MICHIGAN
Dayton, Ohio Ann Arbor (7)
Battle Creek (2)
BRANCHES CALIFORNIA Birmingham (21)
- -------- Los Angeles (4) East Lansing (6)
OHIO Grand Rapids (15)
Akron (11) FLORIDA Grosse Pointe Woods (7)
Canfield (7) Naples (9) Holland (2)
Canton (6)
Chillicothe (1) NEW JERSEY
Cincinnati (46) GEORGIA Jersey City (19)
Columbus (6) Atlanta (4)
Dayton (6)
Dublin (6) ILLINOIS TENNESSEE
Elyria (9) Chicago (7) Memphis (10)
Findlay (5)
Hudson (4) INDIANA
Kenwood (10) Elkhart (6)
Kettering (5) Fort Wayne (6)
Lancaster (3) Indianapolis (12)
Lima (2) Indianapolis North (8)
</TABLE>
The Company's executive office and largest sales office is located in
Cleveland, Ohio. The Company's order entry, trading, investment banking,
research, operations and accounting activities are primarily centralized in the
Cleveland office. The office, which occupies approximately 158,500 square feet
of space, is operated under a lease expiring in 2009. The Gradison Division of
McDonald Securities is located in Cincinnati, Ohio. The Gradison Division
office, which occupies approximately 48,000 square feet of space, is operating
under a lease expiring in 2008. Personnel at the Gradison Division are primarily
involved in the mutual fund and investment advisory operations, retail sales,
management, and also certain accounting and administrative functions. The S. J.
Wolfe Division was opened in December, 1990 when the Company acquired certain
assets and the business of S. J. Wolfe & Co., a stock brokerage firm. The S. J.
Wolfe Division has an over-the-counter trading operation.
The Company believes that at the present time its administrative and
sales office space is adequate and is suitably utilized.
- 15 -
<PAGE> 16
ITEM 3. LEGAL PROCEEDINGS.
As is the case with many firms in the securities industry, McDonald
Securities is a defendant or co-defendant in a number of lawsuits alleging
damages, which are ordinary and routine litigation, incidental to the securities
and investment banking business. The Company is contesting the allegations of
the complaints in these cases and believes that there are meritorious defenses
in each of these lawsuits. Some of the proceedings relate to public
underwritings of securities in which McDonald Securities participated as a
member of the underwriting syndicate. The Company is also aware of litigation
against certain underwriters of offerings in which McDonald Securities was a
participant, but where McDonald Securities is not now a defendant. In these
latter cases, it is possible that McDonald Securities may be called upon to
contribute to settlements or judgments.
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 plaintiff, McDonald Securities and/or the
other defendants enabled, facilitated and/or assisted the County's investment
staff to engage in unsuitable and inappropriate investment and trading
activities and practices. The plaintiff seeks 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 plaintiff seeks 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 plaintiff's 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 plaintiff. 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 its 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 plaintiff and raising a number of
affirmative defenses to the plaintiff's allegations. McDonald Securities also
filed counterclaims against 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 plaintiff's claims against McDonald Securities are without merit, and
intends to contest vigorously the allegations in the complaint.
On February 29, 1996, the Company filed an application (the
"Application") with the Securities and Exchange Commission pursuant to Section
9(c) of the Investment Company Act of 1940 (the "Investment Company Act") for a
Temporary Order and a Permanent Order exempting it from the provisions of
Section 9(a)(1) of the Investment Company Act. That section prohibits, among
other things, any person convicted of a misdemeanor arising out of such person's
conduct as a broker-dealer from serving as an investment advisor to, or
principal underwriter for, any registered investment company. The Application
was prompted by the decision of the Franklin County Court of Common Pleas that
the Company violated Section 101.41(C) of the Ohio Revised Code by failing to
accurately report certain lawful expenditures (i.e., payments of honoraria to
speakers at Company-sponsored meetings) during 1993. The Company has been
granted temporary exemptions by the SEC, and its application for a Permanent
Order exempting it from Section 9(a)(1) is currently pending. Based upon its
discussions with the staff of the SEC and the treatment of similarly situated
persons in prior proceedings, the Company has no reason to believe that its
application for a permanent exemption will not be granted.
- 16 -
<PAGE> 17
ITEM 3. LEGAL PROCEEDINGS - Continued
In view of the number and diversity of claims against the Company and
the inherent difficulty of predicting the outcome of litigation and other
claims, the Company cannot state with certainty what the eventual outcome of
pending litigation or other claims will be. The Company provides for costs
relating to these matters when a loss is probable and the amount can be
reasonably estimated. The effect of the outcome of these matters on the
Company's future results of operations cannot be predicted because any such
effect depends on future results of operations and the amount and timing of the
resolution of such matters. While it is not possible to predict with certainty,
management believes that the ultimate resolution of such matters will not have a
material adverse effect on the consolidated financial position, liquidity, or
results of operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
- 17 -
<PAGE> 18
EXECUTIVE OFFICERS OF THE REGISTRANT.
(Included pursuant to Instruction 3 to Item 401(b) of Regulation S-K)
The following table sets forth the executive officers of the Company and certain
other information with respect to each individual, including the years certain
individuals were partners in the Partnership, the predecessor to the Company's
business. Except for Mr. Weston, each of the executive officers listed below is
a Director of McDonald Securities.
NAME AGE PRINCIPAL OCCUPATION
---- --- --------------------
Thomas M. O'Donnell 61 Chairman of the Company since April 1, 1989;
Director of the Company since June 7, 1983;
Chairman of McDonald Securities from April
1, 1989 to August 1, 1995; Chief Executive
Officer of the Company from April 1, 1989 to
January 1, 1994; President of the Company
and McDonald Securities from July 23, 1984
to April 1, 1989; Secretary of the Company
from June 7, 1983 to July 23, 1984; Managing
Director (Corporate Finance and Special
Products) and Secretary of McDonald
Securities from June 7, 1983 to July 23,
1984; Partner from 1968 to 1990 and Managing
Partner from 1989 to 1990.
William B. Summers, Jr. 47 Director of the Company since June 7, 1983;
Chief Executive Officer of the Company and
McDonald Securities since January 1, 1994;
President of the Company since April 1,
1989; Chairman of McDonald Securities since
August 2, 1995; President of McDonald
Securities from April 1, 1989 to August 1,
1995; Executive Vice President of the
Company and McDonald Securities from
November 1, 1988 to April 1, 1989; Managing
Director (Fixed Income Institutional Sales)
of McDonald Securities from June 7, 1983 to
November 1, 1988; Partner from 1975 to 1990.
Robert T. Clutterbuck 46 Director of the Company since August 7,
1996; President and Chief Operating Officer
of McDonald Securities since August 2, 1995;
Treasurer of the Company since January 1,
1994; Chief Financial Officer of McDonald
Securities from January 1, 1994 to June 14,
1996; Executive Managing Director of
McDonald Securities from January 1, 1994 to
August 1, 1995; Senior Managing Director
(Municipal Bond Trading and Underwriting) of
McDonald Securities from June 1, 1992 to
December 31, 1993; Managing Director from
May 1, 1987 to May 31, 1992; Senior Vice
President from May 1, 1984 to April 30,
1987; First Vice President from June 7, 1983
to April 30, 1984; Partner from 1978 to
1990.
Daniel F. Austin 45 Vice Chairman of McDonald Securities since
August 2, 1995; Senior Managing Director
(Corporate and Public Finance) of McDonald
Securities from June 1, 1992 to August 1,
1995; Managing Director from January 4, 1991
to May 31, 1992; Senior Vice President from
May 1, 1986 to January 3, 1991; First Vice
President from May 1, 1985 to April 30,
1986.
Jack N. Aydin 56 Managing Director (Resident Manager - Jersey
City, New Jersey) of McDonald Securities
since May 1, 1988; Senior Vice President
from May 1, 1986 to April 30, 1988; First
Vice President from June 7, 1983 to April
30, 1986; Partner from 1977 to 1990.
- 18 -
<PAGE> 19
EXECUTIVE OFFICERS OF THE REGISTRANT (cont.)
NAME AGE PRINCIPAL OCCUPATION
---- --- --------------------
Eugene H. Bosart III 54 Senior Managing Director (Regional Sales
Manager - Michigan) of McDonald Securities
since June 15, 1996; Managing Director from
May 1, 1987 to June 14, 1996; Senior Vice
President from June 7, 1983 to April 30,
1987; Partner from 1972 to 1990.
Thomas G. Clevidence 47 Senior Managing Director (Human Resources
and Community Affairs) of McDonald
Securities since June 15, 1996; Managing
Director (Human Resources and Community
Affairs) from January 2, 1996 to June 14,
1996; Managing Director (Human Resources)
from July 1, 1992 to June 14, 1996; Vice
President - Corporate Employment, Society
Corporation/Ameritrust Corporation, from
October 1989 to June 30, 1992; Senior
Manager, Ernst & Young, from 1982 to October
1989.
Ralph Della Ratta 43 Senior Managing Director (Corporate Finance)
of McDonald Securities since June 1, 1996;
Managing Director from June 1, 1992 to May
31, 1996; Senior Vice President from June 1,
1991 to May 31, 1992; First Vice President
from June 1, 1990 to May 31, 1991; Vice
President from October 12, 1987 to May 31,
1990.
Dennis J. Donnelly 47 Senior Managing Director (Operations) of
McDonald Securities since June 1, 1992;
Managing Director from May 1, 1987 to May
31, 1992; Senior Vice President from May 1,
1984 to April 30, 1987; First Vice President
from June 7, 1983 to April 30, 1984; Partner
from 1980 to 1990.
David W. Ellis, III 41 Managing Director (Gradison-McDonald Asset
Management) Gradison Division of McDonald
Securities, since June 15, 1996; Senior Vice
President, Gradison Division of McDonald
Securities, from October 4, 1991 to June 14,
1996; Director of Gradison & Company
Incorporated from January 1, 1987 to October
3, 1991; Senior Vice President, Gradison &
Company Incorporated from September 1, 1988
to October 3, 1991; Vice President from
September 1, 1980 to August 31, 1988.
Patricia J. Jamieson 42 Senior Managing Director (Chief Financial
Officer) of McDonald Securities since June
1, 1997; Managing Director and Chief
Financial Officer from June 15, 1996 to May
31, 1997; Chief Accounting Officer of
McDonald Securities from August 2, 1995 to
June 14, 1996; Senior Vice President since
June 1, 1991; First Vice President from May
1, 1985 to May 31, 1991; Vice President from
August 15, 1984 to April 30, 1985; Associate
Vice President from October 3, 1983 to
August 14, 1984.
