<PAGE>
- ------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 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
incorporation of organization) 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
Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- ---------------------
Common Stock, par value $.125 per share New York Stock Exchange, Inc.
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 and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part
III of this Form 10-K or any amendment to this Form 10-K. [X]
As of March 3, 1999, 12,508,575 shares of common stock were outstanding,
and the aggregate market value of the common shares (based upon the closing
price at March 3, 1999, on the New York Stock Exchange) of Dain Rauscher
Corporation, held by non-affiliates was approximately $256,206,669.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement of Registrant to be filed within 120 days
of December 31, 1998 are incorporated in Part III of this report.
- ------------------------------------------------------------------------------
<PAGE>
PART I
ITEM 1. BUSINESS:
(a) GENERAL DEVELOPMENT OF BUSINESS.
We (Dain Rauscher Corporation) are a Minneapolis, Minnesota-based
holding company formed in 1973 that provides investment advice and services
to individual investors in the western United States and investment banking
services to corporate and governmental clients nationwide through our
principal subsidiary, Dain Rauscher Incorporated ("DRI"). We also clear and
settle securities trades on a fully-disclosed basis for 170 correspondent
brokerage firms through our correspondent clearing unit, which is based in
St. Louis, Missouri. Another subsidiary, Insight Investment Management Inc.
("Insight"), serves as investment advisor to the Great Hall Investment Funds
(five open-end money market mutual funds) and provides fixed income portfolio
management services to a variety of private accounts. Dain Rauscher Lending
Services Inc. was formed in 1997 to make certain types of loans to customers
that are collateralized by customers' control and restricted securities. At
December 31, 1998, we had approximately 3,600 employees located in 27 states.
We are a Delaware corporation with executive offices located at Dain Rauscher
Plaza, 60 South Sixth Street, Minneapolis, Minnesota 55402-4422. Our
telephone number is (612) 371-2711.
For further information on changes to our structure during 1998 see
Item 7, "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
(b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
For a discussion of our results by segment see Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
(c) NARRATIVE DESCRIPTION OF BUSINESS
SECURITIES BUSINESS
GENERAL. Our broker-dealer subsidiary DRI conducts securities and
investment banking activities. DRI deals in securities of and is a
market-maker for entities based throughout the United States. DRI's equity
research, trading and investment banking activities in recent years have
evolved from a geographic orientation to one focused on selected industries.
At December 31, 1998, DRI had 1,188 retail sales representatives and 111
institutional sales representatives. DRI is a member firm of the New York
Stock Exchange, Inc. ("NYSE") and is registered in the NASDAQ system as a
market maker. At December 31, 1998, DRI was registered as a market maker for
382 companies.
Our operating results are sensitive to many factors outside of our
control, including the general volatility of securities prices and interest
rates, trading volume of securities, income and capital gains tax legislation
and demand for investment banking services. Economic conditions in the
regions in which we operate also affect operating results.
1
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Results by business line are discussed in Item 7 "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Revenue for each business line is generated from the following activities:
DAIN RAUSCHER CORPORATION
REVENUE BY SOURCE
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------
1998 1997 1996
------------------------------------------------------------------------
<S> <C> <C> <C>
Commissions:
Listed securities.................. $130,594 $113,426 $87,862
Mutual funds....................... 89,170 81,160 62,679
Over-the-counter securities........ 45,033 47,958 46,845
Insurance and annuity products..... 25,080 20,782 15,399
Options, commodities and other..... 9,790 11,521 10,299
----------- ----------- -----------
Total........................... 299,667 274,847 223,084
----------- ----------- -----------
Principal Transactions:
Equity securities.................. 71,732 75,699 89,251
Municipal securities............... 28,686 32,100 29,451
Government securities.............. 24,531 19,289 20,826
Corporate fixed income securities.. 12,544 15,483 20,371
Mortgage-backed and other.......... 13,099 9,579 9,141
----------- ----------- -----------
Total........................... 150,592 152,150 169,040
----------- ----------- -----------
Investment Banking and Underwriting:
Corporate.......................... 68,910 69,532 67,749
Municipal and other................ 56,560 41,748 43,642
----------- ----------- -----------
Total................................ 125,470 111,280 111,391
----------- ----------- -----------
Interest:
Customer margin accounts........... 88,994 78,945 66,770
Trading inventories and other...... 25,487 28,705 28,250
Deposits and short-term
investments.................... 14,857 14,842 15,531
----------- ----------- -----------
Total............................ 129,338 122,492 110,551
----------- ----------- -----------
Asset Management:
Individual and institutional
accounts........................ 37,571 28,763 21,697
Money market funds................. 23,632 17,541 14,193
----------- ----------- -----------
Total........................ 61,203 46,304 35,890
----------- ----------- -----------
Correspondent Clearing................ 17,873 19,827 15,806
Other................................. 36,192 23,775 17,554
----------- ----------- -----------
Total revenue................... $ 820,335 $ 750,675 $ 683,316
=========== =========== ===========
</TABLE>
2
<PAGE>
COMMISSIONS. As a securities broker, DRI acts as an agent in the
purchase and sale of securities, options, commodities and futures contracts
traded on various securities and commodities exchanges or in the
over-the-counter ("OTC") market. DRI charges a brokerage commission when
acting as an agent for the purchaser or seller of a security. If the security
is listed on an exchange, the transaction is generally completed through
DRI's own floor broker. If the security is traded in the OTC market,
transactions are generally completed with a market maker in the security. In
addition, DRI also earns commissions from transactions involving many other
financial products, including mutual funds and insurance and annuity
products. DRI earns commissions primarily from individual investors, however
institutional commissions have increased in recent years.
PRINCIPAL TRANSACTIONS. DRI is a dealer in corporate, tax-exempt and
governmental fixed income securities and equity securities. DRI recognizes
profits or losses on transactions from trading securities inventory. Trading
securities requires a substantial capital commitment and exposes us to the
risk of loss if market prices of the securities decrease. However, DRI marks
trading securities held in inventory to market, recognizing any unrealized
gains or losses on fluctuations in value as part of principal transactions
revenue.
See Item 8, "Note J to Consolidated Financial Statements", for
further discussion on our inventory and risk management policies.
INVESTMENT BANKING AND UNDERWRITING ACTIVITIES. DRI earns investment
banking fees by assisting clients with financial needs planning and by
advising them on raising and managing capital. We also help our clients
implement financing plans by managing or co-managing public offerings of
securities or by arranging private placements of securities with
institutional or individual investors. Our Equity Capital Markets group
originates, syndicates and distributes securities of companies in five key
sectors: consumer, energy, financial services, health care and technology.
Our syndicate department (part of Equity Capital Markets) coordinates the
distribution of managed and co-managed corporate equity underwritings,
accepts invitations to participate in competitive or negotiated underwritings
managed by other investment banking firms, and allocates and merchandises
DRI's selling allotments to our Private Client group branch offices,
institutional clients and other broker-dealers. Our Fixed Income Capital
Markets group originates, syndicates and distributes securities primarily of
municipalities, state and local agencies, and health care organizations.
Participation in equity and tax-exempt securities underwritings can
expose us to significant risk, as it is possible that securities we have
committed to purchase cannot then be resold at the initial offering price. We
work under the provisions of federal and state securities laws and
regulations that can impose substantial potential liabilities for violations
in connection with an underwriters' sales of securities to the public. In
addition to public offerings and private placements, DRI provides other
consulting services, including valuations of securities and companies,
arranging and evaluating mergers and acquisitions and advising clients with
respect to financing plans and related matters.
CUSTOMER FINANCING. A significant portion of DRI's' profitability is
from net interest income, the majority of which is related to customer
balances. Our customers conduct their transactions on either a cash or margin
basis. Purchases on a cash basis require full payment by the settlement date
(generally the third business day following the transaction date). DRI's
balance sheet includes all our customers' debit and credit balances as well
as those of the introducing correspondent firms serviced by our correspondent
clearing unit. DRI is at risk in the event a customer fails to settle a trade
and the value of the securities subsequently decline. When a customer
purchases securities on a margin basis, DRI extends credit to the customer
for a portion of the purchase price. The amount of the loan is subject to
margin regulations of the Federal Reserve Board, the NYSE and our internal
policies, which are generally more stringent than these regulations. DRI is
at risk of loss for customers who are unable to pay on margin loans where the
collateral is less than the amount of the loan as a result of declines in
market value. We charge interest at a floating rate based on the amount a
customer borrows. The rate is dependent on the customers' average margin
balance, activity level, and our cost of funds. See Item 8, "Note J to
Consolidated Financial Statements", for further discussion of these customer
activities.
Customers also accumulate credit balances in their accounts from
receipt of dividends, interest or principal on securities we hold on their
behalf, from funds received for the sale of securities, and from cash
deposits made by customers. DRI pays interest to customers on their credit
balances. DRI also uses available customer credit balances to lend funds to
other customers purchasing securities on margin. DRI weekly calculates the
amount of customer credit balances, if any, that must be segregated ("excess
customer credit balances") from other customer funds, based on regulations
designed to protect customer balances. Excess customer credit balances are
invested in short-term securities in accordance with these regulations. See
Item 8 "Note L to Consolidated Financial Statements" for further discussion
of these regulatory requirements. DRI generates net interest income from the
interest rate spread between the yield on customer debit balances and
short-term investments and the rate paid to customers on credit balances. DRI
is a member of the Securities Investor
3
<PAGE>
Protection Corporation ("SIPC"), which insures customer accounts up to
specified limits in the event of liquidation. We also maintain additional
coverage in order to further protect customer accounts in excess of SIPC
coverage.
SECURITY REPURCHASE ACTIVITIES. DRI acts as principal in the
purchase and sale to customers of U.S. government and government agency
securities, including repurchase agreements in these securities and certain
other money market instruments. DRI may match purchases and sales of these
securities and is at risk to the extent that the contracts are not properly
matched or its customers are unable to meet their obligations. These risks
are higher during periods of rapidly changing interest rates or fluctuations
in market conditions. In addition to requiring collateral, DRI takes physical
possession of securities purchased under agreements to resell. These
repurchase agreements provide DRI with the right to maintain the relationship
between the market value of the collateral held and the amount owed. DRI
typically enters into these contracts only with large, credit-worthy
customers. DRI also utilizes securities sold under repurchase agreements as a
means of financing portions of its trading inventories.
RESEARCH ACTIVITIES. DRI has fixed income and equity research
departments which provide analysis, investment recommendations and market
information with an emphasis on companies in selected industry segments. At
December 31, 1998, DRI had 36 securities analysts. We also purchase products
from independent organizations to supplement our internal research activities.
REGULATION. The securities industry is regulated by federal and
state governments, the various securities and commodities exchanges and other
self-regulatory bodies. Regulations cover all aspects of the securities
business including sales practices, registration and distribution of
securities, trade practices among broker-dealers, transactions with
affiliates, conflicts of interest, uses and safekeeping of customers' funds
and securities, capital levels of securities firms, record-keeping and the
conduct of employees. Violations of these rules and regulations can result in
censure, fines, suspensions, revocation of the right to do business and
private rights of action for damages. DRI believes it has operated in
compliance with applicable rules and regulations in all material respects.
UNIFORM NET CAPITAL RULE. See Item 8 "Note L to Consolidated
Financial Statements."
CLEARING SERVICES
DRI is also in the business of marketing correspondent clearing
services. Our correspondents disclose to their customers that the customers'
trades are being cleared and settled by us. As of December 31, 1998, DRI
provided clearing services to 170 correspondents. Correspondent firms are
charged fees based on their use of services.
MONEY MANAGEMENT AND OTHER SERVICES
Our subsidiary, Insight, is a registered investment advisor
providing fixed income portfolio management services to the Great Hall
Investment Funds, Inc. ("Great Hall") and to individual and institutional
clients. Great Hall is an open-end investment company that currently offers
shares in five separate money market mutual funds.
COMPETITION
DRI encounters intense competition in its business as a
broker-dealer, competing directly with numerous firms, many of which have
substantially greater capital and other resources. We also encounter
competition from banks, insurance companies and financial institutions.
During the past two years a number of commercial banks have acquired
securities firms, gaining unprecedented entry into the securities industry.
These acquisitions have brought new sources of capital into the securities
industry, resulting in more formidable competitors. Additionally, competition
among securities firms and other competitors for successful sales
representatives, securities traders, securities analysts and investment
bankers is intense and continuous.
DRI competes with other securities firms and with banks, insurance
companies and other financial institutions based on service, product
selection, price, location and reputation in local markets. DRI does operate
at a price disadvantage to discount brokerage firms, although these firms do
not offer equivalent services. Insight competes with other fixed income
portfolio managers principally on the basis of portfolio performance, price
and service.
EMPLOYEES
At December 31, 1998, we had approximately 3,600 full-time
employees, none of whom were represented by a collective bargaining unit.
4
<PAGE>
ITEM 2. PROPERTIES:
Our headquarters and administrative offices are located in two
buildings in downtown Minneapolis, Minnesota, including the Dain Rauscher
Plaza. One location contains back office and data processing operations. We
also lease significant space in Dallas, Texas. DRI has an extensive branch
office system, and leases office space in various locations throughout the
country. We believe that our facilities are suitable and adequate to meet our
needs, and are appropriately utilized.
ITEM 3. 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. These actions are listed below. For a more detailed discussion of
these actions and other litigation see Item 8, "Note I to the Consolidated
Financial Statements."
MIDWEST LIFE INSURANCE COMPANY RELATED CLAIMS
KARSIAN, ET AL. v. INTER-REGIONAL FINANCIAL GROUP, INC., AND
DAIN BOSWORTH INCORPORATED, Case No. 93-M-1806 (U.S. Dist. Ct.,
Colorado, filed 1993).
NEBRASKA LIFE AND HEALTH INSURANCE GUARANTY ASS'N v.
INTER-REGIONAL FINANCIAL GROUP, INC. AND DAIN BOSWORTH
INCORPORATED, Docket 527, Page 023 (Nebraska Dist. Ct., Lancaster
County, filed 1995).
JOHN A. DIXON, JR., AS COMMISSIONER OF INSURANCE AD HOC, FOR THE
STATE OF LOUISIANA v. THE MIDWEST LIFE INSURANCE COMPANY/MIDWEST
LIFE INSURANCE COMPANY, IN LIQUIDATION v. INTERRA FINANCIAL
INCORPORATED, DAIN BOSWORTH INCORPORATED AND THE CENTRAL NATIONAL
LIFE INSURANCE COMPANY OF OMAHA, Div. Action No. 97-716 (I.S. Dist.
Ct., Middle Dist. Of Louisiana, filed 1997).
STATE OR ARIZONA SEC PROCEEDING
SECURITIES AND EXCHANGE COMMISSION v. RAUSCHER PIERCE REFSNES,
INC., JAMES FELTHAM AND DAIN RAUSCHER INCORPORATED, No. DIV98-0027
PHX ROS (U.S. Dist. Ct., Arizona, filed 1998).
ORANGE COUNTY RELATED SEC PROCEEDING
SECURITIES AND EXCHANGE COMMISSION v. DAIN RAUSCHER, INC., KENNETH
D. OUGH AND VIRGINIA O. HORLER, Case No. SACV 98-639 GLT (Anx) (U.S.
Dist. CT., Central Dist. Of California, filed 1996).
ITEM 3. B. LEGAL PROCEEDINGS:
In addition, the following actions, suits or proceedings were settled
during 1998. For a more detailed discussion of these actions see Item 8, "Note I
to the Consolidated Financial Statements."
MIDWEST LIFE INSURANCE COMPANY RELATED CLAIMS
WASHINGTON LIFE AND HEALTH INSURANCE GUARANTY ASS'N v.
INTER-REGIONAL FINANCIAL GROUP, INC. AND DAIN BOSWORTH INCORPORATED
IOWA LIFE AND HEALTH INSURANCE GUARANTY ASS'N v. INTER-REGIONAL
FINANCIAL GROUP, INC. AND DAIN BOSWORTH INCORPORATED (Iowa Dist.
Ct., Polk County)
C. RANDOLPH, L. SCHNOBRICH, V. TROUMBLY, P. DUMKE, E. DAVIS AND
MINNESOTA LIFE AND HEALTH INSURANCE GUARANTY ASS'N v.
INTER-REGIONAL FINANCIAL GROUP, INC. AND DAIN BOSWORTH
INCORPORATED (Hennepin County, Minnesota Dist. Ct.)
MONTANA LIFE AND HEALTH INSURANCE GUARANTY ASS'N v. INTER-REGIONAL
FINANCIAL GROUP, INC. AND DAIN BOSWORTH INCORPORATED, (Montana
First Judicial Court, Lewis & Clark County)
NORTH DAKOTA LIFE AND HEALTH INSURANCE GUARANTY ASS'N v.
INTER-REGIONAL FINANCIAL GROUP, INC. AND DAIN BOSWORTH
INCORPORATED, (District Court, Cass County, North Dakota)
SOUTH DAKOTA LIFE AND HEALTH INSURANCE GUARANTY ASS'N v.
INTER-REGIONAL FINANCIAL GROUP, INC. AND DAIN BOSWORTH
5
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INCORPORATED, (South Dakota Second Judicial Circuit, Minnehaha
County)
WYOMING LIFE AND HEALTH INSURANCE GUARANTY ASS'N v. INTER-REGIONAL
FINANCIAL GROUP, INC. AND DAIN BOSWORTH INCORPORATED, (Wyoming
District Court for Laramie County)
OREGON LIFE AND HEALTH INSURANCE GUARANTY ASS'N v. INTER-REGIONAL
FINANCIAL GROUP, INC. AND DAIN BOSWORTH INCORPORATED, (Oregon
Circuit Court of Multnomah County)
ORANGE COUNTY BANKRUPTCY LITIGATION
THOMAS HAYES, AS LITIGATION REPRESENTATIVE FOR THE COUNTY OF ORANGE
AND AS ASSIGNEE OF THE DISTRICTS' EXCLUDED CLAIMS v. DAIN RAUSCHER
CORP., Case No. SACV 98-768 AHS (ANx) (U.S. Dist. Ct., Central Dist.
of California)
COUNTY OF ORANGE, A POLITICAL SUBDIVISION OF THE STATE OF CALIFORNIA
v. RAUSCHER PIERCE REFSNES, INC., A CORPORATION and filed in the
Chapter 9 proceeding entitled IN RE COUNTY OF ORANGE, A POLITICAL
SUBDIVISION OF THE STATE OF CALIFORNIA in the United States
Bankruptcy Court for the Central District of California
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS:
No matters were submitted to a vote of security holders during the
fourth quarter ended December 31, 1998.
6
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EXECUTIVE OFFICERS OF THE REGISTRANT
The following officers have been designated by our Board of
Directors as current "executive officers" for SEC reporting purposes. All
officers are generally elected annually at the Board meeting held in
conjunction with our annual stockholders meeting and hold such offices until
the following year, subject to their earlier death, resignation or removal.
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION AND
BUSINESS EXPERIENCE
NAME AGE FOR THE PAST FIVE YEARS
- ---- --- -------------------------
<S> <C> <C>
John C. Appel...............................50 Vice Chairman and Chief Financial Officer, Dain Rauscher Corporation,
since October 1997. Vice Chairman and Chief Financial Officer, Dain
Rauscher Incorporated, since January 1998. Chief Executive Officer,
Dain Bosworth, February 1997 to December 1997; President, Dain
Bosworth, 1994 to December 1997. Executive Vice President, Dain
Rauscher Corporation, 1990 to December 1997; Director, Dain Rauscher
Corporation, since 1995. Member of the Dain Rauscher Corporation
Executive Committee.
Nelson D. Civello...........................53 Senior Executive Vice President, Fixed Income Capital Markets, Dain
Rauscher Incorporated, since October 1997. Senior Executive Vice
President, Dain Rauscher Corporation, since October 1997. Executive
Vice President, Fixed Income Group, Dain Bosworth, 1990 to December
1997. Member of the Dain Rauscher Corporation Executive Committee.
B. J. French................................62 Senior Vice President, Dain Rauscher Corporation, since May 1996.
Senior Vice President, Dain Rauscher Incorporated, since January
1998. Director of Corporate and Investor Communications, Dain
Rauscher Corporation, since 1991.
David J. Parrin.............................44 Senior Vice President and Controller of Dain Rauscher Corporation and
Dain Rauscher Incorporated since April 1998; Senior Vice President and
Controller of U.S. Bancorp, May 1994 to April 1998; Partner, Ernst &
Young 1989 to May 1994.
Carla J. Smith..............................41 Senior Vice President, Dain Rauscher Corporation, since 1994; General
Counsel and Secretary, Dain Rauscher Corporation, since 1991. Senior
Vice President, General Counsel and Secretary, Dain Rauscher
Incorporated, since January 1998.
J. Scott Spiker.............................43 Senior Executive Vice President, Business Services Group, Dain
Rauscher Incorporated, since January 1998. Senior Executive Vice
President, Dain Rauscher Corporation, since October 1997. Chairman of
the Board and Chief Executive Officer, Insight Investment Management
Inc., since January 1998. President and Chief Executive Officer,
Interra Advisory Services Inc., 1995 to December 1997. Executive Vice
President, Dain Rauscher Corporation, May 1996 to October 1997; Senior
Vice President, Director of Strategic Planning and Corporate
Development, Dain Rauscher Corporation, 1994 and 1995. Senior Vice
President, Manager Employee Benefit Services, Norwest Bank Minnesota,
N.A., 1989 to 1994. Member of Dain Rauscher Corporation Executive
Committee.
Douglas J. Strachan........................53 Senior Vice President, Dain Rauscher Corporation, since 1997. Chief
Information Officer, Dain Rauscher Corporation, since 1996. Senior
Vice President and Director, Information Sytems, Dain Rauscher
Corporation, since 1993.
7
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Ronald A. Tschetter.........................57 Senior Executive Vice President, Private Client Group, Dain Rauscher
Incorporated, since October 1997. Senior Executive Vice President,
Dain Rauscher Corporation, since October 1997. Executive Vice
President, Private Client Group, Dain Bosworth, 1991 to December
1997. Member of the Dain Rauscher Corporation Executive Committee.
Irving Weiser...............................51 Chairman of the Board, Dain Rauscher Corporation, since 1995; Chief
Executive Officer, Dain Rauscher Corporation, since 1990; President
and Director, Dain Rauscher Corporation, since 1985. Chairman of the
Board and Chief Executive Officer, Dain Rauscher Incorporated, since
January 1998. Chairman of the Board, Dain Bosworth, 1990 to December
1997; Chief Executive Officer, Dain Bosworth, 1990 to February 1997.
Chairman of the Board, Rauscher Pierce Refsnes, 1995 to December 1997;
Acting President and Chief Executive Officer, Rauscher Pierce Refsnes,
1995 to June 1996. President, Dain Bosworth, 1990 to 1994. Member of
Dain Rauscher Corporation Executive Committee.
Kenneth J. Wessels..........................56 Senior Executive Vice President, Dain Rauscher Corporation and Dain
Rauscher Wessels group of Dain Rauscher Incorporated since March of
1998; Director, Dain Rauscher Corporation, since March 1998; Member of
Dain Rauscher Corporation Executive Committee. CEO and Managing
Director, Wessels, Arnold & Henderson, LLC 1986 to March 1998. CEO
and Managing Director, WAH Group, 1995 to March 1998.
</TABLE>
8
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PART II
ITEM 5. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS:
(a) MARKET INFORMATION.
Our common stock trades on the NYSE under the symbol "DRC." Following
are the high and low sales prices per share by quarter for the last two years:
<TABLE>
<CAPTION>
1998 1997
QUARTER HIGH LOW HIGH LOW
------- ---------- ----------- --------- ----------
<S> <C> <C> <C> <C>
First $ 69 $ 53-1/2 $ 42-5/8 $ 34-3/4
Second 60-3/16 50-13/16 45-5/8 41-15/16
Third 58-3/4 31-3/16 60-1/16 43-1/2
Fourth 37-13/16 27-5/16 69-3/16 56-15/16
</TABLE>
(b) HOLDERS.
At February 28, 1999, there were approximately 6,500 holders of our
common stock.
(c) DIVIDENDS.
Cash dividends per common share paid by quarter for the last two
years were as follows:
<TABLE>
<CAPTION>
QUARTER 1998 1997
- ------ ----- ------
<S> <C> <C>
First $0.22 $0.18
Second 0.22 0.18
Third 0.22 0.18
Fourth 0.22 0.18
</TABLE>
Whether or not cash dividends will continue to be paid in the future
will depend on our future financial condition, earnings and available funds.
9
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------
(Dollars in thousands, except per-share amounts) 1998 1997 1996 1995 1994
----------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
OPERATING RESULTS:
Total revenue........................... $ 820,335 $ 750,675 $ 683,316 $ 606,747 $ 496,289
Pretax income........................... 12,484 76,755 87,402 56,271 39,795
Net income.............................. 7,990 49,275 56,811 35,873 25,453
Pretax margin (net revenue)............. 1.7% 11.1% 14.0% 10.4% 8.7%
Return on average equity................ 2.5 16.5 22.8 17.3 13.5
Before non-recurring items:*
Net revenue............................. $ 740,583 $ 692,102 $ 625,756 $ 541,970 $ 457,351
Pretax operating income................. 47,484 91,755 87,402 56,271 39,795
Net operating income.................... 30,390 58,875 56,811 35,873 25,453
Operating margin (net revenue).......... 6.4% 13.3% 14.0% 10.4% 8.7%
Operating return on average equity...... 9.2 19.5 22.8 17.3 13.5
- ----------------------------------------------------------------------------------------------------------------------
PER COMMON SHARE:
Net income:
Basic................................ $ .64 $ 4.01 $ 4.68 $ 2.96 $ 2.09
Diluted.............................. .61 3.77 4.49 2.85 2.03
Operating income:*
Basic................................ 2.45 4.80 4.68 2.96 2.09
Diluted.............................. 2.31 4.51 4.49 2.85 2.03
Cash dividends.......................... .88 .72 .56 .42-2/3 .37-1/3
Book value.............................. 26.27 26.00 22.66 18.44 16.20
- ----------------------------------------------------------------------------------------------------------------------
FINANCIAL POSITION (AT YEAR END):
Total assets............................ $ 2,466,487 $2,304,401 $ 1,827,425 $ 2,021,908 $ 1,952,611
Long-term debt.......................... 112,505 15,659 27,290 41,410 47,023
Shareholders' equity.................... 329,773 319,091 275,886 222,494 195,420
Long-term debt-to-equity ratio.......... 34.1% 4.9% 9.9% 18.6% 24.1%
- ----------------------------------------------------------------------------------------------------------------------
OTHER INFORMATION:
Common shares outstanding at year end... 12,553 12,275 12,175 12,065 12,062
Average number of employees............. 3,608 3,525 3,379 3,285 3,133
Average number of investment
executives........................... 1,271 1,267 1,263 1,271 1,205
Operating office locations at year end.. 103 96 91 91 95
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
*Nonrecurring items include: $5.6 million (after tax) gain from sale of
investment securities and $15.2 million (after tax) in litigation-related
expense in 4Q98; merger-related expense of $12.8 million (after tax) in 1Q98;
and $9.6 million (after tax) restructuring charge in 3Q97.
10
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS:
BUSINESS ENVIRONMENT
We are primarily engaged in securities brokerage, investment banking
and trading as a principal in equity and fixed income securities. All of
these activities are highly competitive and sensitive to many factors outside
of our direct control. Our business results may be affected by changes in
interest rates, income tax legislation, financial market volatility or
economic conditions, any of which can affect demand for investment banking
and securities brokerage services. Changes in securities prices and trading
volumes may also affect revenue. Consequently, our net earnings can vary
significantly from period to period.
1998 OVERVIEW
We posted 1998 net operating earnings of $30.4 million, or $2.31 per
diluted share, on a 7% increase in net revenue to $741 million. That compares
with net operating earnings of $58.9 million, or $4.51 per diluted share, in
1997.
Our 1998 net income was $8.0 million, or 61 cents per diluted share,
compared with $49.3 million, or $3.77 per diluted share, in 1997. These
results included a $12.8 million, after tax, first-quarter charge related to
the acquisition of Wessels, Arnold and Henderson ("WAH"), and a $9.6 million,
after tax, fourth-quarter charge related to the settlement of several
significant litigation matters. This charge, which was $15.0 million pretax,
included $23.8 million in litigation-related expense, offset by an $8.8
million pretax gain on the sale of investment securities.
INCOME STATEMENT HIGHLIGHTS
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1998 1997
--------- ---------
<S> <C> <C>
Revenue*..................................... $811,548 $750,675
Interest expense............................. (70,965) (58,573)
--------- ---------
Net revenue*................................. 740,583 692,102
Expenses excluding interest
and nonrecurring expenses................. 693,099 600,347
--------- ---------
Operating earnings before income taxes....... 47,484 91,755
Income tax expense from operations........... (17,094) (32,880)
--------- ---------
Net operating earnings....................... 30,390 58,875
Net nonrecurring items (net of tax)*......... (22,400) (9,600)
--------- ---------
Net income .................................. $ 7,990 $ 49,275
======== =========
EARNINGS PER SHARE:
From net operating earnings:
Basic..................................... $ 2.45 $ 4.80
Diluted................................... $ 2.31 $ 4.51
Net:
Basic..................................... $ 0.64 $ 4.01
Diluted................................... $ 0.61 $ 3.77
</TABLE>
*Excludes nonrecurring items, which include (after tax): $5.6 million gain
from sale of investment securities and $15.2 million in litigation-related
expense in 4Q98; merger-related expense of $12.8 million in 1Q98; and $9.6
million restructuring charge in 3Q97.
11
<PAGE>
During 1998 we combined three entities into a single corporation.
First, we completed the combination of our broker-dealer subsidiaries--Dain
Bosworth Incorporated ("Dain Bosworth") and Rauscher Pierce Refsnes, Inc.
("Rauscher Pierce Refsnes")--and our operations subsidiary into a new firm,
Dain Rauscher Incorporated ("DRI"). As a result of this change, on January 2,
1998, we changed our name to Dain Rauscher Corporation and our trading symbol
on the New York Stock Exchange to "DRC." Next we completed the acquisition of
WAH, a privately held investment banking, institutional equity sales and
trading firm based in Minneapolis, on March 31, 1998. We accounted for this
transaction as a purchase. The purchase price of $150 million included $120
million in cash and $30 million in five-year, subordinated debentures. We
paid the cash portion of the purchase price from both available cash and a
subordinated commercial bank credit facility. As a result of the transaction,
we recorded approximately $120 million of goodwill, which is being amortized
over 25 years.
With the acquisition of WAH, now included in the Equity Capital
Markets Group, we significantly increased our equity capital markets
capabilities. In connection with this acquisition, DRI recorded an expense 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, $2.5 million for office space consolidation; and the remaining $1.5
million for converting systems and other integration costs. By the end of
1998, we had spent approximately $17 million of this restructuring charge,
$16 million of which was severance. We expect to charge any remaining costs
to the restructuring reserve during the first quarter of 1999.
In addition to the restructuring charge and the goodwill
amortization resulting from the WAH acquisition, certain other expenses
increased during 1998 due to the changes in our structure. Compensation
expenses increased, partly as a result of transitional incentive compensation
arrangements that we implemented to minimize turnover during the
restructuring. These incentive agreements expired at the end of 1998. We also
paid higher commissions on the higher revenue levels generated by employees
as securities prices and trade volumes rose during the year. Compensation
expense also increased with a modest rise in the number of employees, and
general salary increases during the year. Additional office space, as a
result of both the acquisition and also the opening of new retail and fixed
income offices, increased occupancy costs during the year. These operating
expense increases (with compensation being the largest) had a significant
impact on our net operating earnings, which decreased 48% from 1997.
Finally, during the fourth quarter, we recorded $23.8 million
(pretax) in litigation expenses to settle several lawsuits regarding our
alleged involvement in the bankruptcy of Orange County, California, and the
failure of a former subsidiary, Midwest Life Insurance Company. We also
realized an $8.8 million pretax gain from the sale of an equity investment.
As a result, our fourth quarter 1998 results included a net nonrecurring
expense of $9.6 million, after taxes. Although 1997 results also included a
restructuring charge, the combined impact of the 1998 restructuring charge
and litigation settlements were significantly higher than in the prior year.
The effect of these nonrecurring items, in addition to the operating expense
increases, resulted in an 84% decline in our net income in 1998.
12
<PAGE>
1998 BUSINESS LINE INFORMATION
Our business includes three major segments: Private Client Group, which
includes securities and financial product sales for individual investors,
correspondent clearing, and asset management for individual investors; Equity
Capital Markets, which includes investment banking and underwriting,
institutional sales, and over-the-counter and listed equity trading; and
Fixed Income Capital Markets, which includes fixed income securities sales,
trading, underwriting, and advisory services. All corporate expenses and
miscellaneous revenues and expenses that are not allocated to individual
business lines are included in Corporate. Corporate pretax income also
includes the 1998 gain on the sale of an investment security.
<TABLE>
<CAPTION>
(Dollars in thousands) 1998 1997 % CHANGE
------------ ------------ ----------
<S> <C> <C> <C>
Net Revenue:
Private Client Group..................... $ 531,197 $ 491,577 8%
Equity Capital Markets................... 93,317 97,118 (4)
Fixed Income Capital Markets............. 110,041 86,292 27
Gain on sale of investment security...... 8,787 - nm
Corporate................................ 6,028 17,115 nm
------------ ------------ ----------
TOTAL................................ $ 749,370 $ 692,102 8%
============ ============ ==========
Pretax income:
Private Client Group..................... $ 51,134 $ 60,460 (15)%
Equity Capital Markets................... (19,468) 3,891 nm
Fixed Income Capital Markets............. 16,334 9,783 67
Nonrecurring Items....................... (43,787) (15,000) nm
Corporate................................ 8,271 17,621 (53)
------------ ------------ ----------
TOTAL................................ $ 12,484 $ 76,755 (84)%
============ ============ ===========
Pretax margin on net revenue:
Private Client Group..................... 9.6% 12.3%
Equity Capital Markets................... (20.9) 4.0
Fixed Income Capital Markets............. 14.8 11.3
Corporate................................ nm nm
------------ ------------
TOTAL............................... 1.7% 11.1%
============ ============
</TABLE>
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 Investment Management
("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 1998 came from higher sales of
mutual funds, listed securities and insurance products. The increase in both
securities prices and trade volumes on the NASDAQ, NYSE and other exchanges
drove much of this gain. Our investment executives completed more customer
trades at generally higher prices than in prior years. Increases in
investment executive productivity and growth from new offices further
augmented commission revenue.
Correspondent clearing income also increased slightly over the
prior year, despite a small loss in the number of correspondents. This
increase was primarily a result of higher interest revenue from larger
customer margin borrowings during 1998. Asset management fees were also
higher for 1998, as a result of higher levels of assets under administration
during the year in both Great Hall Funds and in other fee-based managed
account programs.
13
<PAGE>
PCG's interest revenue from margin loans to customers, based on
debit balances in customer accounts, increased with higher levels of customer
borrowings in 1998. The interest Private Client Group paid to customers on
certain credit balances on deposit with us declined with lower interest
rates. PCG net interest income is dependent upon the level of customer debit
and credit balances, as well as the spread between the rate earned on those
balances and the interest costs on borrowed funds. As long as there are
favorable interest-rate spreads and the level of interest-bearing accounts
remains stable, we expect net interest income to remain a significant
component of earnings. The following chart summarizes PCG's net interest
income from margin lending:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------
(Dollars in thousands) 1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Net interest income from
Margin loans to customers:
Average balance........................................ $1,076,900 $ 934,833 $ 810,693
Average interest rate spread........................... 2.5% 2.6% 2.5%
----------- --------- ----------
$ 26,641 $ 24,070 $ 20,479
========== ========= ==========
</TABLE>
Despite increased revenue, Private Client Group pretax income
declined 15% for the year. Increased compensation expenses from transitional
incentive programs implemented during our restructuring and recruiting
activity during the year were the most significant factors in decreasing the
pretax margin in 1998. Compensation and benefits were 55.1% of net revenue in
1998 compared with 54.0% in 1997. Occupancy expenses were also higher as the
result of opening new offices, and promotional and travel costs also increased
partly as a result of the merger of our broker-dealers.
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 or 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 secondary offerings, IPOs 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.
In general, 1998 ECM revenue was negatively affected by the changes
required to merge Dain Bosworth and Rauscher Pierce Refsnes, as well as the
acquisition of WAH. Investment banking revenue declined 18% for the year. IPO
fee revenue was lower in 1998, as many companies responded to difficult
market conditions in the third quarter by canceling or postponing IPOs
scheduled for the last half of the year. M&A fees were also lower in 1998 for
ECM, despite being up industry-wide. Although M&A fees did increase in the
last half of the year, disruption related to the WAH integration prevented
ECM from participating fully in M&A activity earlier in the year. Revenue
from both equity trading and institutional equity sales increased
approximately 10% during the year.
