SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended June 30, 1998
or
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-8186
Dain Rauscher Corporation
(Exact name of registrant as specified in its charter)
DELAWARE 41-1228350
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation of organization)
Dain Rauscher Plaza, 60 South Sixth Street
Minneapolis, Minnesota 55402-4422
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (612) 371-2711
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
------- -------
As of July 31, 1998, the Company had 12,432,264 shares of common stock
outstanding.
DAIN RAUSCHER CORPORATION
REPORT ON FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 1998
INDEX
Page
----
I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
II. OTHER INFORMATION:
Item 1. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
Item 6. Exhibits and Reports on Form 8-K
Signatures
Index of Exhibits
Exhibits
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DAIN RAUSCHER CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
June 30, December 31,
1998 1997
(Unaudited)
----------- -----------
Assets:
Cash and cash equivalents $32,082 $35,909
Receivable from customers 1,229,455 1,170,160
Receivable from brokers and dealers 216,697 229,421
Securities purchased under agreements to resell 259,649 135,777
Trading securities owned, at market 548,884 541,511
Equipment, leasehold improvements and
buildings, at cost, net 43,070 42,376
Other receivables 89,727 80,867
Deferred income taxes 43,295 44,868
Goodwill, net of amortization 116,246 2,835
Other assets 35,890 20,677
---------- ----------
$2,614,995 $2,304,401
========== ==========
Liabilities and Shareholders' Equity:
Liabilities:
Short-term borrowings $283,557 $179,000
Drafts payable 89,506 83,499
Payable to customers 552,190 601,949
Payable to brokers and dealers 666,738 580,970
Securities sold under repurchase agreements 134,410 170,906
Trading securities sold, but not yet
purchased, at market 272,978 127,364
Accrued compensation 94,660 128,463
Other accrued expenses and accounts payable 89,287 97,500
Subordinated and other debt 102,030 15,659
---------- ----------
2,285,356 1,985,310
---------- ----------
Shareholders' equity:
Common stock 1,564 1,546
Additional paid-in capital 95,102 89,321
Retained earnings 237,754 233,419
Treasury stock, at cost (4,781) (5,195)
---------- ----------
329,639 319,091
---------- ----------
$2,614,995 $2,304,401
========== ==========
See accompanying notes to consolidated financial statements.
DAIN RAUSCHER CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in thousands, except per-share amounts)
Three Months ended June 30, Six Months Ended June 30,
1998 1997 1998 1997
-------------------------- ------------------------
Revenue:
Commissions $75,797 $63,060 $148,721 $126,687
Principal transactions 32,833 34,490 69,628 76,514
Investment banking and
underwriting 38,986 23,202 61,215 49,070
Interest 33,767 26,475 65,564 55,209
Asset management 15,532 10,609 28,862 21,109
Correspondent clearing 4,428 4,585 8,894 9,013
Other 7,139 6,083 13,612 10,974
------- ------- ------- -------
Total revenue 208,482 168,504 396,496 348,576
Interest expense (20,466) (12,373) (36,033) (26,483)
------- ------- ------- -------
Net revenue 188,016 156,131 360,463 322,093
------- ------- ------- -------
Expenses excluding interest:
Compensation and benefits 120,169 96,449 231,129 197,933
Communications 12,145 11,328 24,332 22,637
Occupancy and equipment 11,774 10,276 23,293 20,039
Travel and promotional 8,233 7,475 15,446 14,052
Floor brokerage and
clearing fees 2,876 2,790 5,703 5,717
Other 14,331 10,314 25,235 19,827
Merger-related expense - - 20,000 -
------- ------- ------- -------
Total expenses excluding
interest 169,528 138,632 345,138 280,205
------- ------- ------- -------
Earnings:
Earnings before
income taxes 18,488 17,499 15,325 41,888
Income tax expense (6,656) (6,362) (5,517) (14,996)
------- ------- ------- -------
Net earnings $11,832 $11,137 $ 9,808 $26,892
======= ======= ======= =======
Earnings per share:
Basic $ 0.96 $ 0.91 $ 0.79 $ 2.20
======= ======= ======= =======
Diluted $ 0.90 $ 0.86 $ 0.74 $ 2.07
======= ======= ======= =======
See accompanying notes to consolidated financial statements.
