Registration Statement for Securities Offered Pursuant to a Transaction — Form S-3
Filing Table of Contents
Document/Exhibit Description Pages Size
1: S-3 Registration Statement for Securities Offered 94 541K
Pursuant to a Transaction
2: EX-1.1 Underwriting Agreement 27 124K
7: EX-4.11 Instrument Defining the Rights of Security Holders 25 89K
8: EX-4.13 Instrument Defining the Rights of Security Holders 8 29K
9: EX-4.14 Instrument Defining the Rights of Security Holders 15 50K
3: EX-4.3 Instrument Defining the Rights of Security Holders 76 310K
4: EX-4.4 Instrument Defining the Rights of Security Holders 83 334K
5: EX-4.7 Instrument Defining the Rights of Security Holders 29 101K
6: EX-4.9 Instrument Defining the Rights of Security Holders 23 82K
10: EX-5.1 Opinion re: Legality 4 21K
11: EX-12 Statement re: Computation of Ratios 1 11K
12: EX-23.2 Consent of Experts or Counsel 1 7K
13: EX-24 Power of Attorney 2 14K
14: EX-25.1 Statement re: Eligibility of Trustee 5 19K
S-3 — Registration Statement for Securities Offered Pursuant to a Transaction
Document Table of Contents
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 28, 1998
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
FORM S-3
---------------
DAIN RAUSCHER CORPORATION
(Exact name of registrant as specified in its charter)
[Download Table]
DELAWARE 41-1228350
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
DAIN RAUSCHER PLAZA
60 SOUTH SIXTH STREET
MINNEAPOLIS, MINNESOTA 55402-4422
(612) 371-7750
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
--------------------------
CARLA J. SMITH, ESQ.
SENIOR VICE PRESIDENT, GENERAL COUNSEL AND SECRETARY
DAIN RAUSCHER CORPORATION
DAIN RAUSCHER PLAZA
60 SOUTH SIXTH STREET
MINNEAPOLIS, MINNESOTA 55402-4422
(612) 371-7858
(Name, address, including zip code, and telephone number, including area code,
of agent for service of process)
COPY TO:
ROBERT A. ROSENBAUM, ESQ.
DORSEY & WHITNEY LLP
Pillsbury Center South
220 South Sixth Street
Minneapolis, Minnesota 55402
(612) 340-2600
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED DISTRIBUTION: From time to time
after the effective date of this Registration Statement.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. / /
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. /X/
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
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CALCULATION OF REGISTRATION FEE
[Enlarge/Download Table]
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED BE REGISTERED PER UNIT(1) OFFERING PRICE(2) REGISTRATION FEE
Debt Securities(3)(4), Preferred Stock(5), Common
Stock, par value $.125 per share(5)(6) and
Securities Warrants(7).......................... $200,000,000(3) 100% $200,000,000(3) $59,000
(FOOTNOTES ON NEXT PAGE)
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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(FOOTNOTES FROM PREVIOUS PAGE)
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(1) Not specified as to each class of securities to be registered pursuant to
General Instruction II.D of Form S-3. Securities registered hereby may be
offered for U.S. dollars or the equivalent thereof in foreign currencies,
currency units or composite currencies. Securities registered hereby may be
sold separately or together with other securities registered hereby.
(2) Estimated solely for the purpose of computing the registration fee pursuant
to Rule 457(o).
(3) In the case of Debt Securities issued at an original issue discount, such
greater principal amount as shall result in an aggregate offering price of
the amount set forth above or, in the case of Debt Securities denominated in
a currency other than U.S. dollars or in a composite currency, such U.S.
dollar amount as shall result from converting the aggregate public offering
price of such Debt Securities into U.S. dollars at the spot exchange rate in
effect on the date such Debt Securities are initially offered to the public.
(4) The Debt Securities to be offered hereunder will consist of one or more
series of Senior Notes or Subordinated Notes, or both, as more fully
described herein.
(5) Such indeterminate number of shares of Preferred Stock and Common Stock, as
may be issued from time to time at indeterminate prices.
(6) The aggregate amount of Common Stock registered hereunder is limited, solely
for purposes of any at-the-market offerings, to that which is permissible
under Rule 415(a)(4) of the Securities Act of 1933, as amended.
(7) Securities Warrants will represent rights to purchase Debt Securities,
Preferred Stock or Common Stock registered hereby. Because the Securities
Warrants will provide a right only to purchase the Debt Securities,
Preferred Stock and Common Stock offered hereunder, no additional
registration fee is required.
PROSPECTUS
SUBJECT TO COMPLETION, DATED MAY 28, 1998
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
$200,000,000
DAIN RAUSCHER CORPORATION
DEBT SECURITIES, PREFERRED STOCK,
COMMON STOCK AND SECURITIES WARRANTS
------------------
Dain Rauscher Corporation (the "Company") may offer from time to time in one
or more series: (i) its unsecured debt securities, which may be either senior
debt securities (the "Senior Notes") or subordinated debt securities (the
"Subordinated Notes" and, together with the Senior Notes, the "Debt
Securities"); (ii) shares of its preferred stock, $1.00 par value per share (the
"Preferred Stock"), in one or more series; (iii) shares of its common stock, par
value $.125 per share (the "Common Stock"); and (iv) warrants (collectively, the
"Securities Warrants") to purchase Debt Securities (the "Debt Securities
Warrants"), Preferred Stock (the "Preferred Stock Warrants") or shares of Common
Stock (the "Common Stock Warrants"), for an aggregate initial public offering
price of up to $200,000,000 or the equivalent in foreign currencies, currency
units or composite currencies (each, a "Currency"). The Debt Securities,
Preferred Stock, Common Stock and Securities Warrants (collectively, the
"Securities") will be offered for sale directly to purchasers or through
dealers, underwriters or agents to be designated. The Securities will be offered
to the public at prices and on terms determined at the time of offering. The
Securities may be sold for U.S. dollars or other Currencies and any amounts
payable by the Company in respect of the Securities may likewise be payable in
U.S. dollars or other Currencies.
The Senior Notes, when issued, will rank PARI PASSU in right of payment with
all unsecured and unsubordinated indebtedness of the Company. The Subordinated
Notes when issued will be subordinated as described herein under "Description of
Debt Securities--Subordination of Subordinated Notes."
