Document/Exhibit Description Pages Size
1: 10-Q McDonald & Company Investments, Inc. 10-Q 15 83K
2: EX-11.1 Statement re: Computation of Earnings Per Share 1 8K
3: EX-27.1 Financial Data Schedule (Pre-XBRL) 1 7K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 25, 1998
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OR
[___] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 1-8526
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McDonald & Company Investments, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 34-1391950
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
McDonald Investment Center, 800 Superior Avenue, Cleveland, Ohio 44114-2603
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area
code (216) 443-2300
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Not Applicable
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Former name, former address and former fiscal year, if changed since last report
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [X]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 18,662,635 of Common Stock, par
value $1.00 per share, were outstanding on October 16, 1998.
(1)
McDONALD & COMPANY INVESTMENTS, INC.
INDEX
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Page
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PART I - FINANCIAL INFORMATION
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Item 1. Financial Statements -
Consolidated statements of financial condition (unaudited) -
September 25, 1998 and March 27, 1998 ..................... 3
Consolidated statements of income (unaudited) -
Fiscal six months ended September 25, 1998
and September 26, 1997 .................................... 4
Consolidated statements of cash flows (unaudited) Fiscal three and six
months ended September 25, 1998 and
September 26, 1997 ........................................ 5
Notes to consolidated financial statements (unaudited) -
September 25, 1998 ........................................ 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operation ............................................ 7
PART II - OTHER INFORMATION
---------------------------
Item 1. Legal Proceedings .......................................... 11
Item 4. Submission of Matters to a Vote of Security Holders ........ 11
Item 5. Other Information .......................................... 12
Item 6. Exhibits and Reports on Form 8-K ........................... 13
SIGNATURES .................................................................... 14
EXHIBIT INDEX ................................................................. 15
(2)
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MCDONALD & COMPANY INVESTMENTS, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (UNAUDITED)
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(In thousands, except for share amount)
September 25, 1998 March 27, 1998
---------------------- -------------------
ASSETS
Cash and cash equivalents $ 11,546 $ 13,844
Receivable from customers 280,136 238,476
Receivable from brokers and dealers 38,584 51,695
Securities purchased under agreements
to resell 86,096 61,874
Securities owned 145,665 223,436
Other receivables 42,987 36,150
Furniture, equipment and leasehold
improvements, at cost, less accumulated
depreciation and amortization 21,035 20,192
Other investments 27,803 28,028
Other assets 50,087 28,825
---------------------- -------------------
$ 703,939 $ 702,520
====================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Short-term borrowings $ 53,226 $ 41,807
Payable to customers 57,749 74,536
Payable to brokers and dealers 14,473 13,643
Securities loaned 105,985 68,207
Securities sold under agreements to repurchase 108,592 135,232
Securities sold but not yet purchased 55,117 70,584
Accrued compensation 40,229 55,126
Accounts payable, accrued expenses and
other liabilities 39,652 32,207
Long-term borrowings 20,000 20,000
---------------------- -------------------
$ 495,023 $ 511,342
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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
(24,053,330 and 23,831,527 shares
issued respectively) $ 24,053 $ 23,832
Additional paid-in capital 54,892 48,499
Retained earnings 158,730 147,727
Less treasury stock, at cost (5,390,695 and
5,413,353 shares, respectively) (28,759) (28,880)
---------------------- -------------------
208,916 191,178
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$ 703,939 $ 702,520
====================== ===================
See Notes to consolidated financial statements (unaudited).
