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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(MARK ONE)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the year ended December 31, 1996
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: 33-22183
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OLDE FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Michigan 38-2722519
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(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
751 Griswold Street Detroit, Michigan 48226
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(Address of principal executive offices) (Zip Code)
(313) 961-6666
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Sections 12(g) of the Act: None
Securities registered pursuant to the Securities Act of 1933:
Class of Securities Principal Amount
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12.5% Senior Subordinated Debentures Due August 1, 1998 $10,000,000
9.6% Senior Subordinated Debentures Due May 1, 2002 $20,000,000
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
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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 the 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 [X]
The aggregate market value of the voting stock (Common Stock) held by
non-affiliates of the Registrant as of the close of business on March 14, 1997:
$10,570,102
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Common stock, $0.10 par value 30,997,124
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Class Outstanding as of March 14, 1997
DOCUMENTS INCORPORATED BY REFERENCE:
(1.) Certain exhibits from the Registrant's Regulation Statement filed on Form
S-1 declared effective April 14, 1988 are incorporated by reference into
Part IV.
(2.) Certain exhibits from the Registrant's Regulation Statement filed on Form
S-1 declared effective July 1, 1988 are incorporated by reference into
Part IV.
(3.) Certain exhibits from the Registrant's Regulation Statement filed on Form
S-1 declared effective May 6, 1992 are incorporated by reference into Part
IV.
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OLDE FINANCIAL CORPORATION
FORM 10-K FOR DECEMBER 31, 1996
INDEX
PART 1
Item 1. Business 3
Item 2. Properties 13
Item 3. Legal Proceedings 13
Item 4. Submissions of Matters to a Vote of Security Holders 13
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholders' Matters 14
Item 6. Selected Financial Data 15
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 16
Item 8. Financial Statements and Supplementary Data 20
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 20
PART III
Item 10. Directors and Executive Officers of the Registrant 21
Item 11. Executive Compensation 22
Item 12. Security Ownership of Certain Beneficial Owners
and Management 24
Item 13. Certain Relationships and Related Transactions 24
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K 26
Index to Exhibits 27
Signature 28
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PART I
"Safe Harbor" Statement under the Private Securities Litigation Reform Act of
1995: Some of the statements under "Business" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and other statements
which are not historical facts are forward-looking statements that involve
risks and uncertainties. Such risks and uncertainties include, but are not
limited to, the effect of national and international economic and political
conditions on the securities industry generally, the impact of competitive
products and services on the Company's business specifically, and the Company's
ability to introduce new products successfully. Other factors include changes
in securities rules and regulations affecting the Company's business, revisions
in regulatory bodies' interpretations of these rules and regulations, Federal
Reserve Board policies and actions with regard to interest rates, news media
reports on securities valuations, changes in the taxation of securities
transactions, alterations in customer investment product preferences, and other
risks. Business risk and uncertainty being inherent in these components of the
Company's business environment, there can be no assurance that projections in
such forward-looking statements will be realized.
ITEM 1. BUSINESS
General Description of Business
OLDE Financial Corporation (the "Company") is a financial services holding
company, incorporated in the state of Michigan on August 5, 1986. Its
principal subsidiary, OLDE Discount Corporation ("OLDE Discount"), engages in
a discount securities brokerage business primarily for retail customers
throughout the United States. OLDE Discount also engages in market making and
specialist activities in stocks, and is a dealer in corporate and municipal
bonds and U.S. Government securities. OLDE Discount effects transactions both
on an "execution only" and solicited basis for its customers at commission
rates lower than the rates full-commission brokerage firms charge. Although
OLDE Discount has historically been oriented toward providing traditional
discount brokerage services to retail customers who do not seek investment
education, assistance or advice, it is a full-service brokerage, having formed
departments which provide investment recommendations and research services and
its registered representatives receive compensation for the solicitation of
transactions in investment securities. OLDE Discount, founded in 1970, is a
member of the New York Stock Exchange, Inc. ("NYSE"), other national
securities exchanges and the National Association of Securities Dealers, Inc.
("NASD"). OLDE Discount is a registered broker-dealer with the Securities and
Exchange Commission ("SEC").
OLDE Discount is one of the largest discount brokers in the United States. It
is authorized to do business as a broker-dealer in all 50 states and the
District of Columbia. As of March 1, 1997, OLDE Discount has 190 retail
offices located in 34 states and the District of Columbia and has approximately
520,000 active customers.
Through its subsidiary, OLDE Asset Management, Inc. ("OAM"), the Company
provides investment and portfolio management services to the three separate
money market series of the OLDE Custodian Fund. The Company owns all of the
capital stock of OAM, which was formed in 1986. OAM is registered with the SEC
as an investment adviser.
Pursuant to a corporate reorganization, on April 1, 1987, the Company acquired
99% of the outstanding capital stock of OLDE Discount and 100% of the
outstanding capital stock of C.U. Brokerage Services, Inc. ("CUBS"). CUBS is
currently an inactive entity. In May 1987, the Company formed OLDE Clearing
Corporation. In March 1989 the Company acquired, via a dividend of shares in
American Brokerage Services, Inc. ("ABS") from OLDE Discount, 100% of the
outstanding stock of ABS. In addition, the Company received a cash dividend of
$585,000 from OLDE Discount which it contributed to the capital of ABS. In
August 1991, ABS was reorganized with the exchange of 10 shares of voting and
990 shares of nonvoting stock for 1,000 shares of voting stock. The Company
subsequently sold 50% of the voting stock in ABS, which amounted to 0.5% of the
total outstanding stock of ABS, to four persons, all of whom were officers of
either OLDE Discount or OLDE Property Corporation. In March 1995, the
operational functions and all customer assets and liabilities of ABS were
transferred to OLDE Discount and ABS ceased daily order execution activity.
ABS is inactive.
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In February 1992, the Company formed three subsidiaries to acquire, improve,
and hold real property interests, primarily for lease to OLDE Discount for use
as retail branch and/or regional operations offices. These three companies are
Realty Acquisitions, Inc. ("RAI"), OLDE Property Corporation ("OPC"), and OLDE
Realty Corporation ("ORC"). As of December 31, 1996, these companies and their
subsidiaries owned 78 commercial real estate properties with a book value of
approximately $37.5 million, occupied primarily by OLDE Discount.
In September 1992, the Company formed OLDE Equipment Corporation ("OEC") to
acquire certain computer hardware and software primarily for lease to OLDE
Discount. As of December 31, 1996, OEC had assets with a book value of
approximately $6.7 million.
Since it was formed, the Company has conducted operations relating to
consummation of corporate reorganizations, acting as a holding company of
subsidiaries and public offerings of its senior subordinated debentures. The
aggregate amount of senior subordinated debentures as of December 31, 1996 was
$30 million. On April 1, 1996, $7.5 million of 12% senior subordinated
debentures matured and were repaid.
In February 1997, the Board of Directors of OLDE Discount approved the payment
of cash dividends to the Company in the amount of $45,124,940. The dividends
were paid in the first quarter of 1997. OAM's Board of Directors approved the
payment of cash dividends to the Company in February 1997 for the amount of
$2,250,000, which were also paid in the first quarter of 1997. The Company,
utilizing the funds obtained from the dividends from OLDE Discount and OAM,
redeemed 5,812,876 shares of its capital stock at $8.15 per share, for total
consideration of $47,374,940. During 1997, the Company has provided management
and administrative services to its subsidiaries.
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
REVENUES BY SOURCE
The Company operates in a single industry segment and has no foreign
operations. No material part of the Company's revenues are received from a
single customer or related group of customers. The following table sets forth
revenues of the Company by source on a comparative basis for the periods
indicated:
YEAR ENDED DECEMBER 31,
(DOLLARS IN THOUSANDS)
1996 1995 1994
Commissions:
Retail Branches $140,226 36.9% $127,763 32.8% $106,326 35.2%
Brokerage Services Div. 4,540 1.2% 5,212 1.4% 6,285 2.1%
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144,766 38.1% 132,975 34.2% 112,611 37.3%
Principal Transactions 118,070 31.1% 146,155 37.5% 115,724 38.4%
Interest 104,310 27.4% 98,673 25.3% 64,656 21.5%
Other Income 12,874 3.4% 11,477 3.0% 8,341 2.8%
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Total Revenue $380,020 100% $389,280 100% $301,332 100%
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NARRATIVE DESCRIPTION OF BUSINESS
In 1975, the SEC eliminated all fixed commission rates on securities
transactions. Although this resulted in an immediate and substantial reduction
in commission rates charged to institutional customers, rates charged to
individual retail customers by the full-commission brokerage firms generally
were not reduced. OLDE Discount's management recognized that an opportunity
existed for firms willing to offer brokerage services at commission rates
substantially below the pre-1975 fixed rates and, in 1975, OLDE Discount began
offering such services.
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OLDE Discount offers customers commission rates substantially below that of
full-commission firms. However, OLDE Discount provides many of the services
and products typically offered by full-commission firms. These services and
products include: stock research and recommendations; money market funds with
sweep provisions for settlement of customer transactions; fixed-income
products; mutual funds; Smartvest an on-line investment news, research, and
statistical data service available through customers' personal computers;
margin accounts; accounts offering checking privileges; option accounts; and
individual retirement accounts with no annual fee. OLDE Discount is able to
maintain low commission rates while offering full service due to the ongoing
implementation of innovations in technology throughout the firm, as well as
cost containment.
Revenue from OLDE Discount's discount brokerage activities represent a
significant portion of the Company's revenues and are generated through
customer purchases and sales of stocks, bonds, options, mutual funds,
investment trusts, certificates of deposit and other financial products.
Commissions may be charged on both listed and over-the-counter transactions
executed on an agency basis. When OLDE Discount executes transactions as a
dealer on a principal basis, it may charge mark-ups or mark-downs which are
equivalent to its discounted commission schedule. Under certain circumstances,
customers may be eligible to effect securities transactions in which
commissions, mark-ups and/or mark-downs are not charged. For those stocks in
which OLDE Discount makes a market, the firm may derive revenue from the
spread, the difference between the bid and offer prices.
Registered representatives receive compensation in the form of commissions on
OLDE Discount's revenues from customer transactions and may receive additional
compensation on customer transactions in securities recommended by OLDE
Discount or for which OLDE Discount provides research.
SECURITIES TRADING
OLDE Discount is a dealer and regularly trades securities on a principal basis
and for its own account in the National Association of Securities Dealers
Automated Quotation System ("NASDAQ"), over-the-counter ("OTC") market and on
regional stock exchanges. In addition, OLDE Discount regularly trades in
corporate and municipal bonds, various U.S. Government and U.S. Government
Agency securities and certificates of deposit. OLDE Discount acts as a
qualified dealer in certain listed securities on the Cincinnati Stock Exchange.
OLDE Discount commits its capital and incurs market risk whenever it purchases
securities for its own account. Profits and losses in this activity are
dependent upon a number of factors, including the skill of traders, market
activity, market volatility and liquidity and general market conditions.
During 1996, OLDE Discount's average net long month-end inventory position in
firm-owned securities held for trading purposes, which primarily consisted of
fixed income securities, was approximately $26.7 million. This compares to an
average of $23.9 million in 1995. Revenue generated from market-making
activities involves the risk of unfavorable changes in market prices and market
liquidity, both of which may limit OLDE Discount's ability to liquidate its
positions on favorable terms.
OLDE Discount's market-making activities have contributed significantly to its
revenue. OLDE Discount selects the stocks in which it makes a market based upon
fundamental and market factors. However, due to the nature of the activity and
the volatility of the securities markets, OLDE Discount may realize losses as a
result of adverse market fluctuations.
ADVERTISING AND MARKETING
Advertising and marketing have played a significant role in connection with
obtaining new customers, and introducing new products and services. OLDE
Discount's marketing efforts have been developed by an affiliated company and
consist of advertising, commercials, and printed materials describing the many
investment services OLDE Discount offers to retail customers. Advertising and
promotional expenses of the Company for 1996, 1995, and 1994 were $16.8
million, $18.2 million and $14.4 million, respectively.
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OLDE Discount reaches investors through a combination of advertising media.
These include newspapers, magazines, radio, yellow pages, direct mail,
television and an Internet home page. Upon contact with OLDE Discount, a
prospective customer receives an investor package including an account
application and a brochure which contains information on the services and
investment products offered by OLDE Discount. Additional detailed brochures
are available upon request based upon the customers' investment preference.
Subject matter includes: Money Market Funds, Equity Research, Fixed Income
Securities, Mutual Funds and Retirement Accounts.
OTHER BUSINESS ACTIVITIES
OLDE Discount has a research department which prepares research reports made
available to customers and prospective customers. OLDE Discount, like most full
service firms, typically makes a market in the securities recommended by its
research department.
Investment company products accounted for approximately $14.7 million in
commission revenues in 1996, and approximately $6.1 million in commission
revenues in 1995. Management believes OLDE Discount's mutual fund business will
continue to be a significant source of revenue.
