<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-Q
(Mark One)
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X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
- -----
For the quarterly period ended December 31, 1997
OR
- ---- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
- ---- OF 1934
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For the transition period from to
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Commission file number 1-8526
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McDonald & Company Investments, Inc.
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(Exact name of registrant as specified in its charter)
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<CAPTION>
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Delaware 34-1391950
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
McDonald Investment Center, 800 Superior Avenue, Cleveland, Ohio 44114-2603
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(Address of principal executive offices) (Zip Code)
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Registrant's telephone number, including area
code (216) 443-2300
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Not Applicable
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Former name, former address and former fiscal year, if changed since last report
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 18,285,468 of Common Stock, par
value $1.00 per share, were outstanding on January 30, 1998.
(1)
<PAGE> 2
McDONALD & COMPANY INVESTMENTS, INC.
INDEX
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Page
----
PART I - FINANCIAL INFORMATION
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Item 1. Financial Statements -
Consolidated statements of financial condition (unaudited) -
December 31, 1997 and March 28, 1997 ....................................... 3
Consolidated statements of income (unaudited) -
Fiscal three and nine months ended December 31, 1997
and December 31, 1996 ...................................................... 4
Consolidated statements of cash flows (unaudited) -
Fiscal nine months ended December 31, 1997 and
December 31, 1996 .......................................................... 5
Notes to consolidated financial statements (unaudited) -
December 31, 1997 .......................................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operation ........................................................... 8
PART II - OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings ......................................................... 11
Item 5. Other Information ......................................................... 11
Item 6. Exhibits and Reports on Form 8-K .......................................... 12
SIGNATURES ............................................................................... 13
EXHIBIT INDEX ............................................................................ 14
</TABLE>
(2)
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
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MCDONALD & COMPANY INVESTMENTS, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (UNAUDITED)
(In thousands, except for share amount)
December 31, 1997 March 28, 1997
---------------- ----------------
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ASSETS
Cash and cash equivalents $ 17,558 $ 8,907
Receivable from customers 234,896 179,606
Receivable from brokers and dealers 46,159 37,500
Securities purchased under agreements
to resell 105,475 43,943
Securities owned 206,607 127,632
Other receivables 38,722 42,597
Furniture, equipment and leasehold
improvements, at cost, less accumulated
depreciation and amortization 19,851 19,562
Other investments 24,142 12,970
Other assets 29,847 29,851
---------------- ----------------
$ 723,257 $ 501,968
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Short-term borrowings $ 79,394 $ 46,285
Payable to customers 79,534 55,656
Payable to brokers and dealers 20,123 14,626
Securities loaned 87,116 29,850
Securities sold under agreements to repurchase 81,550 67,151
Securities sold but not yet purchased 111,159 48,350
Accrued compensation 34,204 33,548
Accounts payable, accrued expenses and
other liabilities 29,934 27,380
Long-term borrowings 25,000 25,000
---------------- ----------------
$ 548,014 $ 347,846
---------------- ----------------
Stockholders' equity
Preferred Stock, without par value;
200,000 shares authorized; none issued
Common Stock, par value $1.00 per share;
50,000,000 shares authorized
(23,758,896 and 23,603,240 shares
issued respectively) 23,759 11,802
Additional paid-in capital 46,929 55,868
Retained earnings 132,795 115,189
Less treasury stock, at cost (5,473,428 and
5,569,872 shares, respectively) (28,240) (28,737)
---------------- ----------------
175,243 154,122
---------------- ----------------
$ 723,257 $ 501,968
================ ================
</TABLE>
See Notes to consolidated financial statements (unaudited).
