<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 SEPTEMBER 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 October 31, 2000, the Company had 13,031,583 shares of common stock
outstanding.
--------------------------------------------------------------------------------
<PAGE> 2
DAIN RAUSCHER CORPORATION
REPORT ON FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2000
INDEX
PAGE
----
I. FINANCIAL INFORMATION:
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 1. Legal Proceedings........................................... 15
Item 6. Exhibits and Reports on Form 8-K............................ 16
Signatures.................................................. 17
Index of Exhibits........................................... 18
Exhibits.................................................... 19
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DAIN RAUSCHER CORPORATION
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------ ------------
(UNAUDITED)
<S> <C> <C>
Assets:
Cash and cash equivalents.................................. $ 33,626 $ 39,087
Receivable from customers.................................. 1,802,989 1,453,488
Receivable from brokers and dealers........................ 283,261 321,571
Securities purchased under agreements to resell............ 76,987 67,357
Trading securities owned................................... 300,587 243,740
Equipment and leasehold improvements, at cost, net of
depreciation 46,827 47,578
Other receivables.......................................... 126,871 123,805
Deferred income taxes...................................... 65,865 58,891
Goodwill, net of amortization.............................. 110,488 114,485
Other assets............................................... 38,718 29,853
---------- ----------
$2,886,219 $2,499,855
========== ==========
Liabilities and Shareholders' Equity:
Liabilities:
Short-term borrowings...................................... $ 36,322 $ 55,836
Customer drafts payable.................................... 70,431 76,267
Payable to customers....................................... 522,788 690,559
Payable to brokers and dealers............................. 1,137,106 677,056
Securities sold under repurchase agreements................ 57,265 23,213
Trading securities sold, but not yet purchased............. 98,773 79,023
Accrued compensation....................................... 263,820 235,858
Other liabilities and accrued expenses..................... 75,270 121,486
Subordinated and other debt................................ 129,144 150,807
---------- ----------
2,390,919 2,110,105
Shareholders' equity:
Common stock............................................... 1,666 1,630
Additional paid-in capital................................. 158,087 125,320
Retained earnings.......................................... 358,637 285,966
Treasury stock, at cost.................................... (23,090) (23,166)
---------- ----------
495,300 389,750
---------- ----------
$2,886,219 $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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- --------------------------
2000 1999 2000 1999
--------------------------- --------------------------
<S> <C> <C> <C> <C>
Revenue:
Commissions.......................... $ 80,161 $ 75,499 $ 278,215 $ 242,868
Investment banking and underwriting.. 45,431 56,837 193,227 149,720
Principal transactions............... 52,327 42,329 170,129 124,879
Interest............................. 45,927 33,553 135,287 99,128
Asset management..................... 26,531 20,147 76,785 55,440
Correspondent services............... 4,908 4,966 17,766 16,695
Gain on sale of investment........... - - - 15,378
Other................................ 11,973 9,799 42,053 26,663
----------- ----------- ----------- ----------
Total revenue........................ 267,258 243,130 913,462 730,771
Interest expense........................ (23,418) (18,253) (69,877) (53,357)
----------- ---------- ----------- ---------
Net revenue............................. 243,840 224,877 843,585 677,414
----------- ----------- ----------- ----------
Operating expenses:
Compensation and benefits............ 152,496 144,005 534,391 424,887
Occupancy and equipment.............. 15,189 13,368 44,530 41,148
Communications....................... 11,390 12,558 35,996 37,404
Travel and promotional............... 10,822 8,830 31,643 27,259
Floor brokerage and clearing fees.... 4,044 3,153 11,350 10,003
Branch closing and consolidation
expense - 2,111 - 2,977
Other................................ 15,934 16,345 54,712 46,024
----------- ----------- ----------- ----------
Total operating expenses................ 209,875 200,370 712,622 589,702
----------- ----------- ----------- ----------
Income before income taxes.............. 33,965 24,507 130,963 87,712
Income tax expense...................... (12,907) (9,190) (49,766) (32,892)
----------- ----------- ----------- ----------
Net income.............................. $ 21,058 $ 15,317 $ 81,197 $ 54,820
=========== =========== =========== ==========
Earnings per share:
Basic................................ $ 1.63 $ 1.23 $ 6.33 $ 4.41
=========== =========== =========== ==========
Diluted.............................. $ 1.43 $ 1.13 $ 5.61 $ 4.09
=========== =========== =========== ==========
Dividends per share..................... $ .22 $ .22 $ .66 $ .66
=========== =========== =========== ==========
</TABLE>
See notes to consolidated financial statements.