OLDE Discount acts as custodian, as well as broker, for Individual Retirement
Accounts ("IRA's") and charges no fee for its custodial services. The
investments of all the IRA's established at OLDE Discount are self-directed by
the customers holding those accounts. As of December 31, 1996, OLDE Discount
serviced approximately 142,000 active IRA's, containing an aggregate of
approximately $4.1 billion in market value of securities.
The Company is the sponsor of the OLDE Custodian Fund (the "Fund"). The Fund
was organized as a Massachusetts business trust and operates as a diversified,
open-end management investment company. The Fund consists of three series of
shares of beneficial interest: OLDE Money Market Series, OLDE Premium Money
Market Series, and OLDE Premium Plus Money Market Series. All three series are
offered as "no load" funds. OLDE Money Market Series commenced operations in
October 1989; OLDE Premium Money Market Series in July 1990; and OLDE Premium
Plus Money Market Series in January 1992. Each series of the Fund is managed
by OLDE Asset Management, Inc., a subsidiary of the Company. The shares of the
Fund are underwritten by OLDE Discount and distributed exclusively by OLDE
Discount. At December 31, 1996, the combined net assets of the OLDE Money
Market Series, OLDE Premium Money Market Series and OLDE Premium Plus Money
Market Series were $2.4 billion, which compared with $1.7 billion at December
31, 1995 and $791 million at December 31, 1994.
Competitive pressures within the industry are likely to result in OLDE
Discount's continuing expansion of the range of products and services offered
customers.
RETAIL BRANCHES
Management believes that the existence of branch offices contributes to OLDE
Discount's growth and customer satisfaction. Existence of a branch office
generally results in an increase in unsolicited customer transactions in the
geographic area near the branch. Many retail customers prefer to conduct
business with personnel in local rather than distant offices. A branch office
system has been established by OLDE Discount in response to these factors.
Customers use branch offices to receive and deliver checks and deliver
securities. As an alternative to visiting a branch office, an investor may
contact OLDE Discount by calling a national toll-free or local telephone
number. Currently, 113 of the retail branch offices are leased from
unaffiliated entities. Depending upon the availability of suitable properties
in the commercial real estate market, the Company may selectively replace
leased facilities with facilities acquired by subsidiaries of the Company (See
also, General Description of Business).
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The following table sets forth the number of retail branch offices of OLDE
Discount located in each state where OLDE Discount maintains retail branch
offices and the approximate number of full-time registered representatives
engaged in sales activities in such offices as of March 1, 1997. OLDE Discount
currently has a total of 190 retail branch offices in 34 states and the
District of Columbia.
Number of Registered
Number of Retail Representatives In
Branch offices Sales Activity
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Arizona 9 68
California 16 114
Colorado 5 40
Connecticut 2 7
District of Columbia 1 12
Florida 27 183
Georgia 6 40
Illinois 15 159
Indiana 2 18
Iowa 1 7
Kansas 2 21
Kentucky 2 16
Louisiana 1 8
Maryland 3 37
Massachusetts 3 24
Michigan 22 186
Minnesota 3 22
Mississippi 1 5
Missouri 1 7
Nebraska 1 11
New Jersey 6 55
New Mexico 1 8
New York 7 52
North Carolina 2 23
Ohio 12 79
Oregon 1 7
Pennsylvania 7 48
Rhode Island 1 6
South Carolina 1 5
Tennessee 1 6
Texas 16 148
Utah 1 8
Virginia 5 43
Washington 3 17
Wisconsin 3 21
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TOTAL 190 1,511
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BROKERAGE SERVICES DIVISION
OLDE Discount has provided a means by which banks, savings and loan
associations and credit unions may offer discount brokerage services.
Currently, OLDE Discount has agreements with approximately 180 financial
institutions to make discount brokerage services available to customers of
these institutions.
OLDE Discount offers three different arrangements to financial institutions.
Under the first arrangement, a financial institution's customers deal directly
with OLDE Discount's employees. OLDE Discount is responsible for all order
taking, execution, securities handling, confirmations and monthly account
statements.
Under the second arrangement, a financial institution's customers deal directly
with the institution's employees, who take orders and forward them to OLDE
Discount for execution. In certain instances, OLDE Discount has designated
branch offices on the premises of financial institutions. This designation
requires OLDE Discount to supervise and exercise control over the
securities-related activities of certain financial institution employees in
accordance with NYSE and other securities regulations. As of March 1, 1997,
OLDE Discount had seven approved branch offices at financial institution
locations. These are in addition to OLDE Discount's 190 retail branch offices.
The financial institution may lease or purchase quotation equipment and receive
quotation data from OLDE Discount or from a third-party vendor. Financial
institutions with larger trading volumes use computer terminals for order
entry and account retrieval.
Under the third arrangement, a subsidiary of the financial institution is a
registered broker-dealer and the broker-dealer introduces orders to OLDE
Discount on a fully disclosed basis.
Amounts earned by the financial institutions under these arrangements range
from 0% of commission revenues (for small or accommodation trades) to 100% of
commission revenues, less transaction charges. OLDE Discount's revenues were
approximately $1 million, $2.7 million and $800,000 under the first, second and
third arrangements, respectively, in 1996; $1 million, $3.6 million and
$500,000, respectively, in 1995; and $750,000, $4.3 million, and $486,000,
respectively in 1994.
INTEREST
Interest revenues consist primarily of margin interest charged to customers on
amounts OLDE Discount has loaned customers to finance customer securities
transactions, interest on overnight investment of cash, and interest on the
investment of funds segregated into Special Reserve Accounts for the Exclusive
Benefit of Customers pursuant to Rule 15c3-3 of the Securities Exchange Act of
1934. Margin lending provides an important source of revenue to OLDE Discount.
OLDE Discount's margin interest revenues were $94 million and $89 million in
1996 and 1995, respectively.
The rate of interest charged on loans to customers is based on the broker call
money rate (the published charge on bank loans made to brokers and secured by
firm or customer securities), to which up to 1.75% may be added. The
percentage added depends on the average net loan balance in an individual
customer's margin account.
MARGIN ACCOUNTS
Customers of OLDE Discount may effect transactions on either a cash or margin
basis. In a margin account, the customer deposits less than the full cost of
the securities purchased, and the broker-dealer finances the balance of the
purchase for the customer. The loan is collateralized by the securities
purchased. The amount of the loan is subject to regulation by the Board of
Governors of the Federal Reserve System under Regulation T and NYSE
requirements. Regulation T and NYSE requirements are subject to change. Changes
in requirements could have an adverse impact on OLDE Discount's margin lending
business. The Company's internal margin policies are in most instances more
stringent than the Federal Reserve's and the NYSE's requirements. Currently,
for most stock transactions, Regulation T requires that the amount loaned to a
customer for a particular purchase may not exceed
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50% of the purchase price of the securities, so that initially the customer's
equity in the securities is at least 50%. 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 the securities in the margin account. OLDE Discount has adopted a more
conservative policy that generally requires the outstanding balance be no
greater that 70% of the value of the collateral securities in the margin
account. OLDE Discount may impose higher maintenance requirements on specific
accounts. In permitting customers to purchase securities on margin, OLDE
Discount is subject to the risk of a market decline which could reduce the
value of collateral below a customer's indebtedness. Under the terms of its
margin account agreements with customers, OLDE Discount may unilaterally
liquidate securities in a customer's account in the event that the collateral
is deemed insufficient.
The sources of funds to finance customers' margin account loans are amounts
payable to customers, funds obtained from securities lending activity, equity
capital, subordinated debentures and bank lines of credit. OLDE Discount pays
interest on certain amounts payable to customers pending their reinvestment.
To the extent that the amounts payable to customers or funds obtained from
securities lending reduce the need for bank borrowing, interest expense is
reduced, since the interest rate paid on such funds is typically lower than
rates paid on bank borrowing.
Because OLDE Discount calculates its net capital requirements under the
alternative method, customer debit balances constitute a major determinant of
its net capital requirements under the rules of the SEC and NYSE. If customer
debit balances increase, capital requirements of OLDE Discount will increase.
SUBSIDIARIES
The following entities are subsidiaries of the Company:
OLDE Discount Corporation
OLDE Property Corporation
OLDE Asset Management, Inc.
OLDE Equipment Corporation
OLDE Realty Corporation*
OLDE Clearing Corporation
Credit Union Brokerage Services, Inc.
American Brokerage Services, Inc.
Smart Travel, Inc.
Realty Acquisitions, Inc.
*and its seven subsidiaries
ADMINISTRATION AND OPERATIONS
OLDE Discount's management, administrative and operations personnel have
policy-making or operational responsibility for the processing of
transactions, including receipt, identification and delivery of funds and
securities, custody of customer securities, extension of credit to customers,
general accounting and office services functions, administration of employee
benefits, establishment and monitoring of internal financial and management
controls, and legal and regulatory compliance.
OLDE Discount is a self-clearing broker-dealer and a member of all major U.S.
stock exchanges. Customer and proprietary transactions in NASDAQ and
exchange-listed securities are directed for execution through an automated
order routing system to the various stock exchanges or to OLDE Discount's
trading departments. Options and OTC securities may be executed through various
facilities including OLDE Discount's trading department or by other firms. OLDE
Discount acts as a qualified dealer in certain listed securities on the
Cincinnati Stock Exchange. A number of transactions in listed securities are
executed OTC. OLDE Discount does not conduct any business in financial or
commodity futures.
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Securities transactions are recorded and posted to the books daily. Designated
personnel monitor these transactions to ensure compliance with applicable laws,
rules, and regulations. Although fraud and misconduct by customers and
employees, and the possibility of theft of securities, are risks inherent in
the securities industry, OLDE Discount believes that its internal controls and
safeguards are adequate. As required by regulatory bodies, OLDE Discount
carries fidelity bonds covering loss or theft of securities, as well as
employee dishonesty, forgery and alteration of checks or similar items, and
forgery of securities. Management believes the amounts of coverage provided by
the fidelity bonds are adequate.
COMPETITION
OLDE Discount encounters significant competition in all aspects of the
securities business and competes directly with larger, more diversified,
well-capitalized national and regional full-commission and discount brokerage
firms, as well as other organizations offering financial services. The laws and
regulations governing the financial and securities industries have enabled
banks, savings and loan associations, insurance companies, credit unions and
other organizations not previously engaged in the securities business to
acquire or form securities firms.
Management believes that the principal factors affecting competition in the
securities industry are the type, quality and costs of services and products
offered. To the extent OLDE Discount's competitors have greater capital,
personnel and other resources employed to provide products and services which
compete with those of OLDE Discount, the securities business of OLDE Discount
may be adversely affected.
Management believes it can and does compete favorably with full-commission
firms who may offer discounts to selected customers. Because of the
compensation structure for sales personnel and the cost of providing investment
research and proprietary products at full-commission firms, OLDE Discount's
management believes these firms are unlikely to offer substantial discounts on
commissions to all of their retail customers as does OLDE Discount. However,
full-commission brokerage firms, as well as other financial institutions that
offer a broad range of financial services, provide strong competition for OLDE
Discount, especially for those customers who are attracted by the convenience
of dealing with one firm for many or all of their financial service needs. OLDE
Discount intends to continue to expand the financial services and products it
offers in order to remain competitive with other brokerage firms.
There are many securities brokerage firms which offer discount brokerage
services. Several of those competitors are expanding their branch office
networks, and some of those offices are or may be located in areas in which
OLDE Discount has branch offices. Other brokerage firms offer brokerage
services via electronic telecommunications facilities, and/or deep-discount
commission rates. As a result, OLDE Discount may experience increasingly
stronger competition for the self-directed and other investors it seeks as
customers. Such competition could adversely affect the growth of OLDE
Discount's customer base and commission revenues.
EMPLOYEES
As of March 1, 1997, the Company had approximately 2,131 full-time employees,
including 1,511 registered representatives engaged primarily in sales of
securities to individual investors. OLDE Discount has a training program for
prospective registered representatives which is designed to prepare them for
various registration examinations. OLDE Discount's registered representatives
receive a salary and compensation in the form of commissions on OLDE Discount's
revenues from customer transactions. They may receive additional compensation
on customer transactions in securities recommended by OLDE Discount or for
which OLDE Discount provides research. None of OLDE Discount's employees are
covered by a collective bargaining agreement. Management considers employee
relations to be satisfactory.
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REGULATION (SEE ALSO ITEM 3 BELOW)
The securities industry in the United States is subject to extensive regulation
under Federal and state laws. The SEC is a Federal agency charged with
administration of Federal securities laws. Much of the regulation of
broker-dealers, however, has been delegated to self-regulatory organizations,
principally the national securities exchanges and the NASD. These
self-regulatory organizations adopt rules, which are subject to approval by the
SEC, for governing the industry and conduct periodic examinations of member
broker-dealers. Securities firms are also subject to regulation by state
securities commissions. Violation of regulations issued by any of these
entities could result in sanctions being imposed against OLDE Discount or the
Company. OLDE Discount is currently registered or otherwise qualified to do
business as a broker-dealer in all 50 states and the District of Columbia.