(3)
MCDONALD & COMPANY INVESTMENTS, INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
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Fiscal Three Months Ended Fiscal Six Months Ended
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September 25, September 26, September 25, September 26,
1998 1997 1998 1997
(13 weeks) (13 weeks) (26 weeks) (26 weeks)
---------------- ----------------- ---------------- -----------------
(In thousands, except for share and per share amounts)
Revenues:
Underwriting and investment banking $ 29,934 $ 18,363 $ 47,678 $ 28,835
Principal transactions 9,894 13,784 22,431 30,727
Commissions 28,506 25,432 55,674 47,571
Investment management fees 10,910 8,330 21,690 15,794
Interest and dividends 9,920 5,905 18,748 11,586
Other 811 1,756 2,746 3,619
---------------- ----------------- ---------------- -----------------
$ 89,975 $ 73,570 $ 168,967 $ 138,132
---------------- ----------------- ---------------- -----------------
Expenses:
Employee compensation and benefits $ 53,956 $ 42,879 $ 99,652 $ 80,009
Interest 4,764 2,575 9,091 4,997
Communications 4,085 4,175 8,547 7,777
Occupancy and equipment 6,294 5,441 12,301 10,462
Promotion and development 3,079 2,621 6,137 5,149
Floor brokerage and clearance 859 745 1,647 1,423
Taxes, other than income taxes 2,423 2,162 4,775 4,296
Other operating expenses 3,073 2,385 5,635 4,511
---------------- ----------------- ---------------- -----------------
$ 78,533 $ 62,983 $ 147,785 $ 118,624
---------------- ----------------- ---------------- -----------------
Income before income taxes $ 11,442 $ 10,587 $ 21,182 $ 19,508
Provision for income taxes 4,450 3,680 7,860 6,980
---------------- ----------------- ---------------- -----------------
Net income $ 6,992 $ 6,907 $ 13,322 $ 12,528
================ ================= ================ =================
Basic net income per share $ .37 $ .38 $ .71 $ .69
================ ================= ================ =================
Diluted net income per share $ .37 $ .37 $ .71 $ .68
================ ================= ================ =================
Dividends paid per share $ .0625 $ .0625 $ .1250 $ .1094
================ ================= ================ =================
Average number of shares
outstanding 18,663,000 18,197,000 18,587,000 18,138,000
================ ================= ================ =================
See Notes to consolidated financial statements (unaudited).
(4)
MCDONALD & COMPANY INVESTMENTS, INC.
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CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
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(In thousands)
[Enlarge/Download Table]
Fiscal Six Months Ended
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Sept. 25, 1998 Sept. 26, 1997
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OPERATING ACTIVITIES:
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Net Income $ 13,322 $ 12,528
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 4,911 3,935
Deferred compensation 5,261 1,146
Deferred income taxes (2,450) (491)
(Increase) in receivable from customers (41,660) (21,015)
(Increase) decrease in receivable from brokers and dealers 13,111 (19,108)
Decrease in securities owned 77,771 12,709
(Increase) decrease in other receivables (6,837) 8,838
Increase (decrease) in payable to customers (16,787) 13,359
Increase (decrease) in payable to brokers and dealers 830 (1,963)
Increase in securities loaned 37,778 8,344
Increase (decrease) in securities sold but not yet purchased (15,467) 145
Decrease in accrued compensation (8,388) (1,657)
Increase in accounts payable, accrued expenses and other 2,344 3,422
----------------- -----------------
Net cash provided by operating activities $ 63,739 $ 20,192
================= =================
INVESTING ACTIVITIES:
---------------------
Purchase of furniture, equipment and leaseholds $ (5,400) $ (3,016)
Increase in other investments 225 (5,175)
Decrease in other assets (19,166) 2,412
----------------- -----------------
Net cash used for investing activities $ (24,341) $ (5,779)
================= =================
FINANCING ACTIVITIES:
---------------------
(Increase) decrease in securities purchased under agreement to resell $ (24,222) $ 9,507
Increase in short-term borrowings 11,419 14,605
Decrease in securities sold under agreements to repurchase (26,640) (19,706)
Cash dividends (2,319) (1,982)
Proceeds from issuance of treasury stock 66 185
----------------- -----------------
Net cash provided by (used for) financing activities $ (41,696) $ 2,609
----------------- -----------------
Increase (decrease) in cash and cash equivalents (2,298) 17,022
Cash and cash equivalents at beginning of period 13,844 8,907
----------------- -----------------
Cash and cash equivalents at end of period $ 11,546 $ 25,929
================= =================
See Notes to consolidated financial statements (unaudited).
(5)
McDONALD & COMPANY INVESTMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
September 25, 1998
NOTE A - BASIS OF PRESENTATION
------------------------------
The consolidated financial statements include the accounts of McDonald & Company
Investments, Inc. and its subsidiaries, collectively referred to as the
"Company". All significant intercompany accounts and transactions are eliminated
in consolidation.
