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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED MARCH 31, 1999
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 (IRS Employer Identification
of organization) 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 April 30, 1999, the Company had 12,373,993 shares of common stock
outstanding.
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DAIN RAUSCHER CORPORATION
REPORT ON FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1999
INDEX
PAGE
----
I. FINANCIAL INFORMATION:
ITEM 1. Financial Statements
Consolidated Balance Sheet. . . . . . . . . . . . . . . . . . . . . 1
Consolidated Statement of Operations. . . . . . . . . . . . . . . . 2
Consolidated Statement of Cash Flows. . . . . . . . . . . . . . . . 3
Notes to Consolidated Financial Statements. . . . . . . . . . . . . 4
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . . . . . 5
II. OTHER INFORMATION:
ITEM 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . . . . 11
Signatures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Index of Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . 13
Exhibits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DAIN RAUSCHER CORPORATION
CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS)
MARCH 31, DECEMBER 31,
1999 1998
------------ ------------
(UNAUDITED)
Assets:
Cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . . . . $ 50,254 $ 47,273
Receivable from customers. . . . . . . . . . . . . . . . . . . . . . . . 1,272,089 1,172,398
Receivable from brokers and dealers. . . . . . . . . . . . . . . . . . . 289,620 288,207
Securities purchased under agreements to resell. . . . . . . . . . . . . 255,569 237,662
Trading securities owned, at market. . . . . . . . . . . . . . . . . . . 422,597 379,901
Equipment and leasehold improvements, at cost, net of depreciation . . . 46,083 48,271
Other receivables. . . . . . . . . . . . . . . . . . . . . . . . . . . . 99,396 83,957
Deferred income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . 53,302 48,219
Goodwill, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 118,483 121,580
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37,008 39,019
------------ ------------
$ 2,644,401 $ 2,466,487
------------ ------------
------------ ------------
Liabilities and Shareholders' Equity:
Liabilities:
Short-term borrowings. . . . . . . . . . . . . . . . . . . . . . . . . . $ 293,803 $ 127,415
Customer drafts payable. . . . . . . . . . . . . . . . . . . . . . . . . 93,634 109,396
Payable to customers . . . . . . . . . . . . . . . . . . . . . . . . . . 524,239 585,848
Payable to brokers and dealers . . . . . . . . . . . . . . . . . . . . . 713,538 690,459
Securities sold under repurchase agreements. . . . . . . . . . . . . . . 85,684 38,354
Trading securities sold, but not yet purchased, at market. . . . . . . . 257,920 240,825
Accrued compensation . . . . . . . . . . . . . . . . . . . . . . . . . . 87,238 139,703
Other accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . 130,895 92,209
Subordinated and other debt. . . . . . . . . . . . . . . . . . . . . . . 111,018 112,505
------------ ------------
2,297,969 2,136,714
------------ ------------
Shareholders' equity:
Common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,586 1,580
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . 117,461 112,142
Retained earnings. . . . . . . . . . . . . . . . . . . . . . . . . . . . 250,232 230,421
Treasury stock, at cost. . . . . . . . . . . . . . . . . . . . . . . . . (22,847) (14,370)
------------ ------------
346,432 329,773
------------ ------------
$ 2,644,401 $ 2,466,487
------------ ------------
------------ ------------
See notes to consolidated financial statements.