DAIN RAUSCHER CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
Six Months Ended June 30,
1998 1997
----------- -----------
Cash flows from operating activities:
Net earnings $ 9,808 $ 26,892
Adjustments to reconcile earnings to cash provided (used)
by operating activities, net of effect of acquisition:
Depreciation and amortization 8,427 5,581
Deferred income taxes 1,463 (2,322)
Other non-cash items 4,573 5,190
Cash and short-term investments segregated
for regulatory purposes - 15,000
Net payable to brokers and dealers 108,808 96,270
Securities purchased under agreements to resell (123,872) (150,236)
Net trading securities owned and trading
securities sold, but not yet purchased 144,314 (57,473)
Short-term borrowings and drafts payable
of securities companies 110,564 155,506
Net receivable from customers (109,054) (129,456)
Other receivables (9,301) 6,630
Securities sold under repurchase agreements (36,496) 51,596
Accrued compensation (33,980) (38,525)
Other (4,202) 1,465
-------- --------
Cash provided (used) by operating activities 71,052 (13,882)
-------- --------
Cash flows from financing activities:
Proceeds from:
Subordinated and other debt 80,000 -
Issuance of common stock 1,049 1,480
Revolving credit agreement, net - 25,000
Payments for:
Revolving credit agreement, net (30,000) -
Subordinated and other debt (15,641) (6,784)
Dividends on common stock (5,440) (4,413)
-------- --------
Cash provided by financing activities 29,968 15,283
-------- --------
Cash flows from investing activities:
Proceeds from investment dividends and sales 1,707 -
Payments for:
Acquisition, net of cash acquired (95,588) -
Equipment, leasehold improvements and other (10,966) (9,012)
-------- --------
Cash used by investing activities (104,847) (9,012)
-------- --------
Decrease in cash and cash equivalents (3,827) (7,611)
Cash and cash equivalents:
At beginning of period 35,909 34,387
-------- --------
At end of period $ 32,082 $ 26,776
======== ========
Income tax payments totaled $3,112,000 and $24,068,000 and interest
payments totaled $31,577,000 and $26,238,000 during the six months
ended June 30, 1998 and 1997, respectively.
During the six months ended June 30, 1998, the Company had non-cash
financing activity of $21,657,000 representing subordinated debentures
issued as a portion of the consideration paid for an acquisition.
Also for the six months ended June 30, 1998 and 1997, respectively,
the Company had non-cash financing activity of $4,149,000 and
$2,323,000 associated with the crediting of common stock to deferred
compensation plan participants.
See accompanying notes to consolidated financial statements.
DAIN RAUSCHER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
A. Condensed Consolidated Financial Statements
The accompanying unaudited interim condensed consolidated financial
statements have been prepared in accordance with the instructions for
Form 10-Q and do not include all the information and footnotes
required by generally accepted accounting principles for complete
financial statements and should be read in conjunction with the
consolidated financial statements and related notes included in the
Company's Annual Report on Form 10-K for the year ended December 31,
1997. In the opinion of management, all adjustments necessary for a
fair presentation of such interim consolidated financial statements
have been included. All such adjustments are of a normal recurring
nature. The results of operations for the three-month period ended
June 30, 1998, are not necessarily indicative of results for
subsequent periods.
Certain prior year amounts in the financial statements have been
reclassified to conform to the 1998 presentation.
B. Acquisition
On March 31, 1998, the Company acquired Wessels, Arnold &
Henderson, LLC ("WAH"), a privately held investment banking, and
institutional equity sales and trading firm based in Minneapolis. The
transaction was accounted for as a purchase and, accordingly, the
revenues and operating results of WAH are not included in the
consolidated statements of operations for the three months ended March
31, 1998.
The consideration paid for the acquisition was $120 million of
cash and five-year subordinated debentures with a discounted value of
$21.7 million ($30 million face amount). Goodwill of approximately
$115 million was recorded and will be amortized over an estimated life
of 25 years.
