<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 27, 1998
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
- ------------------------------- ----------------------------------
(State or other jurisdiction of (I.RS 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:
<TABLE>
<CAPTION>
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
<S> <C>
Common Stock, par value $1.00 per share New York Stock Exchange
Series A Junior Preferred Stock Purchase Rights New York Stock Exchange
</TABLE>
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. [ ]
As of June 4, 1998, 18,437,632 shares of Common Stock, par value $1.00
per share, were outstanding, and the aggregate market value of the shares of
Common Stock of the Registrant held by non-affiliates (based upon the closing
price of the Registrant's shares on the New York Stock Exchange on June 4, 1998,
which was $29.813 per share) was $492,686,478. 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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<PAGE> 2
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents are incorporated by reference to
Parts II, III, and IV of this Form 10-K: (i) the Registrant's definitive Proxy
Statement to be used in connection with its Annual Meeting of Stockholders to be
held on July 29, 1998 (the "1998 Proxy Statement"), and (ii) the Registrant's
1998 Annual Report to Stockholders for the fiscal year ended March 27, 1998 (the
"1998 Annual Report to Stockholders").
Except as otherwise stated, the information contained in this Report on
Form 10-K is as of March 27, 1998.
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PART I
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ITEM 1. BUSINESS.
(a) RECENT DEVELOPMENT
On June 15, 1998, the Company entered into an Agreement and Plan of
Merger with KeyCorp pursuant to which the Company will be acquired by KeyCorp.
Under the terms of the Agreement and Plan of Merger, shareholders of the Company
will receive, in a tax-free exchange, $35.00 of KeyCorp common stock for each
share of the Company's common stock, subject to possible adjustments if
KeyCorp's common stock price is below $33 or above $44.50 per common share at
the time of closing. In addition, KeyCorp has established a $68 million employee
retention program to be paid in cash and options over a three-year period to
certain employees of the Company. The merger is expected to close during the
fourth calendar quarter of 1998, subject to approval of the Company's
stockholders, certain regulatory approvals and certain other conditions to
closing. Additional information regarding the proposed merger can be found in
the press release filed as Exhibit 99.1 to the Company's Form 8-K dated June 15,
1998.
(b) 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. The Company also
provides asset management services through its Gradison & Company division
("Gradison").
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 23 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.
(c) 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.
(d) 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 in October 1991.
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, 1998, approximately
51% of total revenues were derived from retail customers, 18% from institutional
customers, 23% 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.
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ITEM 1. BUSINESS-- Continued
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 43 offices in 11 states, all of which offices
are leased. The Company has approximately 1,450 employees, of whom 333 are
full-time retail investment consultants and 65 are full time institutional
investment consultants.
REVENUES BY SOURCE
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.
-----------------------------------------------------------------------------------
Fiscal Year Ended
-----------------------------------------------------------------------------------
March 27, 1998 March 28, 1997 March 29, 1996
-------------- --------------- --------------
(Dollar amounts in thousands)
Amount % Amount % Amount %
------------ -------- ---------- --------- ------------ --------
<S> <C> <C> <C> <C> <C> <C>
Underwriting and
investment banking:
Corporate $ 98,899 29 % $ 60,651 23 % $ 45,672 20 %
Municipal 4,024 1 3,917 1 5,826 3
Limited partnership
investments 487 1 9,043 3 4,161 2
------------ -------- ---------- --------- ------------ --------
103,410 31 73,611 27 55,659 25
Principal transactions:
Unlisted stocks 27,130 8 22,411 9 21,457 9
Corporate bonds
and preferred stocks 13,046 3 11,303 4 10,914 5
Municipal bonds 11,158 3 10,128 4 9,001 4
Government bonds 5,178 2 6,130 2 6,470 3
Mortgage-backed
securities 4,026 1 5,270 2 6,180 3
Other 233 1 143 1 79 1
------------ -------- ---------- --------- ------------ --------
60,771 18 55,385 22 54,101 25
Commissions:
Listed stocks 49,510 15 37,426 14 33,860 15
Mutual funds and
money market funds 30,581 9 25,210 9 19,588 8
Unlisted stocks 11,410 3 10,618 4 8,411 4
Insurance and annuities 6,859 2 5,356 2 3,510 2
Options 1,913 1 1,297 1 1,129 1
------------ -------- ---------- --------- ------------ --------
100,273 30 79,907 30 66,498 30
Investment management fees:
Investment advisory fees 21,744 6 14,717 6 10,333 5
Mutual funds and money
market funds 12,215 4 10,419 4 9,509 4
------------ -------- ---------- --------- ------------ --------
33,959 10 25,136 10 19,842 9
Interest and dividends 26,602 8 20,406 8 17,170 8
Other 8,331 3 7,052 3 7,351 3
------------ -------- ---------- --------- ------------ --------
Total revenues $ 333,346 100 % $ 261,497 100 % $ 220,621 100 %
============ ======== ========== ========= ============ ========
</TABLE>
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<PAGE> 5
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.
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 27, 1998,
McDonald Securities made markets in the common stock or other equity securities
of approximately 215 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.
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<PAGE> 6
ITEM 1. BUSINESS-- Continued
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. As a result of the implementation of 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
- -----------
In executing customers' orders to buy or sell listed securities and
unlisted stocks and bonds in which it does not make a market, McDonald
Securities generally acts as an agent and charges a commission which is
competitive within the industry.
INVESTMENT MANAGEMENT FEES
- --------------------------
Revenues from investment management fees include advisory fees from the
Company's mutual funds and money market funds and investment advisory fees
earned related to individual managed accounts.
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 27, 1998 from
individual managed accounts represented approximately 64% of total revenues from
investment management fees.
As of March 27, 1998, McDonald Securities is the investment advisor to
and the distributor of the following mutual funds: Gradison 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 Municipal Custodian
Trust, which is comprised of one portfolio, Gradison Ohio Tax-Free 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). All of these funds are diversified, open-end management investment
companies.
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<PAGE> 7
ITEM 1. BUSINESS--Continued
The following summarizes the number of accounts and the size of each of
the Funds as of March 27, 1998 and March 28, 1997:
<TABLE>
<CAPTION>
March 27, 1998 March 28, 1997
----------------------------- ------------------------------
Funds Accounts $ Accounts $
- ----- ---------- --------------- ----------- --------------
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
Gradison Cash Reserve Trust
U.S. Government Reserves 102,136 1,794,815 91,036 1,555,308
Gradison Custodian Trust
Government Income Fund 4,493 158,853 4,744 155,799
Gradison Municipal Custodian Trust:
Ohio Tax-Free Fund 1,571 92,472 1,464 76,336
Gradison Growth Trust:
Established Value Fund 16,678 560,067 15,049
443,385
Opportunity Value Fund 7,540 169,939 6,340 117,469
Growth & Income Fund 3,225 57,692 1,783 26,007
International Fund 2,255 32,177 1,881
24,372
---------- --------------- ----------- --------------
Total 137,898 2,866,015 122,297 2,398,676
========== =============== =========== ==============
</TABLE>
The investment advisory fees received from these funds are directly
related to the amounts invested in the funds. Accordingly, McDonald Securities'
investment advisory fees from the investment companies would be reduced in the
future if the amounts invested in the funds decrease.
McDonald Securities also receives reimbursements from the Gradison Funds
for providing such funds with data processing, shareholder services and other
miscellaneous services.
INTEREST AND DIVIDENDS
- ----------------------
A significant portion of the Company's pretax income is derived from
interest and dividend 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 59% 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 32% of the Company's
interest and dividend income is generated from securities owned. Approximately
4% of the Company's interest and dividend income is generated from securities
borrowed, and the remaining 5% includes interest on notes receivable, dividend
income, and other.
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<PAGE> 8
ITEM 1. BUSINESS--Continued
OTHER
- -----
During the fiscal year ended March 27, 1998, approximately 27% of other
income represented service fees, IRA administration fees, and other
retail-related revenues compared to 29% and 27%, respectively, for the fiscal
years ended in March 1997 and 1996. Approximately 42% of other income
represented transfer agent fees and other fees derived from the Company's money
market and mutual funds compared to 44% and 36%, respectively, for the fiscal
1997 and 1996 years. For the fiscal year ended March 27, 1998, 23% of other
income represented revenues related to certain venture capital investments,
compared to 17% in fiscal 1997 and 24% in fiscal 1996. The Company periodically
invests in venture capital and other investments in the form of limited
partnerships, general partnerships and equity positions. Miscellaneous income
represented 8%, 10% and 13% of other income, respectively, in the fiscal years
ended March 1998, 1997 and 1996.
RETAIL BUSINESS
- ---------------
During the fiscal year ended March 27, 1998, approximately 74% of the
Company's total revenues from customers were from individuals. During the fiscal
year ended March 27, 1998, 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 30% of revenues from individual customers were derived
from proprietary and nonproprietary 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 18% of
retail-related revenues are derived from principal transactions in equity and
debt securities. The remaining 24% of retail-related revenues include revenues
from the sale of investment banking products and revenues from the sale of
annuities, life insurance and other products.
INSTITUTIONAL BUSINESS
- ----------------------
During the fiscal year ended March 27, 1998, approximately 26% 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 27,
1998, approximately 41% of the revenues from institutional accounts were derived
from principal transactions, 34% from investment banking and 25% 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.
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<PAGE> 9
ITEM 1. BUSINESS--Continued
SECURITY REPURCHASE ACTIVITIES
- ------------------------------
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.
SECURITIES BORROWING AND LENDING ACTIVITIES
- -------------------------------------------
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
- -----------------
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 31 equity
analysts who cover approximately 250 companies, a majority of which maintain
their headquarters in the Midwest. 9 of the 31 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> 10
ITEM 1. BUSINESS--Continued
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 1,446 employees, of whom 19 have senior managerial
responsibilities, 398 are full-time investment brokers, 365 are engaged in other
production areas, including trading, research, investment banking, and
investment advisory, and 664 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.
REGULATION
- ----------
The securities industry in the United States is subject to extensive
regulation under federal and state laws. The Securities and Exchange Commission
(the "Commission") is the federal agency charged with administration of the
federal securities laws. Much of the regulation of broker-dealers, however, has
been delegated to self-regulatory organizations, principally the NASD and the
national securities exchanges. These self-regulatory organizations adopt rules
(which are subject to approval by the Commission) which govern the industry and
conduct periodic examinations of member broker-dealers. Securities firms are
also subject to examination by state securities commissions in the states in
which they are registered. McDonald Securities is currently registered as a
broker-dealer in all states. In addition, McDonald Securities is registered as a
broker-dealer with the Commission.
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<PAGE> 11
ITEM 1. BUSINESS--Continued
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 $l00,000 on claims for cash balances.
NET CAPITAL REQUIREMENTS
- ------------------------
As a broker-dealer and member of the NYSE, McDonald Securities is
subject to the Uniform Net Capital Rule promulgated by the Commission (Rule
15c3-1) which provides that a broker-dealer doing business with the public shall
not permit its aggregate indebtedness (as defined) to exceed 15 times its net
capital (as defined) or, alternatively, that its net capital shall not be less
than 2% of aggregate debit balances (primarily receivables from customers)
computed in accordance with Rule 15c3-3. The Rule is designed to measure the
general financial integrity and liquidity of a broker-dealer and the minimum net
capital deemed necessary to meet the broker-dealer's continuing commitments to
its customers. Management believes that the alternative method is more directly
related to the level of customer business, therefore McDonald Securities
computes its net capital under the alternative method.
A broker-dealer may be required to reduce its business if its net
capital is less than 4% of aggregate debit balances and may be prohibited from
expanding its business or declaring cash dividends if its net capital is less
than 5% of aggregate debit balances. In addition, a broker-dealer may be subject
to disciplinary action by the Commission and self-regulatory agencies, such as
the NYSE, including fines, censure, suspension or expulsion.
Under Rule 15c3-1 a broker-dealer is required to provide advance written
notice to the Commission of any loan, unsecured advance, or withdrawal of equity
capital which exceeds, in any 30 day period, 30% of excess net capital.
Additionally, written notice must be given to the Commission of any loan,
unsecured advance, or withdrawal of equity capital which exceeds, in any 30 day
period, 20% of excess net capital, within two business days subsequent to the
transaction.
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 27, 1998, McDonald Securities' net capital was $86,641,000, which
was 32% of its aggregate debit balances and $81,219,000 in excess of the minimum
required net capital.
-11-
<PAGE> 12
ITEM 1. BUSINESS--Continued
McDonald Securities has outstanding $20,000,000 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.
-12-
<PAGE> 13
ITEM 2. PROPERTIES.
The Company has a total of 43 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 (20) Crestview Hills (5)
Cleveland (51) Rocky River (17)
Sandusky (5) MASSACHUSETTS
DIVISIONS Strongsville (8) Boston (6)
Gradison Division Toledo (5)
Cincinnati, Ohio Willoughby Hills (12) MICHIGAN
S. J. Wolfe Division Ann Arbor (7)
Dayton, Ohio Battle Creek (3)
CALIFORNIA Birmingham (16)
BRANCHES Los Angeles (4) East Lansing (6)
- -------- San Francisco (1) Grand Rapids (16)
OHIO Grosse Pointe Woods (6)
Akron (8) FLORIDA
Canfield (2) Naples (12)
Canton (6) NEW JERSEY
Chillicothe (1) GEORGIA Jersey City (17)
Cincinnati (44) Atlanta (3)
Columbus (4)
Dayton (7) ILLINOIS TENNESSEE
Dublin (6) Chicago (6) Memphis (6)
Elyria (10)
Findlay (5) INDIANA
Hudson (7) Elkhart (8)
Kenwood (13) Fort Wayne (6)
Kettering (5) Indianapolis (10)
Lancaster (3) Indianapolis North (9)
Lima (3)
Mahoning Valley (5)
</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 165,500 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 will occupy approximately 151,000 square feet of space effective
July 1, 1998, 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.