DAIN RAUSCHER CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED, IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
THREE MONTHS ENDED MARCH 31,
----------------------------
1999 1998
-------- --------
Revenue:
Commissions . . . . . . . . . . . . . . . . . . $ 83,266 $ 72,924
Principal transactions. . . . . . . . . . . . . 42,488 36,795
Investment banking and underwriting . . . . . . 33,435 22,229
Interest. . . . . . . . . . . . . . . . . . . . 30,860 31,797
Asset management. . . . . . . . . . . . . . . . 16,952 13,330
Correspondent clearing. . . . . . . . . . . . . 5,878 4,467
Other . . . . . . . . . . . . . . . . . . . . . 7,778 6,472
Gain on sale of investment. . . . . . . . . . . 15,378 -
-------- --------
Total revenue . . . . . . . . . . . . . . . . . 236,035 188,014
Interest expense. . . . . . . . . . . . . . . . . (16,053) (15,567)
-------- --------
Net revenue . . . . . . . . . . . . . . . . . . . 219,982 172,447
-------- --------
Operating Expenses:
Compensation and benefits . . . . . . . . . . . 130,908 110,960
Communications. . . . . . . . . . . . . . . . . 12,146 12,187
Occupancy and equipment rental. . . . . . . . . 13,225 11,519
Travel and promotional. . . . . . . . . . . . . 9,053 7,213
Floor brokerage and clearing fees . . . . . . . 3,450 2,827
Other . . . . . . . . . . . . . . . . . . . . . 15,055 10,904
Merger and restructuring charges. . . . . . . . - 20,000
-------- --------
Total operating expenses. . . . . . . . . . . . 183,837 175,610
-------- --------
Income (loss) before taxes. . . . . . . . . . . . 36,145 (3,163)
Income taxes. . . . . . . . . . . . . . . . . . . (13,555) 1,139
-------- --------
Net income (loss) . . . . . . . . . . . . . . . . $ 22,590 $ (2,024)
-------- --------
-------- --------
Earning (loss) per share:
Basic . . . . . . . . . . . . . . . . . . . . . $ 1.81 $ (.16)
-------- --------
-------- --------
Diluted . . . . . . . . . . . . . . . . . . . . $ 1.70 $ (.16)
-------- --------
-------- --------
Dividends per share . . . . . . . . . . . . . . . $ .22 $ .22
-------- --------
-------- --------
See notes to consolidated financial statements.
DAIN RAUSCHER CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED, IN THOUSANDS)
THREE MONTHS ENDED MARCH 31,
----------------------------
1999 1998
-------- --------
Cash flows from operating activities:
Net income (loss) . . . . . . . . . . . . . . . . . . . . $ 22,590 $ (2,024)
Adjustments to reconcile income to cash provided
(used) by operating activities:
Depreciation and amortization. . . . . . . . . . . . . 5,735 3,453
Deferred income taxes. . . . . . . . . . . . . . . . . (5,083) (54)
Other non-cash items . . . . . . . . . . . . . . . . . 3,295 2,106
Net payable to brokers and dealers . . . . . . . . . . 21,666 (58,247)
Securities purchased under agreements to resell. . . . (17,907) (192,044)
Net trading securities owned and trading
securities sold, but not yet purchased. . . . . . . . (25,601) 328,404
Short-term borrowings and drafts payable
of securities companies . . . . . . . . . . . . . . . 150,626 28,090
Net receivable from customers. . . . . . . . . . . . . (161,300) 41,055
Other receivables. . . . . . . . . . . . . . . . . . . (15,439) 4,514
Securities sold under repurchase agreements. . . . . . 47,330 (12,150)
Accrued compensation . . . . . . . . . . . . . . . . . (52,464) (56,908)
Accounts payable and other accrued liabilities . . . . 35,793 17,143
Other. . . . . . . . . . . . . . . . . . . . . . . . . (7,843) (9,004)
--------- ---------
Cash provided by operating activities . . . . . . . . . . . 1,398 94,334
--------- ---------
Cash flows from financing activities:
Proceeds from:
Issuance of common stock . . . . . . . . . . . . . . . 664 1,215
Subordinated and other debt. . . . . . . . . . . . . . - 80,000
Payments for:
Revolving credit agreement, net. . . . . . . . . . . . - (50,000)
Purchase of common stock . . . . . . . . . . . . . . . (9,567) -
Subordinated and other debt. . . . . . . . . . . . . . - (9,000)
Dividends on common stock. . . . . . . . . . . . . . . (2,764) (2,713)
--------- ---------
Cash provided (used) by financing activities. . . . . . . . (11,667) 19,502
--------- ---------
Cash flows from investing activities:
Proceeds from gain on sale of investment securities . . . 15,378 1,532
Payments for:
Equipment, leasehold improvements and other. . . . . . (2,128) (3,874)
Acquisition, net of cash acquired. . . . . . . . . . . - (95,588)
--------- ---------
Cash provided (used) by financing activities. . . . . . . . 13,250 (97,930)
--------- ---------
Increase in cash and cash equivalents . . . . . . . . . . . 2,981 15,906
Cash and cash equivalents:
At beginning of period . . . . . . . . . . . . . . . . 47,273 35,909
--------- ---------
At end of period . . . . . . . . . . . . . . . . . . . $ 50,254 $ 51,815
--------- ---------
--------- ---------
Income tax payments totaled $5,671,000 and $2,651,000 and interest payments
totaled $14,544,000 and $11,489,000 during the three months ended March 31, 1999
and 1998, respectively.
During the three months ended March 31, 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 three months ended
March 31, 1999 and 1998, respectively, the Company had non-cash financing
activity of $4,580,000 and $4,149,000 associated with the crediting of common
stock to deferred compensation plan participants.
