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 September 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
incorporation of organization) (IRS Employer Identification Number)
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 October 31, 1998, the Company had 12,444,139 shares of common
stock outstanding.
DAIN RAUSCHER CORPORATION
REPORT ON FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1998
INDEX
Page
----
I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Consolidated Balance Sheet
Consolidated Statement of Operations
Consolidated Statement 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 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 SHEET
(Dollars in thousands)
September 30, December 31,
1998 1997
------------ -----------
(Unaudited)
Assets:
Cash and cash equivalents $42,296 $35,909
Cash and short-term investments segregated
for regulatory purposes 8,000 -
Receivable from customers 1,111,817 1,170,160
Receivable from brokers and dealers 231,212 229,421
Securities purchased under agreements to resell 335,068 135,777
Trading securities owned, at market 565,366 541,511
Equipment, leasehold improvements and buildings,
at cost, net 43,862 42,376
Other receivables 86,696 80,867
Deferred income taxes 43,095 44,868
Goodwill, net of amortization 115,034 2,835
Other assets 36,585 20,677
---------- ----------
$2,619,031 $2,304,401
========== ==========
Liabilities and Shareholders' Equity:
Liabilities:
Short-term borrowings $175,415 $179,000
Drafts payable 72,868 83,499
Payable to customers 512,891 601,949
Payable to brokers and dealers 651,079 580,970
Securities sold under repurchase agreements 217,819 170,906
Trading securities sold, but not yet purchased,
at market 346,172 127,364
Accrued compensation 113,705 128,463
Other accrued expenses and accounts payable 95,062 97,500
Subordinated and other debt 102,221 15,659
---------- ----------
2,287,232 1,985,310
---------- ----------
Shareholders' equity:
Common stock 1,566 1,546
Additional paid-in capital 96,501 89,321
Retained earnings 238,513 233,419
Treasury stock, at cost (4,781) (5,195)
---------- ----------
331,799 319,091
---------- ----------
$2,619,031 $2,304,401
========== ==========
See accompanying notes to consolidated financial statements.
DAIN RAUSCHER CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited, in thousands, except per-share amounts)
Three Months Ended Nine Months Ended
September 30, September 30,
---------------- ------------------
1998 1997 1998 1997
---------------- ------------------
Revenue:
Commissions $75,414 $74,237 $224,135 $200,924
Principal transactions 36,139 39,430 105,767 115,944
Investment banking and underwriting 28,385 25,016 89,600 74,086
Interest 33,546 33,315 99,110 88,524
Asset management 16,349 12,154 45,211 33,263
Correspondent clearing 4,298 5,668 13,192 15,315
Other 6,663 6,785 20,275 17,125
------- ------- -------- --------
Total revenue 200,794 196,605 597,290 545,181
Interest expense (19,934) (15,237) (55,967) (41,720)
------- ------- ------- -------
Net revenue 180,860 181,368 541,323 503,461
------- ------- ------- -------
Non-interest expenses:
Compensation and benefits 120,113 110,233 351,242 308,166
Communications 12,248 12,130 36,580 34,767
Occupancy and equipment 12,669 10,507 35,962 30,546
Travel and promotional 9,955 7,085 25,401 21,137
Floor brokerage and clearing fees 3,658 3,258 9,361 8,975
Other 16,738 12,164 41,973 31,991
Merger and restructuring expenses - 15,000 20,000 15,000
------- ------- ------- -------
Total non-interest expenses 175,381 170,377 520,519 450,582
------- ------- ------- -------
Income before income taxes 5,479 10,991 20,804 52,879
Income taxes (1,972) (3,935) (7,489) (18,931)
------- ------- ------- -------
Net income $ 3,507 $ 7,056 $13,315 $33,948
======= ======= ======= =======
Net Income per share:
Basic $ 0.28 $ 0.57 $ 1.08 $ 2.77
======= ======= ======= =======
Diluted $ 0.27 $ 0.54 $ 1.01 $ 2.61
======= ======= ======= =======
See accompanying notes to consolidated financial statements.