David W. Knall 52 Senior Managing Director (Resident Manager -
Indianapolis, Indiana) of McDonald
Securities since June 15, 1996; Managing
Director from June 7, 1983 to June 14, 1996;
Partner from 1973 to 1990.
- 19 -
<PAGE> 20
EXECUTIVE OFFICERS OF THE REGISTRANT (cont.)
NAME AGE PRINCIPAL OCCUPATION
---- --- --------------------
Thomas M. McDonald 50 Senior Managing Director (Private Client
Group) of McDonald Securities since June 1,
1997; Managing Director from June 1, 1993 to
May 31, 1997; Senior Vice President from
September 27, 1991 to May 31, 1993; Senior
Vice President of Prescott Ball & Turben, a
division of Kemper Securities Group, Inc.
from February 1988 to September 26, 1991.
Lawrence T. Oakar 62 Managing Director (Private Client Group) of
McDonald Securities since June 15, 1996;
Senior Vice President from May 1, 1986 to
June 14, 1996; First Vice President from
July 20, 1983 to April 30, 1986; Partner
from 1979 to 1990.
John F. O'Brien 60 Senior Managing Director (Private Client
Group) of McDonald Securities since June 1,
1992; Managing Director from June 17, 1983
to May 31, 1992; Partner from 1971 to 1990.
James C. Redinger 60 Senior Managing Director (Equity
Institutional Sales and Trading) of McDonald
Securities since June 1, 1992; Managing
Director from May 1, 1987 to May 31, 1992;
Senior Vice President from May 1, 1984 to
April 30, 1987; First Vice President from
June 7, 1983 to April 30, 1984; Partner from
1980 to 1990.
David D. Sutcliffe 36 Managing Director (Fixed Income Sales) of
McDonald Securities since June 15, 1996;
Senior Vice President from May 1, 1989 to
June 14, 1996; First Vice President from May
1, 1987 to April 30, 1989; Vice President
from 1984 to April 30, 1987.
Bradley E. Turner 38 Senior Managing Director (Gradison-McDonald
Asset Management) of McDonald Securities
since June 15, 1996; Managing Director
(Gradison-McDonald Asset Management) of
McDonald Securities from June 1, 1995 to
June 14, 1996; Senior Vice President
(Portfolio Strategies Group) from June 1,
1992 to May 31, 1995; First Vice President
(Portfolio Strategies Group) from June 1,
1990 to May 31, 1992; Vice President from
May 1, 1988 to May 31, 1990; Associate Vice
President from May 1, 1986 to April 30,
1988.
Donald E. Weston 61 Director of the Company since October 4,
1991; Chairman and Chief Executive Officer
of the Gradison Division of McDonald
Securities since October 4, 1991; Chairman
of the Board and Chief Executive Officer of
Gradison & Company Incorporated from
January, 1982 to October 4, 1991; Trustee
and Chairman of the Board of the
Gradison-McDonald Cash Reserves Trust since
August, 1982; of the Gradison Growth Trust
since August, 1983; of the Gradison
Custodian Trust since September, 1987 and of
the Gradison-McDonald Municipal Custodian
Trust since September, 1992.
- 20 -
<PAGE> 21
PART II
-------
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS.
The information required by this item is included herein at Exhibit
99(a) to this Form 10-K Annual Report set forth under the caption "Supplementary
Financial Data - Quarterly Data (Unaudited)".
ITEM 6. SELECTED FINANCIAL DATA.
The information required by this item is included herein at Exhibit
99(b) to this Form 10-K Annual Report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The information required by this item is included herein at Exhibit
99(c) to this Form 10-K Annual Report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information required by this item is included herein at Exhibit
99(d) to this Form 10-K Annual Report.
ITEM 9. DISAGREEMENTS WITH ACCOUNTANTS ON FINANCIAL DISCLOSURE.
None.
- 21 -
<PAGE> 22
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information regarding Directors appearing under the caption of
"Election of Directors" in the registrant's definitive Proxy Statement to be
used in connection with Annual Meeting of Stockholders to be held on July 30,
1997 (the "1997 Proxy Statement") is incorporated herein by reference.
Information regarding executive officers of the Registrant is set forth in Part
I of this Form 10-K Annual Report.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item is incorporated herein by
reference to "Executive Compensation" in the 1997 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this item is incorporated by reference to
"Stock Ownership of Principal Holders and Management" in the 1997 Proxy
Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this item is incorporated herein by
reference to "Certain Transactions" in the 1997 Proxy Statement.
- 22 -
<PAGE> 23
PART IV
-------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) DOCUMENT LIST
1. Financial Statements
The following financial statements and other information are filed as
part of this Form 10-K Annual Report herein at Exhibit 99(d).
McDonald & Company Investments, Inc. and Subsidiaries:
- ------------------------------------------------------
(i) Consolidated Statements of Income--fiscal years ended
March 28, 1997, March 29, 1996 and March 31, 1995
(ii) Consolidated Statements of Financial Condition--March 28,
1997 and March 29, 1996
(iii) Consolidated Statements of Changes in Stockholders'
Equity--fiscal years ended March 28, 1997, March 29, 1996
and March 31, 1995
(iv) Consolidated Statements of Cash Flows--fiscal years ended
March 28, 1997, March 29, 1996 and March 31, 1995
(v) Notes to Consolidated Financial Statements--March 28, 1997
(vi) Report of Independent Auditors
2. Supplementary Data and Financial Statement Schedules
(i) Supplementary data entitled "Supplementary Financial Data-
Quarterly Data (Unaudited)" is filed as part of this Form 10-K
Annual Report herein at Exhibit 99(a).
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable, and therefore have
been omitted.
- 23 -
<PAGE> 24
ITEM 14(a) DOCUMENT LIST -- Continued
3. Exhibits Required by Securities and Exchange Commission
Regulation S-K
(a) The following exhibits are filed as part of this Report:
<TABLE>
<CAPTION>
Exhibit Sequential Page
------- ---------------
<S> <C> <C>
11 Statement Re: Computation of Per Share Earnings 29
21 Subsidiaries of the Registrant..................................................... 30
23 Consent of Independent Auditors.................................................... 32
27 Financial Data Schedule BD
99(a) Supplementary Financial Data - Quarterly Data
(Unaudited)...................................................................... 33
99(b) Selected Financial Data............................................................ 34
99(c) Management's Discussion and Analysis of Results of
Operations and Financial Condition............................................... 35
99(d) Consolidated Financial Statements of the Company and Independent Auditors'
Report thereon listed under Item 14(a)(1)........................................ 41
(b) The following exhibits are incorporated herein by reference:
2(a): Agreement and Plan of Reorganization dated as of July 24, 1991 by
and among the Registrant, McDonald & Company Securities, Inc. and
Gradison & Company Incorporated (incorporated by reference to Exhibit
2.1 to the Company's Amendment No. 1 to Form S-4 Registration Statement
(Reg. No. 33-42566), which became effective on September 13, 1991)
2(b): Form of First Amendment to the Agreement and Plan of
Reorganization by and among the Registrant, McDonald & Company
Securities, Inc. and Gradison & Company Incorporated (incorporated by
reference to Exhibit 2.2 to the Company's Amendment No. 1 to Form S-4
Registration Statement (Reg. No. 33-42566), which became effective on
September 13, 1991)
2(c): Form of Agreement of Merger by and among the Registrant, McDonald
& Company Securities, Inc. and Gradison & Company Incorporated
(incorporated by reference to Exhibit 2.3 to the Company's Amendment
No. 1 to Form S-4 Registration Statement (Reg. No. 33-42566), which
became effective on September 13, 1991)
3(a): Certificate of Incorporation of the Company (incorporated by
reference to Exhibit 4(a) to the Company's Form S-8 Registration
Statement (Reg. No. 33-11335), which became effective on February 2,
1987)
3(b): By-Laws of the Company (incorporated by reference to Exhibit 4(b)
to the Company's Form S-8 Registration Statement (Reg. No. 33-11335),
which became effective on February 2, 1987)
3(c): Certificate of Amendment to the Company's Certificate of
Incorporation (incorporated by reference to Exhibit 3(c) to the
Company's Form 10-K for the fiscal year ended March 26, 1993)
4(a): Specimen Stock Certificate (incorporated by reference to Exhibit
4 to the Company's Form S-1 Registration Statement (Reg. No. 2-84300),
which became effective on July 20, 1983)
</TABLE>
- 24 -
<PAGE> 25
ITEM 14(a) DOCUMENT LIST -- Continued
10(a): Stock Option Plan (incorporated by reference to Exhibit 4(b) to
the Company's Form S-8 Registration Statement (Reg. No. 33-ll335),
which became effective on February 2, 1987)*
10(b): 1990 Stock Option Plan for Outside Directors (incorporated by
reference to Exhibit 4.4 to the Company's Form S-8 Registration
Statement (Reg. No. 33-37603), which became effective on November 5,
1990)*
10(c): Documents reflecting lines of credit with First National Bank of
Chicago ($25,000,000), and the Bank of Tokyo ($45,000,000)
(incorporated by reference to Exhibit 10(p) to the Company's Form 10-K
for the fiscal year ended March 27, 1992)
10(d): Documents reflecting line of credit with The Northern Trust
Company ($10,000,000) (incorporated by reference to Exhibit 10(p) to
the Company's Form 10-K for the fiscal year ended March 29, 1991)
10(e): Documents reflecting lines of credit with Bankers Trust Company
($50,000,000), and Huntington National Bank ($25,000,000) (incorporated
by reference to Exhibit 10(p) to the Company's Form 10-K for the fiscal
year ended March 26, 1993)
10(f): Documents reflecting lines of credit with National City Bank
($25,000,000) and Star Bank ($20,000,000) (incorporated by reference to
Exhibit 10(m) to the Company's Form 10-Q for the fiscal quarter ended
September 24, 1993)
10(g): 1993 Restricted Stock Bonus Plan (incorporated herein by
reference to the Company's Definitive Proxy Statement for its Annual
Meeting held on July 27, 1993)*
10(h): Form of Note Purchase Agreement between McDonald & Company
Securities, Inc. and the Purchasers listed therein, dated as of January
15, 1993, relating to $25,000,000 principal amount of 8.24%
Subordinated Notes (incorporated by reference to Exhibit 10 of the
Company's Form 8-K filed with the Securities and Exchange Commission on
February 5, 1993)
10(i): McDonald & Company Securities, Inc. Retirement Savings Trust and
Plan (incorporated by reference to Exhibit 10(n) to the Company's Form
10-Q for the fiscal quarter ended September 24, 1993)*
10(j): Documents reflecting lines of credit with Bank of New York
($90,000,000) (incorporated by reference to Exhibit 10(m) to the
Company's Form 10-K for the fiscal year ended March 25, 1994)
10(k): Lease Agreement dated July 21, 1994 for the Company's executive
offices, which became effective April 1, 1994 (incorporated by
reference to Exhibit 10(k) to the Company's Form 10-K for the fiscal
year ended March 31, 1995)
10(l): 1995 Stock Bonus Plan (incorporated by reference to the
Company's Definitive Proxy Statement for its Annual Meeting held on
August 2, 1995)*
10(m): 1995 Key Employees Stock Option Plan (incorporated by reference
to the Company's Definitive Proxy Statement for its Annual Meeting held
on August 2, 1995)*
10(n): 1995 Stock Option Plan for Non-Officer Directors (incorporated
by reference to the Company's Definitive Proxy Statement for its Annual
Meeting held on August 7, 1996)*
* Management contract or compensatory plan or arrangement identified pursuant to
Item 14(c) of this Form 10-K.