(3)
<PAGE> 4
<TABLE>
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MCDONALD & COMPANY INVESTMENTS, INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Fiscal Three Months Ended Fiscal Nine Months Ended
-------------------------------------- --------------------------------------
Dec. 31, 1997 Dec. 31, 1996 Dec. 31, 1997 Dec. 31, 1996
(13 weeks) (13 weeks) (39 weeks) (39 weeks)
---------------- ---------------- ---------------- ----------------
(In thousands, except for share and per share amounts)
<S> <C> <C> <C> <C>
Revenues:
Underwriting and investment banking $ 27,399 $ 14,545 $ 56,234 $ 51,737
Principal transactions 12,715 12,899 43,442 42,103
Commissions 25,953 20,592 73,524 57,226
Investment management fees 9,065 6,625 24,859 18,226
Interest and dividends 6,995 5,945 18,581 15,219
Other 1,157 2,357 4,776 5,401
---------------- ---------------- ---------------- ----------------
$ 83,284 $ 62,963 $ 221,416 $ 189,912
---------------- ---------------- ---------------- ----------------
Expenses:
Employee compensation and benefits $ 49,151 $ 36,914 $ 129,160 $ 110,859
Interest 3,387 2,899 8,384 7,248
Communications 3,721 3,453 11,498 10,937
Occupancy and equipment 5,398 4,345 15,860 13,012
Promotion and development 2,937 2,126 8,086 6,822
Floor brokerage and clearance 701 666 2,124 1,939
Taxes, other than income taxes 2,127 1,810 6,423 5,452
Other operating expenses 2,766 2,489 7,277 7,051
---------------- ---------------- ---------------- ----------------
$ 70,188 $ 54,702 $ 188,812 $ 163,320
---------------- ---------------- ---------------- ----------------
Income before income taxes $ 13,096 $ 8,261 $ 32,604 $ 26,592
Provision for income taxes 4,898 2,980 11,878 9,580
---------------- ---------------- ---------------- ----------------
Net income $ 8,198 $ 5,281 $ 20,726 $ 17,012
================ ================ ================ ================
Basic net income per share $ 0.45 $ 0.29 $ 1.14 $ 0.95
================ ================ ================ ================
Diluted net income per share $ 0.44 $ 0.29 $ 1.12 $ 0.94
================ ================ ================ ================
Dividends per share $ .0625 $ .0469 $ .1719 $ .1363
================ ================ ================ ================
Average number of shares
outstanding 18,252,000 17,863,000 18,176,000 17,891,000
================ ================ ================ ================
</TABLE>
See Notes to consolidated financial statements (unaudited).
(4)
<PAGE> 5
<TABLE>
<CAPTION>
MCDONALD & COMPANY INVESTMENTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
Fiscal Nine Months Ended
------------------------
Dec. 31, 1997 Dec. 31, 1996
---------------- ----------------
OPERATING ACTIVITIES:
- ---------------------
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Net Income $ 20,726 $ 17,012
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 5,642 5,074
Deferred compensation 1,195 402
Deferred income taxes (1,362) (441)
Increase in receivable from customers (55,290) (22,544)
(Increase) decrease in receivable from brokers and dealers (8,659) 5,503
Increase in securities owned (78,975) (26,381)
Decrease (increase) in other receivables 3,875 (9,383)
Increase in payable to customers 23,878 23,477
Increase (decrease) in payable to brokers and dealers 5,497 (3,832)
Increase in securities loaned 57,266 15,901
Increase in securities sold but not yet purchased 62,809 43,622
Increase in accrued compensation 2,479 2,443
Increase (decrease) in accounts payable, accrued expenses and other 2,554 (1,293)
---------------- ----------------
Net cash provided by operating activities $ 41,635 $ 49,560
================ ================
INVESTING ACTIVITIES:
- ---------------------
Purchase of furniture, equipment and leaseholds $ (5,447) $ (8,160)
Increase in other investments (11,172) (8,824)
Decrease in other assets 282 4,938
---------------- ----------------
Net cash used for investing activities $ (16,337) $ (12,046)
================ ================
FINANCING ACTIVITIES:
- ---------------------
Decrease in securities purchased under agreement to resell $ (61,532) $ (40,616)
Increase (decrease) in short-term borrowings 33,109 (6,682)
Decrease in securities sold under agreements to repurchase 14,399 8,730
Cash dividends (3,120) (2,434)
Purchase of treasury stock -- (3,314)
Proceeds from issuance of treasury stock 497 502
---------------- ----------------
Net cash used for financing activities $ (16,647) $ (43,814)
---------------- ----------------
Increase (decrease) in cash and cash equivalents 8,651 (6,300)
Cash and cash equivalents at beginning of period 8,907 12,376
---------------- ----------------
Cash and cash equivalents at end of period $ 17,558 $ 6,076
================ ================
</TABLE>
See Notes to consolidated financial statements (unaudited)
(5)
<PAGE> 6
McDONALD & COMPANY INVESTMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
December 31, 1997
NOTE A - BASIS OF PRESENTATION
- ------ ---------------------
The consolidated financial statements include the accounts of McDonald & Company
Investments, Inc. and its subsidiaries, collectively referred to as the
"Company". All significant intercompany accounts and transactions are eliminated
in consolidation.