DAIN RAUSCHER CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited, in thousands)
Nine Months Ended
September 30,
-----------------
1998 1997
------ ------
Cash flows from operating activities:
Net income $13,315 $33,948
Adjustments to reconcile earnings to cash provided (used)
by operating activities, net of effect of acquisition:
Depreciation and amortization 13,658 5,843
Deferred income taxes 1,773 (2,322)
Non-cash merger and restructuring charge,
net of tax 12,800 9,600
Other non-cash items 8,025 7,725
Cash and short-term investments segregated
for regulatory purposes (8,000) (60,000)
Net payable to brokers and dealers 78,634 67,892
Securities purchased under agreements to resell (199,291) (255,009)
Net trading securities owned and trading
securities sold, but not yet purchased 201,026 20,905
Short-term borrowings and drafts payable
of securities companies (14,215) 12,009
Net receivable from customers (30,716) 46,086
Other receivables (5,388) 820
Securities sold under repurchase agreements 46,913 104,079
Accrued compensation (14,935) (17,447)
Other 3,460 3,746
-------- -------
Cash provided (used) by operating activities 107,059 (22,125)
-------- -------
Cash flows from financing activities:
Proceeds from:
Subordinated and other debt 80,000 50,000
Issuance of common stock 2,257 1,811
Payments for:
Revolving credit agreement, net (50,000) -
Subordinated and other debt (15,641) (9,925)
Dividends on common stock (8,172) (6,627)
-------- -------
Cash provided by financing activities 8,444 35,259
-------- -------
Cash flows from investing activities:
Proceeds from investment dividends and sales 1,967 1,768
Payments for:
Acquisition, net of cash acquired (95,588) -
Equipment, leasehold improvements and other (15,495) (12,684)
-------- -------
Cash used by investing activities (109,116) (10,916)
-------- -------
Increase in cash and cash equivalents 6,387 2,218
Cash and cash equivalents:
At beginning of period 35,909 34,387
-------- -------
At end of period $42,296 $36,605
======== =======
Income tax payments totaled $3,649,000 and $25,332,000 and interest
payments totaled $50,862,000 and $37,937,000 during the nine months
ended September 30, 1998 and 1997, respectively. During the nine
months ended September 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
nine months ended September 30, 1998 and 1997, respectively, the
Company had non-cash financing activity of $4,149,000 and $2,173,000
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
September 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 only included in the
consolidated statement of operations since April 1, 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, including $16.0 million for severance; $2.5 million for space
consolidation; with the remaining $1.5 million for other integration
costs. As of September 30, 1998, approximately $17 million in
expenditures ($16 million related to 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.
Nine Months Ended
September 30,
1998 1997
----------------------------
Statement of Operations Data:
Revenue $614,763 $592,552
Interest expense (58,295) (47,968)
-------- --------
Net revenue 556,468 544,584
Non-interest expenses 515,724 492,958
-------- --------
Income before taxes 40,744 51,626
Income tax expense (14,667) (18,480)
-------- --------
Net income $ 26,077 $ 33,146
======== ========
Basic income per share $ 2.11 $ 2.70
======== ========
Diluted income per share $ 1.98 $ 2.55
======== ========
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 Offered Rate
(LIBOR) plus 61 basis points. No amounts were outstanding under the
facility at September 30, 1998. 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 nine month periods ended
September 30, 1998 and 1997:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ------------------
1998 1997 1998 1997
------------------ ------------------
Revenue $200,794 $196,605 $597,290 $545,181
Interest expense (19,934) (15,237) (55,967) (41,720)
-------- -------- -------- --------
Net revenue 180,860 181,368 541,323 503,461
Expenses excluding interest and
merger and restructuring 175,381 155,377 500,519 435,582
-------- -------- -------- --------
Operating earnings before income taxes 5,479 25,991 40,804 67,879
Income tax expense from operations (1,972) (9,335) (14,689) (24,331)
-------- -------- -------- --------
Net operating earnings 3,507 16,656 26,115 43,548
Merger and restructuring expense
(net of tax) - (9,600) (12,800) (9,600)
-------- -------- -------- --------
Net income $3,507 $7,056 $13,315 $33,948
======== ======== ======== ========
Income per share:
From net operating earnings:
Basic $ 0.28 $ 1.35 $ 2.11 $ 3.55
Diluted 0.27 1.27 1.98 3.35
Net:
Basic $ 0.28 $ 0.57 $ 1.08 $ 2.77
Diluted 0.27 0.54 1.01 2.61
Third-quarter net revenue decreased slightly from third-quarter
1997, and $7.1 million (4 percent) from the second quarter of 1998.