The regulations to which broker-dealers are subject cover all aspects of the
securities business, including sales practices, trade practices among
broker-dealers, uses and safekeeping of customer funds, capital structure of
securities firms, record keeping and the conduct of directors, officers and
employees.
The SEC, the states and the self-regulatory organizations may conduct
administrative proceedings which can result in censure, fines, 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 the
securities markets and customers rather than the protection of general
creditors, subordinated lenders or shareholders of broker-dealers.
Additional legislation, changes in rules (promulgated by the SEC, the various
states, or by self-regulatory organizations such as the NASD and the Municipal
Securities Rulemaking Board ("MSRB")), or changes in the interpretation or
enforcement of existing laws and rules, have affected and will continue to
affect the method of operation and profitability of broker-dealers. Pending and
proposed legislation are also likely to alter the manner in which the
securities brokerage firms conduct business.
Beginning in 1994 and continuing into 1996, the Department of Justice, the SEC
and the NASD engaged in conducting a series of investigations and regulatory
actions concerning the activities of market makers in NASDAQ securities. These
initiatives originated in response to publication of academic studies of dealer
"spreads" quoted on NASDAQ securities, in particular the general conclusion in
the studies that such spreads were artificially maintained. In July 1996, OLDE
Discount and 23 other NASDAQ market-makers settled this two year investigation.
The industry wide settlement resolved all aspects of the investigation without
admission or finding of liability. The settlement was consistent with the
Company's commitment to advancing the best interests of its customers. The
settlement contained no monetary fine, and the settling market-makers have
undertaken to comply with specified trading practices and procedures.
Management notes that current regulatory initiatives appear primarily focused
on the prices at which trades are executed, and not the net cost to a customer
of completing a transaction. Changes in order handling rules and other changes
in the market environment impact OLDE Discount's cost savings programs offered
to customers. The cost savings programs offered to customers by OLDE Discount
undergo continual re-evaluation. While OLDE Discount intends to respond to
changing market conditions with programs that enable its customers to transact
their securities business at low net transaction costs, vis-a-vis competing
broker- dealers, the characteristics of such programs are changing and their
ultimate success cannot be determined.
As a result of the regulatory initiatives discussed above, significant changes
have occurred in market-making activity and revenue from market-making
activity has declined. Whatever changes in the business environment occur,
management believes that OLDE Discount must adapt to the new conditions and
continue to offer transaction cost savings programs designed to benefit
customers in order to attract and retain their business.
The Securities Investor Protection Corporation ("SIPC") protects customers'
securities accounts maintained at OLDE Discount up to $500,000 each, limited to
$100,000 for cash balances. In addition to this coverage, OLDE Discount has
secured additional coverage of $24.5 million for each customer from the
National Union Fire
11
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Insurance Company of Pittsburgh, PA. Neither the SIPC nor the excess SIPC
coverage extends to the payment of principal or interest on the Senior
Subordinated Debentures of the Company.
NET CAPITAL REQUIREMENTS
As a registered broker-dealer, OLDE Discount is subject to the net capital rule
(Rule 15c3-1) promulgated by the SEC and adopted through incorporation by
reference in NYSE Rule 325. The Rule, which specifies minimum net capital
requirements for registered brokers and dealers, is designed to measure the
financial soundness and liquidity of a broker-dealer and requires at least a
minimum portion of its assets be kept in liquid form.
OLDE Discount has elected to compute net capital under the alternative method
of computation permitted by Rule 15c3-1, which at December 31, 1996 required
that net capital be not less than the greater of $250,000 or 2% of aggregate
debit balances (primarily receivables from customers and other broker-dealers).
In computing net capital, various deductions are made from net worth and
qualifying subordinated indebtedness. These deductions include the book value
of assets not readily convertible into cash and prescribed percentages of
securities owned or sold short. Any failure of OLDE Discount to maintain the
required net capital may subject OLDE Discount to suspension or revocation of
registration or other limitations on the firm's activity by the SEC, and
suspension or expulsion by the NYSE, NASD or other regulatory bodies, and
ultimately could require the broker-dealer's liquidation. OLDE Discount could
also be prohibited from paying dividends and redeeming stock. OLDE Discount
would be prohibited from prepaying or making payments of principal on
subordinated indebtedness (including indebtedness to the Company - see below)
if its net capital were to become less than the greater of 5% of combined
aggregate debit balances, or $250,000.
Under NYSE Rule 326, OLDE Discount is required to reduce its business if its
net capital is less than 4% of aggregate debit balances, and is prohibited from
expanding business or redeeming subordinated indebtedness if its net capital is
less than 5% of its aggregate debit balances.
Net capital rules could limit OLDE Discount's ability to engage in new
activities and expansion, and could restrict the Company's ability to withdraw
capital from its brokerage subsidiaries. Such a restriction in turn, could
limit the Company's ability to repay or reduce indebtedness (including
subordinated debentures of the Company) and pay dividends. Further, a
significant operating loss or an extraordinary charge against net capital could
adversely affect OLDE Discount's ability to expand or maintain its current
levels of business. While these amounts may vary from day to day, OLDE
Discount's net capital at December 31, 1996 was $268.5 million in excess of its
minimum requirements, and was 22% of aggregate debit balances.
In February 1997, the Board of Directors of OLDE Discount approved the payment
of cash dividends to the Company in the amount of $45,124,940. The dividends
were paid in the first quarter of 1997. If OLDE Discount's net capital had
been reduced by the dividend payment, the net capital ratio at December 31,
1996 would have been 19% of aggregate debit balances.
The Company believes that OLDE Discount has at all times been in compliance
with applicable net capital requirements. In addition to the above rules, OLDE
Discount is required to provide advance notice to the SEC if within any thirty
calendar day period any transactions are contemplated which would result in a
diminution of the broker-dealers' net capital by an amount which exceeds thirty
percent (30%) of the broker-dealer's excess net capital. Under these rules, the
SEC could prohibit the transactions from taking place. At December 31, 1996,
the amount of capital which could be withdrawn without providing advance notice
to the SEC was $80.6 million.
Portions of the net proceeds from the public offerings of subordinated
debentures of the Company have been loaned to OLDE Discount pursuant to
subordination agreements, the form of which was approved by the NYSE. At
December 31, 1996, $14.2 million of subordinate loans were outstanding under
such agreements, all of which are included in computing the net capital of OLDE
Discount under SEC rules. Repayment of the loans at their maturities are
subject to OLDE Discount's continued compliance with net capital requirements.
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On April 1, 1996, the Company's $7.5 million of 12% subordinated debentures
matured and were repaid. Approximately $7.2 million of this amount was
received from OLDE Discount upon maturity of a cash subordination agreement
between the Company and OLDE Discount. As a result of that transaction, OLDE
Discount's net capital was reduced by $7.2 million.
ITEM 2. PROPERTIES
The Company is a holding company whose assets consist principally of the
capital stock of its subsidiaries, short-term investments, subordinated loans
to OLDE Discount and loans to OLDE Property Corporation. OLDE Discount's
headquarters and main sales branch buildings in Detroit, Michigan are leased.
As of March 1, 1997,
78 branch offices were located in facilities owned by various real estate
subsidiaries of the Company and leased primarily by OLDE Discount. Their
locations are as follows: 22 locations in Florida; 11 locations in Michigan; 9
locations in Texas; 5 locations each in Arizona and Virginia; 4 locations in
Georgia; 3 locations each in California, Colorado, Illinois, and Ohio; 2
locations each in Kansas and Wisconsin; and one location each in Massachusetts,
North Carolina, Minnesota, Indiana, Utah and Pennsylvania.
ITEM 3. LEGAL PROCEEDINGS
OLDE Discount is a defendant or respondent in a number of civil actions,
arbitrations, and class actions arising out of its business as a broker-dealer,
including a consolidated certified class action in Federal court which alleges
that 33 securities dealers conspired to fix and maintain artificial bid-ask
spreads on certain securities traded on the National Association of Securities
Dealers Automated Quotation System ("NASDAQ") over-the-counter market, and
other purported class actions. OLDE Discount believes it has meritorious
defenses against these claims and intends to assert them vigorously. It is
management's opinion that the disposition of these claims will not have a
material adverse effect on the financial condition of the Company.
OLDE Discount is the subject of an investigation by the Securities and Exchange
Commission ("SEC"). The investigation has focused on certain sales practices
of the Company. The Company has cooperated fully with the SEC and does not
believe that the broker-dealer has engaged in improper activity. However, at
this time this investigation has not been concluded. The SEC may seek to
impose a fine and/or other remedial sanctions on the Company and/or its
employees.
The Company, its principal shareholder, OLDE Discount and certain affiliates,
and others, were named as defendants in a civil action filed on March 17, 1992
by a former executive of the firm. The complaint alleged various tort,
contractual, and statutory claims relative to OLDE Discount's termination of
the former executive's employment. This matter was subsequently ordered to
arbitration. During 1996, this matter was resolved without a material effect
on the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's securities holders during
the fourth quarter of 1996.
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PART II
ITEM 5. REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
There is no established public trading market in the Company's common stock.
The Company's common stock was held by 19 persons on March 14, 1997. No
dividends were paid by the Company in 1996. The Company's ability to pay
dividends is limited by restrictions on the ability of its subsidiaries to pay
dividends and make advances. Limitations on the payment of dividends by OLDE
Discount are imposed by the net capital requirements of the SEC, the NYSE, and
the NASD.
In February 1997, the Board of Directors of OLDE Discount approved the payment
of cash dividends to the Company in the amount of $45,124,940. The dividends
were paid in the first quarter of 1997. OAM's Board of Directors approved the
payment of cash dividends to the Company in February 1997 for the amount of
$2,250,000, which were also paid in the first quarter of 1997. Under
agreements with certain shareholders entered into during February 1997, the
Company has redeemed 5,812,876 shares of its common stock at $8.15 per share,
for a total consideration of $47,374,940.
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ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data, except for the ratio of
earnings to fixed charges and the number of retail branch offices, have been
derived from the audited Financial Statements of the Company. The selected
consolidated financial data should be read in conjunction with the Financial
Statements and related notes and with "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
AS OF AND FOR THE YEAR ENDED DECEMBER 31
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
1996 1995 1994 1993 1992
---------- ---------- ---------- -------- --------
Revenues:
Commissions $ 144,767 $ 132,975 $ 112,611 $107,538 $ 71,171
Principal transactions 118,069 146,155 115,724 71,957 32,512
Interest 104,310 98,672 64,656 28,884 20,228
Other 12,874 11,477 8,341 7,014 5,118
---------- ---------- ---------- -------- --------
Total revenue 380,020 389,279 301,332 215,393 129,029
Expenses:
Employees compensation
& benefits 129,757 124,724 94,328 67,041 41,771
Commissions, floor
brokerage fees 9,993 9,860 10,503 10,315 8,350
Communications 10,570 9,913 8,077 5,330 3,723
Advertising &
promotional 16,771 18,211 14,375 12,421 8,791
General &
administrative 33,094 26,692 15,148 11,553 8,592
Interest 45,522 44,516 28,440 13,916 10,106
Occupancy 22,000 19,884 16,988 13,020 10,501
Data processing &
supplies 10,224 8,994 8,746 6,666 5,140
---------- ---------- ---------- -------- --------
Total expenses 277,931 262,794 196,605 140,262 96,974
Income before
income taxes: 102,089 126,485 104,727 75,131 32,055
Provision for
income taxes: 38,342 48,127 39,685 28,447 12,028
---------- ---------- ---------- -------- --------
Net income $ 63,747 $ 78,358 $ 65,042 $ 46,684 $ 20,027
========== ========== ========== ======== ========
Net income per
common share $ 1.73 $ 2.12 $1.74 $ 1.26 $0.54
========== ========== ========== ======== ========
Ratio of earnings to
fixed charges (1) 3.14x 3.45x 4.03x 5.41x 3.59x
Retail branch offices open
at the end of period 190 195 197 195 186
Balance Sheet Data:
Total assets $1,650,228 $1,625,161 $1,156,102 $824,729 $426,880
Real estate
mortgages 13,411 16,531 12,166 7,701 -
Capital lease oblig. 4,227 6,483 6,985 4,520 2,778
Subordinated
indebtedness 30,000 37,500 37,500 37,500 37,500
Total stockholders'
equity 298,865 234,702 159,661 93,681 46,997
(1) For the purpose of computing the ratio of earnings to fixed charges,
earnings have been determined by adding fixed charges and income taxes to net
income. Fixed charges consist of all interest expense and an interest
component of rent expense.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion of the Company's financial condition and results of
operations for the three years ended December 31, 1996, 1995, and 1994, should
be read in conjunction with the Financial Statements and related notes thereto.
Unless otherwise indicated, all references to the term "Company" mean the
Company and its consolidated subsidiaries.