ECM pretax income declined significantly from the prior year as
expenses while revenue declined. Transitional incentive compensation programs
caused much higher compensation expenses (86.9% of net revenue for 1998
versus 70.9% in 1997.) All other operating expenses increased in 1998, led by
occupancy and promotional and travel. Costs associated with integrating the
three entities and establishing and operating the restructured Equity Capital
Markets group accounted for part of these increases. Due to these increased
costs and lower revenue, ECM's pre-tax margin was a negative 20.9% in 1998
versus a positive 4%. in 1997.
14
<PAGE>
FIXED INCOME: Fixed Income Capital Markets ("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 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, along with
associated commissions, is included as part of principal transaction revenue
on our consolidated statement of operations.
Municipal and other tax-exempt underwriting fees increased
significantly in 1998. Low interest rates resulted in more, and larger, fixed
income offerings and debt refinancings by municipalities. The increase in
these offerings also helped drive increases in our trading and sales revenues
from fixed income securities. Revenue from taxable fixed income securities
sales was also up substantially during the year as we increased the
size of our sales force and these securities gained favor with investors.
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 net interest
income increased slightly in 1998 from 1997.
Pretax income increased from the prior year, even though
compensation expense was higher as a direct result of the higher revenue
levels. Compensation expense as a percent of net revenue, however, was 58.7%
in 1998 and 59.4% in 1997. Other operating expenses also increased
(particularly occupancy expenses from the opening of new offices) although at
a lower rate than revenue, resulting in higher margins in 1998.
CORPORATE: Corporate revenue consists primarily of asset management
fees generated by our subsidiary Insight Investment Management, and net
interest which 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 1998 as
assets under management at Insight grew during the year. However, net
interest declined as the cost of financing the WAH acquisition increased
interest expense in 1998.
Corporate expense includes goodwill amortization, professional fees,
and any nonrecurring expenses. Amortization of WAH goodwill represents a portion
of the increase in corporate expense during 1998. However, our two nonrecurring
charges, for the WAH merger and internal restructuring ($20 million pretax) and
fourth quarter litigation settlements ($23.8 million pretax), accounted for the
majority of the increase. Finally, the cash paid to acquire WAH decreased funds
available for investment, resulting in a decline in unallocated net interest
during 1998.
15
<PAGE>
1997 OVERVIEW
Consolidated net revenue increased 11% in 1997 over 1996. PCG was
responsible for a significant portion of this increase with higher sales of
mutual funds, listed securities, and insurance and annuity products, partly
as a result of favorable market conditions. These favorable conditions and
low interest rates contributed to increased margin borrowing by our customers
in 1997, resulting in higher interest income for PCG during the year.
Clearing revenue also increased during the year, as correspondent trade
volumes increased. In 1997 Equity Capital Markets increased corporate
underwriting and institutional equity sales; however, over-the-counter equity
trading decreased, resulting in essentially flat revenue versus 1996. Another
factor affecting ECM trading revenue was the industry-wide change in share
pricing (from dollar fractions in eighths to sixteenths or less) resulting in
smaller spreads in our share purchase versus sale price. Our Fixed Income
Capital Markets Group increased both revenues and profits in 1997 as a result
of increased tax-exempt bond sales, increases in trading revenues, and
expense reductions from downsizing in 1996. However, FICM municipal
underwriting fees declined in 1997 from the prior year. Finally, other
revenue also increased during 1997 due to increased account and transaction
fees from a higher number of IRA and cash management accounts.
1997 results were also affected by a $15 million (pretax)
restructuring charge. This charge was taken in 1997 in anticipation of the
combination of our subsidiaries Dain Bosworth and Rauscher Pierce Refsnes
into a single broker-dealer, DRI.
Compensation and benefits expense varies according to the level of
operating revenue, as well as the number of employees and earnings.
Compensation and benefits increased in 1997 primarily as the result of
increased commissions and benefits paid to revenue-producing employees
generating higher levels of operating revenues, a 4% increase in the average
number of employees, and general salary increases.
Other expenses (excluding compensation and benefits and the
restructuring charge) increased in 1997 principally due to: (1) increased
travel and promotional costs associated with the generation of new business
and the merger of our broker-dealer subsidiaries in January 1998; (2)
increased occupancy costs associated with office expansions and office
operating costs, including real estate taxes, and equipment upgrades; (3)
costs associated with information system upgrades; (4) volume-driven
increases in communications, market-data and clearing services; and (5) bad
debt expenses.
LIQUIDITY AND CAPITAL RESOURCES
Our assets consist mainly of cash or assets readily convertible into
cash. We finance our assets primarily through customer credit balances
(interest- and non-interest-bearing), repurchase agreements, deposits for
securities loaned, other payables, short-term and subordinated bank
borrowings and equity capital. Our financing requirements are directly
affected by changes in the amount of our trading and underwriting securities,
customer and broker receivables and securities purchased under agreements to
resell. Repurchase agreements are our primary method of financing our trading
inventories.
We have various sources of capital to fund operations and growth, in
addition to capital provided by earnings. Our broker-dealer subsidiary, DRI,
maintains uncommitted lines of credit from a number of banks to finance
transactions (principally trading and underwriting positions) and supplement
internally generated capital. Trading securities and customers' margin
securities collateralize the majority of these uncommitted lines of credit.
On December 31, 1998, approximately $400 million of a total of $540 million
in uncommitted lines of credit was unused. We also maintain a $50 million
committed, unsecured revolving credit facility that we use for advances to
DRI, irrevocable letters of credit and general corporate purposes. This
facility was renegotiated in March 1998 and is annually renewable for three
one-year periods. We renewed this facility in March 1999. Loans under this
facility are unsecured and bear interest at a floating rate of Federal Funds
plus 85 basis points. On December 31, 1998, all of this revolving credit
facility was unused. Our subsidiary, Dain Rauscher Lending Services Inc.,
also maintains a $50 million uncommitted credit line to finance loans made to
customers. As of December 31, 1998, $8.4 million was outstanding under this
facility at a 6.1% interest rate.
During 1998, DRI borrowed $80 million on a subordinated basis over
four years to finance a portion of the purchase price of the WAH acquisition
and refinance existing subordinated debt. We also issued $30 million (face
amount) in five-year zero coupon subordinated debentures in connection with
the acquisition of WAH. The discounted present value of the debentures at
year end was $22.5 million.
16
<PAGE>
DRI is also subject to the Securities and Exchange Commission's
Uniform Net Capital Rule (the "Rule"), which measures capitalization and
liquidity, and restricts amounts of capital that may be transferred to
affiliates. The Rule is designed to measure the general financial integrity
and liquidity of a broker-dealer and the minimum net capital deemed necessary
to meet the broker-dealer's continuing commitments to customers. The Rule
provides for two methods of computing net capital. DRI uses what is known as
the alternative method. Under this method, minimum net capital is defined as
2% of customer debit balances. In addition to the SEC rule, the NYSE may also
require a member organization to reduce its business if net capital is less
than 4% of aggregate debit items and may prohibit a member firm from
expanding its business and declaring cash dividends if its regulatory net
capital is less than 5% of aggregate debit items. We exclude assets that are
not readily convertible into cash and conservatively value trading securities
when computing net capital. Failure to maintain the required net capital may
subject a firm to suspension or expulsion by the NYSE, the SEC and other
regulatory bodies and may ultimately require its liquidation. DRI has at all
times maintained its net capital above both SEC and NYSE required levels. At
December 31, 1998, regulatory net capital was $121.9 million at DRI, which
was 9.5 % of aggregate debit balances and $57.6 million in excess of the 5%
requirement. During the year, and prior to the combination, Dain Bosworth,
Rauscher Pierce Refsnes, and our operations subsidiary all maintained
regulatory net capital in excess of the minimum requirements.
DRI is a dealer in corporate, tax-exempt and governmental fixed
income securities. While many of DRI's principal transactions are executed on
behalf of clients, DRI also maintains a trading inventory for our own
account. This inventory typically includes U.S. government or U.S. government
agency securities and, in order to mitigate market and interest rate risk, is
often hedged with a combination of short sales of similar securities,
financial futures contracts or option contracts. Holdings of high-yield
securities are not material.
SECURITIES LENDING AND BORROWING ACTIVITIES
We borrow securities from and lend securities to other brokers and
dealers to facilitate short sales and clearance and delivery of securities
sold by customers if customers fail to deliver securities prior to settlement
date. We also will arrange securities lending transactions between brokers
and utilize available securities as collateral for short-term loans. When
these stock loan transactions occur, the lending broker provides excess
customer margin securities to the borrowing broker in return for a cash
deposit, generally equivalent to 102% of the market value of the securities
loaned. Both the lending and borrowing brokers mark the securities to market
to maintain the ratio between the market value of the securities loaned and
the cash collateral deposited. When the securities are no longer needed by
the borrowing firm, they are returned to the lending broker, which returns
the cash deposit, plus interest, to the borrowing broker.
When we engage in stock lending, we collect cash deposits from
brokers, invest the cash, and profit from the spread between the interest
rate we pay to the borrowing broker on the cash deposit and the rate we earn
from our investment. In lending transactions, we are at risk to the extent
that we do not maintain the ratio between the market value of the securities
we loaned and the value of the cash we hold. In stock borrowing transactions,
we are at risk to the extent that securities we borrow decline in value and
the lending broker fails to return our cash deposit.
OPTIONS AND FINANCIAL FUTURES
We periodically hedge our fixed income trading inventories with
financial futures or option contracts. We had no written option contracts at
either December 31, 1998, or December 31, 1997. In addition, the average fair
market value and trading revenue associated with these contracts during 1998
were not material. Option and financial futures contracts expose us to
off-balance-sheet market risk in the event that changes in interest rates do
not closely correlate with the change in the hedged security's price. We
conduct all transactions in futures contracts through regulated exchanges,
which guarantee performance of counterparties and are settled in cash on a
daily basis, thereby minimizing credit risk. Maintaining futures contracts
typically requires that we deposit cash or securities with an exchange or
other financial intermediary as security for our obligations. Fluctuations in
the market value of the futures contract may require us to deposit additional
cash or securities. When we write option contracts, we receive a premium from
the purchaser in exchange for our obligation to purchase or sell securities
upon the exercise of that option. We may be required to purchase securities
at prices higher than prevailing market prices or sell securities at prices
below prevailing market prices in order to fulfill our obligations under the
contract. We do not enter into derivative financial instruments with
off-balance-sheet risk other than those described. While we utilize certain
types of derivatives to manage our risk exposure, derivative financial
instruments held or issued were immaterial to our consolidated financial
statements. Our exposure to credit risk is the fair value of trading
securities we own.
17
<PAGE>
MARKET RISK
In 1997, the Securities and Exchange Commission issued market risk
disclosure requirements designed to provide additional information regarding
accounting and risk management policies for derivatives and other financial
instruments. The SEC requirements provide for quantitative disclosure of the
market risk inherent in derivatives and other financial instruments.
Information regarding our derivatives held is included in Item 8, "Note J to
Consolidated Financial Statements."
Equity and fixed income securities in inventory are held primarily
for trading purposes. As our trading inventories are marked to market, there
are no unrecorded gains or losses in value. While a significant portion of
our trading inventories have contractual maturities greater than five years,
our trading inventories on average, turnover more than 10 times per year. We
also hedge our fixed income trading inventories to protect against
unfavorable interest rate fluctuations. Accordingly, the interest rate risk
inherent in our inventories and financial instruments is less than for firms
in other industries. The detail of inventories held for trading purposes is
included in Item 8, "Note E to Consolidated Financial Statements."
SHARE REPURCHASING AND DIVIDENDS
Our Board of Directors authorized programs to repurchase up to
700,000 shares of our common stock. Purchases of common stock may be made
from time to time in the open market, by block purchases, or in privately
negotiated transactions. Repurchased shares are held as treasury stock and
used for our employee stock option and other benefit plans, or for other
corporate purposes. During 1998, no shares were repurchased. During 1997, we
repurchased approximately 88,000 shares.
We paid a regular quarterly cash dividend of $0.22 per share in each
quarter of 1998. Our Board of Directors, based on our financial condition,
earnings and available funds, will determine whether and at what levels
dividends will continue to be paid.
EFFECT OF RECENT ACCOUNTING STANDARDS
We adopted the provisions of SFAS 125, "Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities", on January 1, 1998. The
adoption of SFAS 125 did not have a material effect on our consolidated
financial statements. We have adopted the provisions of SFAS 131,
"Disclosures about Segments of an Enterprise and Related Information", as of
December 31, 1998. SFAS 131 requires disclosure of certain information by
business segment, and had no effect on our consolidated financial statements.
We have determined that SFAS 133, "Accounting for Derivative Instruments and
Hedging Activities," will have no material effect on our consolidated
financial statements.
INFLATION
Our assets are not significantly affected by inflation, as they are
primarily either cash or easily converted into cash, and turn over
frequently. However, inflation affects many of our operating costs, and we
may not be able to readily increase our prices to offset any increases in
costs.
YEAR 2000 ISSUE AND TECHNOLOGY
The technological problems that 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
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
18
<PAGE>
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. To date,
substantially all of our internal mainframe systems (not including external
interfaces) have been assessed, modified, tested, implemented and run in
daily production. We expect to complete necessary upgrades or replacements to
achieve Year 2000 compliance for our remaining mission-critical systems by
the end of the first quarter of 1999. We expect to upgrade and test our
external interfaces as each service provider informs us that the external
interface is ready for testing. We have identified approximately 300
mainframe mission-critical interfaces with 80 third-parties. We have
determined that approximately 90% of these interfaces are either Year
2000-compliant or are not affected by Year 2000 sensitivity. The remaining
interfaces will be evaluated during upcoming industry-wide testing. We will
remediate any issues as necessary subsequent to this testing. We expect that
testing, installation and certification of all of our mission-critical
interfaces will be completed by July 1999. The Year 2000 Plan also calls for
us to receive compliance status information directly from all
mission-critical vendors. Based on this information, we will take appropriate
action during 1999 to make our vendor relationships Year 2000 compliant.
We also expect 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, 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 now in process. Remediation and testing of these systems are scheduled to
continue into the third quarter 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 be 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 are developing written
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 follows.
19
<PAGE>
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") that 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 on-line 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. See Exhibit 99
for further discussion of the Reform Act.
ITEM 7.A. MARKET RISK
See Item 7, "Management's Discussion and Analysis" for discussion of
market risk. Also see Item 8, "Note J to Consolidated Financial Statements",
for further discussion on our inventory and risk management policies.
20
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1998 AND 1997, AND FOR EACH OF
THE YEARS IN THE THREE-YEAR PERIOD ENDED DECEMBER 31, 1998
AND SUPPLEMENTARY DATA
PAGE
----
<S> <C>
Independent Auditors' Report................................................................................ 22
Consolidated Financial Statements:
Consolidated statement of operations................................................................... 23
Consolidated balance sheet............................................................................. 24
Consolidated statement of shareholders' equity......................................................... 25
Consolidated statement of cash flows................................................................... 26
Notes to consolidated financial statements............................................................. 27
Quarterly Financial Information (unaudited)................................................................. 40
</TABLE>
21
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
Dain Rauscher Corporation:
We have audited the accompanying consolidated balance sheets of Dain
Rauscher Corporation as of December 31, 1998 and 1997 and the related
consolidated statement of operations, shareholders' equity and cash flows for
each of the years in the three-year period ended December 31, 1998. In
connection with our audits of the consolidated financial statements, we have
also audited the financial statement schedule listed in the table of contents
on page 45 hereof. These consolidated financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide
a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position of
Dain Rauscher Corporation as of December 31, 1998 and 1997, and the results
of its operations and its cash flows for each of the years in the three-year
period ended December 31, 1998, in conformity with generally accepted
accounting principles. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
February 3, 1999
22
<PAGE>
DAIN RAUSCHER CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Revenue:
Commissions............................................. $ 299,667 $ 274,847 $ 223,084
Principal transactions.................................. 150,592 152,150 169,040
Investment banking and underwriting..................... 125,470 111,280 111,391
Interest................................................ 129,338 122,492 110,551
Asset management........................................ 61,203 46,304 35,890
Correspondent clearing.................................. 17,873 19,827 15,806
Gain on sale of investment.............................. 8,787 - -
Other................................................... 27,405 23,775 17,554
--------- -------- ---------
820,335 750,675 683,316
Interest expense.......................................... (70,965) (58,573) (57,560)
--------- -------- ---------
Net revenue............................................... 749,370 692,102 625,756
--------- -------- ---------
Operating expenses:
Compensation and benefits............................... 486,021 427,599 385,905
Communications.......................................... 48,933 46,450 43,301
Occupancy and equipment rental.......................... 48,927 41,512 35,870
Travel and promotional.................................. 35,304 30,293 24,296
Floor brokerage and clearing fees....................... 13,042 12,328 10,271
Other................................................... 60,872 42,165 38,711
Merger and restructuring charges.......................... 20,000 15,000 -
Litigation settlements.................................. 23,787 - -
--------- -------- ---------
736,886 615,347 538,354
--------- -------- ---------
Income before income taxes................................ 12,484 76,755 87,402
Income tax expense........................................ (4,494) (27,480) (30,591)
--------- -------- ---------
Net income................................................ $ 7,990 $ 49,275 $ 56,811
========== ========== ==========
Earnings per share:
Basic................................................... $ 0.64 $ 4.01 $ 4.68
========== ========== ==========
Diluted................................................. $ 0.61 $ 3.77 $ 4.49
========== ========== ==========
</TABLE>
See notes to consolidated financial statements.
23
<PAGE>
DAIN RAUSCHER CORPORATION
CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1998 1997
------------ -------------
<S> <C> <C>
Assets:
Cash and cash equivalents................................................ $ 47,273 $ 35,909
Receivable from customers................................................ 1,172,398 1,170,160
Receivable from brokers and dealers...................................... 288,207 229,421
Securities purchased under agreements to resell.......................... 237,662 135,777
Trading securities owned................................................. 379,901 541,511
Equipment and leasehold improvements, at cost,
less accumulated depreciation of $35,671 and $20,106................... 48,271 42,376
Other receivables........................................................ 83,957 80,867
Deferred income taxes.................................................... 48,219 44,868
Goodwill, net of amortization of $5,499 and $1,859....................... 121,580 2,835
Other assets............................................................. 39,019 20,677
------------ ------------
$ 2,466,487 $ 2,304,401
============ ============
Liabilities and Shareholders' Equity:
Short-term borrowings.................................................... $ 127,415 $ 179,000
Customer drafts payable.................................................. 109,396 83,499
Payable to customers..................................................... 585,848 601,949
Payable to brokers and dealers........................................... 690,459 580,970
Securities sold under repurchase agreements.............................. 38,354 170,906
Trading securities sold, but not yet purchased........................... 240,825 127,364
Accrued compensation..................................................... 139,703 128,463
Other accrued expenses................................................... 92,209 97,500
Subordinated and other debt.............................................. 112,505 15,659
------------ ------------
2,136,714 1,985,310
Shareholders' equity:
Common stock (1998: issued 12,638,525 and outstanding 12,552,957
shares; 1997: issued 12,367,447 and outstanding 12,275,104 shares)... 1,580 1,546
Additional paid-in capital............................................... 112,142 89,321
Retained earnings........................................................ 230,421 233,419
Treasury stock, at cost.................................................. (14,370) (5,195)
------------ -----------
329,773 319,091
------------ ------------
$ 2,466,487 $ 2,304,401
============ ============
</TABLE>
See notes to consolidated financial statements.
24
<PAGE>
DAIN RAUSCHER CORPORATION
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMMON STOCK
---------------------- ADDITIONAL
SHARES PAID-IN RETAINED TREASURY SHAREHOLDERS'
OUTSTANDING AMOUNT CAPITAL EARNINGS STOCK EQUITY
----------- --------- --------- ---------- --------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995...................... 12,065 $ 1,508 $ 76,623 $ 144,363 $ 222,494
-------- --------- --------- ---------- -----------
Net income........................................ - - - 56,811 56,811
Repurchase and retirement of common stock......... (59) (7) - (1,334) (1,341)
Common stock issued under
stock options plans............................ 136 17 1,217 - 1,234
Net restricted common stock issued and amortized.. 33 4 342 - 346
Stock credited to deferred
compensation plan participants................. - - 3,134 - 3,134
Cash dividends on common stock
($0.56 per share).............................. - - - (6,792) (6,792)
-------- --------- --------- ---------- -----------
Balance at December 31, 1996...................... 12,175 1,522 81,316 193,048 275,886
-------- --------- --------- ---------- -----------
Net income........................................ - - - 49,275 49,275
Repurchase of common stock........................ (92) - - - $ (5,195) (5,195)
Common stock issued under
stock option plans............................. 146 18 1,761 - - 1,779
Net restricted common stock issued and amortized.. 46 6 393 - - 399
Stock credited to deferred
compensation plan participants................. - - 4,941 - - 4,941
Cash dividends on common stock
($0.72 per share).............................. - - - (8,904) - (8,904)
Tax benefits from stock incentive plans........... - - 910 - - 910
-------- --------- --------- ---------- --------- -----------
Balance at December 31, 1997...................... 12,275 1,546 89,321 233,419 (5,195) 319,091
-------- --------- --------- ---------- --------- -----------
Net income........................................ - - - 7,990 - 7,990
Common stock issued under
stock option plans............................. 202 25 3,250 - - 3,275
Net restricted common stock issued and amortized.. 69 9 644 - - 653
Stock credited/issued to deferred
compensation plan participants................. 7 - 8,314 - 415 8,729
Cash dividends on common stock
($0.88 per share).............................. - - - (10,988) - (10,988)
Shares purchased by trustee for deferred
compensation plan participants*................ - - 9,590 - (9,590) -
Tax benefits from stock incentive plans........... - - 1,023 - - 1,023
-------- --------- --------- ---------- --------- -----------
Balance at December 31, 1998...................... 12,553 $ 1,580 $ 112,142 $ 230,421 $(14,370) $ 329,773
======== ========= ========= ========== =========
</TABLE>
*Shares held by a deferred plan were transferred from Additional Paid in
Capital to Treasury Stock during 1998. This change, made in accordance with
revised accounting rules regarding trusts, had no effect on total
shareholders' equity.
See notes to consolidated financial statements.
25
<PAGE>
DAIN RAUSCHER CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------
1998 1997 1996
--------- -------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income............................................. $ 7,990 $ 49,275 $ 56,811
Adjustments to reconcile net earnings to cash
provided by operating activities:
Depreciation and amortization.................... 19,088 11,764 9,563
Deferred income taxes............................ (3,351) (5,164) (7,711)
Non cash restructuring charges, net of tax....... 12,800 9,600 -
Other non cash items............................. 13,583 6,600 8,626
Cash and short-term investments segregated
for regulatory purposes....................... - 15,000 396,000
Net trading securities owned and trading
securities sold, but not yet purchased........ 281,144 (184,128) 31,823
Other receivables................................ (2,650) (5,182) 5,153
Drafts payable and short-term borrowings
of securities companies....................... 24,312 117,510 (52,442)
Net receivable from customers.................... (18,339) (402,005) (384,511)
Net payable to brokers and dealers............... 61,019 323,737 30,987
Net securities under repurchase agreements....... (234,437) 58,793 (64,239)
Other accrued liabilities........................ (51,844) 3,749 ( 7,607)
Accrued compensation............................. 11,063 9,219 23,256
Other............................................ (8,675) (12,080) (2,202)
------ -------- ---------
Cash provided (used) by operating activities.............. 111,703 (3,312) 43,507
--------- -------- ---------
Cash flows from financing activities:
Proceeds from:
Issuance of subordinated debt....................... 80,000 - -
Revolving credit agreement, net..................... - 50,000 -
Issuance of common stock under stock option plans... 3,275 1,779 1,580
Payments for:
Revolving credit agreement, net..................... (50,000) - -
Subordinated and other debt......................... (15,659) (11,631) (14,120)
Purchase of common stock............................ - (5,195) (1,341)
Dividends on common stock........................... (10,988) (8,904) (6,792)
--------- -------- ---------
Cash provided (used) by financing activities.............. 6,628 26,049 (20,673)
--------- -------- ---------
Cash flows from investing activities:
Payments for:
WAH acquisition, net of cash acquired............... (95,588) - -
Equipment, leasehold improvements and other......... (22,133) (22,983) (15,841)
Proceeds from:
Gain from sale of investment security............... 8,787 - -
Investment dividends and sales of
non-marketable securities......................... 1,967 1,768 1,227
--------- -------- ---------
Cash (used) by investing activities....................... (106,967) (21,215) (14,614)
------- -------- ---------
Increase in cash and cash equivalents..................... 11,364 1,522 8,220
Cash and cash equivalents:
At beginning of year............................. 35,909 34,387 26,167
--------- -------- ---------
At end of year................................... $ 47,273 $ 35,909 $ 34,387
======== ======== =========
</TABLE>
Cash income tax payments totaled $3,630,000 in 1998, $32,111,000 in 1997, and
$32,841,100 in 1996. Cash interest payments totaled $68,401,000, $57,396,000,
and $56,901,000 in 1998, 1997 and 1996, respectively. During the years ended
December 31, 1998, 1997 and 1996, respectively, we had non-cash financing
activity of $8,729,000, $4,941,000 and $3,134,000 associated with the crediting
of common stock to deferred compensation plan participants. During the year
ending December 31, 1998, we had non-cash financing activity of $21.7 million
representing subordinated debentures issued as a portion of the consideration
paid for the acquisition.
See notes to consolidated financial statements.
26
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
DAIN RAUSCHER CORPORATION
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS: We ("Dain Rauscher Corporation") are a
Minneapolis, Minnesota-based holding company that provides advice and
services to individual investors in the western United States and investment
banking services to corporate and governmental clients nationwide through our
principal subsidiary, Dain Rauscher Incorporated ("DRI"). We also own Insight
Investment Management Inc. ("Insight"), which manages the Great Hall money
market funds and institutional fixed income accounts, and Dain Rauscher
Lending Services Inc. ("Lending"), which makes certain types of loans that
are collateralized by customers' control and restricted securities.
BASIS OF PRESENTATION: The consolidated financial statements include
DRI, Insight, and Lending as of December 31, 1998. All subsidiaries are
wholly owned, and all inter-company balances and transactions have been
eliminated in consolidation. Certain prior-year amounts in the consolidated
financial statements have been reclassified to conform to the 1998
presentation. We do not present a statement of comprehensive income as there
are no comprehensive income items.
We have made estimates and assumptions in reporting certain assets
and liabilities and the disclosure of contingent liabilities in preparing
these financial statements in conformity with generally accepted accounting
principles. Actual results could differ from those estimates.
We have also adopted SFAS Statement 131, "Disclosures about Segments
of an Enterprise and Related Information." Accordingly, we provide net
revenue and pretax income and margin information about our business lines. We
do not provide balance sheet information by business line, as our assets are
not allocated to a particular segment, and we do not currently track
performance based on this information.
CASH AND CASH EQUIVALENTS: Cash and cash equivalents include cash on
hand, cash in depository accounts with other financial institutions and money
market investments with original maturities of 90 days or less.
SECURITIES: Securities transactions and the related commission
revenue and expense are recorded on settlement date, which is not materially
different than if transactions were recorded on trade date.
Trading securities owned; trading securities sold, but not yet
purchased; and derivative financial instruments are stated at market value.
We mark our securities to market and include resulting unrealized gains and
losses in revenue from principal transactions. We determine market value by
using public market quotations, quoted prices from dealers or recent market
transactions, depending upon the underlying security.
From time to time we receive equity instruments as compensation for
certain underwriting transactions. We account for these equity instruments as
investments and record them at the lower of cost or market, which is
generally zero. We also have venture capital investments in securities that
are currently non-marketable. These securities, which are accounted for at
cost, are included in other assets on our consolidated balance sheet. When
the restrictions expire on these investments and they become readily
marketable, we mark them to their fair market value.
REPURCHASE TRANSACTIONS: Securities purchased under agreements to
resell (reverse repurchase agreements) and securities sold under repurchase
agreements are accounted for as financing transactions. We record these at
the contract amount that the securities will subsequently be resold or
reacquired, plus accrued interest. These transactions generally can be
terminated by us or our counterparties on short notice.
OTHER RECEIVABLES: Included in other receivables are forgivable loans
made to investment executives and other revenue-producing employees,
typically in connection with their recruitment. These loans are forgivable
based on continued employment and are amortized over the life of the loan,
which is generally three to five years, using the straight-line method.
27
<PAGE>
RECEIVABLES FROM AND PAYABLES TO CUSTOMERS: The amounts receivable
from customers primarily represent margin balances. Other customer
receivables and payables result from cash transactions. We do not include in
the consolidated financial statements either securities owned by customers
and held as collateral for receivables or securities sold short by customers.
TREASURY STOCK: Treasury stock is recorded at cost and includes
common shares we repurchased, and shares for a deferred compensation plan
reclassified from additional paid-in capital to treasury stock as a result of
accounting standards issued in 1998. This reclassification had no net impact
on total shareholders' equity.
GOODWILL: Goodwill is primarily related to the 1998 acquisition of
Wessels, Arnold and Henderson, LLC ("WAH"). We are amortizing this goodwill
on a straight-line basis over 25 years. Prior to 1998, goodwill was not a
material asset, and we therefore had not established a policy for evaluating
goodwill impairment. We will continue to evaluate goodwill in accordance with
the requirements of generally accepted accounting principles. In our opinion,
no material impairment exists as of December 31, 1998.
DEPRECIATION AND AMORTIZATION: Equipment is depreciated using the
straight-line method over estimated useful lives of two to eight years.
Leasehold improvements are amortized over the lesser of the estimated useful
life of the improvement or the term of the lease.
INCOME TAXES: We determine deferred tax liabilities and assets and
any provision for income taxes based on the differences between the financial
statement and tax bases of assets and liabilities at each year end.
FAIR VALUES OF FINANCIAL INSTRUMENTS: Substantially all of our
financial assets and liabilities are carried at market value or at amounts
which, because of their short-term nature, approximate current fair value.
The fair value of our borrowings, if recalculated based on current interest
rates, would not differ significantly from the amounts recorded at December
31, 1998.
STOCK-BASED COMPENSATION: We account for stock option grants
under APB Opinion No. 25 ("APB 25"). We grant options at fair market value on
the date of the grant and, accordingly, do not recognize compensation
expense. Restricted stock grants typically vest over a four-year period.
EARNINGS PER SHARE: Basic earnings per share is based upon the
weighted average number of common shares outstanding during the reporting
period. Diluted earnings per share takes into account the dilutive effect of
potentially dilutive securities using the treasury stock method.
The components of earnings per share are:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------
(In thousands, except per-share data) 1998 1997 1996
--------- -------- ---------
<S> <C> <C> <C>
Net income................................................ $ 7,990 $ 49,275 $ 56,811
========= ======== =========
Weighted average common shares outstanding................ 12,404 12,277 12,132
Dilutive effect of stock options (net of tax benefits).... 463 579 435
Shares credited to deferred compensation
plan participants..................................... 304 204 98
--------- -------- ---------
13,171 13,060 12,665
========= ======== =========
Basic earnings per share.................................. $0.64 $4.01 $4.68
========= ======== =========
Diluted earnings per share................................ $ 0.61 $ 3.77 $ 4.49
========= ======== =========
</TABLE>
28
<PAGE>
In 1996 and 1997 the number of options with an exercise price greater
than the average market price that were excluded from the calculation of
diluted earnings per share was not material. In 1998 we did not include in the
calculation of diluted earning per share a significant number of options priced
greater than our stock's average 1998 market price. See Note H for further
information on outstanding options.
B. ACQUISITION
On March 31, 1998, DRI acquired 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, subordinated
debentures with a discounted value of $22 million ($30 million face amount)
to acquire WAH. Goodwill of approximately $120 million was recorded and will
be amortized over an estimated life of 25 years. The amortization of this
goodwill is fully deductible for tax purposes.
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. This pro forma financial information does not
include the effect of the $20.0 million charge recorded by DRI in the quarter
ended March 31, 1998 that was directly related to the acquisition of WAH.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1998 1997
--------------------------
<S> <C> <C>
Statement of Operations Data:
Revenue........................................................ $ 837,808 $ 828,796
Interest expense............................................... (73,293) (67,171)
----------- -----------
Net revenue.................................................... 764,515 761,625
Operating expenses............................................. 732,091 663,533
----------- -----------
Income before income taxes..................................... 32,424 98,092
Merger and restructuring charge................................ (15,000)
Income tax expense............................................. (11,672) (29,761)
----------- -----------
Net income..................................................... $ 20,752 $ 53,331
=========== ===========
Basic income per share......................................... $ 1.67 $ 4.34
=========== ===========
Diluted income per share....................................... $ 1.58 $ 4.08
=========== ===========
</TABLE>
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 is it necessarily indicative of future operating results.
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 the end of 1998, we had spent approximately $17 of this
charge, primarily for severance. We expect to charge any remaining restructuring
costs to the reserve during the first quarter of 1999. We believe the remaining
$3 million restructuring reserve is adequate to cover all future expenditures
associated with this plan.
29
<PAGE>
In connection with the adoption of a formal restructuring plan to
combine Dain Bosworth, Rauscher Pierce Refsnes and our former operations
subsidiary into a single broker-dealer during the first quarter of 1998, we
recorded a pretax charge of $ 15 million ($9.6 million after taxes), or 74
cents per share diluted, against third-quarter 1997 earnings. All of the $15
million of the restructuring costs resulted in cash expenditures, primarily
during the fourth quarter of 1997 and first quarter of 1998. The composition
of the $15 million charge was $12 million for severance and short-term
retention payments to terminated employees; and $3 million for other
expenditures including costs of changing our name, relocation, outplacement
services and professional fees related to the restructuring. This
restructuring has been completed as of December 31, 1998, and all amounts
were spent.
D. RECEIVABLE FROM AND PAYABLE TO BROKERS AND DEALERS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
(In thousands) 1998 1997
------------ ------------
<S> <C> <C>
Receivable from brokers and dealers:
Deposits for securities borrowed.......................................... $ 193,361 $ 164,917
Securities failed to deliver.............................................. 80,954 58,673
Clearing organizations, correspondent brokers and other................... 13,892 5,831
----------- ----------
$ 288,207 $ 229,421
=========== ==========
Payable to brokers and dealers:
Deposits for securities loaned............................................ $ 588,055 $ 538,588
Securities failed to receive.............................................. 90,608 34,627
Clearing organizations, correspondent brokers and other................... 11,796 7,755
----------- ----------
$ 690,459 $ 580,970
=========== ==========
</TABLE>
Securities failed to deliver and receive represent the contract value
of securities that have not been delivered or received subsequent to
settlement date. Securities borrowed and securities loaned are recorded at
the amount of cash collateral advanced or received in connection with the
transaction. We, or our counterparties, may terminate these transactions on
short notice. Securities borrowed transactions require us to deposit cash or
other collateral with the lender. With respect to securities loaned, we
receive cash or other collateral. The initial collateral advanced or received
has a market value equal to or greater than the market value of the
securities borrowed or loaned. We monitor the market value of the securities
borrowed and loaned on a daily basis and request additional collateral or
return excess collateral.
E. TRADING SECURITIES
The market values of trading securities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
(In thousands) 1998 1997
----------- ----------
<S> <C> <C>
Owned:
U. S. government and government agency securities......................... $ 224,936 $ 320,646
Municipal securities...................................................... 109,644 157,336
Corporate fixed income and other securities............................... 36,239 42,957
Equity securities......................................................... 9,082 20,572
----------- ----------
$ 379,901 $ 541,511
=========== ==========
Sold, but not yet purchased:
U. S. government, government agency and municipal securities.............. $ 236,184 $ 122,265
Corporate and other securities............................................ 4,641 5,099
----------- ----------
$ 240,825 $ 127,364
=========== ==========
</TABLE>
30
<PAGE>
Our principal transaction revenue from trading activities by type, including
derivatives, is summarized below:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
(In thousands) 1998 1997
------------ -----------
<S> <C> <C>
Equity securities........................................................... $ 71,732 $ 75,699
Municipal securities........................................................ 28,686 32,100
Government securities....................................................... 24,531 19,289
Corporate fixed income securities........................................... 12,544 15,483
Mortgage-backed and other securities........................................ 13,099 9,579
----------- ----------
$ 150,592 $ 152,150
=========== ==========
</TABLE>
F. SHORT-TERM BORROWINGS
Short-term borrowings of DRI only at December 31, 1998 and 1997, were
$119.0 million and $129.0 million, respectively. These short-term borrowings
were in bank loans on uncommitted lines of credit. The majority of these
borrowings are collateralized by both trading securities we own and our
customers' margin securities, and have a floating rate of interest
approximately 50 basis points above the Federal Funds rate, which was 5.3 %
at December 31, 1998. The market value of our trading securities pledged as
collateral at December 31, 1998, was $139.4 million. We had agreements in
place for uncommitted credit lines totaling approximately $540 million at
year end.
We have available revolving credit borrowings and irrevocable letters
of credit under a commitment totaling $50 million. This facility was
renegotiated in March 1998 and is annually renewable for three one-year
periods. Loans under this facility are unsecured and bear interest at a
floating rate of Federal Funds plus 85 basis points. Nothing was outstanding
under this facility at year-end 1998. At December 31, 1997, $50.0 million was
outstanding under the revolving credit facility at a 7% interest rate. We
have maintained the levels of net worth and regulatory net capital required
under this agreement.