- 25 -
<PAGE> 26
ITEM 14(a) DOCUMENT LIST--Continued
10(o): Lease Agreement dated May 21, 1996 for the Company's Gradison
Division, which became effective July 1, 1996 (incorporated by
reference to Exhibit 10(p) to the Company's Form 10-Q for the fiscal
quarter ended September 27, 1996)
10(p): Documents reflecting line of credit with Star Bank ($20,000,000)
(incorporated by reference to Exhibit 10(q) to the Company's Form 10-Q
for the fiscal quarter ended December 31, 1996)
10(q): First Amendment to the Stock Bonus Plan, which became effective
March 30, 1996 (incorporated by reference to the Company's Definitive
Proxy Statement for its Annual Meeting to be held on July 30, 1997)*
ITEM 14(b) REPORTS ON FORM 8-K.
The Company did not file a current Report on Form 8-K during the fiscal
quarter ended March 28, 1997.
OTHER
- -----
On February 9, 1995, the Company announced the continuation of an open
market repurchase program originally instituted in July 1987. The current
program allows the Company to purchase up to 1,000,000 shares of its Common
Stock at an aggregate price not to exceed $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 year ended March 28, 1997 the Company purchased
176,803 shares of the Company's Common Stock at an average price of $18.716 per
share. During the fiscal year ended March 28, 1997, the Company utilized 83,362
shares of the Company's Common Stock held in treasury to satisfy options
exercised under the Company's stock option plans.
* Management contract or compensatory plan on arrangement identified pursuant to
Item 14(c) of this Form 10-K.
- 26 -
<PAGE> 27
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized at Cleveland, Ohio on
this 20th day of June, 1997.
McDONALD AND COMPANY INVESTMENTS, INC.
By: /s/ William B. Summers, Jr.
---------------------------------------
William B. Summers, Jr., President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on .
<TABLE>
<CAPTION>
Signature Title:
- --------- ------
<S> <C>
/s/ William B. Summers, Jr. President and Director
- -------------------------------------- (Principal Executive Officer)
William B. Summers, Jr.
/s/ Robert T. Clutterbuck Treasurer and Director (Principal
- -------------------------------------- Financial and Accounting Officer)
Robert T. Clutterbuck
/s/ Thomas M. O'Donnell Chairman and Director
- --------------------------------------
Thomas M. O'Donnell
/s/ Rena J. Blumberg Director
- --------------------------------------
Rena J. Blumberg
/s/ Jeanette Grasselli Brown Director
- --------------------------------------
Jeanette Grasselli Brown
/s/ Edward Fruchtenbaum Director
- --------------------------------------
Edward Fruchtenbaum
/s/ James A. Karman Director
- --------------------------------------
James A. Karman
/s/ David N. McCammon Director
- --------------------------------------
David N. McCammon
/s/ Frederick R. Nance Director
- --------------------------------------
Frederick R. Nance
/s/ Donald E. Weston Director
- --------------------------------------
Donald E. Weston
</TABLE>
- 27 -
<PAGE> 28
McDonald & Company Investments, Inc.
Report on FORM 10-K for the Fiscal Year ended March 28, 1997
EXHIBIT INDEX
-------------
<TABLE>
<CAPTION>
Exhibit No. Description Sequential Page
- ----------- ----------- ---------------
<S> <C> <C>
11 Statement Re: Computation of
Per Share Earnings..................................................... 29
21 Subsidiaries of the Registrant......................................... 30
23 Consent of Independent
Auditors............................................................. 32
27 Financial Data Schedule BD
99(a) Supplementary Financial Data
Quarterly Data (Unaudited)........................................... 33
99(b) Selected Financial Data................................................ 34
99(c) Management's Discussion and
Analysis of Results of Operations
and Financial Condition.............................................. 35
99(d) Consolidated Financial Statements of the Company and Independent
Auditors' Report thereon listed under Item 14(a)(1).................. 41
</TABLE>
- 28 -
<PAGE> 1
Exhibit 11
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
-----------------------------------------------
<TABLE>
<CAPTION>
Fiscal year ended
----------------------------------------------------
March 28, 1997 March 29, 1996 March 31, 1995
-------------- -------------- --------------
PRIMARY
- -------
<S> <C> <C> <C>
Average shares outstanding 8,955,000 8,930,000 9,150,000
Net effect of dilutive stock
options - based on the
treasury stock method using
average market price 158,000 142,000 153,000
----------- ----------- -----------
TOTAL 9,113,000 9,072,000 9,303,000
----------- ----------- -----------
Net income $24,656,000 $19,766,000 $13,684,000
----------- ----------- -----------
Net income per share $ 2.71 $ 2.18 $ 1.47
=========== =========== ===========
FULLY DILUTED
- -------------
Average shares outstanding 8,955,000 8,930,000 9,150,000
Net effect of dilutive stock
options - based on the
treasury stock method using greater
of year-end or average market price 158,000 155,000 153,000
----------- ----------- -----------
TOTAL 9,113,000 9,085,000 9,303,000
----------- ----------- -----------
Net income $24,656,000 $19,766,000 $13,684,000
----------- ----------- -----------
Net income per share $ 2.71 $ 2.18 $ 1.47
=========== =========== ===========
</TABLE>
- 29 -
<PAGE> 1
SUBSIDIARIES OF THE REGISTRANT
- ------------------------------
Exhibit 21
The following is a list of the subsidiaries of the Company:
1. McDonald & Company Securities, Inc.
-----------------------------------
McDonald & Company Securities, Inc., an Ohio corporation, is a
wholly owned subsidiary of the Company.
2. McD Real Estate, Inc.
---------------------
McD Real Estate, Inc., an Ohio corporation, is a wholly owned
subsidiary of the Company.
3. McD-Gradison Agency, Inc.
-------------------------
The Company owns all of the issued and outstanding shares of
preferred stock of McD-Gradison Agency, Inc., an Ohio corporation.
All of the issued and outstanding shares of Common Stock are held
by three officers of the Company.
4. McDonald Financial Services, Inc.
---------------------------------
McDonald Financial Services, Inc., an Ohio corporation, is a
wholly-owned subsidiary of the Company.
5. McDonald & Company Venture Capital, Inc.
----------------------------------------
McDonald & Company Venture Capital, Inc., an Ohio corporation, is a
wholly-owned subsidiary of the Company.
6. McDonald & Company Venture Capital, Inc. II
-------------------------------------------
McDonald & Company Venture Capital, Inc. II, an Ohio corporation,
is a wholly-owned subsidiary of the Company.
7. Gradvantage, Inc.
-----------------
Gradvantage, Inc., an Ohio corporation, is a wholly-owned
subsidiary of the Company.
8. Gradison Insurance Agency, Inc.
-------------------------------
Gradison Insurance Agency, Inc., an Ohio corporation, is a wholly
owned subsidiary of the Company.
9. McD Property Advisors, Inc.
---------------------------
McD Property Advisors, Inc., an Ohio corporation, is a wholly-owned
subsidiary of the Company.
10. Bond Lease Corporation V
------------------------
Bond Lease Corporation V, an Ohio corporation, is a wholly-owned
subsidiary of the Company.
- 30 -
<PAGE> 2
SUBSIDIARIES OF THE REGISTRANT (cont.)
- --------------------------------------
11. Bond Lease Corporation VI
-------------------------
Bond Lease Corporation VI, an Ohio corporation, is a wholly-owned
subsidiary of the Company.
12. Bond Lease Corporation VII
--------------------------
Bond Lease Corporation VII, an Ohio corporation, is a wholly-owned
subsidiary of the Company.
13. Gradison & Company, Inc.
------------------------
Gradison & Company, Inc., an Ohio corporation, is a wholly-owned
subsidiary of the Company.
14. Secured Lease Finance Corp.
---------------------------
Secured Lease Finance Corp., an Ohio corporation, is a wholly-owned
subsidiary of the Company.
15. Secured Lease Finance Corp. II
------------------------------
Secured Lease Finance Corp. II, an Ohio corporation, is a
wholly-owned subsidiary of the Company.
16. McDonald Mortgage Pass-Through Corp.
------------------------------------
McDonald Mortgage Pass-Through Corp., an Ohio corporation, is a
wholly-owned subsidiary of the Company.
17. The McDonald Trust Company
--------------------------
The McDonald Trust Company, an Indiana corporation, is a
wholly-owned subsidiary of the Company.
18. McD Freedom Advisors, Inc.
--------------------------
McD Freedom Advisors, Inc., an Ohio corporation, is a wholly-owned
subsidiary of the Company.
19. McD Methane, Inc.
-----------------
McD Methane, Inc., a Delaware corporation, is a wholly-owned
subsidiary of the Company.
20. McD Property Advisors 1996, Inc.
--------------------------------
McD Property Advisors 1996, Inc., an Ohio corporation, is a
wholly-owned subsidiary of the Company.
21. McD Developers, Inc.
--------------------
McD Developers, Inc., an Ohio corporation, is a wholly-owned
subsidiary of the Company.
22. McD Property Advisors, Inc. - 1997
----------------------------------
McD Property Advisors, Inc. - 1997, an Ohio corporation, is a
wholly-owned subsidiary of the Company.