The decline in net revenue for the quarter from the prior year period
was mainly due to a significant decrease in corporate underwriting
activity as reflected in the performance of the Equity Capital Markets
Group ("ECM"). ECM net revenue in the third quarter of 1998 declined
12 percent compared with 1997 and 20 percent from the 1998 second
quarter. ECM was adversely affected by the industry-wide drought in
the initial public offering market. Net revenue for the Private
Client Group ("PCG") increased slightly over the prior year, but
declined 3 percent from the 1998 second quarter. The Fixed Income
Capital Markets Group ("FICM"), led by strong performances in public
finance investment banking and taxable institutional sales, increased
net revenue by 23 percent over third-quarter 1997 and by 4 percent
over second quarter 1998. For the nine-month period ended September
30, 1998, the Company's net revenue increased $37.9 million (8
percent) over the same period last year.
Third-quarter consolidated net operating earnings decreased $13.1
million (79 percent) from third-quarter 1997 and $8.3 million (70
percent) from second quarter 1998, while year-to-date net operating
earnings decreased $17.4 million (40 percent) from 1997. Overall, net
earnings for the nine-months year-to-date were down from the prior
year by $20.6 million (61 percent) due to negative equity market
conditions affecting third quarter 1998, and transition costs related
to the combination of Dain Bosworth and Rauscher Pierce Refsnes and
the acquisition of Wessels Arnold & Henderson, LLC ("WAH").
Results of Operations
Commission revenue increased slightly in the third-quarter 1998
from 1997 and $23.2 million (11 percent) year-to-date from the 1997
nine-month period. This was primarily the result of increased sales
of mutual funds, listed securities and insurance and annuity products
to individual and institutional investors. During the first half of
the year increased trading volumes on most exchanges resulted in
increased sales, although these increases slowed in the third
quarter as market conditions turned negative during the period.
Principal transaction revenue declined $3.3 million (9 percent)
from the 1997 third-quarter, and $10.2 million (9 percent) from the
same period year-to-date in 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 both the
quarter and nine-month periods.
Investment banking and underwriting revenue increased $3.4 million
(13 percent) from the 1997 third-quarter and $15.5 million (20
percent) in the first nine months of 1998 versus the prior year.
Revenue increases were partly attributable to increased corporate
underwriting activity by the Company resulting from the March 31,
1998, acquisition of WAH, despite negative industry trends in the
third-quarter 1998 which resulted in a decline in underwriting
activity from the first six months of 1998. In addition, municipal
underwriting activity increased significantly in both the quarter and
year-to-date 1998 periods over the corresponding periods in the prior
year.
Net interest income decreased $4.5 million (25 percent) from the
third-quarter 1997 and $3.7 million (8 percent) from the same period
in the prior year. The Company's net interest income is dependent
upon the level of customer balances and trading inventories, as well
as the spread between the rate it earns on those assets compared with
its cost of funds. For the quarter, interest revenue was flat while
interest expense increased $4.7 million (31 percent), due primarily to
a 51-percent decline in available customer credit balances, compared
to the prior year quarter, and increased expense due to the financing
related to the WAH acquisition. For the nine months year-to-date,
net interest income decreased due to an increase in interest expense
resulting primarily from a decrease in customer credit balances, a
decrease in the spreads on margin balances, and increased expense due
to WAH acquisition financing.
Asset management revenues increased $4.2 million (34 percent) for
the quarter and $11.9 million (35 percent) over the prior period year-
to-date due to increases during the year in the volume of assets in
fee-based managed account programs at Dain Rauscher Incorporated and
in assets under management at Insight Investment Management.