-13-
<PAGE> 14
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.
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.
-14-
<PAGE> 15
ITEM 4A. 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.
<TABLE>
<CAPTION>
NAME AGE PRINCIPAL OCCUPATION
---- --- --------------------
<S> <C> <C>
Thomas M. O'Donnell 62 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. 48 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 47 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 January 1, 1994; Managing Director from May
1, 1987 to June 1, 1992; Senior Vice President from May 1, 1984
to May 1, 1987; First Vice President from June 7, 1983 to May 1,
1984; Partner from 1978 to 1990.
Daniel F. Austin 46 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 2, 1995; Managing Director
from January 4, 1991 to June 1, 1992; Senior Vice President from
May 1, 1986 to January 3, 1991; First Vice President from May 1,
1985 to May 1, 1986.
Jack N. Aydin 57 Managing Director (Resident Manager - Jersey City, New Jersey) of
McDonald Securities since May l, l988; Senior Vice President from
May l, l986 to May 1, l988; First Vice President from June 7,
l983 to May 1, l986; Partner from l977 to 1990.
</TABLE>
-15-
<PAGE> 16
EXECUTIVE OFFICERS OF THE REGISTRANT (cont.)
<TABLE>
<CAPTION>
NAME AGE PRINCIPAL OCCUPATION
---- --- --------------------
<S> <C> <C>
Eugene H. Bosart III 55 Senior Managing Director (Regional Sales Manager - Michigan) of
McDonald Securities since June 15, 1996; Managing Director from
May 1, 1987 to June 15, 1996; Senior Vice President from June 7,
1983 to May 1, 1987; Partner from 1972 to 1990.
Thomas G. Clevidence 48 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 15,
1996; Managing Director (Human Resources) from July 1, 1992 to
June 15, 1996; Vice President - Corporate Employment, Society
Corporation/Ameritrust Corporation, from October 1989 to July 1,
1992; Senior Manager, Ernst & Young, from 1982 to October 1989.
Ralph M. Della Ratta, Jr. 44 Senior Managing Director (Corporate Finance) of McDonald Securities
since June 1, 1996; Managing Director from June 1, 1992 to June
1, 1996; Senior Vice President from June 1, 1991 to June 1, 1992;
First Vice President from June 1, 1990 to June 1, 1991; Vice
President from October 12, 1987 to June 1, 1990.
Leonard J. DeRoma 44 Senior Managing Director (Fixed Income Trading) of McDonald
Securities since October 13, 1997; Managing Director (New York
Taxable Fixed Income) of BZW Securities, Inc. from June, 1988 to
January, 1997; Senior Vice President of Dean Witter Reynolds from
June, 1987 to May, 1988; Senior Vice President of Lehman Brothers
from June, 1982 to June, 1987; Associate Vice President,
Citibank, from September, 1977 to June, 1982.
Dennis J. Donnelly 48 Senior Managing Director (Operations) of McDonald Securities since
June 1, 1992; Managing Director from May 1, 1987 to June 1, 1992;
Senior Vice President from May 1, 1984 to May 1, 1987; First Vice
President from June 7, 1983 to May 1, 1984; Partner from 1980 to 1990.
David W. Ellis, III 42 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 15, 1996; Director of Gradison & Company
Incorporated from January 1, 1987 to October 4, 1991; Senior Vice
President, Gradison & Company Incorporated from September 1, 1988
to October 4, 1991; Vice President from September 1, 1980 to
September 1, 1988.
Patricia J. Jamieson 43 Senior Managing Director (Chief Financial Officer) of McDonald
Securities since June 1, 1997; Managing Director and Chief
Financial Officer from June 15, 1996 to June 1, 1997; Chief
Accounting Officer of McDonald Securities from August 2, 1995 to
June 15, 1996; Senior Vice President from June 1, 1991 to June
15, 1996; First Vice President from May 1, 1985 to June 1, 1991;
Vice President from August 15, 1984 to May 1, 1985; Associate
Vice President from October 3, 1983 to August 15, 1984.
David W. Knall 53 Senior Managing Director (Private Client Group Investment Consultant
- Indianapolis, Indiana) of McDonald Securities since June 15,
1996; Managing Director from June 7, 1983 to June 15, 1996;
Partner from 1973 to 1990.
</TABLE>
-16-
<PAGE> 17
EXECUTIVE OFFICERS OF THE REGISTRANT (cont.)
<TABLE>
<CAPTION>
NAME AGE PRINCIPAL OCCUPATION
---- --- --------------------
<S> <C> <C>
Thomas M. McDonald 51 Senior Managing Director (Private Client Group) of McDonald
Securities since June 1, 1997; Managing Director from June 1,
1993 to June 1, 1997; Senior Vice President from September 27,
1991 to June 1, 1993; Senior Vice President of Prescott Ball &
Turben, a division of Kemper Securities Group, Inc. from February
1988 to September 27, 1991.
Lawrence T. Oakar 63 Managing Director (Private Client Group Investment Consultant -
Cleveland, Ohio) of McDonald Securities since June 15, 1996;
Senior Vice President from May 1, 1986 to June 15, 1996; First
Vice President from July 20, 1983 to May 1, 1986; Partner from
1979 to 1990.
John F. O'Brien 61 Senior Managing Director (Private Client Group Investment Consultant
- Rocky River, Ohio office) since January 1, 1998. Senior
Managing Director (Private Client Group) of McDonald Securities
from June 1, 1992 to January 1, 1998; Managing Director from June
17, 1983 to June 1, 1992; Partner from 1971 to 1990.
James C. Redinger 61 Senior Managing Director (Equity Institutional Sales and Trading) of
McDonald Securities since June 1, 1992; Managing Director from
May 1, 1987 to June 1, 1992; Senior Vice President from May 1,
1984 to May 1, 1987; First Vice President from June 7, 1983 to
May 1, 1984; Partner from 1980 to 1990.
David D. Sutcliffe 37 Managing Director (Fixed Income Sales) of McDonald Securities since
June 15, 1996; Senior Vice President from May 1, 1989 to June 15,
1996; First Vice President from May 1, 1987 to May 1, 1989; Vice
President from 1984 to May 1, 1987.
Bradley E. Turner 39 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 15, 1996; Senior Vice President (Portfolio
Strategies Group) from June 1, 1992 to June 1, 1995; First Vice
President (Portfolio Strategies Group) from June 1, 1990 to June
1, 1992; Vice President from May 1, 1988 to June 1, 1990;
Associate Vice President from May 1, 1986 to May 1, 1988.
Donald E. Weston 62 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.
</TABLE>
-17-
<PAGE> 18
PART II
-------
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS.
The information required by this item is set forth at page 36 of the
1998 Annual Report to Stockholders, under the caption "Supplementary Financial
Data - Quarterly Data (Unaudited)", which information is incorporated herein by
reference.
ITEM 6. SELECTED FINANCIAL DATA.
The information required by this item is set forth at page 30 of the
1998 Annual Report to Stockholders, which information is incorporated herein by
reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The information required by this item is set forth at pages 30 through
36 of the 1998 Annual Report to Stockholders, which information is incorporated
herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information required by this item is set forth at pages 36 through
45 of the 1998 Annual Report to Stockholders, which information is incorporated
herein by reference.
ITEM 9. DISAGREEMENTS WITH ACCOUNTANTS ON FINANCIAL DISCLOSURE.
None.
-18-
<PAGE> 19
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 29,
1998 (the "1998 Proxy Statement") is incorporated herein by reference.
Information regarding executive officers of the Registrant is set forth in Item
4A of 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 1998 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 1998 Proxy
Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this item is incorporated herein by
reference to "Election of Directors--Certain Transactions" in the 1998 Proxy
Statement.
-19-
<PAGE> 20
PART IV
-------
ITEM l4. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) DOCUMENT LIST
1. Financial Statements
The following financial statements and other information, included
in the 1998 Annual Report to Stockholders on pages 36 through 45, are
incorporated by reference in Item 8.
McDonald & Company Investments, Inc. and Subsidiaries:
- ------------------------------------------------------
(i) Consolidated Statements of Income--fiscal years ended
March 27, 1998, March 28, 1997, and March 29, 1996.
(ii) Consolidated Statements of Financial Condition--March 27,
1998 and March 28, 1997.
(iii) Consolidated Statements of Changes in Stockholders'
Equity-- fiscal years ended March 27, 1998, March 28,
1997, and March 29, 1996.
(iv) Consolidated Statements of Cash Flows--fiscal years ended
March 27, 1998, March 28, 1997, and March 29, 1996.
(v) Notes to Consolidated Financial Statements--March 27,
1998.
(vi) Report of Independent Auditors
2. Financial Statement Schedules
All 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.
-20-
<PAGE> 21
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>
3(a) Certificate of Incorporation of the Company, as amended............................ 26
11 Statement Re: Computation of Per Share Earnings ................................... 49
13(a) Supplementary Financial Data - Quarterly Data
(Unaudited)..................................................................... 50
13(b) Selected Financial Data............................................................ 51
13(c) Management's Discussion and Analysis of Results of
Operations and Financial Condition.............................................. 52
13(d) Consolidated Financial Statements of the Company and Independent Auditors'
Report thereon listed under Item 14(a)(1)....................................... 58
21 Subsidiaries of the Registrant..................................................... 68
23 Consent of Independent Auditors....................................................
27 Financial Data Schedule BD
</TABLE>
(b) The following exhibits are incorporated herein by reference:
2(a): Agreement and Plan of Reorganization dated as of July 24, 1991 by
and among the Registrant, McDonald & Company Securities, Inc. and
Gradison & Company Incorporated (incorporated by reference to Exhibit
2.1 to the Company's Amendment No. 1 to Form S-4 Registration Statement
(Reg. No. 33-42566) which became effective on September 13, 1991)
2(b): Form of First Amendment to the Agreement and Plan of
Reorganization by and among the Registrant, McDonald & Company
Securities, Inc. and Gradison & Company Incorporated (Incorporated by
reference to Exhibit 2.2 to the Company's Amendment No. 1 to Form S-4
Registration Statement (Reg. No. 33-42566) which became effective on
September 13, 1991)
2(c): Form of Agreement of Merger by and among the Registrant, McDonald
& Company Securities, Inc. and Gradison & Company Incorporated
(incorporated by reference to Exhibit 2.3 to the Company's Amendment
No. 1 to Form S-4 Registration Statement (Reg. No. 33-42566) which
became effective on September 13, 1991)
3(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)
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)
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)*
-21-
<PAGE> 22
ITEM 14(a) DOCUMENT LIST -- Continued
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
-22-
<PAGE> 23
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 held on July 30, 1997).*
10(r): Documents reflecting line of credit with Harris Trust and
Savings Bank ($20,000,000) (incorporated by reference to Exhibit 10(r)
to the Company's Form 10-Q for the fiscal quarter ended June 27, 1997).
10(s): Documents reflecting line of credit with Star Bank ($20,000,000)
(incorporated by reference to Exhibit 10(s) to the Company's Form 10-Q
for the fiscal quarter ended September 26, 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 27, 1998.
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 2,000,000 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 27, 1998 the Company purchased
47,920 shares of the Company's Common Stock at an average price of $25.09 per
share. During the fiscal year ended March 27, 1998, the Company utilized 204,529
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.
-23-
<PAGE> 24
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 22nd day of June, 1998.
McDONALD AND COMPANY INVESTMENTS, INC.
By: /s/ William B. Summers
---------------------------------------
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
Signature Title:
- --------- ------
/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
-24-
<PAGE> 25
McDonald & Company Investments, Inc.
Report on FORM 10-K for the Fiscal Year ended March 27, 1998
EXHIBIT INDEX
-------------
<TABLE>
<CAPTION>
Exhibit No. Description Sequential Page
- ----------- ----------- ---------------
<S> <C> <C>
3(a) Certificate of Incorporation of the Company, as amended.................. 26
11 Statement Re: Computation of
Per Share Earnings..................................................... 49
13(a) Supplementary Financial Data
Quarterly Data (Unaudited)............................................. 50
13(b) Selected Financial Data.................................................. 51
13(c) Management's Discussion and
Analysis of Results of Operations
and Financial Condition................................................ 52
13(d) Consolidated Financial Statements of the Company and Independent
Auditors' Report thereon listed under Item 14(a)(1).................... 58
21 Subsidiaries of the Registrant........................................... 68
23 Consent of Independent
Auditors...............................................................
27 Financial Data Schedule BD
</TABLE>
-25-
<PAGE> 1
Exhibit 3(a)
CERTIFICATE OF AMENDMENT
TO
CERTIFICATE OF INCORPORATION
OF
MCDONALD & COMPANY INVESTMENTS, INC.