The specific terms, with respect to the series or issue of Securities such
as: (i) the terms of any Debt Securities offered, including, where applicable,
their title, ranking, aggregate principal amount, maturity, rate of interest (or
method of calculation) and time of payment thereof, any redemption or repayment
terms, any restrictive covenants, the Currency or Currencies in which such Debt
Securities will be denominated or payable, any index, formula or other method
pursuant to which principal, premium, if any, or interest, if any, may be
determined, any conversion or exchange provisions, and other specific terms not
described in this Prospectus; (ii) the terms of any Preferred Stock offered,
including, where applicable, the specific designation, number of shares,
dividend rate (or method of calculation) and time of payment thereof,
liquidation preference, any redemption or repayment terms, any conversion or
exchange provisions, any voting rights, and other specific terms not described
in this Prospectus; (iii) the terms of any Securities Warrants offered,
including where applicable, the exercise price, detachability, duration and
other specific terms not described in this Prospectus; and (iv) the initial
public offering price and the net proceeds to the Company and other specific
terms related to the offered Securities, will be set forth in one or more
supplements to this Prospectus (each a "Prospectus Supplement").
This Prospectus may not be used to consummate sales of Securities unless
accompanied by a Prospectus Supplement.
FOR A DISCUSSION OF CERTAIN FACTORS WHICH SHOULD BE CONSIDERED BY
PROSPECTIVE PURCHASERS OF THE SECURITIES OFFERED HEREBY, SEE "RISK FACTORS"
BEGINNING ON PAGE 8 HEREIN.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
The Securities may be sold to or through underwriters, dealers or agents for
public offering or directly to other purchasers pursuant to the terms of the
offering at the time of sale. See "Plan of Distribution." Any underwriters,
dealers or agents participating in an offering of Securities will be named in
the accompanying Prospectus Supplement or Prospectus Supplements. Such
underwriters, dealers or agents may be deemed "underwriters" within the meaning
of the Securities Act of 1933.
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THE DATE OF THIS PROSPECTUS IS 1998
CERTAIN PERSONS PARTICIPATING IN OFFERINGS OF THE SECURITIES MAY ENGAGE IN
TRANSACTIONS THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE
SECURITIES OFFERED. SUCH TRANSACTIONS MAY INCLUDE STABILIZING ACTIVITIES,
PURCHASING SECURITIES TO COVER SYNDICATE SHORT POSITIONS AND IMPOSING PENALTY
BIDS.
2
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information can be inspected and copied at the public
reference facilities of the Commission, at 450 Fifth Street N.W, Washington,
D.C. 20549, and at the regional offices of the Commission located at Seven World
Trade Center, 13th floor, New York, New York 10048, and at 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661, and copies of such materials can be
obtained from the Public Reference Branch of the Commission at 450 Fifth Street
N.W, Washington, D.C. 20549, at prescribed rates. The Commission maintains a Web
site (http://www.sec.gov) that contains reports, proxy and other information
statements and other information regarding registrants that file electronically
with the Commission. Reports, proxy statements and other information concerning
the Company can also be inspected at the offices of the New York Stock Exchange,
20 Broad Street, New York, New York 10005.
The Company has filed with the Commission a registration statement on Form
S-3 (herein, together with all amendments and exhibits, referred to as the
"Registration Statement") under the Securities Act of 1933, as amended (the
"Securities Act"). This Prospectus does not contain all the information set
forth in the Registration Statement, certain parts of which are omitted in
accordance with the rules and regulations of the Commission. For further
information, reference is hereby made to the Registration Statement.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents of the Company which have been filed with the
Commission are hereby incorporated by reference in this Prospectus:
(i) Annual Report on Form 10-K for the year ended December 31, 1997;
(ii) Quarterly Report on Form 10-Q for the quarter ended March 31, 1998, as
amended by a Form 10-Q/A filed May 27, 1998
(iii) Current Reports on Form 8-K dated February 9, 1998 and March 31, 1998, as
amended on May 14, 1998; and
(iv) Description of the Company's Common Stock contained in any Registration
Statement filed under the Exchange Act, including any amendment or report
filed for the purpose of updating such description.
All documents filed by the Company with the Commission pursuant to Sections
13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date of this
Prospectus and prior to the termination of the offering of the Securities
offered hereby shall be deemed to be incorporated by reference in this
Prospectus and to be a part hereof from the date of filing of such documents.
Any statement contained in a document incorporated or deemed to be incorporated
by reference herein shall be deemed to be modified or superseded for purposes of
this Prospectus to the extent that a statement contained herein or in any other
subsequently filed document which also is or is deemed to be incorporated by
reference herein or in the accompanying Prospectus Supplement modifies or
supersedes such statement. Any such statement so modified or superseded shall
not be deemed, except as so modified or superseded, to constitute a part of this
Prospectus.
The Company will provide without charge to each person to whom this
Prospectus is delivered, upon the written or oral request of such person, a copy
of any or all of the foregoing documents incorporated herein by reference other
than exhibits to such documents for which the Company may impose a copying
charge. Requests for such copies should be directed to: Secretary, Dain Rauscher
Corporation, Dain Rauscher Plaza, 60 South Sixth Street, Minneapolis, Minnesota
55402-4422. Telephone requests may be directed to (612) 371-7750.
3
PROSPECTUS SUMMARY
THE COMPANY
Dain Rauscher Corporation (the "Company'), a Minneapolis, Minnesota-based
holding company formed in 1973, provides investment advice and services to
individual investors primarily in the western half of the United States and
investment banking, research and institutional sales and trading services to
corporate and governmental clients nationwide through its principal subsidiary,
Dain Rauscher Incorporated ("Dain Rauscher"). Dain Rauscher also clears and
settles securities trades on a fully disclosed basis for 173 correspondent
brokerage firms through its RPR Correspondent Clearing division ("RPR
Clearing"), which is based in St. Louis, Missouri. Another subsidiary, Insight
Investment Management, Inc. ("Insight Management"), serves as the investment
advisor to the Great Hall Investment Funds (four open-end money market mutual
funds) and provides fixed income portfolio management services to a variety of
private accounts. Dain Rauscher Lending Services Inc. ("DRL") was formed in 1997
to make certain types of loans to customers that are collateralized by
customers' control and restricted securities. At March 31, 1998, the Company had
approximately 3,600 employees located in 26 states.
Effective January 2, 1998, the Company's name was changed to Dain Rauscher
Corporation from Interra Financial Incorporated and, during the first quarter of
1998, the Company's three broker-dealer subsidiaries, Dain Bosworth Incorporated
("Dain Bosworth"), a full service regional securities firm based in Minneapolis,
Minnesota, Rauscher Pierce Refsnes, Inc. ("Rauscher Pierce Refsnes"), a full
service regional securities firm based in Dallas, Texas, and Interra Clearing
Services, Inc., a clearing and operations broker-dealer based in Minneapolis,
Minnesota, were merged together and renamed Dain Rauscher Incorporated. Between
the time of its formation in 1973 and February 1997, the Company was known as
Inter-Regional Financial Group, Inc.