The accompanying unaudited consolidated financial statements do not include all
of the information and notes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments, consisting only of normal and recurring adjustments, considered
necessary for a fair presentation of the financial condition and results of
operations for the periods presented have been included.
NOTE B - LONG-TERM BORROWINGS
-----------------------------
McDonald & Company Securities, Inc. ("McDonald Securities") has outstanding
$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 of McDonald
Securities. The principal amount of the notes has been approved by the New York
Stock Exchange, Inc. for inclusion in the regulatory capital of McDonald
Securities.
NOTE C - NET INCOME PER SHARE
-----------------------------
In February 1997, the Financial Accounting Standards Board issued Statement No.
128, Earnings per Share "Statement 128", which was required to be adopted on
December 15, 1997. Under Statement 128, the Company is required to change the
method used to compute earnings per share and to restate all prior periods
presented. The impact of Statement 128 on the calculation of earnings per share
was not material.
Net income per share is based on the average number of shares outstanding during
the periods. On July 30, 1997, the Company declared a 100% stock dividend, which
was distributed on September 15, 1997, to stockholders of record on August 25,
1997. Share and per share information have been restated to reflect the effect
of the stock dividend as if it had occurred at the beginning of the fiscal six
months ended September 26, 1997.
NOTE D - CONTINGENCIES
----------------------
As is the case with many firms in the securities industry, McDonald Securities
is a defendant or co-defendant in a number of lawsuits alleging damages, which
are ordinary and routine litigation, incidental to the securities and investment
banking business. The Company is contesting the allegations of the complaints in
these cases and believes that there are meritorious defenses in each of these
lawsuits. Some of the proceedings relate to public underwritings of securities
in which McDonald Securities participated as a member of the underwriting
syndicate. The Company is also aware of litigation against certain underwriters
of offerings in which McDonald Securities was a participant, but where McDonald
Securities is not now a defendant. In these latter cases, it is possible that
McDonald Securities may be called upon to contribute to settlements or
judgments.
NOTE E - MERGERS AND ACQUISITIONS
---------------------------------
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. The closing
of the merger of the Company with and into KeyCorp will occur after the close of
trading on Friday, October 23, 1998. At the closing, each outstanding share of
the Company's common stock will be converted into the right to receive 1.06
KeyCorp common shares. The merger has been approved by the Company's Board of
Directors and stockholders.
On September 4, 1998, the Company completed the acquisition of Essex Capital
Markets, Inc. (Essex) for a purchase price of $12,700,000. The financial
operations of Essex are not material to the Company.
(6)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
---------------------------------------------------------------
RESULTS OF OPERATIONS
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BUSINESS ENVIRONMENT
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McDonald & Company Investments, Inc. (the "Company") operates a full-service
regional investment banking, investment advisory and brokerage business through
its principal subsidiary, McDonald & Company Securities, Inc. ("McDonald
Securities"). The Company is involved in the origination, underwriting,
distribution, trading and brokerage of fixed income and equity securities, and
provides investment advisory services.
The profitability of the Company is sensitive to many factors, including the
level of securities trading volume and the volatility and general level of
market prices. Many of its activities have high operating costs that do not
decrease with reduced levels of activity. Sustained periods of reduced volume,
or loss of clients, could have adverse effects upon profitability.
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. The closing
of the merger of the Company with and into KeyCorp will occur after the close of
trading on Friday, October 23, 1998. At the closing, each outstanding share of
the Company's common stock will be converted into the right to receive 1.06
KeyCorp common shares. Each holder of Company common stock who would otherwise
be entitled to a fractional interest in a KeyCorp common share will receive cash
in lieu thereof. Holders of record of shares of Company common stock immediately
prior to the closing will receive transmittal materials after the closing for
use in exchanging their certificates that formerly represented shares of Company
common stock. Harris Trust Company of New York will act as exchange agent for
exchange of the Company common stock converted in the merger. Additional
information regarding the merger can be found in the definitive Proxy
Statement-Prospectus filed by KeyCorp as part of its Registration Statement on
Form S-4 on August 12, 1998, and Proxy Statement Supplement filed by the Company
on September 3, 1998, as well as in press releases filed as exhibits 99.1 to the
following Forms 8-K filed by the Company: (1) Form 8-K dated June 15, 1998; (2)
Form 8-K/A dated June 16, 1998; (3) Form 8-K dated September 15, 1998; and (4)
Form 8-K dated October 21, 1998.