CHANGES IN FINANCIAL POSITION AND RESULTS OF OPERATIONS
1996 COMPARED TO 1995
During the year ended December 31, 1996, total assets of the Company increased
by 1.5% to $1.65 billion. U.S. Government and U. S. Government Agencies
securities purchased under agreements to resell increased by $54.9 million to
$180 million. Funds invested in the Special Reserve account increased by
$109.6 million to $119.9 million. Receivables from customers decreased by
$132.5 million to $1.15 billion.
Total liabilities decreased by $39.1 million or 2.8% due primarily from a
decrease of $293.8 million in amounts payable to brokers and dealers as a
result of decreases in securities lending activity. While securities lending
balances decreased, payables to customers from customer margin balances
increased by $267.6 million. Also, subordinated debentures decreased $7.5
million from the maturity and redemption of these bonds.
Stockholders equity increased $64.2 million primarily due to earnings. No
dividends were paid or declared in 1996. In February 1997, the Board of
Directors of OLDE Discount approved the payment of cash dividends to the
Company in the amount of $45,124,940. The dividends were paid in the first
quarter of 1997. OAM's Board of Directors approved the payment of cash
dividends to the Company in February 1997 for the amount of $2,250,000, which
were also paid in the first quarter of 1997. Under agreements with certain
shareholders entered into during February 1997, the Company has redeemed
5,812,876 shares of its common stock at $8.15 per share, for a total
consideration of $47,374,940.
Total revenue for the year ended December 31, 1996, decreased by $9.3 million
or 2.4%. Total expenses increased $15.1 million or 5.8%. Pretax income
decreased by $24.4 million to $102 million. Net income decreased $14.6 million
to $63.7 million.
Commission revenue increased $11.8 million or 8.9%, primarily due to a moderate
increase in the volume of customer securities transactions.
Revenue from principal transactions decreased $28.1 million or 19.2% primarily
as a consequence of changes in securities regulations affecting the markets for
equity securities. In 1996, OLDE Discount made a market in approximately 770
stocks. During the year, revenue derived from the trading of equity securities
was $90.4 million, a decrease of $31.1 million or 25.6% from the prior year.
Revenue from the trading of fixed-income securities was $27.6 million, which
was an increase of $2.9 million or 11.9% from 1995. Trading revenues are
subject to a variety of factors including, but not limited to, market
liquidity, volatility, trading volume, trader skill and economic conditions,
including regulation impacting trading markets. Changes in any of these
factors may materially affect revenue derived from these activities.
Revenue from certain principal transactions in OTC stocks has decreased since
July 1994 primarily as a result of changes to the NASD Rules of Fair Practice
pertaining to the handling and execution of customer limit orders. As a NASDAQ
market maker, OLDE Discount routinely executes customer trades in the
securities in which it makes a market. Therefore, OLDE Discount's revenues will
be directly affected by changes in rules governing such transactions (See also,
"Regulation" under ITEM 1 of this Form).
Interest revenue increased by $5.6 million or 5.7% due to increases in margin
loans outstanding.
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The components of interest income are identified in Table I.
Table I - Interest Revenue
Year Ended December 31
(Dollars in Thousands)
1996 1995 1994
-------- ------- -------
Customer margin balances $ 93,702 $89,053 $60,119
Repurchase agreements 7,770 6.543 2,649
U.S. Government securities 205 272 48
Securities borrowed 908 1,644 1,084
Other 1,725 1,160 756
-------- ------- -------
TOTAL $104,310 $98,672 $64,656
======== ======= =======
Compensation and employee benefits increased $5 million or 4% primarily due to
increases in salaries and commissions paid to salespersons and assistants.
Provisions for bonus, payroll taxes and medical insurance also increased.
Communications expense increased $657,000 or 6.6% due to increased
telecommunications usage.
Advertising and promotion expenses decreased by $1.4 million or 7.9%. The
Company decreased its expenditures for direct mail and related postage.
Interest expense increased $1 million or 2.3% primarily due to an increase in
customer credit balances. The components of interest expense are identified in
Table II.
Table II - Interest Expense
Year Ended December 31
(Dollars in Thousands)
1996 1995 1994
------- ------- -------
Customer credit balances $30,568 $26,439 $17,385
Subordinated loans 3,395 4,070 4,070
Securities lending 9,959 12,245 5,843
Other 1,600 1,762 1,142
------- ------- -------
TOTAL $45,522 $44,516 $28,440
======= ======= =======
Occupancy expense increased $2.1 million or 10.6%. This increase was due to
increased expenditures for repairs and maintenance to company owned real
estate.
General and administrative expense increased $6.4 million or 24% due to
increases in expenses occurring as a result of increases in general business
expenses, ongoing expenses related to the matters described in Item 3 of Part I
of this Form, and expenses associated with other legal matters.
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1995 COMPARED TO 1994
During the year ended December 31, 1995, total assets of the Company increased
by 40.6% to $1.6 billion. This increase was due primarily to a $341.2 million
increase in customer margin loans outstanding. U.S. Government and U.S.
Government Agencies securities purchased under agreements to resell increased
by $84.3 million.
Total liabilities increased by $394 million or 39.5% due primarily to a $250.6
million increase in amounts payable to brokers and dealers as a result of
increases in securities lending activity. Payables to customers increased
$129.8 million. Other liabilities increased $7.8 million, and real estate
mortgages increased $4.4 million.
Stockholders equity increased $75 million primarily due to earnings of $78.4
million. No dividends were paid or declared.
Total revenue for the year ended December 31, 1995, increased by $87.9 million
or 29.2%. Total expenses increased $66.2 million or 33.7%. Pretax income
increased by $21.8 million to $126.5 million. Net income increased $13.3
million to $78.4 million.
Commission revenue increased $20.4 million or 18.1% due to slightly higher
retail trading volumes.
Revenue from principal transactions increased $30.5 million or 26.4% as OLDE
Discount experienced continued growth in revenue from its market making,
specialist and trading activities. Over the two year period ending December 31,
1995, OLDE Discount made a market in approximately 870 stocks. During 1995,
revenue derived from the trading of equity securities was $121.5 million, an
increase of $19.7 million or 19.4% from the prior year. Revenue from the
trading of fixed-income securities was $24.7 million, which is an increase of
$10.7 million or 76.4% from the prior year. Trading revenues are subject to a
variety of factors including, but not limited to, market liquidity,
volatility, trading volume, trader skill and economic conditions. Changes in
any of these factors may materially affect revenue derived from these
activities.
Interest revenue increased by $34 million or 52.6% due primarily to increases
in margin loans outstanding and higher rates of interest charged.
Compensation and employee benefits increased $30.4 million or 32.2% due
primarily to increases in salaries and commissions of salespersons and
assistants. Provisions for bonus, payroll taxes and medical insurance also
increased.
Floor brokerage, commission and fees decreased approximately 6%, due primarily
to a decline in commission charges related to OLDE Discount's brokerage
services business.
Communications expense increased $1.8 million or 22.7% due to greater telephone
usage.
Advertising and promotion expenses increased $3.8 million or 26.7% due
primarily to increases for direct mail, cable television and newspaper
advertising.
Interest expense increased $16.1 million or 56.5% due to increases in both
customer credit balances and securities lending balances and the rates paid on
such outstanding balances. The components of interest expense are identified in
Table II.
Occupancy expense increased $2.9 million or 17.1%. This increase was due in
large part to a planned increase in expenditures for repairs and maintenance to
company owned real estate.
General and administrative expenses increased $11.5 million or 76.2% due to
general increases in expenses occurring as a result of an increased volume of
business, ongoing expenses related to matters described in Item 3 of Part 1 of
this Form, and expenses associated with the resolution of other legal matters.
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LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1996, the Company's total assets were $1.65 billion as compared
with total assets of $1.63 billion at December 31, 1995. U.S. Government
securities purchased under agreements to resell increased $54.9 million from
the prior year. U.S. Government securities held under such agreements and
segregated in the Special Reserve account increased $109.6 million. Margin
loans receivables from customers decreased by $132.5 million.
Most of the Company's assets are highly liquid, consisting primarily of cash,
U.S. Government and U.S. Government agencies securities purchased under
agreements to resell (which may be segregated for the exclusive benefit of
customers pursuant to regulatory requirements), marketable securities and
receivables from customers and other broker-dealers. As of December 31, 1996,
approximately $119.9 million of U.S. Government securities purchased under
agreements to resell and cash were segregated in special reserve accounts of
OLDE Discount for the exclusive benefit of customers. Assets in these special
reserve accounts are not available to meet obligations of OLDE Discount except
to customers. Receivables from customers are collateralized by readily
marketable securities in accordance with margin regulations. Receivables from
other broker-dealers represent amounts due upon the Company's delivery of
securities, either to settle a sell transaction or to close a stock borrowed
position.
The Company does not regularly hold for its own account or actively engage in
the trading of either fixed income securities rated below investment grade
(such as "junk bonds") or derivative securities ("derivatives"). As an
accommodation to customers, the Company may occasionally hold immaterial
positions of such items on a temporary basis.
With the exception of subordinated indebtedness, substantially all of OLDE
Discount's liabilities are due on demand of customers or within 30 days. OLDE
Discount has historically maintained investment durations of less than 30 days
through investment in repurchase agreements.
Customer credit balances have provided the Company's principal subsidiary, OLDE
Discount, with the primary source of funds for financing customer debit
balances. OLDE Discount has obtained funds from securities lending activities
as well. Management believes that customer credit balances will continue to
provide a source of such financing for OLDE Discount in the future. Securities
lending is anticipated to provide a second source of such financing for OLDE
Discount. In addition, OLDE Discount has arranged for $180 million in secured
lines of credit and letters of credit from two banks and it has periodically
drawn on these lines of credit. Other sources of financing for OLDE Discount's
operations have been subordinated borrowings and cash generated by operations.
OLDE Property Corporation, the primary real estate subsidiary of the Company,
has arranged additional financing for future real estate acquisitions. To the
extent that the Company continues to increase its real property interests, an
increased percentage of the Company's consolidated assets will be illiquid.
OLDE Discount is subject to regulatory net capital requirements designed to
ensure the financial integrity and liquidity of broker-dealers. As of December
31, 1996, OLDE Discount had net capital for regulatory purposes of $268.5
million which exceeded its minimum net capital requirement by $244.5 million.
In February 1997, the Board of Directors of OLDE Discount approved the payment
of a cash dividend to the Company in the amount of $45,124,940. The dividends
were paid in the first quarter of 1997. If OLDE Discount's net capital had
been reduced by the dividend payment, OLDE Discount's net capital ratio at
December 31, 1996 would have been 19% of aggregate debit balances. Also, the
Board of Directors of OAM Management approved the payment of a cash dividend to
the Company in the amount of $2,250,000 which were also paid in the first
quarter of 1997.
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EFFECTS OF INFLATION
OLDE Discount's assets consist primarily of cash, U.S. Government and U.S.
Government Agencies securities purchased under agreements to resell, marketable
securities, customer and other receivables. Its liabilities consist largely of
subordinated long-term indebtedness, short-term obligations, marketable
securities, customer and other payables. These assets and liabilities are not
significantly affected by inflation because they are primarily monetary and
liquid. To the extent that the Company's subsidiaries continue to acquire real
estate, management anticipates that the value of such assets would increase in
market value in inflationary economic periods. However, such increases in value
would be subject to factors other than inflation, including general economic
conditions, including interest rates, and therefore the value would not be
assured.
Increases in OLDE Discount's expenses as a result of inflation may not be
readily recoverable in the price of services offered by OLDE Discount. To the
extent that inflation results in rising interest rates and has other adverse
effects on securities markets and on the value of securities held in inventory,
it may adversely affect OLDE Discount's financial position and results of
operations. Management believes these factors would generally affect the entire
securities industry and does not believe, in this regard, that it would be
affected differently than other comparable securities broker-dealers.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this item is included in ITEM 14 of this form, located after
the signature page.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The directors and executive officers of the Company are:
Director of the
Name and Age Position Company Since
- - ---------------------------- -------------------------------------- ---------------
Ernest J. Olde, 59 Chairman of the Board and a Director 1986
Randal J. Mudge, 46 President and Director 1986
Jeffrey M. Slopen, 49 Director 1989
Mack H. Sutton, 53 Treasurer and Chief Financial Officer
Thomas P. Fitzgerald, 40 General Counsel
Michael S. Dzialo, 32 Senior Vice President of OLDE Discount
Daniel S. Patterson, 35 Senior Vice President of OLDE Discount
The principal occupations of each of the Company's directors and executive
officers during at least the past five years are set forth below:
ERNEST J. OLDE has been Chairman of the Board of the Company since its
inception in 1986. Mr. Olde held the office of Chairman of the Board of OLDE
Discount from its inception in 1971 through January 1989, and from April 1991
through 1994.
RANDAL J. MUDGE has been President of the Company since 1991, and had served as
Senior Vice President of the Company from its inception in 1986 until he was
elected President. Mr. Mudge is currently serving as Managing Director of OLDE
Discount, a position he previously held from 1991 through 1992. He served as
Senior Vice President of OLDE Discount before serving as its President from
1989 to 1991. He joined OLDE Discount in 1982. Mr. Mudge has been a director of
OLDE Discount from 1984 to present.