----------------------------------------
Pursuant to Section 242 of the
Delaware General Corporation Law
----------------------------------------
The undersigned, Thomas F. McKee, being the Secretary of McDonald &
Company Investments, Inc. a Delaware corporation, does hereby certify that a
meeting of the stockholders of McDonald & Company Investments, Inc. was duly
called and held on July 30, 1997, at which meeting an amendment to the
Certificate of Incorporation was duly adopted in accordance with Section 242 of
the Delaware General Corporation Law through the adoption of the following
resolution:
RESOLVED, that Article IV of the Certificate of Incorporation is
amended by deleting the first full sentence in its entirety and substituting in
lieu thereof the following:
"the total authorized capital stock of the Corporation consists of
fifty million two hundred thousand (50,200,000) shares, of which number
two hundred thousand (200,000) are shares of Preferred Stock, without
par value ("Preferred Stock"), and fifty million (50,000,000) are
shares of Common Stock, par value $1.00 per share ("Common Stock")."
IN WITNESS WHEREOF, the undersigned hereunto subscribes this
Certificate of Amendment and affirms that the facts stated herein are true
under penalties of perjury, this 30th day of July, 1997.
---------------------
Thomas F. McKee
Secretary
-26-
<PAGE> 2
STATE OF DELAWARE
SECRETARY OF STATE
DIVISION OF CORPORATIONS
FILED 09:00 AM 07/28/1992
922105205 - 2009337
CERTIFICATE OF AMENDMENT
TO
CERTIFICATE OF INCORPORATION
OF
McDONALD & COMPANY INVESTMENTS, INC.
-------------------------------------------
Pursuant to Section 242 of the
Delaware General Corporation Law
-------------------------------------------
The undersigned, Thomas M. O'Donnell, being the Chairman of the Board,
and Thomas F. McKee, being the Secretary, of McDonald & Company Investments,
Inc., a Delaware corporation (the "Corporation"), hereby certify as follows:
1. The name of the Corporation is McDonald & Company Investments, Inc.
2. The amendment of the Certificate of Incorporation as hereinafter set
forth has been duly adopted in accordance with Section 242 of the Delaware
General Corporation Law.
3. The Certificate of Incorporation of the Corporation is hereby
amended by deleting the first full sentence of Article IV in its entirety and
substituting in lieu thereof the following:
"The total authorized capital stock of the Corporation
consists of fifteen million two hundred thousand (15,200,000) shares, of which
number two hundred thousand (200,000) are shares of Preferred Stock, without par
value ("Preferred Stock"), and fifteen million (15,000,000) are shares of Common
Stock, par value $1.00 per share ("Common Stock")."
IN WITNESS WHEREOF, the undersigned, being the duly elected and acting
Chairman of the Board and Secretary, respectively, have hereunto subscribed
their names to this
-27-
<PAGE> 3
Certificate of Amendment and affirm that the facts stated herein are true under
penalties of perjury, this 28th day of July, 1992.
/s/ Thomas M. O'Donnell,
-----------------------------
Thomas M. O'Donnell,
Chairman of the Board
/s/ Thomas F. McKee,
- ---------------------------
Thomas F. McKee, Secretary
-28-
<PAGE> 4
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
McDONALD & COMPANY INVESTMENTS, INC.
------------------------------------
McDonald & Company Investments, Inc., a corporation organized and
existing under the General Corporation Law of the State of Delaware (the
"Corporation"), does hereby certify:
The amendment to the Corporation's Certificate of Incorporation set
forth in the following resolution was approved by the Corporation's Board of
Directors and said resolution was duly adopted by the stockholders, all in
accordance with the provisions of Section 242 of the General Corporation Law of
the State of Delaware:
RESOLVED, That Article VII of the Certificate of Incorporation of
the Corporation be and the same is hereby amended and restated to read in its
entirety as follows:
"A director of the Corporation shall not be personally
liable to the Corporation or its stockholders for monetary
damages for breach of fiduciary duty as a director, except for
liability (i) for any breach of the director's duty of loyalty
to the Corporation or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) under Section
174 of the General Corporation Law of the State of Delaware,
or (iv) for any transaction from which the director derived an
improper personal benefit. Any repeal, amendment or other
modification of this Article shall not affect the liability or
alleged liability of any director of the Corporation then
existing with respect to any state of facts then or
theretofore existing or any action, suit cr proceeding
theretofore or thereafter brought or threatened based in whole
or in part upon any such state of facts."
IN WITNESS WHEREOF, the Corporation has caused this Certificate to be
signed and attested by its duly authorized officers this 25th day of
November, 1986.
McDONALD & COMPANY INVESTMENTS, INC.
By /s/ Willard E. Carmel
-------------------------------------
Willard E. Carmel, Chairman of
the Board of Directors
Attest:
/s/ John E. Kohl
- ----------------------------
John E. Kohl, Secretary
-29-
<PAGE> 5
REGISTERED OFFICE AND OF REGISTERED AGENT
PURSUANT TO SECTION 134 OF TITLE OF THE DELAWARE CODE
To: DEPARTMENT OR STATE
Division of Corporations
Townsend Building
Federal Street
Dover, Delaware 19903
Pursuant to the provisions of Section 134 of Title 8 of the Delaware
Code, the undersigned Agent for service of process, in order to change the
address of the registered office of the corporations for which it is registered
agent, hereby certifies that:
1. The name of the agent is: The Corporation Trust Company
2. The address of the old registered office was:
100 West Tenth Street
Wilmington, Delaware 19801
3. The address to which the registered office is to be changed is:
Corporation Trust Center
1209 Orange Street
Wilmington, Delaware 19801
The new address will be effective on July 30, 1984.
4. The names of the corporations represented by said agent are set
forth on the list annexed to this certificate and made a part
hereof by reference.
IN WITNESS WHEREOF, said agent has caused this certificate to
be signed on its behalf by its Vice-President and Assistant Secretary this 25th
day of July, 1984.
THE CORPORATION TRUST COMPANY
-----------------------------
(Name of Registered Agent)
By /s/ Virginia Colvell
---------------------
(Vice-President)
ATTEST:
/s/ Mary G. ??????????
- -----------------------------
(Assistant Secretary)
-30-
<PAGE> 6
STATE OF DELAWARE - DIVISION OF CORPORATIONS
CHANGE OF ADDRESS FILING FOR
CORPORATION TRUST AS OF JULY 27, 1984
DOMESTIC
<TABLE>
<S> <C> <C>
2009225 PRUDENTIAL-BACHE VENTURE CAPITAL INC. 05/19/1983 D DE
2009226 VALLEY WEST, INC. 05/19/1983 D DE
2009227 TAKE TWO PRODUCTIONS LIMITED 05/19/1983 D DE
2009228 JASON ENERGY, INC. 05/19/1983 D DE
2009229 DOMINO'S PIZZA OF WASHINGTON D.C., INC. 05/19/1983 D DE
2009230 LARCO ENTERPRISES INC. 05/19/1983 D DE
2009231 CLARK'S RESTAURANT, INC. 05/19/1983 D DE
2009232 S.G. WARBURG & CO. INC. 05/19/1983 D DE
2009233 COPPER RECOVERY CORP. 05/19/1983 D DE
2009235 NATIONAL SEMICONDUCTOR DATACHECKER/DTS CORPORATION 05/19/1983 D DE
2009236 ALLIED FINANCIAL INSTITUTIONS, INC. 05/19/1983 D DE
2009240 WESTERBEKE INTERNATIONAL, INC. 05/19/1983 D DE
2009241 P & 0 INTERNATIONAL LTD. 05/19/1983 D DE
2009242 VIDEOLINK INCORPORATED 05/19/1983 D DE
2009250 NORDEN SERVICE COMPANY, INC. 05/19/1983 D DE
2009277 Z.L. COMPANY, INC. 05/20/1983 D DE
2009279 ZESTMO, LTD. 05/20/1983 D DE
2009280 JANE BARRY, INC. 05/2D/i983 D DE
2009265 HYDROCON INTERNATIONAL, INC. 05/20/1983 D DE
2009286 ALEXANDER DEVELOPMENT, LTD. 05/20/1983 D DE
2009287 BONNCO PETROL, INC. 05/20/1983 D DE
2009290 G. D. RITZY'S, INC. 05/20/1983 D DE
2009291 ATLAS CHAIN COMPANY 05/20/1983 D DE
2009292 VINGMED, INC. 05/20/1983 D DE
2009294 FINANCIAL CLEARING & SERVICES CORPORATION 05/20/1983 D DE
2009295 COUNTY YELLOW PAGES TELEPHONE DIRECTORIES OF 05/20/1983 D DE
2009296 GIBSON RESEARCH CORP. 05/20/1983 D DE
2009297 STEWART SEARCH INC. 05/20/1983 D DE
2009298 TMF INTERNATIONAL SALES CORPORATION 05/20/1983 D DE
2009299 PCK ASSOCIATES, INC. 05/20/1983 D DE
2009300 AZIMUTH ADVERTISING INC. 05/20/1983 D DE
2009301 BEAR AUTOMOTIVE OF NORTHERN CALIFORNIA, INC. 05/20/1983 D DE
2009302 21ST CENTURY FASTENER SCREW CORPORATION 05/20/1983 D DE
2009303 LOTTERY DESIGN, INC. 05/20/1983 D DE
2009304 JASCO MARINE INC. 05/20/1983 D DE
2009308 COCA-COLA PROPERTY PLANNING GROUP, INC. 05/20/1983 D DE
2009309 DSC ACQUISITION, INC. 05/20/1983 D DE
2009314 INTERFACE SOLUTIONS, INC. 05/20/1983 D DE
2009315 AMERICAN HEALTH & NUTRITION, LTD. 05/20/1983 D DE
2009316 COCA-COLA FINANCIAL HOLDINGS, INC. 05/20/1983 D DE
2009322 TANGO CORPORATION 05/20/1983 D DE
2009327 AOT-GD, INC. 05/20/1983 D DE
2009328 PRIVATE RESIDENTIAL INSURED MORTGAGE EXCHANGE, INC. 05/20/1983 D DE
2009337 MCDONALD & COMPANY INVESTMENTS, INC. 05/20/1983 D DE
2009338 TECHNOLOGY CONSULTANTS, INC. 05/20/1983 D DE
2009361 PCT INCORPORATED 05/23/1983 D DE
2009362 TEKTEL, INC. 05/23/1983 D DE
</TABLE>
-31-
<PAGE> 7
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
McDONALD & COMPANY INVESTMENTS, INC.
------------------------------------
McDonald & Company Investments, Inc., a corporation organized and
existing under the General Corporation Law of the State of Delaware (the
"Corporation"), does hereby certify:
The amendment to the Corporation's Certificate of Incorporation set
forth in the following resolution approved by the Corporation's Board of
Directors and stockholders was duly adopted in accordance with the provisions of
Section 242 of the General Corporation Law of the State of Delaware:
RESOLVED, That the first sentence of Article V, Section 1 of
the Certificate of Incorporation of the Corporation be and
the same is hereby amended to read as follows:
"The Board of Directors shall consist of not less than
three (3) nor more than eighteen (18) members and shall
be divided into three classes, Class I, Class II, and
Class III, which shall be as nearly equal in number as
possible."
and that the remainder of said Article V, Section 1 of the
Certificate of Incorporation of the Corporation following
such amended language remain unchanged.
IN WITNESS WHEREOF, the Corporation has caused this Certificate to be
signed and attested by its duly authorized officers this 12th day of July, 1983.
McDONALD & COMPANY INVESTMENTS, INC.
By /s/ Willard E. Carmel
--------------------------------------
Willard E. Carmel, Chairman of the
Board of Directors and President
Attest:
/s/ Thomas M. O'Donnell
- -----------------------------
Thomas M. O'Donnell, Secretary
-32-
<PAGE> 8
CERTIFICATE OF AMENDMENT
------------------------
OF
--
CERTIFICATE OF INCORPORATION
----------------------------
OF
--
McDONALD & COMPANY INVESTMENTS, INC.
------------------------------------
BEFORE PAYMENT OF CAPITAL
-------------------------
McDONALD & COMPANY INVESTMENTS, INC., a corporation organized and
existing under the laws of the State of Delaware, hereby certifies as follows:
1. The name of the Corporation is McDonald & Company Investments, Inc.
2. The date of filing of its original Certificate of Incorporation with
the Secretary of State was May 20, 1983.
3. The Corporation has not received any payments for its stock, nor has
its initial Board of Directors been elected.
4. The amendment was duly adopted in accordance with the provisions of
Section 241 of the General Corporation Law of the State of Delaware.
5. The text of the Certificate of Incorporation, as amended, is as
follows:
ARTICLE I
---------
The name of the Corporation is McDONALD & COMPANY INVESTMENTS, INC.
-33-
<PAGE> 9
ARTICLE II
----------
The address of its registered office in the State of Delaware is No.
100 West Tenth Street, in the City of Wilmington, County of New Castle. The name
of its registered agent at such address is as The Corporation Trust Company.
ARTICLE III
-----------
The nature of the business to be conducted or promoted and the purposes
of the Corporation shall be to engage in any lawful act or activity for which
corporations may be organized under the General Corporation Law of the State of
Delaware.