Our subsidiary, Lending, also maintains a $50 million uncommitted
credit line to finance loans made to customers. Lending holds customers'
securities as collateral for these loans. This credit line has a floating
interest rate of 75 basis points over the Federal Funds rate. As of December
31, 1998, $8.4 million was outstanding under this facility at a 6.1% interest
rate.
G. SUBORDINATED AND OTHER DEBT
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
(In thousands) 1998 1997
------------- ----------
<S> <C> <C>
Subordinated debt payable to commercial banks............................... $ 80,000 $ 9,000
Subordinated debentures..................................................... 22,505 -
Capital lease obligations .................................................. - 6,659
Litigation settlement notes................................................. 10,000 -
------------- ----------
$ 112,505 $ 15,659
============= ==========
</TABLE>
On March 31, 1998, DRI entered into an $80 million subordinated term
loan agreement with a group of banks which is unsecured and bears interest at
160 basis points over 30, 60 or 180 day LIBOR. The agreement allows us to fix
the interest rate for the remainder of the term, at any time. Principal
payments of $5.0 million per quarter begin April 1, 1999 with the final
payment due on December 31, 2002. Proceeds from the loan qualify as
regulatory capital. We must comply with provisions in the agreement regarding
both net worth and regulatory net capital.
We also issued $30 million (face amount) in 5-year zero coupon
subordinated debentures in connection with the acquisition of WAH. The
discounted present value of the debentures at year end is $22.5 million. At
December 31, 1998, the weighted average interest rate on all of our
subordinated debt was 7.2 %. The $10 million in litigation settlement notes
represents the present value of non-interest bearing notes payable in the
settlement of litigation discussed further in Note I, Commitments and
Contingent Liabilities.
31
<PAGE>
H. SHAREHOLDERS' EQUITY
COMMON STOCK: Our common stock has a par value of $.125 per share;
60,000,000 shares are authorized. At December 31, 1998, 5,008,297 shares of
our common stock were reserved for issuance under all our incentive and
retirement plans.
Our Board of Directors approved the repurchase of up to 1,300,000
shares under three separate authorizations in 1994, 1996, and 1997.
We repurchased 688,000 shares under the 1994 and 1996 authorizations,
including 59,000 in 1996 and 88,000 in 1997; none were repurchased in 1998.
Approximately 612,000 shares are available for repurchase under previous
authorizations at year-end 1998.
STOCK COMPENSATION PLANS: We have two fixed stock compensation plans,
the 1986 Stock Option Plan ("1986 Plan") and the 1996 Stock Incentive Plan
("1996 Plan"). We made the final grants under the 1986 Plan in February 1996.
The 1996 plan authorizes the grant of incentive and non-qualified options and
the grant of restricted stock and other stock based awards. The 1996 Plan
requires all option grants at not less than the fair market value of the
shares at the date of grant. Options generally become exercisable at rates of
20, 50 and 100 percent as of two, three and four years, after the date of
grant and expire 10 years from date of grant. Options granted to outside
directors become exercisable six months after grant date and expire five
years after grant. At December 31, 1998, 1,578,245 shares of common stock
were available for grant under the 1996 Plan; none are available under the
1986 plan.
We apply APB 25 and its interpretations in accounting for our stock
option incentive plans. Accordingly, no compensation expense has been
recognized in the consolidated financial statements for stock option grants.
The following table summarizes the pro-forma effect of recognizing
compensation expense as based on the criteria of SFAS 123:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------
(In thousands, except per-share amounts) 1998 1997 1996
----------- ---------- -----------
<S> <C> <C> <C>
Net income:
As reported.................................... $ 7,990 $ 49,275 $ 56,811
Pro forma...................................... $ 4,596 $ 47,914 $ 56,392
Earnings per share:
Basic:
As reported.................................... $ 0.64 $ 4.01 $ 4.68
Pro forma...................................... $ 0.37 $ 3.90 $ 4.65
Diluted:
As reported.................................... $ 0.61 $ 3.77 $ 4.49
Pro forma...................................... $ 0.35 $ 3.67 $ 4.45
</TABLE>
The weighted average per-share fair value of options granted during
1998, 1997 and 1996, was $20.74, $17.55 and $7.96, respectively. The fair
value of each option granted is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions used for grants in 1998, 1997 and 1996, respectively: dividend
yields of 1.5%, 1.5% and 2.3%; expected volatility of 38.7% in 1998, 36.6% in
1997 and 30.2% for 1996; risk-free interest rates of 4.5%, 4.8% and 5.0%; and
expected lives of five years. Pro forma amounts may not be indicative of
future results.
32
<PAGE>
The following table summarizes the activity related to our stock option plans
for each of the last three years:
<TABLE>
<CAPTION>
1998 1997 1996
-------------------------- ------------------------ ----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
--------- ------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding at
beginning of year....................... 1,469,325 $ 26.51 1,304,045 $ 17.14 1,243,987 $ 14.71
Granted................................. 851,152 58.11 419,800 49.90 260,600 24.86
Exercised............................... (204,850) 16.83 (155,955) 12.90 (140,492) 9.66
Cancelled............................... (93,800) 46.74 (98,565) 24.87 (60,050) 17.86
---------- ------- ---------- -------- --------- -------
Options outstanding at end of year...... 2,021,827 $ 39.85 1,469,325 $ 26.51 1,304,045 $ 17.14
========== ======= ========== ======== ========= =======
Options exercisable at end of year...... 589,413 551,700 405,980
========== ========== =========
Price range of outstanding options...... $4.58-$59.44 $4.58-$59.44 $4.58-$33.38
Price range of exercised options........ $4.58-$42.75 $4.67-$20.83 $4.58-$20.83
Weighted-average fair value of
options granted during the year......... $20.74 $17.55 $7.96
Average market price $ 48.88 $ 46.14 $ 26.53
</TABLE>
The following table summarizes currently outstanding and exercisable options
at December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------ -----------------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
NUMBER REMAINING AVERAGE NUMBER AVERAGE
RANGE OF OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE EXERCISE
EXERCISE PRICES AT 12/31/98 LIFE PRICE AT 12/31/98 PRICE
--------------- --------------- ---------------- ---------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
$ 4.58-$ 4.67 43,900 1.4 years $ 4.62 43,900 $ 4.62
$10.00-$15.83 420,700 4.4 years 14.45 320,938 14.02
$16.83-$22.38 329,775 5.2 years 21.45 224,575 21.01
$25.38-$33.38 50,500 7.7 years 31.52 -
$42.75-$59.44 1,176,952 9.0 years 55.76 - -
---------- ---------- --------- ---------
2,021,827 $ 39.85 $589,413 $ 15.99
========== ========== ======== =========
</TABLE>
The closing price of our stock was $29.50 on December 31, 1998.
Restricted shares awarded had weighted average per-share fair values
at grant date of $33.61, $58.80 and $25.07 in 1998, 1997 and 1996, and
resulted in compensation expense of $653,000, $399,000 and $355,000 in these
respective years.
33
<PAGE>
I. COMMITMENTS AND CONTINGENT LIABILITIES
LEASES: We lease office space, furniture and communications and data
processing equipment under several noncancelable operating leases. Most
office space lease agreements include rate increases and include the payment
of real estate taxes, insurance and other expenses of occupancy.
Aggregate minimum rental commitments as of December 31, 1998, are as follows:
<TABLE>
<CAPTION>
OPERATING
(In thousands) LEASES
------------
<S> <C>
1999.............................................. $ 23,188
2000.............................................. 20,274
2001.............................................. 18,288
2002.............................................. 17,282
2003.............................................. 14,735
Thereafter........................................ 50,886
-----------
Total minimum lease payments...................... $ 144,653
===========
</TABLE>
Rental expense for operating leases was $26,598,000, $27,679,000, and
$25,558,000, for the years ended December 31, 1998, 1997 and 1996,
respectively. Included in equipment and leasehold improvements at December
31, 1997, is $2,230,000 for capitalized leases.
LITIGATION: We are defendants in various actions, suits and
proceedings before courts, arbitrators and governmental agencies. Certain of
these actions, including those described below, claim substantial damages and
could have a material adverse effect on our consolidated financial condition
or results of operations, should these matters not be resolved in our favor.
While the outcome of any litigation is uncertain, we believe, based in part
upon consultation with our legal counsel, that the resolution of all matters
pending or threatened against us will not have a material adverse effect on
our consolidated financial condition or results of operations.
MIDWEST LIFE INSURANCE COMPANY LITIGATION: Until December 1998, we and Dain
Bosworth ("DBI") were defendants in eleven actions brought in connection with
losses suffered from single premium deferred annuities issued by Midwest Life
Insurance Company ("MWL"), a former subsidiary we acquired in 1980 and sold
in early 1986. The annuities were sold primarily through DBI's private client
sales force. MWL was sold two times subsequent to its 1986 sale by us, was
relocated from Nebraska to Louisiana by its final owner, Southshore Holding
Corp., and was declared insolvent and ordered liquidated by the State of
Louisiana in August 1991. Generally, MWL policyholders were reimbursed for
their losses up to $100,000 per holder by state life and health insurance
guaranty associations. The policyholders and the guaranty associations,
between them, have received approximately $.30 for each $1.00 of loss in
liquidation payments from the liquidator of MWL's estate.
In August 1998 following a jury trial, a judgment was entered against us in
an action by the Washington guaranty association in the amount of $4.3
million. In December 1998 we settled this case along with seven other
guaranty association cases (cases brought by the guaranty associations in
Iowa, Minnesota, Montana, North Dakota, South Dakota, Wyoming and Oregon), in
which the plaintiffs sought a total of $37.1 million, plus prejudgment
interest, punitive damages, attorney's fees and costs. The total settlement
for all eight cases was $23.2 million, comprised of $13.2 million in cash and
approximately $10 million (present value) of non-interest bearing notes. The
notes are payable in four equal installments of $3 million beginning December
1999.
Two remaining actions related to MWL are in the Colorado and Louisiana
federal courts. In Colorado the plaintiffs are approximately 200 individual
former MWL policyholders. In 1991, these individuals did not have guaranty
association coverage, because Colorado had just created a state guaranty
association and the MWL insolvency occurred prior to the effective date.
Guaranty association coverage was extended to MWL policyholders in 1994 as a
result of our lobbying efforts, and each policyholder was reimbursed for his
or her losses up to $100,000, plus most accrued interest. By the time this
occurred, however, many of the policyholders had already filed suit, and
others were required to join as a condition of receiving their guaranty
association reimbursement. The Colorado plaintiffs allege fraudulent
misrepresentation, fraudulent nondisclosure, breach of fiduciary duty,
negligent performance of an assumed duty to monitor and advise as to the
safety of their MWL annuities, and negligent misrepresentation.
34
<PAGE>
In July 1997, a Colorado jury returned a verdict awarding twelve of the
plaintiffs damages of $4.75 million, including $1.3 million in compensatory
damages, $1.65 million for emotional distress and $1.8 million in punitive
damages. The court entered judgment in this amount, plus $2 million in
prejudgment interest and costs. An appeal of the judgment is scheduled to be
heard in March 1999. We believe the trial court erred by, among other things,
withholding key evidence from the jury, including evidence of Dain Bosworth's
successful efforts to obtain guaranty association coverage and reimbursement
for the plaintiffs. While the appeal is pending, the parties have submitted
proposals to the trial judge as to trial of the remaining plaintiffs' cases.
In the Louisiana case, the liquidator of the MWL estate alleges violations of
the Racketeer Influenced and Corrupt Organizations Act ("RICO"), breach of
fiduciary duty and conspiracy to breach fiduciary duty. The plaintiff is
seeking to recover in excess of $59 million in compensatory damages, plus
treble damages under RICO, interest, costs, attorneys' fees and other relief.
The complaint challenges certain coinsurance transactions between MWL and
Central National Life Insurance Company (also a defendant) in 1980. A motion
to dismiss the case is pending.
In the remaining MWL cases, we believe that we have substantial and
meritorious defenses and are vigorously defending ourselves.
ORANGE COUNTY: In December 1998, we settled a case brought against Rauscher
Pierce Refsnes ("RPR") by Orange County, California, in which the County
claimed RPR was its financial advisor on five 1994 note offerings totaling
$975 million. The County claimed that RPR breached legal duties by failing to
warn County officials of the risks of the Orange County Investment Pool
("OCIP"), in which the County was investing the proceeds of the notes. The
County sought at least $500 million in damages.
At the same time, we settled a related case brought on behalf of school
districts for which Rauscher Pierce was financial advisor or underwriter on
other 1994 note offerings, including a pooled $300 million offering involving
many districts, the proceeds of which were deposited in OCIP. Again, the
claim was based on alleged failure to warn the issuers of the risks in the
County's investment strategy. The districts' representative sought over $50
million. This case and the County action were settled for a total of $10
million..
STATE OF ARIZONA: In January 1998, the SEC filed a federal court action
against DRI (as successor to RPR) and a former employee in connection with a
$130 million refunding issue by the State of Arizona in 1992, on which RPR
served as financial advisor. The complaint alleges violations of antifraud
provisions of the Securities Act of 1933, the Securities Exchange Act of 1934
and the Investment Advisor Act of 1940. RPR purchased government securities
and sold them to the escrow trustee in the transaction at a markup of
approximately 0.55% of our cost. The SEC alleges that we failed to disclose
that we purchased and sold the government securities as a principal, that we
expected to make a profit and the amount of the profit. The SEC also alleges
that the markup was excessive and that we falsely represented that the
securities were sold to the trustee at fair market value. We believe that we
have substantial and meritorious defenses available and are vigorously
defending ourselves in this action.
35
<PAGE>
J. OFF -BALANCE SHEET RISK
We adopted the requirements of SFAS 119 "Disclosure about Derivative
Financial Instruments and Fair Value of Financial Instruments," which defines
a derivative as a future, forward, swap or option contract, or as an interest
rate swap, floor, or collar. Generally, a derivative represents a future
commitment to purchase or sell a financial instrument at specific terms and
dates. These financial instruments may have market or credit risk which is
not reflected in the market values included on our balance sheet.
We have risk management policies that limit the size and risk of
inventories. The policy includes a risk point methodology, which assigns risk
points to certain inventories based on modified duration, which adjusts all
securities to a one-year maturity. We also monitor our inventories for
factors that include credit and concentration risk, contract length, and
inventory age. These inventories are held primarily for distribution to our
individual and institutional clients in order to meet those clients' needs.
We do not enter into derivative financial instruments with off-balance-sheet
risk other than those described in this footnote. While we utilize certain
types of derivatives to manage our risk exposure, derivative financial
instruments held or issued were immaterial to our consolidated financial
statements.
MARKET RISK: As part of our broker-dealer activities, we purchase
and sell a variety of cash and derivative financial instruments in order to
reduce our exposure to market risk. Market risk includes changes in interest
rates, currency exchange rates, indices, or value fluctuations in the
underlying financial instruments. Our hedging strategy involves the purchase
and sale of derivative financial instruments to offset market risk associated
with other transactions. We regularly sell securities not yet purchased
(short sales) for our own account, primarily to hedge our fixed income
trading securities. Short positions may expose us to market risk in the event
prices increase, as we may be obligated to acquire the securities at
prevailing market prices.
We use notional (contract) amounts to measure our derivative
activity. Notional amounts are not included on our balance sheet, as these
contract amounts are not actually paid or received. Notional amounts allow us
to calculate the cash flows to be exchanged and our involvement in any
particular type of financial instrument; however these amounts are not
indicative of overall market risk.
At December 31, 1998 and 1997, we had open commitments to sell under
futures contracts with notional amounts of $15.8 million and $20.6 million.
During 1998, the average notional amounts for futures and options on futures
contracts were $11.9 million and $16.8 million. The fair market value of
these contracts was not material at December 31, 1998 or 1997.
We may also pledge our customers' securities as collateral for bank
loans, securities loaned or to satisfy margin deposit requirements of
various exchanges. In the event our counterparty is unable to return the
securities pledged, we may need to acquire the securities at prevailing
market prices. In the case of repurchase agreements, we risk holding
collateral at a market value less than that of the related pledged
securities. To control these risks, we monitor the market value of securities
pledged and require adjustments of collateral levels when necessary. At
December 31, 1998, the market value of securities pledged approximated the
borrowings outstanding.
CREDIT RISK: The notional amounts of derivative instruments also do
not represent our potential risk from counterparty nonperformance. We
periodically hedge our fixed income trading securities owned or sold short by
entering into financial futures or option contracts. Transactions in futures
contracts are conducted through regulated exchanges, which guarantee
performance of counterparties and are settled in cash on a daily basis,
minimizing credit risk. We believe that our exposure to credit risk is
represented by the fair value of trading securities owned.
36
<PAGE>
CUSTOMER ACTIVITIES: In the normal course of business, we execute,
settle, and finance customer security transactions. Our customers' securities
activities are transacted on either a cash or margin basis. As part of our
customer transactions, we trade option contracts and also sell borrowed
securities on their behalf (short sales). The risk with these transactions is
that customers may fail to satisfy their obligations, requiring us to
purchase or sell various financial instruments at prevailing market prices to
fulfill customer obligations.
We mitigate risk by requiring our customers to maintain margin
collateral in compliance with both regulatory and internal guidelines. We
monitor necessary margin levels daily and require customers to either deposit
additional collateral or reduce margin positions. However, market declines
could reduce the value of collateral to below the amount we have loaned, plus
interest, before we are able to sell the collateral.
K. SEGMENT INFORMATION
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 sales, trading, underwriting, and advisory services. All corporate
expenses and miscellaneous revenues and expenses, which are not allocated to
individual business lines, are included in Corporate. Corporate pretax income
in 1998 includes the gain on the sale of an investment security.
<TABLE>
<CAPTION>
(Dollars in thousands) 1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Net Revenue:
Private Client Group..................... $ 531,197 $ 491,577 $ 432,499
Equity Capital Markets................... 93,317 97,118 96,701
Fixed Income............................. 110,041 86,292 82,642
Gain on sale of investment securities.... 8,787 - -
Corporate ............................... 6,028 17,820 13,914
------------ ------------ ------------
TOTAL................................ $ 749,370 $ 692,102 $ 625,756
------------ ------------ ------------
Pretax income:
Private Client Group..................... $ 51,134 $ 60,460 $ 42,576
Equity Capital Markets................... (19,468) 3,891 19,264
Fixed Income............................. 16,334 9,783 7,448
Nonrecurring items....................... (43,787) (15,000) -
Corporate ............................... 8,271 17,621 13,225
------------ ------------ ------------
TOTAL................................ 12,484 76,755 $ 87,402
------------ ------------ ------------
Pretax margin on net revenue:
Private Client Group..................... 9.6% 12.3% 11.0%
Equity Capital Markets................... (20.9) 4.0 19.9
Fixed Income............................. 14.8 11.3 9.0
Corporate ............................... nm nm nm
------------ ------------ ------------
TOTAL................................ 1.7% 11.1% 14.0%
------------ ------------ ------------
</TABLE>
37
<PAGE>
L. REGULATORY REQUIREMENTS
As a broker-dealer and member firm of the NYSE, DRI is subject to the
Uniform Net Capital Rule (the "Rule") of the Securities and Exchange
Commission ("SEC"). The Rule is designed to measure the general financial
integrity and liquidity of a broker-dealer and the minimum net capital deemed
necessary to meet the broker-dealer's continuing commitments to customers.
The Rule provides for two methods of computing net capital. DRI uses what is
known as the alternative method. Under this method, minimum net capital is
defined as 2% of customer debit balances. In addition to the SEC rule, the
NYSE may also require a member organization to reduce its business if net
capital is less than 4% of aggregate debit items and may prohibit a member
firm from expanding its business and declaring cash dividends if its
regulatory net capital is less than 5 percent of aggregate debit items. We
exclude assets which are not readily convertible into cash and conservatively
value trading securities when computing net capital. Failure to maintain the
required net capital may subject a firm to suspension or expulsion by the
NYSE, the SEC and other regulatory bodies and may ultimately require its
liquidation. DRI has maintained its net capital above both SEC and NYSE
required levels. At December 31, 1998, DRI had net capital of $121.9 million,
which was $57.6 million in excess of 5% of aggregate debit items.
Rule 15c3-3 of the Securities Exchange Act of 1934 specifies when
broker-dealers carrying customer accounts may be required to maintain cash or
qualified securities in a special reserve account for the exclusive benefit
of customers. Reserve amounts are computed in accordance with a formula
defined in Rule 15c3-3. DRI transferred $42 million to a special reserve
account on January 5, 1999 pursuant to the December 31, 1998 reserve
calculation.
M. EMPLOYEE BENEFIT PLANS
We sponsor a retirement plan which covers substantially all full-time
employees who are at least 21 years of age and have been employed for at
least six months. Participants may contribute on a pretax basis up to 12% of
eligible compensation to the plan subject to certain aggregate limitations;
we then match 40% of the first 5% of eligible compensation. Matching
contributions are limited to $3,000 per employee annually and are made in
shares of our stock. The plan requires that we make a minimum contribution of
3% of eligible compensation.
At the end of each year, an additional profit-based contribution can
be made at the discretion of our Board of Directors. No discretionary
contribution was made for the year ended December 31, 1998.
Our policy is to fund plan costs currently. Earnings have been
charged for contributions, net of forfeitures, to the retirement plan as
follows: $12,943,000, $15,759,000 and $18,901,000 for 1998, 1997 and 1996.
N. INCOME TAXES
Income tax expense consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
(In thousands) 1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Current:
Federal................................................ $ 6,608 $ 27,561 $ 32,896
State.................................................. 1,237 5,083 5,534
Deferred:
Federal................................................ (2,823) (4,360) (6,710)
State.................................................. (528) (804) (1,129)
-------- -------- --------
$ 4,494 $ 27,480 $ 30,591
-------- -------- --------
-------- -------- --------
</TABLE>
38
<PAGE>
A reconciliation of ordinary federal income taxes (based on a rate of 36 %) with
the actual tax expense provided on earnings is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
(Dollars in thousands) 1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Ordinary federal income tax expense....................... $ 4,369 $ 26,864 $ 30,590
State income taxes, net of federal tax benefit............ 804 3,229 3,249
Tax-exempt interest, net of related interest expense...... (1,372) (1,428) (872)
Other..................................................... 693 (1,185) (2,376)
-------- -------- --------
$ 4,494 $ 27,480 $ 30,591
-------- -------- --------
-------- -------- --------
Effective tax rate........................................ 36.0% 35.8% 35.0%
-------- -------- --------
-------- -------- --------
</TABLE>
The tax effects of temporary differences that give rise to the deferred tax
assets and deferred tax liabilities are:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
(In thousands) 1998 1997
-------- --------
<S> <C> <C>
Deferred tax assets:
Accruals not currently deductible.......................................... $ 43,308 $ 40,873
Federal operating loss and AMT credit carryforward, acquired............... 2,128 1,120
Fixed assets............................................................... 2,617 2,506
Other...................................................................... 3,278 597
-------- --------
51,331 45,096
Deferred tax liabilities:
Goodwill................................................................... (1,913) -
Other...................................................................... (1,199) (228)
-------- --------
Net deferred income taxes $ 48,219 $ 44,868
-------- --------
-------- --------
</TABLE>
We have determined that we are not required to establish a valuation
allowance for the deferred tax asset. Our assumption is that it is more
likely than not that the deferred tax asset will be realized principally
through future reversals of existing taxable temporary differences, through
carryback to taxable income in prior years, and, to a lesser extent, future
taxable income. Our conclusion that it is more likely than not that the
deferred tax asset will be realized is based on federal taxable income of
over $156 million in the carryback period, substantial state taxable income
in the carryback period, as well as prospects for continued earnings.
39
<PAGE>
<TABLE>
<CAPTION>
DAIN RAUSCHER CORPORATION
QUARTERLY FINANCIAL INFORMATION
(UNAUDITED, IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
1998
Net revenue............................ $ 172,447 $ 188,016 $ 180,860 $ 208,047
============= ============ ============ ============
Income (loss) before income taxes...... $ (3,163) $ 18,488 $ 5,479 $ (8,320)
============= ============ ============ ============
Net Income (loss)...................... $ (2,024) $ 11,832 $ 3,507 $ (5,325)
============= ============ ============ ============
Per-share data:
Basic net earnings (loss)........... $ (.16) $ .96 $ .28 $ (.43)
============= ============ ============ ============
Diluted net earnings (loss)......... $ (.16) $ .90 $ .27 $ (.43)
============= ============ ============ ============
Dividends .......................... $ .22 $ .22 $ .22 $ .22
============= ============ ============ ============
1997
Net revenue............................ $ 165,962 $ 156,131 $ 181,368 $ 188,641
============= ============ ============ ============
Income before income taxes............. $ 24,389 $ 17,499 $ 10,991 $ 23,876
============= ============ ============ ============
Net income............................. $ 15,755 $ 11,137 $ 7,056 $ 15,327
============= ============ ============ ============
Per-share data:
Basic net earnings.................. $ 1.29 $ .91 $ .57 $ 1.24
============= ============ ============ ============
Diluted net earnings................ $ 1.22 $ .86 $ .54 $ 1.16
============= ============ ============ ============
Dividends .......................... $ .18 $ .18 $ .18 $ .18
============= ============ ============ ============
</TABLE>
40
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE:
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT:
See Part I, Item 4 of this Annual Report for information with
respect to our executive officers. Other information required in Item 10 will
be contained in our definitive Proxy Statement to be filed pursuant to
Regulation 14A within 120 days after the close of the fiscal year for which
this Report is filed and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION:
The information required in Item 11 will be contained in our
definitive Proxy Statement to be filed pursuant to Regulation 14A within 120
days after the close of the fiscal year for which this Report is filed and is
incorporated herein by reference, except that, pursuant to Item 402(a)(8) of
Regulation S-K, the information to be contained in our definitive Proxy
Statement in response to paragraphs (k) and (l) of Item 402 is not
incorporated by reference herein.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT:
The information required in Item 12 will be contained in our
definitive Proxy Statement to be filed pursuant to Regulation 14A within 120
days after the close of the fiscal year for which this Report is filed and is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS:
The information required in Item 13 will be contained in our
definitive Proxy Statement to be filed pursuant to Regulation 14A within 120
days after the close of the fiscal year for which this Report is filed and is
incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K:
(a) Documents filed as part of this Report:
<TABLE>
<CAPTION>
PAGE
------
<S> <C>
1. Financial statements:
Reference is made to the table of contents to financial statements and financial statement
schedule hereinafter contained........................................................................ 45
2. Financial statement schedules:
Reference is made to the table of contents to financial statements and financial statement
schedule hereinafter contained for all other financial statement schedules............................ 45
</TABLE>
41
<PAGE>
3. Exhibits:
<TABLE>
<CAPTION>
ITEM NO. ITEM METHOD OF FILING
-------- ---- ----------------
<S> <C> <C>
2.1 Agreement and Plan of Merger, dated February 8, Filed as Exhibit 2.1 to the Company's Report on Form
1998 among Dain Rauscher Corporation, Dain 8-K dated March 31, 1998.
Rauscher Incorporated and Wessels, Arnold &
Henderson Group, L.L.C. and Wessels, Arnold &
Henderson, L.L.C..
3.1 Restated Certificate of Incorporation of Incorporated by reference to Exhibit 4.1 to the
the Company. Company's Quarterly Report on Form 10-Q/A dated March 31, 1998,
File No. 333-26947.
3.2 Amended and Restated Bylaws of the Company. Incorporated by reference to Exhibit 3.1 to the Company's
Quarterly Report on Form 10-Q dated September 30, 1996.
4.1 Rights Agreement dated April 30, 1997. Incorporated by reference to the Company's Registration
Statement on Form 8 dated May 1, 1997.
4.2 Credit Agreement dated June 27, 1997. Incorporated by reference to Exhibit 4.1 to the
Company's Quarterly Report on Form 10-Q dated June 30, 1997.
4.3 First Amendment to Credit Agreement dated Incorporated by reference to Exhibit 10.8 to the Company's
December 22, 1997. Annual Report on Form 10-K dated December 31, 1997.
4.4 Amended and restated credit agreement dated Filed herewith.
March 20, 1998.
10.1* 1986 Stock Option Plan, as amended on April 24, Incorporated by reference to Exhibit 10(b) to the
1987, May 9, 1990, March 3, 1993, and April 27, Company's Current Report on Form 8-K dated July 15, 1993.
1993.
10.2 Form of Indemnity Agreement with Directors and Incorporated by reference to Exhibit 10(c) to the
Officers of the Company. Company's Annual Report on Form 10-K for the year
ended December 31, 1990.
10.3* Form of Non-Employee Director Retirement Incorporated by reference to Exhibit 10(g) to the
Compensation Agreement. Company's Annual Report on Form 10-K for the year
ended December 31, 1992.
10.4* IFG Executive Deferred Compensation Plan dated Incorporated by reference to Exhibit 10(a) to the
March 31, 1993. Company's Current Report on Form 8-K dated July 15, 1993.
10.5 Trust Agreement for IFG Executive Deferred Incorporated by reference to Exhibit 10.5 to the
Compensation Plan dated February 11, 1994. Company's Annual Report on Form 10-K dated December
31, 1994.
10.7* 1996 Stock Incentive Plan. Incorporated by reference to Exhibit 10 to the
Company's Quarterly Report on Form 10-Q dated March 31, 1996.
10.8* Offer of Employment and Amended Offer of Incorporated by reference to Exhibit 10.8 to the
Employment Agreements between the Company and Company's Annual Report on Form 10-K dated December 31,
William A. Johnstone dated May 28, 1996, and 1997.
October 9, 1997, respectively.
10.10* Employment Agreement between the Company and Incorporated by reference to Exhibit 10 to the
Kenneth J. Wessels dated March 31, 1998. Company's Quarterly Report on Form 10-Q/A dated March
31, 1998
10.11* Revised Employment Agreement between the Filed herewith.
Company and Kenneth J. Wessels dated March 4,
1999.
11 Computation of net earnings per share. Filed herewith.
21 List of subsidiaries. Filed herewith.
23 Independent Auditors' consent. Filed herewith.
24 Power of Attorney. Filed herewith.
27 Financial Data Schedule. Filed herewith.
99 Cautionary Statements for Purposes of the "Safe Filed herewith.
Harbor" Provision of the Private Securities
Litigation Reform Act of 1995
</TABLE>
* Management contract or compensatory plan or arrangement required to
be filed as an exhibit pursuant to Item 14(c) of this report.
42
<PAGE>
(b) One report on Form 8-K was filed during the fourth quarter of 1998.
(1) Item Reported
Exhibit 99 - Press release announcing registrant's settlement of
litigation.
Date of earliest event reported - December 3, 1998.
Financial Statements Filed - None
REPORT FOR EMPLOYEE STOCK PURCHASE PLAN:
The financial statements required by Form 11-K with respect to our
Retirement Plan will be filed by amendment hereto within 180 days of such plan's
fiscal year end as permitted by Rule 15d-21.
43
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT
HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT IN
THE CAPACITIES INDICATED:
SIGNATURE TITLE
Irving Weiser Chairman of the Board, President,
- ----------------------- Chief Executive Officer
Irving Weiser (Principal Executive Officer)
and Director
John C. Appel Vice Chairman, Chief Financial Officer
- ------------------------ (Principal Financial Officer)
John C. Appel and Director
Kenneth J. Wessels Senior Executive Vice President
- ------------------------ and Director
Kenneth J. Wessels
David J. Parrin Senior Vice President and Controller
- ------------------------ (Principal Accounting Officer)
David J. Parrin
J. Evans Attwell
- ------------------------ Director
J. Evans Attwell
Susan S. Boren
- ------------------------ Director
Susan S. Boren
F. Gregory Fitz-Gerald
- ------------------------ Director
F. Gregory Fitz-Gerald
Walter F. Mondale
- ------------------------ Director
Walter F. Mondale
C.A. Rundell, Jr.
- ------------------------ Director
C.A. Rundell, Jr.
Robert L. Ryan
- ------------------------ Director
Robert L. Ryan
Arthur R. Schulze, Jr.
- ------------------------ Director
Arthur R. Schulze, Jr.
44
<PAGE>
DAIN RAUSCHER CORPORATION
FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
AS OF DECEMBER 31, 1998 AND 1997 AND FOR EACH
OF THE YEARS IN THE THREE-YEAR PERIOD
ENDED DECEMBER 31, 1998
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report.............................................. 22
Consolidated Financial Statements:
Consolidated statement of operations................................. 23
Consolidated balance sheet........................................... 24
Consolidated statement of shareholders' equity....................... 25
Consolidated statement of cash flows................................. 26
Notes to consolidated financial statements........................... 27
Financial Statement Schedule:
Schedule III - Condensed financial information of the registrant..... 46
</TABLE>
Schedules not listed above have been omitted because they are either
not applicable or the required information has been provided in the
consolidated financial statements or notes thereto.
45
<PAGE>
SCHEDULE III --CONDENSED FINANCIAL INFORMATION
OF THE REGISTRANT
DAIN RAUSCHER CORPORATION
(PARENT COMPANY)
STATEMENT OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Revenue:
Management fees........................................ $ - $ 18,941 $ 9,373
Gain on sale of investment securities.................. 8,787 - -
Facilities rental...................................... - 964 1,058
Interest............................................... - 2,043 1,743
--------- -------- ---------
8,787 21,948 12,174
--------- -------- ---------
Expenses:
Compensation and benefits.............................. - 12,475 8,010
Interest............................................... - 2,218 2,011
Other operating expenses............................... 260 12,823 8,619
Litigation settlement.................................. 23,787 - -
Restructuring charge................................... - 15,000 -
--------- -------- ---------
24,047 42,516 18,640
--------- -------- ---------
Loss before income taxes and equity in
subsidiaries' earnings................................. (15,260) (20,568) (6,466)
Income tax benefit........................................ 5,494 7,851 2,520
--------- -------- ---------
Loss before equity in subsidiaries' earnings.............. (9,766) (12,717) (3,946)
Equity in subsidiaries' earnings.......................... 17,756 61,992 60,757
--------- -------- ---------
Net income................................................ $ 7,990 $ 49,275 $ 56,811
========= ======== =========
</TABLE>
See notes to condensed financial information.
46
<PAGE>
SCHEDULE III -- CONDENSED FINANCIAL INFORMATION
OF THE REGISTRANT -- (CONTINUED)
DAIN RAUSCHER CORPORATION
(PARENT COMPANY)
BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1998 1997
------------ ------------
<S> <C> <C>
Assets:
Cash...................................................................... $ 1,039 $ 974
Advances to subsidiaries.................................................. 17,893 70,119
Equipment and leasehold improvements, at cost, less
accumulated depreciation of $27,279 and $13,489, respectively........... 22,445 18,360
Investment in subsidiaries, at cost, on an equity basis................... 325,298 312,436
Other assets.............................................................. 24,635 7,870
----------- ----------
$ 391,310 $ 409,759
=========== ==========
Liabilities and Shareholders' Equity:
Short-term borrowings..................................................... $ - $ 50,000
Accounts payable and accrued expenses..................................... 29,032 34,027
Capital lease obligations and other debt.................................. 32,505 6,641
----------- ----------
61,537 90,668
----------- ----------
Shareholders' equity:
Common stock.............................................................. 1,580 1,546
Additional paid-in capital................................................ 112,142 89,321
Retained earnings......................................................... 230,421 233,419
Treasury stock............................................................ (14,370) (5,195)
----------- ----------
329,773 319,091
----------- ----------
$ 391,310 $ 409,759
=========== ==========
</TABLE>
See notes to condensed financial information.
47
<PAGE>
SCHEDULE III -- CONDENSED FINANCIAL INFORMATION
OF THE REGISTRANT -- (CONTINUED)
DAIN RAUSCHER CORPORATION
(PARENT COMPANY)
STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings.............................................. $ 7,990 $ 49,275 $ 56,811
Non-cash items included in earnings:
Equity in net earnings of subsidiaries................. (17,756) (61,992) (60,788)
Depreciation, amortization and other................... - 7,899 4,014
--------- --------- ---------
(9,766) (4,818) 37
Change in operating assets and liabilities................ 14,761 9,917 7,054
--------- --------- ---------
Cash provided by operating activities..................... 4,995 5,099 7,091
--------- --------- ---------
Cash flows from financing activities:
Proceeds from:
Revolving credit agreement.......................... - 50,000 -
Issuance of common stock............................ 3,275 1,779 1,580
Advances from subsidiaries, net..................... 52,226 - -
Payments for:
Advances to subsidiaries, net....................... - (41,030) (2,803)
Dividends on common stock........................... (10,988) (8,904) (6,792)
Capital leases and other debt...................... (6,639) (1,288) (2,454)
Purchases of common stock........................... - (5,195) (1,341)
Revolving credit agreement.......................... (50,000) - -
--------- --------- ---------
Cash provided (used) by financing activities.............. (12,126) (4,638) (11,810)
--------- --------- ---------
Cash flows from investing activities:
Gain from sale of investment........................ 8,787 - -
Dividends from subsidiaries......................... 4,894 10,648 13,170
Investment in Lending............................... - (500) -
Purchases of investments from subsidiary............ (2,400) - -
Purchases of fixed assets........................... (4,085) (10,705) (8,299)
--------- --------- ---------
Cash provided (used) by investing activities.............. 7,196 (557) (4,871)
--------- --------- ---------
Increase (decrease) in cash............................... 65 (96) 152
Cash at beginning of year................................. 974 1,070 918
--------- --------- ---------
Cash at end of year....................................... $ 1,039 $ 974 $ 1,070
========= ========= =========
</TABLE>
See notes to condensed financial information.