Correspondent clearing revenue declined $1.4 million (25 percent)
for the quarter and $1.5 million (11 percent) from the prior year
nine-month period. The decrease in revenue in both periods was caused
by a slowdown in correspondent trading volume. For the year-to-date
period, revenue also declined from the prior year due to a loss of
certain correspondent clients, primarily in the second quarter 1998.
Other revenue was essentially unchanged from the prior year
quarter, but increased $2.5 million (14 percent) for the year-to-date
primarily due to increases in customer service charges. These fees
include account fees for Individual Retirement Accounts, cash
management accounts, and account transfer fees.
Compensation related expenses were up $9.9 million (8 percent)
over third-quarter 1997 and $43.1 million (13 percent) in the nine-
month 1998 period versus 1997. For the nine month period ended
September 30, this increase was due principally to increased
commissions associated with higher levels of operating revenues and
incentive compensation, some of which is transitional in nature
related to the Dain Bosworth and Rauscher Pierce Refsnes merger, and
the WAH acquisition.
Expenses other than compensation and benefits (excluding the $20
million WAH merger-related expenses) increased $10.1 million (22
percent) in the 1998 third-quarter over the same period in 1997, and
$21.9 million (17 percent) over the nine months year-to-date in 1997.
The increases quarter-over-quarter and year-to-date are due
principally to: (1) increased occupancy costs associated with new
office openings, expansion of existing offices and office operating
costs; (2) amortization of goodwill from the acquisition of WAH; (3)
travel and promotional costs associated with the generation of new
business; and (4) increased information system contractor and
development costs. Finally, volume-driven increases in market-data
communications and clearing services during the first half of the year
also resulted in increased expenses for the year-to-date 1998 over the
same period 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 Offered Rate (LIBOR) plus 61 basis points. The
Company draws against the line periodically to meet short-term funding
needs. At September 30, 1998, no amounts were outstanding under this
facility. 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 September 30, 1998, net capital was $117.5
million, or 10.0 percent of aggregate debit balances and $58.7
million in excess of the 5-percent requirement.
During the 1998 third 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.
The Company has a shelf registration statement with the Securities
and Exchange Commission that 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
general corporate purposes.
Year 2000 Issue
It is widely known that certain technological problems may arise
in connection with reaching the Year 2000. Since the early 1990's,
the Company has taken steps to assess and implement remediation plans,
and test its hardware and software systems for Year 2000 compliance.
In 1993, the Company consolidated the back-office operations of its
subsidiary broker-dealers (Dain Bosworth and Rauscher Pierce Refsnes).
With that consolidation, the Company upgraded or replaced the bulk of
its mission critical data processing systems. While upgrade and
replacement projects were performed primarily for competitive reasons,
they included the added benefit of making these systems Year 2000-
compliant.
The Company has a Year 2000 Task Force, headed by its Chief
Financial Officer and its Chief Information Officer. The Task Force
analyzes the Company's internal information technology ("IT") and non-
IT systems, including critical outsourced systems supplied by vendors,
for Year 2000 readiness. The Task Force also identifies and
prioritizes the Company's critical third-party relationships,
including those with securities exchanges, vendors, clients, and
transaction counter-parties, and communicates with them about their
plans and progress in addressing the Year 2000 problem. The Company
consulted with the Securities Industry Association ("SIA"), its
outside auditors and other industry participants to formulate its Year
2000 program. A comprehensive Year 2000 project plan (the "Year 2000
Plan"), which covers the Company's mission critical IT and non-IT
systems and third-party interfaces, is complete. The Year 2000 Plan
includes steps for inventory, assessment and testing, along with a
detailed schedule for completing each of the segments.
For systems that are not currently Year 2000-compliant, the
Company has prepared and is executing remediation plans. To date,
approximately 80 percent of the Company's internal systems (not
including external interfaces) have been assessed, modified, tested,
implemented and run in daily production. Upgrades or replacements
necessary to achieve Year 2000 compliance for remaining mission
critical systems are expected to be completed in 1998. The Company
expects to remediate and test its external interfaces (such as its
electronic interfaces with the Securities Industry Automation
Corporation and Depository Trust Company) as each service provider
informs the Company that the external interface is ready for testing.