ARTICLE IV
----------
The total authorized capital stock of the Corporation consists of
eleven million two hundred thousand (11,200,000) shares, of which number two
hundred thousand (200,000) are shares of Preferred Stock, without par value
("Preferred Stock"), and eleven million (11,000,000) are shares of Common Stock,
par value $1.00 per share ("Common Stock"). The designations and the powers,
preferences and relative, participating, optional or other special rights, and
the qualifications, limitations or restrictions thereof, of the Preferred Stock
and the Common Stock shall be as follows:
1. The Preferred Stock may be issued, from time to time, in one or more
series, with such designations,
-34-
<PAGE> 10
voting powers, if any, preferences and relative, participating, optional or
other special rights, and qualifications, limitations or restrictions thereof,
as shall be stated and expressed in the resolution or resolutions providing for
the issue of such series adopted by the Board of Directors. The Board of
Directors, in such resolution or resolutions (a copy of which shall be filed and
recorded as required by law), is also expressly authorized to fix:
(a) the distinctive serial designations and the division of such
shares into series and the number of shares of a particular
series, which may be increased or decreased, but not below
the number of shares thereof then outstanding, by a
certificate made, signed, filed and recorded as required by
law;
(b) the annual dividend rate for the particular series, and the
date or dates from which dividends on all shares of such
series shall be cumulative, if dividends on stock of the
particular series shall be cumulative;
(c) the redemption price or prices, if any, for the particular
series;
(d) the right, if any, of the holders of a particular series to
convert such stock into other classes of stock, and the terms
and conditions of such conversion; and
-35-
<PAGE> 11
(e) the obligation, if any, of the Corporation to purchase and
retire and redeem shares of a particular series as a sinking
fund or redemption or purchase account, the terms thereof and
the redemption price or prices per share for such series
redeemed pursuant to the sinking fund or redemption or
purchase account.
All shares of any one series of Preferred Stock shall be alike in every
particular and all series shall rank equally and be identical in all respects
except insofar as they may vary with respect to the matters which the Board of
Directors is hereby expressly authorized to determine in the resolution or
resolutions providing for the issue of any series of the Preferred Stock.
2. In the event of any liquidation, dissolution or winding up of the
affairs of the Corporation, then before any distribution or payment shall have
been made to the holders of the Common Stock, the holders of the Preferred Stock
of each series shall be entitled to be paid, or to have set apart in trust for
payment, an amount from the net assets of the Corporation equal to that stated
and expressed in the resolution or resolutions adopted by the Board of
Directors which provide for the issue of such series, respectively. The
remaining net assets of the Corporation shall be distributed solely among the
holders of Common Stock according to their respective shares.
-36-
<PAGE> 12
3. Holders of shares of Common Stock shall be entitled to one vote for
each share of such stock upon all questions presented to stockholders of the
Corporation. The rights of holders of Common Stock shall be subject to the
powers, preferences and rights, and the qualifications, limitations or
restrictions thereof, of the Preferred Stock.
ARTICLE V
---------
1. The Board of Directors shall consist of not less than three (3) nor
more than fifteen (15) members and shall be divided into three classes, Class I,
Class II and Class III, which shall be as nearly equal in number as possible.
Subject to the foregoing limitations, the number of directors shall be fixed by,
or in the manner provided in, the By-Laws of the Corporation. In the event the
total number of directors is not divisible by three (3), an extra director shall
be assigned to Class I if there is one (1) extra director to be assigned among
the classes, and an extra director shall be assigned to each of Classes I and II
if there are two (2) extra directors to be assigned among the classes. The
directors to be elected at each annual meeting of stockholders shall be only the
members of the class whose term of office then expires. The term of office of
the initial directors in each respective class shall be as follows: (a)
directors in Class I shall hold office until the first annual meeting of
stockholders, which shall be held in 1984; (b) directors in Class II shall hold
office
-37-
<PAGE> 13
until the annual meeting of stockholders held in 1985; and (c) directors in
Class III shall hold office until the annual meeting of stockholders held in
1986. Each director elected at any stockholders' meeting commencing with the
1984 annual meeting shall serve for a term ending on the date of the third
annual meeting of stockholders following the meeting at which such director was
elected. Elections of directors need not be by written ballot unless the ByLaws
of the Corporation shall so provide.
2. In the event of any increase or decrease in the authorized number of
directors, (a) each director then serving as such shall nevertheless continue as
a director of the class of which he is a member until the expiration of
his current term, or his prior death, retirement, resignation, or removal, and
(b) the newly created or eliminated directorships resulting from such increase
or decrease shall be apportioned by the Board of Directors among the three
classes of directors as provided above in this Article V.
3. Notwithstanding any of the foregoing provisions of this Article,
each director shall serve until his successor is elected and qualified or until
his prior death, retirement, resignation or removal. No director may be removed
except for cause and (in addition to the affirmative vote which may be required
of the holders of any series of Preferred Stock which may then be outstanding)
by the affirmative vote of the holders of at least a majority of the
-38-
<PAGE> 14
outstanding shares of Common Stock of the Corporation entitled to vote thereon.
Should a vacancy occur or be created, whether arising through death, resignation
or removal of a director or through an increase in the number of directors, such
vacancy shall be filled by a majority vote of the directors then in office, or
by the sole remaining director if only one director remains in office. A
director so elected to fill a vacancy shall serve for the remainder of the
present term of office of the class to which he was elected.
4. The By-Laws of the Corporation may be amended or repealed by action
of the Board of Directors which is approved by the affirmative vote of a
majority of all directors then in office, or (in addition to the affirmative
vote which may be required of the holders of any series of Preferred Stock
which may then be outstanding) by the affirmative vote of the holders of at
least seventy percent (70%) of the outstanding shares of Common Stock of the
Corporation entitled to vote thereon.
ARTICLE VI
----------
1. Special meetings of the stockholders, for any purpose or purposes,
may be called by the President or Chairman of the Board of Directors and shall
be called by the President or Secretary at the written request of a majority of
the Board of Directors. The stockholders are
-39-
<PAGE> 15
expressly denied any power or authority to call, or to cause to be called, any
special meeting of stockholders.
2. The right of any holder of any class of stock of the Corporation to
vote cumulatively is expressly denied.
3. The right of the stockholders to take any action by consent in
writing without a regular or special meeting of the stockholders is expressly
denied.
ARTICLE VII
-----------
The Corporation shall to the extent permitted by Section 145 of the
Delaware General Corporation Law, as amended from time to time, indemnify and
reimburse all persons whom it may indemnify and reimburse pursuant thereto.
Notwithstanding the foregoing, the indemnification provided for in this Article
shall not be deemed exclusive of any other rights to which those entitled to
receive indemnification or reimbursement hereunder may be entitled under any
By-Law of the Corporation, agreement, vote of stockholders or disinterested
directors or otherwise.
ARTICLE VIII
------------
Whenever a compromise or arrangement is proposed between this
Corporation and its creditors or any class of them and/or between this
Corporation and its stockholders or any class of them, any court of equitable
jurisdiction within the State of Delaware may, on the application in a summary
way of this Corporation or of any creditor or stockholder thereof or on the
application of any receiver or
-40-
<PAGE> 16
receivers appointed for this Corporation under the provisions of Section 291 of
the Delaware General Corporation Law or on the application of trustees in
dissolution or of any receiver or receivers appointed for this Corporation under
the provisions of Section 279 of the Delaware General Corporation Law order a
meeting of the creditors or class of creditors, and/or of the stockholders or
class of stockholders of this Corporation, as the case may be, to be summoned in
such manner as the said court directs. If a majority in number representing
three-fourths in value of the creditors or class of creditors, and/or of the
stockholders or class of stockholders of this Corporation, as the case may be,
agree to any compromise or arrangement and to any reorganization of this
Corporation as consequence of such compromise or arrangement, the said
compromise or arrangement and the said reorganization shall, if sanctioned by
the court to which the said application has been made, be binding on all the
creditors or class of creditors, and/or on all the stockholders or class of
stockholders, of this Corporation, as the case may be, and also on this
Corporation.
ARTICLE IX
----------
The books of the Corporation may be kept (subject to any
requirement of the Delaware General Corporation Law) outside the State of
Delaware at such place or places as may be designated from time to time by the
Board of Directors or in the By-Laws of the Corporation.
-41-
<PAGE> 17
ARTICLE X
---------
1. In addition to the affirmative vote which may be required of the
holders of any series of Preferred Stock which may then be outstanding, the
affirmative vote of the holders of not less than seventy percent (70%) of the
outstanding shares of Common Stock of the Corporation, which shall include the
affirmative vote of at least fifty-five percent (55%) of the outstanding shares
of Common Stock held by stockholders other than the "Related Person" (as
hereinafter defined). shall be required for the approval or authorization of any
"business combination" (as hereinafter defined) of the Corporation with any
Related Person; provided, however, that such 70% and 55% voting requirements
shall not be applicable if the stockholders are asked to approve or authorize a
particular business combination which has been authorized and proposed to the
stockholders by action of the Board of Directors of the Corporation by the
affirmative vote of a majority of all directors then in office, or if the
stockholders are asked to approve or authorize a particular business combination
as to which both of the following conditions are satisfied:
(a) the aggregate amount of the cash and the fair market value
of the consideration other than cash to be received per share by the
holders of the Common Stock of the Corporation in such business
combination is at least equal to the greater
-42-
<PAGE> 18
of (1) the highest price per share (including any brokerage
commissions, transfer taxes and soliciting dealer's fees) paid or
agreed to be paid by the Related Person to acquire beneficial ownership
of any share of such Common Stock (with appropriate adjustments for
recapitalizations, and for stock splits, stock dividends and like
distributions), (2) the highest price per share (including any
brokerage Commissions, transfer taxes and soliciting dealer's fees)
paid by any person to acquire beneficial ownership of any share of such
Common Stock on the open market at any time during the twenty-four
month period immediately prior to the taking of such vote, or (3) the
per share book Value of such Common Stock at the end of the calendar
quarter immediately preceding the taking of such vote; and
(b) the consideration to be received by holders of Common
Stock in such business combination shall be in the same form and of the
same kind as the most favorable form and kind of consideration paid by
the Related Person in acquiring beneficial ownership of any of the
shares of Common Stock already held, directly or indirectly, by it.
-43-
<PAGE> 19
The determination of a majority of the "Disinterested Directors" of the
Corporation, made in good faith and based upon information known to them after
reasonable inquiry, shall be conclusive as to all facts necessary for compliance
with this Article, including without limitation (i) whether any person,
partnership, corporation or firm is a Related Person or affiliate or associate
as defined herein, and (ii) the most favorable form and kind of consideration
paid by the Related Person in acquiring beneficial ownership of shares of Common
Stock.
2. For the purposes of this Certificate of Incorporation:
(a) The term "business combination" shall mean (1) any merger or
consolidation of the Corporation with or into a Related Person, (2) any sale,
lease, exchange, transfer or other disposition, including, without limitation, a
mortgage or any other security device, of all or any substantial part of the
assets of the Corporation (including, without limitation, any voting securities
of a subsidiary) or of a subsidiary, to a Related Person, (3) any merger or
consolidation of a Related Person with or into the Corporation or a subsidiary
of the Corporation, (4) any sale, lease, exchange, transfer or other disposition
of all or any substantial part of the assets of a Related Person to the
Corporation or a subsidiary of the Corporation, (5) the reclassification of the
shares of stock of the Corporation
-44-
<PAGE> 20
generally possessing voting rights in elections for directors, the purchase by
the Corporation of such shares, or the issuance by the Corporation of shares of
any securities convertible thereto or exchangeable therefor which in any such
case has the effect, directly or indirectly, of increasing the proportionate
share of the outstanding shares of any class of equity or convertible securities
of the Corporation which are directly or indirectly owned by any Related Person,
or (6) any agreement, contract or other arrangement providing for any of the
transactions described in this definition of business combination.
(b) The term "Related Person" shall mean and include any individual,
corporation, partnership or other person or entity which, together with its
"affiliates" and "associates," "beneficially" owns (as those terms are defined
in the Securities Exchange Act of 1934 and in the rules thereunder), in the
aggregate, 5% or more of the outstanding shares of Common Stock of the
Corporation, and any "affiliate" or "associate" of any such individual,
corporation, partnership or other person or entity; provided that shares held or
over which such entity has the power to vote or otherwise control as a trustee,
plan administrator, officer of the Corporation or in a similar capacity under an
employee benefit plan of the Corporation or an employee benefit plan of an
affiliate of the Corporation shall not be deemed to be beneficially owned for
purposes of this definition.
-45-
<PAGE> 21
(c) The term "substantial part" shall mean more than ten percent (10%)
of the total consolidated assets of the Corporation as of the end of its most
recent fiscal year ending prior to the time the determination is made.
(d) Without limitation, any shares of Common Stock of the Corporation
which any Related Person has the right to acquire pursuant to any agreement, or
upon exercise of conversion rights, warrants or options, or otherwise, shall be
deemed beneficially owned by such Related Person.
(e) The term "consideration other than cash" shall include, without
limitation, outstanding Common Stock of the Corporation retained by its existing
stockholders in the event of a business combination with a Related Person in
which the Corporation is the surviving corporation.
(f) The term "Disinterested Director" means any member of the Board of
Directors of the Corporation who is not the Related Person or an affiliate or
associate of the Related Person and was a member of the Board prior to the time
that the Related Person became the Related Person, and any successor of a
Disinterested Director who is not the Related Person or an affiliate or
associate of the Related Person and is recommended to succeed a Disinterested
Director by a majority of the Disinterested Directors then in office.
-46-
<PAGE> 22
ARTICLE XI
----------
No amendment of this Certificate of Incorporation shall be effective to
amend, alter, repeal or change the effect of any of the provisions of Articles
V, VI, VII, X or XI unless such amendment shall receive the affirmative vote of
the holders of at least (1) seventy percent (70%) of the outstanding shares of
Common Stock of the Corporation entitled to vote thereon and (2) at least
fifty-five percent (55%) of the shares of Common Stock entitled to vote thereon
held by stockholders none of whom is as of the record date fixed for such vote,
a Related Person, affiliate of a Related Person, or an associate of a Related
Person; provided, however, that such voting requirement shall not be applicable
to the approval of such an amendment if such amendment shall have been proposed
and authorized by action of the Board of Directors of the Corporation by the
affirmative vote of a majority of the directors then in office.