See notes to consolidated financial statements.
DAIN RAUSCHER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
A. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
We have prepared the accompanying unaudited interim consolidated financial
statements in accordance with the instructions for Form 10-Q. These instructions
do not require including all the information and footnotes found in complete
financial statements prepared in accordance with generally accepted accounting
principles. These interim financial statements should be read in conjunction
with the consolidated financial statements and related notes included in our
Annual Report on Form 10-K for the year ended December 31, 1998. We believe we
have included all adjustments necessary for a fair presentation of these
interim financial statements. We have made only normal, recurring adjustments.
However, financial results for the three-months ended March 31, 1999, are not
necessarily indicative of future results.
We have reclassified certain prior year amounts in the financial statements
to conform with our 1999 presentation.
B. ACQUISITION
On March 31, 1998, our broker-dealer subsidiary, Dain Rauscher
Incorporated ("DRI"), 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.
We paid $120 million of cash and issued five-year, zero coupon,
subordinated debentures with a March 31, 1999 discounted value of $20.8 million
($27 million face amount) to acquire WAH. Goodwill of approximately $120 million
is recorded and is amortized over an estimated life of 25 years. The
amortization of goodwill is deductible for tax purposes.
C. MERGER AND RESTRUCTURING CHARGES
As part of our acquisition of WAH, we recorded a charge of $20 million
($12.8 million after tax) in the first quarter of 1998. This charge included
$16 million for severance in the elimination of approximately 150 jobs at
DRI, $2.5 million for facilities consolidation, and the remaining $1.5
million for other integration costs. By March 31, 1999, all amounts related
to the WAH acquisition had been charged against this reserve, which was
adequate to cover all expenses.
D. SHORT-TERM BORROWINGS
On March 15, 1999, we extended and amended our $50 million committed,
revolving credit agreement originally dated March 20, 1998. This agreement
expires March 17, 2000 and contains two further one-year renewal options. Loans
under this agreement are unsecured and bear interest at a floating rate of LIBOR
plus 61 basis points. No amounts were outstanding under this facility at March
31, 1999. Under the terms of this credit agreement, we must comply with
provisions regarding net worth, regulatory net capital and limitations on
indebtedness, among others.
F. SUBORDINATED AND OTHER DEBT
On March 31, 1998, DRI entered into an $80 million subordinated term loan
agreement with a group of banks in connection with the acquisition of WAH.
Proceeds from this loan qualify as regulatory capital. Term loans under this
agreement are unsecured, and consist of advances bearing interest generally at
either the current LIBOR plus 160 basis points, or the lead bank's published
Reference Rate, at our discretion. Under the agreement DRI will make quarterly
payments of $5.0 million beginning April 1, 1999, with the final payment due on
December 31, 2002. DRI must also comply with provisions in the agreement
regarding net worth and regulatory net capital.
F. SEGMENT INFORMATION
See Item 2 "Management's Discussion and Analysis" for a discussion of our
results by business line.
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 our Annual Report on Form 10-K for the year ended
December 31, 1998.
SUMMARY
Following is a consolidated summary of our operating income and results
of operations for the three months ended March 31, 1999 and 1998:
THREE MONTHS ENDED MARCH 31.
----------------------------
1999 1998
--------- ---------
Revenue. . . . . . . . . . . . . . . . . . . . . $ 220,657 $ 188,014
Interest expense . . . . . . . . . . . . . . . . (16,053) (15,567)
--------- ---------
Net revenue. . . . . . . . . . . . . . . . . . . 204,604 172,447
Expenses . . . . . . . . . . . . . . . . . . . . 183,837 155,610
--------- ---------
Operating income before taxes. . . . . . . . . . 20,767 16,837
Income tax expense from operations . . . . . . . (7,788) (6,061)
--------- ---------
Net operating income . . . . . . . . . . . . . . 12,979 10,776
Net nonrecurring items (after tax) . . . . . . . 9,611 (12,800)
--------- ---------
Net income (loss). . . . . . . . . . . . . . . . $ 22,590 $ (2,024)
--------- ---------
--------- ---------
Earnings (loss) per share:
From net operating income:
Basic . . . . . . . . . . . . . . . . . . . . $ 1.04 $ .87
Diluted . . . . . . . . . . . . . . . . . . . $ .98 $ .82
Net
Basic . . . . . . . . . . . . . . . . . . . . $ 1.81 $ (0.16)
Diluted . . . . . . . . . . . . . . . . . . . $ 1.70 $ (0.16)
Consolidated 1999 first quarter earnings include a $15.4 million pre-tax
gain on the sale of an equity investment, which increased net earnings per
diluted share by $0.72. Consolidated 1998 first quarter results include a $20
million merger-related charge we recorded in conjunction with the acquisition of
WAH. This charge covered severance, facilities consolidation and other expenses
related to the merger. As a result of the charge, we incurred a net loss of $2.0
million, or $.16 cents per diluted share, for the quarter ended March 31,
1998.