The accompanying unaudited consolidated financial statements do not include all
of the information and notes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments, consisting only of normal and recurring adjustments, considered
necessary for a fair presentation of the financial condition and results of
operations for the periods presented have been included.
NOTE B - LONG-TERM BORROWINGS
- ------ --------------------
McDonald & Company Securities, Inc., ("McDonald Securities") has outstanding
$25,000,000 in aggregate principal amount of 8.24% Subordinated Notes due
January 15, 2002. McDonald Securities is required to prepay principal amounts of
$5,000,000 on January 15 in each year beginning in 1998. The notes are
subordinated in right of payment to all senior indebtedness of McDonald
Securities. The principal amount of the notes has been approved by the New York
Stock Exchange, Inc. for inclusion in the regulatory capital of McDonald
Securities.
NOTE C - NET INCOME PER SHARE
- ------ --------------------
In February 1997, the Financial Accounting Standards Board issued Statement No.
128, "Earnings per Share", (Statement 128) which was required to be adopted on
December 15, 1997. Under Statement 128, the Company is required to change the
method used to compute earnings per share and to restate all prior periods
presented. The impact of Statement 128 on the calculation of earnings per share
was not material.
Net income per share is based on the average number of shares outstanding during
the periods. On July 30, 1997, the Company declared a 100% stock dividend, which
was distributed on September 15, 1997, to shareholders of record on August 25,
1997. Share and per share information have been restated to reflect the effect
of the stock dividend as if it had occurred at the beginning of each period
presented.
NOTE D - CONTINGENCIES
- ------ -------------
As is the case with many firms in the securities industry, McDonald Securities
is a defendant or co-defendant in a number of lawsuits alleging damages, which
are ordinary and routine litigation, incidental to the securities and investment
banking business. The Company is contesting the allegations of the complaints in
these cases and believes that there are meritorious defenses in each of these
lawsuits. Some of the proceedings relate to public underwritings of securities
in which McDonald Securities participated as a member of the underwriting
syndicate. The Company is also aware of litigation against certain underwriters
of offerings in which McDonald Securities was a participant, but where McDonald
Securities is not now a defendant. In these latter cases, it is possible that
McDonald Securities may be called upon to contribute to settlements or
judgments.
On November 18, 1997, McDonald Securities settled claims related to the
previously disclosed STEPHANIE TUBBS JONES EX REL. THE STATE OF OHIO, ET AL. VS.
MCDONALD & CO SECURITIES, INC., ET AL. lawsuit arising out of losses allegedly
incurred by Cuyahoga County's Secured Assets Funds Earnings Program (the "SAFE
Litigation"). Pursuant to the terms of the Settlement Agreement, McDonald
Securities and six other defendants in the SAFE Litigation each made a
settlement payment of $1,375,000 to Cuyahoga County, Ohio (The "County"), in
return for the County's release of claims and dismissal with prejudice of the
settling defendants from the SAFE Litigation. None of the defendants admitted
any wrongdoing in connection with the SAFE Litigation. The amount paid by
McDonald Securities in settlement of the SAFE Litigation did not have a material
adverse effect on the consolidated financial position, liquidity, or results of
operations of the Company.
(6)
<PAGE> 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
---------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
BUSINESS ENVIRONMENT
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McDonald & Company Investments, Inc. (the "Company") operates a full-service
regional investment banking, investment advisory and brokerage business through
its principal subsidiary, McDonald & Company Securities, Inc. ("McDonald
Securities"). The Company is involved in the origination, underwriting,
distribution, trading and brokerage of fixed income and equity securities, and
provides investment advisory services.