On March 31, 1998, the Company acquired Wessels, Arnold & Henderson, LLC
("WAH"), a privately held investment banking and institutional equity sales and
trading firm based in Minneapolis, Minnesota. On April 6, 1998, WAH was merged
into Dain Rauscher and the combined equity capital markets business of Dain
Rauscher and WAH became known as the Dain Rauscher Wessels equity capital
markets division of Dain Rauscher. The transaction is expected to increase
significantly Dain Rauscher's equity capital markets capabilities. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
The Company is a Delaware corporation with its executive offices located at
Dain Rauscher Plaza, 60 South Sixth Street, Minneapolis, Minnesota 55402-4422.
Its telephone number is (612) 371-2711.
4
The following map indicates the Company's operating office locations as of
March 31, 1998.
OPERATING OFFICE LOCATIONS (AS OF MARCH 31, 1998)
ARIZONA
Phoenix
Sedona
Sun City
Tucson
CALIFORNIA
Palo Alto
San Francisco
COLORADO
Boulder
Colorado Springs
Fort Collins
Denver
Denver Tech
Pueblo
FLORIDA
Miami
Sarasota
ILLIONOIS
Chicago
Hoffman Estates
Oak Brook
Rockford
Vernon Hills
IOWA
Cedar Rapids
Davenport
Des Moines
Dubuque
Iowa City
Sioux City
Waterloo
KANSAS
Overland Park
LOUISIANA
New Orleans
MASSACHUSETTS
Boston
MINNESOTA
Brainerd
Duluth
Edina
Minneapolis
Minnetonka
Rochester
St. Cloud
St. Paul
Shoreview
Wayzata
MISSOURI
Kansas City
St. Joseph
MONTANA
Billings
Great Falls
NEBRASKA
Lincoln
Omaha
NEVADA
Las Vegas
Reno
NEW MEXICO
Albuquerque
NEW YORK
New York
NORTH DAKOTA
Fargo
OKLAHOMA
Oklahoma City
Tulsa
OREGON
Bend
Eugene
Medord
Portland
Salem
SOUTH DAKOTA
Rapid City
Sioux Falls
TENNESSEE
Memphis
TEXAS
Abilene
Austin
Corpus Christi
Dallas Lincoln Centre
Dallas Cityplace
Fort Worth
Houston Center
Houston Post Oak
Kerrville
Longview
Lubbock
Midland
Plano
San Antonio
Tyler
UTAH
Midvale
Salt Lake City
WASHINGTON
Bellevue
Bellingham
Everett
Gig Harbor
Kirkland
Seattle
Silverdale
Spokane
Yakima
WISCONSIN
Appleton
Brookfield
Eau Claire
Madison
Mequon
Milwaukee
Racine
WYOMING
Casper
Cheyenne
RPR Correspondent
Clearing Headquarters
St. Louis, Missouri
5
SUMMARY FINANCIAL INFORMATION
(DOLLARS IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
[Enlarge/Download Table]
THREE MONTHS ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
-------------------- -----------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
--------- --------- --------- --------- --------- --------- ---------
("UNAUDITED")
STATEMENT OF OPERATIONS DATA
Revenues...................... $ 188,014 $ 180,072 $ 750,675 $ 683,316 $ 606,747 $ 496,280 $ 511,615
Interest expense.............. (15,567) (14,110) (58,573) (57,560) (64,777) (38,938) (28,655)
--------- --------- --------- --------- --------- --------- ---------
Net revenues.................. 172,447 165,962 692,102 625,756 541,970 457,351 482,960
Expenses excluding interest
and merger and restructuring
charges..................... 155,610 141,573 600,347 538,354 485,699 417,556 405,607
Merger and restructuring
charges..................... 20,000 -- 15,000 -- -- -- --
--------- --------- --------- --------- --------- --------- ---------
Earnings before income
taxes....................... (3,163) 24,389 76,755 87,402 56,271 39,795 77,353
Income tax (expense) credit... 1,139 (8,634) (27,480) (30,591) (20,398) (14,342) (29,704)
--------- --------- --------- --------- --------- --------- ---------
Net earnings (loss)........... $ (2,024) $ 15,755 $ 49,275 $ 56,811 $ 35,873 $ 25,453 $ 47,649
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
FINANCIAL RATIOS/MEASURES
Diluted earnings (loss) per
share....................... $ (0.16) $ 1.22 $ 3.77 $ 4.49 $ 2.85 $ 2.03 $ 3.78
Pretax margin on net
revenues.................... NM 14.7% 11.1% 14.0% 10.4% 8.7% 16.0%
Annualized net return on
average equity.............. NM 20.6% 16.5% 22.8% 17.3% 13.5% 31.0%
FINANCIAL RATIOS/MEASURES
EXCLUDING MERGER AND
RESTRUCTURING CHARGES
Diluted earnings per share.... $ 0.82 $ 1.22 $ 4.51 $ 4.49 $ 2.85 $ 2.03 $ 3.78
Pretax margin on net
revenues.................... 9.8% 14.7% 13.3% 14.0% 10.4% 8.7% 16.0%
Annualized net return on
average equity.............. 13.0% 20.6% 19.4% 22.8% 17.3% 13.5% 31.0%
OTHER DATA
Weighted average common and
common equivalent shares
used in diluted
calculations................ 12,316 12,952 13,060 12,665 12,585 12,542 12,619
Cash dividends per common
share....................... $ 0.22 $ 0.18 $ 0.72 $ 0.56 $ 0.43 $ 0.37 $ 0.19
BALANCE SHEET DATA
[Enlarge/Download Table]
AS OF MARCH 31, YEAR ENDED DECEMBER 31,
-------------------- -----------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
--------- --------- --------- --------- --------- --------- ---------
("UNAUDITED")
Cash and cash equivalents..... $ 51,815 $ 41,043 $ 35,909 $ 34,387 $ 26,167 $ 22,764 $ 14,047
Total assets.................. 2,528,342 2,172,110 2,304,401 1,827,425 2,021,908 1,952,611 1,786,022
Long-term debt................ 108,316 23,855 15,659 27,290 41,410 47,023 22,166
Total liabilities............. 2,208,457 1,879,313 1,985,310 1,551,539 1,799,414 1,757,191 1,608,339
Total shareholders' equity.... 319,885 292,798 319,091 275,886 222,494 195,420 177,683
Equity per common share....... 25.89 23.88 26.00 22.66 18.44 16.20 14.57
Long-term debt/equity ratio... 33.9% 8.1% 4.9% 9.9% 18.6% 24.1% 12.5%
6
PROFORMA SUMMARY FINANCIAL INFORMATION
REFLECTING THE ACQUISITION OF WESSELS, ARNOLD & HENDERSON BY THE COMPANY
The following unaudited pro forma information has been prepared assuming
that the acquisition of WAH had occurred at the beginning of the periods
presented after including the impact of certain adjustments including
amortization of goodwill, increased interest expense on acquisition debt and the
related income tax effects. The pro forma financial information below does not
include the effect of the $20.0 million charge recorded by the Company in the
quarter ended March 31, 1998 that was directly related to the acquisition of
WAH.