- 31 -
<PAGE> 1
Exhibit 23
Consent of Independent Auditors
-------------------------------
We consent to the incorporation by reference in the Registration
Statement (Form S-8 Number 33-11335) pertaining to the McDonald & Company
Investments, Inc. Stock Option Plan, Registration Statement (Form S-8 Number
33-37603) pertaining to the McDonald & Company Investments, Inc. 1990 Stock
Option Plan for Outside Directors, Registration Statement (Form S-8 Number
33-54521) pertaining to the McDonald & Company Investments, Inc. 1993 Stock
Bonus Plan, Registration Statement (Form S-8 Number 33-65491) pertaining to the
McDonald & Company Investments, Inc. 1995 Stock Bonus Plan, and Registration
Statement (Form S-8 Number 33-65489) pertaining to the McDonald & Company
Investments, Inc. 1995 Key Employees Stock Option Plan, of our report dated May
6, 1997, with respect to the consolidated financial statements of McDonald &
Company Investments, Inc. included in this Annual Report (Form 10-K) for the
fiscal year ended March 28, 1997.
/s/ Ernst & Young LLP
Cleveland, Ohio
June 18, 1997
- 32 -
<TABLE> <S> <C>
<ARTICLE> BD
<LEGEND>
THIS SCHEDULE CONTAINS FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
STATEMENT OF FINANCIAL CONDITION, MAR-28-1997 AND IS QUALIIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-28-1997
<PERIOD-START> MAR-30-1996
<PERIOD-END> MAR-28-1997
<CASH> 8,907
<RECEIVABLES> 217,106
<SECURITIES-RESALE> 43,943
<SECURITIES-BORROWED> 0
<INSTRUMENTS-OWNED> 127,632
<PP&E> 19,562
<TOTAL-ASSETS> 501,968
<SHORT-TERM> 46,285
<PAYABLES> 100,132
<REPOS-SOLD> 67,151
<SECURITIES-LOANED> 0
<INSTRUMENTS-SOLD> 48,350
<LONG-TERM> 25,000
<COMMON> 11,802
0
0
<OTHER-SE> 142,320
<TOTAL-LIABILITY-AND-EQUITY> 501,968
<TRADING-REVENUE> 55,385
<INTEREST-DIVIDENDS> 20,406
<COMMISSIONS> 79,907
<INVESTMENT-BANKING-REVENUES> 73,611
<FEE-REVENUE> 25,136
<INTEREST-EXPENSE> 9,629
<COMPENSATION> 152,708
<INCOME-PRETAX> 38,256
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 24,656
<EPS-PRIMARY> 2.71
<EPS-DILUTED> 0
</TABLE>
<PAGE> 1
EXHIBIT 99(a)
SUPPLEMENTARY FINANCIAL DATA
<TABLE>
<CAPTION>
QUARTERLY DATA (UNAUDITED) Common Stock*
-----------------------------------
Dividends Price Range
(In thousands, except per Income Before Net Net Income Paid Per ------------------------
share amounts) Revenues Income Taxes Income Per Share Share High Low
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Fiscal 1997
- ---------------------------------------------------------------------------------------------------------------------------
First quarter (13 weeks) $ 67,332 $ 10,058 $ 6,458 $ .71 $ .08500 $ 20.750 $ 18.875
Second quarter (13 weeks) 59,617 8,273 5,273 .58 .09375 25.125 17.750
Third quarter (13 weeks) 62,963 8,261 5,281 .58 .09375 34.875 23.875
Fourth quarter (13 weeks) 71,585 11,664 7,644 .84 .09375 40.875 33.000
- ---------------------------------------------------------------------------------------------------------------------------
Total Year $ 261,497 $ 38,256 $ 24,656 $ 2.71 $ .36625
- ---------------------------------------------------------------------------------------------------------------------------
Fiscal 1996
- ---------------------------------------------------------------------------------------------------------------------------
First quarter (13 weeks) $ 49,988 $ 5,964 $ 3,764 $ .41 $ .080 $ 16.50 $ 14.38
Second quarter (14 weeks) 55,474 8,116 5,116 .56 .085 17.75 15.75
Third quarter (13 weeks) 53,421 7,236 4,896 .55 .085 18.38 16.75
Fourth quarter (13 weeks) 61,738 9,450 5,990 .66 .085 20.00 17.75
- ---------------------------------------------------------------------------------------------------------------------------
Total Year $ 220,621 $ 30,766 $ 19,766 $ 2.18 $ .335
- ---------------------------------------------------------------------------------------------------------------------------
<FN>
* The Common Stock of McDonald & Company Investments, Inc., is listed on the New York Stock Exchange. The trading symbol
is MDD. At April 25, 1997, the approximate number of stockholders of record was 1,020.
</TABLE>
-33-
<PAGE> 1
EXHIBIT 99(b)
MCDONALD & COMPANY INVESTMENTS, INC.
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Fiscal Year Ended
- ---------------------------------------------------------------------------------------------------------------------------
March 28, March 29, March 31, March 25, March 26,
(In thousands, except per share amounts) 1997 1996 1995 1994* 1993*
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operations
Revenues $ 261,497 $ 220,621 $ 177,726 $ 204,680 $ 173,817
Income before income taxes 38,256 30,766 20,704 34,688 24,700
Net income 24,656 19,766 13,684 21,588 16,050
Net income per share 2.71 2.18 1.47 2.38 1.92
Cash dividends paid per share .36625 .335 .315 .288 .312
<CAPTION>
Financial position as of: March 28, March 29, March 31, March 25, March 26,
1997 1996 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total assets $ 501,968 $ 471,101 $ 401,332 $ 590,578 $ 528,942
Long-term borrowings 25,000 25,000 25,000 25,000 38,055
Stockholders' equity 154,122 130,823 114,362 107,405 77,927
<FN>
* All net income per share and cash dividends paid per share information has
been adjusted for a 20% stock dividend paid during the fiscal year ended March
25, 1994.
</TABLE>
-34-
<PAGE> 1
EXHIBIT 99(c)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Business Environment
McDonald & Company Investments, Inc. (the "Company"), operates a full-service,
regional investment banking, brokerage and investment advisory 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 recently 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
potential 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
institutional fixed income divisions cover accounts throughout the United States
and internationally.
Liquidity and Capital Resources
The majority of the Company's assets are highly liquid and short-term in nature.
Cash and liquid assets, principally receivables from customers, receivables from
brokers and dealers, securities purchased under agreements to resell and
securities owned, represented approximately 88% of the Company's assets at March
28, 1997. These assets are financed by a number of sources, including payables
to customers and brokers, short-term borrowings and securities sold under
agreements to repurchase, long-term borrowings and equity capital.
-35-
<PAGE> 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
McDonald Securities is a dealer in corporate, mortgage-backed and governmental
fixed income securities and equity securities which are carried as securities
owned primarily for distribution to individual and institutional customers.
Periodically, McDonald Securities buys, sells and positions mortgage-derivative
securities and structured notes. Holdings of high-yield securities are not
material. McDonald Securities may enter into short positions in United States
government bonds in order to manage the interest rate risk related to fixed
income trading positions. McDonald Securities maintains comprehensive risk
management policies, including position limits and credit requirements.
At March 28, 1997, McDonald Securities has outstanding $25,000,000 in aggregate
principal amount of 8.24% Subordinated Notes due January 15, 2002. McDonald
Securities is required to pay principal amounts of $5,000,000 on January 15 of
each year beginning in 1998. The notes are subordinated in right of payment to
all senior indebtedness and general creditors of McDonald Securities. In
addition to providing additional long-term financing, the notes have been
approved by the New York Stock Exchange, Inc. for inclusion in McDonald
Securities' regulatory capital.
Changes in the levels of securities owned and in customer and broker receivables
directly affect the Company's financing arrangements. The Company has available
lines of credit of $310,000,000, of which $279,749,000 was unused as of March
28, 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 McDonald Securities to
satisfy the regulatory requirements of the Securities and Exchange Commission
and the New York Stock Exchange, Inc. The regulatory requirements represent
Uniform Net Capital Rules designed to measure the general financial integrity
and liquidity of registered broker/dealers and to provide minimum acceptable net
capital levels to meet the continuing commitments to customers. Net capital, as
defined, changes from day to day. At March 28, 1997, McDonald Securities was in
compliance with the Uniform Net Capital Rules and had net capital of
$78,724,000, which was $74,686,000 in excess of the minimum required.
RESULTS OF OPERATIONS
The following table summarizes the changes in the major categories of revenues
and expenses for the fiscal years ended March 28, 1997, March 29, 1996, and
March 31, 1995.
<TABLE>
<CAPTION>
Fiscal 1997 Fiscal 1996
Versus Versus
(Dollars in thousands) Fiscal 1996 Fiscal 1995
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues
Underwriting and investment banking $ 17,952 32% $ 13,708 33%
Principal transactions 1,284 2 8,218 18
Commissions 13,409 20 16,444 33
Investment management fees 5,294 27 3,881 24
Interest and dividends 3,236 19 (2,027) (11)
Other (299) (4) 2,671 57
- ---------------------------------------------------------------------------------------------------------------------------
$ 40,876 19% $ 42,895 24%
- ---------------------------------------------------------------------------------------------------------------------------
Expenses
Employee compensation and benefits $ 25,649 20% $ 24,502 24%
Interest 1,991 26 1,268 20
Communications 1,112 8 1,088 9
Occupancy and equipment 2,470 16 2,126 16
Promotion and development 912 11 788 11
Floor brokerage and clearance 87 3 (18) (1)
Taxes, other than income taxes 804 12 526 9
Other operating expenses 361 4 2,553 39
- ---------------------------------------------------------------------------------------------------------------------------
$ 33,386 18% $ 32,833 21%
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
-36-
<PAGE> 3
MCDONALD & COMPANY INVESTMENTS, INC.
FISCAL 1997 COMPARED WITH FISCAL 1996
Total revenues for the fiscal year ended March 28, 1997 were $261,497,000, an
increase of $40,876,000, or 19%, from revenues of $220,621,000 for the fiscal
year ended March 29, 1996.
Net income for the fiscal year ended March 28, 1997 was $24,656,000, or $2.71
per share, compared with $19,766,000, or $2.18 per share, for the fiscal year
ended March 29, 1996, an increase in net income of 25%.
The average number of shares and share equivalents outstanding was 9,113,000 for
the fiscal year ended March 28, 1997, compared with 9,072,000 for the fiscal
year ended March 29, 1996.