The Company recorded a $20.0 million pretax charge ($12.8 million
after tax) during the 1998 first quarter for costs related to the
merger. Substantially all of the $20.0 million charge will result in
cash outflows, primarily during the second quarter of 1998. As a
result of the merger, approximately 150 jobs were eliminated. These
non-recurring costs include the following: $16.0 million for
severance; $2.5 million for space consolidation; and the remaining
$1.5 million for other integration costs. As of June 30, 1998,
approximately $16 million in expenditures, primarily severance, had
been incurred.
The following unaudited pro forma information has been prepared
assuming that the acquisition of WAH had occurred at the beginning of
the periods presented after including the impact of certain
adjustments including amortization of goodwill, increased interest
expense on acquisition debt and the related income tax effects. The
pro forma financial information below does not include the effect of
the $20.0 million charge recorded by the Company in the quarter ended
March 31, 1998 that was directly related to the acquisition of WAH.
Six Months Ended
June 30,
1998 1997
----------------------------
Statement of Operations Data:
Revenues $413,969 $374,412
Interest expense (38,361) (30,649)
-------- --------
Net revenues 375,608 343,763
Expenses excluding interest 340,343 304,858
-------- --------
Earnings before income taxes 35,265 38,905
Income tax expense (12,695) (14,007)
-------- --------
Net earnings $ 22,570 $ 24,898
======== ========
Basic earnings per share $ 1.83 $ 2.03
======== ========
Diluted earnings per share $ 1.71 $ 1.92
======== ========
The pro forma financial information above is presented for
informational purposes only and is not necessarily indicative of the
actual results that would have been achieved had the merger been
consummated prior to the dates or periods indicated, nor are they
necessarily indicative of future operating results.
C. Short-Term Borrowings
On March 20, 1998, the Company entered into a $50 million
committed, revolving credit agreement to replace a similar facility
dated June 27, 1997. The facility expires March 19, 1999 and contains
a one-year renewal option. Loans under the facility are unsecured and
bear interest at a floating rate of the London Interbank Offering Rate
(LIBOR) plus 61 basis points. At June 30, 1998, $20 million was
outstanding under the facility. The Company must comply with
provisions in the agreement regarding net worth, regulatory net
capital and indebtedness.
D. Subordinated and Other Debt
On March 31, 1998, the Company's broker-dealer subsidiary entered
into an $80 million subordinated term loan agreement with a group of
banks in connection with the acquisition of WAH. Proceeds from the
loan qualify as regulatory capital. Term loans under this agreement
are unsecured, and consist of advances bearing interest at either the
current Eurodollar Interbank Rate plus 160 basis points, or the lead
bank's published Reference Rate, at the discretion of the Company.
Principal payments under the agreement consist of $5.0 million per
quarter beginning April 1, 1999 with the final payment due on December
31, 2002. The Company must comply with provisions in the agreement
regarding net worth and regulatory net capital.
On March 31, 1998, the Company also issued $30 million (face
amount) in 5-year zero coupon subordinated debentures in connection
with the acquisition of WAH. The debentures were recorded at a
discounted present value of $21.7 million.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This discussion should be read in conjunction with Item 7
(Management's Discussion and Analysis) of the Company's Annual Report
on Form 10-K for the year ended December 31, 1997.