[Enlarge/Download Table]
THREE MONTHS ENDED
MARCH 31, YEAR ENDED
---------------------- DECEMBER 31,
1998 1997 1997
---------- ---------- ------------
STATEMENT OF OPERATIONS DATA
Revenues.......................................... $ 205,487 $ 194,843 $ 828,796
Interest expense.................................. (17,895) (16,194) (67,171)
---------- ---------- ------------
Net revenues...................................... 187,592 178,649 761,625
Expenses excluding interest and restructuring
charge.......................................... 170,815 152,726 663,533
Restructuring charge.............................. -- -- 15,000
---------- ---------- ------------
Earnings before income taxes...................... 16,777 25,923 83,092
Income tax expense................................ (5,916) (9,186) (29,761)
---------- ---------- ------------
Net earnings...................................... $ 10,861 $ 16,737 $ 53,331
---------- ---------- ------------
---------- ---------- ------------
FINANCIAL RATIOS/MEASURES
Diluted earnings per share........................ $ 0.82 $ 1.29 $ 4.08
Pretax margin on net revenues..................... 8.9% 14.5% 10.0%
Annualized net return on average equity........... 13.7% 23.5% 17.8%
The pro forma financial information above is presented for informational
purposes only and is not necessarily indicative of the actual results that would
have been achieved had the merger been consummated prior to the dates or periods
indicated, nor are they necessarily indicative of future operating results.
7
RISK FACTORS
INVESTORS SHOULD CAREFULLY CONSIDER THE FOLLOWING MATTERS IN CONNECTION WITH
AN INVESTMENT IN THE SECURITIES IN ADDITION TO THE OTHER INFORMATION CONTAINED
OR INCORPORATED BY REFERENCE IN THIS PROSPECTUS. THIS PROSPECTUS CONTAINS
FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES
ACT AND SECTION 21E OF THE EXCHANGE ACT, INCLUDING STATEMENTS WHICH REFLECT THE
COMPANY'S CURRENT VIEWS WITH RESPECT TO FUTURE EVENTS AND FINANCIAL PERFORMANCE.
THE WORDS "BELIEVE," "EXPECT," "ANTICIPATE," "INTENDS," "ESTIMATE," "FORECAST,"
"PROJECT," "SHOULD" AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY
FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES
ACT AND SECTION 21E OF THE EXCHANGE ACT. ALL SUCH FORWARD-LOOKING STATEMENTS
INVOLVE INHERENT RISKS AND UNCERTAINTIES, INCLUDING, WITHOUT LIMITATION, THOSE
DISCUSSED BELOW. ALL SUCH FORWARD-LOOKING STATEMENTS AND THE DESCRIPTION OF THE
RISKS AND UNCERTAINTIES INHERENT IN SUCH FORWARD-LOOKING STATEMENTS ARE MADE
BASED ON INFORMATION AVAILABLE TO THE COMPANY AS OF THE DATE HEREOF. THE COMPANY
ASSUMES NO OBLIGATION TO UPDATE ANY SUCH FORWARD-LOOKING STATEMENTS OR THE
DESCRIPTION OF ANY RISKS AND UNCERTAINTIES INHERENT THEREIN. THE COMPANY'S
ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THE
FORWARD-LOOKING STATEMENTS CONTAINED HEREIN. FACTORS THAT MIGHT CAUSE SUCH A
DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THE RISKS AND UNCERTAINTIES
DISCUSSED BELOW.
VOLATILE NATURE OF THE SECURITIES BUSINESS
The Company's principal business activities, securities broker-dealer and
investment banking operations, as well as its investment advisory, clearing and
other services, are highly competitive and subject to various risks, including
volatile or illiquid trading markets, fluctuations in the volume of market
activity, counterparty or customer failure to meet commitments and losses and
expenses resulting from litigation and regulatory proceedings. The securities
business is directly affected by a variety of factors, many of which are beyond
the Company's control. Such factors include market conditions and psychology,
the availability and cost of short-term or long-term funding and capital, the
credit capacity or perceived creditworthiness of the Company and the securities
industry in the marketplace, the level and volatility of interest rates,
inflation and deflation, economic and political conditions, broad trends in
business and finance, and legislation and regulation affecting the national and
international business and financial communities and the securities markets.
These and other factors can result in significant fluctuations in the Company's
revenues and operating results from quarter to quarter and from year to year.
Since approximately 1990, the securities markets have enjoyed a sustained
bull market that is virtually unprecedented. This, in turn, has fueled
tremendous growth in revenues and income for securities firms generally,
including the Company. Particularly in comparison to these favorable conditions,
volatile or illiquid trading markets could expose the Company to reduced levels
of demand for the products and services offered by the Company, as well as to
the risk of trading losses and losses resulting from the ownership or
underwriting of securities. Reductions in the volume of market activity or in
securities prices generally can result in reduced commission and principal
transaction revenues and investment banking and asset management fees as fewer
transactions are effected and the value of the securities being sold and assets
under management declines. In periods of low transaction volume, results of
operations can be further adversely affected because certain expenses remain
relatively fixed. Sudden sharp declines in market values of securities can
result in illiquid markets, which, in turn, may result in the Company having
difficulty selling securities, hedging its securities positions and investing
funds under its management and can increase the frequency and size of credit
extensions and counterparty and customer failures to meet commitments. Such
unfavorable market conditions may further reduce demand for the Company's
investment banking and other services.