48
<PAGE>
SCHEDULE III -- CONDENSED FINANCIAL INFORMATION
OF THE REGISTRANT -- (CONTINUED)
DAIN RAUSCHER CORPORATION
(PARENT COMPANY)
NOTES TO CONDENSED FINANCIAL INFORMATION
A. The condensed financial statements of Dain Rauscher Corporation (Parent
Company) should be read in conjunction with the consolidated financial
statements of Dain Rauscher Corporation, and the notes thereto beginning
in Item 8.
Prior to 1998, the Parent Company received management fees from its
subsidiaries in return for human resources, finance, purchasing,
communications and other services performed for the benefit of the
subsidiaries. Other holding company and corporate expenses were absorbed
by the Parent Company prior to 1998. With the merger of the Parent
Company's three broker-dealer subsidiaries into a single entity during the
1998 first quarter, Parent Company employees and operating expenses were
transferred to its subsidiaries, principally DRI. In 1998 the Parent
Company's Statement of Operations includes only non-recurring or
infrequent items.
Certain prior-year amounts in the Parent Company's financial statements
have been reclassified to conform to the 1998 presentation. The
reclassifications include restating prior-year amounts related to the
Parent Company's capitalization of its former operations subsidiary via
advances from Dain Bosworth and Rauscher Pierce Refsnes.
B. Investments in subsidiaries are carried at cost plus equity in
undistributed earnings. See Note L to Consolidated financial statements
for information regarding net capital requirements of the broker-dealer
subsidiary which could result in restriction on the ability of the
subsidiary to transfer funds to the parent in the form of loans, advances
or cash dividends.
C. COMMITMENTS:
The Parent Company has guaranteed the repayment of any advances to Dain
Rauscher Lending Services Inc. from a $50 million uncommitted credit
facility available to finance certain loans made to customers
collateralized by securities. As of December 31, 1998, $8.4 million was
outstanding under this facility at a 6.1% interest rate. See Note F to
consolidated financial statements for further discussion of this credit
facility.
LEASES: We lease office space, furniture and communications and data
processing equipment under several noncancelable operating leases. Most
office space lease agreements include rate increases and include the
payment of real estate taxes, insurance and other expenses of occupancy.
All lease payments are being made by DRI. DRC is the guarantor of the
lease for our headquarters location, however we anticipate that DRI will
continue to make the payments for this lease and this expense will not be
reflected on DRC's statement of operations.
49
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
AMENDED AND RESTATED
CREDIT AGREEMENT
Dated as of March 20, 1998
Among
DAIN RAUSCHER CORPORATION,
U.S. BANK NATIONAL ASSOCIATION,
as a Bank and as Agent,
and
NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION and
THE CHASE MANHATTAN BANK, as Banks and Co-Agents,
and THE BANK OF NEW YORK,
as a Bank
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
ARTICLE I DEFINITIONS AND ACCOUNTING TERMS............................................1
Section 1.1 DEFINED TERMS.........................................................1
Section 1.2 ACCOUNTING TERMS AND CALCULATIONS.....................................8
Section 1.3 COMPUTATION OF TIME PERIODS...........................................8
Section 1.4 OTHER DEFINITIONAL TERMS..............................................8
ARTICLE II TERMS OF LENDING...........................................................9
Section 2.1 THE LOANS.............................................................9
(a) REVOLVING LOANS............................................................9
(b) SWING LINE LOANS...........................................................9
(c) TERM LOANS.................................................................9
Section 2.2 ADVANCE OPTIONS.......................................................9
Section 2.3 BORROWING PROCEDURES.................................................10
(a) REQUEST BY BORROWER.......................................................10
(b) FUNDING OF AGENT..........................................................10
Section 2.4 CONTINUATION OR CONVERSION OF LOANS..................................11
Section 2.5 THE NOTES............................................................11
(a) REVOLVING NOTES...........................................................11
(b) SWING LINE NOTE...........................................................12
(c) TERM NOTES................................................................12
Section 2.6 FUNDING LOSSES.......................................................12
Section 2.7 REFUNDING OF SWING LINE LOANS........................................13
Section 2.8 LETTERS OF CREDIT....................................................14
Section 2.9 EXTENSION OF THE TERMINATION DATE....................................18
Section 2.10 USE OF PROCEEDS......................................................19
ARTICLE III INTEREST AND FEES........................................................19
Section 3.1 INTEREST.............................................................19
(a) EURODOLLAR ADVANCES.......................................................19
(b) FEDERAL FUNDS RATE ADVANCES...............................................20
(c) INTEREST AFTER MATURITY...................................................20
Section 3.2 FACILITY FEES........................................................20
Section 3.3 COMPUTATION..........................................................21
Section 3.4 PAYMENT DATES........................................................21
ARTICLE IV PAYMENTS, PREPAYMENTS, REDUCTION OR TERMINATION OF THE CREDIT AND SETOFF..21
Section 4.1 REPAYMENT............................................................21
Section 4.2 OPTIONAL PREPAYMENTS.................................................21
Section 4.3 OPTIONAL REDUCTION OR TERMINATION OF COMMITMENTS.....................21
Section 4.4 PAYMENTS.............................................................22
Section 4.5 PRORATION OF PAYMENTS................................................22
ARTICLE V ADDITIONAL PROVISIONS RELATING TO LOANS AND LETTERS OF CREDIT..............22
-i-
<PAGE>
Section 5.1 INCREASED COSTS......................................................22
Section 5.2 DEPOSITS UNAVAILABLE OR INTEREST RATE UNASCERTAINABLE OR INADEQUATE;
IMPRACTICABILITY.....................................................23
Section 5.3 CHANGES IN LAW RENDERING EURODOLLAR ADVANCES UNLAWFUL................23
Section 5.4 CAPITAL ADEQUACY.....................................................24
Section 5.5 DISCRETION OF THE BANKS AS TO MANNER OF FUNDING......................24
ARTICLE VI CONDITIONS PRECEDENT......................................................25
Section 6.1 CONDITIONS OF INITIAL LOAN OR INITIAL LETTERS OF CREDIT..............25
Section 6.2 CONDITIONS PRECEDENT TO ALL LOANS AND ALL LETTERS OF CREDIT..........25
ARTICLE VII REPRESENTATIONS AND WARRANTIES...........................................26
Section 7.1 ORGANIZATION, STANDING, ETC..........................................26
Section 7.2 AUTHORIZATION AND VALIDITY...........................................26
Section 7.3 NO CONFLICT; NO DEFAULT..............................................26
Section 7.4 GOVERNMENT CONSENT...................................................26
Section 7.5 FINANCIAL STATEMENTS AND CONDITION...................................27
Section 7.6 LITIGATION AND CONTINGENT LIABILITIES................................27
Section 7.7 COMPLIANCE...........................................................27
Section 7.8 ENVIRONMENTAL, HEALTH AND SAFETY LAWS................................27
Section 7.9 ERISA................................................................27
Section 7.10 MARGIN REGULATIONS...................................................28
Section 7.11 OWNERSHIP OF PROPERTY; LIENS.........................................28
Section 7.12 TAXES................................................................28
Section 7.13 TRADEMARKS, PATENTS..................................................28
Section 7.14 INVESTMENT COMPANY ACT...............................................28
Section 7.15 PUBLIC UTILITY HOLDING COMPANY ACT...................................28
Section 7.16 SUBSIDIARIES.........................................................29
Section 7.17 REGISTERED BROKER-DEALER; MEMBERSHIP.................................29
Section 7.18 ASSESSMENTS BY THE SECURITIES INVESTOR PROTECTION CORPORATION........29
ARTICLE VIII AFFIRMATIVE COVENANTS...................................................29
Section 8.1 FINANCIAL STATEMENTS AND REPORTS.....................................29
Section 8.2 CORPORATE EXISTENCE..................................................31
Section 8.3 INSURANCE............................................................31
Section 8.4 PAYMENT OF TAXES AND CLAIMS..........................................31
Section 8.5 INSPECTION...........................................................31
Section 8.6 MAINTENANCE OF PROPERTIES............................................31
Section 8.7 BOOKS AND RECORDS....................................................32
Section 8.8 COMPLIANCE...........................................................32
Section 8.9 ERISA................................................................32
Section 8.10 ENVIRONMENTAL MATTERS................................................32
Section 8.11 GENERAL NET CAPITAL REQUIREMENT......................................32
ARTICLE IX NEGATIVE COVENANTS........................................................32
Section 9.1 MERGER AND CONSOLIDATION.............................................32
-ii-
<PAGE>
Section 9.2 SALE OF ASSETS.......................................................32
Section 9.3 PLANS................................................................33
Section 9.4 CHANGE IN NATURE OF BUSINESS.........................................33
Section 9.5 OWNERSHIP OF STOCK IN MATERIAL SUBSIDIARIES..........................33
Section 9.6 OTHER AGREEMENTS.....................................................33
Section 9.7 RESTRICTED PAYMENTS..................................................33
Section 9.8 INVESTMENTS..........................................................34
Section 9.9 INDEBTEDNESS AND CONTINGENT LIABILITIES..............................34
Section 9.10 LIENS................................................................35
Section 9.11 TRANSACTIONS WITH RELATED PARTIES....................................36
Section 9.12 FISCAL YEAR..........................................................36
Section 9.13 MINIMUM CONSOLIDATED NET WORTH.......................................36
Section 9.14 MINIMUM NET CAPITAL REQUIRED FOR DAIN RAUSCHER INCORPORATED..........36
Section 9.15 WAH SUBORDINATED DEBENTURES..........................................36
ARTICLE X EVENTS OF DEFAULT AND REMEDIES.............................................36
Section 10.1 EVENTS OF DEFAULT...................................................36
Section 10.2 REMEDIES............................................................38
Section 10.3 LETTERS OF CREDIT...................................................39
Section 10.4 OFFSET..............................................................39
ARTICLE XI THE AGENT.................................................................39
Section 11.1 APPOINTMENT AND GRANT OF AUTHORITY..................................39
Section 11.2 NON RELIANCE ON AGENT...............................................40
Section 11.3 RESPONSIBILITY OF THE AGENT AND OTHER MATTERS.......................40
Section 11.4 ACTION ON INSTRUCTIONS..............................................41
Section 11.5 INDEMNIFICATION.....................................................41
Section 11.6 U.S. BANK AND AFFILIATES............................................41
Section 11.7 NOTICE TO HOLDER OF NOTES...........................................41
Section 11.8 SUCCESSOR AGENT.....................................................42
ARTICLE XII MISCELLANEOUS............................................................42
Section 12.1 NO WAIVER AND AMENDMENT.............................................42
Section 12.2 AMENDMENTS, ETC.....................................................42
Section 12.3 ASSIGNMENTS.........................................................43
(a) ASSIGNMENTS...............................................................43
(b) EFFECTIVENESS OF ASSIGNMENTS..............................................43
(c) TAX MATTERS...............................................................44
(d) INFORMATION...............................................................44
(e) FEDERAL RESERVE BANK......................................................44
Section 12.4 COSTS, EXPENSES AND TAXES; INDEMNIFICATION..........................44
Section 12.5 NOTICES.............................................................45
Section 12.6 SUCCESSORS..........................................................45
Section 12.7 SEVERABILITY........................................................45
Section 12.8 SUBSIDIARY REFERENCES...............................................45
Section 12.9 CAPTIONS............................................................45
Section 12.10 ENTIRE AGREEMENT...................................................45
-iii-
<PAGE>
Section 12.11 COUNTERPARTS.......................................................45
Section 12.12 CONFIDENTIALITY OF INFORMATION.....................................45
Section 12.13 GOVERNING LAW......................................................46
Section 12.14 CONSENT TO JURISDICTION............................................46
Section 12.15 WAIVER OF JURY TRIAL...............................................46
Section 12.16 RESTATEMENT OF ORIGINAL CREDIT AGREEMENT...........................46
Section 12.17 SURVIVAL OF CERTAIN PROVISIONS OF THIS AGREEMENT...................46
</TABLE>
-iv-
<PAGE>
AMENDED AND RESTATED
CREDIT AGREEMENT
THIS CREDIT AGREEMENT, dated as of March 20, 1998, is by and among DAIN
RAUSCHER CORPORATION, a Delaware corporation (the "Borrower"), the banks or
financial institutions listed on the signature pages hereof or which hereafter
become parties hereto by means of assignment and assumption as hereinafter
described (individually referred to as a "Bank" or collectively as the "Banks"),
and U.S. BANK NATIONAL ASSOCIATION, a national banking association, as agent for
the Banks (in such capacity, the "Agent").
RECITALS
WHEREAS, the Borrower and certain of the Banks have entered into a
Credit Agreement dated as of June 27, 1997 (as amended, the "Original Credit
Agreement"), pursuant to which such Banks, subject to the terms and conditions
set forth therein, agreed to make loans to the Borrower and agreed to issue
letters of credit for the account of the Borrower;
WHEREAS, the obligation of the Borrower to repay the revolving loans
made by such Banks under the Original Credit Agreement is evidenced by the
Revolving Notes of the Borrower dated June 27, 1997, payable to the order of
such Banks (the "Original Revolving Notes");
WHEREAS, the obligation of the Borrower to repay the swing line loans
made by the Swing Line Bank under the Original Credit Agreement is evidenced by
the Swing Line Note of the Borrower dated June 27, 1997, payable to the order of
the Swing Line Bank (the "Original Swing Line Note");
WHEREAS, the Borrower has requested, among other things, that (i) such
Banks consent to the WAH Acquisition (defined below), (ii) the Termination Date
be extended, and (iii) The Bank of New York be added as a Bank.
WHEREAS, the Banks are willing to grant the requests of the Borrower
pursuant to the terms of this Agreement, which shall constitute an amendment to
and a complete restatement of the Original Credit Agreement;
NOW, THEREFORE, in consideration of the premises and of the mutual
agreements herein, the Borrower and the Banks hereby agree as follows:
ARTICLE I DEFINITIONS AND ACCOUNTING TERMS
Section 1.1 DEFINED TERMS. In addition to the terms defined elsewhere
in this Agreement, the following terms shall have the following respective
meanings (and such meanings shall be equally applicable to both the singular and
plural form of the terms defined, as the context may require):
"ADVANCE": The portion of the outstanding Loans bearing interest at an
identical rate for an identical Interest Period, provided that all Federal Funds
Rate Advances shall be deemed a single Advance. An Advance may be a "Eurodollar
Advance" or "Federal Funds Rate Advance" (each, a "type" of Advance).
"ADVERSE EVENT": The occurrence of any event that could have material
adverse effect on the business, operations, property, assets or condition
(financial or otherwise) of the Borrower and the Subsidiaries as a consolidated
enterprise or on the ability of the Borrower or any other party obligated
thereunder to perform its obligations under the Loan Documents.
"AGGREGATE COMMITMENT": The aggregate of the Commitments of the Banks,
being initially $50,000,000, as the same may be reduced from time to time
pursuant to SECTION 4.3.
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"AGGREGATE DEBIT ITEMS": With respect to any Person at any time, the
aggregate debit items of such Person at such time as computed in accordance with
the Formula for Determination of Reserve Requirements for Brokers and Dealers,
Exhibit A to Rule 15c3-3.
"AGENT": U.S. Bank National Association, as agent for the Banks
hereunder and each successor, as provided in SECTION 11.8, who shall act as
Agent.
"AGREEMENT": This Amended and Restated Credit Agreement, as it may be
amended, modified, supplemented, restated or replaced from time to time.
"APPLICABLE EURODOLLAR RATE MARGIN": A percentage equal to (i)
sixty-one one-hundredths of one percent (.61%) at all times when the Borrower's
senior debt (A) is not rated by Moody's or by Standard & Poors, (B) if rated by
Moody's and Standard & Poors, has a rating of less than BBB- by Moody's and has
a rating of less than Baa3 by Standard & Poors, (C) if rated only by Moody's,
has a rating of less than BBB- by Moody's, or (D) if rated only by Standard &
Poors, has a rating of less than Baa3 by Standard & Poors, and (ii) forty-five
one-hundredths of one percent (.45%) at all times when the Borrower's senior
debt (A) if rated by Moody's and Standard & Poors, has a rating of BBB- or
better by Moody's or has a rating of Baa3 or better by Standard & Poors, (B) if
rated only by Moody's, has a rating of BBB- or better by Moody's, or (C) if
rated only by Standard & Poors, has a rating of Baa3 or better by Standard &
Poors.
"APPLICABLE FACILITY FEE PERCENTAGE": A percentage equal to (i)
fourteen one-hundredths of one percent (.14%) at all times when the Borrower's
senior debt (A) is not rated by Moody's or by Standard & Poors, (B) if rated by
Moody's and Standard & Poors, has a rating of less than BBB- by Moody's and has
a rating of less than Baa3 by Standard & Poors, (C) if rated only by Moody's,
has a rating of less than BBB- by Moody's, or (D) if rated only by Standard &
Poors, has a rating of less than Baa3 by Standard & Poors, and (ii) ten
one-hundredths of one percent (.10%) at all times when the Borrower's senior
debt (A) if rated by Moody's and Standard & Poors, has a rating of BBB- or
better by Moody's or has a rating of Baa3 or better by Standard & Poors, (B) if
rated only by Moody's, has a rating of BBB- or better by Moody's, or (C) if
rated only by Standard & Poors, has a rating of Baa3 or better by Standard &
Poors.
"APPLICABLE FEDERAL FUNDS RATE MARGIN": A percentage equal to (i)
eighty-five one-hundredths of one percent (.85%) at all times when the
Borrower's senior debt (A) is not rated by Moody's or by Standard & Poors, (B)
if rated by Moody's and Standard & Poors, has a rating of less than BBB- by
Moody's and has a rating of less than Baa3 by Standard & Poors, (C) if rated
only by Moody's, has a rating of less than BBB- by Moody's, or (D) if rated only
by Standard & Poors, has a rating of less than Baa3 by Standard & Poors, and
(ii) seventy one-hundredths of one percent (.70%) at all times when the
Borrower's senior debt (A) if rated by Moody's and Standard & Poors, has a
rating of BBB- or better by Moody's or has a rating of Baa3 or better by
Standard & Poors, (B) if rated only by Moody's, has a rating of BBB- or better
by Moody's, or (C) if rated only by Standard & Poors, has a rating of Baa3 or
better by Standard & Poors.
"APPLICABLE LETTER OF CREDIT MARGIN": A percentage equal to (i)
sixty-eight one-hundredths of one percent (.68%) at all times when the
Borrower's senior debt (A) is not rated by Moody's or by Standard & Poors, (B)
if rated by Moody's and Standard & Poors, has a rating of less than BBB- by
Moody's and has a rating of less than Baa3 by Standard & Poors, (C) if rated
only by Moody's, has a rating of less than BBB- by Moody's, or (D) if rated only
by Standard & Poors, has a rating of less than Baa3 by Standard & Poors, and
(ii) fifty-two one-hundredths of one percent (.52%) at all times when the
Borrower's senior debt (A) if rated by Moody's and Standard & Poors, has a
rating of BBB- or better by Moody's or has a rating of Baa3 or better by
Standard & Poors, (B) if rated only by Moody's, has a rating of BBB- or better
by Moody's, or (C) if rated only by Standard & Poors, has a rating of Baa3 or
better by Standard & Poors.
"ASSIGNEE": As defined in SECTION 12.3(a).
"ASSIGNMENT": As defined in SECTION 12.3(a).
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"ASSIGNMENT AND ASSUMPTION AGREEMENT": As defined in SECTION 12.3(a).
"BUSINESS DAY": Any day (other than a Saturday, Sunday or legal holiday
in the State of Minnesota or the State of New York) on which national banks are
permitted to be open in Minneapolis, Minnesota, and national banks and state
member banks are permitted to be open in New York, New York, and, with respect
to Eurodollar Advances, a day on which dealings in Dollars may be carried on by
the Agent in the London interbank market.
"CAPITALIZED LEASE": Any lease which is or should be capitalized on the
books of the lessee in accordance with GAAP.
"CODE": The Internal Revenue Code of 1986, as amended, or any successor
statute, together with regulations thereunder.
"COMMITMENT": In the case of each Bank, the amount set forth opposite
such Bank's signature on the signature page of this Agreement (or in the
relevant Assignment and Assumption Agreement for such Bank), as the same may be
reduced from time to time pursuant to SECTION 4.3 , or, as the context may
require, the agreement of each Bank to make Loans to the Borrower and to
participate in Swing Line Loans made to the Borrower and Letters of Credit
issued for the account of the Borrower up to such amount, subject to the terms
and conditions of this Agreement.
"COMPLIANCE CERTIFICATE": A certificate in the form of EXHIBIT F, duly
completed and signed by the treasurer or the chief financial officer of the
Borrower.
"CONSOLIDATED NET INCOME": The Borrower's consolidated net income as
determined in accordance with GAAP.
"CONSOLIDATED NET WORTH": As of any date of determination, the sum of
the amounts set forth on the consolidated balance sheet of the Borrower as the
sum of the common stocks, preferred stock, additional paid-in capital and
retained earnings of the Borrower (excluding treasury stock) as determined in
accordance with GAAP.
"DAIN RAUSCHER INCORPORATED": Dain Rauscher Incorporated, a Minnesota
corporation.
"DAIN RAUSCHER INCORPORATED CREDIT AGREEMENT": The Credit Agreement to
be entered into on or about March 30, 1998, by and among the Agent, the Banks
and Dain Rauscher Incorporated pursuant to which the Banks will loan $80,000,000
to Dain Rauscher Incorporated, as the same may be amended, modified,
supplemented, restated or replaced from time to time.
"DAIN RAUSCHER LENDING SERVICES": Dain Rauscher Lending Services, Inc.,
a Minnesota corporation.
"DEFAULT": Any event which, with the giving of notice to the Borrower
or lapse of time, or both, would constitute an Event of Default.
"ERISA": The Employee Retirement Income Security Act of 1974, as
amended, and any successor statute, together with regulations thereunder.
"ERISA AFFILIATE": Any trade or business (whether or not incorporated)
that is a member of a group of which the Borrower is a member and which is
treated as a single employer under Section 414 of the Code.
"EURODOLLAR ADVANCE": An Advance designated as such in a notice of
borrowing under SECTION 2.3 or a notice of continuation or conversion under
SECTION 2.4.
"EURODOLLAR INTERBANK RATE": The average offered rate for deposits in
United States Dollars (rounded upwards, if necessary, to the nearest 1/16 of 1%)
for delivery of such deposits on the first day of an Interest Period
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of a Eurodollar Advance, for the number of days comprised therein (except in
the case of a one (1) week or two (2) week Interest Period, such rate shall
be determined on the basis of the number of days comprised in a one (1) month
Interest Period), which appears on the Reuters Screen LIBO Page as of 11:00
a.m., Minneapolis time (or such other time as of which such rate appears) on
the Business Day that is two Business Days preceding the first day of the
Interest Period (except in the case of a one (1) week Interest Period, such
rate shall be determined on the Business Day which is the first Business Day
of the Interest Period) or the rate for such deposits determined by the Agent
at such time based on such other published service of general application as
shall be selected by the Agent for such purpose; PROVIDED, that in the event
that the Reuters Screen LIBO Page and such other published services of
general application are unavailable, the Agent may determine the rate based
on rates offered to the Agent for deposits in United States Dollars (rounded
upwards, if necessary, to the nearest 1/16 of 1%) in the interbank eurodollar
market at such time for delivery on the first day of the Interest Period for
the number of days comprised therein. "Reuters Screen LIBO Page" means the
display designated as page "LIBO" on the Reuter Monitor Money Rates Service
(or such other page as may replace the LIBO Page on that service for the
purpose of displaying London interbank offered rates of major banks for
United States Dollar deposits).
"EURODOLLAR RATE (RESERVE ADJUSTED)": A rate per annum (rounded upward,
if necessary, to the nearest 1/16th of 1%) calculated for the Interest Period of
a Eurodollar Advance in accordance with the following formula:
ERRA = Eurodollar Interbank Rate
-------------------------
1.00 - ERR
In such formula, "ERR" means "Eurodollar Reserve Rate" and "ERRA" means
"Eurodollar Rate (Reserve Adjusted)", in each instance determined by the Agent
for the applicable Interest Period. The Agent's determination of all such rates
for any Interest Period shall be conclusive in the absence of manifest error.
"EURODOLLAR RESERVE RATE": A percentage equal to the daily average
during such Interest Period of the aggregate maximum reserve requirements
(including all basic, supplemental, marginal and other reserves), as specified
under Regulation D of the Federal Reserve Board, or any other applicable
regulation that prescribes reserve requirements applicable to Eurocurrency
liabilities (as presently defined in Regulation D) or applicable to extensions
of credit by the Agent the rate of interest on which is determined with regard
to rates applicable to Eurocurrency liabilities. Without limiting the generality
of the foregoing, the Eurocurrency Reserve Requirement shall reflect any
reserves required to be maintained by the Agent against (i) any category of
liabilities that includes deposits by reference to which the Eurodollar
Interbank Rate is to be determined, or (ii) any category of extensions of credit
or other assets that includes Eurodollar Advances.
"EVENT OF DEFAULT": Any event described in SECTION 10.1.
"FACILITY FEES": As defined in SECTION 3.2.
"FEDERAL FUNDS RATE": For any date of determination, the interest rate
per annum determined by U.S. Bank to be equal to the average rate for overnight
federal funds transactions with members of the Federal Reserve System, arranged
by federal funds brokers, applicable to federal funds transactions on that date.
"FEDERAL FUNDS RATE ADVANCE": An Advance designated as such in a
notice of borrowing under SECTION 2.3 or a notice of continuation or conversion
under SECTION 2.4.
"FEDERAL RESERVE BOARD": The Board of Governors of the Federal Reserve
System or an successor thereto.
"GAAP": Generally accepted accounting principles as applied in the
preparation of the audited financial statements of Interra Financial
Incorporated (now Dain Rauscher Corporation), Dain Bosworth Incorporated,
Rauscher Pierce Refsnes, Inc. and Interra Clearing Services Inc. (Dain Bosworth
Incorporated, Rauscher Pierce Refsnes, Inc. and Interra Clearing Services Inc.
are now merged into Dain Rauscher Incorporated) referred to in SECTION 7.5.
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"INDEBTEDNESS": Without duplication, all obligations, contingent or
otherwise, which in accordance with GAAP should be classified upon the obligor's
balance sheet as liabilities, but in any event including the following (whether
or not they should be classified as liabilities upon such balance sheet): (a)
obligations secured by any mortgage, pledge, security interest, lien, charge or
other encumbrance existing on property owned or acquired subject thereto,
whether or not the obligation secured thereby shall have been assumed and
whether or not the obligation secured is the obligation of the owner or another
party; (b) any obligation for the deferred purchase price of any property or
services, except Trade Accounts Payable, (c) any obligation as lessee under any
Capitalized Lease; (d) all guaranties, endorsements and other contingent
obligations in respect to Indebtedness of others; (e) all repurchase
transactions and all swap transactions which are included as liabilities or
obligations under GAAP; and (f) undertakings or agreements to reimburse or
indemnify issuers of letters of credit.
"INTEREST PERIOD" Either (a) for any Eurodollar Advance, the period
commencing on the borrowing date of such Eurodollar Advance or the date a
Federal Funds Rate Advance is converted into such Eurodollar Advance, or the
last day of the preceding Interest Period for such Eurodollar Advance, as the
case may be, and ending on the numerically corresponding day one (1) week, two
(2) weeks, one (1) month, two (2) months, three (3) months or six (6) months
thereafter, as selected by the Borrower pursuant to SECTION 2.3 or SECTION 2.4;
PROVIDED, that:
(i) any Interest Period which would otherwise end on a day which is not
a Business Day shall end on the next succeeding Business Day unless
such next succeeding Business Day falls in another calendar month, in
which case such Interest Period shall end on the next preceding
Business Day;
(ii) any Interest Period of one (1), two (2), three (3) or six (6)
months which begins on the last Business Day of a calendar month (or on
a day for which there is no numerically corresponding day in the
calendar month at the end of such Interest Period) shall end on the
last Business Day of the calendar month at the end of such Interest
Period; and
(iii) no Interest Period shall extend beyond the Termination Date.
"LIEN": Any security interest, mortgage, pledge, lien, hypothecation,
judgment lien or similar legal process, charge, encumbrance, title retention
agreement or analogous instrument or device (including, without limitation, the
interest of the lessors under Capitalized Leases and the interest of a vendor
under any conditional sale or other title retention agreement).
"LETTERS OF CREDIT": As defined in SECTION 2.8(a).
"LETTER OF CREDIT AGREEMENTS": As defined in SECTION 2.8(c)(ix).
"LETTER OF CREDIT PARTICIPATION AMOUNT": As defined in SECTION 2.8(a).
"LETTER OF CREDIT OBLIGATIONS": The aggregate amount of all possible
drawings under all Letters of Credit plus all amounts drawn under any Letter of
Credit and not reimbursed by the Borrower under the applicable Letter of Credit
Agreement.
"LOANS": The Revolving Loans and the Swing Line Loans or the Term
Loans, as the case may be.
"LOAN DOCUMENTS": This Agreement, the Notes, each Letter of Credit
Agreement and each other instrument, document, guaranty, security agreement,
mortgage, or other agreement executed and delivered by the Borrower or any
guarantor or party granting security interests in connection with this
Agreement, the Loans or the Letter of Credit Obligations or any collateral for
the Loans or the Letter of Credit Obligations.
"MATERIAL SUBSIDIARY":
(a) For so long as it shall be a Subsidiary of the Borrower,
Dain Rauscher Incorporated; and
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(b) For any fiscal year of the Borrower, any other Subsidiary
of the Borrower (i) which contributed (or, in the case of any
Subsidiary acquired during such fiscal year, would have contributed, if
acquired, at the beginning of the preceding fiscal year) more than 10%
of the revenues of Borrower and its Subsidiaries on a consolidated
basis during the preceding fiscal year or (ii) which had (or, in the
case of any Subsidiary acquired during such fiscal year, would have
had, if acquired on the last day of the preceding fiscal year)
aggregate assets in excess of 10% of the assets of Borrower and its
Subsidiaries on a consolidated basis at the close of the preceding
fiscal year.
"MOODY'S": Moody's Investors Services.
"NET CAPITAL": Net Capital shall mean "net capital" as defined in Rule
15c3-1.
"NOTES": The Revolving Notes and the Swing Line Note or the Term Notes,
as the case may be.
"ORIGINAL CREDIT AGREEMENT": As defined in the Recitals to this
Agreement.
"ORIGINAL REVOLVING NOTES": As defined in the Recitals to this
Agreement.
"ORIGINAL SWING LINE NOTE": As defined in the Recitals to this
Agreement.
"PAYMENT DATE": Each of the following: (a) with respect to each
Eurodollar Advance, the last day of each Interest Period and, if such Interest
Period is in excess of three (3) months, on the last day of each three (3) month
period occurring after the commencement of such Interest Period prior to the
last day of such Interest Period; (b) with respect to each Federal Funds Rate
Advance and for any fees including, without limitation, Facility Fees, the last
day of each calendar month, (c) unless the Banks shall have made the Term Loans
to repay the Revolving Loans in accordance with the provisions of SECTION
2.1(c), the Termination Date; and (d) if the Banks shall have made the Terms
Loans to repay the Revolving Loans in accordance with the provisions of SECTION
2.1(c), the Term Loan Maturity Date.
"PBGC": The Pension Benefit Guaranty Corporation, established pursuant
to Subtitle A of Title IV of ERISA, and any successor thereto or to the
functions thereof.
"PERCENTAGE": As to any Bank, the percentage set forth opposite such
Bank's signature on the signature page of this Agreement (or in the relevant
Assignment and Assumption Agreement for such Bank) (I.E., the proportion,
expressed as a percentage, that such Bank's Commitment bears to the Aggregate
Commitment).
"PERSON": Any natural person, corporation, partnership, joint venture,
firm, association, trust, unincorporated organization, government or
governmental agency or political subdivision or any other entity, whether acting
in an individual, fiduciary or other capacity.
"PLAN": An employee benefit plan or other plan, maintained for
employees of the Borrower or of any ERISA Affiliate, and subject to Title IV of
ERISA or Section 412 of the Code.
"REFERENCE RATE": The rate of interest from time to time publicly
announced by U.S. Bank as its "reference rate." U.S. Bank may lend to its
customers at rates that are at, above or below the Reference Rate. For purposes
of determining any interest rate which is based on the Reference Rate, such
interest rate shall change on the effective date of any change in the Reference
Rate.
"RELATED PARTY": Any Person (other than a Subsidiary): (a) which
directly or indirectly through one or more intermediaries controls, or is
controlled by, or is under common control with, the Borrower, or (b) 5% or more
of the equity interest of which is beneficially owned or held by the Borrower or
a Subsidiary. The term "control" means the possession, directly or indirectly,
of the power to direct or cause the direction of the management and policies of
a Person, whether through the ownership of voting securities, by contract or
otherwise.
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"REFUNDED SWING LINE LOANS": As defined in SECTION 2.7(a).
"REGULATIONS T, U AND X": Regulations T, U and X of the Board of
Governors of the Federal Reserve System.
"REPORTABLE EVENT": A reportable event as defined in Section 4043 of
ERISA and the regulations issued under such Section, with respect to a Plan,
excluding, however, such events as to which the PBGC by regulation has waived
the requirement of Section 4043(a) of ERISA that it be notified within 30 days
of the occurrence of such event, provided that a failure to meet the minimum
funding standard of Section 412 of the Code and Section 302 of ERISA shall be a
reportable event regardless of the issuance of any such waivers in accordance
with Section 412(d) of the Code.
"REQUIRED BANKS": Those Banks whose total Percentage of the Commitments
equals or exceeds 66-2/3%, or if the Commitments have been terminated, those
Banks whose share of the outstanding principal of the Loans constitutes at least
66-2/3% of the aggregate outstanding principal of all Loans.
"REVOLVING LOANS": The Loans described in SECTION 2.1(a).
"REVOLVING NOTES": The promissory notes of the Borrower described in
SECTION 2.5(a), substantially in the form of EXHIBIT A-1, as such promissory
notes may be amended, modified or supplemented from time to time, and such term
shall include any substitutions for, or renewals of, such promissory notes.
"RULE 15c3-1": Rule 15c3-1 of the General Rules and Regulations as
promulgated by the Securities and Exchange Commission under the Securities and
Exchange Act of 1934, as amended (17 CFR 240.15c3-1), as such Rule may be
amended from time to time, or any rule or regulation which replaces Rule 15c3-1.
"RULE 15c3-3": Rule 15c3-3 of the General Rules and Regulations as
promulgated by the Securities and Exchange Commission under the Securities and
Exchange Act of 1934, as amended (17 CFR 240.15c3-3), as such Rule may be
amended from time to time, or any rule or regulation which replaces Rule 15c3-3.
"SUBSIDIARY": Any Person of which or in which the Borrower and its
other Subsidiaries own directly or indirectly 50% or more of: (a) the combined
voting power of all classes of stock having general voting power under ordinary
circumstances to elect a majority of the board of directors of such Person, if
it is a corporation, (b) the capital interest or profit interest of such Person,
if it is a partnership, joint venture, limited liability company or similar
entity, or (c) the beneficial interest of such Person, if it is a trust,
association or other unincorporated organization.
"STANDARD & POORS": Standard & Poors Corporation.
"SWING LINE COMMITMENT": $5,000,000, or, as the context may require,
the agreement of the Swing Line Bank to make the Swing Line Loans to the
Borrower subject to the terms and conditions of this Agreement.
"SWING LINE BANK": U.S. Bank.
"SWING LINE LOANS": The Loans described in SECTION 2.1(b).
"SWING LINE NOTE": The promissory note of the Borrower described in
SECTION 2.5(b), substantially in the form of EXHIBIT A-2, as such promissory
note may be amended, modified or supplemented from time to time, and such term
shall include any substitutions for, or renewals of, such promissory note.
"SWING LINE PARTICIPATION AMOUNT": As defined in SECTION 2.7(b).
"TERM LOANS": The Loans described in SECTION 2.1(c).
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"TERM NOTES": The promissory notes of the Borrower described in SECTION
2.5(c), substantially in the form of EXHIBIT A-3, as such promissory notes may
be amended, modified or supplemented from time to time, and such term shall
include any substitutions for, or renewals of, such promissory notes.
"TERM LOAN MATURITY DATE": The second (2nd) anniversary of the date on
which the Banks make the Term Loans to the Borrower under SECTION 2.1(c).
"TERMINATION DATE": The earliest of (a) March 19, 1999, or such later
date to which the Termination Date is extended pursuant to the provisions of
SECTION 2.9, (b) the date on which the Commitments are terminated pursuant to
SECTION 10.2 hereof or (c) the date on which the Commitments are reduced to zero
pursuant to SECTION 4.3 hereof.