ARTICLE XII
-----------
The name of the incorporator is Richard N. Ogle and his mailing address
is 1800 Central National Bank Building, Cleveland, Ohio 44114.
-47-
<PAGE> 23
IN WITNESS WHEREOF, said McDonald & Company Investments, Inc. has
executed this Certificate of Amendment by its sole incorporator this 3rd day of
June, 1983.
McDONALD & COMPANY
INVESTMENTS, INC.
By /s/ Richard N. Ogle
-------------------------------
Richard N. Ogle,
Sole Incorporator
STATE OF OHIO )
) SS:
COUNTY OF CUYAHOGA )
Before me, a Notary Public, in and for said County and State,
personally appeared RICHARD N. OGLE, sole incorporator of McDONALD & COMPANY
INVESTMENTS, INC., being the person who executed the foregoing Certificate of
Amendment, known to me personally as such, and acknowledged the Certificate of
Amendment to be his act and deed and the act and deed of said corporation and
that the facts stated therein are true.
IN WITNESS WHEREOF, I have hereunto set my hand and official seal, at
Cleveland, Ohio, this 3rd day of June, 1983.
/s/ Thomas E. Baker
----------------------------
Notary Public
THOMAS EMORY BAKER
Notary Public - State of Ohio
My commission has no expiration date.
Section 147.03 R.C.
-48-
<PAGE> 1
Exhibit 11
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
-----------------------------------------------
<TABLE>
<CAPTION>
Fiscal year ended
-----------------------------------------------
March 27, 1998 March 28, 1997 March 29, 1996
-------------- -------------- --------------
BASIC
- -----
<S> <C> <C> <C>
Average shares outstanding 18,219,000 17,910,000 17,860,000
=========== =========== ===========
Net income $36,803,000 $24,656,000 $19,766,000
=========== =========== ===========
Net income per share $ 2.02 $ 1.38 $ 1.11
=========== =========== ===========
DILUTED
- -------
Average shares outstanding 18,219,000 17,910,000 17,860,000
Net effect of dilutive stock
options - based on the
treasury stock method using
average market price 254,000 316,000 284,000
=========== =========== ===========
TOTAL 18,473,000 18,226,000 18,144,000
=========== =========== ===========
Net income $36,803,000 $24,656,000 $19,766,000
=========== =========== ===========
Net income per share $ 1.99 $ 1.36 $ 1.09
=========== =========== ===========
</TABLE>
-49-
<PAGE> 1
Exhibit 13(a)
SUPPLEMENTARY FINANCIAL DATA
<TABLE>
<CAPTION>
QUARTERLY DATA (UNAUDITED) COMMON STOCK*
--------------------------------
Basic Dividends Price Range
Income Before Net Net Income Paid Per -------------------
(In thousands, except per share amounts) Revenues Income Taxes Income Per Share* Share High Low
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Fiscal 1998
- -----------------------------------------------------------------------------------------------------------------------------------
First quarter (13 weeks) $ 64,562 $ 8,921 $ 5,621 $ .31 $ .0469 $ 22.75 $ 17.63
- -----------------------------------------------------------------------------------------------------------------------------------
Second quarter (13 weeks) 73,570 10,587 6,907 .38 .0625 29.50 21.50
- -----------------------------------------------------------------------------------------------------------------------------------
Third quarter (13 weeks) 83,284 13,096 8,198 .45 .0625 29.44 21.94
- -----------------------------------------------------------------------------------------------------------------------------------
Fourth quarter (13 weeks) 111,930 24,199 16,077 .88 .0625 30.94 23.38
- -----------------------------------------------------------------------------------------------------------------------------------
Total Year $ 333,346 $ 56,803 $ 36,803 $ 2.02 $ .2344
============================================================================================================-----------------------
Fiscal 1997
- -----------------------------------------------------------------------------------------------------------------------------------
First quarter (13 weeks) $ 67,332 $ 10,058 $ 6,458 $ .37 $ .0424 $ 10.38 $ 9.44
- -----------------------------------------------------------------------------------------------------------------------------------
Second quarter (13 weeks) 59,617 8,273 5,273 .29 .0469 12.56 8.87
- -----------------------------------------------------------------------------------------------------------------------------------
Third quarter (13 weeks) 62,963 8,261 5,281 .29 .0469 17.44 11.94
- -----------------------------------------------------------------------------------------------------------------------------------
Fourth quarter (13 weeks) 71,585 11,664 7,644 .43 .0469 20.44 16.50
- -----------------------------------------------------------------------------------------------------------------------------------
Total Year $ 261,497 $ 38,256 $ 24,656 $ 1.38 $ .1831
============================================================================================================-----------------------
</TABLE>
Note: The Common Stock of McDonald & Company Investments, Inc., is listed on the
New York Stock Exchange. The trading symbol is MDD. At April 30, 1998, the
approximate number of stockholders of record was 1,052.
* Net Income Per Share, Dividends Paid Per Share, and the Common Stock Price
Ranges have been restated to reflect the effect of a 100% stock dividend which
was paid on September 15, 1997.
-50-
<PAGE> 1
Exhibit 13(b)
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Fiscal Year Ended
- ----------------------------------------------------------------------------------------------------------------------------
March 27, March 28, March 29, March 31, March 25,
(In thousands, except per share amounts) 1998* 1997* 1996* 1995* 1994*
- ----------------------------------------------------------------------------------------------------------------------------
OPERATIONS
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues $333,346 $261,497 $220,621 $177,726 $204,680
- ----------------------------------------------------------------------------------------------------------------------------
Income before income taxes 56,803 38,256 30,766 20,704 34,688
- ----------------------------------------------------------------------------------------------------------------------------
Net income 36,803 24,656 19,766 13,684 21,588
- ----------------------------------------------------------------------------------------------------------------------------
Basic net income per share 2.02 1.38 1.11 0.75 1.21
Diluted net income per share 1.99 1.36 1.09 0.74 1.19
- ----------------------------------------------------------------------------------------------------------------------------
Cash dividends paid per share .2344 .1831 .1675 .1575 .1440
- ----------------------------------------------------------------------------------------------------------------------------
FINANCIAL POSITION AS OF: March 27, March 28, March 29, March 31, March 25,
1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------
Total assets $702,520 $501,968 $471,101 $401,332 $590,578
- ----------------------------------------------------------------------------------------------------------------------------
Long-term borrowings 20,000 25,000 25,000 25,000 25,000
- ----------------------------------------------------------------------------------------------------------------------------
Stockholders' equity 191,178 154,122 130,823 114,362 107,405
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
* All net income per share and cash dividends paid per share information has
been adjusted for a 100% stock dividend paid during the fiscal year ended March
27, 1998. For the fiscal year ended March 25, 1994, net income per share and
cash dividends paid per share information were adjusted for a 20% stock dividend
paid during that year. Basic and diluted earnings per share are reflective of
the Company's adoption of Statement of Financial Accounting Standards No. 128
"Earnings Per Share" which was adopted in the Company's fiscal third quarter.
See Note A to the consolidated financial statements.
-51-
<PAGE> 1
Exhibit 13(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.
The Annual Report contains forward-looking statements about the Company's future
operating results and its plans for achieving them. Forward-looking statements
are made based on management's expectations and beliefs concerning future events
impacting the Company. All forward-looking statements involve risk and
uncertainty. Actual results may be materially affected by a variety of factors,
some of which may be beyond the control of the Company. These factors include
changes in the regulatory environment, the Company's ability to deal with
increasing competition in the securities industry, the Company's ability to
attract and retain qualified personnel, conditions in the securities markets in
the United States and abroad and general economic conditions.
Employee compensation and benefits increased $25,649,000, or 20%, for the fiscal
year ended March 28, 1997. Commission and other sales compensation expense
increased $10,946,000, or 17%, for the fiscal year ended March 28, 1997,
primarily as a result of the increase in revenues. Other clerical and
administrative expenses increased $5,853,000, or 16%, for the fiscal year ended
March 28, 1997. The increase in other clerical and administrative expense
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, when compared to 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 expense 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%, when compared to 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 when compared to the prior fiscal year.
Interest expense increased $1,991,000, or 26%, for the fiscal year ended March
28, 1997, when compared to 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%.
-52-
<PAGE> 2
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. Management
believes that the Company has taken all reasonable precautions to ensure a
smooth transition. However, the Company's brokerage business is highly dependent
on outside service providers and any problems encountered would potentially have
a material adverse effect on the Company's business activities and, accordingly,
its results of operations, financial condition and cash flows.
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 84% of the Company's assets at March
27, 1998. 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.
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 27, 1998, McDonald Securities has outstanding $20,000,000 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 $330,000,000, of which $295,418,000 was unused as of March
27, 1998. 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 27, 1998, McDonald Securities was in
compliance with the Uniform Net Capital Rules and had net capital of
$86,641,000, which was $81,219,000 in excess of the minimum required.
-53-
<PAGE> 3
RESULTS OF OPERATIONS
The following table summarizes the changes in the major categories of revenues
and expenses for the fiscal years ended March 27, 1998, March 28, 1997, and
March 29, 1996.
<TABLE>
<CAPTION>
Fiscal 1998 Fiscal 1997
Versus Versus
(Dollars in thousands) Fiscal 1997 Fiscal 1996
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUES
- ----------------------------------------------------------------------------------------------------------------------------
Underwriting and investment banking $ 29,799 40 % $ 17,952 32 %
- ----------------------------------------------------------------------------------------------------------------------------
Principal transactions 5,386 10 1,284 2
- ----------------------------------------------------------------------------------------------------------------------------
Commissions 20,366 25 13,409 20
- ----------------------------------------------------------------------------------------------------------------------------
Investment management fees 8,823 35 5,294 27
- ----------------------------------------------------------------------------------------------------------------------------
Interest and dividends 6,196 30 3,236 19
- ----------------------------------------------------------------------------------------------------------------------------
Other 1,279 18 (299) (4)
- ----------------------------------------------------------------------------------------------------------------------------
$ 71,849 27 % $ 40,876 19 %
============================================================================================================================
EXPENSES
- ----------------------------------------------------------------------------------------------------------------------------
Employee compensation and benefits $ 41,556 27 % $ 25,649 20 %
- ----------------------------------------------------------------------------------------------------------------------------
Interest 2,532 26 1,991 26
- ----------------------------------------------------------------------------------------------------------------------------
Communications 1,108 8 1,112 8
- ----------------------------------------------------------------------------------------------------------------------------
Occupancy and equipment 4,660 26 2,470 16
- ----------------------------------------------------------------------------------------------------------------------------
Promotion and development 1,366 15 912 11
- ----------------------------------------------------------------------------------------------------------------------------
Floor brokerage and clearance 254 10 87 3
- ----------------------------------------------------------------------------------------------------------------------------
Taxes, other than income taxes 806 11 804 12
- ----------------------------------------------------------------------------------------------------------------------------
Other operating expenses 1,020 11 361 4
- ----------------------------------------------------------------------------------------------------------------------------
$ 53,302 23 % $ 33,386 18 %
============================================================================================================================
</TABLE>
FISCAL 1998 COMPARED WITH FISCAL 1997
Total revenues for the fiscal year ended March 27, 1998 were $333,346,000, an
increase of $71,849,000, or 27%, from revenues of $261,497,000, for the fiscal
year ended March 28, 1997.
Net income for the fiscal year ended March 27, 1998 was $36,803,000, or $2.02
per share, compared to $24,656,000, or $1.38 per share, for the fiscal year
ended March 28, 1997, an increase in net income of 49%.
The average number of shares and share equivalents outstanding was 18,219,000
for the fiscal year ended March 27, 1998 compared with 17,910,000 for the fiscal
year ended March 28, 1997.
On July 30, 1997, the Company declared a 100% stock dividend payable September
15, 1997 to shareholders of record as of August 25, 1997. Applicable share and
per share information has been adjusted for the stock dividend as if it had
occurred at the beginning of the periods presented.
Revenues from underwriting and investment banking increased $29,799,000, or 40%,
for the fiscal year ended March 27, 1998, when compared to the fiscal year ended
March 28, 1997. Revenues from corporate underwriting and investment banking
increased $29,692,000, or 43%, for the fiscal year ended March 27, 1998, when
compared to the prior fiscal year. The significant increase in revenues from
corporate underwriting and investment banking was comprised of the following:
Revenues from merger and advisory fees increased $34,935,000, or 224%, from
$15,634,000 for the fiscal year ended March 1997 to $50,569,000 for the fiscal
year ended March 1998. Revenues from public offerings of debt and equity
securities increased $14,694,000, or 66%. Revenues from private placements
decreased $18,807,000, or 87%. Revenues from syndicate participations in debt
and equity securities declined $1,130,000, or 12%.
The increase in merger and advisory fee revenues of $34,935,000, or 224%, was
due to the strong market for such services and the expansion of the Company's
capabilities in the areas of mergers, advisory and project finance. For the
current fiscal year, advisory fee revenues included fees from two significant
transactions: during the fourth quarter of fiscal 1998, revenues from corporate
underwriting and investment banking included fees from the Company's
largest-ever transaction, the $650 million financing for Nakornthai Strip Mill
Public Company Limited (NSM), a flat-rolled mini-mill located in Thailand. The
total fees related to this transaction were approximately $19,700,000. During
the third quarter of fiscal 1998 the Company recorded a merger fee of $6,250,000
in the Financial Services Group. The fees related to these two transactions
totaled $25,950,000, or 74% of the total increase in revenues from merger and
advisory fees.