At this stage of its review, the Company believes it has approximately
275 mission critical interfaces within 80 third-party relationships.
As of September 30, 1998, 42 interfaces have been tested and moved
into production, 70 interfaces have been remediated but not tested,
and 64 interfaces are still being reviewed with counterparties. The
remaining interfaces have been reviewed and determined to have no Year
2000 sensitivity. The Company expects that all of its mission
critical interfaces will be tested and moved into production by early
1999. The Year 2000 Plan also calls for the Company to receive
compliance status information directly from all mission critical
vendors. As of September 30, 1998, the Company believes that all but
two of the Company's mission critical software and utilities are
operating on software versions that are Year 2000 compliant. The
Company anticipates that both of these subsystems will be made Year
2000 compliant by early 1999.
During 1998 to date, the Company has spent approximately $550,000
on Year 2000 related planning, testing and upgrades or replacements.
Such costs have not had, and are not expected to have, a material
effect on the Company's consolidated financial statements. The
Company expects to be able to fund any such future costs from
operations.
The Company also expects to participate in industry-wide testing
coordinated by the SIA. The testing is currently planned for March
and April 1999, and is intended to identify whether significant Year
2000 problems exist in placing, settling and clearing orders and
trades among SIA-member firms, third party vendors, and major
exchanges. While there can be no assurance, the Company believes that
its internal systems will not experience significant disruption in
connection with the Year 2000.
The Company's business is highly dependent on communications,
trading, information and data processing systems. Although the Company
has outsourced certain of its communications and quotations and
trading systems services, the Company currently maintains its own
order-routing and back-office processing system. The Company and its
vendors have in place tested disaster recovery systems. However, if
the Company's internal systems, vendors, other information providers,
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. The Company is developing a written
contingency plan to provide for continuity of processing under various
scenarios, which it expects to complete by the end of 1998.
Readers are cautioned that forward-looking statements contained in
the section "Year 2000 Issue" should be read in conjunction with the
Company's disclosures under the heading: "Private Securities
Litigation Reform Act of 1995 'Safe Harbor'" which appear below.
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 a more detailed discussion concerning these risk factors see
Exhibit 99 of the Company's Quarterly Report on Form 10-QA for the
quarter ended March 31, 1998.
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 - The Court reduced the award of attorneys' fees to
approximately $1.3 million, but otherwise denied the Company's post-
trial motions. The Court awarded interest and costs in the amount of
approximately $1.2 million, bringing the total amount of the judgment
to approximately $4.3 million. The Company has appealed.
Iowa Action - The Court denied plaintiff's collateral estoppel motion
and defendants' summary judgment motion. The trial began in September
and is proceeding.
Orange County Related Claims
School District Claims - In September 1998, a case was filed under the
caption Thomas Hayes, as litigation representative for the County of
Orange and as assignee of the Districts' Excluded Claims v. Dain
Rauscher Corp., a Delaware corporation, formerly known as Dain
Rauscher Inc., Successor by Merger to Rauscher Pierce Refsnes, Inc. in
the United States District Court for the Central District of
California. The plaintiff asserts claims allegedly assigned to him by
certain school districts for which Rauscher Pierce Refsnes served as
underwriter or financial advisor in 1994, including most of the school
districts involved in issuing the $300 million pooled Tax and Revenue
Anticipation Note that is a subject of the SEC proceeding. The
plaintiff alleges that Rauscher Pierce violated fiduciary,
professional and contractual duties by failing to apprise the school
districts of the risks in the Orange County Investment Pool and by
furthering the County's investment program in derogation of the school
districts' interests. The complaint alleges losses in excess of $50
million. Dain Rauscher denies the allegations and believes it has
substantial and meritorious defenses in this action.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Item No. Item Method of Filing
-------- ---- ----------------
11 Computation of 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
September 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: November 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 SEPTEMBER 30, 1998
(a) Exhibits
Item No. Item Method of Filing
-------- ---- ----------------
11 Computation of 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
September 30, 1998.