"TRADE ACCOUNTS PAYABLE": The trade accounts payable of any Person with
a maturity of not greater than 90 days incurred in the ordinary course of such
Person's business.
"UNREFUNDED SWING LINE LOANS": As defined in SECTION 2.7(b).
"U.S. BANK": U.S. Bank National Association, in its individual capacity
and not as Agent hereunder.
"WAH": Collectively, Wessels, Arnold & Henderson Group, L.L.C., a
Delaware limited liability company, and Wessels, Arnold & Henderson, L.L.C., a
Delaware limited liability company.
"WAH ACQUISITION": The acquisition and merger of WAH into Dain Rauscher
Incorporated, with Dain Rauscher Incorporated as the surviving corporation,
pursuant to the terms and conditions of the WAH Acquisition Agreement.
"WAH ACQUISITION AGREEMENT": The Agreement and Plan of Merger dated as
of February 8, 1998, among Dain Rauscher Corporation, Dain Rauscher Incorporated
and WAH.
"WAH SUBORDINATED DEBENTURES": The subordinated debentures issued by
the Borrower to the members of WAH in the aggregate principal amount of
$30,000,000, with the entire principal balance of such subordinated debentures
being due and payable on March 31, 2003.
Section 1.2 ACCOUNTING TERMS AND CALCULATIONS. Except as may be
expressly provided to the contrary herein, all accounting terms used herein
shall be interpreted and all accounting determinations hereunder (including,
without limitation, determination of compliance with financial ratios and
restrictions in ARTICLES VIII and IX hereof) shall be made in accordance with
GAAP consistently applied. Any reference to "consolidated" financial terms shall
be deemed to refer to those financial terms as applied to the Borrower and its
Subsidiaries in accordance with GAAP.
Section 1.3 COMPUTATION OF TIME PERIODS. In this Agreement, in the
computation of a period of time from a specified date to a later specified date,
unless otherwise stated the word "from" means "from and including" and the word
"to" or "until" each means "to but excluding."
Section 1.4 OTHER DEFINITIONAL TERMS. The words "hereof", "herein" and
"hereunder" and words of similar import when used in this Agreement shall refer
to this Agreement as a whole and not to any particular provision of this
Agreement. References to Sections, Exhibits, schedules and like references are
to this Agreement unless otherwise expressly provided.
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ARTICLE II TERMS OF LENDING
Section 2.1 THE LOANS.
(a) REVOLVING LOANS. Subject to the terms and conditions of this
Agreement and in reliance upon the warranties of the Borrower in this
Agreement, each Bank agrees, severally and not jointly, to make
revolving loans (each, a "Revolving Loan" and, collectively, the
"Revolving Loans") to the Borrower from time to time from the date
hereof until the Termination Date, during which period the Borrower may
repay and reborrow in accordance with the provisions hereof, provided,
that (i) the aggregate unpaid principal amount of such Bank's Revolving
Loans, such Bank's Letter of Credit Participation Amount and such
Bank's Swing Line Participation Amount at any one time shall not exceed
its Commitment, and (ii) the aggregate unpaid principal amount of all
outstanding Loans and all Letter of Credit Obligations shall not at any
time exceed the Aggregate Commitment. The Revolving Loans shall be made
by the Banks on a pro rata basis, calculated for each Bank based on its
Percentage.
(b) SWING LINE LOANS. Subject to the terms and conditions of this
Agreement and in reliance upon the warranties of the Borrower in this
Agreement, the Swing Line Bank agrees to make revolving loans (each a
"Swing Line Loan" and, collectively, the "Swing Line Loans") to the
Borrower from time to time from the date hereof until the Termination
Date, during which period the Borrower may repay and reborrow in
accordance with the provisions hereof, provided, that the aggregate
unpaid principal amount of the Swing Line Loans at any one time
outstanding shall not exceed the Swing Line Commitment. The Borrower
acknowledges that the Swing Line Bank contemplates that a Swing Line
Loan will not be outstanding for more than six (6) consecutive Business
Days, and in no event shall a Swing Line Loan be outstanding for more
than ten (10) consecutive calendar days.
(c) TERM LOANS. Provided that no Default or Event of Default shall have
occurred and be continuing and subject to the other terms and
conditions of this Agreement and in reliance upon the warranties of the
Borrower in this Agreement, each Bank agrees, severally and not
jointly, to make a single term loan (each a "Term Loan" and,
collectively, the "Term Loans") to the Borrower, on the Termination
Date, in an amount equal to the then outstanding principal balance of
the Revolving Loans made by such Bank to the Borrower. The proceeds of
each Bank's Term Loan shall be simultaneously applied by such Bank to
the repayment of such Bank's Revolving Note, whereupon such Bank's
Revolving Note shall be returned to the Borrower marked "Replaced by
Term Note" and the Commitment of such Bank shall be automatically
terminated. The Borrower shall deliver to each Bank its respective Term
Note, appropriately completed and properly executed on behalf of the
Borrower, prior to the funding of the Term Loans.
Section 2.2 ADVANCE OPTIONS. The Revolving Loans and the Term Loans
shall consist of Eurodollar Advances and Federal Funds Rate Advances, as shall
be selected by the Borrower, except as otherwise provided herein. The Swing Line
Loans shall be Federal Funds Rate Advances, and may not be converted into
Eurodollar Advances. Any combination of types of Advances may be outstanding at
the same time, except that the total number of outstanding Eurodollar Advances
shall not exceed three (3) at any one time. Each Eurodollar Advance shall
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be in a minimum amount of $1,000,000 or in an integral multiple of $500,000
above such amount. Each Federal Funds Rate Advance shall be in an amount that
is an integral multiple of $500,000. Federal Funds Rate Advances shall not be
outstanding for more than ten (10) consecutive calendar days.
Section 2.3 BORROWING PROCEDURES.
(a) REQUEST BY BORROWER. Any request by the Borrower for a Loan shall
be in writing, or by telephone promptly confirmed in writing, and must
be given so as to be received by the Agent not later than:
(i) 10:00 a.m., Minneapolis time, on the date of any requested
Revolving Loans that shall be comprised of Federal Funds Rate
Advances;
(ii) 10:00 a.m., Minneapolis time, on the date of any requested
Revolving Loans that shall be, or shall include, a Eurodollar
Advance having an Interest Period of one (1) week;
(iii) 10:00 a.m., Minneapolis time, two (2) Business days prior to
the date of any requested Revolving Loans that shall be, or shall
include, a Eurodollar Advance having an Interest Period of two (2)
weeks or longer;
(iv) 2:00 p.m., Minneapolis time, on the date of any requested
Swing Line Loan; or
(v) at any time during the period from May 1 through June 15 prior
to the Termination Date for the Term Loans.
Each request for a Loan shall specify (1) the borrowing date (which
shall be a Business Day), (2) the amount of such Loan and if Revolving
Loans or Term Loans, the type or types of Advances comprising such
Loans, and (3) if such Revolving Loans or Term Loans shall include
Eurodollar Advances, the initial Interest Periods for such Eurodollar
Advances.
(b) FUNDING OF AGENT. The Agent shall promptly notify each other Bank
of the receipt of such request, the matters specified therein, and of
such Bank's Percentage of the requested Loans. On the date of the
requested Revolving Loans, each Bank shall provide its share of the
requested Loans to the Agent in immediately available funds not later
than 1:00 p.m., Minneapolis time. On the date of any requested Swing
Line Loans, the Swing Line Bank shall provide the requested Swing Line
Loan to the Agent in immediately available funds not later than 4:00
p.m., Minneapolis time. Unless the Agent determines that any applicable
condition specified in ARTICLE VI has not been satisfied, the Agent
will make the requested Loans available to the Borrower at the Agent's
principal office in Minneapolis, Minnesota in immediately available
funds not later than 5:00 p.m. (Minneapolis time) on the lending date
so requested. If the Agent has made a Loan to the Borrower on behalf of
a Bank but has not received the amount of such Loan from such Bank by
the time herein required, such Bank shall pay interest to the Agent on
the amount so advanced at the Federal Funds Rate from the date of such
Loan to the date funds are received by the Agent from such Bank, such
interest to be
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payable with such remittance from such Bank of the principal amount
of such Loan (provided, however, that the Agent shall not make
any Loan on behalf of a Bank if the Agent has received prior
notice from such Bank that it will not make such Loan). If the Agent
does not receive payment from such Bank by the next Business Day after
the date of any Loan, the Agent shall be entitled to recover such Loan,
with interest thereon at the rate then applicable to such Loan, on
demand, from the Borrower, without prejudice to the Agent's and the
Borrower's rights against such Bank. If such Bank pays the Agent the
amount herein required with interest at the overnight Federal Funds
Rate before the Agent has recovered from the Borrower, such Bank shall
be entitled to the interest payable by the Borrower with respect to the
Loan in question accruing from the date the Agent made such Loan.
Section 2.4 CONTINUATION OR CONVERSION OF LOANS. The Borrower may elect
to (i) continue any outstanding Eurodollar Advance from one Interest Period into
a subsequent Interest Period to begin on the last day of the earlier Interest
Period, or (ii) convert any outstanding Advance into another type of Advance (on
the last day of an Interest Period only, in the instance of a Eurodollar
Advance), by giving the Agent notice in writing, or by telephone promptly
confirmed in writing, given so as to be received by the Agent not later than:
(a) 10:00 a.m., Minneapolis time, on the date of the requested
continuation or conversion, if the continuing or converted Advance
shall be a Federal Funds Rate Advance;
(b) 10:00 a.m., Minneapolis time, on the date of the requested
continuation or conversion, if the continuing or converted Advance
shall be a Eurodollar Advance having an Interest Period of one (1)
week; or
(c) 10:00 a.m., Minneapolis time, two (2) Business days prior to the
date of the requested continuation or conversion, if the continuing or
converted Advance shall be a Eurodollar Advance having an Interest
Period of two (2) weeks or longer.
Each notice of continuation or conversion of an Advance shall specify (i) the
effective date of the continuation or conversion date (which shall be a Business
Day), (ii) the amount and the type or types of Advances following such
continuation or conversion (subject to the limitation on amount set forth in
SECTION 2.2), and (iii) for continuation as, or conversion into, Eurodollar
Advances, the Interest Periods for such Advances. Absent timely notice of
continuation or conversion, each Eurodollar Advance shall automatically convert
into a Federal Funds Rate Advance on the last day of an applicable Interest
Period, unless paid in full on such last day. No Advance shall be continued as,
or converted into, a Eurodollar Advance if a Default or Event of Default shall
exist or if the shortest Interest Period for such Advance may not transpire
prior to the Termination Date in the case of a Revolving Loan or the Term Loan
Maturity Date in the case of a Term Loan.
Section 2.5 THE NOTES. The Loans shall be evidenced by the following
Notes:
(a) REVOLVING NOTES. The Revolving Loans of each Bank shall be
evidenced by a promissory note of the Borrower (each a "Revolving Note"
and collectively for all Banks, the "Revolving Notes"), substantially
in the form of EXHIBIT A-1 hereto, in the amount of such Bank's
Commitment originally in effect and dated as of the date of this
Agreement (or dated as of the relevant date of the Assignment and
Assumption Agreement for such Bank). The Revolving Notes have been
issued in replacement of, and in substitution for,
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but not in payment of, the Original Revolving Notes. Each Bank shall
enter in its respective records the amount of each Revolving Loan, the
rate or rates of interest borne by its Revolving Loans and the payments
made on the Revolving Loans, and such records shall be deemed
conclusive evidence of the subject matter thereof, absent manifest
error.
(b) SWING LINE NOTE. The Swing Line Loans of the Swing Line Bank shall
be evidenced by a promissory note of the Borrower (the "Swing Line
Note"), substantially in the form of EXHIBIT A-2 hereto, in the amount
of the Swing Line Commitment. The Swing Line Note has been issued in
replacement of, and in substitution for, but not in payment of, the
Original Swing Line Note. The Swing Line Bank shall enter in its
records the amount of each Swing Line Loan and the payments made on the
Swing Line Loans, and such records shall be deemed conclusive evidence
of the subject matter thereof, absent manifest error.
(c) TERM NOTES. The Term Loan of each Bank shall be evidenced by a
promissory note of the Borrower (each a "Term Note" and, collectively
for all Banks, the "Term Notes"), substantially in the form of EXHIBIT
A-3 hereto, in the amount of such Bank's outstanding Revolving Advances
immediately prior to making the Term Loan and dated as of the
Termination Date. Each Bank shall enter in its respective records the
amount of its Term Loan, the rate or rates of interest borne by its
Term Loan and the payments made on its Term Loan, and such records
shall be deemed conclusive evidence of the subject matters thereof,
absent manifest error.
Section 2.6 FUNDING LOSSES. The Borrower will indemnify each Bank upon
demand against any loss or expense which such Bank may sustain or incur
(including, without limitation, any loss or expense sustained or incurred in
obtaining, liquidating or employing deposits or other funds acquired to effect,
fund, or maintain any Advance) as a consequence of (i) any failure of the
Borrower to make any payment when due of any amount due hereunder or under any
Note, (ii) any failure of the Borrower to borrow, continue or convert an Advance
on a date specified therefor in a notice thereof, or (iii) any payment
(including, without limitation, any payment pursuant to SECTION 4.2, 4.3 or
10.2), prepayment or conversion of any Eurodollar Advance on a date other than
the last day of the Interest Period for such Advance. Determinations by each
Bank for purposes of this SECTION 2.6 of the amount required to indemnify such
Bank shall be conclusive in the absence of manifest error. Without limiting the
effect of the foregoing, each Bank's loss under clause (ii) or (iii) above with
respect to a Eurodollar Advance shall include an amount equal to the excess, if
any, of (a) the amount of interest that otherwise would have accrued on the
principal amount so paid, so prepaid, so not borrowed, so not converted or so
not continued for the period from the date of such payment or such failure to
borrow, convert or continue to the last day of then current Interest Period for
such Eurodollar Advance (or, in the case of a failure to borrow, convert or
continue, the Interest Period for such Eurodollar Advance that would have
commenced on the date specified for such borrowing, conversion on continuation)
at the applicable rate of interest (or the rate of interest which would have
been applicable) for such Eurodollar Advance provided herein over (b) the amount
of interest that otherwise would have accrued on such principal amount at a rate
per annum equal to the interest component of the amount such Bank would have bid
in the London interbank market for dollar deposits of leading banks in amounts
comparable to such principal
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amount and with maturities comparable to such Interest Period (as reasonably
determined by such Bank).
Section 2.7 REFUNDING OF SWING LINE LOANS.
(a) The Swing Line Bank, at any time and from time to time in its sole
and absolute discretion may, on behalf of the Borrower (which hereby
irrevocably directs the Swing Line Bank to act on its behalf), upon
notice given by the Swing Line Bank no later than 10:00 a.m.,
Minneapolis time, on the relevant refunding date, request each Bank to
make, and each Bank hereby agrees to make, a Revolving Loan (which
shall be a Federal Funds Rate Advance), in an amount equal to such
Bank's Percentage of the aggregate amount of the Swing Line Loans (the
"Refunded Swing Line Loans") outstanding on the date of such notice, to
refund such Swing Line Loans. Each Bank shall make the amount of such
Revolving Loan available to the Agent in immediately available funds,
no later than 1:00 p.m., Minneapolis time, on the date of such notice.
The proceeds of such Revolving Loans shall be distributed by the Agent
to the Swing Line Bank and immediately applied by the Swing Line Bank
to repay the Refunded Swing Line Loans.
(b) If, for any reason, Revolving Loans may not be (as determined by
the Agent in its sole discretion), or are not, made pursuant to SECTION
2.7(a) to repay Swing Line Loans, then, effective on the date such
Revolving Loans would otherwise have been made, each Bank severally,
unconditionally and irrevocably agrees that it shall purchase a
participating interest in such Swing Line Loans ("Unrefunded Swing Line
Loans") in an amount equal to the amount of Revolving Loans which would
otherwise have been made by such Bank pursuant to SECTION 2.7(a). Each
Bank will immediately transfer to the Agent, in immediately available
funds, the amount of its participation (the "Swing Line Participation
Amount"), and the proceeds of such participation shall be distributed
by the Agent to the Swing Line Bank in such amount as will reduce the
amount of the participating interest retained by the Swing Line Bank in
its Swing Line Loans.
(c) Whenever, at any time after the Swing Line Bank has received from
any Bank such Bank's Swing Line Participation Amount, the Swing Line
Bank receives any payment on account of the Swing Line Loans, the Swing
Line Bank will distribute to such Bank its Swing Line Participation
Amount (appropriately adjusted, in the case of interest payments, to
reflect the period of time during which such Bank's participating
interest was outstanding and funded and, in the case of principal and
interest payments, to reflect such Bank's PRO RATA portion of such
payment if such payment is not sufficient to pay the principal of and
interest on all Swing Line Loans then due); PROVIDED, HOWEVER, that in
the event that such payment received by the Swing Line Bank is required
to be returned, such Bank will return to the Swing Line Bank any
portion thereof previously distributed to it by the Swing Line Bank.
(d) Each Bank's obligation to make the Revolving Loans referred to in
SECTION 2.7(a) and to purchase participating interests pursuant to
SECTION 2.7(b) shall be absolute and unconditional and shall not be
affected by any circumstance, including, without limitation, (i) any
setoff, counterclaim, recoupment, defense or other right which such
Bank or the Borrower may have against the Swing Line Bank, the Borrower
or any other Person for
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any reason whatsoever; (ii) the occurrence or continuance of a
Default or an Event of Default or the failure to satisfy any
of the other conditions precedent specified in ARTICLE VI;
(iii) any adverse change in the condition (financial or otherwise) of
the Borrower; (iv) any breach of this Agreement or any other Loan
Document by the Borrower or any Bank; or (v) any other circumstance,
happening or event whatsoever, whether or not similar to any of the
foregoing. Notwithstanding the foregoing, a Bank shall not have any
obligation to make a Revolving Loan pursuant to SECTION 2.7(a) or to
purchase a participating interest in a Swing Line Loan pursuant to
SECTION 2.7(b) if (A) a Default or an Event of Default shall have
occurred and be continuing at the time such Swing Line Loan was made or
if any other condition precedent set forth in SECTION 6.2 was not
satisfied at the time such Swing Line Loan was made AND (B) such Bank
shall have provided written notice to the Swing Line Bank, received by
the Swing Line Bank at least one (1) Business Day prior to the date on
which such Swing Line Loan was made, that such Default or Event of
Default has occurred and is continuing or that such other condition
precedent set forth in SECTION 6.2 is not capable of being satisfied,
and, as a result thereof, that such Bank will not make Revolving Loans
pursuant to SECTION 2.7(a) or purchase participating interests in Swing
Line Loans pursuant to SECTION 2.7(b) while such Default or Event of
Default is continuing or while such other condition precedent is not
capable of being satisfied.
Section 2.8 LETTERS OF CREDIT.
(a) LETTERS OF CREDIT. Subject to the terms and conditions of this
Agreement and in reliance upon the warranties of the Borrower in this
Agreement, upon request by the Borrower, the Agent shall issue letters
of credit for the account of the Borrower (such letters of credit as
any of them may be amended, supplemented, extended or confirmed from
time to time, being herein collectively called the "Letters of Credit")
subject to the following: (i) compliance by the Borrower with all
conditions precedent set forth in ARTICLE VI hereof, (ii) entry by the
Borrower into Letter of Credit Agreements and such other documents
deemed appropriate by the Agent for the issuance of such Letters of
Credit at least three (3) Business Days prior to the date of any
requested Letter of Credit, (iii) satisfaction of the Agent with the
form and substance of each such Letter of Credit, and (iv) the absence
of any statutory or regulatory change or directive affecting the
issuance by the Agent of letters of credit. Upon the date of the
issuance of a Letter of Credit, the Agent shall be deemed, without
further action by any party hereto, to have sold to each Bank, and each
Bank shall be deemed without further action by any party hereto, to
have purchased from the Agent, a participation, in its Percentage, in
such Letter of Credit and the related Letter of Credit Obligations (the
"Letter of Credit Participation Amount").
(b) Each Bank's purchase of a participating interest in a Letter of
Credit pursuant to SECTION 2.8(a) shall be absolute and unconditional
and shall not be affected by any circumstance, including, without
limitation, (i) any setoff, counterclaim, recoupment, defense or other
right which such Bank or the Borrower may have against the Agent, the
Borrower or any other Person for any reason whatsoever; (ii) the
occurrence or continuance of a Default or an Event of Default or the
failure to satisfy any of the other conditions precedent in ARTICLE VI;
(iii) any adverse change in the condition (financial or otherwise) of
the Borrower; (iv) any breach of this Agreement or any other Loan
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Document by the Borrower or any Bank; (v) the expiry date of any Letter
of Credit occurring after such Bank's Commitment has terminated or (vi)
any other circumstance, happening or event whatsoever, whether or not
similar to any of the foregoing. Notwithstanding the foregoing, a Bank
shall not have any obligation to purchase a participating interest in a
Letter of Credit pursuant to SECTION 2.8(a) if (A) a Default or an
Event of Default shall have occurred and be continuing at the time such
Letter of Credit was issued or if any other condition precedent set
forth in SECTION 6.2 was not satisfied at the time such Letter of
Credit was issued AND (B) such Bank shall have provided written notice
to the Agent, received by the Agent at least one (1) Business Day prior
to the date on which such Letter of Credit was issued, that such
Default or Event of Default has occurred and is continuing or that such
other condition precedent set forth in SECTION 6.2 is not capable of
being satisfied, and, as a result thereof, that such Bank will not
purchase participating interests in Letters of Credit pursuant to
SECTION 2.8(a) while such Default or Event of Default is continuing or
while such other condition precedent is not capable of being satisfied.
(c) ADDITIONAL PROVISIONS. The following additional provisions shall
apply to each Letter of Credit:
(i) Upon receipt of any request for a Letter of Credit, the Agent
shall notify each Bank of the contents of such request and of such
Bank's Percentage of the amount of such proposed Letter of Credit.
(ii) Each Letter of Credit shall have an expiry date of one (1)
year or less from the date of issuance of such Letter of Credit.
(iii) No Letter of Credit may be issued if, after giving effect to
such Letter of Credit, the Letter of Credit Obligations shall
exceed the Aggregate Commitment minus the aggregate outstanding
principal amount of the Loans. The Commitment of each Bank shall
be deemed to be utilized for all purposes of this Agreement in an
amount equal to such Bank's Letter of Credit Participation Amount.
(iv) Upon receipt from the beneficiary of any Letter of Credit of
any demand for payment thereunder, Agent shall promptly notify the
Borrower and each Bank as to the amount to be paid as a result of
such demand and the payment date. If at any time the Agent shall
have made a payment to a beneficiary of such Letter of Credit in
respect of a drawing or in respect of an acceptance created in
connection with a drawing under such Letter of Credit, each Bank
will pay to Agent immediately upon demand by the Agent at any time
during the period commencing after such payment until
reimbursement thereof in full by the Borrower, an amount equal to
such Bank's Percentage of such payment, together with interest on
such amount for each day from the date of demand for such payment
(or, if such demand is made after 2:00 p.m. Minneapolis time on
such date, from the next succeeding Business Day) to the date of
payment by such Bank of such amount at a rate of interest per
annum equal to the Federal Funds Rate for such period.
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(v) The Borrower shall be irrevocably and unconditionally
obligated forthwith to reimburse the Agent for any amount paid by
the Agent upon any drawing under any Letter of Credit, without
presentment, demand, protest or other formalities of any kind, all
of which are hereby waived. Such reimbursement may, subject to
satisfaction of the conditions in ARTICLE VI hereof and to the
available Commitments of the Banks (after adjustment in the same
to reflect the elimination of the corresponding Letter of Credit
Obligation), be made by the borrowing of Revolving Loans. The
Agent will pay to each Bank such Bank's Percentage of all amounts
received from the Borrower for application in payment, in whole or
in part, of a Letter of Credit Obligation, but only to the extent
such Bank has made payment to the Agent in respect of such Letter
of Credit pursuant to CLAUSE (iv) above.
(vi) The Borrower's obligation to reimburse the Agent for any
amount paid by the Agent upon any drawing under any Letter of
Credit shall be performed strictly in accordance with the terms of
this Agreement and the applicable Letter of Credit Agreement under
any and all circumstances whatsoever and irrespective of (A) any
lack of validity or enforceability of any Letter of Credit, any
Letter of Credit Agreement or this Agreement, or any term or
provision therein, (B) any draft or other document presented under
a Letter of Credit proving to be forged, fraudulent or invalid in
any respect or any statement therein being untrue or inaccurate in
any respect, (C) payment by the Agent under a Letter of Credit
against presentation of a draft or other document that does not
comply with the terms of such Letter of Credit, or (D) any other
event or circumstance whatsoever, whether or not similar to any of
the foregoing, that might, but for the provisions of this clause
(vi), constitute a legal or equitable discharge of, or provide a
right of setoff against, the Borrower's obligations hereunder.
Neither the Agent nor the Banks shall have any liability or
responsibility by reason of or in connection with the issuance or
transfer of any Letter of Credit or any payment or failure to make
any payment thereunder (irrespective of any of the circumstances
referred to in the preceding sentence), or any error, omission,
interruption, loss or delay in transmission or delivery of any
draft, notice or other communication under or relating to any
Letter of Credit (including any document required to make a
drawing thereunder), any error in interpretation of technical
terms or any consequence arising from causes beyond the control of
the Agent; provided that the foregoing shall not be construed to
excuse the Agent from liability to the Borrower to the extent of
any direct damages (as opposed to consequential damages, claims in
respect of which are hereby waived by the Borrower to the extent
permitted by applicable law) suffered by the Borrower that are
caused by the Agent's failure to exercise care when determining
whether drafts and other documents presented under a Letter of
Credit comply with the terms thereof. The parties hereto expressly
agree that, in the absence of gross negligence or willful
misconduct on the part of the Agent (as finally determined by a
court of competent jurisdiction), the Agent shall be deemed to
have exercised care in each such determination. In furtherance of
the foregoing and without limiting the generality thereof, the
parties hereto expressly agree that, with respect to documents
presented which appear on their face to be in substantial
compliance with the terms of a Letter of Credit, the Agent may, in
its sole discretion, either accept and make payment upon such
documents without responsibility for further investigation or
refuse to accept and make payment upon such documents if such
documents are not in strict compliance with the terms of such
Letter of Credit.
(vii) The Borrower will pay to Agent a letter of credit fee with
respect to each Letter of Credit equal to an amount, calculated on
the basis of the face amount of each Letter of Credit, in each
case for the period from and including the date of issuance of
such Letter of Credit to and including the date of expiration or
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termination thereof, at a per annum rate equal to the Applicable
Letter of Credit Margin PLUS $250, such fee to be due and payable
in advance on the date of the issuance thereof. From each such
letter of credit fee paid by the Borrower, the Agent will retain
for its own account, in consideration of the Agent's fronting such
Letter of Credit, a fee equal to seven one-hundredths of one
percent (.07%) of the face amount of such Letter of Credit (the
"Agent's Letter of Credit Fronting Fee"). After deducting the
Agent's Letter of Credit Fronting Fee, the Agent will pay to each
Bank an amount equal to the product of such Bank's Percentage
TIMES the remainder of such letter of credit fee (after taking
into account the Agent's retention of the Agent's Letter of Credit
Fronting Fee). The Borrower agrees to provide written notice to
the Agent within three (3) Business Days of the Borrower's senior
debt becoming rated by Moody's or by Standard & Poors or, once the
Borrower's senior debt has become so rated, of any change in the
rating of the Borrower's senior debt by Moody's or by Standard &
Poors. Any reduction in the Applicable Letter of Credit Margin
shall become effective with respect to all Letters of Credit
issued after the Borrower has provided three (3) Business Day's
prior written notice to the Agent of the rating or change in
rating of the Borrower's senior debt which entitles the Borrower
to a reduction in the Applicable Letter of Credit Margin. Any
increase in the Applicable Letter of Credit Margin shall become
effective with respect to all Letters of Credit issued after the
earlier to occur of (i) the date which is three (3) Business Days
after the date on which the Agent becomes aware of a rating change
in the Borrower's senior debt which subjects the Borrower to an
increase in the Applicable Letter of Credit Margin, or (ii) the
date which is three (3) Business Days after the Borrower has
notified the Agent in writing of the rating change in the
Borrower's senior debt which subjects the Borrower to an increase
in the Applicable Letter of Credit Margin.
(viii) In addition to the letter of credit fee described in CLAUSE
(vii) above, the Borrower agrees to pay to the Agent for the
Account of Agent, on written demand of the Agent from time to
time, the administrative fees charged by the Agent in the ordinary
course of business in connection with the honoring of drafts under
Letters of Credit and all other activity with respect to Letters
of Credit at the then-current rates of the Agent. All fees under
CLAUSE (vii) above and under this clause (viii) shall be computed
on the basis of a year of 360 days and paid for the actual number
of days elapsed.
(ix) The issuance by the Agent of each Letter of Credit shall, in
addition to the other conditions precedent specified in this
Agreement, be subject to the condition precedent that the Borrower
shall have executed and delivered such applications and other
instruments and agreements relating to such Letter of Credit as
the Agent shall have reasonably requested (the "Letter of Credit
Agreements"). In the event of a conflict between the terms of this
Agreement and the terms of any Letter of Credit Agreement
(including the charging of any fees other than normal and
customary reimbursable expenses), the terms hereof shall control.
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(d) INDEMNIFICATION: RELEASE. Borrower hereby indemnifies and holds
harmless the Agent and each Bank from and against any and all claims
and damages, losses, liabilities, costs or expenses which the Agent or
such Bank may incur (or which may be claimed against the Agent or such
Bank by any Person whatsoever), regardless of whether caused in whole
or in part by the negligence of any of the indemnified parties, in
connection with the execution and delivery of any Letter of Credit or
transfer of or payment or failure to pay under any Letter of Credit;
PROVIDED that the Borrower shall not be required to indemnify any party
seeking indemnification for any claims, damages, losses, liabilities,
costs or expenses to the extent, but only to the extent, caused by (i)
the willful misconduct or gross negligence of the party seeking
indemnification, or (ii) by the failure by the party seeking
indemnification to pay under any Letter of Credit after the
presentation to it of a request required to be paid under applicable
law.
(e) BORROWER'S ABILITY TO OBTAIN LETTERS OF CREDIT OUTSIDE OF THIS
AGREEMENT. Nothing in this SECTION 2.8 is intended to limit the ability
of the Borrower to obtain letters of credit outside of this Agreement
from financial institutions other than the Banks, provided that, after
giving effect to any such letter of credit outside of this Agreement,
the Borrower shall be in compliance with all provisions of this
Agreement, including, without limitation, SECTION 9.9.
Section 2.9 EXTENSION OF THE TERMINATION DATE.
(a) The Borrower may, by notice to the Agent in substantially the form
of EXHIBIT G hereto (a copy of which notice the Agent shall promptly
deliver to each of the Banks) not less than sixty (60) days and not
more than ninety (90) days prior to the Termination Date then in effect
(the "Current Termination Date"), request that the Banks extend their
respective Commitments for an additional 364 days from the Extension
Consent Date (as defined below). Each Bank, acting in its sole
discretion, shall, by notice to the Agent in substantially the form of
EXHIBIT H hereto and given no later than the date occurring thirty (30)
days prior to the Current Termination Date (such date, the "Extension
Consent Date"), advise the Agent whether or not such Bank agrees to
such extension; provided that each Bank that determines not to extend
the Current Termination Date (a "Non-Extending Bank") shall notify the
Agent of such fact promptly after such determination (but in any event
no later than the Extension Consent Date) and any Bank that does not so
advise the Agent on or before the Extension Consent Date shall be
deemed to be a Non-Extending Bank. The election of any Bank to agree to
such extension shall not obligate any other Bank to so agree. The
Borrower shall have the right to request an extension of the
Termination Date pursuant to this SECTION 2.9 not more than three (3)
times.
(b) The Agent shall notify the Borrower which Banks, if any, have
elected to extend the Current Termination Date not later than
twenty-one (21) days prior to the Current Termination Date. If (and
only if) Banks holding at least two-thirds (66 2/3%) of the Aggregate
Commitment shall have agreed to extend the Current Termination Date in
accordance with the provisions of SECTION 2.9(a), then, effective as of
the Current Termination Date, the Termination Date shall be extended to
the date falling 364 days after the Current Termination Date (provided,
if such date is not a Business Day, then the Termination Date as so
extended shall be the next preceding Business Day). If Banks holding
more than two-thirds (66 2/3%) but less than all of the Aggregate
Commitment shall have elected to extend the Current Termination Date,
the
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Commitment of each such extending Bank shall remain unchanged
through the new Termination Date and the Aggregate Commitment shall be
reduced to the aggregate of the Commitments of such extending Banks.
(c) Notwithstanding the foregoing, the extension of the Termination
Date shall not be effective with respect to any Bank unless:
(i) no Default or Event of Default shall have occurred and be
continuing on each of the date of the notice requesting such
extension, the applicable Extension Consent Date and the
applicable Current Termination Date;
(ii) each of the representations and warranties of the Borrower in
Article VII hereof shall be true and correct on and as of each of
the date of the notice requesting such extension, the applicable
Extension Consent Date and the applicable Current Termination Date
with the same force and effect as if made on and as of each such
date (or, if any such representation or warranty is expressly
stated to have been made as of a specific date, as of such
specific date);
(iii) each Non-Extending Bank shall have been paid in full by the
Borrower on or before the Current Termination Date all amounts
owing to such Bank hereunder and under the other Loan Documents;
and
Even if the Termination Date is extended as aforesaid by certain of the
Banks, the Commitment of each Non-Extending Bank shall terminate on the
applicable Current Termination Date.
(d) If the Borrower shall have requested an extension of the Current
Termination Date pursuant to this SECTION 2.9, the Agent shall,
simultaneously with the Agent's notice to the Borrower, notify each
Bank as to whether or not the Current Termination Date shall have been
so extended, specifying the individual Commitments of the respective
Banks and the Aggregate Commitment of the Banks after giving effect to
such extension. If requested by the Agent, the Borrower and the Banks
shall enter into such amendments to this Agreement as the Agent shall
require to evidence any extension of the Current Termination Date.
Section 2.10 USE OF PROCEEDS. The proceeds of the Loans and the Letters
of Credit shall be used by the Borrower for its general corporate purposes.
ARTICLE III INTEREST AND FEES
Section 3.1 INTEREST.
(a) EURODOLLAR ADVANCES. The unpaid principal amount of each Eurodollar
Advance shall bear interest prior to maturity at a rate per annum equal
to the Eurodollar Rate (Reserve Adjusted) in effect for each Interest
Period for such Eurodollar Advance plus the Applicable Eurodollar
Margin. The Borrower agrees to provide written notice to the
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Agent within three (3) Business Days of the Borrower's senior debt
becoming rated by Moody's or by Standard & Poors or, once the
Borrower's senior debt has become so rated, of any change in the rating
of the Borrower's senior debt by Moody's or by Standard & Poors. Any
reduction in the Applicable Eurodollar Margin shall become effective
three (3) Business Days after the Borrower has so notified the Agent in
writing of the rating or change in rating of the Borrower's senior debt
which entitles the Borrower to a reduction in the Applicable Eurodollar
Margin. Any increase in the Applicable Eurodollar Margin shall become
effective on the earlier to occur of (i) the date which is three (3)
Business Days after the date on which the Agent becomes aware of a
rating change in the Borrower's senior debt which subjects the Borrower
to an increase in the Applicable Eurodollar Margin, or (ii) the date
which is three (3) Business Days after the Borrower has notified the
Agent in writing of the rating change in the Borrower's senior debt
which subjects the Borrower to an increase in the Applicable Eurodollar
Margin.
(b) FEDERAL FUNDS RATE ADVANCES. The unpaid principal amount of each
Federal Funds Rate Advance shall bear interest prior to maturity at a
rate per annum equal to the Federal Funds Rate plus the Applicable
Federal Funds Rate Margin. The Borrower agrees to provide written
notice to the Agent within three (3) Business Days of the Borrower's
senior debt becoming rated by Moody's or by Standard & Poors or, once
the Borrower's senior debt has become so rated, of any change in the
rating of the Borrower's senior debt by Moody's or by Standard & Poors.
Any reduction in the Applicable Federal Funds Rate Margin shall become
effective three (3) Business Days after the Borrower has so notified
the Agent in writing of the rating or change in rating of the
Borrower's senior debt which entitles the Borrower to a reduction in
the Applicable Federal Funds Rate Margin. Any increase in the
Applicable Federal Funds Rate Margin shall become effective on the
earlier to occur of (i) the date which is three (3) Business Days after
the date on which the Agent becomes aware of a rating change in the
Borrower's senior debt which subjects the Borrower to an increase in
the Applicable Federal Funds Rate Margin, or (ii) the date which is
three (3) Business Days after the Borrower has notified the Agent in
writing of the rating change in the Borrower's senior debt which
subjects the Borrower to an increase in the Applicable Federal Funds
Rate Margin.
