<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED JUNE 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 1-8186
DAIN RAUSCHER CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 41-1228350
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation of organization)
DAIN RAUSCHER PLAZA, 60 SOUTH SIXTH STREET
MINNEAPOLIS, MINNESOTA 55402-4422
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (612) 371-2711
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
------ -------
As of July 31, 2000, the Company had 12,882,940 shares of common
stock outstanding.
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DAIN RAUSCHER CORPORATION
REPORT ON FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2000
INDEX
<TABLE>
<CAPTION>
PAGE
I. FINANCIAL INFORMATION:
<S> <C> <C>
Item 1. Financial Statements
Consolidated Balance Sheet......................................................... 3
Consolidated Statement of Income................................................... 4
Consolidated Statement of Cash Flows............................................... 5
Notes to Consolidated Financial Statements......................................... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................................................ 8
II. OTHER INFORMATION:
Item 4. Submission of Matters to a Vote of Security Holders................................ 15
Item 6. Exhibits and Reports on Form 8-K................................................... 16
Signatures......................................................................... 17
Index of Exhibits.................................................................. 18
Exhibits........................................................................... 19
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DAIN RAUSCHER CORPORATION
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
------------- -------------
(UNAUDITED)
<S> <C> <C>
Assets:
Cash and cash equivalents................................................ $ 41,532 $ 39,087
Receivable from customers................................................ 1,809,373 1,453,488
Receivable from brokers and dealers...................................... 248,857 321,571
Securities purchased under agreements to resell.......................... 50,253 67,357
Trading securities owned................................................. 282,498 243,740
Equipment and leasehold improvements, at cost, net of depreciation....... 45,266 47,578
Other receivables........................................................ 117,823 123,805
Deferred income taxes.................................................... 70,365 58,891
Goodwill, net of amortization............................................ 111,820 114,485
Other assets............................................................. 36,804 29,853
------------ ------------
$ 2,814,591 $ 2,499,855
============ ============
Liabilities and Shareholders' Equity:
Liabilities:
Short-term borrowings.................................................... $ 31,608 $ 55,836
Customer drafts payable.................................................. 71,744 76,267
Payable to customers..................................................... 524,333 690,559
Payable to brokers and dealers........................................... 1,150,595 677,056
Securities sold under repurchase agreements.............................. 33,516 23,213
Trading securities sold, but not yet purchased........................... 52,143 79,023
Accrued compensation..................................................... 223,832 235,858
Other liabilities and accrued expenses................................... 120,251 121,486
Subordinated and other debt.............................................. 137,599 150,807
------------ ------------
2,345,621 2,110,105
Shareholders' equity:
Common stock............................................................. 1,653 1,630
Additional paid-in capital............................................... 150,849 125,320
Retained earnings........................................................ 340,443 285,966
Treasury stock, at cost.................................................. (23,975) (23,166)
------------ ------------
468,970 389,750
------------ ------------
$ 2,814,591 $ 2,499,855
============ ============
</TABLE>
See notes to consolidated financial statements.
3
<PAGE> 4
DAIN RAUSCHER CORPORATION
CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED, IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------------- --------------------------------
2000 1999 2000 1999
-------------- --------------- -------------- --------------
<S> <C> <C> <C> <C>
Revenue:
Commissions................................... $ 83,184 $ 84,103 $ 198,054 $ 167,369
Investment banking and underwriting........... 49,076 59,448 147,796 92,883
Principal transactions........................ 49,988 40,062 117,802 82,550
Interest...................................... 46,892 34,715 89,360 65,575
Asset management.............................. 26,249 18,341 50,254 35,293
Correspondent services........................ 5,472 5,851 12,858 11,729
Gain on sale of investment.................... - - - 15,378
Other......................................... 13,495 9,086 30,080 16,864
-------------- ------------- -------------- -------------
Total revenue................................. 274,356 251,606 646,204 487,641
Interest expense................................. (25,621) (19,051) (46,459) (35,104)
-------------- ------------- -------------- -------------
Net revenue...................................... 248,735 232,555 599,745 452,537
-------------- ------------- -------------- -------------
Operating expenses:
Compensation and benefits..................... 158,053 149,974 381,895 280,882
Occupancy and equipment....................... 15,117 14,555 29,341 27,780
Communications................................ 12,599 12,700 24,606 24,846
Travel and promotional........................ 11,251 9,376 20,821 18,429
Floor brokerage and clearing fees............. 3,760 3,400 7,306 6,850
Branch closing and consolidation expense...... - 867 - 867
Other......................................... 15,980 14,624 38,778 29,679
-------------- ------------- -------------- -------------
Total operating expenses......................... 216,760 205,496 502,747 389,333
-------------- ------------- -------------- -------------
Income before income taxes....................... 31,975 27,059 96,998 63,204
Income tax expense............................... (11,825) (10,147) (36,859) (23,702)
--------------- -------------- -------------- -------------
Net income....................................... $ 20,150 $ 16,912 $ 60,139 $ 39,502
============== ============= ============== =============
Earnings per share:
Basic......................................... $ 1.57 $ 1.37 $ 4.70 $ 3.18
============== ============= ============== =============
Diluted....................................... $ 1.39 $ 1.26 $ 4.22 $ 2.96
============== ============= ============== =============
Dividends per share.............................. $ .22 $ .22 $ .44 $ .44
============== ============= ============== =============
</TABLE>
See notes to consolidated financial statements.