The profitability of the Company is sensitive to many factors, including the
level of securities trading volume and the volatility and general level of
market prices. Many of its activities have high operating costs which do not
decrease with reduced levels of activity. Sustained periods of reduced volume,
or loss of clients, could have adverse effects upon profitability.
The Company faces increasing competition from commercial banks and thrift
institutions as these institutions offer certain investment banking and
corporate and individual financial services traditionally provided only by
securities firms. In that regard, the Federal Reserve Board has increased the
percentage of a bank holding company's revenue that may be derived from the
securities activities of non-bank affiliates, including underwriting, and
eliminated or refined a number of "firewall" provisions that historically
separated banks from their securities subsidiaries. In addition, legislation
designed to further ease the restrictions on banks' ability to underwrite
securities and to reduce barriers to competition between banks and securities
firms is under consideration by the United States Congress. The Company also
anticipates regulation of the securities industry to increase and that
compliance with regulations may become more difficult. At present, the Company
is unable to predict the extent of changes that may be enacted, or their effect
on the Company's business.
The Company has formulated a comprehensive strategic plan which is periodically
reviewed and revised. The plan emphasizes the Company's historical roots as a
regional brokerage and investment banking firm. The Company has focused on the
Ohio, Michigan and Indiana markets by increasing the number of sales
representatives covering individual investors, as well as increasing investment
banking activities in this region. The Company's institutional equity and
institutional fixed income divisions cover accounts throughout the United States
and internationally.
The Company is evaluating Year 2000 compliance issues, including exposure
related to vendors, software, and other systems to determine that internal and
external concerns are addressed. The Committee established to oversee this
evaluation and implementation is led by the Senior Managing Director -
Information Technologies and Operations. Since the Company does not have a
significant amount of internal programming, the majority of the exposure and
costs related to the Year 2000 problem is through vendors. Most of the costs
will be in the form of higher prices for goods and services from vendors. The
Company is not able to determine the extent of these costs presently.
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 90% of the Company's assets at
December 31, 1997. These assets are financed by a number of sources, including
payables to customers and brokers, short-term borrowings, securities loaned,
securities sold under agreements to repurchase, long-term borrowings, and equity
capital.
At December 31, 1997, McDonald Securities had outstanding $25,000,000 in
aggregate principal amount of 8.24% Subordinated Notes due January 15, 2002.
McDonald Securities is required to pay principal amounts of $5,000,000 on
January 15 in each year beginning in 1998. The notes are subordinated in right
of payment to all senior indebtedness and general creditors of McDonald
Securities. In addition to providing additional long-term financing, the notes
have been approved by the New York Stock Exchange, Inc. for inclusion in
McDonald Securities' regulatory capital.
(7)
<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
-----------------------------------------------------------------------
OF OPERATIONS (continued)
-------------------------
FISCAL THREE AND NINE MONTH PERIODS ENDED DECEMBER 31, 1997 AND DECEMBER 31,
- ----------------------------------------------------------------------------
1996
- ----
Changes in the levels of securities owned and in customer and broker receivables
directly affect the Company's financing arrangements. The Company has available
lines of credit of $325,000,000, of which $265,290,000 was unused at December
31, 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 continuing commitments to customers. Net capital, as
defined, changes from day to day. At December 31, 1997, McDonald Securities was
in compliance with the Uniform Net Capital Rules and had net capital of
$59,267,000 which was $54,046,000 in excess of the minimum required.
Total revenues for the fiscal quarter ended December 31, 1997 were $83,284,000,
an increase of $20,321,000, or 32%, from revenues of $62,963,000 for the fiscal
quarter ended December 31, 1996.
For the fiscal nine months ended December 31, 1997, total revenues were
$221,416,000 compared to $189,912,000 for the first nine months of fiscal 1997,
an increase of $31,504,000, or 17%.
Net income for the fiscal quarter ended December 31, 1997 was $8,198,000, or
$.45 per share, compared with net income of $5,281,000, or $.29 per share, for
the fiscal quarter ended December 31, 1996, which represents an crease in net
income of 55%.
For the fiscal nine months ended December 31, 1997, net income was $20,726,000
or $1.14 per share, compared to $17,012,000 or $.95 per share, for the fiscal
nine months ended December 31, 1996, an increase in net income of 22%.