(c) INTEREST AFTER MATURITY. Any amount of the Loans not paid when due,
whether at the date scheduled therefor or earlier upon acceleration,
shall bear interest until paid in full at a rate per annum equal to the
greater of (i) two percent (2.00%) in excess of the rate applicable to
the unpaid principal amount immediately before it became due, or (ii)
two percent (2.00%) in excess of the Reference Rate in effect from time
to time.
Section 3.2 FACILITY FEES. The Borrower shall pay fees (the "Facility
Fees") to the Agent for the account of the Banks in an amount determined by
applying the Applicable Facility Fee Percentage to the amount of the Aggregate
Commitment of the Banks for the period from the date of this Agreement to the
Termination Date. The Borrower agrees to provide written notice to the Agent
within three (3) Business Days of the Borrower's senior debt becoming rated by
Moody's or by Standard & Poors or, once the Borrower's senior debt has become so
rated, of any change in the rating of the Borrower's senior debt by Moody's or
by Standard & Poors. Any reduction in the Applicable Facility Fee Percentage
shall become effective three (3) Business Days after the Borrower has so
notified the Agent in writing of the rating or change in rating of
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the Borrower's senior debt which entitles the Borrower to a reduction in the
Applicable Facility Fee Percentage. Any increase in the Applicable Facility
Fee Percentage shall become effective on the earlier to occur of (i) the date
which is three (3) Business Days after the date on which the Agent becomes
aware of a rating change in the Borrower's senior debt which subjects the
Borrower to an increase in the Applicable Facility Fee Percentage, or (ii)
the date which is three (3) Business Days after the Borrower has notified the
Agent in writing of the rating change in the Borrower's senior debt which
subjects the Borrower to an increase in the Applicable Facility Fee
Percentage.
Section 3.3 COMPUTATION. Interest and Facility Fees shall be computed
on the basis of actual days elapsed and a year of 360 days.
Section 3.4 PAYMENT DATES. Accrued interest under SECTION 3.1(a) and
(b) and Facility Fees shall be payable on the applicable Payment Dates. Accrued
interest under SECTION 3.1(c) shall be payable on demand.
ARTICLE IV PAYMENTS, PREPAYMENTS, REDUCTION OR TERMINATION
OF THE CREDIT AND SETOFF
Section 4.1 REPAYMENT. Unless the Banks shall have made the Term Loans
to repay the Revolving Loans in accordance with the provisions of SECTION
2.1(c), the outstanding principal balance of the Revolving Loans and of the
Swing Line Loans, together with all accrued and unpaid interest thereon, shall
be due and payable on the Termination Date. The outstanding principal balance of
each Term Loan shall be due and payable in seven (7) equal quarterly
installments sufficient to fully amortize the principal balance of such Term
Loan on the Term Loan Maturity Date, with the first such quarterly installment
commencing on the last day of the month of September immediately following the
making of the Term Loans, and with subsequent quarterly installments continuing
on the last day of each December, March, June and September thereafter until the
Term Loan Maturity Date, when the remaining outstanding principal balance of
such Term Loan, and all accrued interest thereon, shall be due and payable.
Section 4.2 OPTIONAL PREPAYMENTS. The Borrower may, upon at least one
(1) Business Days' prior written or telephonic notice received by the Bank,
prepay the Loans, in whole or in part, at any time subject to the provisions of
SECTION 2.6, without any other premium or penalty. Any such prepayment must be
accompanied by accrued and unpaid interest on the amount prepaid. Each partial
prepayment shall be in an amount of $500,000 or an integral multiple thereof.
Any partial prepayment of the Term Loans shall be applied to the Term Loans in
inverse order of their maturity.
Section 4.3 OPTIONAL REDUCTION OR TERMINATION OF COMMITMENTS. The
Borrower may, at any time, upon no less than three (3) Business Days prior
written or telephonic notice received by the Agent, reduce the Commitments of
all Banks, such reduction to be in a minimum amount of $5,000,000 or an integral
multiple of $1,000,000 in excess thereof and to be applied ratably to the
Commitments of the respective Banks. Upon any reduction in the Commitments
pursuant to this Section, the Borrower shall pay to the Agent for the account of
the Banks the amount, if any, by which the aggregate unpaid principal amount of
outstanding Loans plus the Letter of
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Credit Obligations exceeds the total Commitments of all Banks as so reduced.
Amounts so paid cannot be reborrowed. The Borrower may, at any time, upon not
less than three (3) Business Days prior written notice to the Agent,
terminate the Commitments in their entirety. Upon termination of the
Commitments pursuant to this Section, the Borrower shall pay to the Agent for
the account of the Banks the full amount of all outstanding Loans, all
accrued and unpaid interest thereon, all unpaid Facility Fees accrued to the
date of such termination and all other unpaid obligations of the Borrower to
the Banks hereunder. All payments described in this Section are subject to
the provisions of SECTION 2.6. Notwithstanding the foregoing, the Commitments
may not be terminated or reduced to an amount below outstanding Letter of
Credit Obligations if Letters of Credit are outstanding.
Section 4.4 PAYMENTS. Payments and prepayments of principal of, and
interest on, the Notes, the Letter of Credit Obligations and all fees, expenses
and other obligations under the Loan Documents shall be made without set-off or
counterclaim in immediately available funds not later than 2:00 p.m.,
Minneapolis time, on the dates due at the main office of the Agent in
Minneapolis, Minnesota. Funds received on any day after such time shall be
deemed to have been received on the next Business Day. The Agent shall promptly
distribute in like funds to each Bank its Percentage share of each such payment
of principal, interest and Facility Fees. Subject to the definition of the term
"Interest Period", whenever any payment to be made under this Agreement, the
Notes or the other Loan Documents shall be stated to be due on a day which is
not a Business Day, such payment shall be made on the next succeeding Business
Day and such extension of time shall be included in the computation of any
interest or fees.
Section 4.5 PRORATION OF PAYMENTS. If any Bank or other holder of a
Loan shall obtain any payment or other recovery (whether voluntary, involuntary,
by application of offset, pursuant to the guaranty hereunder, or otherwise) on
account of principal of, interest on, or fees with respect to any Loan, or
payment of any Letter of Credit Obligations, in any case in excess of the share
of payments and other recoveries of other Banks or holders, such Bank or other
holder shall purchase from the other Banks or holders, in a manner to be
specified by the Agent, such participations in the Loans or Letter of Credit
Obligations held by such other Banks or holders as shall be necessary to cause
such purchasing Bank or other holder to share the excess payment or other
recovery ratably with each of such other Banks or holders; PROVIDED, HOWEVER,
that if all or any portion of the excess payment or other recovery is thereafter
recovered from such purchasing Bank or holder, the purchase shall be rescinded
and the purchase price restored to the extent of such recovery, but without
interest.
ARTICLE V ADDITIONAL PROVISIONS RELATING TO LOANS
AND LETTERS OF CREDIT
Section 5.1 INCREASED COSTS. If, as a result of any law, rule,
regulation, treaty or directive, or any change therein or in the interpretation
or administration thereof, or compliance by the Banks with any request or
directive (whether or not having the force of law) from any court, central bank,
governmental authority, agency or instrumentality, or comparable agency:
(a) any tax, duty or other charge with respect to any Loan, the Notes,
the Letters of Credit or the Commitments is imposed, modified or deemed
applicable, or the basis of taxation of payments to any Bank of
interest or principal of the Loans or of the Facility
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Fees (other than taxes imposed on the overall net income of such Bank
by the jurisdiction in which such Bank has its principal office) is
changed;
(b) any reserve, special deposit, special assessment or similar
requirement against assets of, deposits with or for the account of, or
credit extended by, any Bank is imposed, modified or deemed applicable;
or
(c) any other condition affecting this Agreement or the Commitments is
imposed on any Bank or the relevant funding markets;
and such Bank determines that, by reason thereof, the cost to such Bank of
making or maintaining the Loans, issuing or participating in the Letters of
Credit or extending its Commitment is increased, or the amount of any sum
receivable by such Bank hereunder or under the Notes in respect of any Loan is
reduced;
THEN, the Borrower shall pay to such Bank upon demand such additional amount or
amounts as will compensate such Bank (or the controlling Person in the instance
of (c) above) for such additional costs or reduction (provided that such Bank
has not been compensated for such additional cost or reduction in the
calculation of the Eurodollar Reserve Rate). Simultaneously with such Bank's
demand for any such additional amount, the Bank shall submit to the Borrower a
certificate in reasonable detail of such Bank setting forth the basis for the
determination of such additional amount payable under this SECTION 5.1.
Determinations by each Bank for purposes of this SECTION 5.1 of the additional
amounts required to compensate such Bank shall be conclusive in the absence of
manifest error. In determining such amounts, the Banks may use any reasonable
averaging, attribution and allocation methods.
Section 5.2 DEPOSITS UNAVAILABLE OR INTEREST RATE UNASCERTAINABLE OR
INADEQUATE; IMPRACTICABILITY. If the Agent determines (which determination shall
be conclusive and binding on the parties hereto) that:
(a) deposits of the necessary amount for the relevant Interest Period
for any Eurodollar Advance are not available in the relevant markets or
that, by reason of circumstances affecting such market, adequate and
reasonable means do not exist for ascertaining the Eurodollar Interbank
Rate for such Interest Period;
(b) the Eurodollar Rate (Reserve Adjusted) will not adequately and
fairly reflect the cost to the Banks of making or funding the
Eurodollar Advance for a relevant Interest Period; or
(c) the making or funding of Eurodollar Advances has become
impracticable as a result of any event occurring after the date of this
Agreement which, in the opinion of the Agent, materially and adversely
affects such Advances or any Bank's Commitment or the relevant market;
the Agent shall promptly give notice of such determination to the Borrower, and
(i) any notice of a new Eurodollar Advance previously given by the Borrower and
not yet borrowed or converted shall be deemed to be a notice to make a Federal
Funds Rate Advance, and (ii) the Borrower shall be obligated to either prepay in
full any outstanding Eurodollar Advances, without premium or penalty on the last
day of the current Interest Period with respect thereto or convert any such
Eurodollar Advance to a Federal Funds Rate Advance on such last day.
Section 5.3 CHANGES IN LAW RENDERING EURODOLLAR ADVANCES UNLAWFUL. If
at any time due to the adoption of any law, rule, regulation, treaty or
directive, or any change therein or in the interpretation or administration
thereof by any court, central bank, governmental authority,
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agency or instrumentality, or comparable agency charged with the
interpretation or administration thereof, or for any other reason arising
subsequent to the date of this Agreement, it shall become unlawful or
impossible for any Bank to make or fund any Eurodollar Advance, the
obligation of such Bank to provide such Advance shall, upon the happening of
such event, forthwith be suspended for the duration of such illegality or
impossibility. If any such event shall make it unlawful or impossible for the
Bank to continue any Eurodollar Advance previously made by it hereunder, such
Bank shall, upon the happening of such event, notify the Agent and the
Borrower thereof in writing, and the Borrower shall, at the time notified by
such Bank, either convert each such unlawful Advance to a Federal Funds Rate
Advance or repay such Advance in full, together with accrued interest
thereon, subject to the provisions of SECTION 2.6.
Section 5.4 CAPITAL ADEQUACY. The Borrower shall pay directly to each
Bank from time to time on request of such Bank such amounts as such Bank may
determine to be necessary to compensate such Bank (or, without duplication, the
bank holding company of which such Bank is a subsidiary) for any costs that it
determines are attributable to the maintenance by such Bank (or such bank
holding company), pursuant to any law or regulation or any interpretation,
directive or request (whether or not having the force of law and whether or not
failure to comply therewith would be unlawful) of any court or governmental or
monetary authority (i) following any Regulatory Change or (ii) implementing at
the national level any risk-based capital guideline or other requirement
(whether or not having the force of law and whether or not the failure to comply
therewith would be unlawful) hereafter issued by any government or governmental
or supervisory authority implementing the Basle Accord (including, without
limitation, the Final Risk-Based Capital Guidelines of the Board of Governors of
the Federal Reserve System (12 CFR Part 208, Appendix A; 12 CFR Part 225,
Appendix A) and the Final Risk-Based Capital Guidelines of the Office of the
Comptroller of the Currency (12 CFR Part 3, Appendix A)), of capital in respect
of its Commitment, Loans or participation in Letters of Credit (such
compensation to include, without limitation, an amount equal to any reduction of
the rate of return on assets or equity of such Bank (or such bank holding
company) to a level below that which such Bank (or such bank holding company)
could have achieved but for such law, regulation, interpretation, directive or
request). Simultaneously with such Bank's request for any such amount, the Bank
shall submit to the Borrower a certificate in reasonable detail of such Bank
setting forth the basis for the determination of such amount payable under this
SECTION 5.4. Determinations by each Bank for purposes of this SECTION 5.4 shall
be conclusive in the absence of manifest error. In determining such amounts, the
Banks may use any reasonable averaging, attribution and allocation methods. For
purposes of this SECTION 5.4, "Regulatory Change" shall mean, with respect to
any Bank, any change after the date of this Agreement in Federal, state or
foreign law or regulations (including, without limitation, Regulation D) or the
adoption or making after such date of any interpretation, directive or request
applying to a class of banks (other than those applying solely to banks formally
determined by the applicable regulator to be in a financially troubled
condition) including such Bank of or under any Federal, state or foreign law or
regulations (whether or not having the force of law and whether or not failure
to comply therewith would be unlawful) by any court or governmental or monetary
authority charged with the interpretation or administration thereof. For
purposes of this SECTION 5.4, "Basle Accord" shall mean the proposals for
risk-based capital framework described by the Basle Committee on Banking
Regulations and Supervisory Practices in its paper entitled "International
Convergence of Capital Measurement and Capital Standards" dated July 1988, as
amended, modified and supplemented and in effect from time to time or any
replacement thereof.
Section 5.5 DISCRETION OF THE BANKS AS TO MANNER OF FUNDING.
Notwithstanding any provision of this Agreement to the contrary, each Bank shall
be entitled to fund and maintain its funding of all or any part of the Loans in
any manner it elects; it being understood, however, that for purposes of this
Agreement, all determinations hereunder shall be made as if the Banks had
actually funded and maintained each Eurodollar Advance during the Interest
Period for such Advance through the purchase of deposits having a term
corresponding to such Interest Period and bearing an interest rate equal to the
Eurodollar Interbank Rate for such Interest Period.
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ARTICLE VI CONDITIONS PRECEDENT
Section 6.1 CONDITIONS OF INITIAL LOAN OR INITIAL LETTERS OF CREDIT.
The obligation of the Banks to make the initial Loan hereunder or of the Agent
to issue the initial Letter of Credit hereunder shall be subject to the
satisfaction of the conditions precedent, in addition to the applicable
conditions precedent set forth in SECTION 6.2 below, that the Agent shall have
received all of the following, in form and substance satisfactory to the Agent,
each duly executed and certified or dated the date of the initial Loan or the
initial Letter of Credit, as applicable, or such other date as is satisfactory
to the Agent:
(a) The Revolving Notes and the Swing Line Note executed by a duly
authorized officer (or officers) of the Borrower.
(b) A copy of the corporate resolution of the Borrower authorizing the
execution, delivery and performance of the Loan Documents, certified by
the Secretary or an Assistant Secretary of the Borrower.
(c) An incumbency certificate showing the names and titles, and bearing
the signatures of, the officers of the Borrower authorized to execute
the Loan Documents and to request Loans and Letters of Credit
hereunder, certified by the Secretary or an Assistant Secretary of the
Borrower.
(d) A copy of the Articles or Certificate of Incorporation of the
Borrower with all amendments thereto, certified by the appropriate
governmental official of the jurisdiction of its incorporation.
(e) A Certificate of Good Standing for the Borrower in the jurisdiction
of its incorporation, certified by the appropriate governmental
officials.
(f) A copy of the By-Laws of the Borrower with all amendments thereto,
certified by the Secretary or an Assistant Secretary of the Borrower.
(g) An opinion of counsel to the Borrower, addressed to the Agent and
the Banks, in form and content acceptable to the Agent and its counsel
Section 6.2 CONDITIONS PRECEDENT TO ALL LOANS AND ALL LETTERS OF
CREDIT. The obligation of the Banks to make any Loan hereunder (including the
initial Loan) and of the Agent to issue any Letter of Credit hereunder
(including the initial Letter of Credit) shall be subject to the satisfaction of
the following conditions precedent (and any request for a Loan or a Letter of
Credit shall be deemed a representation and warranty by the Borrower that the
following have been satisfied):
(a) Before and after giving effect to such Loan or such Letter of
Credit, as applicable, the representations and warranties contained in
ARTICLE VII shall be true and correct, as though made on the date of
such Loan or such Letter of Credit, as applicable (except to the extent
that any such representation or warranty is expressly stated to have
been
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made as of a specific date, then such representation or warranty
shall be true and correct as of such specific date).
(b) Before and after giving effect to such Loan or such Letter of
Credit, as applicable, no Default or Event of Default shall have
occurred and be continuing.
ARTICLE VII REPRESENTATIONS AND WARRANTIES
To induce the Agent and the Banks to enter into this Agreement, to
grant the Commitments and to make Loans and to issue Letters of Credit
hereunder, the Borrower represents and warrants to the Agent and the Banks:
Section 7.1 ORGANIZATION, STANDING, ETC. The Borrower and each of its
corporate Subsidiaries are corporations duly incorporated and validly existing
and in good standing under the laws of the jurisdiction of their respective
incorporation and have all requisite corporate power and authority to carry on
their respective businesses as now conducted and to (in the instance of the
Borrower) enter into the Loan Documents and to perform its obligations under the
Loan Documents. The Borrower and each of its Subsidiaries are duly qualified and
in good standing as a foreign corporation in each jurisdiction in which the
character of the properties owned, leased or operated by it or the business
conducted by it makes such qualification necessary.
Section 7.2 AUTHORIZATION AND VALIDITY. The execution, delivery and
performance by the Borrower of the Loan Documents have been duly authorized by
all necessary corporate action by the Borrower, and the Loan Documents
constitute the legal, valid and binding obligations of the Borrower, enforceable
against the Borrower in accordance with their respective terms, subject to
limitations as to enforceability which might result from bankruptcy, insolvency,
moratorium and other similar laws affecting creditors' rights generally and
subject to limitations on the availability of equitable remedies.
Section 7.3 NO CONFLICT; NO DEFAULT. The execution, delivery and
performance by the Borrower of the Loan Documents will not (a) violate any
provision of any law, statute, rule or regulation or any order, writ, judgment,
injunction, decree, determination or award of any court, governmental agency or
arbitrator presently in effect having applicability to the Borrower, (b) violate
or contravene any provisions of the Articles (or Certificate) of Incorporation
or by-laws of the Borrower, or (c) result in a breach of or constitute a default
under any indenture, loan or credit agreement or any other agreement, lease or
instrument to which the Borrower is a party or by which it or any of its
properties may be bound or result in the creation of any Lien on any asset of
the Borrower or any Subsidiary. Neither the Borrower nor any Subsidiary is in
default under or in violation of any such law, statute, rule or regulation,
order, writ, judgment, injunction, decree, determination or award or any such
indenture, loan or credit agreement or other agreement, lease or instrument in
any case in which the consequences of such default or violation could constitute
an Adverse Event. No Default or Event of Default has occurred and is continuing.
Section 7.4 GOVERNMENT CONSENT. No order, consent, approval, license,
authorization or validation of, or filing, recording or registration with, or
exemption by, any governmental or public body or authority is required on the
part of the Borrower to authorize, or is required in
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connection with the execution, delivery and performance of, or the legality,
validity, binding effect or enforceability of, the Loan Documents.
Section 7.5 FINANCIAL STATEMENTS AND CONDITION. The audited financial
statements of Interra Financial Incorporated (now the Borrower) as of December
31, 1997 and of Dain Bosworth Incorporated, Rauscher Pierce Refsnes, Inc. and
Interra Clearing Services Inc. (Dain Bosworth Incorporated, Rauscher Pierce
Refsnes, Inc. and Interra Clearing Services Inc. have now been merged into Dain
Rauscher Incorporated) as of December 31, 1997, and the unaudited pro forma
consolidating balance sheets of Dain Rauscher Incorporated as of December 31,
1997, as heretofore furnished to the Banks, have been prepared in accordance
with GAAP on a consistent basis and fairly present the financial condition of
the foregoing entities as at such dates and the results of their operations and
changes in financial position for the respective periods then ended. As of the
dates of such financial statements, none of the foregoing entities had any
material obligation, contingent liability, liability for taxes or long-term
lease obligation which is not reflected in such financial statements or in the
notes thereto. Since December 31, 1997, no Adverse Event has occurred.
Section 7.6 LITIGATION AND CONTINGENT LIABILITIES. Except as described
in EXHIBIT B, there are no actions, suits or proceedings pending or, to the
knowledge of the Borrower, threatened against or affecting the Borrower or any
Subsidiary or any of their properties before any court or arbitrator, or by any
governmental agency or instrumentality which, if determined adversely to the
Borrower or such Subsidiary, could constitute an Adverse Event. Except as
described in EXHIBIT C, neither the Borrower nor any Subsidiary has any
contingent liabilities which are material to the Borrower and the Subsidiaries
as a consolidated enterprise.
Section 7.7 COMPLIANCE. The Borrower and its Subsidiaries are in
compliance with all statutes and governmental rules and regulations applicable
to them, except where failure to be in compliance, individually or in the
aggregate, could not reasonably be expected to result in an Adverse Event.
Section 7.8 ENVIRONMENTAL, HEALTH AND SAFETY LAWS. There does not exist
any violation by the Borrower or any Subsidiary of any applicable federal, state
or local law, rule or regulation or order of any government, governmental
department, board, agency or other instrumentality relating to environmental,
pollution, health or safety matters which will or threatens to impose a material
liability on the Borrower or a Subsidiary or which would require a material
expenditure by the Borrower or such Subsidiary to cure. Neither the Borrower nor
any Subsidiary has received any notice to the effect that any part of its
operations or properties is not in material compliance with any such law, rule,
regulation or order or notice that it or its property is the subject of any
governmental investigation evaluating whether any remedial action is needed to
respond to any release of any toxic or hazardous waste or substance into the
environment, the consequences of which non-compliance or remedial action could
constitute an Adverse Event.
Section 7.9 ERISA. Each Plan complies with all material applicable
requirements of ERISA and the Code and with all material applicable rulings and
regulations issued under the provisions of ERISA and the Code setting forth
those requirements. No Reportable Event, other than a Reportable Event for which
the reporting requirements have been waived by regulations of the PBGC, has
occurred and is continuing with respect to any Plan. All of the minimum funding
standards applicable to such Plans have been satisfied and there exists no event
or
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condition which would permit the institution of proceedings to terminate any
Plan under Section 4042 of ERISA. The current value of the Plans' benefits
guaranteed under Title IV or ERISA does not exceed the current value of the
Plans' assets allocable to such benefits.
Section 7.10 MARGIN REGULATIONS. Certain of the Material Subsidiaries
of the Borrower are broker-dealers subject to Regulation T. The Material
Subsidiaries of the Borrower which are subject to Regulation T maintain
procedures and internal controls reasonably adapted to insure that such Material
Subsidiaries do not extend or maintain credit to or for their respective
customers other than in accordance with the provisions of Regulation T. Neither
the making of any Loan hereunder, nor the use of the proceeds thereof, will
violate the provisions of Regulation T, U or X.
Section 7.11 OWNERSHIP OF PROPERTY; LIENS. Each of the Borrower and the
Subsidiaries has good and marketable title to its real properties and good and
sufficient title to its other properties, including all properties and assets
referred to as owned by the Borrower and its Subsidiaries in the audited
financial statement of the Borrower referred to in SECTION 7.5 (other than
property disposed of since the date of such financial statement in the ordinary
course of business). None of the properties, revenues or assets of the Borrower
is subject to a Lien, except for (a) Liens disclosed in the financial statements
referred to in SECTION 7.5, (b) Liens listed on EXHIBIT D, or (c) Liens allowed
under SECTION 9.10.
Section 7.12 TAXES. Each of the Borrower and the Subsidiaries has filed
all federal, state and local tax returns required to be filed and has paid or
made provision for the payment of all taxes due and payable pursuant to such
returns and pursuant to any assessments made against it or any of its property
and all other taxes, fees and other charges imposed on it or any of its property
by any governmental authority (other than taxes, fees or charges the amount or
validity of which is currently being contested in good faith by appropriate
proceedings and with respect to which reserves in accordance with GAAP have been
provided on the books of the Borrower). No tax Liens have been filed and no
material claims are being asserted with respect to any such taxes, fees or
charges. The charges, accruals and reserves on the books of the Borrower in
respect of taxes and other governmental charges are adequate.
Section 7.13 TRADEMARKS, PATENTS. Each of the Borrower and the
Subsidiaries possesses or has the right to use all of the patents, trademarks,
trade names, service marks and copyrights, and applications therefor, and all
technology, know-how, processes, methods and designs used in or necessary for
the conduct of its business, without known conflict with the rights of others.
Section 7.14 INVESTMENT COMPANY ACT. Neither the Borrower nor any
Subsidiary is an "investment company" or a company "controlled" by an investment
company within the meaning of the Investment Company Act of 1940, as amended.
Section 7.15 PUBLIC UTILITY HOLDING COMPANY ACT. Neither the Borrower
nor any Subsidiary is a "holding company" or a "subsidiary company" of a holding
company or an "affiliate" of a holding company or of a subsidiary company of a
holding company within the meaning of the Public Utility Holding Company Act of
1935, as amended.
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Section 7.16 SUBSIDIARIES. EXHIBIT E sets forth as of the date of this
Agreement a list of all Subsidiaries which are directly owned by the Borrower
and which are currently operating and the number and percentage of the shares of
each class of capital stock owned beneficially or of record by the Borrower
therein, and the jurisdiction of incorporation of each such Subsidiary.
Section 7.17 REGISTERED BROKER-DEALER; MEMBERSHIP. Each Subsidiary
engaged in the business of a securities broker-dealer is duly registered with
the Securities and Exchange Commission as a broker-dealer and is a member in
good standing of the National Association of Securities Dealers, Inc. and of the
New York Stock Exchange, Inc.
Section 7.18 ASSESSMENTS BY THE SECURITIES INVESTOR PROTECTION
CORPORATION. Each Subsidiary engaged in the business of a securities
broker-dealer is not in arrears with respect to any assessment made upon it by
the Securities Investor Protection Corporation.
ARTICLE VIII AFFIRMATIVE COVENANTS
From the date of this Agreement and thereafter until the Commitments
are terminated or expire and the Loans, the Letter of Credit Obligations and all
other liabilities of the Borrower to the Banks and/or the Agent hereunder and
under the other Loan Documents have been paid in full, the Borrower agrees that:
Section 8.1 FINANCIAL STATEMENTS AND REPORTS. The Borrower will furnish
to the Banks:
(a) As soon as available and in any event within 90 days after the end
of each fiscal year of the Borrower, the annual audit reports of the
Borrower and Dain Rauscher Incorporated and the unaudited financial
statements of Dain Rauscher Lending Services prepared on a consolidated
basis and in conformity with GAAP, consisting of at least statements of
income, cash flow and stockholders' equity, and a consolidated balance
sheet as at the end of such year, setting forth in each case in
comparative form corresponding figures from the previous annual audit,
certified without qualification by certified public independent
auditors of recognized standing selected by the Borrower and acceptable
to the Agent.
(b) Together with the audited financial statements required under
SECTION 8.1(a), a statement by the firm of certified public independent
auditors performing such audit stating that it has reviewed this
Agreement and that in performing its examination nothing came to its
attention that caused it to believe that any Default or Event of
Default exists in respect of the Borrower's covenants set forth in
SECTIONS 9.8, 9.9, 9.13 or 9.14, or, if such Default or Event of
Default exists, describing its nature.
(c) As soon as available and in any event within 45 days after the end
of each fiscal quarter of each fiscal year of the Borrower, copies of
the unaudited consolidated and consolidating balance sheets and income
statements of the Borrower and its Subsidiaries prepared in accordance
with GAAP applied on a basis consistent with the accounting practices
applied in the annual audit reports referred to in SECTION 8.1(a),
signed by the Borrower's treasurer or chief financial officer, for such
quarter and for the period from the beginning of such fiscal year to
the end of such quarter.
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(d) Together with the financial statements furnished by the Borrower
under SECTIONS 8.1(a) and 8.1(c), a Compliance Certificate signed by
the treasurer or the chief financial officer of the Borrower
demonstrating in reasonable detail compliance (or noncompliance, as the
case may be) with each of the financial ratios and restrictions
contained in ARTICLE IX and stating that as at the date of each such
financial statement there did not exist any Default or Event of Default
or, if such Default or Event of Default existed, specifying the nature
and period of existence thereof and what action the Borrower proposes
to take with respect thereto.
(e) Immediately upon becoming aware of any Default or Event of Default,
a notice describing the nature thereof and what action the Borrower
proposes to take with respect thereto.
(f) Immediately upon becoming aware of the occurrence, with respect to
any Plan, of any Reportable Event (other than a Reportable Event for
which the reporting requirements have been waived by PBGC regulations)
or any "prohibited transaction" (as defined in Section 4975 of the
Code), a notice specifying the nature thereof and what action the
Borrower proposes to take with respect thereto, and, when received,
copies of any notice from PBGC of intention to terminate or have a
trustee appointed for any Plan.
(g) As soon as available and in any event within 15 days after mailing
or filing thereof, copies of all financial statements, reports and
proxy statements mailed to the Borrower's shareholders.
(h) As soon as available and in any event within 15 days after filing
thereof, copies of all quarterly FOCUS reports, proposed subordination
filings and notices of all material violations of rules and regulations
of the Securities and Exchange Commission or any material securities
exchange which the Borrower or any Subsidiary shall file with the
Securities and Exchange Commission or any material securities exchange;
(i) Immediately upon becoming aware of the occurrence thereof, notice
of the suspension or expulsion of any Subsidiary from membership in the
New York Stock Exchange, Inc. or from membership in the National
Association of Securities Dealers, Inc.;
(j) Immediately upon becoming aware of the occurrence thereof, notice
of the institution of any litigation, arbitration or governmental
proceeding which could result in an Adverse Event, notice of any
development in any pending litigation, arbitration or governmental
proceeding which could result in an Adverse Event and notice of the
rendering of a judgment or decision in any litigation, arbitration or
governmental proceeding which could result in an Adverse Event, and, in
any such circumstance, the steps being taken by the Person affected by
such circumstance.
(k) Immediately upon becoming aware of the occurrence thereof, notice
of any violation as to any environmental matter by the Borrower or any
Subsidiary and of the commencement of any judicial or administrative
proceeding relating to health, safety or environmental matters (i) in
which an adverse determination or result could result in the revocation
of or have a material adverse effect on any operating permits, air
emission
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permits, water discharge permits, hazardous waste permits or other
permits held by the Borrower or any Subsidiary which are material
to the operations of the Borrower or such Subsidiary, or (ii) which
will or threatens to impose a material liability on the Borrower or
such Subsidiary to any Person or which will require a material
expenditure by the Borrower or such Subsidiary to cure any alleged
problem or violation.
(l) From time to time, such other information regarding the business,
operation and financial condition of the Borrower and the Subsidiaries
as any Bank may reasonably request.
Section 8.2 CORPORATE EXISTENCE. The Borrower will, and will cause each
Subsidiary to, maintain its corporate existence in good standing under the laws
of its jurisdiction of incorporation and its qualification to transact business
in each jurisdiction in which the character of the properties owned, leased or
operated by it or the business conducted by it makes such qualification
necessary.
Section 8.3 INSURANCE. The Borrower will, and will cause each
Subsidiary to, maintain with financially sound and reputable insurance companies
such insurance as may be required by law and such other insurance in such
amounts and against such hazards as is customary in the case of reputable
corporations engaged in the same or similar business and similarly situated.
Section 8.4 PAYMENT OF TAXES AND CLAIMS. The Borrower will, and will
cause each Subsidiary to, file all tax returns and reports which are required by
law to be filed by it and pay before they become delinquent all taxes,
assessments and governmental charges and levies imposed upon it or its property
and all claims or demands of any kind (including, without limitation, those of
suppliers, mechanics, carriers, warehouses, landlords and other like Persons)
which, if unpaid, might result in the creation of a Lien upon its property;
PROVIDED that the foregoing items need not be paid if they are being contested
in good faith by appropriate proceedings, and as long as the Borrower's or such
Subsidiary's title to its property is not materially adversely affected, its use
of such property in the ordinary course of its business is not materially
interfered with and adequate reserves with respect thereto have been set aside
on the Borrower's or such Subsidiary's books in accordance with GAAP.
Section 8.5 INSPECTION. The Borrower will, and will cause each
Subsidiary to, permit any Person designated by any Bank to visit and inspect any
of its properties, corporate books and financial records, to examine and to make
copies of its books of accounts and other financial records, and to discuss the
affairs, finances and accounts of the Borrower and the Subsidiaries with, and to
be advised as to the same by, its officers at such reasonable times and
intervals as such Bank may designate.
Section 8.6 MAINTENANCE OF PROPERTIES. The Borrower will, and will
cause each Subsidiary to, maintain its properties used or useful in the conduct
of its business in good condition, repair and working order, and supplied with
all necessary equipment, and make all necessary repairs, renewals, replacements,
betterments and improvements thereto, all as may be necessary so that the
business carried on in connection therewith may be properly and advantageously
conducted at all times.
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Section 8.7 BOOKS AND RECORDS. The Borrower will, and will cause each
Subsidiary to, keep adequate and proper records and books of account in which
full and correct entries will be made of its dealings, business and affairs.
Section 8.8 COMPLIANCE. The Borrower will, and will cause each
Subsidiary to, comply in all respects with all laws, rules, regulations, orders,
writs, judgments, injunctions, decrees or awards to which it may be subject,
except where failure to be in compliance, individually or in the aggregate,
could not reasonably be expected to result in an Adverse Event.
Section 8.9 ERISA. The Borrower will, and will cause each Subsidiary
to, maintain each Plan in compliance with all material applicable requirements
of ERISA and of the Code and with all material applicable rulings and
regulations issued under the provisions of ERISA and of the Code.
Section 8.10 ENVIRONMENTAL MATTERS. The Borrower will, and will cause
each Subsidiary to, observe and comply with all laws, rules, regulations and
orders of any government or government agency relating to health, safety,
pollution, hazardous materials or other environmental matters to the extent
non-compliance could result in a material liability or otherwise constitute or
result in an Adverse Event.
Section 8.11 GENERAL NET CAPITAL REQUIREMENT. The Borrower will cause
each Subsidiary subject to Rule 15c3-1 to at all times maintain its Net Capital
as required by Rule 15c3-1.
ARTICLE IX NEGATIVE COVENANTS
From the date of this Agreement and thereafter until the Commitments
are terminated or expire and the Loans, the Letter of Credit Obligations and all
other liabilities of the Borrower to the Banks and/or the Agent hereunder and
under the other Loan Documents have been paid in full, the Borrower agrees that:
Section 9.1 MERGER AND CONSOLIDATION. The Borrower will not, and will
not permit any Subsidiary to, merge or consolidate or enter into any analogous
reorganization or transaction with any Person; PROVIDED, HOWEVER, that the
restrictions contained in this SECTION 9.1 shall not apply to or prevent the
following so long as no Event of Default exists:
(a) any wholly-owned Subsidiary may be merged with or liquidated into
the Borrower (if the Borrower is the surviving corporation) or any
other wholly-owned Subsidiary of the Borrower; and
(b) the acquisition of all or substantially all of the assets or stock
of any Person to the extent permitted by SECTION 9.8(g).
Section 9.2 SALE OF ASSETS. The Borrower will not, and will not permit
any Material Subsidiary to, sell, transfer, lease or otherwise convey all or any
substantial part of its assets other than in the ordinary course of business and
except for sales or other transfers by a wholly-owned Subsidiary to the Borrower
or another wholly-owned Subsidiary of the Borrower.
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Section 9.3 PLANS. The Borrower will not, and will not permit any
Material Subsidiary to, permit any condition to exist in connection with any
Plan which might constitute grounds for the PBGC to institute proceedings to
have such Plan terminated or a trustee appointed to administer such Plan, permit
any Plan to terminate under any circumstances which would cause the lien
provided for in Section 4068 of ERISA to attach to any property, revenue or
asset of the Borrower or any Material Subsidiary or permit the underfunded
amount of Plan benefits guaranteed under Title IV of ERISA to exceed $5,000,000.
Section 9.4 CHANGE IN NATURE OF BUSINESS. The Borrower will not, and
will not permit any Subsidiary to, conduct any business other than the business
of the Borrower or of such Subsidiary carried on as of the date hereof and such
other businesses which are related to the broker-dealer, investment banking and
related financial services activities of the Borrower or such Subsidiary.
Section 9.5 OWNERSHIP OF STOCK IN MATERIAL SUBSIDIARIES. The Borrower
will not, and will not permit any Material Subsidiary to, take any action which
would result in a decrease in the Borrower's ownership interest in any Material
Subsidiary (including, without limitation, decrease in the percentage of the
shares of any class of stock in a Material Subsidiary).