4
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DAIN RAUSCHER CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
------------------------------
2000 1999
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Cash flows from operating activities:
<S> <C> <C>
Net income .............................................................. $ 60,139 $ 39,502
Adjustments to reconcile income to cash provided
by operating activities:
Depreciation and amortization...................................... 12,440 12,014
Deferred income taxes.............................................. (11,474) 1,079
Other non cash items............................................... 5,284 7,366
Net trading securities owned and trading
securities sold, but not yet purchased.......................... (65,638) (145,609)
Other receivables.................................................. 5,982 (46,256)
Drafts payable and short-term borrowings
of securities companies......................................... (28,751) 45,430
Net receivable from customers...................................... (522,111) (300,161)
Net payable to brokers and dealers................................. 546,253 244,877
Net securities under repurchase agreements......................... 27,407 133,320
Other accrued liabilities.......................................... (7,527) 23,428
Accrued compensation............................................... (12,026) (5,286)
Other.............................................................. 2,736 (7,426)
------------ ------------
Cash provided by operating activities....................................... 12,714 2,278
------------ ------------
Cash flows from financing activities:
Proceeds from:
Issuance of common stock for stock options............................ 1,166 1,422
Payments for:
Subordinated and other debt........................................... (10,000) (5,000)
Dividends on common stock............................................. (5,628) (5,477)
Purchase of common stock.............................................. - (9,790)
------------ ------------
Cash used by financing activities........................................... (14,462) (18,845)
------------ ------------
Cash flows from investing activities:
Gain on sale of investment securities................................. 10,527 15,378
Payments for equipment, leasehold improvements and other.............. (6,334) (3,594)
------------ ------------
Cash provided by investing activities....................................... 4,193 11,784
------------ ------------
Increase (decrease) in cash and cash equivalents............................ 2,445 (4,783)
Cash and cash equivalents:
At beginning of period................................................ 39,087 47,273
------------ ------------
At end of period...................................................... $ 41,532 $ 42,490
============ ============
</TABLE>
See notes to consolidated financial statements.
5
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DAIN RAUSCHER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
A. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
We have prepared the accompanying unaudited interim consolidated
financial statements in accordance with the instructions for Form 10-Q. These
instructions do not require including all the information and footnotes found in
complete financial statements prepared in accordance with generally accepted
accounting principles. These interim financial statements should be read in
conjunction with the consolidated financial statements and related notes
included in our Annual Report on Form 10-K for the year ended December 31, 1999.
We believe we have included all adjustments necessary for a fair presentation of
these interim financial statements. We have made only normal, recurring
adjustments. However, financial results for the three and six-month periods
ended June 30, 2000, are not necessarily indicative of future results.
B. SHORT-TERM BORROWINGS
On March 16, 2000, we amended our committed, revolving credit agreement
to extend the maturity date to March 15, 2001, and increase the credit limit to
$80 million from $67 million. Loans under this agreement are unsecured and bear
interest at a floating rate of LIBOR plus 87 basis points. No amounts were
outstanding under this facility at June 30, 2000. Under the terms of this credit
agreement, we must comply with covenants regarding net worth, regulatory net
capital, minimum investment level in our broker-dealer subsidiary, Dain Rauscher
Incorporated (DRI), and limitations on indebtedness, among others.