RESULTS OF OPERATIONS BY TRANSACTION TYPE
Commission revenue increased $10.3 million or 14% during the 1999 first
quarter over the 1998 first quarter primarily on strong sales of listed
securities. The continuing positive performance of the U.S. economy coupled with
the rise of the securities markets (particularly as measured by NASDAQ and NYSE
indices) pushed securities prices and trading volumes higher during the 1999
quarter, which in turn contributed to an increase in our commission revenue.
Sales of insurance and annuity products also increased in the 1999 first quarter
from the prior year.
Revenue from principal transactions increased $5.7 million or 16% primarily
due to higher sales and trading of over-the-counter securities, as well as
higher revenue from trading of mortgage-backed securities and municipal bonds.
Investment banking and underwriting revenue rose significantly in 1999 from
the same period a year ago due to equity capital markets activity primarily in
the technology sector. The 50% ($11.2 million) increase was driven by strong
fees from initial or secondary offerings primarily in the technology sector.
Correspondent clearing revenue rose 32% ($1.4 million) as customer
transactions increased over first quarter 1998 volumes. These higher transaction
volumes were in line with market conditions and strong investor activity levels.
Net interest income decreased $1.4 million or 9% during the 1999 first
quarter. Average margin loan balances increased by 5%, however, interest expense
also increased due to the cost of the $80 million in subordinated debt. Margin
loan increases can be attributed to favorable market conditions coupled with
comparatively low interest rates. Average margin spreads (the difference between
the rate our customers pay us on margin loans and our average borrowing cost)
were slightly higher in first quarter 1999 than they had been during first
quarter 1998.
Asset management revenue increased $3.6 million or 27% in the 1999 first
quarter over the prior year. Assets under management at Insight Investment
Management Inc. ("Insight"), our money management subsidiary, increased 18% from
1998.
Other revenue increased $1.3 million or 20% over the 1998 first quarter
primarily due to increases in various retail customer product service fees. The
1999 non-recurring gain resulted from our sale of an equity investment.
During the 1999 first quarter, compensation and benefits increased $19.9
million or 18% from the prior year. First quarter 1998 expenses, including
compensation and benefits, do not include the effects of the WAH merger, and
are not directly comparable with first quarter 1999 expense. Compensation as
a percent of revenue, however, declined slightly to 64.0% in 1999 from 64.4%
in 1998 as guarantees and other transitional compensation arrangements
expired at the end of 1998.
Operating expenses increased in 1999 by $8.3 million or 19% over the 1998
first quarter. The impact of the WAH merger on 1999 expenses included
amortization expense on goodwill from the WAH acquisition, and increased due to
travel and promotional costs incurred in generating new business. Occupancy
costs also increased along with the number of retail offices operating in the
1999 first quarter versus the same period a year ago. Finally, errors and
settlement expenses rose on increased transaction volumes.
RESULTS OF OPERATIONS BY BUSINESS LINE
Our business includes three major segments: Private Client Group, which
includes securities sales to individual investors, correspondent clearing, and
asset management for individual investors; Equity Capital Markets, which
includes investment banking and underwriting and equity sales and trading; and
Fixed Income Capital Markets, which includes fixed income securities trading,
sales, underwriting, and advisory services. All corporate expenses, and
miscellaneous revenues and expenses, which are not allocated to individual
business lines, are included in Corporate.