Revenues from public offerings of debt and equity securities increased
$14,694,000, or 66%, from $22,365,000 for the fiscal year ended March 1997 to
$37,059,000 for the fiscal
-54-
<PAGE> 4
year ended March 1998. Revenues from public offerings of equity securities
increased $6,879,000, or 33% from $20,720,000 for the fiscal year ended March
1997 to $27,599,000 for the fiscal year ended March 1998. The increase is due to
the continued strong markets for such securities. Revenues from the underwriting
of debt securities increased $7,815,000, or 475% from $1,645,000 for the fiscal
year ended March 28, 1997 to $9,458,000 for the fiscal year ended March 27,
1998. The significant increase in revenues from debt securities originations
reflects both favorable market conditions for such offerings and the Company's
focus on expanding its expertise in this area.
Revenues from private placements declined $18,807,000, or 87% from $21,660,000
for the fiscal year ended March 28, 1997 to $2,853,000 for the fiscal year ended
March 27, 1998. In the fiscal year ended March 28, 1997, private placement
revenues had included a fee of $9,336,000 from a single $500 million private
placement of debt and equity securities. Additionally, during the fiscal year
ended March 28, 1997, private placement revenues included approximately
$9,048,000 in fees related to the placement of limited partnership investments
in low income housing and historic rehabilitation investment tax credit funds.
These fees were not significant in fiscal 1998. In this area of the Investment
Banking division, revenues for the current fiscal year were adversely impacted
by the loss of key personnel.
Revenues from syndicate participations declined $1,130,000, or 12%. The decrease
in revenues from syndicate participations was comprised of a decrease in
revenues from participations in equity syndications of $1,537,000, or 25%, from
$6,131,000 in fiscal 1997 to $4,594,000 in fiscal 1998, and an increase in
revenues from participations in debt syndications of $407,000, or 11%, from
$3,592,000 in fiscal 1997 to $3,999,000 in fiscal 1998. Revenues from
participations in equity syndications continue to be adversely impacted by a
decrease in Managing firms' allocations of syndicate participations to other
firms.
Revenues from Municipal finance, including originations and participations, were
$4,024,000 in fiscal 1998 and $3,917,000 in fiscal 1997, an increase of
$107,000, or 3%.
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 $5,386,000, or 10%, for the
fiscal year ended March 27, 1998, when compared to the prior fiscal year.
Revenues from principal transactions in equity securities increased $4,809,000,
or 21%, for the fiscal year ended March 27, 1998, when compared to the prior
fiscal year. This increase is primarily due to a strong NASDAQ market and the
continued expansion of the Company's 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 $453,000, or 2% from $22,703,000 for the fiscal year ended
March 28, 1997 to $22,250,000 for the current fiscal year. 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
$1,244,000, or 24%, and government bonds of $952,000, or 16%. These decreases
were due to lower institutional demand for this type of fixed income product as
a result of lower yields. Offsetting these decreases, revenues from retail
transactions in taxable debt securities increased $2,145,000, or 32%, due to the
Company's efforts to expand our expertise in this area, and expansion of the
Private Client Group sales force. Revenues from trading municipal bonds
increased $1,030,000, or 10%, 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 $20,366,000, or 25%, for the fiscal year ended
March 27, 1998, when compared to the fiscal year ended March 28, 1997. 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 $13,492,000, or 27%, and an increase in
revenues from mutual fund sales of $5,371,000, or 21%, for the current fiscal
year. Revenues from commissions in insurance products increased $1,503,000, or
28%.
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 $8,823,000, or 35%, for the fiscal year ended March
27, 1998 when compared to the prior fiscal year. Revenues from investment
management fees related to individual managed accounts increased $7,027,000, or
48%, and advisory fees from the Company's mutual funds and money market funds
increased $1,796,000, or 17%. These increases were a result of an increase in
assets under management.
-55-
<PAGE> 5
FISCAL 1998 COMPARED WITH FISCAL 1997
Interest and dividend income increased $6,196,000, or 30%, for the fiscal year
ended March 27, 1998, when compared to the prior fiscal year. Interest earned on
customer margin accounts increased $3,970,000, or 34%, due to a higher level of
customer margin loans. Interest earned on inventory positions increased
$1,750,000, or 26%, due to higher average positions.
Other income increased $1,279,000, or 18%, for the fiscal year ended March 27,
1998, when compared to the prior fiscal year. This increase resulted from a
$957,000 increase in gains related to venture capital investments, and a
$322,000 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 $50,770,000, or
24%, for the fiscal year ended March 27, 1998, when compared to the prior fiscal
year.
Employee compensation and benefits increased $41,556,000, or 27%, for the
current fiscal year. Commission and other sales compensation expense increased
$16,414,000, or 21%, for the current fiscal year, primarily as a result of the
increase in revenues. Other clerical and administrative expenses increased
$8,442,000, or 20%, for the current fiscal year. The increase in other clerical
and administrative expense represents compensation, employee benefit costs and
recruitment costs related to an increase in the professional and support staff
during the 1998 fiscal year. The remaining $16,700,000 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 underwriting and
investment banking revenues, with corresponding higher incentive compensation in
the investment banking area.
All other operating expenses except interest increased $9,214,000, or 15%, for
the fiscal year ended March 27, 1998, when compared to the fiscal year ended
March 28, 1997. 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 27,
1998, communications expenses increased $1,108,000, or 8%, reflecting higher
headcount and the higher business volume. Occupancy and equipment costs
increased $4,660,000, or 26%. Rent, depreciation and amortization of furniture
and leaseholds and other occupancy costs increased $2,123,000, or 27%,
reflecting increased occupancy costs due to the increased number of employees,
and the expansion of our Cleveland, Ohio headquarters space and the branch
system. Depreciation on computer and other office equipment and other technology
costs increased $1,879,000, or 39%, reflecting both headcount increases and the
continuing costs of improving and upgrading the Company's technological
capabilities. Promotion and business development expense increased $1,366,000,
or 15%, when compared to 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 $806,000, or 11%, reflecting primarily increased payroll taxes due to
increases in compensation expenses. The category of other operating expenses
increased $1,020,000, or 11%, for the fiscal year ended March 27, 1998 when
compared to the prior fiscal year. Of this amount, $403,000 represented an
increase in charitable contributions expense and the remaining $617,000
represents a 7% increase in costs including legal, audit and other professional
fees.
Interest expense increased $2,532,000, or 26%, for the fiscal year ended March
27, 1998, when compared to the fiscal year ended March 28, 1997, 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 27, 1998, was
$56,803,000, resulting in a pre-tax return on revenues of 17%. For the fiscal
year ended March 28, 1997, income before income taxes was $38,256,000, resulting
in a pre-tax return on revenues of 14.6%.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1996, the Financial Accounting Standards Board (the "FASB") issued SFAS
125, "Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities." The Company adopted the provisions of SFAS 125 on March 29, 1997.
The adoption of SFAS 125 did not have a material effect on the Company's
consolidated financial statements.
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.
The Company adopted SFAS 128, "Earnings per share," during the third quarter of
the fiscal year ended March 27, 1998. SFAS 128 requires the reporting of basic
and diluted earnings per share amounts. Basic earnings per share are based upon
the average number of common shares outstanding during the reporting period.
Diluted earnings per share take into account the dilutive effect, if any, of
stock options and other dilutive potential common shares outstanding during the
period.
The FASB issued Statement No. 130 "Reporting Comprehensive Income" and Statement
No. 131 "Disclosures about Segments of an Enterprise and Related Information" in
June 1997. The Company will adopt these pronouncements in its 1999 fiscal year,
as required. The Company is reviewing the provisions of these statements and
does not believe their
-56-
<PAGE> 6
implementation will have a material impact on the presentation of the Company's
financial position, results of operations or cash flows.
The Securities and Exchange Commission recently issued market risk disclosure
requirements to enhance disclosure requirements of accounting policies for
derivatives and other financial instruments and to provide quantitative and
qualitative disclosures about market risk inherent in derivative and other
financial instruments. The Company will incorporate the disclosures in its
Annual Report for the fiscal 1999 year, as required.
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 $1.38
per share, compared to $19,766,000, or $1.11 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 17,910,000
for the fiscal year ended March 28, 1997 compared with 17,860,000 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, when compared to 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, when
compared to 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%. 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 principal transactions increased $1,284,000, or 2%, for the fiscal
year ended March 28, 1997, when compared to 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, when compared to the prior fiscal year. This
increase is primarily due to a strong NASDAQ market and the continued expansion
of the Company's 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%, 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, when compared to 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 when compared to 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, when compared to 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.
Other income decreased $299,000, or 4%, for the fiscal year ended March 28,
1997, when compared to 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, when compared to the prior fiscal
year.
-57-
<PAGE> 1
Exhibit 13(d)
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Fiscal Year Ended
- -------------------------------------------------------------------------------------------------------------------------------
March 27, March 28, March 29,
(In thousands, except share and per share amounts) 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES
- -------------------------------------------------------------------------------------------------------------------------------
Underwriting and investment banking $ 103,410 $ 73,611 $ 55,659
- -------------------------------------------------------------------------------------------------------------------------------
Principal transactions 60,771 55,385 54,101
- -------------------------------------------------------------------------------------------------------------------------------
Commissions 100,273 79,907 66,498
- -------------------------------------------------------------------------------------------------------------------------------
Investment management fees 33,959 25,136 19,842
- -------------------------------------------------------------------------------------------------------------------------------
Interest and dividends 26,602 20,406 17,170
- -------------------------------------------------------------------------------------------------------------------------------
Other 8,331 7,052 7,351
- -------------------------------------------------------------------------------------------------------------------------------
333,346 261,497 220,621
- -------------------------------------------------------------------------------------------------------------------------------
EXPENSES
- -------------------------------------------------------------------------------------------------------------------------------
Employee compensation and benefits 194,264 152,708 127,059
- -------------------------------------------------------------------------------------------------------------------------------
Interest 12,161 9,629 7,638
- -------------------------------------------------------------------------------------------------------------------------------
Communications 15,801 14,693 13,581
- -------------------------------------------------------------------------------------------------------------------------------
Occupancy and equipment 22,317 17,657 15,187
- -------------------------------------------------------------------------------------------------------------------------------
Promotion and development 10,560 9,194 8,282
- -------------------------------------------------------------------------------------------------------------------------------
Floor brokerage and clearance 2,898 2,644 2,557
- -------------------------------------------------------------------------------------------------------------------------------
Taxes, other than income taxes 8,125 7,319 6,515
- -------------------------------------------------------------------------------------------------------------------------------
Other operating expenses 10,417 9,397 9,036
- -------------------------------------------------------------------------------------------------------------------------------
276,543 223,241 189,855
- -------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 56,803 38,256 30,766
- -------------------------------------------------------------------------------------------------------------------------------
Provision for income taxes 20,000 13,600 11,000
- -------------------------------------------------------------------------------------------------------------------------------
Net income $ 36,803 $ 24,656 $ 19,766
===============================================================================================================================
Net income per share - Basic $ 2.02 $ 1.38 $ 1.11
- -------------------------------------------------------------------------------------------------------------------------------
- Diluted $ 1.99 $ 1.36 $ 1.09
- -------------------------------------------------------------------------------------------------------------------------------
Average number of shares and share equivalents outstanding 18,219,000 17,910,000 17,860,000
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
-58-
<PAGE> 2
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
March 27, March 28,
(In thousands, except share and per share amounts) 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
- ---------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents $ 13,844 $ 8,907
- ---------------------------------------------------------------------------------------------------------------------------
Receivable from customers 238,476 179,606
- ---------------------------------------------------------------------------------------------------------------------------
Receivable from brokers and dealers 51,695 37,500
- ---------------------------------------------------------------------------------------------------------------------------
Securities purchased under agreements to resell 61,874 43,943
- ---------------------------------------------------------------------------------------------------------------------------
Securities owned 223,436 127,632
- ---------------------------------------------------------------------------------------------------------------------------
Other receivables 36,150 42,597
- ---------------------------------------------------------------------------------------------------------------------------
Furniture, equipment, and leasehold improvements,
- ---------------------------------------------------------------------------------------------------------------------------
at cost, less accumulated depreciation and
- ---------------------------------------------------------------------------------------------------------------------------
amortization of $26,111 at March 27, 1998,
- ---------------------------------------------------------------------------------------------------------------------------
and $24,369 at March 28, 1997 20,192 19,562
- ---------------------------------------------------------------------------------------------------------------------------
Other investments 28,028 13,708
- ---------------------------------------------------------------------------------------------------------------------------
Other assets 28,825 28,513
- ---------------------------------------------------------------------------------------------------------------------------
$ 702,520 $ 501,968
===========================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
- ---------------------------------------------------------------------------------------------------------------------------
Liabilities
- ---------------------------------------------------------------------------------------------------------------------------
Short-term borrowings $ 41,807 $ 46,285
- ---------------------------------------------------------------------------------------------------------------------------
Payable to customers 74,536 55,656
- ---------------------------------------------------------------------------------------------------------------------------
Payable to brokers and dealers 13,643 14,626
- ---------------------------------------------------------------------------------------------------------------------------
Securities loaned 68,207 29,850
- ---------------------------------------------------------------------------------------------------------------------------
Securities sold under agreements to repurchase 135,232 67,151
- ---------------------------------------------------------------------------------------------------------------------------
Securities sold but not yet purchased 70,584 48,350
- ---------------------------------------------------------------------------------------------------------------------------
Accrued compensation 55,126 33,548
- ---------------------------------------------------------------------------------------------------------------------------