Summary
The following is a consolidated summary of the Company's
results of operations for the three and six month periods ended June
30, 1998 and 1997:
Three Months ended June 30, Six Months Ended June 30,
1998 1997 1998 1997
-------------------------- ------------------------
Revenues $208,482 $168,504 $396,496 $348,576
Interest expense (20,466) (12,373) (36,033) (26,483)
-------- -------- -------- --------
Net revenues 188,016 156,131 360,463 322,093
Expenses excluding interest and
merger-related expense 169,528 138,632 325,138 280,205
-------- -------- -------- --------
Operating earnings before
income taxes 18,488 17,499 35,325 41,888
Income tax expense from
operations (6,656) (6,362) (12,717) (14,996)
-------- -------- -------- --------
Net operating earnings 11,832 11,137 22,608 26,892
Merger-related expense
(net of tax) - - (12,800) -
-------- -------- -------- --------
Net earnings $ 11,832 $ 11,137 $ 9,808 $ 26,892
======== ======== ======== ========
Earnings per share:
From net operating earnings:
Basic $ 0.96 $ 0.91 $ 1.83 $ 2.20
Diluted 0.90 0.86 1.72 2.07
Net:
Basic $ 0.96 $ 0.91 $ 0.79 $ 2.20
Diluted 0.90 0.86 0.74 2.07
Second quarter consolidated net operating earnings increased $0.7
million or 6 percent from second quarter 1997 and $1.1 million or 10
percent from the first quarter 1998, while year-to-date net operating
earnings decreased $4.3 million or 16 percent over 1997. Net revenues
increased $31.9 million or 20 percent over second quarter 1997 and
$15.6 or 9 percent over the first quarter 1998. During the first half
of 1998 net revenues increased $38.4 million or 12 percent over the
same period last year. Driving performance during the quarter, the
Company's Private Client Group posted record net revenues up 15
percent over the 1997 quarter and 3 percent over first quarter 1998.
The growth was largely due to increased commissions on listed
securities and mutual funds driven by strong market volumes in April
and to a lesser extent, an increase in customer margin debits. Also
contributing was the Fixed Income Capital Markets Group, driven by
both public finance investment banking and taxable sales and trading
business, which increased net revenue by 24 percent over second-
quarter 1997 and by 17 percent over first-quarter 1998, to finish with
first half 1998 net revenues up 21 percent over the prior year period.
Also, the Equity Capital Markets Group increased net revenues over 50
percent from 1997 second quarter and from first quarter 1998. Overall,
net earnings for the first-half of 1998 were down $17.1 million or 64
percent from $26.9 million to $9.8 million; primarily the result of
the one-time $20 million charge taken in the first quarter 1998
related to the Wessels, Arnold, Henderson, LLC ("WAH") acquisition.
Results of Operations
Commission revenue increased $12.7 million or 20 percent from the
1997 second quarter and $22.0 or 17 percent from the 1997 first half
as a result of increased sales of mutual funds, listed securities and
insurance and annuity products to individual and institutional
investors. The increased sales were due largely to increased trading
volumes on most exchanges with an increase of approximately 25 percent
in the New York Stock Exchange's average quarterly trading volumes
as well as general increases in securities prices for the quarter
and year-to-date periods versus the comparable periods in 1997.
Principal transaction revenue declined $1.7 million or 5 percent
from the 1997 second quarter and $6.9 million or 9 percent from the
first half of 1997. The Company earned lower spreads trading over-the-
counter equity securities as its strategy was modified to facilitate
institutional trading in connection with the WAH acquisition. Also
contributing to the declines were lower sales and trading of tax-
exempt fixed income securities. However, sales and trading of taxable
fixed income securities increased during the periods.
Investment banking and underwriting revenue increased $15.8
million or 68 percent over the 1997 second quarter and $12.1 million
or 25 percent over the first half of 1997. Revenue increases were
attributable to increased corporate underwriting activity in the
second quarter resulting from the March 31, 1998, acquisition of WAH
and, to a lesser extent, increased fees earned from underwriting
securities for municipal and government clients.
Net interest income decreased $0.8 million or 6 percent over the
second quarter 1998 versus second quarter 1997. Revenue increases were
due primarily to a 20-percent increase in margin loan balances.
However, offsetting the revenue increase during the second quarter was
an increase in interest expenses due to financing related to the WAH
acquisition as well as a 27-percent decline in customer credit
balances. For the first six months of 1998, net interest income
increased $0.8 million or 3 percent over the same period of 1997.
Revenue increases were due primarily to an 18-percent increase in
margin loan balances which was partially offset by a 34-percent
decline in customer credit balances.
Asset management revenues increased $4.9 million or 46 percent for
the quarter and $7.8 million or 37 percent over the first half due to
increases in volumes of assets in fee-based managed account programs
at Dain Rauscher Incorporated, and to lesser degree, increases of
approximately 65 percent in assets under management at Insight
Investment Management.