On September 4, 1998, the Company completed the acquisition of Essex Capital
Markets, Inc., "Essex" a privately held, regional investment firm with five
offices. Essex has 55 brokers and will operate as a division of the Company.
The Company has formulated a comprehensive strategic plan that is periodically
reviewed and revised. The plan emphasizes the Company's historical roots as a
regional brokerage and investment banking firm. The Company has focused on the
Ohio, Michigan and Indiana markets by increasing the number of sales
representatives covering individual investors, as well as increasing investment
banking activities in this region. The Company's institutional equity and
institutional fixed income divisions cover accounts throughout the United States
and internationally.
The Company is evaluating Year 2000 compliance issues, including exposure
related to vendors, software, and other systems to determine whether internal
and external concerns are addressed. The Company has established a committee to
oversee this evaluation and implementation, which 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 there can be no guarantee that Year 2000
problems will not be encountered, some of which could potentially have a
material adverse effect on the Company's business activities and, accordingly,
its results of operations, financial condition and cash flows.
(7)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
---------------------------------------------------------------
RESULTS OF OPERATIONS (continued)
---------------------------------
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 86% of the Company's assets at
September 25, 1998. These assets are financed by a number of sources, including
payables to customers and brokers, short-term borrowings, securities loaned,
securities sold under agreements to repurchase, long-term borrowings, and equity
capital.
At September 25, 1998, McDonald Securities had 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 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 $315,000,000, of which $269,113,000 was unused at September
25, 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 continuing commitments to customers. Net capital, as
defined, changes from day to day. At September 25, 1998, McDonald Securities was
in compliance with the Uniform Net Capital Rules and had net capital of
$81,129,000, which was $66,199,000 in excess of the minimum required.
FISCAL THREE AND SIX MONTH PERIODS ENDED SEPTEMBER 25, 1998 AND SEPTEMBER 26,
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1997
----
Total revenues for the fiscal quarter ended September 25, 1998 were $89,975,000,
an increase of $16,405,000, or 23%, from revenues of $73,570,000 for the fiscal
quarter ended September 26, 1997.
For the fiscal six months ended September 25, 1998, total revenues were
$168,967,000 compared to $138,132,000 for the first six months of fiscal 1998,
an increase of $30,835,000, or 22%.
Net income for the fiscal quarter ended September 25, 1998 was $6,992,000, or
$.37 per share, compared with net income of $6,907,000, or $.38 per share, for
the fiscal quarter ended September 26, 1997, which represents an increase in net
income of 1%.
For the fiscal six months ended September 25, 1998, net income was $13,322,000,
or $.71 per share, compared to $12,528,000, or $.69 per share for the fiscal six
months ended September 26, 1997, an increase of $794,000, or 6%.
The average number of basic shares outstanding was 18,663,000 and 18,587,000 for
the fiscal three and six months ended September 25, 1998, respectively, compared
to 18,197,000 and 18,138,000 for the fiscal three and six months ended September
26, 1997, respectively.
On July 30, 1997, the Company declared a 100% stock dividend, which was
distributed on September 15, 1997, to stockholders of record on August 25, 1997.
For the fiscal three and six months ended September 26, 1997, share and per
share information have been restated to reflect the effect of the stock dividend
as if it had occurred at the beginning of the periods.
(8)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
---------------------------------------------------------------
RESULTS OF OPERATIONS (continued)
FISCAL THREE AND SIX MONTH PERIODS ENDED SEPTEMBER 25, 1998 AND SEPTEMBER 26,
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1997 (cont.)
------------
Revenues from underwriting and investment banking increased $11,571,000, or 63%,
for the quarter and increased $18,843,000, or 65%, for the six months ended
September 25, 1998 when compared to the same periods in the prior fiscal year.