C. SUBORDINATED AND OTHER DEBT
On November 2, 1999, we entered into a $50 million five-year term loan
agreement with a group of banks. This loan is unsecured, bears an interest rate
of LIBOR plus 175 basis points, and is repayable in 12 equal quarterly
installments beginning January 2002. Under the terms of this credit agreement,
we must comply with covenants regarding net worth, regulatory net capital,
minimum investment level in DRI, and limitations on indebtedness, among others.
There are no restrictions on our use of the loan proceeds.
On March 31, 1998, DRI entered into an $80 million subordinated term
loan agreement with a group of banks in connection with its acquisition of
Wessels, Arnold and Henderson, LLP (WAH). Proceeds from this loan qualify as
regulatory capital. Term loans under this agreement are unsecured, and consist
of advances bearing interest generally at either the current LIBOR plus 160
basis points, or the lead bank's published Reference Rate, at our discretion.
Under the agreement DRI makes quarterly payments of $5.0 million. These payments
began on April 1, 1999, and the final payment is due on December 31, 2002. DRI
must also comply with covenants in the agreement regarding, among others, net
worth and regulatory net capital. During the 1999 second quarter we entered into
an interest rate swap agreement for this subordinated debt (see footnote E for a
further discussion of this interest-rate swap).
D. SEGMENT INFORMATION
See Item 2 "Management's Discussion and Analysis" for a discussion of
our results by business line.
E. OFF-BALANCE-SHEET RISK
MARKET RISK
The types of transactions in which we participate and the types of
inventory we hold remain essentially unchanged since year-end 1999. See the
Market Risk discussion in Item 7 (Management's Discussion and Analysis) of our
Annual Report on Form 10-K for the year ended December 31, 1999, for a further
discussion of this issue.
6
<PAGE> 7
INTEREST RATE RISK
In April 1999 we entered into a fixed interest rate amortizing swap on
the subordinated debt discussed in Note C to reduce our risk of increased
interest costs should interest rates increase. Under the terms of our swap
agreement, our quarterly interest payments are made at a fixed interest rate of
6.895%. In return, we receive variable payments based on the current 30-day
LIBOR rate. The difference between the amount of interest we pay and what we
receive under the terms of the swap is included in interest expense. The fair
value of this interest rate swap was approximately $1.1 million (unrealized
gain, not recorded in our consolidated income statement) at June 30, 2000. This
interest rate swap matures on December 31, 2002.
F. SUPPLEMENTARY CASH FLOW STATEMENT INFORMATION
Income tax payments totaled $50,391,000 and $19,049,000 during the six
months ended June 30, 2000 and 1999, respectively. Interest payments totaled
$42,494,000 and $33,261,000 during the same respective three-month periods.
During the six months ended June 30, 2000 and 1999, we credited common
stock to deferred compensation plan participants, resulting in net non-cash
financing activity of $22,445,000 and $4,747,000, respectively.
7
<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This discussion should be read in conjunction with Item 7 (Management's
Discussion and Analysis) of our Annual Report on Form 10-K for the year ended
December 31, 1999.
SUMMARY
Following is a consolidated summary of our income and results of
operations for the three and six months ended June 30, 2000 and 1999:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------------- --------------------------------
2000 1999 2000 1999
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<S> <C> <C> <C> <C>
Revenue.......................................... $ 274,356 $ 251,606 $ 646,204 $ 487,641
Interest expense................................. (25,621) (19,051) (46,459) (35,104)
-------------- ------------- -------------- -------------
Net revenue...................................... 248,735 232,555 599,745 452,537
Operating expenses............................... 216,760 205,496 502,747 389,333
-------------- ------------- -------------- -------------
Income before income taxes....................... 31,975 27,059 96,998 63,204
Income tax expense............................... (11,825) (10,147) (36,859) (23,702)
-------------- ------------- -------------- --------------
Net income....................................... $ 20,150 $ 16,912 $ 60,139 $ 39,502
============== ============= ============== ==============
Earnings per share:
Basic......................................... $ 1.57 $ 1.37 $ 4.70 $ 3.18
Diluted....................................... 1.39 1.26 4.22 2.96
</TABLE>
RESULTS OF OPERATIONS BY TRANSACTION TYPE
Commission revenue declined slightly from the prior year quarter, but
increased 18% in the first six months of 2000 over the prior year period. Strong
sales of over-the-counter and listed equity securities in the first three months
of the year, which saw both record NASDAQ trading volumes and strong volumes on
the NYSE, drove the year-to-date increase. Changing market conditions, resulting
in lower trading volumes and securities prices on both exchanges, in the current
year second quarter dampened securities sales and commission revenue for the
quarter. Sales of mutual funds and insurance and annuity products remained
strong throughout the first six-months of 2000, however, which offset much of
the decline in revenue from equity sales in the second quarter. The ongoing
movement by customers to fee-based asset management accounts, rather than the
traditional brokerage accounts where fees are paid per transaction, also
affected commission revenue for the year.