THREE MONTHS ENDED MARCH 31,
----------------------------
(DOLLARS IN THOUSANDS) 1999 1998
--------- ---------
Net Revenue:
Private Client Group . . . . . . . . . . . $ 142,919 $ 129,303
Equity Capital Markets . . . . . . . . . . 33,415 16,591
Fixed Income Capital Markets . . . . . . . 25,781 21,992
Corporate:
Staff and other. . . . . . . . . . . . . 2,489 4,561
Nonrecurring gain. . . . . . . . . . . . 15,378 -
--------- ---------
TOTAL . . . . . . . . . . . . . . . . $ 219,982 $ 172,447
--------- ---------
--------- ---------
THREE MONTHS ENDED March 31,
----------------------------
(DOLLARS IN THOUSANDS) 1999 1999
-------- --------
Pretax income (loss):
Private Client Group . . . . . . . . $ 15,209 $ 14,581
Equity Capital Markets . . . . . . . 1,167 (1,937)
Fixed Income Capital Markets . . . . 2,864 2,142
Corporate:
Staff and other. . . . . . . . . . 1,527 2,051
Nonrecurring gain (expense). . . . 15,378 (20,000)
-------- --------
TOTAL . . . . . . . . . . . . . $ 36,145 $ (3,163)
-------- --------
-------- --------
Pretax margin on net revenue:
Private Client Group . . . . . . . . 10.6% 11.3%
Equity Capital Markets . . . . . . . 3.5 (11.7)
Fixed Income Capital Markets . . . . 11.1 9.7
Corporate. . . . . . . . . . . . . . 61.4 45.0
-------- --------
TOTAL . . . . . . . . . . . . . 16.4% (1.8)%
PRIVATE CLIENT GROUP: Private Client Group ("PCG") generates revenue
primarily from commissions earned by investment executives on individual
(retail) investor activity. Additional sources of revenue include asset
management fees paid to the group by Insight from the Great Hall money market
funds, and fees paid by customers for us to manage or arrange the management
of their portfolios. PCG also earns interest from customers who have borrowed
funds to settle trades (margin accounts). Revenue generated from
correspondent (or trade) clearing is also included in PCG. Correspondent
clearing fees are paid to us by outside (introducing) brokers to act as their
representative with financial exchanges, and to clear and settle their
clients' transactions.
PCG's increased commission revenue in 1999 resulted from higher sales of
listed securities and annuity and other insurance products. Commission revenue
increased in line with both trade volumes and securities prices on the NASDAQ,
NYSE and other exchanges. Increases in investment executive productivity also
augmented commission revenue. Correspondent clearing revenue increased slightly
over the prior year as customer transaction volumes rose. Asset management fees
were also higher in 1999, increasing as a result of higher levels of assets
under administration in both Great Hall Funds and in other fee-based managed
account programs.
Private Client Group pretax income increased 4% for the year, although
margins declined somewhat with increases in certain operating expenses. The
compensation and benefits ratio decreased slightly as a percent of net revenue
to 56.3% in first quarter 1999 compared with 56.6% in 1998. Occupancy expenses
were higher as there were six more offices operating in 1999 versus the same
period a year ago. Recruiting expenses, including relocation and other new hire
expenses, also increased in the 1999 first quarter with a 2% increase in the
number of investment executives from the prior year.
EQUITY CAPITAL MARKETS: Equity Capital Markets ("ECM") revenue comes from
several sources: underwriting fees from purchasing registered securities and
selling them to customers or institutions through our institutional sales force
or our Private Client Group; advisory fees, which may including valuations,
private placements, initial public offerings ("IPOs"); and merger and
acquisition ("M&A") fees. ECM revenue also includes fees from our syndicate
activities, which involve participating with other securities firms in
underwriting securities offerings, IPO's, and other registered securities. All
of these various fees are included as part of investment banking and
underwriting fees on our consolidated statement of operations. ECM also
makes-a-market (trades) and provides research coverage in certain
over-the-counter and listed securities. These activities allow ECM to develop
expertise in selected market sectors both to increase investment banking
opportunities and to provide services to our institutional and retail customers.
ECM trading gains and losses are included in principal transactions on our
consolidated statement of operations. Commissions earned from transactions on
registered securities sold through our Private Client Group are included in
PCG's business line revenue.
1999 first quarter ECM revenue increased significantly over the prior year.
Investment banking revenue more then doubled, led by strong underwriting
activity in the technology sector. ECM co-managed or led 16 IPO's or secondary
offerings, with a total value of $1.6 billion, during the first three months of
1999. Institutional equity sales were also up almost 80%, mostly due to strong
market conditions. Syndicate business was also stronger in the 1999 quarter than
it had been in the prior year.
ECM pretax income and margin improved significantly as compensation and
benefits declined to 67.1% of revenue in 1999 versus 74.1% in 1998. The pre-tax
margin was affected by increases in operating expenses during 1999, particularly
promotional and travel which rose as part of the increase in investment banking
activity. Additionally, occupancy and other related expenses (including
information systems), were higher as 1998 expenses do not include the effects of
the WAH acquisition.