Revenues from underwriting and investment banking increased $17,952,000, or 32%,
for the fiscal year ended March 28, 1997, compared with the fiscal year ended
March 29, 1996. Revenues from corporate underwriting and investment banking
increased $19,861,000, or 40%, for the fiscal year ended March 28, 1997,
compared with the prior fiscal year. This resulted from increases in revenues
from managed and co-managed originations of $5,768,000, or 35%, increases in
revenues from participation in syndicate groups of $110,000, or 1%, and an
increase in revenues from private placements of debt and equity securities and
limited partnerships of $10,009,000, or 83%, in the current fiscal year. These
increases are attributable to favorable market conditions for both public
offerings and private placements of debt and equity securities. Included in
private placement revenues for the fiscal year ended March 28, 1997 were fees of
$9,336,000 from a single $500 million private placement of debt and equity
securities. Additionally, revenues from mergers and acquisitions and other
financial advisory fees increased $3,974,000, or 34%, due to favorable market
conditions for this type of activity. Revenues from public finance decreased
$1,909,000, or 33%, for the fiscal year ended March 28, 1997, due to a lower
level of public finance offerings in which McDonald Securities participated.
Revenues from underwriting and investment banking activities are highly
dependent on general market conditions for such business activities. Market
conditions for underwriting and investment banking services can be affected by
economic and legislative events, both in the United States and abroad. To the
extent that future events are unpredictable, uncertainty will be a factor in the
level of McDonald Securities' business activity. Also, competitive pressure from
other entities providing investment banking services can and will have an effect
on the success of the Company in obtaining such business and on the prices which
can be charged for investment banking and underwriting services. Management
believes that the Company can compete effectively in this segment of its
business activities.
Revenues from principal transactions increased $1,284,000, or 2%, for the fiscal
year ended March 28, 1997, compared with the prior fiscal year. Revenues from
principal transactions in equity securities increased $1,018,000, or 5%, for the
fiscal year ended March 28, 1997, compared with the prior fiscal year. This
increase is primarily due to a strong NASDAQ market and the continued expansion
of the Company's retail sales force and its institutional equity capabilities.
Revenues from trading taxable fixed income securities, including corporate
bonds, United States government bonds and mortgage-backed securities, decreased
$861,000, or 4%. This decrease in revenues from principal transactions in
taxable fixed income securities was due primarily to a decrease in revenues from
trading mortgage-backed securities of $910,000, or 15%, due to lower market
demand for this type of fixed income product. Revenues from trading municipal
bonds increased $1,127,000, or 13%, for the current fiscal year, primarily due
to increased focus on secondary trading in light of the decreased supply of
public finance business.
Commissions revenue increased $13,409,000, or 20%, for the fiscal year ended
March 28, 1997, compared with the fiscal year ended March 29, 1996. The increase
in commissions revenue reflects higher volume resulting from both strong equity
markets and the continued expansion of the Company's retail sales force and
institutional equity capabilities. The increase in commissions revenue was
comprised primarily of increases in revenues from listed and over-the-counter
agency commissions of $5,941,000, or 14%, and an increase in revenues from
mutual fund sales of $5,622,000, or 29%, for the current fiscal year.
Revenues from investment management fees include advisory fees from the
Company's mutual funds and money market funds and investment management fees
earned related to individual managed accounts. Revenues from investment
management fees increased $5,294,000, or 27%, for the fiscal year ended March
28, 1997, compared with the prior fiscal year. Revenues from investment
management fees related to individual managed accounts increased $4,384,000, or
42%, and advisory fees from the Company's mutual funds and money market funds
increased $910,000, or 10%. These increases were a result of an increase in
assets under management.
Interest and dividend income increased $3,236,000, or 19%, for the fiscal year
ended March 28, 1997, compared with the prior fiscal year. Interest earned on
customer margin accounts increased $2,142,000, or 23%, due to a higher level of
customer margin loans. Income from securities borrowed increased $909,000, or
140%, due to higher average positions, primarily as a result of securities
borrowed related to short positions in customer accounts.
-37-
<PAGE> 4
FISCAL 1997 COMPARED WITH FISCAL 1996
Other income decreased $299,000, or 4%, for the fiscal year ended March 28,
1997, compared with the prior fiscal year. This decrease resulted from a
$545,000 decline in gains related to venture capital investments, offset in part
by a $246,000 increase in transfer agent, service and other fee income related
to the continued expansion of the retail business.
Operating expenses (total expenses before interest) increased $31,395,000, or
17%, for the fiscal year ended March 28, 1997, compared with the prior fiscal
year.
Employee compensation and benefits increased $25,649,000, or 20%, for the
current fiscal year. Commission and other sales compensation expense increased
$10,946,000, or 17%, for the current fiscal year, primarily as a result of the
increase in revenues. Other clerical and administrative expenses increased
$5,853,000, or 16%, for the current fiscal year. The increase in other clerical
and administrative expenses represents compensation and employee benefit costs
related to an increase in the professional and support staff during the 1997
fiscal year. The remaining $8,850,000 increase in employee compensation
represents increases in incentive compensation and profit sharing accruals,
which are directly related to the increase in profitability. Incentive
compensation expense was also impacted by the increase in investment banking
private placements and advisory fee revenues, with corresponding higher
incentive compensation in the investment banking area.
All other operating expenses increased $5,746,000, or 10%, for the fiscal year
ended March 28, 1997, compared with the fiscal year ended March 29, 1996. The
increase in all other operating costs reflects the communications, occupancy and
equipment and other operating costs related to the expansion of the Company's
business. For the fiscal year ended March 28, 1997, communications expenses
increased $1,112,000, or 8%. Of this increase, approximately $589,000 represents
expenses related to the renovation of the Company's headquarters office and the
recent Companywide technology renovation. The remaining increase in
communications expenses reflects higher telecommunications, quotation and
information services costs, due to both higher volume and higher employee
headcount. Occupancy and equipment costs increased $2,470,000, or 16%. Of this
increase, approximately $1,448,000 represents expenses related to the renovation
of the Company's headquarters office and the technology renovation. Without
regard to these items, occupancy and equipment costs increased 7%, reflecting
increased costs related to headcount increases. Promotion and business
development expense increased $912,000, or 11%, compared with the prior fiscal
year, primarily due to increased promotional, travel and business entertainment
expenses resulting from the continued expansion of the Company's business. Taxes
other than income taxes increased $804,000, or 12%, reflecting primarily
increased payroll taxes, due to increases in compensation expenses. The category
of other operating expenses increased $361,000, or 4%, for the fiscal year ended
March 28, 1997, compared with the prior fiscal year.
Interest expense increased $1,991,000, or 26%, for the fiscal year ended March
28, 1997, compared with the fiscal year ended March 29, 1996, due to a higher
level of average short-term borrowings which increased primarily as a result of
higher customer margin borrowings and a higher level of securities owned.
Income before income taxes for the fiscal year ended March 28, 1997 was
$38,256,000, resulting in a pre-tax return on revenues of 14.6%. For the fiscal
year ended March 29, 1996, income before income taxes was $30,766,000, resulting
in a pre-tax return on revenues of 13.9%.
FISCAL 1996 COMPARED WITH FISCAL 1995
Total revenues for the fiscal year ended March 29, 1996 were $220,621,000, an
increase of $42,895,000, or 24%, from revenues of $177,726,000 for the fiscal
year ended March 31, 1995.
Net income for the fiscal year ended March 29, 1996 was $19,766,000, or $2.18
per share, compared with $13,684,000, or $1.47 per share, for the fiscal year
ended March 31, 1995, an increase in net income of 44%.
The average number of shares and share equivalents outstanding was 9,072,000 for
the fiscal year ended March 29, 1996, compared with 9,303,000 for the fiscal
year ended March 31, 1995.
Revenues from underwriting and investment banking increased $13,708,000, or 33%,
for the fiscal year ended March 29, 1996, compared with the fiscal year ended
March 31, 1995. Revenues from corporate underwriting and investment banking
increased $15,788,000, or 46%, for the fiscal year ended March 29, 1996,
compared with the prior fiscal year. This resulted from increases in revenues
from managed and co-managed originations of $6,005,000, or 57%, increases in
revenues from participation in syndicate groups of $2,289,000, or 31%, and an
increase in revenues from private placements of debt and equity securities and
limited partnerships of $5,512,000, or 84%, in the fiscal year ended March 29,
1996. These increases were attributable to favorable market conditions for
public and private offerings of debt and equity securities. Additionally,
revenues from mergers and acquisitions and other financial advisory fees
-38-
<PAGE> 5
MCDONALD & COMPANY INVESTMENTS, INC.
increased $1,982,000, or 21%, due to favorable market conditions for this type
of activity. Revenues from public finance decreased $2,080,000, or 26%, for the
fiscal year ended March 29, 1996, due to a lower level of public finance
offerings in which McDonald Securities participated.
Revenues from principal transactions increased $8,218,000, or 18%, for the
fiscal year ended March 29, 1996, compared with the prior fiscal year. Revenues
from trading taxable fixed income securities, including corporate bonds, United
States government bonds and mortgage-backed securities, increased $1,261,000, or
6%. This increase in revenues from principal transactions in taxable fixed
income securities was due to a more stable interest rate environment. Revenues
from trading municipal bonds increased $1,655,000, or 23%, for the fiscal year
ended March 29, 1996, primarily reflecting a trading loss of $2,440,000 recorded
in March 1995, related to certain municipal inventory positions. Without regard
to the fiscal year 1995 trading loss on certain municipal positions, revenues
from trading municipal bonds decreased $1,385,000, or 14%. This decrease
reflects a lower level of individual investor interest in tax-exempt securities,
due to uncertainties caused by potential tax law changes. Revenues from
principal transactions in equity securities increased $5,302,000, or 33%, for
the fiscal year ended March 29, 1996, compared with the prior fiscal year. This
increase was primarily due to a strong NASDAQ market and the continued expansion
of the Company's sales force and its institutional equity capabilities.
Commissions revenue increased $16,444,000, or 33%, for the fiscal year ended
March 29, 1996, compared with the fiscal year ended March 31, 1995. The increase
in commissions revenue reflects higher volume resulting from both strong equity
markets and the continued expansion of the Company's sales force. The increase
in commissions revenue was comprised primarily of increases in revenues from
listed and over-the-counter agency commissions of $11,223,000, or 35%, and an
increase in revenues from mutual fund sales of $5,674,000, or 41%.
Revenues from investment management fees include advisory fees from the
Company's mutual funds and money market funds and investment management fees
earned related to individual managed accounts. Revenues from investment
management fees increased $3,881,000, or 24%, for the fiscal year ended March
29, 1996, compared with the prior fiscal year. Revenues from investment
management fees related to individual managed accounts increased $3,398,000, or
49%, while advisory fees from the Company's mutual funds and money market funds
increased $483,000, or 5%. These increases were a result of an increase in
assets under management.