Revenues from corporate underwriting and investment banking increased
$11,666,000, or 66%, for the second quarter and increased $18,954,000, or 69%,
for the six month period. The increase for the quarter is due primarily to
increased revenues from private placements of $7,464,000, or 1,723%, and merger
and other fees of $7,950,000, or 153%. The increase for the six month period is
due primarily to an increase in private placement fees of $8,513,000, or 4,092%,
and merger and other fees of $13,298,000, or 172%. However, revenues from public
offerings of equity and debt securities decreased $4,688,000, or 46%, for the
three months and $5,457,000, or 34%, for the six months. The decreases in
revenues from public offerings was due to adverse market conditions for such
issuances.
Revenues from underwriting and investment banking activities are highly
dependent on general market conditions for such business activities. Market
conditions for underwriting and investment banking services can be affected by
political and economic events both in the United States and abroad. To the
extent future events are unpredictable, uncertainty will be a factor in the
level of McDonald Securities' business activity. Also, competitive pressure from
other investment banking firms can and will have an effect on the success of
McDonald Securities in obtaining such business and on the prices that can be
charged for investment banking and underwriting services. The Management of
McDonald Securities believes it can compete effectively in this segment of its
business activities.
Revenues from principal transactions decreased $3,890,000, or 28%, for the
second quarter of fiscal 1999 and decreased $8,296,000, or 27%, for the fiscal
six months when compared to the same periods in the prior fiscal year. Revenues
from principal transactions in equity securities decreased $3,460,000, or 58%,
and $6,388,000, or 47%, for the fiscal three and six month periods, reflecting
the decline in equity markets. Revenues from trading taxable fixed income
securities decreased $788,000, or 14%, and $2,060,000, or 17%, for the fiscal
three and six month periods, reflecting an adverse market for taxable fixed
income products. These declines were partially offset by an increase in revenues
from trading municipal bonds of $358,000, or 17%, for the quarter and $152,000,
or 3%, for the six month period.
Commissions revenue increased $3,074,000, or 12%, in the current quarter and
$8,103,000, or 17%, in the first six months when compared to the same periods in
fiscal 1998. Commission revenue from transactions in equity securities increased
$2,046,000, or 13%, and $4,927,000, or 17%, for the quarter and six month
period, respectively, primarily due to the growth in the Company's sales force
and the continued high levels of transactions. Commission revenues from
non-proprietary mutual funds increased $432,000, or 8%, and $2,087,000, or 20%,
for the quarter and six month period, respectively. Commission revenue from
proprietary mutual funds increased $331,000, or 16%, and $784,000, or 20%, for
the three and six month periods. The increase in commission revenue for both
non-proprietary and proprietary mutual funds is due to the continued popularity
of mutual fund investments with individual investors. Commission revenue from
annuity and life insurance products increased $265,000, or 14%, for the quarter
and $305,000, or 9%, for the six months primarily due to increased marketing
efforts for the sale of these products.
Revenues from investment management fees include advisory fees from the
Company's mutual funds and money market funds and investment management fees
earned related to individually managed accounts. Revenues from investment
management fees increased $2,580,000, or 31%, and $5,896,000, or 37%, for the
fiscal quarter and six month periods ended September 25, 1998 when compared to
the same periods in the prior fiscal year. Of these amounts, revenues from
advisory fees related to individually managed accounts represented $2,229,000,
or 86%, and $4,941,000, or 84%, respectively, of the total increase for the
fiscal three and six month period.
Other income decreased $945,000, or 54%, and $873,000, or 24%, for the fiscal
three and six month periods, respectively, ended September 25, 1998. The
decrease is a result of decreased income from proprietary investments.
(9)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
---------------------------------------------------------------
RESULTS OF OPERATIONS (continued)
---------------------------------
FISCAL THREE AND SIX MONTH PERIODS ENDED SEPTEMBER 25, 1998 AND SEPTEMBER 26,
-----------------------------------------------------------------------------
1997 (cont.)