FIXED INCOME: Fixed Income Capital Market's ("FICM") revenue comes from
municipal fixed income underwriting fees, as well as taxable and tax-exempt
fixed income securities sales and trading. FICM underwriting fees come from
purchasing the tax-exempt fixed income securities of municipalities, counties,
cities, school districts and other community development organizations. These
securities are then resold, primarily to our retail and institutional customers.
FICM also generates revenue from acting as a financial advisor to state and
local governments and other community development organizations reviewing
financing options or preparing for bond issues. These fees are all included in
investment banking and underwriting fees on our consolidated statement of
operations. FICM also makes-a-market in certain fixed income securities,
primarily to offer these securities to our retail and institutional customers.
This trading income is included as part of principal transaction revenue on our
consolidated statement of operations. FICM earns interest from the fixed income
securities purchased or held in inventory, as well as from entering into reverse
repurchase transactions. FICM also pays interest on the short-term bank
borrowings and repurchase agreements used to finance trading inventories as well
as securities sold short to hedge inventory positions.
FICM's 17% net revenue increase from 1998 was led by increases in taxable
fixed income securities sales and trading revenue. Taxable fixed income
securities continued to be favored by institutional investors, and we increased
our sales force from first quarter 1998. Mortgage-backed securities trading
revenue was the primary driver of increases from 1998 first quarter levels.
Municipal securities sales and trading revenue was also up, although municipal
securities advisory and underwriting revenue declined from a year ago as FICM
was involved in fewer transactions during the first quarter of 1999. Retail
sales of fixed income securities other than municipal equities declined somewhat
from the prior year, as many individual investors favored stocks over bonds
given favorable equity market conditions.
Operating expenses rose modestly as we increased our sales force, number of
fixed income offices, and made other investments in building our infrastructure.
Compensation expense rose along with revenues, and compensation as a percent of
revenue increased to 60.3% in 1999 versus 59.4% in the prior year. Despite these
modest expense increases, FIMC's pre-tax margins increased 14% in 1999 over 1998
first quarter margins.
NONRECURRING ITEMS: The 1999 nonrecurring gain represents profit on the
sale of an equity investment. In the first quarter of 1998 we expensed $20
million, pre-tax, in merger costs related to the WAH acquisition.
CORPORATE: Corporate revenue consists primarily of asset management fees
generated by Insight, and net interest that is not allocated to a specific
business line. Insight manages the Great Hall money market funds and certain
institutional fixed income managed accounts. Great Hall asset management fees
increased in 1999 as assets under management at Insight rose in the first three
months of the year.
Corporate expense includes goodwill amortization, professional fees, and
any other non-allocated expenses. Amortization of WAH goodwill represents a
significant portion of the increase in 1999 corporate expense
LIQUIDITY AND CAPITAL RESOURCES
On March 15, 1999, we renewed our $50 million committed, revolving credit
agreement originally dated March 20, 1998. This agreement expires March 17, 2000
and contains two further one-year renewal options. Loans under this agreement
are unsecured and bear interest at a floating rate of LIBOR plus 61 basis
points. No amounts were outstanding under this facility at March 31, 1999. Under
the terms of this credit agreement, we must comply with provisions regarding net
worth, regulatory net capital and indebtedness, among others.
As described in Note L of the Consolidated Financial Statements of our 1998
Annual Report on Form 10-K, DRI must comply with certain regulations of the SEC
and New York Stock Exchange, Inc. measuring capitalization and liquidity. DRI
continues to operate above minimum net capital standards of 5 percent of
aggregate debit items. At March 31, 1999, net capital was $114.8 million, 9.5
percent of aggregate debit balances and $54.5 million in excess of the 5-percent
requirement.
During the 1999 first quarter, we declared and paid a regular quarterly
dividend on our 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 March 31, 1998, DRI 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 generally at
either the current LIBOR plus 160 basis points, or the lead bank's published
Reference Rate, at our discretion. DRI began making principal payments required
under the agreement of $5.0 million per quarter on April 1, 1999. The final
payment is due on December 31, 2002. DRI must also comply with provisions in the
agreement regarding net worth and regulatory net capital.
On March 31, 1998, we issued $30 million (face amount) in 5-year zero
coupon subordinated debentures related to the acquisition of WAH. The debentures
have a discounted present value of $20.8 million.
MARKET RISK
The types of transactions in which we participate and the types of
inventory we hold remain essentially unchanged since year-end 1998. See the
Market Risk discussion of Item 7 (Management's Discussion and Analysis) of our
Annual Report on Form 10-K for the year ended December 31, 1998 for a further
discussion of this issue.