Accounts payable, accrued expenses and other liabilities 32,207 27,380
- ---------------------------------------------------------------------------------------------------------------------------
Long-term borrowings 20,000 25,000
- ---------------------------------------------------------------------------------------------------------------------------
511,342 347,846
- ---------------------------------------------------------------------------------------------------------------------------
Commitments and Contingencies
- ---------------------------------------------------------------------------------------------------------------------------
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;
- ---------------------------------------------------------------------------------------------------------------------------
(23,831,527 and 23,603,240 shares issued, respectively) 23,832 11,802
- ---------------------------------------------------------------------------------------------------------------------------
Additional paid-in capital 48,499 55,868
- ---------------------------------------------------------------------------------------------------------------------------
Retained earnings 147,727 115,189
- ---------------------------------------------------------------------------------------------------------------------------
220,058 182,859
- ---------------------------------------------------------------------------------------------------------------------------
Less treasury stock, at cost -
- ---------------------------------------------------------------------------------------------------------------------------
5,413,353 shares at March 27, 1998 and
- ---------------------------------------------------------------------------------------------------------------------------
5,569,872 shares at March 28, 1997 (28,880) (28,737)
- ---------------------------------------------------------------------------------------------------------------------------
191,178 154,122
- ---------------------------------------------------------------------------------------------------------------------------
$ 702,520 $ 501,968
===========================================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
-59-
<PAGE> 3
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Additional Retained Treasury
(In thousands, except share and per share amounts) Stock Paid-In Capital Earnings Stock
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT MARCH 31, 1995 $ 11,435 $ 48,342 $ 77,034 $(22,449)
- ---------------------------------------------------------------------------------------------------------------------------
Net income for the fiscal year 19,766
- ---------------------------------------------------------------------------------------------------------------------------
Purchase of 499,708 shares of treasury stock, at cost (4,196)
- ---------------------------------------------------------------------------------------------------------------------------
Issuance of 79,788 shares of treasury stock
- ---------------------------------------------------------------------------------------------------------------------------
to satisfy exercise of stock options 56 376
- ---------------------------------------------------------------------------------------------------------------------------
Issuance of 372,138 shares of common stock 186 3,265
- ---------------------------------------------------------------------------------------------------------------------------
Cash dividends, $.1675 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 353,606 shares of treasury stock, at cost (3,309)
- ---------------------------------------------------------------------------------------------------------------------------
Issuance of 166,724 shares of treasury stock
- ---------------------------------------------------------------------------------------------------------------------------
to satisfy exercise of stock options (134) 841
- ---------------------------------------------------------------------------------------------------------------------------
Issuance of 361,526 shares of common stock 181 4,339
- ---------------------------------------------------------------------------------------------------------------------------
Cash dividends, $.1831 per share (3,275)
===========================================================================================================================
BALANCE AT MARCH 28, 1997 11,802 55,868 115,189 (28,737)
- ---------------------------------------------------------------------------------------------------------------------------
Net income for the fiscal year 36,803
Purchase of 47,920 shares of treasury stock, at cost (1,203)
- ---------------------------------------------------------------------------------------------------------------------------
Issuance of 204,529 shares of treasury stock
- ---------------------------------------------------------------------------------------------------------------------------
to satisfy exercise of stock options (280) 1,060
- ---------------------------------------------------------------------------------------------------------------------------
Issuance of 228,287 shares of common stock 163 4,778
- ---------------------------------------------------------------------------------------------------------------------------
Issuance of common stock to satisfy 100% stock dividend 11,867 (11,867)
- ---------------------------------------------------------------------------------------------------------------------------
Cash dividends, $.2344 per share (4,265)
- ---------------------------------------------------------------------------------------------------------------------------
BALANCE AT MARCH 27, 1998 $ 23,832 $ 48,499 $ 147,727 $(28,880)
===========================================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
-60-
<PAGE> 4
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Fiscal Year Ended
- ---------------------------------------------------------------------------------------------------------------------------
March 27, March 28, March 29,
(In thousands) 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
- ---------------------------------------------------------------------------------------------------------------------------
Net Income $ 36,803 $ 24,656 $ 19,766
- ---------------------------------------------------------------------------------------------------------------------------
Adjustments to reconcile net income to net cash
- ---------------------------------------------------------------------------------------------------------------------------
provided by (used for) operating activities:
- ---------------------------------------------------------------------------------------------------------------------------
Depreciation and amortization 8,107 6,681 5,485
- ---------------------------------------------------------------------------------------------------------------------------
Loss on disposal of furniture and equipment 236 387 670
- ---------------------------------------------------------------------------------------------------------------------------
Deferred compensation 1,255 380 393
- ---------------------------------------------------------------------------------------------------------------------------
Deferred income taxes (494) (377) 68
- ---------------------------------------------------------------------------------------------------------------------------
Increase in receivable from customers (58,870) (3,633) (39,793)
- ---------------------------------------------------------------------------------------------------------------------------
(Increase) decrease in receivable from brokers
- ---------------------------------------------------------------------------------------------------------------------------
and dealers (14,195) 21,719 (40,938)
- ---------------------------------------------------------------------------------------------------------------------------
Increase in securities owned (95,804) (25,430) (7,018)
- ---------------------------------------------------------------------------------------------------------------------------
(Increase) decrease in other receivables 6,447 (24,229) (2,000)
- ---------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in payable to customers 18,880 (16,066) 36,342
- ---------------------------------------------------------------------------------------------------------------------------
Decrease in payable to brokers and dealers (983) (921) (5,239)
- ---------------------------------------------------------------------------------------------------------------------------
Increase in securities loaned 38,357 29,850
- ---------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in securities sold but not
- ---------------------------------------------------------------------------------------------------------------------------
yet purchased 22,234 19,134 (18,485)
- ---------------------------------------------------------------------------------------------------------------------------
Increase in accrued compensation 26,250 9,403 11,834
- ---------------------------------------------------------------------------------------------------------------------------
Increase in accounts payable, accrued expenses
- ---------------------------------------------------------------------------------------------------------------------------
and other liabilities 3,841 1,031 4,708
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) operating activities (7,936) 42,585 (34,207)
- ---------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
- ---------------------------------------------------------------------------------------------------------------------------
Purchase of furniture, equipment, and
- ---------------------------------------------------------------------------------------------------------------------------
leasehold improvements (8,328) (10,316) (9,993)
- ---------------------------------------------------------------------------------------------------------------------------
(Increase) decrease in other investments (14,320) (8,030) (2,595)
- ---------------------------------------------------------------------------------------------------------------------------
(Increase) decrease in other assets (463) 2,783 (2,946)
- ---------------------------------------------------------------------------------------------------------------------------
Net cash used for investing activities (23,111) (15,563) (15,534)
- ---------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
- ---------------------------------------------------------------------------------------------------------------------------
(Increase) decrease in securities purchased under
- ---------------------------------------------------------------------------------------------------------------------------
agreements to resell (17,931) 6,109 38,817
- ---------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in short-term borrowings (4,478) (30,739) 12,100
- ---------------------------------------------------------------------------------------------------------------------------
Increase in securities sold under agreements
- ---------------------------------------------------------------------------------------------------------------------------
to repurchase 68,081 16 15,106
- ---------------------------------------------------------------------------------------------------------------------------
Payments made on subordinated notes payable (5,000)
- ---------------------------------------------------------------------------------------------------------------------------
Cash dividends (4,265) (3,275) (2,992)
- ---------------------------------------------------------------------------------------------------------------------------
Purchase of treasury stock (1,203) (3,309) (4,196)
- ---------------------------------------------------------------------------------------------------------------------------
Proceeds from issuance of treasury stock 780 707 432
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) financing activities 35,984 (30,491) 59,267
- ---------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 4,937 (3,469) 9,526
- ---------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at beginning of fiscal year 8,907 12,376 2,850
- ---------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of fiscal year $ 13,844 $ 8,907 $ 12,376
===========================================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
-61-
<PAGE> 5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
The consolidated financial statements include the accounts of McDonald & Company
Investments, Inc., and its subsidiaries, collectively referred to as the
"Company." All significant intercompany accounts and transactions are eliminated
in consolidation.
The Company's fiscal year is the 52- or 53-week period ending on the last Friday
in March.
The Company, through its principal subsidiary, McDonald & Company Securities,
Inc. ("McDonald Securities"), is engaged in the business of a securities broker
and dealer, which is comprised of several classes of service, such as
underwriting and investment banking, principal and agency transactions, and
investment advisory services.
Substantially all of the Company's financial assets and liabilities are carried
at market value or at amounts which, because of the short-term nature of the
financial instruments, approximate current fair value. The market value of the
Company's long-term borrowings, estimated based on current interest rates, does
not differ significantly from the amount recorded at March 27, 1998.
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 Financial Accounting Standards
Board (the "FASB") issued Statement No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities" and Statement
No. 127, "Deferral of Certain Provisions of FAS No. 125." The Company adopted
the provisions of these statements as required during the fiscal year ended
March 27, 1998. The adoption of SFAS 125 and 127 did not have a material effect
on the Company's consolidated financial statements.
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.
For purposes of determining the pro forma impact under SFAS No. 123, the fair
value of stock options granted in 1998, 1997 and 1996 was estimated at the date
of grant using a Black-Scholes option pricing model. Options were granted under
the Company's 1995 Stock Option Plan for Non-Officer Directors in 1998, 1997 and
1996. The following weighted average assumptions were used in the option pricing
model for this plan: a risk-free interest rate of 5.6%, 6.8% and 6.8% for 1998,
1997 and 1996, respectively; an expected dividend yield of 2.0% and an expected
option life of seven years for all three years; and a volatility factor of .397,
.287 and .202 for 1998, 1997 and 1996, respectively. Options were granted under
the Company's 1995 Key Employees Stock Option Plan for 1998. The following
weighted average assumptions were used in the option pricing model for this
plan: a risk-free interest rate of 5.6%; an expected dividend yield of 2.0%; an
expected option life of seven years; and a volatility factor of .397.
The Company adopted SFAS 128, "Earnings Per Share," during the third quarter of
the fiscal year ended March 27, 1998. SFAS 128 requires the reporting of basic
and diluted earnings per share amounts. Basic earnings per share are based upon
the average number of common shares outstanding during
-62-
<PAGE> 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
the reporting period. Diluted earnings per share take into account the dilutive
effect, if any, of stock options and other dilutive potential common shares
outstanding during the period. The following reconciliation illustrates the
computation of basic and diluted earnings per share as prescribed under SFAS
128:
<TABLE>
<CAPTION>
(In thousands, March 27, March 28, March 29,
except per share amounts) 1998 1997 1996
- ---------------------------------------------------------------
<S> <C> <C> <C>
Net earnings $ 36,803 $ 24,656 $ 19,766
===============================================================
Weighted average common
- ---------------------------------------------------------------
shares outstanding 18,219 17,910 17,860
- ---------------------------------------------------------------
Dilutive effect of
- ---------------------------------------------------------------
stock options 254 316 284
- ---------------------------------------------------------------
18,473 18,226 18,144
===============================================================
Basic earnings per share $ 2.02 $ 1.38 $ 1.11
===============================================================
Diluted earnings per share $ 1.99 $ 1.36 $ 1.09
===============================================================
</TABLE>
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 27, March 28,
(In thousands) 1998 1997
- --------------------------------------------------------------
<S> <C> <C>
Securities owned
- --------------------------------------------------------------
Mortgage-backed securities $ 96,624 $ 38,698
- --------------------------------------------------------------
Corporate obligations 68,436 45,804
- --------------------------------------------------------------
State and municipal obligations 23,254 26,665
- --------------------------------------------------------------
Corporate stocks 17,437 13,733
- --------------------------------------------------------------
U.S. government obligations 12,502 2,666
- --------------------------------------------------------------
Other 5,183 66
- --------------------------------------------------------------
$ 223,436 $ 127,632
==============================================================
Securities sold but not yet purchased
- --------------------------------------------------------------
U.S. government obligations $ 50,084 $ 43,358
- --------------------------------------------------------------
Mortgage-backed securities 12,235
- --------------------------------------------------------------
Corporate stocks 6,518 4,664
- --------------------------------------------------------------
Other 1,747 328
- --------------------------------------------------------------
$ 70,584 $ 48,350
==============================================================
</TABLE>
NOTE C - SHORT-TERM BORROWINGS
Short-term borrowings include the following:
<TABLE>
<CAPTION>
March 27, March 28,
(In thousands) 1998 1997
- ------------------------------------------------------------
<S> <C> <C>
Secured bank loans $ 2,130 $ 817
- ------------------------------------------------------------
Unsecured bank loans 39,677 45,468
- ------------------------------------------------------------
$ 41,807 $ 46,285
============================================================
</TABLE>
Short-term borrowings are bank loans payable on demand at rates ranging from
6.0% to 8.5% at March 27, 1998. The secured loans were collateralized by
customer-owned securities with a market value of $12,408,000 at March 27, 1998.