The average number of shares outstanding were 18,252,000 and 18,176,000,
respectively, for the fiscal three and nine months ended December 31, 1997
compared to 17,863,000 and 17,891,000, respectively, for the fiscal three and
nine months ended December 31, 1996.
On July 30, 1997, the Company declared a 100% stock dividend, which was
distributed on September 15, 1997, to shareholders of record on August 25, 1997.
Share and per share information have been restated to reflect the effect of the
stock dividend as if it had occurred at the beginning of each period presented.
Revenues from underwriting and investment banking increased $12,854,000, or 88%,
for the quarter and increased $4,497,000, or 9%, for the nine months ended
December 31, 1997 when compared to the same periods in the prior fiscal year.
Revenues from corporate underwriting and investment banking increased
$12,683,000 or 95%, for the third quarter and increased $4,546,000, or 9%, for
the nine month period. The increase for the current quarter is primarily due to
increased revenues from merger and advisory fees of $9,727,000 for the current
quarter and $10,878,000 for the current nine month period. Included in merger
and advisory fee revenues during the quarter ended December 31, 1997 was a
single merger fee of $6,250,000, which represented 48% and 139%, respectively,
of the total increase in Underwriting and Investment Banking revenues for the
current quarter and nine month periods. Revenue from public offerings of equity
and debt securities increased $3,923,000, or 58% for the current quarter and
$7,752,000, or 41%, for the fiscal nine month period. The increase in equity and
debt public offerings for both the quarter and the nine month period reflects
continued strong market conditions for the public offering of securities.
Revenues from private placements decreased $1,405,000, or 69% for the current
quarter. For the fiscal nine month period, revenues from private placements
decreased $12,440,000, or 94%. Included in private placement revenues during the
first nine months of fiscal 1997 were fees of $9,336,000 from a single $500
million private placement of debt and equity securities. Revenues from municipal
finance increased $171,000, or 15%, for the quarter and decreased $49,000 or 2%,
for the nine months ended December 31, 1997 when compared to the same periods in
the prior fiscal year.
(8)
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
-----------------------------------------------------------------------
OF OPERATIONS (continued)
-------------------------
FISCAL THREE AND NINE MONTH PERIODS ENDED DECEMBER 31, 1997 AND DECEMBER 31,1996
- --------------------------------------------------------------------------------
(cont.)
- -------
Revenues from underwriting and investment banking activities are highly
dependent on general market conditions for such business activities. Market
conditions for underwriting and investment banking services can be affected by
political and economic events both in the United States and abroad. To the
extent future events are unpredictable, uncertainty will be a factor in the
level of McDonald Securities' business activity. Also, competitive pressure from
other investment banking firms can and will have an effect on the success of
McDonald Securities in obtaining such business and on the prices which can be
charged for investment banking and underwriting services. The management of
McDonald Securities believes it can compete effectively in this segment of its
business activities.
Revenues from principal transactions decreased $184,000, or 1%, for the third
quarter of fiscal 1998 and increased $1,339,000, or 3%, for the first nine
months when compared to the same periods in the prior fiscal year. Revenues from
principal transactions in equity securities decreased $543,000, or 10%, for the
third quarter and increased $1,475,000, or 9% for the fiscal nine month period.
The decrease in revenues from principal transactions in equity securities in the
current quarter reflects the impact of trading losses of $723,000, resulting
from volatility in the NASDAQ market. The increase in revenues from principal
transactions in equity securities for the fiscal nine month period reflects the
relatively strong NASDAQ markets and the continued expansion of the Company's
sales force. Revenues from trading taxable fixed-income securities, including
corporate bonds, United States government bonds and mortgage-backed securities,
increased $65,000, or 1%, for the third quarter and declined $338,000, or 2%,
for the first nine months of fiscal 1998. Revenues from trading municipal bonds
increased $294,000, or 11%, for the third quarter and $202,000, or 3%, for the
first nine months.