Investment banking and underwriting revenue declined 17% ($10.4
million) in the 2000 second quarter from the prior-year quarter. However, on a
year-to-date basis investment banking and underwriting revenue rose 59% over the
prior year period. First quarter 2000 revenue from initial and secondary public
equity offerings, particularly in the technology sector, accounted for much of
the increase. Advisory fees from mergers and acquisitions also rose strongly in
the first quarter of 2000. During 2000's second quarter, volatile market
conditions delayed or cancelled many public offerings, which reduced revenue for
the quarter. The 1999 second quarter included a $7.5 million advisory fee for a
single transaction. Excluding that fee, 2000's second quarter investment banking
revenue declined only 3% from the prior year's second quarter. Public finance
investment banking fees remained down for the first six months of 2000 from the
prior year, amid a soft market for new issues. However, other public finance
advisory fees rose slightly in the second quarter.
Revenue from principal transactions increased $9.9 million (25%) in the
second quarter of 2000 versus the 1999 second quarter, and rose 43% for the
first six-months of 2000 over the same period in 1999. Higher sales and trading
of over-the-counter equity securities drove this increase in both periods.
Revenue from trading of municipal bonds also rose during both the second quarter
and year-to-date periods, although trading results on taxable fixed income
securities declined for both the three and six-month periods. Amid continuing
interest rate uncertainty, institutional sales of both municipal and taxable
fixed income securities were down from the prior year second quarter and
year-to-date periods.
8
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Correspondent services revenue declined 6% in the second quarter of
2000 versus 1999's second quarter, on lower transaction volumes reflecting the
volatility in U.S. equity markets. However, strong investor activity and higher
trading volumes in 2000's first quarter contributed to a year-to-date increase
of 10% in correspondent services revenue from the same period in 1999.
Net interest income increased $5.6 million (36%) in the second quarter
of 2000 over 1999 and $12.4 million (41%) for the year-to-date over the same
period in 1999. Interest revenue rose strongly in 2000 as customer margin loan
balances grew from the prior year periods. Interest expense for both the quarter
and year-to-date increased as a result of the $50 million term loan we entered
into in November of 1999. Average margin spreads (the difference between the
rate our customers pay us on margin loans and our average borrowing cost) rose
moderately for both the quarter and year-to-date from the same periods in 1999,
as we raised the rates we charge on margin loan balances in line with rate
increases by the Federal Reserve.
Asset management revenue increased $7.9 million (43%) in the second
quarter of 2000 and $15.0 million (42%) in the first six-months of 2000 over the
same periods in 1999. Revenue growth in both the quarter and year-to-date came
from an increase in assets under management in our Private Client Group's
fee-based accounts and money market funds, and from rising market valuations of
existing assets in these accounts.
Other revenue increased 49% ($4.4 million) in the 2000 second quarter
over the prior year second quarter, primarily on gains on the sale of equity
investments made in connection with our Equity Capital Markets business. For the
first six months of 2000, other revenue declined 7% ($2.2 million) from the same
period a year ago. First quarter 1999 results included a significant pretax gain
of $15.4 million resulting from our sale of an equity investment made in
connection with our correspondent services business.
Compensation and benefits as a percent of net revenue declined for the
quarter to 63.5% from 64.5% in the prior year quarter. For the year to date
period, compensation and benefits as a percent of net revenue declined to 63.7%
in 2000 versus 64.3% 1999 (excluding the impact of the $15.4 million investment
gain described above).
Operating expenses, excluding compensation and benefits, increased 6%
in the second quarter of 2000 from the same period a year ago. Travel and
promotional expenses increased 20%, primarily on pending investment banking
activity in our Equity Capital Markets business. Floor brokerage and clearing
fees rose 11% on payments for first quarter's higher trading volumes. Occupancy
and equipment expenses and communication expenses did not change significantly
from the prior year quarter. Other expenses increased by 9%, primarily from
programming and development costs related to web-based technology initiatives.