Interest and dividend income decreased $2,027,000, or 11%, for the fiscal year
ended March 29, 1996, compared with the prior fiscal year. This decrease
resulted from a decrease in interest income from municipal bonds of $4,687,000,
or 79%, due primarily to a decrease in interest income from certain municipal
bond positions. The decrease in interest income from municipal bonds was
partially offset by an increase in interest income earned on customer margin
accounts of $1,690,000, or 22%, due to both a higher level of customer margin
accounts and higher interest rates. Interest income from securities owned other
than municipal bonds increased $475,000, or 10%.
Other income increased $2,671,000, or 57%, for the fiscal year ended March 29,
1996, compared with the prior fiscal year. The increase was primarily due to an
increase of $1,464,000 in gains related to venture capital investments and an
increase of $1,207,000 in transfer agent, service and other fee income related
to the continued expansion of the retail business.
Operating expenses (total expenses before interest) increased $31,565,000, or
21%, for the fiscal year ended March 29, 1996, compared with the prior fiscal
year.
Employee compensation and benefits increased $24,502,000, or 24%, for the fiscal
year ended March 29, 1996. Commission and other sales compensation expense
increased $13,855,000, or 27%, for the fiscal year ended March 29, 1996,
primarily as a result of the increase in revenues. Other clerical and
administrative expenses increased $2,097,000, or 6%, for the fiscal year ended
March 29, 1996. The remaining $8,550,000 increase in employee compensation
represents increases in incentive compensation and profit sharing accruals,
which were directly related to the increase in profitability.
All other operating expenses increased $7,063,000, or 15%, for the fiscal year
ended March 29, 1996, compared with the fiscal year ended March 31, 1995. The
increase in all other operating costs reflects the communications, occupancy and
equipment and other operating costs related to the expansion of the Company's
business. For the fiscal year ended March 29, 1996, communications expenses
increased $1,088,000, or 9%, reflecting higher telecommunications, quotation and
information services costs, due to both higher volume and higher employee
headcount. Occupancy and equipment costs increased $2,126,000, or 16%. Of this
increase, approximately $650,000 represented nonrecurring expenses related to
the Company's technology renovation. Without regard to these items, occupancy
and equipment costs increased 11%, reflecting recurring costs related to the
technology renovation and headcount increases. Taxes other than income taxes
increased $526,000, or 9%, reflecting primarily increased payroll taxes, due to
increases in compensation expenses.
-39-
<PAGE> 6
FISCAL 1996 COMPARED WITH FISCAL 1995
The category of other operating expenses increased $2,553,000, or 39%, for the
fiscal year ended March 29, 1996, compared with the prior fiscal year. The
increase is due primarily to an increase in legal costs of $1,167,000 related to
pending litigation. Additionally, other professional fees increased $510,000,
due to expenses associated with consulting services related to the technology
renovation, and related to expansion of the Company's retail and investment
banking businesses. Contributions expense increased $367,000, due to the higher
level of profitability. The remaining expenses in this category increased
$509,000, or 14%, reflecting primarily costs related to higher volume.
Interest expense increased $1,268,000, or 20%, for the fiscal year ended March
29, 1996, compared with the fiscal year ended March 31, 1995, due to a higher
level of average short-term borrowings and an increase in short-term borrowing
rates.
Income before income taxes for the fiscal year ended March 29, 1996, was
$30,766,000, resulting in a pre-tax return on revenues of 13.9%. For the fiscal
year ended March 31, 1995, income before income taxes was $20,704,000, resulting
in a pre-tax return on revenues of 11.6%.
Effects of Recently Issued Accounting Standards
The Financial Accounting Standards Board recently issued Statement No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities," Statement No. 127, "Deferral of Certain Provisions of FAS No.
125," and Statement No. 128, "Earnings Per Share." The Company will adopt these
pronouncements in its fiscal year ending in March 1998, as required. Although
the Company has not completed its evaluation of the effect of these statements,
the Company does not expect the implementation to have a material impact on the
Company's financial condition or results of operation.
-40-
<PAGE> 1
EXHIBIT 99(d)
MCDONALD & COMPANY INVESTMENTS, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Fiscal Year Ended
- ---------------------------------------------------------------------------------------------------------------------------
March 28, March 29, March 31,
(In thousands, except share and per share amounts) 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues
Underwriting and investment banking $ 73,611 $ 55,659 $ 41,951
Principal transactions 55,385 54,101 45,883
Commissions 79,907 66,498 50,054
Investment management fees 25,136 19,842 15,961
Interest and dividends 20,406 17,170 19,197
Other 7,052 7,351 4,680
- ---------------------------------------------------------------------------------------------------------------------------
261,497 220,621 177,726
- ---------------------------------------------------------------------------------------------------------------------------
Expenses
Employee compensation and benefits 152,708 127,059 102,557
Interest 9,629 7,638 6,370
Communications 14,693 13,581 12,493
Occupancy and equipment 17,657 15,187 13,061
Promotion and development 9,194 8,282 7,494
Floor brokerage and clearance 2,644 2,557 2,575
Taxes, other than income taxes 7,319 6,515 5,989
Other operating expenses 9,397 9,036 6,483
- ---------------------------------------------------------------------------------------------------------------------------
223,241 189,855 157,022
- ---------------------------------------------------------------------------------------------------------------------------
Income before income taxes 38,256 30,766 20,704
Provision for income taxes 13,600 11,000 7,020
- ---------------------------------------------------------------------------------------------------------------------------
Net income $ 24,656 $ 19,766 $ 13,684
- ---------------------------------------------------------------------------------------------------------------------------
Net income per share $ 2.71 $ 2.18 $ 1.47
Average number of shares and share equivalents outstanding 9,113,000 9,072,000 9,303,000
</TABLE>
See Notes to Consolidated Financial Statements.
-41-
<PAGE> 2
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
March 28, March 29,
(In thousands, except share and per share amounts) 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash and cash equivalents $ 8,907 $ 12,376
Receivable from customers 179,606 175,973
Receivable from brokers and dealers 37,500 59,219
Securities purchased under agreements to resell 43,943 50,052
Securities owned 127,632 102,202
Other receivables 42,597 18,368
Furniture, equipment, and leasehold improvements, at cost, less
accumulated depreciation and amortization of $24,369 at March 28, 1997,
and $19,804 at March 29, 1996 19,562 15,719
Other assets 42,221 37,192
- ---------------------------------------------------------------------------------------------------------------------------
$ 501,968 $ 471,101
- ---------------------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Liabilities
Short-term borrowings $ 46,285 $ 77,024
Payable to customers 55,656 71,722
Payable to brokers and dealers 44,476 15,547
Securities sold under agreements to repurchase 67,151 67,135
Securities sold but not yet purchased 48,350 29,216
Accrued compensation 33,548 28,665
Accounts payable, accrued expenses, and other liabilities 27,380 25,969
Long-term borrowings 25,000 25,000
- ---------------------------------------------------------------------------------------------------------------------------
347,846 340,278
Commitments and Contingencies
Stockholders' Equity
Preferred Stock, without par value; 200,000 shares
authorized; none issued
Common Stock, par value $1.00 per share;
15,000,000 shares authorized; (11,801,620 and
11,620,857 shares issued, respectively) 11,802 11,621
Additional paid-in capital 55,868 51,663
Retained earnings 115,189 93,808
- ---------------------------------------------------------------------------------------------------------------------------
182,859 157,092
Less treasury stock, at cost -
2,784,936 shares at March 28, 1997, and
2,691,495 shares at March 29, 1996 (28,737) (26,269)
- ---------------------------------------------------------------------------------------------------------------------------
154,122 130,823
- ---------------------------------------------------------------------------------------------------------------------------
$ 501,968 $ 471,101
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
-42-
<PAGE> 3
MCDONALD & COMPANY INVESTMENTS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Additional Retained Treasury
(In thousands, except share and per share amounts) Stock Paid-In Capital Earnings Stock
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at March 25, 1994 $ 11,176 $ 44,916 $ 66,239 $(14,926)
Net income for the fiscal year 13,684
Purchase of 674,377 shares of treasury stock, at cost (8,380)
Issuance of 107,980 shares of treasury stock
to satisfy exercise of stock options (127) 857
Issuance of 258,659 shares of common stock 259 3,553
Cash dividends, $.315 per share (2,889)
- ---------------------------------------------------------------------------------------------------------------------------
Balance at March 31, 1995 11,435 48,342 77,034 (22,449)
Net income for the fiscal year 19,766
Purchase of 249,854 shares of treasury stock, at cost (4,196)
Issuance of 39,894 shares of treasury stock
to satisfy exercise of stock options 56 376
Issuance of 186,069 shares of common stock 186 3,265
Cash dividends, $.335 per share (2,992)
- ---------------------------------------------------------------------------------------------------------------------------
Balance at March 29, 1996 11,621 51,663 93,808 (26,269)
Net income for the fiscal year 24,656
Purchase of 176,803 shares of treasury stock, at cost (3,309)
Issuance of 83,362 shares of treasury stock
to satisfy exercise of stock options (134) 841
Issuance of 180,763 shares of common stock 181 4,339
Cash dividends, $.36625 per share (3,275)
- ---------------------------------------------------------------------------------------------------------------------------
Balance at March 28, 1997 $ 11,802 $ 55,868 $ 115,189 $(28,737)
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
-43-
<PAGE> 4
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Fiscal Year Ended
- ---------------------------------------------------------------------------------------------------------------------------
March 28, March 29, March 31,
(In thousands) 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
Operating Activities:
Net Income $ 24,656 $ 19,766 $ 13,684
<S> <C> <C> <C>
Adjustments to reconcile net income to net cash
provided by (used for)
operating activities:
Depreciation and amortization 6,681 5,485 4,973
Loss on disposal of furniture and equipment 387 670
Deferred compensation 380 393 609
Deferred income taxes (377) 68 560
Increase in receivable from customers (3,633) (39,793) (11,886)
(Increase) decrease in receivable from brokers
and dealers 21,719 (40,938) 12,634
(Increase) decrease in securities owned (25,430) (7,018) 57,506
Increase in other receivables (24,229) (2,000) (4,281)
Increase (decrease) in payable to customers (16,066) 36,342 7,160
Increase (decrease) in payable to brokers
and dealers 28,929 (5,239) (2,741)
Increase (decrease) in securities sold but not
yet purchased 19,134 (18,485) (16,943)
Increase (decrease) in accrued compensation 9,403 11,834 (492)
Increase (decrease) in accounts payable,
accrued expenses and other liabilities 1,031 4,708 (7,476)
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) operating activities 42,585 (34,207) 53,307
Investing Activities:
Purchase of furniture, equipment, and
leasehold improvements (10,316) (9,993) (5,678)
(Increase) decrease in other assets (5,247) (5,541) 4,109
- ---------------------------------------------------------------------------------------------------------------------------
Net cash (used for) investing activities (15,563) (15,534) (1,569)
Financing Activities:
Decrease in securities purchased under
agreements to resell 6,109 38,817 127,394
Increase (decrease) in short-term borrowings (30,739) 12,100 (25,807)
Increase (decrease) in securities sold under
agreements to repurchase 16 15,106 (146,701)
Cash dividends (3,275) (2,992) (2,889)
Purchase of treasury stock (3,309) (4,196) (8,380)
Proceeds from issuance of treasury stock 707 432 730
- ---------------------------------------------------------------------------------------------------------------------------
Net cash (used for) provided by financing activities (30,491) 59,267 (55,653)
Increase (decrease) in cash and cash equivalents (3,469) 9,526 (3,915)
Cash and cash equivalents at beginning of fiscal year 12,376 2,850 6,765
- ---------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of fiscal year $ 8,907 $ 12,376 $ 2,850
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
-44-
<PAGE> 5
MCDONALD & COMPANY INVESTMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
The consolidated financial statements include the accounts of McDonald & Company
Investments, Inc., and its subsidiaries, collectively referred to as the
"Company." All significant intercompany accounts and transactions are eliminated
in consolidation.