Commissions revenue increased $5,361,000 or 26%, in the current quarter and
$16,298,000, or 28%, in the first nine months when compared to the same periods
in fiscal 1997. The significant increases in Commissions revenues reflects the
continued strong equity markets and continued improvement of the Company's
Private Client Group and Institutional Equity capabilities. Commissions revenues
from agency transactions in listed stocks increased $3,320,000, or 32%, for the
quarter and $10,141,000, or 36%, for the nine month period. Commissions revenues
from agency transactions in NASDAQ stocks increased $712,000, or 27%, for the
quarter and increased $674,000 or 9% for the nine month period. Commissions
revenue from non-proprietary mutual funds increased $1,145,000, or 27%, for the
current quarter and $3,620,000 or 29%, for the first nine months. Commissions
revenue from proprietary mutual funds increased $200,000, or 11%, for the
quarter and $626,000, or 12% for the first nine months. The increase in
commissions revenue for both non-proprietary and proprietary mutual funds is due
to the continued popularity of mutual fund investments with individual
investors. Commissions revenue from annuity and life insurance products
decreased $16,000 or 1%, for the quarter but increased $1,237,000, or 33%, for
the first nine months primarily due to increased marketing efforts for the sale
of these products.
Revenues from investment management fees include advisory fees from the
Company's mutual funds and money market funds and investment management fees
earned related to individually managed accounts. Revenues from investment
management fees increased $2,440,000, or 37%, and $6,633,000, or 36%, for the
fiscal quarter and nine month periods ended December 31, 1997 when compared to
the same periods in fiscal 1997. Of these amounts, revenues from advisory fees
related to individually managed accounts represented $1,568,000, or 64%, and
$4,243,000 or 64%, respectively, of the total increase for the fiscal three and
nine month periods.
Interest and dividend income increased $1,050,000, or 18%, and $3,362,0000, or
22%, for the fiscal three and nine month periods ended December 31, 1997 when
compared to the same periods in the prior fiscal year. The increase was due
primarily to a higher level of customer margin loans in the current periods when
compared to the same periods in the prior fiscal year.
Other income decreased $1,200,000, or 51%, for the current quarter and $625,000,
or 12%, for the nine month period ended December 31, 1997. Of these amounts,
income from venture capital investments represented
(9)
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
-----------------------------------------------------------------------
OF OPERATIONS (continued)
-------------------------
FISCAL THREE AND NINE MONTH PERIODS ENDED DECEMBER 31, 1997 AND DECEMBER 31,1996
- --------------------------------------------------------------------------------
(cont.)
- -------
$1,300,000, or 108%, and $854,000 or 137% respectively, of the total decrease
for the fiscal three and nine month periods. For the current quarter, other
income reflected losses of $454,000 related to venture capital investments
compared to gains of $845,000 in the same quarter of the prior fiscal year. For
the fiscal nine month period, other income reflects gains of $161,000 compared
to gains of $1,015,000 in the prior period.
Operating expenses (total expenses before interest) increased $14,998,000, or
29%, for the third quarter and $24,356,000, or 16%, for the first nine months of
fiscal 1998 when compared to the same period in the prior fiscal year.
Employee compensation and benefits increased $12,237,000, or 33%, for the third
quarter and $18,301,000, or 17%, for the first nine months. Commission and other
sales compensation expense increased $4,573,000, or 23%, for the quarter and
$11,060,000, or 19% for the first nine months, primarily because of increased
revenues from commissions and changes in the business mix and product mix which
affect sales compensation. Other clerical and administrative expenses increased
$2,464,000, or 23%, for the quarter and $5,241,000, or 17% for the first nine
month period. The increase in other clerical and administrative expenses
represents compensation and employee benefit costs related to an increase in the
professional and support staff, and related recruitment costs. The remaining
increase in employee compensation and benefits of $5,200,000 or 52%, for the
third quarter and $2,000,000 or 9%, for the first nine months represents
increases in incentive compensation and profit sharing accruals resulting from
an increase in pretax income before incentive compensation expense. The
incentive compensation expense was also impacted by the change in business and
product mix. For the fiscal three and nine months ended December 31, 1997, the
increase in incentive compensation expense reflects the higher level of
investment banking revenues with corresponding higher incentive compensation
expense.