COMPETITION
All aspects of the Company's business are highly competitive. The Company
competes directly and indirectly for customers with national and regional
full-service broker-dealers, discount broker-dealers, investment banking firms,
investment advisors, commercial banks, insurance companies, mutual fund
8
companies, money managers, financial planners and others. The Company also
competes with others in the financial services industry with respect to the
recruiting and retention of revenue producing employees. See "--Dependence on
Personnel." The financial services industry has become more concentrated
recently as numerous securities firms have either ceased operations, eliminated
certain business lines or have merged with or been acquired by other firms.
International financial services firms have also moved aggressively into the
U.S. securities, banking and other financial sectors. Industry consolidation has
increased competition from firms having significantly greater equity capital,
financial and other resources than the Company. The Company expects competition
from domestic and international commercial banks to continue to increase in
light of the loosening of Federal Reserve Board rules limiting the underwriting
and other activities of securities subsidiaries of bank holding companies which
took effect in early 1997. Acquisitions of securities firms by banks have
brought entirely new sources of capital into the securities industry, resulting
in more competition for the Company's businesses. Legislative proposals
currently under consideration would eliminate the remaining limit on securities
activities of banks and would permit commercial banks and their affiliates to
offer additional services which have traditionally been provided only by
securities and money management firms.
DEPENDENCE ON PERSONNEL
Most aspects of the Company's business are highly dependent on the services
of skilled professional employees. The Company devotes considerable resources to
recruiting, training, retaining and compensating such individuals. The level of
competition for experienced revenue-producing personnel is extremely intense and
levels of compensation for skilled employees have risen accordingly. The loss of
key personnel or the inability to recruit and retain key personnel in the future
could materially and adversely affect the Company's results of operations. In
addition, a key component of the Company's growth strategy is to increase
penetration of existing markets, enter into new markets and expand the kinds of
products or services it provides. The Company's ability to succeed in pursuit of
such strategy is highly dependent on its ability to retain and recruit
experienced revenue-producing and other personnel.
IMPLEMENTATION OF THE COMPANY'S STRATEGIES
The Company's business strategy is to gain a competitive edge in the
marketplace by coupling the regional expertise, knowledge, brand names, capital
and customer relationships of its former broker-dealer subsidiaries into a
single, more powerful brand name that will enable it to simplify its management
structure, gain economies of scale and critical mass and become more responsive
to competitive changes. In order to remain competitive, the Company must grow
its revenues through further penetration of existing markets, entry into new
markets and expansion of the products and services it provides, including
possible expansion into related lines of business. There can be no assurance
that the Company will be able to identify and capitalize on service, product or
market opportunities that will further the Company's strategy and enhance its
business, results of operations or financial condition. While the Company has
grown successfully through strategic acquisitions in the past, there can be no
assurance that the Company in the future will be able to successfully identify,
compete for, acquire on favorable terms or integrate the business and operations
of any acquired business or entity with the Company's existing operations.
DEPENDENCE ON SYSTEMS
The Company's business is highly dependent on communications, trading,
information and data processing systems. As with other areas, the Company's
technology demands have grown considerably in recent years and are anticipated
to continue to grow dramatically in the years ahead. Investor interest and
competitive forces in areas such as electronic order entry and access to
customer statements (including through the Internet) could strain the Company's
technology resources or force it to incur substantial expenses in expanding
these resources. New regulations imposing additional audit trail and other data
capture and retention requirements will cause the Company to incur further
significant expenses. The
9
Company has outsourced certain communications and quotations and trading systems
services and currently maintains its own back-office processing system. Although
the Company and its vendors have in place tested disaster recovery systems, any
failure or interruption of the Company's or a vendor's systems could cause
delays in the Company's securities trading and processing activities and an
inability to execute client transactions, which could have a material adverse
effect on the Company's operating results. There can be no assurance that the
Company or a vendor will not suffer any such systems failure or interruption or
that the Company's or a vendor's backup procedures and disaster recovery
capabilities will be adequate. As technology develops and industry practices and
regulations change, the Company must periodically update or replace various of
its key systems, including, in particular, its back-office data processing
system, in order to remain competitive. The Company has committed to upgrade its
current back-office processing system via an internal development process
between 1998 and 2002 at an expected cost of approximately $17 million. There
can be no assurance that the Company, during the process of upgrading its
current back-office processing system, will not encounter technological
difficulties, cost overruns, problems obtaining the necessary quantity and
quality of development personnel, or difficulties in purchasing necessary
components of such a system from outside vendors. Further, there can be no
assurance that the back-office processing system, upon completion, will be
state-of-the-art and that the system upgrade or implementation process will not
result in interruption of the Company's business or delivery of its products and
services to customers.
It has become widely known that certain technological problems may arise in
connection with reaching the year 2000. Beginning with the Company's
consolidation of the back-office brokerage operations of Dain Bosworth and
Rauscher Pierce Refsnes in 1993, the Company has upgraded and/or replaced the
bulk of its mission-critical data processing system. Such upgrade and
replacement projects were performed primarily for competitive reasons, though
they included the added benefit of making such systems Year 2000 compliant.
Upgrades or replacements necessary to achieve Year 2000 compliance for the
Company's remaining mission-critical systems are expected to be completed in
1998 and the costs related to such upgrades or replacements are not expected to
have a material effect on the Company's consolidated financial statements.
During 1999, the Company, along the rest of the securities industry, expects to
test systems interdependencies with outside parties. While there can be no
assurance, the Company believes that its internal systems will not experience
significant disruption in connection with the Year 2000. There can be no
assurance that another entity's failure to ensure Year 2000 readiness would not
have an adverse effect on the Company. In particular, if the Company's internal
systems or if the Company's vendors and other information providers or the
securities exchanges, clearing agencies and other securities firms and financial
institutions with which the Company transacts business experience any
significant disruption in connection with the Year 2000, such disruption may
have a material adverse effect on the Company's results of operations.
DEPENDENCE ON SOURCES OF FINANCING
The Company, like others in the securities industry, relies on external
sources to finance a significant portion of its day-to-day operations,
principally customer margin account balances, securities inventory and
underwriting positions and certain other transactions. The principal sources of
the Company's cash and liquidity are retained earnings, cash balances held on
behalf of customers pending investment, collateralized repurchase agreements,
collateralized bank loans and securities lending activities. The Company also
has a $50 million unsecured committed revolving credit facility available. In
addition, the Company maintains uncommitted credit lines with a number of banks
aggregating approximately $575 million, of which $142 million were used as of
March 31, 1998. The Company also borrowed $80 million in subordinated debt from
a group of banks and used $40 million of available funds in order to finance the
acquisition of WAH. Because a substantial portion of the Company's capital
resources have been used for the acquisition of WAH or could in the future be
used in additional acquisitions, the Company may require additional debt or
equity financing for its operations, which financing may not be available on
terms favorable to the Company, if at all. Availability of financing to the
Company can vary depending on market
10
conditions, the volume of certain trading activities, credit ratings, credit
capacity and the overall availability of credit to the financial services
industry. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources."