Other revenue increased $1.1 million or 17 percent for the quarter
and $2.6 million or 24 percent for the first half of the year due to
increases in customer service charges and gains on the sale of
securities previously obtained in connection with corporate
underwriting activities.
Compensation related expenses were up $23.7 million or 25 percent
over first quarter 1997 and $33.2 million or 17 percent over the first-
half 1998 versus 1997. The increases are due principally to increased
commissions associated with higher levels of operating revenues and
incentive compensation, some of which is transitional in nature
related to both the January 2, 1998, merging of Dain Bosworth and
Rauscher Pierce Refsnes and the March 31, 1998, WAH acquisition. Also
contributing to the increases were higher salary levels and a 4-
percent rise in the average number of employees for the first-half
1998 versus 1997.
Expenses other than compensation and benefits (net of the $ 20
million WAH acquisition expense) increased $7.2 million or 17 percent
for the 1998 second quarter over the same period of 1997 and $11.7
million or 14 percent over the first half of 1997. The increase
quarter over quarter is due principally to: (1) increased occupancy
costs associated with new office openings, expansion of existing
offices and office operating costs; (2) WAH goodwill amortization; (3)
volume-driven increases in market-data communications and clearing
services; (4) travel and promotional costs associated with the
generation of new business, and (5) increased information system
contractor and development costs. Similar events were responsible for
increases in the first-half of 1998 versus the comparable period for
1997.
Liquidity and Capital Resources
On March 31, 1998, the Company's broker-dealer subsidiary entered
into an $80 million subordinated term loan agreement with a group of
banks in connection with the acquisition of WAH. Proceeds from the
loan qualify as regulatory capital. Term loans under this agreement
are unsecured, and consist of advances bearing interest at either the
current Eurodollar Interbank Rate plus 160 basis points, or the lead
bank's published Reference Rate, at the discretion of the Company.
Principal payments under the agreement consist of $5.0 million per
quarter beginning April 1, 1999 with the final payment due on December
31, 2002. The Company must comply with provisions in the agreement
regarding net worth and regulatory net capital.
On March 20, 1998, the Company entered into a $50 million
committed, revolving credit agreement to replace a similar facility
dated June 27, 1997. The facility expires March 19, 1999 and contains
a one-year renewal option. Loans under the facility are unsecured and
bear interest at a floating rate of the London Interbank Offering Rate
(LIBOR) plus 61 basis points. The Company draws against the line
periodically to meet short term funding needs. At June 30, 1998, $20
million was outstanding under the facility which was repaid the
following business day. The Company must comply with provisions in the
agreement regarding net worth, regulatory net capital and
indebtedness.
On March 31, 1998, the Company also issued $30 million (face
amount) in 5-year zero coupon subordinated debentures related to the
acquisition of WAH. The debentures were recorded at a discounted
present value of $21.7 million.
As described in Note K of the Consolidated Financial Statements of
the Company's 1997 Annual Report on Form 10-K, Dain Rauscher
Incorporated ("Dain Rauscher") must comply with certain regulations of
the Securities and Exchange Commission and New York Stock Exchange,
Inc. measuring capitalization and liquidity. Dain Rauscher continues
to operate above minimum net capital standards of 5 percent of
aggregate debit items. At June 30, 1998, net capital was $111.5
million, 8.6 percent of aggregate debit balances and $46.4 million in
excess of the 5-percent requirement.
During the 1998 second quarter, the Company declared and paid a
regular quarterly dividend on its common stock of $.22 per share. The
determination of the amount of future cash dividends, if any, to be
declared and paid will depend on the Company's future financial
condition, earnings and available funds.
On May 28, 1998, the Company filed a shelf registration statement
with the Securities and Exchange Commission. This registration
statement allows the Company to sell up to $200 million in secured or
unsecured debt or equity securities, using the proceeds for
acquisition financing, subsidiary financing, or other corporate
purposes. The registration statement was declared effective on June
16, 1998.