All other operating expenses increased $2,761,000, or 18%, for the third quarter
and $6,055,000, or 13%, for the first nine months of fiscal 1998 when compared
to fiscal 1997. Communications expense increased $268,000 or 8%, for the current
quarter and $561,000, or 5%, for the first nine months of the current fiscal
year. Occupancy and equipment costs increased $1,053,000, or 24%, for the
current quarter and $2,848,000, or 22%, for the first nine months of the current
fiscal year. These increases reflect costs related to the continued expansion of
the Company's business, and technology improvements. Promotional and business
development expenses increased $811,000, or 38%, for the current quarter and
$1,264,000, or 19%, for the first nine month period, due to increased
promotional, travel and business entertainment expenses related to the higher
volume of business. The category of other operating expenses increased $277,000
or 11%, for the current quarter and $226,000 or 3%, for the first nine month
period.
Interest expense increased $488,000, or 17%, and $1,136,000, or 16%, for the
fiscal three and nine month periods in the current fiscal year when compared to
the same periods in fiscal 1997. The increase in interest expense is due to
higher levels of short-term borrowings and securities loaned which increased
primarily as a result of higher customer margin loans.
Income before income taxes for the fiscal quarter and fiscal nine months ended
December 31, 1997 was $13,096,000 and $32,604,000, respectively, resulting in
pre-tax return on revenues of 15.72% and 14.73%, respectively. For the fiscal
quarter and fiscal nine months ended December 31, 1996, income before income
taxes was $8,261,000 and $26,592,000, resulting in pre-tax revenues of 13.12%
and 14.00% respectively.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
----------------------------------------------------------
Not applicable.
(10)
<PAGE> 11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
As is the case with many firms in the securities industry, McDonald Securities
is a defendant or co-defendant in a number of lawsuits alleging damages, which
are ordinary and routine litigation, incidental to the securities and investment
banking business. The Company is contesting the allegations of the complaints in
these cases and believes that there are meritorious defenses in each of these
lawsuits. Some of the proceedings relate to public underwritings of securities
in which McDonald Securities participated as a member of the underwriting
syndicate. The Company is also aware of litigation against certain underwriters
of offerings in which McDonald Securities was a participant, but where McDonald
Securities is not now a defendant. In these latter cases, it is possible that
McDonald Securities may be called upon to contribute to settlements or
judgments.
On November 18, 1997, McDonald Securities settled claims related to the
previously disclosed STEPHANIE TUBBS JONES EX REL. THE STATE OF OHIO, ET AL. VS.
MCDONALD & CO SECURITIES, INC., ET AL. lawsuit arising out of losses allegedly
incurred by Cuyahoga County's Secured Assets Funds Earnings Program (the "SAFE
Litigation"). Pursuant to the terms of the Settlement Agreement, McDonald
Securities and six other defendants in the SAFE Litigation each made a
settlement payment of $1,375,000 to Cuyahoga County, Ohio (The "County"), in
return for the County's release of claims and dismissal with prejudice of the
settling defendants from the SAFE Litigation. None of the defendants admitted
any wrongdoing in connection with the SAFE Litigation. The amount paid by
McDonald Securities in settlement of the SAFE Litigation did not have a material
adverse effect on the consolidated financial position, liquidity, or results of
operations of the Company.
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 5. Other Information
-----------------
On August 7, 1996, the Company announced the continuation of an open market
repurchase program originally instituted in July, 1987. The current program
allows the Company to purchase up to 1,000,000 shares of its Common Stock at an
aggregate price not to exceed $25,000,000. Treasury shares may be used to
satisfy options exercised under the Company's stock option plans and shares
awarded under the Company's 1995 Stock Bonus Plan.
During the fiscal quarter ended December 31, 1997 the Company utilized 45,804 of
the Company's Common Stock held in treasury to satisfy options exercised under
the Stock Option Plan for employees.
(11)
<PAGE> 12
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
<TABLE>
<CAPTION>
Sequential
(a.) The following exhibits are filed as part of this report: Page Number
-----------
<S> <C> <C>
Exhibit 11 Statement re: Computation of Per Share Earnings 15
Exhibit 27 Financial Data Schedule BD
(b.) Reports on Form 8-K:
On November 21, 1997, the Company filed a report on Form 8-K related to the settlement of the STEPHANIE TUBBS
JONES EX REL. THE STATE OF OHIO, ET AL. VS. MCDONALD & CO SECURITIES, INC., ET AL. LITIGATION
(See Item 1 - Legal Proceedings)
<FN>
* Exhibit 27 is Furnished for Securities and Exchange Commission Purposes Only.