4
<PAGE> 5
DAIN RAUSCHER CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------
2000 1999
----------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income ................................................ $ 81,197 $ 54,820
Adjustments to reconcile income to cash provided
by operating activities:
Depreciation and amortization........................ 18,795 18,372
Deferred income taxes................................ (6,974) 1,379
Other non cash items................................. 3,290 11,990
Net trading securities owned and trading
securities sold, but not yet purchased............ (37,097) (78,983)
Other receivables.................................... (3,066) (35,271)
Drafts payable and short-term borrowings
of securities companies........................... (25,350) (102,748)
Net receivable from customers........................ (517,271) (209,280)
Net payable to brokers and dealers................... 498,360 159,716
Net securities under repurchase agreements........... 24,422 142,314
Other accrued liabilities............................ (40,670) 21,610
Accrued compensation................................. 27,962 33,192
Legal settlements.................................... (13,300) -
Other................................................ (838) (15,177)
---------- ----------
Cash provided by operating activities......................... 9,460 1,934
----------- ----------
Cash flows from financing activities:
Proceeds from:
Issuance of common stock for stock options.............. 5,560 1,766
Payments for:
Subordinated and other debt............................. (15,000) (10,000)
Dividends on common stock............................... (8,477) (8,219)
Purchase of common stock................................ - (9,790)
-------- ---------
Cash used by financing activities............................. (17,917) (26,243)
-------- ---------
Cash flows from investing activities:
Gain on sale of investment securities................... 12,174 15,378
Payments for equipment, leasehold improvements and other (9,178) (520)
---------- ----------
Cash provided by investing activities......................... 2,996 14,858
---------- ----------
Increase (decrease) in cash and cash equivalents.............. (5,461) (9,451)
Cash and cash equivalents:
At beginning of period.................................. 39,087 47,273
---------- ----------
At end of period........................................ $ 33,626 $ 37,822
========== ==========
</TABLE>
See notes to consolidated financial statements.
5
<PAGE> 6
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 nine-month periods ended September 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 September 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. The
loan balance outstanding as of September 30, 2000 is $50 million. 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 rise. Under the terms of our swap
agreement, our monthly 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 $700 thousand (unrealized
gain, not recorded in our consolidated income statement) at September 30, 2000.
This interest rate swap matures on December 31, 2002.
F. SUPPLEMENTARY CASH FLOW STATEMENT INFORMATION
Income tax payments totaled $67,258,000 and $27,429,000 during the nine
months ended September 30, 2000 and 1999, respectively. Interest payments
totaled $65,145,000 and $53,132,000 during the same respective nine-month
periods.
During the nine months ended September 30, 2000 and 1999, we credited
common stock to deferred compensation plan participants, resulting in net
non-cash financing activity of $23,375,000 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.
ACQUISITION
On September 28, 2000, Dain Rauscher agreed to be acquired by Royal Bank
of Canada for $95 per share in cash. Stockholders will receive a proxy statement
containing detailed information regarding this transaction.
SUMMARY
Following is a consolidated summary of our income and results of
operations for the three and nine months ended September 30, 2000 and 1999:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- --------------------------
2000 1999 2000 1999
--------------------------- --------------------------
<S> <C> <C> <C> <C>
Revenue................................. $ 267,258 $ 243,130 $ 913,462 $ 730,771
Interest expense........................ (23,418) (18,253) (69,877) (53,357)
----------- ---------- ----------- ---------
Net revenue............................. 243,840 224,877 843,585 677,414
Operating expenses...................... 209,875 200,370 712,622 589,702
----------- ----------- ----------- ----------
Income before income taxes.............. 33,965 24,507 130,963 87,712
Income tax expense...................... (12,907) (9,190) (49,766) (32,892)
----------- ---------- ----------- ---------
Net income.............................. $ 21,058 $ 15,317 $ 81,197 $ 54,820
=========== =========== =========== ==========
Earnings per share:
Basic................................ $ 1.63 $ 1.23 $ 6.33 $ 4.41
Diluted.............................. 1.43 1.13 5.61 4.09
</TABLE>
RESULTS OF OPERATIONS BY TRANSACTION TYPE
Commission revenue increased 6% from the prior year quarter, and 15% in
the first nine months of 2000 over the prior year period. In the third quarter,
sales of mutual funds, listed securities and over-the-counter securities all
contributed to the increase. On a year-to-date basis, record NASDAQ trading
volumes and strong volumes on the NYSE in the first three months of the year and
increased sales of over-the-counter and listed equity securities contributed to
the year-over-year increase. Sales of mutual funds and insurance and annuity
products were also up throughout the first nine months of 2000. However, the
ongoing movement by customers to fee-based asset management accounts, rather
than the traditional transaction-based brokerage accounts, negatively affected
commission revenue for the year.