USE OF DERIVATIVE FINANCIAL INSTRUMENTS
The Company enters into certain financial futures contracts and option
contracts in the ordinary course of its business to hedge or modify exposures to
interest rate fluctuations related to interest-rate-sensitive securities in its
trading inventories. While the use of these derivatives is intended to allow the
Company to better manage certain risks, it is possible that, over time,
mis-matches may arise with respect to the derivatives and the cash market
instruments they are intended to hedge. Discrepancies can also arise between the
derivative and cash markets. Derivatives also have risks that are similar in
type to the risks of the cash market instruments on which their values are
based. For example, in times of market stress, sharp price movements or
reductions in liquidity in the cash markets may be related to comparable or even
greater price movements and reductions in liquidity in the derivative markets.
Further, the risks associated with derivatives are potentially greater than
those associated with the related cash market instruments because of the
additional complexity and potential for leverage. In addition, derivatives may
create credit risk (the risk that a counterparty on a derivative transaction
will not fulfill its contractual obligations), as well as legal, operational and
other risks beyond those associated with the underlying cash market instruments
on which their values are based.
FEDERAL AND STATE REGULATION; NET CAPITAL REQUIREMENTS
The Company's business is, and the securities and commodities industries
are, subject to extensive regulation in the United States, at both the federal
and state level, as well as by industry self-regulatory organizations. As a
matter of public policy, regulatory bodies are charged with safeguarding the
integrity of the securities and other financial markets and with protecting the
interests of customers participating in those markets and not with protecting
the interests of the Company's stockholders and creditors. In addition,
self-regulatory organizations and other regulatory bodies in the United States,
such as the Commission, the New York Stock Exchange, Inc. (the "NYSE"), the
National Association of Securities Dealers, Inc. (the "NASD") and the Municipal
Securities Rulemaking Board (the "MSRB"), require strict compliance with their
rules and regulations. Failure to comply with any of these laws, rules or
regulations, many of which are quite complex and subject to interpretation,
could result in a variety of adverse consequences including censure, fines,
suspension, revocation or reduction of the right to do business of key persons
associated with the Company or the Company itself, and private rights of action
for damages, which could have a material adverse effect upon the Company's
consolidated financial condition or results of operations.
The laws and regulations, as well as governmental policies and accounting
principles, governing the financial services and banking industries have changed
significantly over recent years and are expected to continue to do so. During
the last several years Congress has considered numerous proposals that would
significantly alter the structure and regulation of such industries. Certain of
such changes, if adopted, could materially and adversely affect the business and
operations of the Company. The Company's businesses may also be materially
affected by regulations of general application, such as existing and proposed
tax legislation, antitrust policy and other governmental regulations and
policies (including the interest rate and other monetary policies of the Federal
Reserve Board). See "The Company--Securities Business-- Regulation."
The Commission, the NYSE, and various other exchanges and regulatory bodies
in the United States have rules with respect to net capital requirements which
affect the Company. These rules have the effect of requiring that at least a
substantial portion of a broker-dealer's assets be kept in cash or highly liquid
investments. Compliance with the net capital requirements by Dain Rauscher could
limit operations that require extensive use of capital, such as underwriting or
trading activities and constrain the ability of the
11
Company to grow its business, either through internal expansion or by
acquisitions. A significant operating loss or any unusually large charge against
net capital could have a material adverse effect on the Company's ability to
operate its business. The net capital rules could also restrict the ability of
the Company to withdraw capital from Dain Rauscher, even in circumstances in
which it has more than the minimum amount of required capital. Such
restrictions, in turn, could limit the ability of the Company to pay dividends,
implement its strategies, pay interest on and repay the principal of its debt
and redeem or repurchase shares of outstanding capital stock. See "The
Company--Securities Business--Uniform Net Capital Rule."
LITIGATION
Many aspects of the securities brokerage and investment banking businesses
involve substantial risks of liability. In recent years, there has been an
increasing incidence of litigation and regulatory enforcement proceedings
involving the securities industry. Such actions include class action suits that
generally seek substantial damages, other suits seeking punitive and/or treble
damages and administrative and court proceedings brought by regulatory agencies
seeking fines, injunctions, suspensions and bars from future participation in
the business against securities firms and, in some cases, their employees and
officers. Underwriters are subject to substantial potential liability for
material misstatements and omissions in prospectuses and other communications
with respect to underwritten offerings of securities. Like other securities
brokerage firms, the Company and certain of its personnel have been named or
threatened to be named as defendants in class action and other legal and
regulatory proceedings which cause the Company to expend substantial financial
and managerial resources in order to defend itself. The outcome of any legal or
regulatory proceeding is uncertain. The settlement of any such proceeding under
adverse circumstances or an adverse judgement in connection with any such
proceeding may have a material adverse effect on the Company's consolidated
financial condition or results of operations. See "The Company--Legal
Proceedings."
HOLDING COMPANY STRUCTURE; EFFECTIVE SUBORDINATION
The Debt Securities and Securities Warrants are obligations exclusively of
the Company and the Preferred Stock and Common Stock are equity interests
exclusively in the Company. The Company is a holding company, substantially all
of the consolidated assets of which are held by its regulated broker-dealer
subsidiary, Dain Rauscher. Accordingly, the cash flow of the Company and the
consequent ability to service its debt, including the Debt Securities, and
maintain or increase the level of its Stockholders' equity, including the
Preferred Stock and the Common Stock, are dependent upon the earnings of such
subsidiary and the ability of the Company to withdraw capital from such
subsidiary. Because the Company is a holding company, the Debt Securities will
be effectively subordinated to all existing and future indebtedness, trade
payables, guarantees, lease obligations and letter of credit obligations of Dain
Rauscher and the Company's other subsidiaries. Therefore, the Company's rights
and the rights of its creditors, including the holders of the Debt Securities,
and stockholders, including the holders of the Preferred Stock and Common Stock,
to participate in any distribution of the assets of any subsidiary upon the
latter's liquidation or reorganization will be subject to the prior claims of
such subsidiaries' creditors and customers. As of March 31, 1998 the Company's
subsidiaries had approximately $2.2 billion of indebtedness and other
liabilities. The Indenture does not limit the amount of Indebtedness the Company
and its subsidiaries may incur. See "Description of Debt Securities" and
"Description of Capital Stock."