Year 2000 Issue & Technology
The Company's business is highly dependent on communications,
trading, information and data processing systems. As with other
areas, the Company's technology demands have grown considerably in
recent years and are anticipated to continue to grow dramatically in
the years ahead. Investor interest and competitive forces in areas
such as electronic order entry and access to customer statements
(including through the Internet) could strain the Company's technology
resources or force it to incur substantial expenses in expanding these
resources. New regulations imposing additional audit trail and other
data capture and retention requirements will cause the Company to
incur further significant expenses. The Company has outsourced
certain communications and quotations and trading systems services,
and currently maintains its own back-office processing system.
Although the Company and its vendors have in place tested disaster
recovery systems, any failure or interruption of the Company's or a
vendor's systems could cause delays in the Company's securities
trading and processing activities and an inability to execute client
transactions, which could have a material adverse effect on the
Company's operating results. There can be no assurance that the
Company or a vendor will not suffer any such systems failure or
interruption or that the Company's or a vendor's backup procedures and
disaster recovery capabilities will be adequate. As technology
develops and industry practices and regulations change, the Company
must periodically update or replace various components of its key
systems, including, in particular, its back-office data processing
system, in order to remain competitive. The Company has committed to
upgrade its current back-office processing system via an internal
development process between 1998 and 2002 at an expected cost of
approximately $17 million. There can be no assurance that the
Company, during the process of upgrading its current back-office
processing system, will not encounter technological difficulties, cost
overruns, problems obtaining the necessary quantity and quality of
development personnel, or difficulties in purchasing necessary
components of such a system from outside vendors. Further, there can
be no assurance that the back-office processing system, upon
completion, will be state-of-the-art and that the system upgrade or
implementation process will not result in interruption of the
Company's business or delivery of its products and services to
customers.
It has become widely known that certain technological problems
may arise in connection with reaching the Year 2000. The Company
began addressing issues related to Year 2000 in conjunction with its
consolidation of the back-office brokerage operations of Dain Bosworth
and Rauscher Pierce Refsnes in 1993. While this consolidation was
done primarily for competitive reasons, it included the added benefit
of making the Company's back-office system Year 2000 compliant. In
1994, the Company's strategic technology plan included an inventory of
all mission-critical systems along with plans to replace or upgrade
each one by year-end 1998. The bulk of such systems were replaced in
1996 and 1997 and remaining systems are expected to be in production
by the end of 1998, in accordance with the 1994 plan. Similar to
the back office system, these replacements and upgrades were done
primarily for competitive reasons, though they included the added
benefit of making such systems Year 2000 compliant. Currently, the
Company has a Year 2000 project plan and task force in place and
functioning to address remaining Year 2000 issues, primarily inter-
faces with third parties, and contingency plans. To date, approx-
imately 15 percent of mission-critical interfaces with third parties
have been remediated, tested and moved into production with the
remainder targeted for completion by the end of 1998. In the course
of its Year 2000 analysis, the Company has not identified any
issues that cannot be resolved by the targeted completion date.
Finally, the Company will participate in industry-wide testing in
March 1999.
While there can be no assurance, the Company believes that its
internal systems will not experience significant disruption in
connection with the Year 2000. There can be no assurance that another
entity's failure to ensure Year 2000 readiness would not have an
adverse effect on the Company. In particular, if the Company's
internal systems or if the Company's vendors and other information
providers or the securities exchanges, clearing agencies and other
securities firms or financial institutions with which the Company
transacts business experience any significant disruption in connection
with the Year 2000, such disruption could affect the Company's ability
to conduct business and may have a material adverse effect on the
Company's results of operations.
Private Securities Litigation Reform Act of 1995 "Safe Harbor"
The Company desires to take advantage of the "safe harbor"
provisions of the Private Securities Litigation Reform Act of 1995 and
is making this cautionary statement in connection with such safe
harbor legislation. This Form 10-Q, the Company's Annual Report to
Shareholders, any Form 10-K, Form 10-Q or Form 8-K of the Company or
any other written or oral statements made by or on behalf of the
Company may include forward-looking statements which reflect the
Company's current views with respect to future events and
financial performance. The words "believe," "expect,"
"anticipate," "intends," "estimate," "forecast," "project," "should"
and similar expressions are intended to identify "forward-looking
statements" within the meaning of the Private Securities Litigation
Reform Act of 1995.