Among our web-based initiatives are enhancements to our customer web-site, which
will allow customers to place orders for the purchase or sale of securities
on-line through their investment executive. The costs of these enhancements are
generally being expensed although certain items are being capitalized in
accordance with current accounting guidelines.
For the first six months of 2000 operating expenses, excluding
compensation and benefits, rose 11% over the same period in 1999. Travel and
promotional expenses increased 13% mainly due to high levels of investment
banking activity from our Equity Capital Markets Group. Floor brokerage and
clearing fees rose 7% on first quarter's high trading volumes. Occupancy and
equipment expenses rose 6% due to equipment upgrades and office remodeling
expenses, primarily in the first quarter of 2000. Communication expenses did not
change significantly from the prior year period. Other expenses increased by
31%, mainly from programming and development costs related to improvements in
our web-sites and other web-related technology.
9
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RESULTS OF OPERATIONS BY BUSINESS LINE
Our business includes three major segments: Private Client Group, which
includes securities sales to individual investors, asset management for
individual investors, and correspondent services; Equity Capital Markets, which
includes corporate investment banking and underwriting, research, and
institutional equity sales and trading; and Fixed Income Capital Markets, which
includes fixed income securities trading, sales, underwriting, and advisory
services. All corporate expenses, and miscellaneous revenue and expenses, which
are not allocated to individual business lines are included in "Corporate."
<TABLE>
<CAPTION>
(In thousands) THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------------- --------------------------------
2000 1999 2000 1999
-------------- --------------- -------------- --------------
<S> <C> <C> <C> <C>
NET REVENUE
Private Client Group.......................... $ 155,049 $ 147,922 $ 346,693 $ 289,522
Equity Capital Markets........................ 65,203 58,610 190,905 92,025
Fixed Income Capital Markets.................. 19,397 22,154 40,144 47,169
Corporate:
Staff and other............................ 9,086 3,869 22,003 8,443
Gain on sale of investment................. - 15,378
-------------- ------------- -------------- -------------
TOTAL................................. $ 248,735 $ 232,555 $ 599,745 $ 452,537
============== ============= ============== =============
(In thousands)
PRE-TAX INCOME (LOSS)
Private Client Group.......................... $ 20,300 $ 17,634 $ 46,251 $ 32,849
Equity Capital Markets........................ 7,352 10,078 36,619 11,244
Fixed Income Capital Markets.................. (1,881) (1,144) (2,912) 953
Corporate .................................... 6,204 491 17,040 18,158
-------------- ------------- -------------- -------------
TOTAL................................. $ 31,975 $ 27,059 $ 96,998 $ 63,204
============== ============= ============== =============
PRE-TAX MARGIN ON NET REVENUE
Private Client Group.......................... 13.1% 11.9% 13.3% 11.3%
Equity Capital Markets........................ 11.3 17.2 19.2 12.2
Fixed Income Capital Markets.................. nm nm nm 2.0
Corporate..................................... 68.3 12.7 77.4 76.2
-------------- ------------- -------------- -------------
TOTAL................................. 12.9% 11.6% 16.2% 14.0%
============== ============= ============== =============
</TABLE>
PRIVATE CLIENT GROUP: Private Client Group ("PCG") generates revenue
primarily from commissions earned by investment executives on individual
(retail) investor activity. PCG receives asset management fees paid by Insight
Investment Management Inc. ("Insight"), an affiliate of DRI which manages the
Great Hall(R) 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 purchase securities (margin purchasing).
Revenue generated from correspondent (or trade) services is also included in
PCG. Correspondent services fees are paid to us by independent, introducing
brokers to clear and settle their clients' transactions, and to extend credit to
their clients to purchase securities (margin purchasing).
10
<PAGE> 11
PCG net revenue rose 5% in the second quarter of 2000 and 20% in the
first six months of 2000 over the same periods in 1999. Commission revenue from
sales of equity securities increased for the current year-to-date period over
1999, on strong levels of investor activity in 2000's first quarter, which also
drove increases in correspondent services revenue during the quarter. However,
in the second quarter of 2000 revenue from sales of equity securities decreased,
as equity markets became more volatile and trading volumes and prices on the
major US exchanges declined. Asset management fees rose for both the quarter and
year-to-date periods as assets under management grew from both new assets and
rising asset valuations. Assets under administration totaled $68 billion as of
June 30, 2000, up from $63 billion at June 30, 1999. Sales of mutual funds also
rose in both the quarter and year-to-date periods, from the same periods in
1999.