YEAR 2000 ISSUE AND TECHNOLOGY
The technological problems which may occur upon reaching the Year 2000 have
been widely discussed. Since the early 1990s, we have taken steps to assess and
implement upgrade plans, and test our hardware and software systems for Year
2000 compliance. In 1993, we consolidated the back-office operations of our
subsidiary broker-dealers (Dain Bosworth and Rauscher Pierce Refsnes). With that
consolidation, we upgraded or replaced the bulk of our mission-critical
mainframe data processing systems. While we performed these upgrade and
replacement projects primarily for competitive reasons, these systems were also
made Year 2000-compliant at that time.
Our Year 2000 Task Force is headed by our Chief Financial Officer and our
Chief Information Officer. The Task Force analyzes our internal information
technology ("IT") and non-IT systems, including critical connections to and
outsourced systems supplied by vendors, for Year 2000 readiness. The Task Force
also identifies and prioritizes our critical third-party relationships,
including those with securities exchanges, vendors, clients, and transaction
counterparties; and communicates with them about their plans and progress in
addressing the Year 2000 problem. We have consulted with the Securities Industry
Association ("SIA"), our outside auditors and other industry participants to
formulate our Year 2000 program. We have completed a comprehensive Year 2000
project plan (the "Year 2000 Plan"), which covers our mission-critical IT and
non-IT systems and third-party interfaces. The Year 2000 Plan includes steps for
inventory, assessment, remediation and testing, along with a detailed schedule
for completing each of the segments.
For systems that are not currently Year 2000-compliant, we have prepared
and are executing modification or upgrade plans. Our mission-critical internal
mainframe systems (not including external interfaces) have been assessed,
modified, tested, implemented and run in daily production. We have upgraded and
tested our external interfaces as each service provider informed us that the
external interface was ready for testing. Of the approximately 300
mission-critical mainframe interfaces (with 80 third-parties) we have
identified, we have determined that approximately 90% of these interfaces were
either Year 2000-compliant or not affected by Year 2000 sensitivity. The
remaining interfaces were evaluated during industry-wide testing in March and
April of this year. We are currently remediating any issues identified during
this testing. As required by the Year 2000 Plan we collecting and assessing Year
2000 compliance status information directly from of our mission-critical
vendors. As we receive this information, we are taking appropriate action during
1999 to make our vendor relationships Year 2000 compliant. We expect that
testing, installation and certification of all of our mission-critical external
interfaces will be completed by June 30 1999.
We recently completed full-cycle industry testing with other SIA-member
firms, exchanges, clearing organizations and service utilities. Identifying
whether significant Year 2000 problems exist in placing, settling and clearing
orders and trades was a key objective of this March and April 1999 testing
coordinated by the SIA. In announcing the results of the industry-wide testing,
the SIA stated that "virtually all of the simulated trades entered over the six
test weekends were
processed free of Y2K bugs." Our internal evaluation of our own performance
during the testing was consistent with these results and showed that we
experienced no Y2K-related errors. Testing of other (non-trading) mainframe
systems will be completed by July 31, 1999. While there can be no assurance, we
believe that our internal systems will not experience significant disruption in
connection with the Year 2000.
The assessment of our server systems, local and wide area network systems,
voice systems and facilities is substantially completed. Remediation, often
involving replacement of software with compliant versions, is nearing completion
for our network and voice systems. Testing of these systems, as well as
remediation and testing of our client server systems, is scheduled for the
second and third quarters of 1999.
During 1998 we spent approximately $1 million 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 our consolidated financial
statements. During 1999 we anticipate spending approximately $1.5 million on
Year 2000-related testing. We believe that we will he able to fund any such
future costs from operations.
Our business is highly dependent on communications, trading, information
and data processing systems. Although we have outsourced some communications,
quotations and trading systems services, we maintain our own order-routing and
back-office processing system. We have in place tested disaster recovery
systems. However, if our internal systems, vendors, other information providers,
the securities exchanges, clearing agencies and other securities firms or
financial institutions with which we transact business, experience any
significant disruption in connection with the Year 2000, the disruption could
affect our ability to conduct business and may have a material adverse effect on
our financial results. We have developed and documented contingency plans to
provide for continuity of processing under various scenarios.
Readers are cautioned that forward-looking statements contained in the
section "Year 2000 Issue" should be read in conjunction with our disclosures
under the heading: "Forward Looking Statements" which appears below.