------------
Interest and dividend income increased $4,015,000, or 68%, and $7,162,000, or
62%, for the fiscal three and six month periods ended September 25, 1998,
respectively, when compared to the same periods in the prior fiscal year. The
increase was due primarily to a higher level of customer margin loans and an
increase in net inventory levels in the current periods when compared to the
same periods in the prior fiscal year.
Operating expenses (total expenses before interest) increased $13,361,000, or
22%, and $25,067,000, or 22%, for the three and six month periods ended
September 25, 1998, respectively, when compared to the same periods in the prior
fiscal year.
Employee compensation and benefits increased $11,077,000, or 26%, for the second
quarter and $19,643,000, or 25%, for the first six months. Commission and other
sales compensation expense increased $2,198,000, or 10%, for the quarter, and
$6,970,000, or 16%, for the first six months, primarily because of increased
revenues from commissions and changes in the business mix which affect sales
compensation. Other clerical and administrative expenses increased $3,334,000,
or 27%, for the quarter and $5,827,000, or 24%, for the six month period. The
increase in other clerical and administrative expenses represents compensation
and employee benefit costs related to an increase in the professional and
support staff in the current periods when compared to the same periods in the
prior fiscal year. The remaining increase in employee compensation and benefits
of $5,545,000, or 72%, for the second quarter and $6,846,000, or 53%, for the
first six months represents increases in incentive compensation expense. The
increases in incentive compensation expenses are due to increases in revenues
from underwriting and investment banking, with corresponding higher incentive
compensation levels.
All other operating expenses increased $2,284,000, or 13%, for the quarter and
$5,424,000, or 16%, for the first six months when compared to the same periods
in the prior fiscal year. Communications expense decreased $90,000, or 2%, for
the quarter and increased $770,000, or 10%, for the first six months of the
current fiscal year. Occupancy and equipment costs increased $853,000, or 16%,
for the quarter and $1,839,000, or 18%, for the first six months. These
increases were due primarily to increases in depreciation expense related to
computer equipment of $612,000, or 125%, for the quarter and $967,000, or 96%,
for the six month period. The increases in technology expenses reflect the
expansion of the business and the continued costs of providing better
technology. Promotion and development expenses increased $458,000, or 17%, for
the quarter and $988,000, or 19%, for the first six months. Floor brokerage and
clearance expenses increased $114,000, or 15%, for the quarter and $224,000, or
16%, for the first six months. Taxes, other than income taxes, increased
$261,000, or 12%, for the quarter and $479,000, or 11%, for the first six
months. Other operating expenses increased $688,000, or 29%, for the quarter and
$1,124,000, or 25%, for the first six months. The increases in operating
expenses, including communications, occupancy and equipment, promotion and
development, and other, reflect primarily the continued expansion of the
Company's business.
Interest expense increased $2,189,000, or 85%, and $4,094,000, or 82%, for the
fiscal three and six month periods in the current fiscal year when compared to
the same periods in the prior fiscal year. The increase in interest expense is
due to higher levels of short-term borrowings which increased primarily as a
result of higher customer margin loans and a higher level of securities owned.
Income before income taxes in the fiscal quarter and fiscal six months ended
September 25, 1998 was $11,442,000, and $21,182,000, respectively, resulting in
pre-tax return on revenues of 12.7% and 12.5%, respectively. For the fiscal
quarter and six months ended September 26, 1997, income before income taxes was
$10,587,0000 and $19,508,000, respectively, resulting in pre-tax return on
revenues of 14.4% and 14.1%, respectively.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
----------------------------------------------------------
Not applicable.
(10)
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
As is the case with many firms in the securities industry, McDonald Securities
is a defendant or co-defendant in a number of lawsuits alleging damages, which
are ordinary and routine litigation, incidental to the securities and investment
banking business. The Company is contesting the allegations of the complaints in
these cases and believes that there are meritorious defenses in each of these
lawsuits. Some of the proceedings relate to public underwritings of securities
in which McDonald Securities participated as a member of the underwriting
syndicate. The Company is also aware of litigation against certain underwriters
of offerings in which McDonald Securities was a participant, but where McDonald
Securities is not now a defendant. In these latter cases, it is possible that
McDonald Securities may be called upon to contribute to settlements or
judgments.