The Company's fiscal year is the 52- or 53-week period ending on the last Friday
in March.
The Company, through its principal subsidiary, McDonald & Company Securities,
Inc. ("McDonald Securities"), is engaged in the business of a securities broker
and dealer, which comprises several classes of service, such as underwriting and
investment banking, principal and agency transactions, and investment advisory
services.
Substantially all of the Company's financial assets and liabilities are carried
at market value or at amounts which, because of the short-term nature of the
financial instruments, approximate current fair value. The market value of the
Company's long-term borrowings, estimated based on current interest rates, does
not differ significantly from the amount recorded at March 28, 1997.
Cash and cash equivalents represent cash in banks and excess cash invested with
banks overnight in short-term instruments.
Repurchase and resale agreements are treated as financing transactions and are
carried at the amounts at which the securities will be reacquired or resold as
specified in the respective agreements. It is the Company's policy to obtain
possession of collateral. The Company monitors the risk of loss by assessing the
market value of the underlying securities as compared to the related receivable
or payable, including accrued interest, and requires additional collateral where
deemed appropriate.
Securities owned and securities sold but not yet purchased are carried at market
value, and unrealized gains and losses are included in revenues from principal
transactions.
Securities transactions and related commissions revenue and expense are recorded
on the settlement date basis. Settlement date is generally the third business
day following the trade date. The effect on the financial statements of using
the settlement date basis, rather than the trade-date basis, is not material.
Investment banking revenue (other than underwriting revenue) and investment
management fees are recorded as the income is earned and the related services
are performed. Underwriting revenue is recorded upon completion of the
underwriting.
Furniture and equipment are depreciated on the straight-line method over their
estimated useful lives. Leasehold improvements are amortized on the
straight-line method over the life of the lease or the useful life of the
improvement, whichever is shorter.
The excess of the purchase price over net identifiable assets acquired
(goodwill) is included in other assets and is being amortized on the
straight-line basis over a period of 25 years.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
During the fiscal year ended March 28, 1997, the Financing Accounting Standards
Board (the "FASB") issued Statement No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities," Statement No.
127, "Deferral of Certain Provisions of FAS No. 125," and Statement No. 128,
"Earnings Per Share." The Company will adopt these pronouncements in its fiscal
year ending in March 1998, as required. Although the Company has not completed
its evaluation of the impact of these statements, the Company does not expect
the implementation to have a material impact on the Company's financial
condition or results of operation.
In October 1995, the FASB issued Statement No. 123, "Accounting for Stock-Based
Compensation," ("SFAS No. 123") which allows an entity to continue to measure
compensation costs for employee stock compensation plans in accordance with
Accounting Principles Board Statement No. 25, ("APB No. 25") or to adopt the
fair value method of accounting prescribed by SFAS No. 123. The Company has
elected to continue to account for stock option grants under APB No. 25. The pro
forma impact on net income and net income per share using the fair value method
of accounting for stock option grants is not material. The fair value method of
accounting for stock option grants may have a material impact on pro forma net
income or net income per share in future years.
-45-
<PAGE> 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE B - SECURITIES OWNED AND SECURITIES
SOLD BUT NOT YET PURCHASED
Securities owned and securities sold but not yet purchased consist of the
following:
<TABLE>
<CAPTION>
March 28, March 29,
(In thousands) 1997 1996
- ----------------------------------------------------------------------
Securities owned
- ----------------------------------------------------------------------
<S> <C> <C>
Corporate obligations $ 45,804 $ 38,962
Mortgage-backed securities 38,698 31,526
State and municipal obligations 26,665 14,993
Corporate stocks 13,733 13,273
U.S. government obligations 2,666 3,305
Other 66 143
- ----------------------------------------------------------------------
$ 127,632 $ 102,202
- ----------------------------------------------------------------------
Securities sold but not yet
purchased
- ----------------------------------------------------------------------
U.S. government obligations $ 43,358 $ 22,545
Corporate stocks 4,664 6,512
Other 328 159
- ----------------------------------------------------------------------
$ 48,350 $ 29,216
- ----------------------------------------------------------------------
</TABLE>
NOTE C - SHORT-TERM BORROWINGS
Short-term borrowings include the following:
<TABLE>
<CAPTION>
March 28, March 29,
(In thousands) 1997 1996
- ----------------------------------------------------------------------
<S> <C> <C>
Secured bank loans $ 817 $ 26,280
- ----------------------------------------------------------------------
Unsecured bank loans 45,468 50,744
- ----------------------------------------------------------------------
$ 46,285 $ 77,024
- ----------------------------------------------------------------------
</TABLE>
Short-term borrowings are bank loans payable on demand at rates ranging from
6.0% to 8.5% at March 28, 1997. The secured loans were collateralized by
customer-owned securities with a market value of $1,288,000 at March 28, 1997.
At March 29, 1996, the secured loans were collateralized
by customer-owned securities with a market value of $87,947,000 and
Company-owned securities with a market value of $14,807,000. For the fiscal
years ended March 28, 1997 and March 29, 1996, the weighted average interest
rate on short-term borrowings was 6.0% and 6.4%, respectively.
The Company had total lines of credit of $310,000,000 at March 28, 1997, under
which a maximum of $150,000,000 could be borrowed on an unsecured basis. There
were no compensating balance requirements associated with these lines of credit.
Securities sold under agreements to repurchase bear interest at rates ranging
from 5.6% to 6.1% and are collateralized by firm-owned securities with a market
value of $67,297,000 at March 28, 1997. For the fiscal years ended March 28,
1997 and March 29, 1996, the weighted average interest rate on repurchase
agreements was 5.86% and 6.14%, respectively.
NOTE D - LONG-TERM BORROWINGS
McDonald Securities has outstanding $25,000,000 in aggregate principal amount of
8.24% Subordinated Notes due January 15, 2002. McDonald Securities is required
to pay principal amounts of $5,000,000 on January 15 in each year beginning in
1998. The notes are subordinated in right of payment to all senior indebtedness
of McDonald Securities. The principal amount of the notes has been approved by
the New York Stock Exchange, Inc. for inclusion in the regulatory capital of
McDonald Securities (See Note H).
Total interest paid was $10,038,000 for the fiscal year ended March 28, 1997,
$7,694,000 for the fiscal year ended March 29, 1996, and $6,412,000 for the
fiscal year ended March 31, 1995.
NOTE E - INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
Fiscal Year Ended
- -------------------------------------------------------------
March 28, March 29, March 31,
(In thousands) 1997 1996 1995
- -------------------------------------------------------------
<S> <C> <C> <C>
Federal
Current $ 13,411 $ 10,582 $ 6,260
Deferred (377) 68 560
- -------------------------------------------------------------
13,034 10,650 6,820
State and Local 566 350 200
- -------------------------------------------------------------
$ 13,600 $ 11,000 $ 7,020
- -------------------------------------------------------------
</TABLE>
The provision for income taxes differs from the amount computed using the
federal statutory rates of 35% for the fiscal years ended March 28, 1997, March
29, 1996 and March 31, 1995, as a result of the following:
<TABLE>
<CAPTION>
Fiscal Year Ended
- -------------------------------------------------------------
March 28, March 29, March 31,
(In thousands) 1997 1996 1995
- -------------------------------------------------------------
<S> <C> <C> <C>
Expected tax provision
at statutory rate $ 13,389 $ 10,768 $ 7,246
Effects of non-taxable
interest income (322) (500) (813)
Non-deductible business
meals and entertainment 442 389 378
Other-net 91 343 209
- -------------------------------------------------------------
$ 13,600 $11,000 $ 7,020
- -------------------------------------------------------------
</TABLE>
Significant components of the Company's deferred tax assets included in Other
assets in the statement of financial condition are as follows:
<TABLE>
<CAPTION>
March 28, March 29,
(In thousands) 1997 1996
- -------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Employee compensation accruals $ 3,142 $ 2,538
Litigation and other reserves 2,656 2,410
Amortization 416 343
Other 827 1,010
- -------------------------------------------------------------
Total deferred tax assets 7,041 6,301
- -------------------------------------------------------------
Deferred tax liabilities:
Depreciation 828 694
Other 585 356
- -------------------------------------------------------------
Total deferred tax liabilities 1,413 1,050
- -------------------------------------------------------------
Net deferred tax assets $ 5,628 $ 5,251
- -------------------------------------------------------------
</TABLE>
-46-
<PAGE> 7
Total income taxes paid were $14,147,000 for the fiscal year ended March 28,
1997, $9,426,000 for the fiscal year ended March 29, 1996, and $5,400,000 for
the fiscal year ended March 31, 1995.
NOTE F - NET INCOME PER SHARE
Net income per share is based on the average number of shares and share
equivalents outstanding during the fiscal years. Share equivalents represent the
effect of shares issuable under the Company's stock option plans.