JEFFREY M. SLOPEN has been a partner with the Windsor, Ontario law firm of
Wilson, Walker, Hochberg & Slopen, Barristers and Solicitors since 1985. The
firm provides legal services to the Company, OLDE Discount and their
affiliates. Mr. Slopen is licensed to practice law in the Canadian province of
Ontario and the State of Michigan.
MACK H. SUTTON has been the Chief Financial Officer and Treasurer of the
Company since its inception in 1986. He has been Chief Financial Officer of
OLDE Discount since 1988, and was Treasurer of OLDE Discount from 1986 through
1991. From 1992 through 1995, Mr. Sutton was Controller of OLDE Discount. Mr.
Sutton is a certified public accountant. He joined OLDE Discount in 1985.
THOMAS P. FITZGERALD has been General Counsel of the Company since March 1995
and a Senior Vice President of OLDE Discount since January 1997. Prior to
joining the Company, Mr. Fitzgerald served as outside counsel to the Company
while engaged in a private law practice concentrating in securities brokerage
matters. Mr. Fitzgerald was employed with the U.S. Securities and Exchange
Commission from 1985 to 1989 and is licensed to practice law in the states of
Michigan and Illinois.
MICHAEL S. DZIALO has been the Director of Research of OLDE Discount since
1991, and a Senior Vice President and Director of OLDE Discount since January
1996. He was a Vice President from 1994 to 1995, and he was an Assistant Vice
President from 1991 to 1994. Mr. Dzialo has been employed by OLDE Discount
since 1987.
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DANIEL S. PATTERSON has been a Senior Vice President of OLDE Discount since
December 1995 and a Director of OLDE Discount since January 1996. Mr.
Patterson served as Vice President of OLDE Discount from 1992 to 1995 and as
Assistant Vice President of OLDE Discount from 1989 to 1992. He joined OLDE
Discount in 1984.
Directors of the Company will hold office until the next annual meeting of the
shareholders or until their successors are elected. Executive officers of the
Company serve at the pleasure of the Board of Directors.
Stanley A. Snider is currently not serving in any capacity for the Company
or any of its subsidiaries. He has resigned as a Director of OLDE Discount and
as a Senior Vice President of the Company.
On April 7, 1989, the Board of Directors of the Company elected Jeffrey M.
Slopen to the Board of Directors of the Company to serve as the "public
director" required by Section 2720(g) of the NASD Conduct Rules. Mr. Slopen and
Randal J. Mudge were also appointed to the Audit Committee of the Board of
Directors, which was established pursuant to Section 2720(f) of the NASD
Conduct Rules, to review the reports and recommendations of the Company's
independent auditors. The functions of the Audit Committee include: (a)
reviewing the scope of the Company's independent audit; (b) reviewing with the
independent auditors the corporate accounting practices and policies and
recommending to whom reports should be submitted within the Company; (c)
reviewing with the independent auditors their reports; (d) reviewing with
internal and independent auditors overall accounting and financial controls;
and (e) being available to the independent auditors during the year for
consultation purposes.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the aggregate compensation, for the Company's
Chairman of the Board and its other five most highly compensated officers, for
services rendered in all capacities to the Company and its subsidiaries for the
years indicated.
SUMMARY COMPENSATION TABLE
Annual Compensation
Other Annual
Principal Position Year Salary Bonus Compensation
- - ------------------ ---- ------ ----- ------------
Ernest J. Olde 1996 $1,000,012 $6,000,000 -
Chairman of the Board 1995 1,000,012 5,000,000 -
OLDE Financial Corp. 1994 1,000,012 3,600,000 -
Randal J. Mudge 1996 300,000 1,300,000 -
President 1995 300,000 700,000 -
OLDE Financial Corp. 1994 200,000 500,000 -
Thomas P. Fitzgerald 1996 200,004 300,000 -
General Counsel 1995 149,271 125,000 -
1994 - - -
Michael Dzialo 1996 100,008 250,000 -
Director of Research 1995 100,008 200,000 -
OLDE Discount 1994 75,000 175,000 -
Mack H. Sutton 1996 150,000 150,000 -
Chief Financial Officer 1995 100,008 150,000 -
1994 78,000 97,000 -
22
23
Excluded from the compensation reported above are personal benefits which
executive officers may derive from life and medical insurance policies, dues
and occasional personal use of leased facilities. The estimated value of
personal use of firm-owned automobiles has been excluded in the compensation
amounts shown above. OLDE Discount leases accommodations in various locations
which are utilized for business purposes in connection with the administration
of OLDE Discount. The aggregate value of personal benefits provided to
executive officers does not for any of them exceed the lesser of $50,000 or
10% of such executive officer's compensation.
All directors and officers are also reimbursed for out-of-pocket expenses
incurred in connection with the Company's business. Board members are not
separately compensated for their attendance at Board meetings.
The Company does not provide annuity, pension or similar retirement benefits to
its officers, directors or employees.
In August 1995, the Company initiated sponsorship of a non-contributory profit
sharing plan under section 401 of the Internal Revenue Code. This "401(k)" plan
is generally available to employees of the Company and its affiliates who have
met certain age and service requirements.
EMPLOYMENT AGREEMENTS
Neither the Company nor its subsidiaries have entered into employment
agreements containing extended salary or severance payment provisions. OLDE
Discount has entered into agreements with both its own employees and employees
of financial institutions in which those employees are informed of the scope of
permissible and impermissible brokerage activities. OLDE Discount has
established a policy whereby it executes agreements with registered
representatives which contain restrictive covenants prohibiting solicitation of
customer accounts for a period of time in the event of an employee's separation
from the firm.
23
24
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The table below sets forth, as of March 1, 1997, the number and percentage of
outstanding shares beneficially owned by each person known by the Company to
own beneficially more than 5% of the Company's common stock, by each director
of the Company, each executive officer of the Company named in the summary
compensation table, and by directors and executive officers of the Company as a
group. Unless otherwise indicated, each stockholder named has sole voting and
dispositive power.
Name Number of Shares Beneficially Owned (1) Percentage of Class
- - -----------------------------------------------------------------------------------
Ernest J. Olde (2) 28,543,773 92.1%
Randal J. Mudge (2) 324,236 1.0%
Jeffrey M. Slopen (2) 0 -%
Mack H. Sutton (2) 60,000 0.2%
Thomas P. Fitzgerald (2) 0 -%
Michael S. Dzialo (2) 50,000 0.2%
Daniel S. Patterson (2) 60,000 0.2%
All directors and executive
officers as a group (7 persons) 29,038,009 93.7%
(1) "Beneficial Ownership" is defined pursuant to regulations promulgated by
the SEC as having or sharing, directly or indirectly, voting power, which
includes the power to vote or to direct the voting, or investment power,
which includes the power to dispose or to direct the disposition of the
shares of common stock indicated.
(2) A director, executive officer or executive officer and director of the
Company. The address of these persons, other than Mr. Slopen, is care of
the Company, 751 Griswold Street, Detroit, Michigan 48226. Mr. Slopen's
address is 443 Ouellette Ave., Windsor, Ontario, N9A 6R4.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Directors, officers, and employees of the Company maintain cash and margin
accounts with OLDE Discount and execute security transactions through OLDE
Discount in the ordinary course of business.
OLDE Discount has historically transacted a substantial portion of its
advertising business under an agreement with Financial Marketing Services, Inc.
("FMS"), which is an advertising firm wholly owned by Ernest J. Olde, Chairman
of the Board of the Company. As a condition of FMS obtaining certain financing
for its printing subsidiary, North American Printing Company (formerly Sumner
Press, Ltd.) ("Sumner"), in August, 1987, FMS, Sumner and OLDE Discount entered
into a written agreement under which OLDE Discount agreed to purchase all of
its advertising and printed materials from FMS through 1997. Minimum annual
advertising purchases under this agreement are $2.4 million through 1997.
During 1996, 1995 and 1994, OLDE Discount purchased substantially all of its
advertising from FMS. Such purchases amounted to approximately $11.7 million,
$14.1 million and $11.5 million, respectively, for these years. Other
subsidiaries of FMS charged the company approximately $850,000, $968,000, and
$963,000 primarily for mailing and general services during the respective
periods.
Canadian Consumer League, Inc. ("CCL"), an importing firm 100% owned by Ernest
J. Olde, the Chairman and majority shareholder of the Company, was formed in
1990. CCL has made certain accommodation purchases on behalf of OLDE Discount
in foreign markets. Such purchases included office furnishings, furniture and
building renovation materials. Management believes that OLDE Discount
made these purchases at a discount from prices available for similar goods from
domestic sources. Prices were determined in consultation with Mr. Olde and other
members of the Company's board. OLDE Discount paid $1 million during 1996 and
$2.6 million during 1995,
24
25
which includes deposits made for future deliveries. Additional purchases
on similar terms are contemplated in future periods.
Management believes that OLDE Discount's expenditures for services provided to
it by FMS, CCL, and Canadian Direct Marketing Services ("CDMS") discussed
herein have been and will be no greater than those that would have been made
with nonaffiliated vendors of equivalent services.
Ernest J. Olde and OLDE Discount are parties to a lease agreement pursuant to
which OLDE Discount is leasing a building owned by Mr. Olde containing
approximately 22,000 square feet of leasable space located at 751 Griswold,
Detroit, Michigan 48226 through December 31, 2000, for use as part of its
corporate offices. The lease agreement provides for monthly lease payments of
$14,500. In addition, OLDE Discount is obligated to pay utilities, real estate
taxes, and other occupancy expenses. The Company believes that the payments
under this lease are comparable to the rents charged by nonaffiliated owners of
equivalent office space.
Ernest J. Olde and OLDE Discount are parties to a lease agreement whereby OLDE
Discount is leasing a commercial office building owned by Mr. Olde containing
approximately 119,000 square feet of usable space at 131 W. Lafayette, Detroit,
Michigan through December 31, 2000. The rental rate is $39,659 per month. OLDE
Discount is also obligated to pay utilities, real estate taxes and other
occupancy expenses. The Company believes that the payments under this lease
are comparable to the rents charged by nonaffiliated owners of equivalent
office space.
OLDE Discount also leases approximately 50,000 square feet of warehouse space
in a building owned by Ernest J. Olde at 1700 W. Fort Street, Detroit, Michigan
through December 31, 2000. The Company believes that the payments under this
lease, currently $13,148 per month, are comparable to the rents charged by
nonaffiliated owners of equivalent warehouse space.
The Company has established a policy for dealing with affiliates requiring:
(i) all transactions between the Company and affiliates be on terms the Board
of Directors determines to be reasonable and comparable with terms that could
or would be obtained from nonaffiliated parties under similar circumstances;
and (ii) all transactions between the Company and affiliate must first be
reviewed and approved by a majority of the Board of Directors and a majority of
those directors who are independent and disinterested to the proposed
transaction (See also, Note 12 to Consolidated Financial Statements).
25
26
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
As required by ITEM 8 of this Form, the following consolidated
financial statements of OLDE Financial Corporation and its
subsidiaries are included.
14 (a) (1) Index to Consolidated Financial Statements 27
Report of Independent Auditors 29
Consolidated Statements of Financial Condition
as of December 31, 1996 and 1995 30
Consolidated Statements of Operations for the years ended
December 31, 1996, 1995, and 1994 32
Consolidated Statements of Changes in Stockholders' Equity for the
years ended December 31, 1996, 1995, and 1994 33
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1995, and 1994 34
Notes to Consolidated Financial Statements 35
14 (a) (2) The following consolidated financial statement schedules of
OLDE Financial Corporation and subsidiaries are included in ITEM 14 (d):
Financial Statement Schedules:
Consolidated Financial Information of Registrant - Schedule 1 44
Valuation and Qualifying Accounts - Schedule 2 48
Computation of Per Share Earnings - Schedule 3 49
Ratio of Earnings to Fixed Charges - Schedule 4 50
All other financial statement schedules for which provision is made
in the applicable accounting regulation of the Securities and
Exchange Commission are not required under the related instructions
or are inapplicable, and therefore have been omitted.
14 (a)(3) Exhibits listed in the accompanying index to exhibits are filed as part of this annual report
14(b) There were no reports filed on Form 8-K during the fourth quarter of 1996.
14(c) Index to Exhibits
26
27
INDEX TO EXHIBITS
Exhibit No. Description of Exhibits Location
- - ----------- --------------------------------------------------- ---------
3(I) Articles of incorporation of registrant as amended. c.
3(ii) Bylaws of registrant. c.
4(a) Form of indenture between registrant and Comerica
Bank, N.A., Trustee. a.
4(b) Specimen 12.5% Debenture. b.
4(c) Specimen 9.6% Debenture. c.
10.1 Services agreement between OLDE Discount
Corporation, Sumner Press Ltd. and Financial
Marketing Services, Inc. dated August 1987. c.
10.2 Services agreement between OLDE Discount
Corporation and Broker-Dealer Services, Inc.
dated December 1985. c.