PCG pretax income increased 15% in the second quarter of 2000 versus
the same period in 1999 and 41% for the first six months of 2000 over the 1999
period, on higher revenues and flat operating expenses. Compensation and
benefits as a percent of net revenue remained relatively flat for the 2000
second quarter at 53.3% versus 53.4% in the 1999 second quarter. Compensation
and benefits as a percent of net revenue for the year-to-date period declined
slightly to 54.3% from 54.5% in 1999, as changes to PCG compensation plans
offset increases due to higher production by investment executives. Operating
expenses, other than compensation and benefits, were flat or declined slightly
for both the quarter and year-to-date periods from 1999 levels, with the
exception of programming and development expenses, which rose for the first six
months of the year over the same period in 1999 due to web-based technology
initiatives.
EQUITY CAPITAL MARKETS: Equity Capital Markets' ("ECM") revenue comes
from several sources: commissions earned from trading and market making in
equity securities and from the purchase or sale of equity securities; principal
sales of equity securities to institutional customers and PCG clients. ECM also
earns fees from underwriting and private placements and initial public offerings
("IPOs"); from providing research; and from merger and acquisition ("M&A") and
other advisory services. ECM revenue also includes fees from our syndicate
activities, which involve participating with other securities firms in
underwriting securities offerings, IPOs, and other registered securities. All of
these various fees are included in investment banking and underwriting revenue
on our consolidated income statement. ECM also makes-a-market (trades) and
provides research coverage in certain over-the-counter equity securities. ECM
trading gains and losses are included in principal transactions on our
consolidated income statement. ECM revenue also includes gains on venture
capital investments made by the group, which are included in other revenue on
our consolidated income statement. Most commissions earned from transactions on
newly issued securities sold through our Private Client Group are included in
PCG's business line revenue.
ECM's revenue rose 11% in 2000's second quarter over the 1999 second
quarter. Strong daily sales and trading results, with sales of NASDAQ securities
particularly robust, more than offset a decline in investment banking revenue
from 1999's second quarter. ECM completed 14 public equity transactions in the
quarter, versus 27 in 1999's second quarter, primarily due to poor market
conditions for IPOs in the 2000-quarter. The majority of 2000's equity offerings
were in the technology sector, although ECM also completed underwriting
transactions in its healthcare, consumer and energy sectors. Although the number
of merger and acquisition transactions in 2000's second quarter was essentially
unchanged from 1999's second quarter, 1999 revenue included a single advisory
fee of $7.5 million. Merger and acquisition revenue was therefore down in
comparison to the prior year. Revenue from private placements, however, grew
strongly in 2000's second quarter versus the prior year quarter, with three
transactions completed during the period.
ECM's year to date 2000 revenue more than doubled from 1999 led by
strong first quarter investment banking revenue. Robust underwriting activity in
the first quarter accounted for much of the increased revenue, although M&A and
private placement revenue also grew in that period. Daily sales and trading
revenues were strong for both the first and second quarters, contributing to the
year-to-date revenue increase.
ECM's pretax income declined in the current year second quarter from
1999's second quarter, despite higher revenue, as expenses also rose during the
period. Compensation and benefits as a percent of ECM's higher net revenue
declined to 66.2% in 2000's second quarter versus 67.7% in 1999's second
quarter. Programming and other technology-related costs increased, as ECM
initiatives focused on improvements to its website and other technology
programs. Travel and promotional expenses also rose in the quarter, primarily
related to generation of future investment banking for the 2000 third quarter.
Communications and occupancy expenses rose modestly from the prior year, due
mostly to equipment upgrades and office-remodeling costs to accommodate expanded
staff.
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<PAGE> 12
On a year-to-date basis, ECM's pretax income and margins grew strongly
in 2000 over 1999, primarily on the strength of the 2000 first quarter's
significantly higher revenue. Compensation and benefits as a percent of this
higher net revenue declined to 65.9% for the year-to-date 2000 versus 67.5% for
the same period in 1999. Programming and other technology-related costs
increased for the year-to-date period due to improvements in web technology.