The Company wishes to caution investors that any forward-looking
statements made by or on behalf of the Company are subject to
uncertainties and other factors that could cause actual results to
differ materially from such statements. These uncertainties and other
risk factors include, but are not limited to: the volatile nature of
the securities business; competition; dependence on personnel;
implementation of the Company's strategies; dependence on systems;
dependence on sources of financing; use of derivative financial
instruments; federal and state regulation; net capital requirements;
and litigation. Though the Company has attempted to list
comprehensively these important factors, the Company wishes to caution
investors that other factors may in the future prove to be important
in affecting the Company's results of operations. New factors emerge
from time to time and it is not possible for management to predict all
such factors, nor can it assess the impact of each such factor on the
business or the extent to which any factor, or a combination of
factors, may cause actual results to differ materially from those
contained in any forward-looking statements.
Investors are further cautioned not to place undue reliance on
such forward-looking statements as they speak only to the Company's
views as of the date the statement is made. The Company undertakes no
obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or
otherwise.
For more detailed discussion concerning these risk factors see
Exhibit 99 of the Company's Annual Report on Form 10-K for the year
ended December 31, 1997.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company and/or its subsidiaries are defendants in various
civil actions and arbitrations incidental to their businesses
involving alleged violations of federal and state securities laws and
other laws. Some of these actions involve claims for substantial
damages. A detailed description of certain of such actions is
included in Item 3 of the Company's Annual Report on Form 10-K for the
year ended December 31, 1997. The following description of recent
developments relating to pending and threatened legal proceedings
should be read in conjunction with such Item 3.
Midwest Life Insurance Litigation
---------------------------------
Washington Action - In a retrial of the Washington action in
May 1998, the jury returned a verdict in the amount of
approximately $1.5 million against the defendants for negligent
nondisclosure and violations of the Washington Consumer
Protection Act ("WCPA"). The jury returned a verdict in favor of
the defendants on the claim of fraudulent nondisclosure and
plaintiff withdrew the claim of breach of fiduciary duty before
the case was submitted to the jury. In July, 1998, the Court
awarded plaintiffs approximately $1.7 million in attorneys' fees,
penalties of $290,000 under the WCPA, miscellaneous costs and an
unspecified amount of prejudgment interest. While final judgment
has not yet been entered, the Company believes the total
judgment, including prejudgment interest, will be approximately
$4.8 million.
Once judgment is entered, the Company will file post-trial
motions seeking to have the judgment in favor of plaintiffs set
aside and, if such motions are unsuccessful, will appeal. The
Company believes the trial court made significant errors of law
and that there are strong grounds for reversal. The Company
anticipates that plaintiffs in other jurisdictions will seek to
obtain collateral estoppel based on the Washington jury's
verdict. The Company intends to vigorously oppose such requests
and believes it has good grounds on which to do so.
Colorado Action - The Court has now ruled on the specific
amount of costs and prejudgment interest to be included in the
final judgment in connection with the verdict in favor of the
first 12 Colorado plaintiffs as approximately $240,000 and $1.8
million, respectively, bringing the total judgment in this case
to approximately $6.8 million.
Iowa Action - In July, 1998, the Court heard oral arguments on
the plaintiffs' collateral estoppel motion and the defendants'
summary judgment motion. No ruling has been issued as of the
date of this filing. Trial is scheduled to commence in Des
Moines on September 8, 1998.
Federal Deposit Insurance Litigation
------------------------------------
Dain Rauscher, as successor to Rauscher Pierce Refsnes,
reached a confidential settlement of this matter with the FDIC.
The settlement had no material adverse effect on the consolidated
financial condition or results of operation of the Company.