10.3 Lease agreement between Ernest J. Olde and
OLDE Discount Corporation effective
date January 1996. d.
10.4 Lease agreement between Ernest J. Olde and OLDE
Discount Corporation effective date January 1996. d.
10.5 Lease agreement between Ernest J. Olde and OLDE
Discount Corporation effective date January 1996. d.
21 Subsidiaries of the registrant. c.
a. Incorporated by reference from the registrant's
registration statement filed on Form S-1 and declared effective
on April 14, 1988.
b. Incorporated by reference from the registrant's
registration statement filed on Form S-1 and declared effective
on July 1, 1988.
c. Incorporated by reference from the registrant's
registration statement filed on Form S-1 and declared effective
on May 6, 1992.
d. Incorporated by reference from the registrant's
exhibits filed with Form 10-Q dated September 29, 1995.
27
28
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, on March 27, 1997.
OLDE FINANCIAL CORPORATION
By: /s/ Randal J. Mudge
--------------------------
Randal J. Mudge, President
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 in the capacities on the date indicated.
Signature Title Date
/s/ Ernest J. Olde Chairman and Director March 27, 1997
- - ---------------------
Ernest J. Olde
/s/ Jeffrey M. Slopen Director March 27, 1997
- - ---------------------
Jeffrey M. Slopen
/s/ Randal J. Mudge President and March 27, 1997
- - ---------------------
Randal J. Mudge Director
/s/ Mack H. Sutton Chief Financial Officer March 27, 1997
- - --------------------- (Principal Financial
Mack H. Sutton and Accounting Officer)
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION
15(D) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT
TO SECTION 12 OF THE ACT.
An annual report is to be furnished to security holders subsequent to the
filing of this Form 10-K.
Copies of the annual report furnished to security holders will be provided to
the Commission at the time the annual report is furnished to security holders.
No proxy material has been sent to security holders.
28
29
[ ERNST & YOUNG LLP LETTERHEAD ]
Report of Independent Auditors
We have audited the accompanying consolidated financial statements of
OLDE Financial Corporation and subsidiaries as of December 31, 1996 and 1995,
and the related consolidated statements of operations, changes in stockholders'
equity, and cash flows for each of the three years in the period ended
December 31, 1996. Our audits also included the financial statement schedules
listed in the Index at Item 14(a). These financial statements and
schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedules 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 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
OLDE Financial Corporation and subsidiaries at December 31, 1996 and 1995,
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended December 31, 1996, in conformity with
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedules, when considered in relation to the basic
financial statements taken as a whole, present fairly in all material respects
the information set forth therein.
ERNST & YOUNG LLP
February 7, 1997
F-1
29
30
Part I. - Financial Information
Item 1. - Financial Statements
OLDE Financial Corporation
Consolidated Statements of Financial Condition
December 31, 1996 and December 31, 1995
December 31, December 31,
1996 1995
------------------------------
Assets:
Cash $ 36,318,892 $ 32,545,541
Short term investments - at cost which approximates
market 22,811,775 20,388,951
U.S. Government and U.S. Government Agencies securities
purchased under agreements to resell - at resale amount 179,974,000 125,066,000
Special reserve account for benefit of customers:
U.S. Government securities purchased under
agreements to resell - at resale amount 119,881,000 10,258,000
Cash 6,201 6,808
119,887,201 10,264,808
Deposits with clearing organizations:
Cash 2,004,965 1,894,061
U.S. Government and other securities - at market 3,689,434 3,827,401
------------------------------
5,694,399 5,721,462
Receivables:
Customers 1,153,541,049 1,286,000,111
Brokers, dealers and clearing organizations 24,270,894 25,984,261
Other, including $323,168 and $513,310 from,
affiliates at December 31, 1996 and December 31, 1995,
respectively 7,030,219 9,443,661
Less reserve for doubtful accounts (1,700,182) (1,576,801)
------------------------------
1,183,141,980 1,319,851,232
Securities owned - at market 37,910,060 45,523,348
Property and equipment - at cost less accumulated
depreciation and amortization of $30,832,793 and $21,588,842
at December 31, 1996 and December 31, 1995, respectively 55,453,237 58,764,062
Exchange memberships - at cost 808,778 814,778
Other 8,227,953 6,220,678
------------------------------
$1,650,228,275 $1,625,160,860
==============================
See accompanying notes
30
31
OLDE Financial Corporation
Consolidated Statements of Financial Condition
December 31, 1996 and December 31, 1995
December 31, December 31,
1996 1995
------------------------------
Liabilities and Stockholders' Equity:
Payable to customers $1,087,561,270 $820,007,186
Payable to brokers and dealers 179,341,557 473,132,159
Securities sold, not yet purchased - at market 6,989,535 5,968,008
Accrued income taxes 3,552,574 3,268,127
Real estate mortgages 13,410,599 16,530,674
Capital lease obligations 4,226,682 6,483,397
Accounts payable, accrued expenses and other
including $1,178,963 and $1,000,503 to affiliates
at December 31, 1996 and December 31, 1995,
respectively 26,281,213 27,568,995
------------------------------
1,321,363,430 1,352,958,546
Subordinated debt:
12% Senior subordinated debentures due
April, 1996 - 7,500,000
12.5% Senior subordinated debentures due
August, 1998 10,000,000 10,000,000
9.6% Senior subordinated debentures due
May, 2002 20,000,000 20,000,000
------------------------------
30,000,000 37,500,000
Commitments and contingencies (Note 6)
Stockholders' equity:
Common stock ($0.10 par value; 40,000,000 shares
authorized; 36,810,000 and 36,745,000 shares
issued and outstanding at December 31, 1996
and December 31, 1995, respectively) 3,681,000 3,674,500
Additional paid in capital 408,850 -
Retained earnings 294,774,995 231,027,814
------------------------------
Total stockholders' equity 298,864,845 234,702,314
------------------------------
$1,650,228,275 $1,625,160,860
==============================
See accompanying notes.
31
32
OLDE Financial Corporation
Consolidated Statements of Operations
For 1996, 1995, and 1994
Year Ended December 31,
1996 1995 1994
----------------------------------------
Revenues:
Commissions $144,766,503 $132,975,490 $112,610,660
Principal transactions 118,069,712 146,155,459 115,724,429
Interest 104,310,373 98,672,123 64,656,339
Other 12,873,785 11,476,564 8,341,200
----------------------------------------
Total revenues 380,020,373 389,279,636 301,332,628
Expenses:
Employee compensation and benefits 129,757,286 124,724,265 94,328,460
Commissions, floor brokerage and fees 9,992,414 9,859,799 10,503,492
Communications 10,570,143 9,913,135 8,077,176
Advertising and promotional (a) 16,770,577 18,211,106 14,374,874
General and administrative (b) 33,094,488 26,691,533 15,148,139
Interest 45,522,255 44,516,190 28,439,851
Occupancy (c) 22,000,283 19,884,498 16,987,866
Data processing and supplies (d) 10,223,744 8,994,030 8,745,783
----------------------------------------
Total expenses 277,931,190 262,794,556 196,605,641
----------------------------------------
Income before income taxes 102,089,183 126,485,080 104,726,987
Income tax provision 38,342,000 48,127,000 39,685,000
----------------------------------------
Net income $ 63,747,183 $ 78,358,080 $65,041,987
========================================
Net income per common share $1.73 $2.12 $1.74
========================================
Weighted average shares
outstanding 36,795,781 37,004,315 37,369,660
========================================
(a) Including approximately $12,100,000, $14,642,000, and $11,510,000 with an
affiliate in 1996, 1995, and 1994 respectively.
(b) Including approximately $436,500, $465,000, and $561,000 with an
affiliate in 1996, 1995, and 1994 respectively.
(c) Including approximately $807,700, $997,000, and $1,081,000 with the
Company's majority stockholder in 1996, 1995, and 1994 respectively.
(d) Including approximately $11,000 and $2,896,000 with an affiliate in 1995
and 1994.
See accompanying notes
32
33
OLDE Financial Corporation
Consolidated Statements of Changes
in Stockholders' Equity
Common Additional Paid Retained
Stock in Capital Earnings Total
---------- --------------- ----------- ------------
Balance, January 1, 1994 $3,702,500 $ 508,150 $ 89,470,641 $ 93,681,291
Issuance of 370,000 shares of
common stock 37,000 900,746 - 937,746
Net Income - - 65,041,985 65,041,985
-------------------------------------------------------------
Balance, December 31, 1994 3,739,500 1,408,896 154,512,626 159,661,022
Redemption of 650,000 shares of
common stock (65,000) (1,408,896) (1,842,894) (3,316,790)
Net Income - - 78,358,080 78,358,080
-------------------------------------------------------------
Balance, December 31, 1995 3,674,500 - 231,027,812 234,702,312
Issuance of 65,000 shares of
common stock 6,500 408,850 - 415,350
Net Income - - 63,747,183 63,747,183
-------------------------------------------------------------
Balance, December 31, 1996 3,681,000 408,850 294,774,995 298,864,845
=============================================================
See accompanying notes
33
34
OLDE Financial Corporation
Consolidated Statements of Cash Flows
YEAR ENDED DECEMBER 31,
CASH FLOWS FROM OPERATING ACTIVITIES: 1996 1995 1994
- - ------------------------------------- ---- ---- ----
Net income $ 63,747,183 $ 78,358,080 $ 65,041,987
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 9,327,929 8,311,351 5,340,146
Deferred income taxes (2,336,000) (775,000) 198,000
(Increase) decrease in:
Special reserve account for benefit
of customers (109,622,393) (1,162,557) 8,659,456
Deposits with clearing organizations 27,063 371,695 (2,385,056)
Receivables from customer 132,459,062 (341,233,049) (297,026,694)
Receivables from brokers, dealers,
and clearing organizations 1,713,367 2,780,843 2,521,464
Receivables from others 2,536,823 (2,068,359) 1,174,337
Securities purchased under agreements
to resell (54,908,000) (84,285,000) (12,698,000)
Securities owned 7,613,288 (25,295,760) (8,068,234)
Other assets, net (2,001,275) (2,747,405) 444,931
Increase (decrease) in:
Payables to customers 267,554,084 129,793,062 149,189,211
Payables to brokers and dealers (293,790,602) 250,627,406 107,183,883
Securities sold, not yet purchased 1,021,527 630,808 956,605
Accrued income taxes 2,620,447 2,081,274 (2,776,170)
Accounts payable, accrued expenses
and other liabilities (1,287,784) 7,796,347 3,711,470
------------- ------------ ------------
Net cash provided by
operating activities 24,674,719 23,183,736 21,467,336
CASH FLOWS USED IN INVESTING ACTIVITIES:
- - ----------------------------------------
Capital expenditures (4,661,321) (16,635,357) (12,760,281)
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES:
- - ------------------------------------------------------
Issuance of common stock 415,350 - 937,746
Redemption of common stock - (3,316,790) -
Payment of Senior Subordinated Debt (7,500,000) - -
Principal payments on real estate mortgages (3,438,075) (2,312,415) (1,156,910)
Real estate mortgages obtained 318,000 6,677,500 5,621,500
Principal payments on capital lease obligations (3,612,498) (3,740,592) (2,398,601)
------------- ------------ ------------
Net cash provided by (used in)
financing activities (13,817,223) (2,692,297) 3,003,735
Net increase (decrease) in cash 6,196,175 3,856,082 11,710,790
Cash and cash equivalents at the
beginning of period 52,934,492 49,078,410 37,367,620
------------- ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 59,130,667 $ 52,934,492 $ 49,078,410
============= ============ ============
Interest Paid $ 45,136,000 $ 43,776,000 $ 27,590,000
See accompanying notes
34
35
OLDE Financial Corporation
Notes to Consolidated Financial Statements
December 31, 1996
1. Business
The accompanying financial statements present the consolidated financial
statements of the Company and its subsidiaries, OLDE Discount Corporation
("OLDE Discount"), American Brokerage Services, Inc. ("ABS"), OLDE Asset
Management , Inc. ("OAM"), OLDE Realty Corporation ("ORC"), OLDE Property
Corporation ("OPC"), OLDE Equipment Corporation ("OEC"), Realty Acquisitions,
Inc. ("RAI"), and Smart Travel, Inc. ("STI"). Material intercompany balances
have been eliminated for all periods presented.
The Company is a financial services company. OLDE Discount engages in a
discount securities brokerage business primarily for retail customers
throughout the United States. OLDE Discount also engages in market making and
specialist activities in common stocks and is a dealer in corporate and
municipal bonds and U. S. Government securities.
Other products and services provided to customers include: stock research and
recommendations; money market funds with sweep provisions for settlement of
customer transactions; fixed-income products; mutual funds; margin accounts;
accounts offering checking privileges; option accounts; and individual
retirement accounts with no annual fee.
OAM provides portfolio management and administrative services to the OLDE
Custodian Fund, a money market fund sponsor. ORC, OPC, and RAI are engaged in
the acquisition, ownership and operation of commercial real estate, leased
primarily to OLDE Discount. OEC leases computer hardware and software to OLDE
Discount. STI provides travel management and purchasing services primarily to
OLDE Discount. ABS is currently inactive.