NOTE G - COMMITMENTS AND CONTINGENCIES
The Company has letters of credit for $3,000,000 which are being used to satisfy
clearing corporation deposit requirements which approximated $1,403,000 at March
28, 1997. The agreements expire in June 1997 and September 1997 and the Company
pays fees at 1% per annum.
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 plaintiff, McDonald Securities and/or the other defendants
enabled, facilitated and/or assisted the County's investment staff to engage in
unsuitable and inappropriate investment and trading activities and practices.
The plaintiff seeks 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 plaintiff seeks 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
plaintiff's 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 plaintiff. In April 1997, pursuant to a stipulation entered into
between the plaintiff and McDonald Securities' co-defendant on the allegations
relating to the TANS/CRANS offerings, the plaintiff dismissed its 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 plaintiff and raising a number of
affirmative defenses to the plaintiff's allegations. McDonald Securities also
filed counterclaims against 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 plaintiff's claims against McDonald Securities are without merit, and
intends to contest vigorously the allegations in the complaint.
The Company is a defendant in various lawsuits incidental to its securities
business. In view of the number and diversity of claims against the Company and
the inherent difficulty of predicting the outcome of litigation and other
claims, the Company cannot state with certainty what the eventual outcome of
pending litigation or other claims will be. The Company provides for costs
relating to these matters when a loss is probable and the amount can be
reasonably estimated. The effect of the outcome of these matters on the
Company's future results of operations cannot be predicted because any such
effect depends on future results of operations and the amount and timing of the
resolution of such matters. While it is not possible to predict with certainty,
management believes that the ultimate resolution of such matters, including the
Jones Litigation, will not have a material adverse effect on the consolidated
financial position, liquidity, or results of operations of the Company.
Aggregate commitments under operating leases for office space and equipment in
effect as of March 28, 1997, with initial or remaining noncancellable lease
terms in excess of one year, are approximately $68,885,000 payable as follows
1998 - $8,787,000; 1999 - $8,259,000; 2000 - $6,876,000; 2001 - $5,923,000; 2002
- - $5,388,000, and thereafter - $33,652,000. Certain of these leases have
escalation clauses, based on certain increases in costs incurred by the lessor,
and renewal options. Rental expense amounted to $7,854,000 for the fiscal year
ended March 28, 1997, $6,744,000 for the fiscal year ended March 29, 1996, and
$6,025,000 for the fiscal year ended March 31, 1995.
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<PAGE> 8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE H - NET CAPITAL REQUIREMENTS
McDonald Securities is subject to the Uniform Net Capital Rule (the "Rule") of
the Securities and Exchange Commission and the net capital rules of the New York
Stock Exchange, Inc. (the "Exchange"), of which McDonald Securities is a member.
McDonald Securities has elected to use the alternative method permitted by the
Rule which requires that it maintain minimum net capital, as defined, equal to
2% of aggregate debit balances arising from customer transactions, as defined.
The Exchange may require a member firm to reduce its business if its net capital
is less than 4% of aggregate debit balances and may prohibit a member firm from
expanding its business or paying cash dividends if resulting net capital would
be less than 5% of aggregate debit balances.
Net capital and aggregate debit balances change from day to day. At March 28,
1997, McDonald Securities' net capital under the Rule was $78,724,000, or 39% of
aggregate debit balances, and $74,686,000 in excess of the minimum required net
capital.
NOTE I - FINANCIAL INSTRUMENTS WITH
OFF-BALANCE SHEET AND CREDIT RISK
In the normal course of business, the Company's activities involve the
execution, settlement and financing of various securities transactions. These
activities may expose the Company to risk in the event the customer is unable to
fulfill its contractual obligations. The Company maintains cash and margin
accounts for its customers located throughout the United States, but primarily
in the Midwest.
The Company, as a part of its normal brokerage activities, assumes short
positions in securities. The establishment of short positions exposes the
Company to off-balance sheet risk in the event prices change, as the Company may
be obligated to cover such positions at a loss. The Company enters into short
positions in United States government bonds in order to manage the interest rate
risk related to trading positions in corporate bonds, mortgage-backed securities
and United States government securities. The Company enters into short positions
in corporate stocks in the ordinary course of operations related to its NASDAQ
trading activities.
As a securities broker and dealer, a substantial portion of the Company's
transactions are collateralized. The Company's exposure to credit risk
associated with the nonperformance in fulfilling contractual obligations
pursuant to securities transactions can be directly impacted by volatile trading
markets, which may impair the customers' or contra parties' ability to satisfy
their obligations to the Company. Where considered necessary, the Company
requires a deposit of additional collateral, or a reduction of securities
positions.
In the normal course of business, the Company enters into underwriting and
forward commitments. At March 28, 1997, the Company's commitments included
forward purchase and sale contracts involving mortgage-backed securities with
market values of approximately $50 million and $49 million, respectively, and
collateralized mortgage obligations with market values of approximately $91
million and $76 million, respectively. At March 29, 1996, the Company's
commitments included forward purchase and sale contracts involving
mortgage-backed securities with market values of approximately $173 million and
$173 million, respectively, and collateralized mortgage obligations with market
values of approximately $83 million and $76 million, respectively. Transactions
relating to such commitments, which were subsequently settled, had no material
effect on financial position.
The average fair value of mortgage-backed securities and collateralized mortgage
obligations included in securities owned was $25,390,000 at March 28, 1997 and
$25,575,000 at March 29, 1996.
The revenues from trading mortgage-backed securities and collateralized mortgage
obligations, including both forward and regular-way transactions, are included
in revenues from principal transactions and were $5,270,000, $6,180,000, and
$5,479,000, respectively, for the fiscal years ended March 28, 1997, March 29,
1996 and March 31, 1995.
NOTE J - EMPLOYEE BENEFIT PLANS
The Company sponsors a 401(k) defined-contribution and profit-sharing plan
covering substantially all employees. The Plan provides for the Company to
match, at a minimum, an amount equal to the retirement savings contributions
made to the Plan by each participant up to a maximum of 50% of the first 4% of
qualified compensation for exempt and sales employees, and 100% of the first 2%
plus 50% of the next 2% of qualified compensation for nonexempt employees. The
Company's profit sharing contribution is determined annually, based on the
Company's performance. The Company's contribution expense related to the plan
was $2,100,000 for the fiscal year ended March 28, 1997, $2,000,000 for the
fiscal year ended March 29, 1996 and $1,532,000 for the fiscal year ended March
31, 1995.
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<PAGE> 9
NOTE K - STOCK OPTION AND RESTRICTED STOCK PLANS
The Company had authorized 720,000 shares of Common Stock for issuance pursuant
to the Company's Stock Option Plan for employees, which terminated on June 6,
1993. An additional 28,800 shares were authorized for issuance under the 1990
Stock Option Plan for Outside Directors. Options outstanding at the time of
termination of these plans continue according to the terms of these plans. The
Company has authorized 500,000 shares of common stock for issuance under the
1995 Key Employees Stock Option Plan, although no shares have been issued under
this plan. The Company also authorized 50,000 shares of common stock for
issuance pursuant to the Company's 1995 Stock Option Plan for Non-Officer
Directors. Stock option activity for the fiscal years ended March 28, 1997,
March 29, 1996, and March 31, 1995 was as follows:
<TABLE>
<CAPTION>
1990 Stock Option Plan 1995 Stock Option Plan
Stock Option Plan for Outside Directors for Non-Officer Directors
- ---------------------------------------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Number of Average Number of Average Number of Average
Options Exercise Price Options Exercise Price Options Exercise Price
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at March 25, 1994 419,666 $ 8.03 19,200 $ 7.08
Exercised (107,980) $ 6.26
Canceled (4,912) $ 6.43
-------- ------
Outstanding at March 31, 1995 306,774 $ 8.67 19,200 $ 7.08
Granted during fiscal 1996 5,000 $18.40
Exercised (37,014) $ 7.15 (2,880) $ 9.69
Canceled (1,200) $ 7.32 (1,920) $ 9.69
-------- ------ ------
Outstanding at March 29, 1996 268,560 $ 8.89 14,400 $ 6.22 5,000 $18.40
Granted during fiscal 1997 6,000 $22.63
Exercised (83,362) $ 8.11
Canceled (9,240) $12.60
-------- ------ ------
Outstanding at March 28, 1997 175,958 $ 9.18 14,400 $ 6.22 11,000 $20.71
-------- ------ ------
Options outstanding at
March 28, 1997:
Exercisable 144,720 $ 8.43 13,440 $ 6.03 5,000 $18.40
Available for future grant -- -- 39,000
Weighted average remaining
contractual life 3.4 years 4.0 years 8.9 years
Range of exercise price per
share for options $3.65 - $12.71 $4.90 - $8.85 $17.75 - $37.63
</TABLE>
The options under the Company's Stock Option Plan and the 1990 Stock Option Plan
for Outside Directors become exercisable over a five-year period from the date
of grant and expire 10 years from the date of grant. Under the 1995 Stock Option
Plan for Non-Officer Directors, options become exercisable one year from the
date of grant and expire 10 years from the date of grant.
The Company has authorized 2,000,000 shares of Common Stock for issuance
pursuant to the Company's 1995 Stock Bonus Plan (the "Bonus Plan"). Under the
Bonus Plan, restricted stock awards may be granted to certain employees.
Employees who are granted stock awards under the terms of the Bonus Plan may
elect to receive shares of stock which are restricted as to sale or transfer for
a period of two years from the June 1 following the date of grant. These shares
are issued at a discount of 5% from the current market value of the shares.
Alternatively, an employee may elect to receive shares which are subject to
forfeiture if the employee's employment terminated within three years from the
June 1 following the date of grant. These shares are issued at a discount of 15%
from the current market value. The Company issued 180,763, 186,069 and 258,659
shares of common stock, respectively, for the fiscal years ended March 28, 1997,
March 29, 1996 and March 31, 1995, in connection with the Bonus Plan.
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<PAGE> 10
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Stockholders and Board of Directors
McDonald & Company Investments, Inc.
We have audited the accompanying consolidated statements of financial condition
of McDonald & Company Investments, Inc., and subsidiaries as of March 28, 1997,
and March 29, 1996, and the related consolidated statements of income, changes
in stockholders' equity and cash flows for each of the three fiscal years in the
period ended March 28, 1997. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of McDonald & Company
Investments, Inc., and subsidiaries at March 28, 1997, and March 29, 1996, and
the consolidated results of their operations and their cash flows for each of
the three fiscal years in the period ended March 28, 1997, in conformity with
generally accepted accounting principles.
/s/ Ernst & Young LLP
Ernst & Young LLP
Cleveland, Ohio
May 6, 1997
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