12
THE COMPANY
The Company, a Minneapolis, Minnesota based holding company formed in 1973,
provides investment advice and services to individual investors primarily in the
western half of the United States and investment banking, research and
institutional sales and trading services to corporate and governmental clients
nationwide through its principal subsidiary, Dain Rauscher. Dain Rauscher also
clears and settles securities trades on a fully disclosed basis for 173
correspondent brokerage firms through the Company's RPR Clearing division, which
is based in St. Louis, Missouri. Another subsidiary, Insight Management, serves
as the investment advisor to the Great Hall Investment Funds (four open-end
money market mutual funds) and provides fixed income portfolio management
services to a variety of private accounts. DRL was formed in 1997 to make
certain types of loans to customers that are collateralized by customers'
control and restricted securities. At March 31, 1998, the Company had
approximately 3,600 employees located in 26 states.
Effective January 2, 1998, the Company's name was changed to Dain Rauscher
Corporation from Interra Financial Incorporated and during the first quarter of
1998 the Company's three broker-dealer subsidiaries, Dain Bosworth Incorporated
("Dain Bosworth"), a full service regional securities firm based in Minneapolis,
Minnesota, Rauscher Pierce Refsnes, Inc. ("Rauscher Pierce Refsnes"), a full
service regional securities firm based in Dallas, Texas, and Interra Clearing
Services, Inc., a clearing and operations broker-dealer based in Minneapolis,
Minnesota, were merged together and renamed Dain Rauscher Incorporated. Between
the time of its formation in 1973 and February 1997, the Company was known as
Inter-Regional Financial Group, Inc.
On March 31, 1998, the Company acquired Wessels, Arnold & Henderson, LLC
("WAH"), a privately held investment banking and institutional equity sales and
trading firm based in Minneapolis, Minnesota. On April 6, 1998, WAH was merged
into Dain Rauscher and the combined equity capital markets business of Dain
Rauscher and WAH became known as the Dain Rauscher Wessels equity capital
markets division of Dain Rauscher. The transaction is expected to significantly
increase Dain Rauscher equity capital markets capabilities. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
The Company is a Delaware corporation with its executive offices located at
Dain Rauscher Plaza, 60 South Sixth Street, Minneapolis, Minnesota 55402-4422.
Its telephone number is (612) 371-7750.
SECURITIES BUSINESS
GENERAL. The securities broker-dealer and investment banking activities of
the Company are conducted through Dain Rauscher. Dain Rauscher deals in
securities of and is a market-maker for entities based throughout the United
States. In general, research and investment banking activities are concentrated
on entities based in regions where the Company does business, though equity
research and investment banking activities, in the past two years, have been
increasingly industry, rather than geographically, focused. With the completion
of the Company's March 31, 1998 acquisition of WAH, the Company expects this
trend to continue and expects its equity capital markets activities to expand.
At March 31, 1998, Dain Rauscher had 1,160 retail sales representatives and 108
fixed income and equity institutional sales representatives in 96 offices
located in 26 states. The firm is a member firm of the NYSE and is registered in
the NASDAQ system as a market maker. Following the WAH acquisition, the Company
expects the total institutional sales force to consist of approximately 110
sales representatives and Dain Rauscher and WAH combined to be registered as a
market maker for approximately 425 equity issuers.
Dain Rauscher operating results are sensitive to many factors outside the
control of the Company, including the general volatility of securities prices
and interest rates, trading volume of securities, income and capital gains tax
legislation and demand for investment banking services. Economic conditions in
the regions in which Dain Rauscher operates also affect operating results.
13
COMMISSIONS. As a securities broker, Dain Rauscher acts as an agent in the
purchase and sale of securities, options, commodities and futures contracts
traded on various securities and commodities exchanges or in the
over-the-counter ("OTC") market. Dain Rauscher charges a brokerage commission
when acting as an agent for the purchaser or seller of a security. If the
security is listed on an exchange, the transaction is generally effected through
Dain Rauscher's own floor brokers. If the security is traded in the OTC market,
transactions are generally effected with a market maker in the security. In
addition, Dain Rauscher also earns commissions from transactions involving many
other financial products including mutual funds. Dain Rauscher's commissions are
derived primarily from individual investors. However, commission revenues from
institutional investors have increased in recent years.
PRINCIPAL TRANSACTIONS. Dain Rauscher is a dealer in corporate, tax-exempt
and governmental fixed income securities and equity securities and recognizes
profits or losses on transactions in, or fluctuations in the value of, such
securities held in inventory. While most of the Company's principal transactions
are executed to facilitate retail and institutional customer trades, Dain
Rauscher also maintains certain inventory positions for its own account. These
positions typically include U. S. government or U. S. government agency
securities and are usually hedged with a combination of short sales of similar
securities, financial futures or option contracts in order to mitigate market
and interest rate risk.
These inventories require the commitment of substantial capital and expose
the Company to the risk of a loss if market prices of the securities held in
inventory decrease. General market conditions, interest rates and the financial
prospects for issuers of such securities may affect the market prices of
securities held in inventory. Internal guidelines intended to limit the size and
risk of inventories maintained have been established and are reviewed
periodically.
INVESTMENT BANKING AND UNDERWRITING ACTIVITIES. Dain Rauscher earns
investment banking revenues by assisting clients in planning to meet their
financial needs and advising them on the most advantageous means of raising
capital. Such plans are sometimes implemented by managing or co-managing public
offerings of securities or by arranging private placements of securities with
institutional or individual investors. The syndicate department coordinates the
distribution of managed and co-managed corporate equity underwritings, accepts
invitations to participate in competitive or negotiated equity underwritings
managed by other investment banking firms, and allocates and merchandises Dain
Rauscher selling allotments to its branch office system, to institutional
clients and to other broker-dealers. The Company is also among the leaders in
its geographic regions in the origination, syndication and distribution of
securities of municipalities, state and local agencies, health care
organizations and financial institutions. Participation in underwritings can
expose the Company to material risk, since the possibility exists that
securities it has committed to purchase cannot be sold at the initial offering
price. Federal and state securities laws and regulations also affect the
activities of underwriters and impose substantial potential liabilities for
violations in connection with sales of securities by underwriters to the public.
In addition to public offerings and private placements, Dain Rauscher provides
other consulting services, including providing valuations of securities and
companies, arranging and evaluating mergers and acquisitions and advising
clients with respect to financing plans and related matters.