2. Significant accounting policies
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates.
OLDE Discount is a registered securities broker-dealer and accounts for
securities transactions (and related commission revenue and expense) on the
trade date basis. The risk of loss on transactions as of trade date is
equivalent to the risk of loss on settlement date and relates to customers' or
other brokers' inability to meet the terms of contracts. Credit risk is
reduced by obtaining and maintaining adequate collateral until the contract is
settled.
The Company is a party to financial instruments with off balance sheet risk in
its normal course of business. The Company is required, in the event of the
non-delivery of customers' securities owed to the Company by other
broker-dealers, or by its customers, to purchase identical securities in the
open market. Such purchases could result in losses not reflected in the
accompanying financial statements. The market value of the securities owed to
the Company approximates the amount payable.
35
36
OLDE Financial Corporation
Notes to Consolidated Financial Statements (Continued)
2. Significant accounting policies (continued)
Securities owned and securities sold, not yet purchased, are carried at market
value. Unrealized gains and losses are reflected in operations. Sales of
securities not yet purchased represent an obligation of the Company to deliver
specified securities at a predetermined date and price. The Company will be
obligated to acquire the required securities at prevailing market prices in the
future to satisfy this obligation.
Securities purchased under agreements to resell are treated as financing
transactions and are carried at the amounts at which the securities will be
subsequently resold as specified in the respective agreements. Collateral
relating to investments in repurchase agreements is held by independent
custodian banks. The securities are valued daily and collateral added whenever
necessary to bring the market value of the underlying collateral equal to or
greater than the repurchase price specified in the contracts.
Depreciation and amortization are provided using both straight-line and
accelerated methods over estimated useful lives of three to thirty nine years.
Leasehold improvements are amortized using both straight-line and accelerated
methods.
The Company considers all non-segregated highly liquid investments (short-term
investments) with a maturity of three months or less when purchased to be cash
equivalents.
The Company does not provide post-employment retirement benefits for any of its
officers, directors or employees.
3. Special reserve account for benefit of customers
U.S. Government securities purchased under agreements to resell and cash have
been segregated in a special reserve account for the exclusive benefit of
customers pursuant to Federal regulations under Rule 15c3-3 of the Securities
Exchange Act of 1934.
4. Securities owned and securities sold, not yet purchased
At December 31, 1996 marketable securities owned and securities sold, not yet
purchased consist of trading and investment securities at quoted market values,
as follows:
Securities Securities Sold
Owned Not Yet Purchased
----------- -----------------
U.S. Government Securities $2,743,004 $ 672,160
Municipal Securities 9,519,096 129,887
Various Fixed Income Securities
(Including Preferred Stocks) 13,590,564 2,953,368
Equity Securities 11,974,244 3,151,075
Other Securities 83,152 83,045
----------- ----------
Total $37,910,060 $6,989,535
=========== ==========
5. Receivables from customers
Receivables from customers include amounts due on margin and cash transactions.
The receivables are collateralized by customers' securities held, which are
not reflected in the financial statements.
36
37
OLDE Financial Corporation
Notes to Consolidated Financial Statements (Continued)
6. Receivables and payables with brokers, dealers, and clearing organizations
Receivables from brokers generally are collected within thirty days and are
collateralized by securities in physical possession, on deposit, or receivable
from customers or other brokers. The Company does business with brokers that
for the most part are members of the major U.S. securities exchanges.
The Company monitors the credit standing of broker-dealers and customers with
whom it conducts business. In addition, the Company monitors the market value
of collateral held and the market value of securities receivable from others.
The Company obtains additional collateral if insufficient protection against
loss exists.
Amounts receivable from and payable to brokers, dealers, and clearing
organizations as of December 31 are as follows:
1996 1995
------------ ------------
Receivables:
Securities failed to deliver $ 567,687 $ 346,377
Deposits on Securities Borrowed 19,719,805 20,963,686
Clearing Organizations & Other 3,983,402 4,674,198
------------ ------------
$ 24,270,894 $ 25,984,261
============ ============
Payables:
Securities failed to receive $1,928,127 $952,465
Deposits received for
Securities Loaned 177,375,254 472,179,694
Other 38,176 -
------------ ------------
$179,341,557 $473,132,159
============ ============
In June 1996, the Financial Accounting Standards Board issued "Statement" 125,
"Transfers and Servicing of Financial Assets and Extinguishment of
Liabilities". This "Statement", which becomes effective in two parts on
January 1, 1997 and January 1, 1998, provides accounting and reporting
standards for transfers and servicing of financial assets and extinguishment of
liabilities. The first part of the "Statement" which became effective on
January 1, 1997, had no effect on the Company. The second part of the
"Statement" effective January 1, 1998 may impact the financial statements of
the Company. The impact of the adoption of "Statement" 125 is not anticipated
to be material to the operations of the Company.
7. Securities lending
At December 31, 1996, funds obtained under securities lending agreements, which
is included with payables to broker dealers, amounted to $177.4 million.
Securities loaned are securities held by customers on margin. When loaning
securities OLDE Discount receives cash collateral approximately equal to the
value of the securities loaned. The amount of cash collateral is adjusted
daily for market fluctuations in the value of the securities loaned. Interest
rates paid on the cash collateral fluctuate with short-term interest rates.
37
38
OLDE Financial Corporation
Notes to Consolidated Financial Statements (Continued)
8. Property and equipment
Property and equipment at cost consist of the following at December 31, 1996:
1996 1995
----------- -----------
Land $ 5,475,317 $ 5,384,425
Building and improvements 35,364,255 33,911,772
Furniture, fixtures, and equipment 45,446,458 41,056,707
----------- -----------
Total Property and Equipment $86,286,030 $80,352,904
=========== ===========
9. Bank lines of credit, debt, commitments and contingencies
At December 31, 1996, bank lines of credit available to OLDE Discount amounted
to $180 million. A line of credit in the amount of $80 million may be
withdrawn at the discretion of the bank. A $100 million committed line of
credit expires in August 1997 and, subject to the terms of the agreement, may
be extended for one year at the bank's discretion. Separate commitments for
letters of credit in the amount of $45 million were also available. Short-term
bank loans outstanding under the lines of credit are payable either on demand
or upon expiration of the line of credit and are collateralized by marketable
securities carried for the accounts of margin customers. Loans outstanding
bear interest at broker loan rates.
There were no borrowings under these lines of credit at December 31, 1996 or
December 31, 1995. During 1996 and 1995, there were no compensating balance
requirements related to these lines of credit. The average daily borrowings of
short-term bank loans were $240,000 , $214,000, and $290,000 with a weighted
average interest rate paid of 6.3%, 6.8%, and 5.5% during 1996, 1995, and
1994.
As of December 31, 1996, OLDE Discount had provided a clearing corporation with
letters of credit totaling $32 million which satisfied margin deposit
requirements of $27.9 million. These letters of credit are secured by
customers' margin securities.
OLDE Discount leases office facilities over varying periods extending to 2005.
The Company's approximate minimum annual rental commitments under
noncancellable operating leases are as follows:
1997 $ 4,978,000
1998 3,630,000
1999 2,623,000
2000 1,656,000
2001 810,000
Thereafter 803,000
-----------
Total $14,500,000
===========
38
39
OLDE Financial Corporation
Notes to Consolidated Financial Statements (Continued)
9. Bank lines of credit, debt, commitments and contingencies (continued)
Certain of the office leases contain renewal options ranging from one to five
years. The office leases generally provide for rent escalation resulting from
increased assessments for real estate taxes and other charges. Rental expense
for office facilities under noncancellable operating leases was $6.6 million,
$6.3 million, and $5.6 million, respectively for the years ended December 31,
1996, 1995 and 1994 respectively.
OLDE Equipment leases computer hardware. The following is a schedule of future
minimum lease payments under capital leases together with the present value of
the net minimum lease payments as of December 31, 1996:
1997 $2,988,652
1998 1,242,406
1999 327,391
----------
Total minimum lease payments 4,558,449
Less amount representing interest 331,767
----------
Present value of net minimum lease payments $4,226,682
==========
Computer systems financed under capital leases and hardware included in
property and equipment amounted to approximately $12.6 million and $11.5
million at cost at December 31, 996 and 1995 respectively, and accumulated
amortization amounted to approximately $6.9 million and $4.5 million
respectively. Amortization of capital leases is included with depreciation and
amortization expense.
At December 31, 1996, OLDE Property Corporation had outstanding $13.4 million
in real estate mortgages. These mortgages are secured by substantially all
land, building, and improvements of the Company. Mortgages outstanding bear
interest at 6.25%, 8%, and 8.25% per annum. These mortgages are scheduled to
mature in 2002 at which point it is the Company's intent to refinance remaining
amounts. The following is a schedule of future minimum mortgage principal
payments:
1997 $ 3,253,440
1998 2,941,416
1999 2,941,416
2000 2,750,510
2001 1,142,856
2002 380,960
-----------
Total $13,410,598
===========
Subsequent to December 31, 1996, OLDE Property Corporation entered into an
agreement to purchase one additional property for approximately $620,000.
OLDE Discount is a defendant and respondent in a number of civil actions,
arbitrations, and class actions arising out of its business as a broker-dealer,
including a consolidated certified class action in Federal court which alleges
that 33 securities dealers conspired to fix and maintain artificial bid-ask
spreads on certain securities traded on the National Association of Securities
Dealers Automated Quotation System ("NASDAQ") over-the-counter market, and
other purported class actions. The Company believes it has meritorious
defenses against these claims and intends to assert them vigorously. It is
management's opinion that the disposition of these claims will not have a
material adverse effect on the financial condition of the Company.
39
40
OLDE Financial Corporation
Notes to Consolidated Financial Statements (Continued)
9. Bank lines of credit, debt, commitments and contingencies (continued)
OLDE Discount is the subject of an investigation by the Securities and Exchange
Commission ("SEC"). The investigation has focused on certain sales practices
of the broker-dealer. OLDE Discount has cooperated fully with the SEC and does
not believe that the broker-dealer has engaged in improper activity. However,
at this time this investigation has not been concluded. The SEC may seek to
impose a fine and/or other remedial sanctions on OLDE Discount and/or its
employees.
The Company, its principal shareholder, OLDE Discount and certain affiliates
and others, were named as defendants in a civil action filed on March 17, 1992
by a former executive of the firm. The complaint alleged various tort,
contractual, and statutory claims relative to OLDE Discount's termination of
the former executive's employment. The matter was subsequently ordered to
arbitration. During 1996, this matter was resolved without a material effect
on the Company.
10. Subordinated Debt
On April 1, 1996, the Company's $7.5 million of 12% senior subordinated
debentures matured, and were repaid.
In July 1988, the Company issued, through a public offering, $10 million of
12.5% Senior Subordinated Debentures due August 1, 1998. Net proceeds of $9.7
million from this offering were invested in OLDE Discount in the form of a note
receivable. This note is subordinated to all of OLDE Discount's creditors
whose claims are not similarly subordinated. The subordination agreement with
OLDE Discount matures on August 1, 1998 and bears interest at 13.5%.
In May 1992, the Company issued, through a public offering, $20 million of 9.6%
Senior Subordinated Debentures due May 1, 2002. Net proceeds of $4.5 million
from this offering were invested in OLDE Discount in the form of a note
receivable. This note is subordinated to all of OLDE Discount's creditors
whose claims are not similarly subordinated. The subordination agreement with
OLDE Discount matures on May 1, 2002 and bears interest at 10.6%. The balance
of the proceeds were invested in OLDE Property Corporation and used in the
acquisition of real properties.
At December 31, 1996, the entire $14.2 million of subordinated debt of OLDE
Discount was included in computing its net capital under the Securities and
Exchange Commission's net capital rules. Such subordinated borrowings are
covered by agreement approved by the New York Stock Exchange, Inc. Repayment
of the notes and termination of the subordination agreements at maturity are
subject to OLDE Discount's continued compliance with its minimum net capital
requirements.
11. Net capital requirements
OLDE Discount is required to maintain minimum net capital as defined under Rule
15c3-1 of the Securities Exchange Act of 1934 and has elected to comply with
the alternative net capital requirement, which requires a broker-dealer to
maintain minimum net capital equal to the greater of $250,000 or 2% of the
combined aggregate debit balances arising from customer transactions, as
defined. The net capital rule also provides that equity capital may not be
withdrawn or cash dividends paid if resulting net capital would be less than
the greater of 5% of combined aggregate debit items or $250,000. At December
31, 1996, OLDE Discount's net capital of $268.5 million, which was 22% of
aggregate debit items, exceeded by $244.5 million its minimum required net
capital of $23.9 million.
40
41
OLDE Financial Corporation
Notes to Consolidated Financial Statements (Continued)
11. Net capital requirements (continued)
In February 1997, the Board of Directors of OLDE Discount Corporation approved
the payment of cash dividends to the Company in the amount of $45,124,940 to be
paid in the first quarter of 1997. If OLDE Discount's net capital had been
reduced by the dividend payment, the Company's net capital ratio at December
31, 1996 would have been 19% of aggregate debits.