</FN>
</TABLE>
(12)
<PAGE> 13
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
McDonald & Company Investments, Inc.
------------------------------------
(Registrant)
Date: February 6, 1998 By: /s/ William B. Summers, Jr.
---------------- ----------------------------------
William B. Summers, Jr.
President and Chief Executive Officer
(Principal Executive Officer)
Date: February 6, 1998 By: /s/Robert T. Clutterbuck
----------------- -----------------------------
Robert T. Clutterbuck
Treasurer
(Principal Financial Officer)
(13)
<PAGE> 14
McDonald & Company Investments, Inc.
Report on FORM 10-Q for the Fiscal Quarter ended December 31, 1997
EXHIBIT INDEX
-------------
<TABLE>
<CAPTION>
Exhibit No. Description Sequential Page
- ----------- ----------- ---------------
<S> <C> <C> <C>
11 Statement re: Computation of Per Share Earnings 15
27 Financial Data Schedule 16
</TABLE>
*Exhibit 27 is Furnished for Securities and Exchange Commission Purposes Only
(14)
<PAGE> 1
Exhibit 11
<TABLE>
<CAPTION>
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
- -----------------------------------------------
Fiscal Three Months Ended Fiscal Nine Months Ended
---------------------------------------- ----------------------------------------
Dec. 31, 1997 Dec. 31, 1996 Dec. 31, 1997 Dec. 31, 1996
(13 weeks) (13 weeks) (39 weeks) (39 weeks)
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
BASIC EARNINGS PER SHARE
- ------------------------
Average shares outstanding 18,252,000 17,863,000 18,176,000 17,891,000
================== ================== ================== ==================
Net income $ 8,198,000 $ 5,281,000 $ 20,726,000 $ 17,012,000
================== ================== ================== ==================
Basic net income per share $ 0.45 $ .29 $ 1.14 $ 0.95
================== ================== ================== ==================
DILUTED EARNINGS PER SHARE
- --------------------------
Average shares outstanding 18,252,000 17,863,000 18,176,000 17,891,000
Net effect of dilutive stock
options - based on the treasury
stock method using average
market price 254,000 363,000 278,000 331,000
------------------ ------------------ ------------------ ------------------
TOTAL 18,506,000 18,226,000 18,454,000 18,222,000
================== ================== ================== ==================
Net income $ 8,198,000 $ 5,281,000 $ 20,726,000 $ 17,012,000
================== ================== ================== ==================
Diluted net income per share $ 0.44 $ 0.29 $ 1.12 $ 0.94
================== ================== ================== ==================
</TABLE>
<TABLE> <S> <C>
<ARTICLE> BD
<LEGEND>
THIS SCHEDULE CONTAINS FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
STATEMENTS OF FINANCIAL CONDITION - DEC-31-1997 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-27-1998
<PERIOD-START> MAR-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 17,558
<RECEIVABLES> 281,055
<SECURITIES-RESALE> 105,475
<SECURITIES-BORROWED> 0
<INSTRUMENTS-OWNED> 206,607
<PP&E> 19,851
<TOTAL-ASSETS> 723,257
<SHORT-TERM> 79,394
<PAYABLES> 99,657
<REPOS-SOLD> 81,550
<SECURITIES-LOANED> 87,116
<INSTRUMENTS-SOLD> 111,159
<LONG-TERM> 25,000
0
0
<COMMON> 23,759
<OTHER-SE> 151,484
<TOTAL-LIABILITY-AND-EQUITY> 723,257
<TRADING-REVENUE> 43,442
<INTEREST-DIVIDENDS> 18,581
<COMMISSIONS> 73,524
<INVESTMENT-BANKING-REVENUES> 56,234
<FEE-REVENUE> 24,859
<INTEREST-EXPENSE> 8,384
<COMPENSATION> 129,160
<INCOME-PRETAX> 32,604
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 20,726
<EPS-PRIMARY> 1.14
<EPS-DILUTED> 1.12
</TABLE>