Section 9.6 OTHER AGREEMENTS. The Borrower will not, and will not
permit any Material Subsidiary to, enter into any agreement, bond, note or other
instrument with or for the benefit of any Person other than the Banks which
would: (a) contain a covenant generally prohibiting the Borrower or such
Material Subsidiary from granting Liens to the Banks; provided, however, nothing
in this SECTION 9.6(a) shall prohibit any Material Subsidiary from granting
Liens in specific assets to other Persons and from agreeing not to grant Liens
in such specific assets to the Banks; (b) be violated or breached by the
Borrower's performance of its obligations under the Loan Documents; or (c)
prohibit or otherwise limit in any way or to any extent the ability of any
Subsidiary to declare or pay dividends to the Borrower.
Section 9.7 RESTRICTED PAYMENTS. The Borrower will not, and will not
permit any Subsidiary to, either: (a) purchase or redeem or otherwise acquire
for value any shares of the Borrower's or any Subsidiary's stock, declare or pay
any dividends thereon (other than stock dividends and dividends payable solely
to the Borrower), make any distribution on, or payment on account of the
purchase, redemption, defeasance or other acquisition or retirement for value
of, any shares of the Borrower's or any Subsidiary's stock or set aside any
funds for any such purpose (other than payment to, or on account of or for the
benefit of, the Borrower only) if a Default or Event of Default has occurred and
is continuing or if, after giving effect to any such purchases, redemption,
acquisition, dividend, distribution or payment, a Default or an Event of Default
would have occurred and be continuing; or (b) directly or indirectly make any
payment on, or redeem, repurchase, defease, or make any sinking fund payment on
account of, or any other provision for, or otherwise pay, acquire or retire for
value, any Indebtedness of the Borrower or any Subsidiary that is subordinated
in right of payment to the Loans (whether pursuant to its terms or by operation
of law), except for regularly-scheduled payments of interest and principal
(which shall not include payments contingently required upon occurrence of a
change of control or other event) that are not otherwise prohibited hereunder or
under the document or agreement stating the terms of such subordination.
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Section 9.8 INVESTMENTS. The Borrower will not make, and the Borrower
will not permit to exist, any direct or indirect investment (whether by means of
equity, debt or otherwise) by the Borrower in any other Person, except:
(a) Investments by the Borrower in Dain Rauscher Incorporated;
(b) Investments by the Borrower or Dain Rauscher Incorporated in
Subsidiaries other than Dain Rauscher Incorporated in an aggregate
amount not to exceed at any time eight percent (8%) of the Borrower's
Consolidated Net Worth;
(c) Investments made after the date of this Agreement to acquire all or
substantially all of the assets or stock of other Persons, provided
that (i) the sum of all cash consideration paid, the current market
value (as of the date of such Investment) of all property given and all
Indebtedness incurred and assumed in connection with all such
investments made after the date of this Agreement shall not exceed an
aggregate amount of $100,000,000 and (ii) any Person whose assets or
stock are so acquired shall be engaged solely in a business carried on
by the Borrower or a Subsidiary of the Borrower on the date of this
Agreement. The investments made by the Borrower to acquire WAH pursuant
to the WAH Acquisition Agreement shall be excluded for purposes of
determining the Borrower's compliance with this SECTION 9.8(c).
Section 9.9 INDEBTEDNESS AND CONTINGENT LIABILITIES. The Borrower will
not incur, create, issue, assume or suffer to exist any Indebtedness or agree to
maintain the net worth of or working capital of, or provide funds to, satisfy
any other financial covenants applicable to, any other Person, except:
(a) Indebtedness under this Agreement and the other Loan Documents;
(b) Current liabilities of the Borrower, other than for borrowed money,
incurred in the ordinary course of business;
(c) Indebtedness (other than Indebtedness permitted under SECTIONS
9.9(a), 9.9(d) and 9.9(e)) in an aggregate amount not to exceed at any
time $50,000,000; PROVIDED, HOWEVER, that the sum of the Borrower's
Indebtedness permitted under this SECTION 9.9(c) and the Borrower's
guarantees permitted under SECTION 9.9(d) below shall not exceed at any
time an aggregate amount of $125,000,000 (the WAH Subordinated
Debentures (i) shall not be included as Indebtedness for purposes of
determining the Borrower's compliance with the $50,000,000 requirement
of this SECTION 9.9(c) and (ii) shall be included as Indebtedness for
purposes of determining the Borrower's compliance with the $125,000,000
requirement of this SECTION 9.9(c);
(d) Guarantees by the Borrower of Indebtedness for borrowed money of
Dain Rauscher Lending Services in an aggregate amount not to exceed at
any time $100,000,000; PROVIDED, HOWEVER, that (i) such guarantees
shall be permitted only for so long as the Borrower and Dain Rauscher
Lending Services are in compliance with each of the following
requirements: (A) the credit facilities under which Dain Rauscher
Lending Services has incurred such guaranteed Indebtedness are made
available by one or more of the Banks, (B) the aggregate amount of such
guaranteed Indebtedness
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which Dain Rauscher Lending Services may borrow under such credit
facilities shall not exceed at any time an aggregate amount of
$100,000,000, (C) all of such guaranteed Indebtedness shall be
secured by Dain Rauscher Lending Services' pledge of the underlying
loans made by Dain Rauscher Lending Services to its customers,
including the stock pledged by customers of Dain Rauscher Lending
Services to Dain Rauscher Lending Services, (D) if the stock
pledged by the customers of Dain Rauscher Lending Services to Dain
Rauscher Lending Services are subject to Rule 144/Rule 145
restrictions, such pledged stock meets Rule 144/Rule 145
requirements for saleability and are not subject to a lockup or
other restrictions; and (E) all loans made by Dain Rauscher Lending
Services to its customers meet the following maximum loan to market
value collateral requirements with respect to the stock pledged by
such customers: (1) with respect to each loan at the time such loan
is made, the ratio of the loan amount to the market value of the
pledged stock is not more than 50% and (2) with respect to each
loan at all times after the time such loan is made, the ratio of
the loan amount to the market value of the pledged stock value is
not more than 65%; and (ii) the sum of the Borrower's guarantees of
Indebtedness for borrowed money of Dain Rauscher Lending Services
permitted under this SECTION 9.9(d) and the Borrower's Indebtedness
permitted under SECTION 9.9(c) above shall not exceed at any time
the aggregate amount of $125,000,000 (the WAH Subordinated
Debentures shall be included as Indebtedness for purposes of
determining the Borrower's compliance with the $125,000,000
requirement of this SECTION 9.9(d)(ii));
(e) Guaranties by the Borrower of existing subordinated loans to Dain
Bosworth and Rauscher Pierce Refsnes in the aggregate amount of
$15,083,324 as of the date of this Agreement and maturing on October 1,
1998; provided, however, that this exception shall not apply to any
extension or renewal of such loans or to any increase in the principal
amounts thereof;
(f) The WAH Subordinated Debentures.
Section 9.10 LIENS. The Borrower will not create, incur, assume or
suffer to exist any Lien with respect to any of its property, revenues or assets
now owned or hereafter arising or acquired, except:
(a) Liens in connection with the acquisition of property after the date
hereof by way of purchase money mortgage, conditional sale or other
title retention agreement, Capitalized Lease or other deferred payment
contract, and attaching only to the property being acquired if the
Indebtedness secured thereby does not exceed 100% of the fair market
value of such property at the time of acquisition thereof;
(b) Liens existing on the date of this Agreement and disclosed on
EXHIBIT D hereto;
(c) Deposits or pledges to secure payment of workers' compensation,
unemployment insurance, old age pensions or other social security
obligations, in the ordinary course of business of the Borrower or a
Subsidiary;
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(d) Liens for taxes, fees, assessments and governmental charges not
delinquent or to the extent that payments therefor shall not at the
time be required to be made in accordance with the provisions of
SECTION 8.4; and
(e) Deposits to secure the performance of bids, trade contracts,
leases, statutory obligations and other obligations of a like nature
incurred in the ordinary course of business.
Section 9.11 TRANSACTIONS WITH RELATED PARTIES. The Borrower will
not, and will not permit any Subsidiary to, enter into or be a party to any
transaction or arrangement, including, without limitation, the purchase,
sale, lease or exchange of property or the rendering of any service, with any
Related Party, except in the ordinary course of and pursuant to the
reasonable requirements of the Borrower's or the applicable Subsidiary's
business and upon fair and reasonable terms no less favorable to the Borrower
or such Subsidiary than would obtain in a comparable arm's-length transaction
with a Person not a Related Party.
Section 9.12 FISCAL YEAR. The Borrower will not change the ending
date of its fiscal year from December 31.
Section 9.13 MINIMUM CONSOLIDATED NET WORTH. The Borrower will not
permit its Consolidated Net Worth at any time to be less than the sum of (i)
$250,000,000 plus (ii) thirty percent (30%) of the sum of the Consolidated
Net Income of the Borrower (with any consolidated net loss during any fiscal
quarter counting as zero) for each fiscal quarter of the Borrower commencing
with the fiscal quarter of the Borrower ending June 30, 1997.
Section 9.14 MINIMUM NET CAPITAL REQUIRED FOR DAIN RAUSCHER
INCORPORATED. The Borrower will not permit the Net Capital of Dain Rauscher
Incorporated at any time to be less than the greater of (i) $70,000,000, or
(ii) seven percent (7%) of the Aggregate Debit Items of Dain Rauscher
Incorporated.
Section 9.15 WAH SUBORDINATED DEBENTURES. Except as currently
provided in the WAH Subordinated Debentures, the Borrower will not prepay the
WAH Subordinated Debentures and will not amend, alter or otherwise change in
any way any of the provisions of the WAH Subordinated Debentures.
ARTICLE X EVENTS OF DEFAULT AND REMEDIES
Section 10.1 EVENTS OF DEFAULT. The occurrence of any one or more of
the following events shall constitute an Event of Default:
(a) The Borrower shall fail to make when due, whether by acceleration
or otherwise, any payment of principal on any of the Notes, any Letter
of Credit Obligation or any fee or other amount required to be made to
the Banks pursuant to the Loan Documents;
(b) Any representation or warranty made or deemed to have been made
by or on behalf of the Borrower or any Subsidiary by any of the Loan
Documents or by or on behalf of the Borrower or any Subsidiary in any
certificate, statement, report or other
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writing furnished by or on behalf of the Borrower to the Banks
pursuant to the Loan Documents shall prove to have been false or
misleading in any material respect on the date as of which the facts
set forth are stated or certified or deemed to have been stated or
certified;
(c) The Borrower shall fail to comply with SECTION 8.2 or SECTION 8.11
hereof or any Section of ARTICLE IX hereof other than SECTION 9.14, or
(ii) shall fail to comply with SECTION 9.14 hereof and such failure
shall continue unremedied until the earlier to occur of (A) five (5)
Business Days after the date on which either the principal financial
officer or the principal accounting officer of the Borrower becomes
aware of such failure, or (B) twenty-one (21) calendar days after the
date on which the Borrower failed to be in compliance with SECTION
9.14;
(d) The Borrower shall fail to comply with any agreement, covenant,
condition, provision or term contained in the Loan Documents (and such
failure shall not constitute an Event of Default under any of the other
provisions of this SECTION 10.1) and such failure to comply shall
continue for 30 calendar days after notice thereof to the Borrower;
(e) The Borrower or any Subsidiary shall become insolvent or shall
generally not pay its debts as they mature or shall apply for, shall
consent to, or shall acquiesce in the appointment of a custodian,
trustee or receiver of the Borrower or such Subsidiary or for a
substantial part of the property thereof or, in the absence of such
application, consent or acquiescence, a custodian, trustee or receiver
shall be appointed for the Borrower or a Subsidiary or for a
substantial part of the property thereof and shall not be discharged
within 30 days;
(f) Any bankruptcy, reorganization, debt arrangement or other
proceedings under any bankruptcy or insolvency law shall be instituted
by or against the Borrower or a Subsidiary;
(g) Any dissolution or liquidation proceeding shall be instituted by
or against the Borrower or a Material Subsidiary, or the Borrower or
any Material Subsidiary shall take any corporate action to approve
institution of, or acquiescence in, such a proceeding;
(h) A judgment or judgments for the payment of money in excess of the
sum of $10,000,000 in the aggregate shall be rendered against the
Borrower and/or its Subsidiaries and the Borrower or such Subsidiary
shall not discharge the same or provide for its discharge in accordance
with its terms, or procure a stay of execution thereof, prior to any
execution on such judgments by such judgment creditor, within 30 days
from the date of entry thereof, and within said period of 30 days, or
such longer period during which execution of such judgment shall be
stayed, appeal therefrom and cause the execution thereof to be stayed
during such appeal;
(i) The institution by the Borrower or any ERISA Affiliate of steps to
terminate any Plan if in order to effectuate such termination, the
Borrower or any ERISA Affiliate would be required to make a
contribution to such Plan or would incur a liability or obligation to
such Plan in excess of $5,000,000, or the institution by the PBGC of
steps to terminate any Plan;
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(j) Indebtedness of the Borrower (other than Indebtedness under this
Agreement) and/or a Subsidiary in an aggregate amount of $5,000,000 or
more shall be accelerated, or the Borrower and/or a Subsidiary shall
fail to pay any such Indebtedness in an aggregate amount of $5,000,000
or more when due (or, in case any such Indebtedness is payable on
demand, when demanded), or any event shall occur or condition shall
exist and shall continue for more than the period of grace, if any,
applicable thereto and shall have the effect of causing, or permitting
(any required notice having been given and grace period having expired)
the holder of any such Indebtedness in an aggregate amount of
$5,000,000 or more or any trustee or other Person acting on behalf of
such holder to cause, such Indebtedness in an aggregate amount of
$5,000,000 or more to become due prior to its stated maturity or to
realize upon any collateral given as security therefor; or
(k) The New York Stock Exchange, Inc., any other national securities
exchange of which a Material Subsidiary is a member or on which such
Material Subsidiary has qualified for privileges or the National
Association of Securities Dealers, Inc. shall make a decision or enter
an order that (i) suspends such Material Subsidiary, or (ii) revokes
such Material Subsidiary's membership or privileges, or (iii) takes any
other action which will materially adversely affect the operations of
such Material Subsidiary; or
(l) The Securities and Exchange Commission shall enter an order that
(i) suspends or revokes the registration of any Material Subsidiary as
a broker or as a dealer or both, (ii) suspends any Material Subsidiary
as a member of a national securities association or national securities
exchange, (iii) expels any Material Subsidiary as a member of a
national securities association or a national securities exchange, or
(iv) takes any other action which will materially adversely affect the
operations of any Material Subsidiary; or
(m) The Securities Investor Protection Corporation shall make an
application for a decree adjudicating that customers of any Subsidiary
are in need of protection under the Securities Investor Protection Act
of 1970; or
(n) Any Person, or group of Persons acting in concert, shall own or
shall have acquired more than thirty percent (30%) of the shares of any
voting class of stock of the Borrower; or
(o) A Default, Event of Acceleration or Event of Default (each as
defined therein) shall occur under the Dain Rauscher Incorporated
Credit Agreement.
Section 10.2 REMEDIES. If (a) any Event of Default described in
SECTIONS 10.1(e), (f) or (g) shall occur with respect to the Borrower, the
Commitments shall automatically terminate and the outstanding unpaid
principal balance of the Notes, the accrued interest thereon and all other
obligations of the Borrower to the Banks and the Agent under the Loan
Documents shall automatically become immediately due and payable; or (b) any
other Event of Default shall occur and be continuing, then the Agent may take
any or all of the following actions (and shall take any or all of the
following actions on direction of the Required Banks): (i) declare the
Commitments terminated, whereupon the Commitments shall terminate, (ii)
declare that the outstanding unpaid principal balance of the Notes, the
accrued and unpaid interest thereon and
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all other obligations of the Borrower to the Banks and the Agent under the
Loan Documents to be forthwith due and payable, whereupon the Notes, all
accrued and unpaid interest thereon and all such obligations shall
immediately become due and payable, in each case without demand or notice of
any kind, all of which are hereby expressly waived, anything in this
Agreement, the Notes or the other Loan Documents to the contrary
notwithstanding, (iii) exercise all rights and remedies under the Loan
Documents and under any other instrument, document or agreement between the
Borrower and the Agent or the Banks, and (iv) enforce all rights and remedies
available under any applicable law.
Section 10.3 LETTERS OF CREDIT. In addition to the foregoing
remedies, if any Event of Default described in SECTION 10.1(e), (f) or (g)
shall have occurred, or if any other Event of Default shall have occurred and
the Agent shall have declared that the principal balance of the Notes is due
and payable, the Borrower shall pay to the Agent an amount equal to all
Letter of Credit Obligations. Such payment shall be in immediately available
funds or in similar cash collateral acceptable to the Agent and shall be
pledged to the Agent for the ratable benefit of the Banks. Such amount shall
be held by the Agent in a cash collateral account until the outstanding
Letters of Credit are terminated without payment or are paid and the Letter
of Credit Obligations with respect thereto are payable. In the event the
Borrower defaults in the payment of any Letter of Credit Obligations, the
proceeds of the cash collateral account shall be applied to the payment
thereof. The Borrower acknowledges and agrees that the Banks would not have
an adequate remedy at law for failure by the Borrower to pay immediately to
the Agent the amount provided under this Section, and that the Agent shall,
on behalf of the Banks, have the right to require the Borrower to perform
specifically such undertaking whether or not any of the Letter of Credit
Obligations are due and payable. Upon the failure of the Borrower to make any
payment required under this Section, the Agent, on behalf of the Banks, may
proceed to use all remedies available at law or equity to enforce the
obligation of the Borrower to pay or reimburse the Agent. The balance of any
payment due under this Section shall bear interest payable on demand until
paid in full at a per annum rate equal to the Reference Rate plus three
percent (3.00%).
Section 10.4 OFFSET. In addition to the remedies set forth in
SECTIONS 10.2 AND 10.3, upon the occurrence of any Event of Default or at any
time thereafter while such Event of Default continues, each Bank or any other
holder of any Note may offset any and all balances, credits, deposits
(general or special, time or demand, provisional or final), accounts or
monies of the Borrower then or thereafter with such Bank or such other
holder, or any obligations of such Bank or such other holder of the Note,
against the Indebtedness then owed by the Borrower to such Bank.
ARTICLE XI THE AGENT
Section 11.1 APPOINTMENT AND GRANT OF AUTHORITY. Each Bank hereby
appoints the Agent, and the Agent hereby agrees to act, as agent under this
Agreement. The Agent shall have and may exercise such powers under this
Agreement as are specifically delegated to the Agent by the terms hereof,
together with such other powers as are reasonably incidental thereto. Each
Bank hereby authorizes, consents to, and directs the Borrower to deal with
the Agent as the true and lawful agent of such Bank to the extent set forth
herein.
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Section 11.2 NON RELIANCE ON AGENT. Each Bank agrees that it has,
independently and without reliance on the Agent or any other Bank, and based
on such documents and information as it has deemed appropriate, made its own
credit analysis of the Borrower and decision to enter into this Agreement and
that it will, independently and without reliance upon the Agent, and based on
such documents and information as it shall deem appropriate at the time,
continue to make its own analysis and decisions in taking or not taking
action under this Agreement. The Agent shall not be required to keep informed
as to the performance or observance by the Borrower of this Agreement and the
Loan Documents or to inspect the properties or books of the Borrower. Except
for notices, reports and other documents and information expressly required
to be furnished to the Banks by the Agent hereunder, the Agent shall not have
any duty or responsibility to provide any Bank with any credit or other
information concerning the affairs, financial condition or business of the
Borrower (or any of its related companies) which may come into the Agent's
possession.
Section 11.3 RESPONSIBILITY OF THE AGENT AND OTHER MATTERS.
(a) The Agent shall have no duties or responsibilities except those
expressly set forth in this Agreement and those duties and liabilities
shall be subject to the limitations and qualifications set forth in
this Section. The duties of the Agent shall be mechanical and
administrative in nature.
(b) Neither the Agent nor any of its directors, officers or employees
shall be liable for any action taken or omitted (whether or not such
action taken or omitted is within or without the Agent's
responsibilities and duties expressly set forth in this Agreement)
under or in connection with this Agreement, or any other instrument or
document in connection herewith, except for gross negligence or willful
misconduct. Without limiting the foregoing, neither the Agent nor any
of its directors, officers or employees shall be responsible for, or
have any duty to examine:
(i) the genuineness, execution, validity, effectiveness,
enforceability, value or sufficiency of (a) this Agreement, the
Notes or the other Loan Documents, or (b) any document or
instrument furnished pursuant to or in connection with this
Agreement, the Notes or the other Loan Documents,
(ii) the collectibility of any amounts owed by the Borrower,
(iii) any recitals or statements or representations or warranties
in connection with this Agreement, the Notes or the other Loan
Documents,
(iv) any failure of any party to this Agreement to receive any
communication sent, or
(v) the assets, liabilities, financial condition, results of
operations, business or creditworthiness of the Borrower.
(c) The Agent shall be entitled to act, and shall be fully protected
in acting upon, any communication in whatever form believed by the
Agent in good faith to be genuine and correct and to have been signed
or sent or made by a proper Person. The Agent may
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consult counsel and shall be entitled to act, and shall be fully
protected in any action taken in good faith, in accordance with
advice given by counsel. The Agent may employ agents and
attorneys-in-fact and shall not be liable for the default or
misconduct of any such agents or attorneys-in-fact selected by the
Agent with reasonable care. The Agent shall not be bound to
ascertain or inquire as to the performance or observance of any of
the terms, provisions or conditions of this Agreement, the Notes or
the other Loan Documents on the Borrower's part.
Section 11.4 ACTION ON INSTRUCTIONS. The Agent shall be entitled to
act or refrain from acting, and in all cases shall be fully protected in
acting or refraining from acting under this Agreement, the Notes or the other
Loan Documents or any other instrument or document in connection herewith or
therewith in accordance with instructions in writing from (i) the Required
Banks except for instructions which under the express provisions hereof must
be received by the Agent from all the Banks, and (ii) in the case of such
instructions which under the express provisions hereof must be received by
the Agent from all of the Banks, from all of the Banks.
Section 11.5 INDEMNIFICATION. To the extent the Borrower does not
reimburse and save the Agent harmless according to the terms hereof for and
from all costs, expenses and disbursements in connection herewith or with the
other Loan Documents, such costs, expenses and disbursements to the extent
reasonable shall be borne by the Banks ratably in accordance with their
Percentages and the Banks hereby agree on such basis (a) to reimburse the
Agent for all such reasonable costs, expenses and disbursements on request of
the Agent and (b) to indemnify and save harmless the Agent against and from
any and all losses, obligations, penalties, actions, judgments and suits and
other reasonable costs, expenses and disbursements of any kind or nature
whatsoever which may be imposed on, incurred by or asserted against the
Agent, other than as a consequence of actual gross negligence or willful
misconduct on the part of the Agent, arising out of or in connection with
this Agreement, the Notes or the other Loan Documents or any instrument or
document in connection herewith or therewith, or any request of the Banks,
including without limitation the reasonable costs, expenses and disbursements
in connection with defending itself against any claim or liability, or
answering any subpoena, related to the exercise or performance of any of its
powers or duties under this Agreement, the Notes or the other Loan Documents
or the taking of or refraining from taking any action under or in connection
with this Agreement, the Notes or the other Loan Documents.
Section 11.6 U.S. BANK AND AFFILIATES. With respect to U.S. Bank's
Commitment and any Loans by U.S. Bank under this Agreement and any Note and
any interest of U.S. Bank in any Note, U.S. Bank shall have the same rights,
powers and duties under this Agreement and any such Note as any other Bank
and may exercise the same as though it were not the Agent. U.S. Bank and its
affiliates may accept deposits from, lend money to, and generally engage, and
continue to engage, in any kind of business with the Borrower as if U.S. Bank
were not the Agent.
Section 11.7 NOTICE TO HOLDER OF NOTES. The Agent may deem and treat
the payees of the Notes as the owners thereof for all purposes unless the
Agent shall have given its consent to the assignment thereof in accordance
with the provisions of SECTION 12.3. Any request, authority or consent of any
holder of any Note shall be conclusive and binding on any subsequent holder,
transferee or assignee of such Note.
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Section 11.8 SUCCESSOR AGENT. The Agent may resign at any time by
giving at least 30 days written notice thereof to the Banks and the Borrower.
Upon any such resignation, the Borrower shall have the right to appoint a
successor Agent from among the Banks, subject to such selected Bank being
willing to accept such appointment; provided, however, if a Default or Event
of Default shall exist such successor Agent shall be selected solely by the
Required Banks and such successor Agent need not be approved by the Borrower.
If no successor Agent shall have been appointed in accordance with the
preceding sentence and shall have accepted such appointment within 30 days
after the retiring Agent's giving notice of resignation, then the retiring
Agent may, but shall not be required to, on behalf of the Banks, appoint a
successor Agent and such successor Agent need not be approved by the Borrower.
ARTICLE XII MISCELLANEOUS
Section 12.1 NO WAIVER AND AMENDMENT. No failure on the part of the
Agent, the Banks or the holders of the Notes to exercise and no delay in
exercising any power or right hereunder or under any other Loan Document
shall operate as a waiver thereof; nor shall any single or partial exercise
of any power or right preclude any other or further exercise thereof or the
exercise of any other power or right. The remedies herein and in any other
instrument, document or agreement delivered or to be delivered to the Agent
and/or the Banks hereunder or in connection herewith are cumulative and not
exclusive of any remedies provided by law. No notice to or demand on the
Borrower not required hereunder or under the other Loan Documents shall in
any event entitle the Borrower to any other or further notice or demand in
similar or other circumstances or constitute a waiver of the right of the
Agent, the Banks or the holders of the Notes to any other or further action
in any circumstances without notice or demand.
Section 12.2 AMENDMENTS, ETC. No amendment or waiver of any
provision of this Agreement, nor consent to any departure by the Borrower
therefrom, shall in any event be effective unless the same shall be in
writing and signed by the Borrower and the Agent upon direction of the
Required Banks and then such waiver or consent shall be effective only in the
specific instance and for the specific purpose for which given; PROVIDED,
HOWEVER, that no amendment, waiver or consent shall, unless agreed to by the
Agent and all of the Banks:
(a) increase the amounts of or extend the terms of the Commitments or
subject the Banks to any additional obligations;
(b) reduce the principal of, or interest (including the rate of
interest) on, the Notes or any fees or other amounts payable hereunder;
(c) change the requirement that payments of principal of, and interest
on, the Revolving Notes or Term Notes, as applicable, be made pro rata
to the Banks on the basis of the outstanding principal amount of the
Revolving Loans or Term Loans, as applicable;
(d) postpone any date fixed for any payment of principal of, or
interest on, the Notes or any fees or other amounts payable hereunder;
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(e) change the definition of Required Banks or amend this SECTION
12.2;
PROVIDED, FURTHER that amendments, waivers or consents affecting the rights
of the Agent shall also require the consent of the Agent.
Section 12.3 ASSIGNMENTS.
(a) ASSIGNMENTS. Each Bank shall have the right, subject to the further
provisions of this SECTIONS 12.3, to sell or assign all or any part of
its Commitments, Loans, Letter of Credit Obligations, Notes, and other
rights and obligations under this Agreement and the other Loan
Documents (such transfer, an "Assignment") to any commercial lender,
other financial institution or other entity (an "Assignee"). Upon such
Assignment becoming effective as provided in SECTION 12.3(b), the
assigning Bank shall be relieved from the portion of its Commitment,
its Swing Line Participation Amount, its Letter of Credit Participation
Amount, its obligations to indemnify the Agent and its other
obligations hereunder to the extent assumed and undertaken by the
Assignee, and to such extent the Assignee shall have assumed such
portion of the assigning Bank's Commitment, its Swing Line
Participation Amount, its Letter of Credit Participation Amount and
such other obligations hereunder and the Assignee shall have the rights
of a "Bank" hereunder. Notwithstanding the foregoing, unless otherwise
consented to by the Borrower and the Agent, each Assignment shall be in
an amount not less than (i) the entire amount of the assigning Bank's
Commitment and related rights and obligations, or (ii) $10,000,000 of
the assigning Bank's Commitment and related rights and obligations
hereunder, or an integral multiple of $1,000,000 if above such amount.
Each Assignment shall be documented by an agreement among the assigning
Bank, the Assignee, the Agent, and so long as no Default or Event of
Default exists, the Borrower (an "Assignment and Assumption Agreement")
in form and substance satisfactory to the Agent.
(b) EFFECTIVENESS OF ASSIGNMENTS. An Assignment shall become effective
hereunder when all of the following conditions precedent shall have
occurred: (i) the Agent shall have given its written consent to such
Assignment evidenced by the Agent's execution of the applicable
Assignment and Assumption Agreement, (ii) so long as no Default or
Event of Default exists, the Borrower shall have given its written
consent to such Assignment evidenced by the Borrower's execution of the
applicable Assignment and Assumption Agreement, unless the Assignee is
already a Bank under this Agreement in which case no consent is
required from the Borrower, (iii) either the assigning Bank or the
Assignee shall have paid a processing fee of $3,500 to the Agent for
the Agent's own account, (iv) the Assignee shall have submitted to the
Agent the Assignment and Assumption Agreement, in which the Assignee
shall have agreed in writing to have irrevocably assumed and undertaken
the transferred portion of the assigning Bank's obligations hereunder
(including, without limitation, the transferred portion of the Swing
Line Participation Amount, the Letter of Credit Participation Amount
and the obligations to indemnify the Agent hereunder), with a copy for
the Borrower, and shall have provided to the Agent information the
Agent shall have reasonably requested to make payments to the Assignee,
and (v) the assigning Bank, the Assignee and the Agent shall have
agreed upon a date upon which the Assignment shall become effective.
Upon the Assignment becoming effective, (A) the Agent and the Borrower
shall make appropriate arrangements so that new Notes are issued to the
assigning Bank and the Assignee;
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and (B) the Agent shall forward all payments of interest, principal,
fees and other amounts that would have been made to the assigning
Bank, in proportion to the percentage of the assigning Bank's rights
transferred, to the Assignee.
(c) TAX MATTERS. No Bank shall be permitted to enter into any
Assignment with any Assignee who is not a United States Person unless
such Assignee represents and warrants to such Bank that, as at the date
of such Assignment, it is entitled to receive interest payments without
withholding or deduction of any taxes and such Assignee executes and
delivers to such Bank on or before the date of execution and delivery
of documentation of such Assignment, a United States Internal Revenue
Service Form 1001 or 4224, or any successor to either of such forms, as
appropriate, properly completed an claiming complete exemption from
withholding and deduction of all Federal Income Taxes. A "United States
Person" means any citizen, national or resident of the United States,
any corporation or other entity created or organized in or under the
laws of the United States or any political subdivision hereof or any
estate or trust, in each case that is not subject to withholding of
United States Federal income taxes or other taxes on payment of
interest, principal of fees hereunder.
(d) INFORMATION. Each Bank may provide to any Assignee or to any
prospective Assignee copies of all Loan Documents and any and all
financial information in such Bank's possession concerning the
Borrowers and its Subsidiaries which has been delivered to such Bank by
or on behalf of the Borrower pursuant to this Agreement or which has
been delivered to such Bank by or on behalf of the Borrower in
connection with such Bank's credit evaluation of the Borrower prior to
entering into this Agreement.
(e) FEDERAL RESERVE BANK. Nothing herein stated shall limit the right
of any Bank to assign any of its interest herein, in any Note and in
the other Loan Documents to a Federal Reserve Bank.
Section 12.4 COSTS, EXPENSES AND TAXES; INDEMNIFICATION. The
Borrower agrees, whether or not any Loan is made hereunder or any Letter of
Credit is issued hereunder, to pay on demand the following out-of-pocket
costs and expenses incurred in connection with the following matters: (i) all
out-of-pocket costs and expenses of the Agent (including the reasonable fees
and expenses of outside counsel to the Agent) in connection with the
preparation, execution and delivery of the Loan Documents and the
preparation, negotiation and execution of any and all amendments to each
thereof and (ii) all out-of-pocket costs and expenses of the Agent and each
of the Banks in connection with the enforcement of the Loan Documents. The
Borrower agrees to pay, and save the Banks harmless from all liability for,
any stamp or other taxes which may be payable with respect to the execution
or delivery of the Loan Documents. The Borrower agrees to defend, protect,
indemnify, and hold harmless the Agent and each and all of the Banks, each of
their respective affiliates and each of the respective officers, directors,
employees and agents of each of the foregoing (each an "Indemnified Person"
and collectively, the "Indemnified Persons") from and against any and all
liabilities, obligations, losses, damages, penalties, actions, judgments,
suits, claims, costs, expenses and disbursements of any kind or nature
whatsoever, including, without limitation, the fees and disbursements of
counsel to such Indemnified Persons, in any manner relating to or arising out
of or in connection with the making of loans under this Agreement or under
the Dain Rauscher Incorporated Credit Agreement, this Agreement, the Dain
Rauscher Incorporated Credit
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Agreement or the WAH Acquisition; provided, however, that the Borrower shall
have no obligation to an Indemnified Person with respect to any of the
foregoing to the extent resulting from the gross negligence or willful
misconduct of such Indemnified Person or arising solely from claims between
one such Indemnified Person and another such Indemnified Person.
Section 12.5 NOTICES. Except when telephonic notice is expressly
authorized by this Agreement, any notice or other communication to any party
in connection with this Agreement shall be in writing and shall be sent by
manual delivery, telegram, telex, facsimile transmission, overnight courier
or United States mail (postage prepaid) addressed to such party at the
address specified on the signature page hereof, or at such other address as
such party shall have specified to the other party hereto in writing. All
periods of notice shall be measured from the date of delivery thereof if
manually delivered, from the date of sending thereof if sent by telegram,
telex or facsimile transmission, from the first (1st) Business Day after the
date of sending if sent by overnight courier, or from four (4) days after the
date of mailing if mailed; PROVIDED, HOWEVER, that any notice to the Agent
under ARTICLE II hereof shall be deemed to have been given only when received
by the Agent.
Section 12.6 SUCCESSORS. This Agreement shall be binding upon the
Borrower, the Banks and the Agent and their respective successors and
assigns, and shall inure to the benefit of the Borrower, the Banks and the
Agent and the successors and assigns of the Banks. The Borrower shall not
assign its rights or duties hereunder without the written consent of the
Banks.
Section 12.7 SEVERABILITY. Any provision of the Agreement which is
prohibited or unenforceable in any jurisdiction shall, as to such
jurisdiction, be ineffective to the extent of such prohibition or
unenforceability without invalidating the remaining provisions hereof or
affecting the validity or enforceability of such provision in any other
jurisdiction.
Section 12.8 SUBSIDIARY REFERENCES. The provisions of this Agreement
relating to Subsidiaries shall apply only during such times as the Borrower
has one or more Subsidiaries.
Section 12.9 CAPTIONS. The captions or headings herein and any table
of contents hereto are for convenience only and in no way define, limit or
describe the scope or intent of any provision of this Agreement.
Section 12.10 ENTIRE AGREEMENT. The Loan Documents embody the entire
agreement and understanding between the Borrower, the Banks and the Agent
with respect to the subject matter hereof and thereof. This Agreement
supersedes all prior agreements and understandings relating to the subject
matter hereof.
Section 12.11 COUNTERPARTS. This Agreement may be executed in any
number of counterparts, all of which taken together shall constitute one and
the same instrument, and any of the parties hereto may execute this Agreement
by signing any such counterpart.
Section 12.12 CONFIDENTIALITY OF INFORMATION. The Agent and each
Bank shall use reasonable efforts to assure that information about the
Borrower and its Subsidiaries and their operations, affairs and financial
condition, not generally disclosed to the public or to trade and other
creditors, which is furnished to the Agent or such Bank pursuant to the
provisions hereof is used only for the purposes of this Agreement and any
other relationship between any Bank and
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the Borrower and shall not be divulged to any Person other than the
Banks, their affiliates and their respective officers, directors, employees and
agents, except: (a) to their attorneys and accountants, (b) in connection with
the enforcement of the rights of the Banks hereunder and under the other Loan
Documents or otherwise in connection with applicable litigation, (c) in
connection with assignments and the solicitation of prospective assignees
referred to in SECTION 12.3, provided that the disclosing Bank complies with
SECTION 9.6(d) and (d) as may otherwise be required or requested by any
regulatory authority having jurisdiction over any Bank or by any applicable law,
rule, regulation or judicial process, in the opinion of such Bank's counsel,
such opinion concerning the making of such disclosure to be binding on the
parties hereto. No Bank shall incur any liability to the Borrower by reason of
any disclosure expressly permitted by this SECTION 12.12.
Section 12.13 GOVERNING LAW. THE VALIDITY, CONSTRUCTION AND
ENFORCEABILITY OF THIS AGREEMENT, THE NOTES AND THE OTHER LOAN DOCUMENTS SHALL
BE GOVERNED BY THE INTERNAL LAWS OF THE STATE OF MINNESOTA, WITHOUT GIVING
EFFECT TO CONFLICT OF LAWS PRINCIPLES THEREOF, BUT GIVING EFFECT TO FEDERAL LAWS
OF THE UNITED STATES APPLICABLE TO NATIONAL BANKS.