Travel and promotional expenses rose year-to-date as, in addition to second
quarter's increase, first quarter expenses were higher on that quarter's strong
investment banking activity. Communications and occupancy expenses rose modestly
for the year-to-date period over 1999.
FIXED INCOME: Fixed Income Capital Markets' ("FICM") revenue comes from
municipal fixed income underwriting fees, as well as commissions from taxable
and tax-exempt fixed income securities sales and trading. FICM underwriting fees
come from purchasing and re-selling the tax-exempt fixed income securities of
municipalities, counties, cities, school districts and other community
development organizations. These securities are resold primarily to our
individual and institutional customers. FICM also receives fees from acting as a
financial advisor to state and local governments and other community development
organizations reviewing financing options or preparing for bond issues. All of
these fees are included in investment banking and underwriting revenue on our
consolidated income statement. FICM also trades certain fixed income securities,
primarily to offer these securities to our individual and institutional
customers. This trading income is included as part of principal transaction
revenue on our consolidated income statement. 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 net revenue declined for both the 2000 second quarter and
year-to-date periods versus the same period a year ago. Uncertainty over
interest rate changes by the Federal Reserve, a decline in new issuances of
tax-exempt bonds, and relatively low yields on U.S. Treasury securities all
contributed to a difficult fixed income market. Institutional sales of both
municipal and taxable bonds declined for both the quarter and year-to-date
periods in this challenging market. Trading results for municipal securities
grew for both the quarter and year-to-date, although taxable trading results
were down for both periods, resulting in flat trading revenue for the first
three and six months of 2000. Although underwriting fees declined for both the
quarter and year-to-date periods, other financial advisory fees rose in the
second quarter, resulting in increased banking revenue for the 2000 second
quarter.
FICM's pre-tax income declined for both the quarter and year-to-date
periods on this lower revenue. Margins also declined for both periods, despite a
decrease in operating expenses. Compensation and benefits as a percent of FICM's
lower net revenue increased to 72.0% in 2000's second quarter, up from 67.9% in
1999's second quarter, and rose to 69.4% for the first six-months of 2000,
versus 64.9% in the same period of 1999.
CORPORATE: Corporate revenue consists primarily of asset management
fees generated by Insight (excluding the portion paid to PCG). Insight manages
the Great Hall money market funds and certain institutional fixed income managed
accounts. Corporate revenue also includes the portion of gains on venture
capital investments made via our Equity Capital Markets group not included in
ECM's revenue, and net interest that is not allocated to a specific business
line.
Great Hall asset management fees increased in 2000 as assets under
management at Insight rose during the year. Corporate revenue for 2000's second
quarter also increased on higher gains on sales of investments for the period.
Corporate revenue in 1999's first quarter included a gain of $15.4 million
representing our profit on the sale of an equity investment. This investment was
made in connection with our correspondent services business, and was not an
equity investment made by our venture capital funds.
Corporate expense includes goodwill amortization, professional fees,
and any other non-allocated expenses. Compensation and benefit expenses
increased in 2000, reflecting improved operating results as incentive
compensation plans are based on various factors, including our return on equity.
Travel and promotional expenses increased for both the quarter and year-to-date
on increased business levels. Programming and other technology-related expenses
also rose as we initiated improvements to our web technology.
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<PAGE> 13
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, stock loan transactions, and bank lines of credit are our primary
methods of financing our trading inventories.
On November 2, 1999, we entered into a $50 million five-year term loan
agreement with a group of banks. This loan is unsecured and bears an interest
rate of LIBOR plus 175 basis points. This loan is repayable in 12 equal
quarterly installments beginning in January 2002. There are no restrictions on
the use of these proceeds and we have the right to contribute these funds as
capital to DRI.
On March 16, 2000, we amended our committed, revolving credit agreement
to extend the maturity date to March 15, 2001, and increase the credit limit to
$80 million from $67 million. Loans under this agreement are unsecured and bear
interest at a floating rate of LIBOR plus 87 basis points. No amounts were
outstanding under this facility at June 30, 2000.
Under the terms of both of the agreements described above, we must
comply with covenants regarding net worth, regulatory net capital; and
indebtedness, among others.
As described in Note M to the Consolidated Financial Statements of our
1999 Annual Report on Form 10-K, DRI must comply with certain regulations of the
Securities and Exchange Commission and New York Stock Exchange, Inc. measuring
capitalization and liquidity. DRI continues to operate above minimum net capital
standards of 5 percent of aggregate debit items. At June 30, 2000, DRI's net
capital was $208.1 million, or 11.04 percent of aggregate debit balances and
$113.9 million in excess of the 5-percent requirement.