At March 28, 1997, the secured loans were collateralized by customer-owned
securities with a market value of $1,288,000. For the fiscal years ended March
27, 1998 and March 28, 1997, the weighted average interest rate on short-term
borrowings was 6.12% and 6.0%, respectively.
The Company had total lines of credit of $330,000,000 at March 27, 1998, under
which a maximum of $170,000,000 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 5.20% to 5.79% and are collateralized by firm-owned securities with a
market value of $136,247,000 at March 27, 1998. For the fiscal years ended March
27, 1998 and March 28, 1997, the weighted average interest rate on repurchase
agreements was 5.76% and 5.86%, respectively.
NOTE D - LONG-TERM BORROWINGS
McDonald Securities has outstanding $20,000,000 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 G).
Total interest paid was $11,873,000 for the fiscal year ended March 27, 1998,
$10,038,000 for the fiscal year ended March 28, 1997, and $7,694,000 for the
fiscal year ended March 29, 1996.
NOTE E - INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
Fiscal Year Ended
- -------------------------------------------------------------
March 27, March 28, March 29,
(In thousands) 1998 1997 1996
- -------------------------------------------------------------
<S> <C> <C> <C>
Federal
- -------------------------------------------------------------
Current $ 19,068 $ 13,411 $ 10,582
- -------------------------------------------------------------
Deferred 32 (377) 68
- -------------------------------------------------------------
19,100 13,034 10,650
- -------------------------------------------------------------
State and Local 900 566 350
- -------------------------------------------------------------
$ 20,000 $ 13,600 $ 11,000
=============================================================
</TABLE>
The provision for income taxes differs from the amount computed using the
federal statutory rates of 35% for the fiscal years ended March 27, 1998, March
28, 1997, and March 29, 1996, as a result of the following:
<TABLE>
<CAPTION>
Fiscal Year Ended
- -------------------------------------------------------------
March 27, March 28, March 29,
(In thousands) 1998 1997 1996
- -------------------------------------------------------------
<S> <C> <C> <C>
Expected tax provision
- -------------------------------------------------------------
at statutory rate $ 19,881 $ 13,389 $ 10,768
- -------------------------------------------------------------
Effects of non-taxable
- -------------------------------------------------------------
interest income (699) (322) (500)
- -------------------------------------------------------------
Non-deductible
- -------------------------------------------------------------
interest expense 223 136 152
- -------------------------------------------------------------
Non-deductible business
- -------------------------------------------------------------
meals and entertainment 493 442 389
- -------------------------------------------------------------
Other - net 102 (45) 191
- -------------------------------------------------------------
$ 20,000 $ 13,600 $11,000
=============================================================
</TABLE>
-63-
<PAGE> 7
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 27, March 28, March 29,
(In thousands) 1998 1997 1996
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
DEFERRED TAX ASSETS:
- -----------------------------------------------------------------------------------
Litigation and other reserves $5,494 $4,969 $4,803
- -----------------------------------------------------------------------------------
Accrued compensation 2,281 1,562 963
- -----------------------------------------------------------------------------------
Leasehold improvements 494 416 343
- -----------------------------------------------------------------------------------
Accrued state and city taxes 259 318 302
- -----------------------------------------------------------------------------------
Other 167 26 84
- -----------------------------------------------------------------------------------
Total deferred tax assets 8,695 7,291 6,495
- -----------------------------------------------------------------------------------
DEFERRED TAX LIABILITIES:
- -----------------------------------------------------------------------------------
Other investments 1,187 637 305
- -----------------------------------------------------------------------------------
Furniture and equipment 903 828 694
- -----------------------------------------------------------------------------------
Deferred investment
- -----------------------------------------------------------------------------------
tax credits 815 102 102
- -----------------------------------------------------------------------------------
Other 194 96 143
- -----------------------------------------------------------------------------------
Total deferred tax liabilities 3,099 1,663 1,244
- -----------------------------------------------------------------------------------
Net deferred tax assets $5,596 $5,628 $5,251
===================================================================================
</TABLE>
Total income taxes paid were $19,057,000 for the fiscal year ended March 27,
1998, $14,147,000 for the fiscal year ended March 28, 1997, and $9,426,000 for
the fiscal year ended March 29, 1996.
NOTE F - 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 $1,479,000 at March
27, 1998. The agreements expire in June 1998 and September 1998 and the Company
pays fees at 1% per annum.
The Company is a defendant in various lawsuits incidental
to its securities business. In view of the number and diversity of claims
against the Company and the inherent difficulty of predicting the outcome of
litigation and other claims, the Company cannot state with certainty what the
eventual outcome of pending litigation or other claims will be. The Company
provides for costs relating to these matters when a loss is probable and the
amount can be reasonably estimated. The effect of the outcome of these matters
on the Company's future results of operations cannot be predicted because any
such effect depends on future results of operations and the amount and timing of
the resolution of such matters. While it is not possible to predict with
certainty, management believes that the ultimate resolution of such matters will
not have a material adverse effect on the consolidated financial position,
liquidity or results of operations of the Company.
Aggregate commitments under operating leases for office space and equipment in
effect as of March 27, 1998, with initial or remaining noncancellable lease
terms in excess of one year are approximately $68,544,000 payable as follows:
1999-$9,373,000; 2000-$8,884,000; 2001-$7,821,000; 2002-$6,941,000;
2003-$6,210,000, and thereafter- $29,314,000. Certain of these leases have
escalation clauses, based on certain increases in costs incurred by the lessor,
and renewal options. Rental expense amounted to $9,394,000 for the fiscal year
ended March 27, 1998, $7,854,000 for the fiscal year ended March 28, 1997, and
$6,744,000 for the fiscal year ended March 29, 1996.
NOTE G - 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 27,
1998, McDonald Securities' net capital under the Rule was $86,641,000, or 32% of
aggregate debit balances, and $81,219,000 in excess of the minimum required net
capital.
NOTE H - 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 operation, related to its NASDAQ
trading activities.
As a securities broker and dealer, a substantial portion of the Company's
transactions are collateralized. The Company's exposure to credit risk
associated with the nonperformance in fulfilling contractual obligations
pursuant to securities transactions can be directly impacted by volatile trading
markets, which may impair the customers' or contra parties' ability to satisfy
their obligations to the Company. Where considered necessary, the Company
requires a deposit of additional collateral, or a reduction of securities
positions.
-64-
<PAGE> 8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In the normal course of business, the Company enters into underwriting and
forward commitments. At March 27, 1998, the Company's commitments included
forward purchase and sale contracts involving mortgage-backed securities with
market values of approximately $60 million and $40 million, respectively, and
collateralized mortgage obligations with market values of approximately $379
million and $345 million, respectively. 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. 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 $30,936,000 at March 27, 1998, and
$25,390,000 at March 28, 1997.
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 $4,026,000, $5,270,000, and
$6,180,000, respectively, for the fiscal years ended March 27, 1998, March 28,
1997, and March 29, 1996.
NOTE I - 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 $2,400,000 for the fiscal year ended March 27, 1998, $2,100,000 for the
fiscal year ended March 28, 1997, and $2,000,000 for the fiscal year ended March
29, 1996.
NOTE J - STOCK OPTION AND RESTRICTED STOCK PLANS
The Company had authorized 1,440,000 shares of Common Stock for issuance
pursuant to the Company's Stock Option Plan for employees, which terminated on
June 6, 1993. An additional 57,600 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 1,000,000 shares of common stock for issuance under the
1995 Key Employees Stock Option Plan. The Company also authorized 100,000 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 27, 1998, March 28, 1997, and March 29, 1996, was as follows:
-65-
<PAGE> 9
<TABLE>
<CAPTION>
1990 Stock Option Plan 1995 Stock Option Plan 1995 Key Employees
Stock Option Plan for Outside Directors for Non-Officer Directors Stock Option Plan
- ----------------------------------------------------------------------------------------------------------------------------------
Weighted Weighted Weighted Weighted
Number of Average Number of Average Number of Average Number of Average
Options Exercise Price Options Exercise Price Options Exercise Price Options Exercise Price
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Outstanding at March 31, 1995 613,548 $ 4.34 38,400 $ 3.54
- ---------------------------------------------------------------------------------------------------------------------------------
Granted during fiscal 1996 10,000 $ 9.20
- ---------------------------------------------------------------------------------------------------------------------------------
Exercised (74,028) $ 3.57 (5,760) $ 4.85
- ---------------------------------------------------------------------------------------------------------------------------------
Canceled (2,400) $ 3.66 (3,840) $ 4.85
- ---------------------------------------------------------------------------------------------------------------------------------
Outstanding at March 29, 1996 537,120 $ 4.44 28,800 $ 3.11 10,000 $ 9.20
- ---------------------------------------------------------------------------------------------------------------------------------
Granted during fiscal 1997 12,000 $ 11.31
- ---------------------------------------------------------------------------------------------------------------------------------
Exercised (166,724) $ 3.93
- ---------------------------------------------------------------------------------------------------------------------------------
Canceled (18,480) $ 6.30
- ---------------------------------------------------------------------------------------------------------------------------------
Outstanding at March 28, 1997 351,916 $ 4.59 28,800 $ 3.11 22,000 $ 10.36
- ---------------------------------------------------------------------------------------------------------------------------------
Granted during fiscal 1998 12,000 $ 17.88 204,750 $ 23.86
- ---------------------------------------------------------------------------------------------------------------------------------
Exercised (198,029) $ 3.66 (2,500) $ 4.42 (4,000) $ 9.44
- ---------------------------------------------------------------------------------------------------------------------------------
Canceled
- ---------------------------------------------------------------------------------------------------------------------------------
Outstanding at March 27, 1998 153,887 $ 5.75 26,300 $ 2.99 30,000 $ 13.48 204,750 $ 23.86
- --------------------------------=======------------------======-------------------======------------------=======----------------
Options outstanding
- ---------------------------------------------------------------------------------------------------------------------------------
at March 27, 1998:
- ---------------------------------------------------------------------------------------------------------------------------------
Exercisable 128,823 $ 5.53 26,300 $ 2.99 18,000 $ 10.55
- ---------------------------------------------------------------------------------------------------------------------------------
Available for future grant 66,000 795,250
- ---------------------------------------------------------------------------------------------------------------------------------
Weighted average
remaining contractual
- ---------------------------------------------------------------------------------------------------------------------------------
life (years) 4.3 2.9 7.8 9.8
- ---------------------------------------------------------------------------------------------------------------------------------
Range of exercise price
- ---------------------------------------------------------------------------------------------------------------------------------
per share for options $ 1.82 - $ 6.35 $ 2.45 - $ 4.43 $ 8.88 - $ 18.81 $ 20.48 - $ 24.13
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The options under the Company's Stock Option Plan, the 1990 Stock Option Plan
for Outside Directors, and the 1995 Key Employees Stock Option Plan 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 4,000,000 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 228,287, 361,526, and 372,138
shares of common stock, respectively, for the fiscal years ended March 27, 1998,
March 28, 1997, and March 29, 1996 in connection with the Bonus Plan.
NOTE K - STOCK DIVIDEND
On July 30, 1997, the Company declared a 100% stock dividend payable September
15, 1997 to stockholders of record as of August 25, 1997. All share and per
share information has been restated to reflect the effect of the stock dividend
as if it had occurred at the beginning of each period presented.
-66-
<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 27, 1998
and March 28, 1997, 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 27, 1998. 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 27,
1998 and March 28, 1997, and the consolidated results of their operations and
their cash flows for each of the three fiscal years in the period ended March
27, 1998, in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Cleveland, Ohio
May 5, 1998
- --------------------------------------------------------------------------------
-67-
<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.
-68-
<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.
-69-
<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, Registration
Statement (Form S-8 Number 33-65489) pertaining to the McDonald & Company
Investments, Inc. 1995 Key Employees Stock Option Plan, and Registration
Statement (Form S-8 Number 33-34889) pertaining to the 1995 Stock Option Plan
for Non-Officer Directors, of our report dated May 5, 1998, 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,
1998.
/s/ Ernst & Young LLP
Cleveland, Ohio
June 19, 1998
-70-
<TABLE> <S> <C>
<ARTICLE> BD
<LEGEND>
THIS SCHEDULE CONTAINS FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
STATEMENT OF FINANCIAL CONDITION - MAR-27-1998 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-27-1998
<PERIOD-START> MAR-29-1997
<PERIOD-END> MAR-27-1998
<CASH> 13,844
<RECEIVABLES> 290,171
<SECURITIES-RESALE> 61,874
<SECURITIES-BORROWED> 0
<INSTRUMENTS-OWNED> 223,436
<PP&E> 20,192
<TOTAL-ASSETS> 702,520
<SHORT-TERM> 41,807
<PAYABLES> 156,386
<REPOS-SOLD> 135,232
<SECURITIES-LOANED> 0
<INSTRUMENTS-SOLD> 70,584
<LONG-TERM> 20,000
0
0
<COMMON> 23,832
<OTHER-SE> 167,346
<TOTAL-LIABILITY-AND-EQUITY> 702,520
<TRADING-REVENUE> 60,771
<INTEREST-DIVIDENDS> 26,602
<COMMISSIONS> 100,273
<INVESTMENT-BANKING-REVENUES> 103,410
<FEE-REVENUE> 33,959
<INTEREST-EXPENSE> 12,161
<COMPENSATION> 194,264
<INCOME-PRETAX> 56,803
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 36,803
<EPS-PRIMARY> 2.02
<EPS-DILUTED> 1.99
</TABLE>