12. Income taxes
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Company's deferred tax assets (liabilities) at December 31, 1996 and
1995 are as follows:
1996 1995
---------- --------
Contingencies reserve $2,876,000 $750,000
Tax over book depreciation (587,000) (648,000)
Reserve for Doubtful accounts 595,000 552,000
Employee Benefits 533,000 452,000
Prepaid Expenses (210,000) (237,000)
Other 65,000 67,000
---------- --------
$3,272,000 $936,000
========== ========
Significant components of the provision for income taxes are as follows:
Current: 1996 1995 1994
------------ ----------- -----------
Federal $36,787,000 $42,741,000 $34,820,000
State and local 3,891,000 6,161,000 4,667,000
------------ ----------- -----------
Total current tax 40,678,000 48,902,000 39,487,000
Deferred (credit):
Federal (2,336,000) (775,000) 198,000
State and local - - -
------------ ----------- -----------
Total deferred (2,336,000) (775,000) 198,000
------------ ----------- -----------
$38,342,000 $48,127,000 $39,685,000
============ =========== ===========
A reconciliation of the total federal income tax provision and the amount
computed by applying the statutory federal income tax rate to earnings before
income taxes is as follows:
1996 1995 1994
------------ ----------- -----------
Tax at U.S. statutory rates $35,730,990 $44,269,778 $36,654,000
Impact of state and local taxes (1,361,850) (2,156,350) (1,633,000)
Other 81,860 (147,428) (3,000)
------------ ----------- -----------
$34,451,000 $41,966,000 $35,018,000
============ =========== ===========
Total income taxes paid approximated $40.5 million, $49.8 million, and $43.1
million for 1996, 1995, and 1994 respectively.
41
42
OLDE Financial Corporation
Notes to Consolidated Financial Statements (Continued)
13. Related party transactions
Directors, officers, and employees of the Company maintain cash and margin
accounts with OLDE Discount and execute securities transactions through OLDE
Discount in the ordinary course of business.
OLDE Discount purchases significant advertising and promotional material from
Financial Marketing Services, Inc. ("FMS"), a Michigan corporation wholly-owned
by the majority shareholder of the Company, and North American Printing Company
("North American") formerly Summer Press, Ltd., a Canadian company controlled
by FMS. North American supplies FMS with substantially all of OLDE Discount's
printed advertising materials. OLDE Discount has agreed to purchase
substantially all of its printed materials from FMS. Minimum annual
advertising purchases under this agreement will be $2.4 million through 1997.
In total, the Company's advertising purchases from FMS amounted to
approximately $11.7 million, $14.1 million, and $11.5 million for the years
ending December 31, 1996, 1995, and 1994 respectively. Other subsidiaries of
FMS charged the Company approximately $850,000, $968,000, and $963,000
primarily for mailing and general services for the same periods, respectively.
Cash disbursements (including deposits made for future deliveries) for office
furnishings, office renovation, remodeling materials and other supplies from
Canadian Consumer League, Inc., a company owned by the Company's majority
shareholder, amounted to approximately $1 million, $2.6 million, and $2.7
million, respectively for the periods ended December 31, 1996, 1995, and 1994.
Future rental commitments include amounts payable to the Company's majority
stockholder under various operating leases covering the Company's and OLDE
Discount's corporate headquarters and other facilities. The leases expire in
2000, and provide for monthly rental payments of approximately $67,000. OLDE
Discount pays utilities, real estate taxes and other occupancy expenses under
these leases.
Through December 1994, OLDE Discount had received certain data processing and
communication services from Broker-Dealer Services, Inc. ("BDSI"). The
Company's majority shareholder and a director of the Company is also a
shareholder of BDSI. In February 1995, the computer systems of BDSI were
purchased by OEC. Total expenses under these agreements were $2.9 million for
the period ending December 31, 1994.
At December 31, 1996 and 1995, the Company held investments of $22.8 million
and $20.4 million, respectively, in shares of money market mutual funds
sponsored and managed by subsidiaries of the Company.
14. Estimated fair values of financial instruments
Generally accepted accounting principles currently require disclosure of
estimated fair values of financial instruments. The Company uses present value
techniques to determine the estimated values of its financial instruments where
quoted market values are not available. These techniques require judgment, and
the estimates may be significantly affected by the assumptions made. A portion
of the Company's financial instruments are securities, traded in nationally
recognized financial markets. These instruments are carried in the Company's
financial statements at quoted market value or the market value for comparable
securities which represents estimated fair value. Changes in market values of
these instruments are reflected in current operating results.
A substantial portion of the Company's other financial instruments, consisting
primarily of customer margin loans and customer credit balances, earn or pay
rates of interest that change in accordance with general changes in short-term
interest rates. Such instruments are carried in the financial statements at
the amount receivable or payable on demand, which is considered to be the
estimated fair value. Outstanding subordinated debentures of the Company pay
rates of interest fixed at the time of their issuance. The estimated market
value of these debentures fluctuates
42
43
inversely to changes in interest rates. The excess of estimated market value
of the debentures compared to their recorded cost based on interest rates in
effect at December 31, 1996, is not considered material.
The above disclosures do not extend to estimated fair value amounts for items
not defined as financial instruments by FASB No. 107 "Disclosures About Fair
Value of Financial Instruments", for example, customer relationships, which
possess significant value.
15. Non cash financing activities
The Company incurred liabilities for capital lease obligations in the amount of
approximately $1.4 million, $3.2 million, and $4.9 million for the periods
ending December 31, 1996, 1995, and 1994 respectively. These transactions
affected the Company's recognized liabilities but were not characterized by the
receipt or payment of cash.
16. Subsequent events
Under agreements with certain shareholders entered into in February 1997, the
Company has redeemed 5,812,876 shares of its common stock at $8.15 per share,
for a total consideration of $47,374,940.
43
44
OLDE FINANCIAL CORPORATION
CONDENSED STATEMENTS OF FINANCIAL CONDITION
(Parent Company Only)
SCHEDULE 1
December 31, December 31,
1996 1995
------------ ------------
Assets:
Cash $ 470,808 $ 169,943
Short Term Investments 210,795 418,237
Accounts receivable 151,654 231,655
Subordinated notes receivable from
OLDE Discount Corporation 14,190,000 21,395,000
Investments in subsidiaries 300,408,072 236,679,697
Advances to other subsidiaries 14,018,280 14,018,280
Debt issuance costs 305,972 394,936
------------ ------------
$329,755,581 $273,307,748
============ ============
Liabilities and Stockholder's equity:
Liabilities:
Accrued interest payable to debenture holders $ 840,833 $ 1,065,833
Intercompany accounts payable 16,000 16,000
Other 33,903 23,603
------------ ------------
890,736 1,105,436
Senior Subordinated debentures 30,000,000 37,500,000
Stockholders' equity:
Common stock ($0.10 par value,
40,000,000 shares authorized; 36,810,000 and
36,745,000 shares issued and outstanding, at
December 31, 1996 and 1995, respectively) 3,681,000 3,674,500
Additional paid-in capital 408,850 -
Retained earnings 294,774,995 231,027,812
------------ ------------
Total Stockholders' Equity $298,864,845 $234,702,312
------------ ------------
$329,755,581 $273,307,748
============ ============
See accompanying notes.
44
45
OLDE FINANCIAL CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
(Parent Company Only)
SCHEDULE 1
Year Ended December 31,
1996 1995 1994
----------- ----------- -----------
Revenues:
Equity in earnings of subsidiaries $63,728,375 $78,321,933 $64,988,635
Interest 3,542,861 4,279,659 4,281,156
----------- ----------- -----------
Total revenues 67,271,236 82,601,592 69,269,791
Expenses:
Interest 3,395,000 4,070,000 4,053,121
General and administrative 118,553 154,011 144,183
----------- ----------- -----------
Total expenses 3,513,553 4,224,011 4,197,304
Income before income taxes 63,757,683 78,377,581 65,072,487
Income tax provision (credit) 10,500 19,501 30,500
----------- ----------- -----------
Net Income $63,747,183 $78,358,080 $65,041,987
=========== =========== ===========
See accompanying notes.
45
46
OLDE FINANCIAL CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(Parent Company Only)
SCHEDULE 1
Year ended December 31,
1996 1995 1994
----------- ----------- -----------
Cash flows from operating activities:
Net Income $63,747,183 $78,358,080 $65,041,987
Adjustments to reconcile income
to cash provided by (used in)
operating activities:
Equity in earnings of subsidiary (63,728,375) (78,321,930) (64,988,260)
Decrease) in interest payable (225,000) - (16,879)
Amortization of debt issuance
costs 88,964 117,394 117,394
Other, net 90,301 17,559 (223,001)
----------- ----------- -----------
Cash flows provided by
(used in) investing activities (26,927) 171,103 (68,759)
Cash flows from investing activities:
Advances to subsidiaries - 2,380,424 (405,517)
----------- ----------- -----------
Cash flows provided by (used in)
investing activities - 2,380,424 (405,517)
Cash flows from financing activities:
Subordinated notes receivable 7,205,000 - -
Senior subordinated
debentures (7,500,000) - -
Redemption of common stock - (3.316,790) -
Issuance of common stock 415,350 - 937,746
----------- ----------- -----------
Cash provided (used in) by
financing activities 120,350 (3,316,790) 937,346
Net increase (decrease) in cash
and cash equivalents 93,423 (765,263) 463,470
Cash and cash equivalents at
beginning of year 588,180 1,353,443 889,973
----------- ----------- -----------
Cash and cash equivalents at
end of year $681,603 $588,180 $1,353,443
=========== =========== ===========
Interest Paid $ 3,395,000 $ 4,070,000 $ 4,070,000
=========== =========== ===========
See accompanying notes.
46
47
OLDE FINANCIAL CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Parent Company Only)
SCHEDULE 1
December 31, 1996
1. Organization, basis of presentation and significant accounting policies
The accompanying condensed financial statements are not the Company's primary
financial statements since they present only the accounts of the Company,
including its investment in subsidiaries reflected on the equity method. The
primary financial statements of the Company are its consolidated financial
statements, which include the accounts of all its subsidiaries.
The Company considers all highly liquid investments (short-term investments)
with a maturity of three months or less when purchased to be cash equivalents.
The issuance costs of the Company's senior subordinated debentures are
amortized using the straight-line method over the lives of each of the issues.
2. Subordinated notes receivable
These notes receivable represent amounts due from OLDE Discount, the Company's
principal subsidiary. The notes are subordinated to claims of all creditors of
OLDE Discount whose claims are not similarly subordinated. The principal
amounts of the notes are $9.7 million and $4.5 million, with interest rates of
13.5% and 10.6%, and maturities in August 1998 and in May 2002, respectively.
On April 1, 1996, $7.2 million of 12.5% subordinated notes payable matured.
3. Senior subordinated debentures
On April 1, 1996, $7.5 million in principal amount of 12% senior subordinated
debentures matured and were repaid. Senior subordinated debentures in the
amount of $10 million with interest at 12.5% are due in August of 1998. Senior
subordinated debentures in the amount of $20 million with interest at 9.6% are
due May 2002.
47
48
OLDE FINANCIAL CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
SCHEDULE 2
RESERVE FOR
Doubtful
Accounts Contingencies
---------- -------------
Beginning January 1, 1994 $ 968,918 $ 817,896
Provision for losses 489,760 511,468
Charge-offs and settlements (18,408) (410,446)
---------- ----------
Balance December 31, 1994 $1,440,270 $918,918
Provisions for losses 193,773 7,754,686
Charge-offs and settlements (57,242) (6,554,686)
---------- ----------
Balance December 31, 1995 $1,576,801 $2,118,918
Provision for losses 180,000 12,290,661
Charge-offs and settlements (56,619) (6,217,190)
---------- ----------
Balance December 31, 1996 $1,700,182 $8,192,389
========== ==========
48
49
OLDE FINANCIAL CORPORATION
COMPUTATION OF PER SHARE EARNINGS
SCHEDULE 3
Year Ended December 31,
1996 1995 1994
----------- ----------- -----------
Weighted Average Shares Outstanding 36,795,781 37,004,315 37,369,660
Net Income $63,747,183 $78,358,080 $65,041,987
Net Income per common share $ 1.73 $ 2.12 $ 1.74
49
50
OLDE FINANCIAL CORPORATION
RATIO OF EARNINGS TO FIXED CHARGES
Year Ended December 31, 1996
SCHEDULE 4
Fixed Charges:
Interest Expense $ 45,522,255
Portion of rent expense
representative of interest 2,276,249
------------
$ 47,798,504
Earnings:
Income from continuing operations
before taxes $102,089,183
Fixed charges per above 47,798,504
Amortization of debt issuance costs 88,964
------------
$149,976,651
============
Ratio of earnings to fixed charges 3.14 to 1
============
50