Orange County Related Claims
----------------------------
SEC Proceeding - On August 3, 1998, the Securities and
Exchange Commission (the "SEC") filed an action against Dain
Rauscher and two former investment banking employees for alleged
violations of certain antifraud provisions under the Securities
Act of 1933 and the Securities Exchange Act of 1934 in connection
with 12 one-year Taxable Note offerings and one pooled Tax and
Revenue Anticipation Note offering. This action, captioned
Securities and Exchange Commission v. Dain Rauscher, Inc., et
al., was filed in United States District Court for the Central
District of California. The offerings were made by certain
school districts and cities during 1993 and 1994 and the proceeds
were invested in the Orange County Investment Pool. Rauscher
Pierce Refsnes, a predecessor of Dain Rauscher, acted either as
underwriter or financial advisor in connection with each of these
transactions. The SEC is seeking through this action to obtain
permanent injunctions and civil remedies against each of the
defendants. Dain Rauscher believes it has substantial and
meritorious defenses available and is defending itself vigorously
in this action.
Bankruptcy Litigation - The County has reportedly reached
settlement agreements with active defendants Merrill Lynch & Co.,
Inc., KPMG Peat Marwick LLP, Morgan Stanley & Co., LeBouef, Lamb
Green & MacRae and over 20 government sponsored enterprises,
including Student Loan Marketing Association and Federal National
Mortgage Association, as well as with Credit Suisse First Boston
Corporation and Nomura Securities whose cases had been stayed.
Such settlements total in excess of $700 million. The County is
seeking damages substantially in excess of such amount. Cases
remain pending against Dain Rauscher, as successor to Rauscher
Pierce Refsnes, Fuji Securities Inc. and McGraw-Hill Companies,
Inc. d/b/a Standard & Poors, as well as 14 other defendants whose
cases have been stayed. The County is currently seeking to lift
the stay on such cases.
While the outcome of any litigation is uncertain, management,
based in part upon consultation with legal counsel as to certain of the
actions pending against the Company and/or its subsidiaries, believes
that the resolution of all matters pending against the Company and its
subsidiaries will not have a material adverse effect on the consoli-
dated financial condidtion or results of operations of the Company as
set forth in the consolidated financial statements contained herein.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the regular Annual Meeting of Stockholders of the Company held
on May 6, 1998, the stockholders elected ten directors, voted to
restate the Certificate of Incorporation to increase authorized common
stock, approved an annual cash bonus plan for designated corporate
officers, approved the Wealth Accumulation Plan and ratified the
appointment of KPMG Peat Marwick L.L.P. as the registrant's indepen-
dent auditors.
Voting results of each of those items were as follows:
Election of Directors:
For Withheld
--- --------
J. C. Appel 10,139,587 587,831
J. E. Attwell 10,139,587 587,831
S. S. Boren 10,137,465 589,953
F. G. Fitz-Gerald 10,139,587 587,831
W. F. Mondale 10,116,814 610,604
C. A. Rundell, Jr. 10,139,437 587,981
R. L. Ryan 10,139,587 587,831
A. R. Schulze, Jr. 10,139,415 588,003
I. Weiser 10,135,732 591,686
K. Wessels 10,139,587 587,831
For Against Abstain
--- ------- -------
Amendment to Restate Certificate of
Incorporation to Increase Authorized
Common Stock 9,590,330 1,094,939 42,149
Annual Cash Bonus Plan for Designated
Corporate Officers 7,099,273 2,117,420 246,088
Approval of the Wealth Accumulation Plan 8,746,070 1,800,942 180,406
Ratification of Appointment of Auditors 10,657,187 53,838 16,392
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Item No. Item Method of Filing
-------- ---- ----------------
11 Computation of Net Earnings Per Share. Filed herewith.
27 Financial Data Schedule. Filed herewith.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended June 30, 1998.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
DAIN RAUSCHER CORPORATION
Registrant
Date: August 13, 1998 By David J. Parrin
----------------- -------------------------
David J. Parrin
Senior Vice President and
Controller
(Principal Accounting Officer)
DAIN RAUSCHER CORPORATION
INDEX OF EXHIBITS TO QUARTERLY REPORT ON FORM 10-Q
FOR QUARTER ENDED JUNE 30, 1998
(a) Exhibits
Item No. Item Method of Filing
-------- ---- ----------------
11 Computation of Net Earnings Per Share. Filed herewith.
27 Financial Data Schedule. Filed herewith.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended June 30, 1998.