Investment banking and underwriting revenue declined 20% ($11.4 million)
in the 2000 third quarter from the prior-year quarter. During 2000's third
quarter, volatile market conditions, which have delayed or cancelled many public
offerings in the past 6 months, continued to dampen investment banking and
underwriting revenue as they had in the second quarter of 2000. However, on a
year-to-date basis, investment banking and underwriting revenue rose 29% over
the prior year period. First quarter 2000 revenue from initial and secondary
public equity offerings, mainly in the technology sector, accounted for much of
this increase. Advisory fees from mergers and acquisitions rose strongly in the
first quarter of 2000 and have continued to grow quarter-over-quarter throughout
the first nine months of the year, although not strongly enough to offset the
decline in underwriting fees. Public finance investment banking fees were down
throughout the first nine months of 2000 from the prior year, amid a soft market
for new issues.
Revenue from principal transactions increased $10 million (24%) in the
third quarter of 2000 versus the 1999 third quarter, and rose 36% for the first
nine months of 2000 over the same period in 1999. Higher sales and trading of
over-the-counter equity securities by our equity capital markets group drove
this increase in both periods. Amid continued volatility and investor
uncertainty over interest rates, institutional sales of both municipal and
taxable fixed income securities were down from the prior year for both the third
quarter and year-to-date periods.
8
<PAGE> 9
Correspondent services revenue declined slightly in the third quarter of
2000 versus 1999's third quarter, on lower transaction volumes reflecting
continued volatility in U.S. equity markets. However, strong investor activity
due to higher trading volumes and strong transaction volume in 2000's first
quarter contributed to a year-to-date increase of 6% in correspondent services
revenue from the same period in 1999.
Net interest income increased $7.2 million (47%) in the third quarter of
2000 over 1999 and $19.6 million (43%) for the year-to-date over the same period
in 1999. Customer margin loan balances continue to show increases from the prior
year although they declined from first quarter 2000 levels; customer margin loan
balances grew in the first quarter in connection with record trading volumes on
the NASDAQ and strong volumes on the NYSE. 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 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 by $6.4 million (32%) in the third
quarter of 2000 and $21.3 million (39%) in the first nine months of 2000 over
the same periods in 1999. Assets under management in our Private Client Group's
fee-based accounts and money market funds continued to grow amid rising market
valuations of existing assets in these accounts. We continue to transition
clients to fee-based asset management accounts, rather than traditional
transaction-based brokerage accounts, which also contributes to increases in
asset management fees.
Other revenue increased 22% ($2.2 million) in the 2000 third quarter over
the prior year third quarter, primarily due to our charging an annual account
fee in the third quarter of 2000 versus second quarter in 1999. For the first
nine months of 2000, other revenue was flat 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 62.5% from 64.0% in the prior year quarter. For the year-to-date
period, compensation and benefits as a percent of net revenue declined to 63.3%
in 2000 versus 64.2% in 1999 (excluding the impact of the $15.4 million
investment gain described above).
Operating expenses, excluding compensation and benefits, increased
slightly (1.8%) in the third quarter of 2000 from the same period a year ago.
During the third quarter, we negotiated a settlement with John G. Kinnard and
Co., Inc. ("Kinnard") related to a 1999 NASD arbitration panel decision. Under
the terms of the agreement, we paid Kinnard $13.3 million in cash, compared to
the original award, plus accrued interest, of $17.2 million. We reversed the
difference between our final payment and the previously accrued settlement and
interest, which reduced other expenses for the quarter. Other expenses increased
by 21%, excluding the settlement, 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. Travel and promotional expenses increased 23%,
primarily on increases in investment banking activity and in the number of
investor conferences held during the quarter by our Equity Capital Markets
business. Floor brokerage and clearing fees rose 28% on higher transaction
volumes during the quarter. Occupancy and equipment expenses increased 14% due
to expansion and opening of offices by our Equity Capital Markets group and
equipment upgrades. Communication expenses declined 9% from the prior year
quarter.
For the first nine months of 2000, operating expenses, excluding
compensation and benefits, rose 8% over the same period in 1999. Travel and
promotional expenses increased 16% mainly due to high levels of investment
banking activity from our Equity Capital Markets Group. Floor brokerage and
clearing fees rose 13% on first quarter's high trading volumes. Occupancy and
equipment expenses rose 8% due to equipment upgrades and office remodeling
expenses, primarily in the first quarter of 2000. Communication expenses
decreased slightly from the prior year period. Other expenses (including the
settlement with Kinnard) increased by 19%, mainly from programming and
development costs related to improvements in our web-sites and other web-related
technology.