FORWARD-LOOKING STATEMENTS
This document contains certain "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995 (the "Reform
Act") which reflect our current views regarding future events and financial
performance. The words "believe," "expect," "anticipate," "intends,"
"estimate," "forecast," "project," "should," and similar expressions are used to
identify these "forward-looking statements". We desire to take advantage of the
"safe harbor" provisions of the Reform Act. We wish to caution investors and
potential investors that any forward-looking statements made by us or on our
behalf are subject to uncertainties and other factors that could cause actual
results to differ materially from those statements. These factors include, among
others, (a) the volatile nature of the securities industry; (b) rapidly growing
competition posed by other broker-dealers, including discount brokerages and
online trading firms; (c) dependence on and competition for experienced
personnel; (d) successful implementation and execution of our long-term
strategies; (e) dependence on highly sophisticated and expensive systems and
technology, including systems maintained and operated by third-parties over
which we have no control; (f) dependence on external sources to finance
day-to-day operations; (g) use of interest-rate sensitive derivative securities
and other hedging instruments; (h) federal and state regulatory and legislative
changes, including any changes affecting net capital requirements; and (i)
adverse findings in existing litigation, increases in class actions,
governmental agency enforcement proceedings, and other litigation-related risks.
This is not an exhaustive list of factors that could have an adverse impact on
our financial performance; other factors which are not identified here or known
to us currently may prove to be important and may adversely affect our results
of operations. It is also not possible for our management to predict or assess
the impact each factor will have on our business or the extent to which any
factor, or a combination of factors, may cause results to differ materially from
those contained in any forward-looking statements. You should also not place
undue reliance on these forward-looking statements as they relate only to our
views as of the date the statements are made. We undertake no obligation to
publicly update or revise any forward-looking statements, even if new
information, future events, or other conditions occur.
We herein incorporate by reference Exhibit 99 of our Annual Report on
Form 10-K for the year ended December 31, 1998.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are defendants in various pending actions, suits and proceedings before
courts, arbitrators and governmental agencies. Certain of these actions claim
substantial damages and, if determined adversely, could have a material adverse
effect on our consolidated financial condition or results of operations. A list
of certain of such actions is included in Item 3 of our Annual Report on Form
10-K for the year ended December 31, 1998, and they are described in more
detail in Item 8, Note I to the Consolidated Financial Statements included in
such Annual Report. The following description of recent developments in
connection with certain of these matters should be read in conjunction with such
description.
MIDWEST LIFE INSURANCE COMPANY RELATED CLAIMS
KARSIAN, ET AL. V. INTER-REGIONAL FINANCIAL GROUP, INC. AND DAIN BOSWORTH
INCORPORATED - In April 1999, the parties agreed to settle this matter for
a cash payment by Dain Rauscher of $15 million and an interest-free note in
the amount of $6.6 million payable over three years. Closing took place on
May 5, 1999.
NEBRASKA LIFE AND HEALTH INSURANCE GUARANTY ASS'N V. INTER-REGIONAL
FINANCIAL GROUP, INC, AND DAIN BOSWORTH INCORPORATED - This Action was
settled in April for a cash payment by Dain Rauscher of $500,000.
These payments, which have an aggregate present value of $21.3 million,
will have no impact on our 1999 earnings.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
ITEM NO. ITEM METHOD OF FILING
-------- ---- ----------------
3.3 Amended and Restated Bylaws of the Company. Filed herewith.
4.5 First Amendment to Amended and Restated Filed herewith.
Credit Agreement, dated March 15, 1999.
10.12 Dain Rauscher 1996 Stock Incentive Plan, Filed herewith.
as amended through April 27 1999
10.13 Dain Rauscher Deferred Compensation Plan Filed herewith.
for Non-Employee Directors, as amended
through April 27 1999
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 March 31,1999.
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: May 12,1999 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 MARCH 31,1999
(a) Exhibits
ITEM NO. ITEM METHOD OF FILING
-------- ---- ----------------
3.3 Amended and Restated Bylaws of the Company. Filed herewith.
4.5 First Amendment to Amended and Restated Filed herewith.
Credit Agreement, dated March 15, 1999.
10.12 Dain Rauscher 1996 Stock Incentive Plan, Filed herewith.
as amended through April 27 1999
10.13 Dain Rauscher Deferred Compensation Plan Filed herewith.
for Non-Employee Directors, as amended
through April 27 1999
11 Computation of Net Earnings Per Share. Filed herewith.
27 Financial Data Schedule. Filed herewith.