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
---------------------------------------------------
The Annual Meeting of Stockholders of the Company was held on July 29, 1998. The
following matters were voted on at the meeting:
1. Election of William B. Summers, Jr., Frederick R. Nance and Jeanette
Grasselli Brown as Directors of the Company. The nominees were elected as
Directors with the following votes:
William B. Summers, Jr.
-----------------------
For 16,695,212
Withheld 47,058
Broker non-votes 0
Frederick R. Nance
------------------
For 16,566,706
Withheld 175,564
Broker non-votes 0
Jeanette Grasselli Brown
------------------------
For 16,655,910
Withheld 86,360
Broker non-votes 0
2. Approval and adoption of the McDonald & Company Investments, Inc. 1998
Deferred Bonus Plan:
For 11,914,758
Against 2,502,758
Abstain 36,089
Broker non-votes 2,287,665
For information on how votes for the above matters have been tabulated, see the
Company's definitive Proxy Statement used in connection with the Annual Meeting
of Stockholders held on July 29,1998.
(11)
PART II. OTHER INFORMATION (cont.)
Item 4. Submission of Matters to a Vote of Security Holders (cont.)
-----------------------------------------------------------
A Special Meeting of Stockholders of the Company was held on September 15, 1998.
The following matter was voted on at the meeting:
1. Adoption of Agreement and Plan of Merger, dated as of June 15, 1998,
between the Company and KeyCorp pursuant to which the Company will be
merged with and into KeyCorp.
For 15,340,149
Against 152,311
Abstain 29,769
Broker non-votes 0
For information on how votes for the above matter have been tabulated, see the
Company's Proxy Statement-Prospectus, dated August 14, 1998, used in connection
with the Special Meeting of Stockholders held on September 15, 1998.
Item 5. Other Information
-----------------
On August 7, 1996, the Company announced the continuation of an open market
repurchase program originally instituted in July, 1987. The current program
allows the Company to purchase up to 1,000,000 shares of its Common Stock at an
aggregate price not to exceed $25,000,000. Treasury shares may be used to
satisfy options exercised under the Company's stock option plans and shares
awarded under the Company's 1995 Stock Bonus Plan.
During the fiscal quarter ended September 25, 1998, the Company utilized 1,200
of the Company's common stock held in treasury to satisfy options exercised
under the Stock Option Plan for employees.
(12)
Item 6. Exhibits and Reports on Form 8-K
---------------------------------
(a.) The following exhibits are filed as part of this report:
[Download Table]
Sequential
Exhibit No. Description Page Number
----------- ----------- -----------
11.1 Statement re: Computation of Per Share Earnings 16
27.1 Financial Data Schedule BD 17
(b.) Reports on Form 8-K:
The Company filed a report on Form 8-K, dated September 15,
1998, to file a press release issued by the Company
announcing the approval by the Company's stockholders of
the Agreement and Plan of Merger, dated as of June 15,
1998, between the Company and KeyCorp. (See Item 2 -
Business Environment)
* Exhibit 27.1 is furnished for Securities and Exchange Commission Purposes
Only.
(13)
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly
authorized.
McDonald & Company Investments, Inc.
------------------------------------
(Registrant)
Date: October 23, 1998 By: /s/William B. Summers, Jr.
---------------- ---------------------------------------------
William B. Summers, Jr.
President and Chief Executive Officer
(Principal Executive Officer)
Date: October 23, 1998 By: /s/Robert T. Clutterbuck
---------------- ---------------------------------------------
Robert T. Clutterbuck
Treasurer
(Principal Financial Officer)
(14)
McDonald & Company Investments, Inc.
Report on FORM 10-Q for the Fiscal Quarter ended June 26, 1998
EXHIBIT INDEX
-------------
[Download Table]
Exhibit No. Description Sequential Page
----------- ----------- ---------------
11.1 Statement re: Computation of Per Share Earnings 16
27.1 Financial Data Schedule 17
*Exhibit 27 is Furnished for Securities and Exchange Commission Purposes Only
(15)
Dates Referenced Herein and Documents Incorporated by Reference
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