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
9
<PAGE> 10
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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- --------------------------
2000 1999 2000 1999
--------------------------- --------------------------
<S> <C> <C> <C> <C>
NET REVENUE
Private Client Group................. $ 146,285 $ 138,136 $ 492,977 $ 427,658
Equity Capital Markets............... 62,955 52,820 253,859 144,845
Fixed Income Capital Markets......... 21,954 26,926 62,098 74,095
Corporate:
Staff and other................... 12,646 6,995 34,651 15,438
Gain on sale of investment........ - - - 15,378
----------- ----------- ----------- ----------
TOTAL........................ $ 243,840 $ 224,877 $ 843,585 $ 677,414
=========== =========== =========== ==========
(In thousands)
PRE-TAX INCOME (LOSS)
Private Client Group................. $ 17,687 $ 13,649 $ 63,939 $ 46,498
Equity Capital Markets............... 5,417 6,319 42,036 17,563
Fixed Income Capital Markets......... 625 2,072 (2,287) 3,025
Corporate ........................... 10,236 2,467 27,275 20,626
----------- ----------- ----------- ----------
TOTAL........................ $ 33,965 $ 24,507 $ 130,963 $ 87,712
=========== =========== =========== ==========
PRE-TAX MARGIN ON NET REVENUE
Private Client Group................. 12% 10% 13% 11%
Equity Capital Markets............... 9% 12% 17% 12%
Fixed Income Capital Markets......... 3% 8% (4%) 4%
Corporate............................ n/m n/m n/m n/m
----------- ----------- ----------- ----------
TOTAL........................ 14% 11% 16% 13%
----------- ----------- ----------- ----------
</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 services is also included in PCG.
Correspondent service 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).
PCG's net revenue rose 6% in the third quarter of 2000 and 15% in the
first nine months of 2000 over the same periods in 1999. Strong revenue growth
in both managed accounts and mutual fund commissions drove third quarter
increases. Commission revenue from sales of equity securities was flat for the
quarter, as equity markets continued to be volatile with trading volumes and
prices on the major US exchanges continuing to decline since the second quarter
of 2000. However, on a year-to-date basis, sales of equity securities were up
16% over 1999 on strong levels of investor activity in 2000's first quarter.
Asset management fees rose for both the quarter and year-to-date periods as
assets under management grew both from new assets and rising asset valuations
over the prior year period. Assets under administration totaled $67.1 billion as
of September 30, 2000, up from $60.5 billion at September 30, 1999.
PCG's pre-tax income increased 30% in the third quarter of 2000 versus
the same period in 1999 and 38% for the first nine months of 2000 over the
corresponding 1999 period on higher revenues. A portion of the increase can be
attributed to the settlement of the Kinnard matter and the related reduction in
accrued expenses discussed previously. Compensation and benefits as a percent of
net revenue declined slightly for the 2000 third quarter to 52.9% from 54.0% in
the 1999 third quarter. Compensation and benefits as a percent of net revenue
for the year-to-date period remained relatively flat at 53.9%
10
<PAGE> 11
versus 54.3% in 1999. Operating expenses, other than compensation and benefits,
declined for both the quarter and year-to-date periods from 1999 levels due to
the settlement of the Kinnard matter.
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; and from
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 net revenue rose 19% in 2000's third quarter over the 1999 third
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 third quarter. ECM completed 17 public equity transactions in the
current quarter versus 30 in the prior year's quarter. The majority of the third
quarter and year-to-date 2000 equity offerings were in the technology sector,
although ECM also completed underwriting transactions in its healthcare,
consumer, financial services, and energy sectors. The number of merger and
acquisition transactions increased to 10 in the 2000 third quarter versus 8 in
the prior year's quarter. Merger and acquisition revenue increased to $8.3
million for the quarter. Revenue from private placements also increased strongly
in the third quarter versus the prior year.
ECM's 2000 revenue increased 75% from the 1999 year-to-date period with
the increase almost equally due to strong daily sales and trading revenue, and
first quarter underwriting activity. M&A and private placement revenue also
increased dramatically during the nine-month period.
ECM's pretax income declined 14% in the current year third quarter from
1999's third quarter. Expenses rose during the period as ECM continued to focus
on improvements to its website and other technology initiatives. Compensation
and benefits as a percent of ECM's higher net revenue declined to 61.4% in
2000's third quarter versus 67.3% in 1999's third quarter. Travel and
promotional expenses rose in the third quarter related to three investor
conferences held in September, as well as pending deals in the pipeline for
investment banking transactions anticipated to close in 2000's fourth quarter.