During the first and second quarters of 2000, we declared and paid a
regular quarterly dividend on our common stock of $.22 per share. The
determination of the amount of future cash dividends, if any, to be declared and
paid will depend on our future financial condition, earnings and available
funds.
During the 1999 second quarter we entered into an interest rate swap
agreement on DRI's $80 million subordinated term loan agreement. (See Footnote C
"Subordinated and Other Debt," for more information about this subordinated
debt.) This interest rate swap allows us to pay a fixed rate on our subordinated
loan, rather than the variable LIBOR-denominated rate of the original debt
agreement.
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<PAGE> 14
FORWARD-LOOKING STATEMENTS
This document contains certain "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995 (the "Reform
Act") which reflect our current views regarding future events and our financial
performance. The words "believe," "expect," "anticipate," "intend," "estimate,"
"will," "look for," "hope to," "goals," "should," and similar expressions are
used to identify these "forward-looking statements". We desire to take advantage
of the "safe harbor" provisions of the Reform Act. We wish to caution investors
and potential investors that any forward-looking statements made by us or on our
behalf are subject to uncertainties and other factors that could cause actual
results to differ materially from those statements. These factors include, among
others: (a) the volatile nature of the securities industry; (b) rapidly growing
competition posed by other broker-dealers, including discount brokerages and
online trading firms and firms, which as a result of industry consolidation or
otherwise, are substantially larger, have substantially more capital or have
direct access to a greater array of products and services; (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 the
number of class action or regulatory proceedings filed against us, and other
litigation-related and regulatory 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 statement(s). You should also not place undue reliance on these
forward-looking statements as they relate only to our views as of the date the
statements are made. We undertake no obligation to publicly update or revise any
forward-looking statements, even if new information, future events, or other
conditions occur.
We herein incorporate by reference Exhibit 99 of our Annual Report on
Form 10-K for the year ended December 31, 1999.
14
<PAGE> 15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the regular Annual Meeting of Stockholders of the Company held on
April 27, 2000, the stockholders elected ten directors, approved an employee
stock purchase plan and ratified the appointment of KPMG LLP. as the
registrant's independent auditors.
Voting results of each of those items were as follows:
Election of Directors:
<TABLE>
<CAPTION>
For Withheld
----- --------
<S> <C> <C>
J. C. Appel 11,425,327 35,660
J. E. Attwell 11,421,523 39,464
S. S. Boren 11,421,058 39,929
F. G. Fitz-Gerald 11,427,665 33,322
W. F. Mondale 10,885,460 575,527
C. A. Rundell, Jr. 11,420,773 40,214
R. L. Ryan 11,421,215 39,772
A. R. Schulze, Jr. 11,424,166 36,821
I. Weiser 11,414,476 46,511
K. J. Wessels 11,428,465 35,522
<CAPTION>
For Against Abstain
--- ------- -------
<S> <C> <C> <C>
Approval of Employee Stock Purchase Plan 10,847,748 593,406 19,833
Ratification of Appointment of Auditors 11,372,510 74,108 14,369
</TABLE>
15
<PAGE> 16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
ITEM NO. ITEM METHOD OF FILING
11 Computation of Earnings Per Share. Filed herewith.
27 Financial Data Schedule. Filed herewith.
(b) Reports on Form 8-K
No Reports on Form 8-K were filed during the quarter ended June 30, 2000.
16
<PAGE> 17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DAIN RAUSCHER CORPORATION
Registrant
Date: August 11, 2000 By Daniel J. Collins
--------------------------- --------------------------------
Daniel J Collins
Senior Vice President
and Controller
(Principal Accounting Officer)
By David J. Parrin
--------------------------------
David J Parrin
Executive Vice President
and Chief Financial Officer
(Principal Financial Officer)
17
<PAGE> 18
DAIN RAUSCHER CORPORATION
INDEX OF EXHIBITS TO QUARTERLY REPORT ON FORM 10-Q
FOR QUARTER ENDED JUNE 30, 2000
(a) Exhibits
ITEM NO. ITEM METHOD OF FILING
11 Computation of Earnings Per Share. Filed herewith.
27 Financial Data Schedule. Filed herewith.
18