Section 12.14 CONSENT TO JURISDICTION. AT THE OPTION OF THE BANKS, THIS
AGREEMENT AND THE NOTES MAY BE ENFORCED IN ANY FEDERAL COURT OR MINNESOTA STATE
COURT SITTING IN MINNEAPOLIS OR ST. PAUL, MINNESOTA; AND THE BORROWER CONSENTS
TO THE JURISDICTION AND VENUE OF ANY SUCH COURT AND WAIVES ANY ARGUMENT THAT
VENUE IN SUCH FORUMS IS NOT CONVENIENT. IN THE EVENT THE BORROWER COMMENCES ANY
ACTION IN ANOTHER JURISDICTION OR VENUE UNDER ANY TORT OR CONTRACT THEORY
ARISING DIRECTLY OR INDIRECTLY FROM THE RELATIONSHIP CREATED BY THIS AGREEMENT,
THE BANKS AT THEIR OPTION SHALL BE ENTITLED TO HAVE THE CASE TRANSFERRED TO ONE
OF THE JURISDICTIONS AND VENUES ABOVE-DESCRIBED, OR IF SUCH TRANSFER CANNOT BE
ACCOMPLISHED UNDER APPLICABLE LAW, TO HAVE SUCH CASE DISMISSED WITHOUT
PREJUDICE.
Section 12.15 WAIVER OF JURY TRIAL. THE BORROWER WAIVES ANY RIGHT TO A
TRIAL BY JURY IN ANY ACTION OR PROCEEDING TO ENFORCE OR DEFEND ANY RIGHTS (a)
UNDER THIS AGREEMENT, THE NOTES OR THE OTHER LOAN DOCUMENTS OR UNDER ANY
AMENDMENT, INSTRUMENT, DOCUMENT OR AGREEMENT DELIVERED OR WHICH MAY IN THE
FUTURE BE DELIVERED IN CONNECTION HEREWITH OR (b) ARISING FROM ANY BANKING
RELATIONSHIP EXISTING IN CONNECTION WITH THIS AGREEMENT, AND AGREES THAT ANY
SUCH ACTION OR PROCEEDING SHALL BE TRIED BEFORE A COURT AND NOT BEFORE A JURY.
Section 12.16 RESTATEMENT OF ORIGINAL CREDIT AGREEMENT. This Agreement
constitutes an amendment to, and a complete restatement of, the Original Credit
Agreement.
Section 12.17 SURVIVAL OF CERTAIN PROVISIONS OF THIS AGREEMENT. In
consideration of the Agent's and the Banks' entering into this Agreement and the
Dain Rauscher Incorporated Credit Agreement, and making the loans and other
credit accommodations available thereunder, the Borrower hereby irrevocably
agrees as follows: (i) the Borrower's covenant under SECTION 9.8 of this
Agreement shall survive until the last to occur of (a) the payment in full of
all obligations of the Borrower to the Agent and/or the Banks under this
Agreement, (b) the termination of the
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Commitment of the Banks to make loans and to issue letters of credit for the
account of the Borrower under this Agreement, and (c) the payment in full of
all obligations of Dain Rauscher Incorporated to the Agent and/or the Banks
under the Dain Rauscher Incorporated Credit Agreement, and (ii) the
Borrower's covenants and obligations under SECTION 12.4 of this Agreement
shall survive forever notwithstanding the repayment in full of all
obligations of the Borrower to the Agent and/or or the Banks under this
Agreement, the termination of the Commitment of the Banks to make loans and
to issue letters of credit for the account of the Borrower under this
Agreement and the payment in full of all obligations of Dain Rauscher
Incorporated to the Agent and/or the Banks under the Dain Rauscher
Incorporated Credit Agreement. The Borrower specifically acknowledges and
agrees that the Borrower's violation of its covenants under SECTION 9.8 of
this Agreement will harm the Agent and the Banks to such an extent that
monetary damages alone would be an inadequate remedy. Therefore, in the event
of any violation by the Borrower of its covenants under SECTION 9.8 of this
Agreement, the Agent and the Banks (in addition to all other remedies which
the Agent and/or the Banks may have by law or agreement) shall be entitled to
a temporary restraining order, injunction and other equitable relief (without
posting any bond or other security) restraining the Borrower from committing
or continuing such violation. If any provision or application of this SECTION
12.17 is held unlawful or unenforceable in any respect, this SECTION 12.17
shall be revised or applied in a manner that renders it lawful and
enforceable to the fullest extent possible.
-47-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the date first above.
DAIN RAUSCHER CORPORATION
By /s/ John C. Appel
Title Vice Chairman and CFO
Dain Rauscher Plaza
60 South Sixth Street
Minneapolis, Minnesota 55402-4422
Attention: Daniel Marcotte
Fax: (612) 371-7951
Commitment: U.S. BANK NATIONAL ASSOCIATION,
$15,000,000 as Agent and a Bank
Percentage: 30%
By /s/ Jose Peris
Title: Senior Vice President
601 2nd Avenue South
Minneapolis, Minnesota 55402-4302
Attention: Vice President, Financial Services
Division
Fax: (612) 973-0832
Commitment: NORWEST BANK MINNESOTA,
$15,000,000 NATIONAL ASSOCIATION
Percentage: 30%
By: /s/ Edward J. Meyer
Title: Vice President
Sixth Street and Marquette Avenue
Minneapolis, Minnesota 55479-0105
Attention: Vice President, Financial
Institutions Division
Fax: (612) 667-7251
SIGNATURE PAGE TO CREDIT AGREEMENT
<PAGE>
Commitment: THE CHASE MANHATTAN BANK
$15,000,000
Percentage: 30% By: /s/ Diane M. Leslie
Title: Managing Director
Broker-Dealer Division
21st Floor
One Chase Manhattan Plaza
New York, New York 10081
Attention: Diane Leslie
Fax: (212) 552-5287
Commitment: THE BANK OF NEW YORK
$5,000,000
Percentage: 10% By: /s/ Andrew Demko
Title: Vice President
One Wall Street
First Floor
New York, New York 10286
Attention: Joe Ciacciarelli
Fax: (212) 809-9375
SIGNATURE PAGE TO CREDIT AGREEMENT
<PAGE>
EXHIBITS
Exhibit Contents
A-1 Form of Revolving Note
A-2 Form of Swing Line Note
A-3 Form of Term Note
B Litigation (Section 7.6)
C Contingent Liabilities (Section 7.6)
D Existing Liens (Sections 7.11 and 9.10)
E Subsidiaries Directly Owned by Borrower (Section 7.16)
F Form of Compliance Certificate
G Form of Request for Extension of Termination Date
H Form of Response for Request for Extension of Termination Date
<PAGE>
EXHIBIT A-1 TO
CREDIT AGREEMENT
REVOLVING NOTE
$[Commitment] Minneapolis, Minnesota
March 20, 1998
FOR VALUE RECEIVED, the undersigned, DAIN RAUSCHER CORPORATION, a
Delaware corporation (the "Borrower"), promises to pay to the order of [BANK]
(the "Bank"), on the Termination Date, or other due date or dates determined
under the Credit Agreement hereinafter referred to, the principal sum of
_______________________________ __________________________________ AND 00/100
DOLLARS ($[Commitment]), or if less, the then aggregate unpaid principal amount
of the Revolving Loans (as such term is defined in the Credit Agreement) as may
be borrowed by the Borrower from the Bank under the Credit Agreement. All
Revolving Loans and all payments of principal shall be recorded by the holder in
its records which records shall be conclusive evidence of the subject matter
thereof, absent manifest error.
The Borrower further promises to pay to the order of the Bank interest
on the aggregate unpaid principal amount hereof from time to time outstanding
from the date hereof until paid in full at the rates per annum which shall be
determined in accordance with the provisions of the Credit Agreement. Accrued
interest shall be payable on the dates specified in the Credit Agreement.
All payments of principal and interest under this Note shall be made in
lawful money of the United States of America in immediately available funds at
the office of U.S. Bank National Association, at 601 2nd Ave. S., Minneapolis,
Minnesota 55402-4302, or at such other place as may be designated by the Agent
to the Borrower in writing.
This Note is a Revolving Note referred to in, and evidences Revolving
Loans incurred by the Borrower to the Bank under, an Amended and Restated Credit
Agreement of even date herewith (herein, as it may be restated, amended,
modified or supplemented from time to time, called the "Credit Agreement") among
the Borrower, the Banks, as defined therein (including the Bank) and U.S. Bank
National Association, as Agent, to which Credit Agreement reference is made for
a statement of the terms and provisions thereof, including those under which the
Borrower is permitted and required to make prepayments and repayments of
principal of such indebtedness and under which such indebtedness may be declared
to be immediately due and payable.
All parties hereto, whether as makers, endorsers or otherwise,
severally waive presentment, demand, protest and notice of dishonor in
connection with this Note.
This Note is made under and governed by the internal laws of the State
of Minnesota.
DAIN RAUSCHER CORPORATION
By
---------------------------------------
Title
----------------------------------
A-1-1
<PAGE>
EXHIBIT A-2 TO
CREDIT AGREEMENT
SWING LINE NOTE
$5,000,000 Minneapolis, Minnesota
March 20, 1998
FOR VALUE RECEIVED, the undersigned, DAIN RAUSCHER CORPORATION, a
Delaware corporation (the "Borrower"), promises to pay to the order of U.S. BANK
NATIONAL ASSOCIATION (the "Bank"), on the Termination Date, or other due date or
dates determined under the Credit Agreement hereinafter referred to, the
principal sum of FIVE MILLION AND 00/100 DOLLARS ($5,000,000), or if less, the
then aggregate unpaid principal amount of the Swing Line Loans (as such term is
defined in the Credit Agreement) as may be borrowed by the Borrower from the
Bank under the Credit Agreement. All Swing Line Loans and all payments of
principal shall be recorded by the holder in its records which records shall be
conclusive evidence of the subject matter thereof, absent manifest error.
The Borrower further promises to pay to the order of the Bank interest
on the aggregate unpaid principal amount hereof from time to time outstanding
from the date hereof until paid in full at the rates per annum which shall be
determined in accordance with the provisions of the Credit Agreement. Accrued
interest shall be payable on the dates specified in the Credit Agreement.
All payments of principal and interest under this Note shall be made in
lawful money of the United States of America in immediately available funds at
the office of U.S. Bank National Association, at 601 2nd Ave. S., Minneapolis,
Minnesota 55402-4302, or at such other place as may be designated by the Agent
to the Borrower in writing.
This Note is the Swing Line Note referred to in, and evidences the
Swing Line Loans incurred by the Borrower to the Bank under, an Amended and
Restated Credit Agreement of even date herewith (herein, as it may be restated,
amended, modified or supplemented from time to time, called the "Credit
Agreement") among the Borrower, the Banks, as defined therein (including the
Bank) and U.S. Bank National Association, as Agent, to which Credit Agreement
reference is made for a statement of the terms and provisions thereof, including
those under which the Borrower is permitted and required to make prepayments and
repayments of principal of such indebtedness and under which such indebtedness
may be declared to be immediately due and payable.
All parties hereto, whether as makers, endorsers or otherwise,
severally waive presentment, demand, protest and notice of dishonor in
connection with this Note.
This Note is made under and governed by the internal laws of the State
of Minnesota.
DAIN RAUSCHER CORPORATION
By
---------------------------------------
Title
----------------------------------
A-2-1
<PAGE>
EXHIBIT A-3 TO
CREDIT AGREEMENT
TERM NOTE
$[Amount of Term Loan] Minneapolis, Minnesota
_______________, ____
FOR VALUE RECEIVED, the undersigned, DAIN RAUSCHER CORPORATION, a
Delaware corporation (the "Borrower"), promises to pay to the order of [BANK]
(the "Bank"), on _______________, ____, or other due date or dates determined
under the Credit Agreement hereinafter referred to, the principal sum of
_______________________________ __________________________________ AND 00/100
DOLLARS ($Term Loan Amount). All payments of principal under this Note shall be
recorded by the holder in its records which records shall be conclusive evidence
of the subject matter thereof, absent manifest error.
The principal balance hereof shall be payable in seven (7) equal
quarterly installments of $____________ each, commencing on the last day of
_______________, ____, and continuing on the last day of each December, March,
June and September thereafter until _______________, _____ (the "Term Loan
Maturity Date"), when the entire remaining principal balance hereof shall be due
and payable.
The Borrower further promises to pay to the order of the Bank interest
on the aggregate unpaid principal amount hereof from time to time outstanding
from the date hereof until paid in full at the rates per annum which shall be
determined in accordance with the provisions of the Credit Agreement. Accrued
interest shall be payable on the dates specified in the Credit Agreement.
All payments of principal and interest under this Note shall be made in
lawful money of the United States of America in immediately available funds at
the office of U.S. Bank National Association, at 601 2nd Ave. S., Minneapolis,
Minnesota 55402-4302, or at such other place as may be designated by the Agent
to the Borrower in writing.
This Note is a Term Note referred to in, and evidences the Term Loan
incurred by the Borrower to the Bank under, an Amended and Restated Credit
Agreement of even date herewith (herein, as it may be restated, amended,
modified or supplemented from time to time, called the "Credit Agreement") among
the Borrower, the Banks, as defined therein (including the Bank) and U.S. Bank
National Association, as Agent, to which Credit Agreement reference is made for
a statement of the terms and provisions thereof, including those under which the
Borrower is permitted and required to make prepayments and repayments of
principal of such indebtedness and under which such indebtedness may be declared
to be immediately due and payable.
All parties hereto, whether as makers, endorsers or otherwise,
severally waive presentment, demand, protest and notice of dishonor in
connection with this Note.
A-3-1
<PAGE>
This Note is made under and governed by the internal laws of the State
of Minnesota.
DAIN RAUSCHER CORPORATION
By
---------------------------------------
Title
----------------------------------
A-3-2
<PAGE>
EXHIBIT B TO
CREDIT AGREEMENT
LITIGATION (SECTION 7.6)
[To be prepared by Borrower]
B-1
<PAGE>
EXHIBIT C TO
CREDIT AGREEMENT
CONTINGENT LIABILITIES (SECTION 7.6)
None
C-1
<PAGE>
EXHIBIT D TO
CREDIT AGREEMENT
EXISTING LIENS (SECTIONS 7.11 AND 9.10)
None
D-1
<PAGE>
EXHIBIT E TO
CREDIT AGREEMENT
SUBSIDIARIES DIRECTLY OWNED BY BORROWER (SECTION 7.16)
[To be prepared by Borrower]
E-1
<PAGE>
EXHIBIT F TO
CREDIT AGREEMENT
FORM OF COMPLIANCE CERTIFICATE
In accordance with SECTION 8.1 of the Amended and Restated Credit
Agreement dated as of March 20, 1998 (the "Credit Agreement"), among Dain
Rauscher Corporation (the "Borrower"), the Banks (as defined in the Credit
Agreement) and U.S. Bank National Association, as Agent, attached are the
financial statements of ________________________
________________________________________________ as of and for the month and
year-to-date period ended _______________, ____ (the "Current Financials").
I certify that the Current Financials have been prepared in accordance
with GAAP applied on a basis consistent with the accounting practices applied in
the annual audit reports referred to in SECTION 8.1(a) of the Credit Agreement.
Defaults and Events of Default (check one):
/ / I have no knowledge of the occurrence of any Default or Event
of Default under the Credit Agreement which has not previously
been reported to the Bank and remedied.
/ / Attached is a detailed description of all Defaults and Events
of Default of which I have knowledge and which have not
previously been reported to the Banks and remedied.
For the date and periods covered by the Current Financials, the
Borrower is in compliance with the covenants set forth in SECTIONS 9.8(b),
9.8(c), 9.9(c), 9.9(d), 9.13 AND 9.14 of the Credit Agreement, except as
indicated below. The calculations made to determine compliance are as follows:
<TABLE>
<CAPTION>
COVENANT ACTUAL REQUIREMENT
- -------- ------ -----------
<S> <C> <C>
9.8(b)
9.8(c)
9.9(c)
9.9(d)
9.13
9.14
</TABLE>
DAIN RAUSCHER CORPORATION
By
---------------------------------------
Title
----------------------------------
Dated: ____________________, ____
F-1
<PAGE>
F-2
<PAGE>
EXHIBIT G TO
CREDIT AGREEMENT
FORM OF REQUEST FOR EXTENSION OF TERMINATION DATE
---------------, ----
U.S. Bank National Association, as Agent
601 2nd Avenue South
Minneapolis, Minnesota 55402-4302
Attention: Vice President, Financial Services Division
Re: DAIN RAUSCHER CORPORATION
Dear Madam or Sir:
We refer to SECTION 2.9 of the Amended and Restated Credit Agreement
dated as of March 20, 1998 among Dain Rauscher Corporation, the Banks (as
defined in the Credit Agreement) and U.S. Bank National Association, as Agent,
and hereby request that the Banks extend the Termination Date (as defined in the
Credit Agreement) for an additional 364 days.
Very truly yours,
DAIN RAUSCHER CORPORATION
By
---------------------------------------
Title
----------------------------------
G-1
<PAGE>
EXHIBIT H TO
CREDIT AGREEMENT
FORM OF RESPONSE TO REQUEST FOR EXTENSION OF TERMINATION DATE
---------------, ----
U.S. Bank National Association, as Agent
601 2nd Avenue South
Minneapolis, Minnesota 55402-4302
Attention: Vice President, Financial Services Division
Re: DAIN RAUSCHER CORPORATION
Dear Madam or Sir:
We refer to the Amended and Restated Credit Agreement dated as of March
20, 1998 (the "Credit Agreement") among Dain Rauscher Corporation (the
"Borrower"), the Banks (as defined in the Credit Agreement") and U.S. Bank
National Association, as Agent, and the request of the Borrower delivered to the
Agent that the Banks extend the Commitment Termination Date (as defined in the
Credit Agreement) for an additional 364 days. [We hereby consent to such
request] or [We hereby deny such request.]
Very truly yours,
[NAME OF BANK]
By
---------------------------------------
Title
----------------------------------
F-2
<PAGE>
March 4, 1999
Mr. Kenneth J. Wessels
Senior Executive Vice President
Dain Rauscher Incorporated
Dain Rauscher Plaza, 18C9
60 South Sixth Street
Minneapolis, MN 55402
Re: Amendment of Employment Agreement
Dear Ken:
This is to confirm the terms under which your Employment Agreement with
Dain Rauscher Incorporated, dated March 31, 1998, has been amended.
Specifically, you have agreed to accept $875,000, rather than $1,125,000, as
guaranteed total cash compensation for 1998.
Please acknowledge your agreement to this amendment by signing in the
space below and returning this letter to me.
Sincerely,
/s/ Irving Weiser
Irving Weiser
IW:rwh
ACKNOWLEDGED, AGREED AND ACCEPTED:
/s/ Kenneth J. Wessels
- ---------------------------------
Kenneth J. Wessels
Effective: February 26, 1999
<PAGE>
EXHIBIT 11
DAIN RAUSCHER CORPORATION
COMPUTATION OF NET EARNINGS PER SHARE
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
BASIC EARNINGS PER SHARE:
Net income............................................. $ 7,990 $ 49,275 $ 56,811
========= ======== =========
Weighted average common shares outstanding............. 12,404 12,277 12,132
========= ======== =========
Basic earnings per share.................................. $ 0.64 $ 4.01 $ 4.68
========= ======== =========
EARNINGS PER SHARE ASSUMING DILUTION:
Net income............................................. $ 7,990 $ 49,275 $ 56,811
========= ======== =========
Weighted average number of common and dilutive
potential common shares outstanding:
Weighted average common shares outstanding.......... 12,404 12,277 12,132
Dilutive effect of stock options (net of tax
benefits)........................................ 463 579 435
Shares credited to deferred compensation
plan participants................................ 304 204 98
--------- -------- ---------
Weighted average number of common and
dilutive potential common shares outstanding........ 13,171 13,060 12,665
========= ======== =========
Diluted earnings per share................................ $ 0.61 $ 3.77 $ 4.49
========= ======== =========
</TABLE>
50
<PAGE>
EXHIBIT 21
DAIN RAUSCHER CORPORATION
LIST OF SUBSIDIARIES AS OF DECEMBER 31, 1998
<TABLE>
<CAPTION>
PERCENTAGE
OF VOTING
STATE IN WHICH SECURITIES
NAME INCORPORATED OWNED
---- -------------- ----------
<S> <C> <C>
Consolidated subsidiaries of Registrant:
Dain Rauscher Incorporated..........................Delaware 100%
Insight Investment Management Inc...................Minnesota 100
Dain Rauscher Lending Services Inc..................Minnesota 100
</TABLE>
51
<PAGE>
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Dain Rauscher Corporation:
We consent to the incorporation by reference in Registration
Statement No. 333-53851, Registration Statement No. 333-03113, Registration
Statement No. 333-20487, Registration Statement No. 33-58069, Registration
Statement No. 33-54223, Registration Statement No. 33-54907, Registration
Statement No. 33-59426, Registration Statement No. 33-39182, Registration
Statement No. 33-25979, post-effective amendment No. 1 to Registration
Statement No. 33-13068, post-effective amendment No. 2 to Registration
Statement No. 33-10243, post-effective amendment No. 2 to Registration
Statement No. 33-10242, post-effective amendment No. 4 to Registration
Statement No. 2-90634, post-effective amendment No. 8 to Registration
Statement No. 2-61514, post-effective amendment No. 11 to Registration
Statement No. 2-57759, post-effective amendment No. 15 to Registration
Statement No. 2-53289, post-effective amendment No. 16 to Registration
Statement No. 2-51150 and Registration Statement No. 1-08186 of Dain Rauscher
Corporation, and subsidiaries of our report dated February 3, 1999, relating
to the consolidated balance sheets of Dain Rauscher Corporation and
subsidiaries as of December 31, 1998 and 1997 and the consolidated statements
of operations, shareholders' equity and cash flows and the related financial
statement schedule for each of the years in the three-year period ended
December 31, 1998, which report appears in the December 31, 1998 Annual
Report on Form 10-K of Dain Rauscher Corporation.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
March 18 , 1999
52
<PAGE>
EXHIBIT 24
POWER OF ATTORNEY
The undersigned hereby constitute and appoint Irving Weiser, John C.
Appel, and David J. Parrin, and each of them, his true and lawful
attorneys-in-fact and agents, with full powers of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign the Annual Report on Form 10-K of Dain Rauscher
Corporation for the fiscal year ending December 31, 1998 and all amendments to
such Annual Report on Form 10-K, and to file the same with all exhibits
thereto, and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, each
acting alone, full power and authority to do and perform to all intents and
purposes as he might or could do in person, hereby ratifying all that said
attorneys-in-fact and agents, each acting alone, or his substitutes, may
lawfully do or cause to be done by virtue thereof.
SIGNATURE DATE
--------- ----
John C. Appel 3/6/99
------------------------ ---------------------
John C. Appel
David J. Parrin 3/6/99
------------------------ ---------------------
David J. Parrin
Irving Weiser 3/6/99
------------------------ ---------------------
Irving Weiser
Kenneth J. Wessels 3/8/99
------------------------ ---------------------
Kenneth J. Wessels
J. Evans Attwell 3/1/99
------------------------ ---------------------
J. Evans Attwell
Susan S. Boren 3/1/99
------------------------ ---------------------
Susan S. Boren
F. Gregory Fitz-Gerald 3/6/99
------------------------ ---------------------
F. Gregory Fitz-Gerald
Walter F. Mondale 3/1/99
------------------------ ---------------------
Walter F. Mondale
C.A. Rundell, Jr. 3/1/99
------------------------ ---------------------
C.A. Rundell, Jr.
Robert L. Ryan 3/9/99
------------------------ ---------------------
Robert L. Ryan
Arthur R. Schulze, Jr. 3/2/99
------------------------ ---------------------
Arthur R. Schulze, Jr.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 47,273
<SECURITIES> 237,667
<RECEIVABLES> 1,544,562
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 379,901
<PP&E> 48,271
<DEPRECIATION> 0
<TOTAL-ASSETS> 2,466,487
<CURRENT-LIABILITIES> 368,240
<BONDS> 112,505
0
0
<COMMON> 1,580
<OTHER-SE> 328,193
<TOTAL-LIABILITY-AND-EQUITY> 2,466,487
<SALES> 0
<TOTAL-REVENUES> 749,370
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 736,886
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 12,484
<INCOME-TAX> (4,494)
<INCOME-CONTINUING> 7,990
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,990
<EPS-PRIMARY> .64<F1>
<EPS-DILUTED> .61<F1>
<FN>
<F1>Earning per share amounts represent Basic and Diluted as prescribed by SFAS
128.
</FN>
</TABLE>
<PAGE>
EXHIBIT 99
DAIN RAUSCHER CORPORATION
CAUTIONARY STATEMENTS FOR PURPOSES OF THE "SAFE HARBOR"
PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
We desire to take advantage of the "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995 and are filing this
cautionary statement in connection with such safe harbor legislation. This
filing, our Annual Report to Shareholders, any Form 10-K, Form 10-Q or Form
8-K of our or any other written or oral statements made by or on behalf of us
may include forward-looking statements which reflect our 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.
We wish to caution investors that any forward-looking statements
made by us are subject to uncertainties and other factors that could cause
actual results to differ materially from such statements. These uncertainties
and other factors include, but are not limited to; the "Risk Factors" listed
below. Though we have attempted to list comprehensively these important
factors, we wish to caution investors that other factors may in the future
prove to be important in affecting our operating results. 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 our views as of the date the
statement is made. We undertake no obligation to publicly update or revise
any forward-looking statements, whether as a result of new information,
future events or otherwise.
VOLATILE NATURE OF THE SECURITIES BUSINESS
Our principal business activities, securities broker-dealer and
investment banking operations, as well as our investment advisory, clearing
and other services, are highly competitive and subject to various risks,
including volatile or illiquid trading markets, fluctuations in the volume of
market activity, counterparty or customer failure to meet commitments and
losses and expenses resulting from litigation and regulatory proceedings. The
securities business is directly affected by a variety of factors beyond our
control. Such factors include market conditions and psychology, the
availability and cost of short-term or long-term funding and capital, our
credit capacity or perceived creditworthiness and the securities industry in
the marketplace, the level and volatility of interest rates, inflation and
deflation economic and political conditions, broad trends in business and
finance, and legislation and regulation affecting the national and
international business and financial communities and the securities markets.
These and other factors can result in significant fluctuations in our
revenues and operating results from quarter to quarter and from year to year.
Since approximately 1990, the securities markets have enjoyed a
sustained bull market that is virtually unprecedented. This, in turn, has
fueled tremendous growth in revenues and income for securities firms
generally, including our Company. Particularly in comparison to these
favorable conditions, volatile or illiquid trading markets could expose us to
the risk of trading losses and losses resulting from the ownership or
underwriting of securities. Reductions in the volume of market activity or in
securities prices generally can result in reduced commission and principal
transaction revenues and reduced investment banking and asset management fees
as fewer transactions are effected and the value of the securities being sold
and assets under management declines. In periods of low transaction volume,
results of operations can be further adversely affected because certain
expenses remain relatively fixed. Sudden sharp declines in market values of
securities can result in illiquid markets, which, in turn, may result in us
having difficulty selling securities, hedging our securities positions and
investing funds under its management and can increase the frequency and size
of credit extensions and counterparty and customer failures to meet
commitments. Such unfavorable market conditions may further reduce demand for
our investment banking and other services.
53
<PAGE>
COMPETITION
All aspects of our business are highly competitive. We compete
directly and indirectly for customers with national and regional full-service
broker-dealers, discount broker-dealers, investment banking firms, investment
advisors, commercial banks, insurance companies, mutual fund companies, money
managers, financial planners and others.
We also compete with others in the financial services industry with
respect to the recruiting and retention of revenue producing employees. The
financial services industry has become more concentrated recently as numerous
securities firms have either ceased operations, eliminated certain business
lines or have merged with or been acquired by other firms. International
financial services firms have also moved aggressively into the U.S.
securities, banking and other financial sectors. Industry consolidation has
increased competition from firms having significantly greater equity capital,
financial and other resources than us. We expect competition from domestic
and international commercial banks to continue to increase in light of recent
loosening of Federal Reserve Board rules limiting the underwriting and other
activities of securities subsidiaries of bank holding companies. Acquisitions
of securities firms by banks have brought entirely new sources of capital
into the securities industry, resulting in more competition for our
businesses. Legislative proposals currently under consideration would
eliminate the remaining limit on securities activities of banks and would
permit commercial banks and their affiliates to offer additional services
which have traditionally been provided only by securities and money
management firms.
DEPENDENCE ON PERSONNEL
Most aspects of our business are highly dependent on the services of
skilled professional employees. We devote considerable resources to
recruiting, training, retaining and compensating such individuals. The level
of competition for experienced revenue-producing personnel is extremely
intense and levels of compensation for skilled employees has risen
accordingly. The loss of key personnel or the inability to recruit and retain
key personnel in the future could materially and adversely affect our
operating results. In addition, a key component of our growth strategy is to
increase penetration of existing markets, enter into new markets and expand
the kinds of products or services it provides. Our ability to succeed in
pursuit of such strategy is highly dependent on its ability to recruit and
retain experienced revenue-producing and other personnel.
IMPLEMENTATION OF OUR STRATEGIES
Our business strategy is to gain a competitive edge in the
marketplace by coupling the regional and industry expertise, knowledge, brand
names, capital and customer relationships of its former broker-dealer
subsidiaries into a single, more powerful brand name that will enable it to
simplify its management structure gain economies of scale and critical mass
and become more responsive to competitive changes. In order to remain
competitive, We must grow its revenues through further penetration of
existing markets, entry into new markets and expansion of the products and
services it provides, including possible expansion into related lines or
business. There can be no assurance that we will be able to identify and
capitalize on service, product or market opportunities that will further our
strategy and enhance its business, results of operations or financial
condition. While we have grown successfully through strategic acquisitions in
the past, there can be no assurance that we in the future will be able to
successfully identify, compete for or acquire on favorable terms or integrate
the business and operations of any acquired business or entity with our
existing operations.
DEPENDENCE ON SYSTEMS
Our business is highly dependent on communications, trading,
information and data processing systems. As with other areas, our 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 our
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 us to incur further
significant expenses. We have outsourced certain communications, quotations
and trading systems services and currently maintain our own back-office
processing system. Although we and our vendors have in place tested disaster
recovery systems, any failure or interruption of our or a vendor's systems
could cause delays in the our securities trading and processing activities
and an inability to execute client transactions, which could have a material
adverse effect on our operating results. There can be no assurance that we or
our vendors will not suffer any such systems failure or interruption or that
we or our vendor's backup procedures and disaster recovery capabilities will
be adequate. As technology develops and industry practices and regulations
change, we must update or replace various of its key systems,
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including, in particular, its back-office data processing system, in order to
remain competitive. We have, in fact, committed to upgrade our 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 we, during the process of upgrading our 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 our business or delivery of our products and services to
customers.
It has become widely known that certain technological problems may
arise in connection with reaching the Year 2000. Beginning with our
consolidation of the back-office brokerage operations of Dain Bosworth and
Rauscher Pierce Refsnes in 1993, we have upgraded and/or replaced the bulk of
its mission-critical data processing systems. Such upgrade and replacement
projects were performed primarily for competitive reasons, though they included
the added benefit of making such systems Year 2000 compliant. Upgrades or
replacements necessary to achieve Year 2000 compliance for our remaining
mission-critical systems are expected to be completed in 1998 and the costs
related to such upgrades or replacements are not expected to have a material
effect on our consolidated financial statements. During 1999, we, along with the
rest of the securities industry, expect to test systems interdependencies with
outside parties. While there can be no assurance, we believe that our 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 us. In particular, if our
internal systems or if our vendors and other information providers or 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, such disruption may have a material
adverse effect on our operating results.
DEPENDENCE ON SOURCES OF FINANCING
We, like others in the securities industry, relies on external sources
to finance a significant portion of its day-to-day operations, principally
customer margin account balances, securities inventory and underwriting
positions and certain other transactions. The principal sources of our cash and
liquidity are retained earnings, cash balances held on behalf of customers
pending investment, collateralized repurchase agreements, collateralized bank
loans and securities lending activities. We also have a $50 million unsecured
committed revolving credit facility available. We maintain uncommitted credit
lines with a number of banks aggregating approximately $540 million. Finally,
because a substantial portion of the our capital resources could be used for
acquisitions, we may require additional debt or equity financing for operations,
which financing may not be available on terms favorable to us, if at all.
Availability of financing to us can vary depending on market conditions, the
volume of certain trading activities, credit ratings, credit capacity and the
overall availability of credit to the financial services industry. See
"Liquidity and Capital Resources."
USE OF DERIVATIVE FINANCIAL INSTRUMENTS
We enter into certain financial futures contracts and option contracts
in the ordinary course of our business to hedge or modify exposures to interest
rate fluctuations related to interest-rate-sensitive securities in its trading
inventories. While the use of these derivatives is intended to allow us to
better manage certain risks, it is possible that, over time, mis-matches may
arise with respect to the derivatives and the cash market instruments they are
intended to hedge. Discrepancies can also arise between the derivative and cash
markets. Derivatives also have risks that are similar in type to the risks of
the cash market instruments on which their values are based. For example, in
times of market stress, sharp price movements or reductions in liquidity in the
cash markets may be related to comparable or even greater price movements and
reductions in liquidity in the derivative markets. Further, the risks associated
with derivatives are potentially greater than those associated with the related
cash market instruments because of the additional complexity and potential for
leverage. In addition, derivatives may create credit risk (the risk that a
counterparty on a derivative transaction will not fulfill its contractual
obligations), as well as legal, operational and other risks beyond those
associated with the underlying cash market instruments on which their values are
based.
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FEDERAL AND STATE REGULATION; NET CAPITAL REQUIREMENTS
Our business is, and the securities and commodities industries are,
subject to extensive regulation in the United States, at both the federal and
state level, as well as by industry self-regulatory organizations. As a matter
of public policy, regulatory bodies are charged with safeguarding the integrity
of the securities and other financial markets and with protecting the interests
of customers participating in those markets and not with protecting the
interests of our stockholders and creditors. In addition, self-regulatory
organizations and other regulatory bodies in the United States, such as the
Commission, the New York Stock Exchange, Inc. (the "NYSE"), the National
Association of Securities Dealers, Inc. and the Municipal Securities Rulemaking
Board, require strict compliance with their rules and regulations. Failure to
comply with any of these laws, rules or regulations, many of which are quite
complex and subject to interpretation, could result in a variety of adverse
consequences including censure, fines, suspension, revocation or reduction of
the right to do business of key persons associated with us or the Company
itself, and private rights of action for damages, which could have a material
adverse effect upon our consolidated financial condition or results of
operations.
The laws and regulations, as well as governmental policies and
accounting principles, governing the financial services and banking industries
have changed significantly over recent years and are expected to continue to do
so. During the last several years Congress has considered numerous proposals
that would significantly alter the structure and regulation of such industries.
Such changes, if adopted, could materially and adversely affect our business and
operations. Our businesses may also be materially affected by regulations of
general application, such as existing and proposed tax legislation, antitrust
policy and other governmental regulations and policies (including the interest
rate and other monetary policies of the Federal Reserve Board).
The Commission, the NYSE, and various other exchanges and regulatory
bodies in the United States have rules with respect to net capital requirements
which affect us. These rules have the effect of requiring that at least a
substantial portion of a broker-dealer's assets be kept in cash or highly liquid
investments. Compliance with the net capital requirements by DRI could limit
operations that require extensive use of capital, such as underwriting or
trading activities and constrain the ability of us to grow its business, either
through internal expansion or by acquisitions. A significant operating loss or
any unusually large charge against net capital could have a material adverse
effect on our ability business. The net capital rules could also restrict the
our ability to withdraw capital from DRI, even in circumstances in which it has
more than the minimum amount of required capital. Such restrictions, in turn,
could limit the our ability to pay dividends, implement strategies, pay interest
on and repay the principal of our debt and redeem or repurchase shares of
outstanding capital stock.
LITIGATION
Many aspects of the securities brokerage and investment banking
businesses involve substantial risks of liability. In recent years, there has
been an increasing incidence of litigation and regulatory enforcement
proceedings involving the securities industry. Such actions include class action
suits that generally seek substantial damages, other suits seeking punitive
and/or treble damages and administrative and court proceedings brought by
regulatory agencies seeking fines, injunctions, suspensions and bars from future
participation in the business against securities firms and, in some cases, their
employees and officers. Underwriters are subject to substantial potential
liability for material misstatements and omissions in prospectuses and other
communications with respect to underwritten offerings of securities. Like other
securities brokerage firms, we, and certain personnel, have been named or
threatened to be named as defendants in legal and regulatory proceedings which
cause us to expend substantial financial and managerial resources in legal
defense. The outcome of any legal or regulatory proceeding is uncertain. The
settlement of any such proceeding under adverse circumstances or an adverse
judgment in connection with any such proceeding may have a material adverse
effect on our consolidated financial condition or operating results.
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