Communications expense was relatively flat for the quarter, while occupancy was
up slightly due to the expansion and opening of offices.
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 64.8% for the year-to-date 2000 versus 67.4% for
the same period in 1999. Programming and other technology-related costs
increased due to the initiatives described above. Travel and promotional
expenses rose year-to-date due to the first quarter's strong investment banking
activity. Communications and occupancy expenses rose modestly for the
year-to-date period over 1999 as ECM upgraded equipment and renovated and opened
offices during the nine-month period.
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
issued by 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's revenue has been negatively affected throughout 2000 by investor
uncertainty over the timing and significance of interest rate adjustments by the
Federal Reserve, the relatively low return on U.S. Treasury securities (with
yields on short-term Treasury securities higher than the yield on long-term
securities), and a slowing market for new tax-exempt bond
11
<PAGE> 12
issuances. FICM's net revenue for both the quarter and year-to-date periods as a
result of these factors was down 18% and 16%, respectively. Institutional sales
of municipal and taxable bonds declined for both the quarter and year-to-date
periods amid these difficult market conditions. Trading results for the quarter
were down from the prior year. Revenue from institutional municipal securities
was the exception, improving strongly over the prior year quarter. For the
year-to-date period, trading revenue was down from 1999. Institutional and
retail municipal trading improved, although taxable trading results continued to
be down sharply from 1999 as they have been throughout the current year. Banking
revenue declined for both the quarter and year-to-date periods, primarily due to
a decline in underwriting fees in the slow market for new tax-exempt bond
issues.
FICM's pre-tax income declined for both the quarter and year-to-date
periods on the group's 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 64.7% in the third quarter of 2000, up
from 62.3% in 1999's third quarter, and rose to 67.8% for the first nine-months
of 2000, versus 64.0% in the same period of 1999. Compensation and benefits as a
percent of revenue did decline from the 2000 second quarter (72.0%), as net
revenue improved somewhat in the third quarter, and the number of employees in
the group decreased.
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 for both the quarter and
year-to-date periods as assets under management rose from 1999 levels. Net
interest revenue also increased during the quarter and year-to-date periods due
to a reduction in interest expense from increases in our equity and
non-interest-bearing liability balances. 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.
12
<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 September 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 September 30, 2000, DRI's
net capital was $221.6 million, or 11.83 percent of aggregate debit balances and
$127.9 million in excess of the 5-percent requirement.
During each of the first three 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
and the impact of the pending acquisition by Royal Bank of Canada referenced
earlier.
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.
13
<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
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We (referred to as "the Company" below) are defendants in various pending
actions, suits and proceedings before courts, arbitrators and governmental
agencies. Certain of these actions claim substantial damages and, if determined
adversely, could have a material adverse effect on our consolidated financial
condition or results of operations. A list of certain of such actions is
included in Item 3 of our Annual Report on Form 10-K for the year ended December
31, 1999, and they are described in more detail in Item 8, Note I to the
Consolidated Financial Statements included in that Annual Report. The following
description of recent developments in connection with certain of these matters
should be read in conjunction with that description.
KINNARD ARBITRATION
In August 2000, a state district court confirmed the arbitration award.
We filed an appeal with the Minnesota Court of Appeals. In September 2000, we
settled the case by making a $13.3 million cash payment and terminated the
appeal.
15
<PAGE> 16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
ITEM NO. ITEM METHOD OF FILING
-------- ---- ----------------
4.9 Employment agreement dated September 28,
2000 between the Company and Irving Weiser. Filed herewith.
4.10 Employment agreement dated September 28,
2000 between the Company and Peter Grant. Filed herewith.
11 Computation of Earnings Per Share. Filed herewith.
27 Financial Data Schedule. Filed herewith.
(b) Reports on Form 8-K
One Report on Form 8-K was filed during the quarter ended September 30,
2000.
Exhibit 99.1 Press release announcing settled arbitration case with
Stockwalk.com.
Exhibit 99.2 Press release announcing acquisition of registrant by
Royal Bank of Canada.
Date of earliest event reported - September 27, 2000
Financial Statements Filed - None
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: November 13, 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 SEPTEMBER 30, 2000
(a) Exhibits
ITEM NO. ITEM METHOD OF FILING
-------- ---- ----------------
4.9 Employment agreement dated September 28,
2000 between the Company and Irving Weiser. Filed herewith.
4.10 Employment agreement dated September 28,
2000 between the Company and Peter Grant. Filed herewith.
11 Computation of Earnings Per Share. Filed herewith.
27 Financial Data Schedule. Filed herewith.
18