CUSTOMER FINANCING. A significant portion of Dain Rauscher's profitability
is derived from net interest income, the major portion of which relates to
customer balances. Customer transactions are effected on either a cash or margin
basis. Purchases on a cash basis require full payment by the designated
settlement date, generally the third business day following the transaction
date. Dain Rauscher is at risk in the event a customer fails to settle a trade
and the value of the securities declines subsequent to the transaction date.
When a purchase is made on a margin basis, Dain Rauscher extends credit to the
customer for a portion of the purchase price. The amount of the loan is subject
to margin regulations of the Federal Reserve Board, the NYSE and the internal
policies of Dain Rauscher, which are generally more stringent than applicable
rules and regulations. In permitting customers to purchase on margin, Dain
Rauscher takes the risk that a market decline could reduce the value of the
collateral securing the margin
14
loan below the amount of the customer's indebtedness and that the customer might
be unable to repay. Interest is charged at a floating rate based on amounts
borrowed by customers to finance purchases on margin. The rate charged is
dependent on the average net debit balance in the customer's accounts, the
activity level in the accounts and the applicable cost of funds. The Company may
at times make loans to customers that are collateralized by customers' control
and restricted securities through DRL.
Customers will at times accumulate credit balances in their accounts. Such
balances result from payment of dividends, interest or principal on securities
held for such customers, from funds received in connection with sales of a
customer's securities and from cash deposits made by customers pending
investment. Pending investment of such funds or reimbursement upon the
customer's request, Dain Rauscher pays interest on those credit balances.
Available credit balances are used to lend funds to Dain Rauscher customers
purchasing securities on margin. Excess customer credit balances are invested in
short-term securities in accordance with applicable regulations and are
segregated for the exclusive benefit of customers. Dain Rauscher generates net
interest income from the positive interest rate spread between the rate earned
from margin lending and alternative short-term investments and the rate paid on
customer credit balances.
Dain Rauscher is a member of the Securities Investor Protection Corporation
("SIPC"), which insures customer accounts up to specified limits in the event of
liquidation. Also, the Company maintains additional coverage in order to protect
customer accounts to specified amounts in excess of SIPC coverage.
SECURITY REPURCHASE ACTIVITIES. Dain Rauscher acts as principal in the
purchase and sale to its customers of securities of the United States government
and its agencies, including repurchase agreements in such securities and certain
other money market instruments. Dain Rauscher may match purchases and sales of
these securities and is at risk to the extent that it does not properly match
the contracts or its customers are unable to meet their obligations, especially
during periods of rapidly changing interest rates and fluctuations in market
conditions. All positions are collateralized. Dain Rauscher generally takes
legal possession of securities purchased under agreements to resell. Such
agreements provide Dain Rauscher with the right to maintain the relationship
between the market value of the collateral and the receivable. Typically, these
contracts are entered into only with clients of substantial size and who are
believed to be credit-worthy. Dain Rauscher also utilizes securities sold under
repurchase agreements as a means of financing portions of its trading
inventories.
SECURITIES LENDING AND BORROWING ACTIVITIES. Securities brokers and
dealers, including Dain Rauscher, borrow securities from and lend securities to
other brokers and dealers to facilitate short sales and clearance and delivery
of securities sold by customers when such customers fail to deliver securities
prior to settlement date. Dain Rauscher also will act as a conduit by arranging
securities lending transactions between brokers and utilize available securities
as collateral for short-term loans. When such transactions occur, the lending
broker provides excess customer margin securities to the borrowing broker in
return for a cash deposit that is generally equivalent to 102 percent of the
market value of the securities loaned. Both the lending and borrowing brokers
have the right to mark the securities to market in order to maintain the
relationship between the market value of the securities loaned and the cash
collateral deposited. When the securities are no longer needed by the borrowing
firm, they are returned to the lending broker, which returns the cash deposit
held, plus interest, to the borrowing broker. When engaging in such securities
lending and borrowing activities, Dain Rauscher collects cash deposits from
brokers that collateralize the securities loaned, invests the cash deposit and
profits from the spread between the interest rate paid to the borrowing broker
on the cash deposit and the rate earned by Dain Rauscher. In all securities
lending transactions, Dain Rauscher is at risk to the extent that it does not
maintain the relationship between the market value of securities loaned and the
value of the cash deposit held. Dain Rauscher is also at risk to the extent that
securities it borrows decline in value and the lending broker fails to return to
Dain Rauscher the cash deposit.
15
RESEARCH ACTIVITIES. Dain Rauscher has a research department which provides
analysis, investment recommendations and market information with an emphasis on
select industries as well as companies located in its regions. At March 31,
1998, Dain Rauscher and WAH combined had 45 securities analysts. Following the
acquisition, the Company's total securities analysts is expected to be
approximately 35, in order to improve the Company's focus on issues affecting
selected industries. The Company also purchases certain research products from
independent research organizations to supplement its internal research
activities.
REGULATION. The securities industry is subject to comprehensive regulation
by federal and state governments, the various securities and commodities
exchanges and other self-regulatory bodies. The regulations cover all aspects of
the securities business including sales practices, registration and distribution
of securities, trade practices among broker-dealers, transactions with
affiliates, conflicts of interest, uses and safekeeping of customers' funds and
securities, capital levels of securities firms, record keeping and the conduct
of employees. Violations of these rules and regulations can result in censure,
fines, suspensions, revocation of the right to do business and private rights of
action for damages. Dain Rauscher believes it has operated in compliance with
applicable rules and regulations in all material respects.
UNIFORM NET CAPITAL RULE. As a broker-dealer and member firm of the NYSE,
Dain Rauscher is subject to the Uniform Net Capital Rule (the "Rule")
promulgated by the Commission. The Rule is designed to measure the general
financial integrity and liquidity of a broker-dealer and the minimum net capital
deemed necessary to meet the broker-dealer's continuing commitments to its
customers. The Rule provides for two methods of computing net capital. Dain
Rauscher currently uses what is generally referred to as the alternative method.
Minimum net capital is defined under this method to be equal to 2 percent of
customer debit balances, as defined. The NYSE may also require a member
organization to reduce its business if net capital is less than 4 percent of
such aggregate debit items and may prohibit a member firm from expanding its
business and declaring cash dividends if its regulatory net capital is less than
5 percent of such aggregate debit items. In computing net capital, various
adjustments are made to exclude assets which are not readily convertible into
cash and to provide a conservative valuation of other assets such as trading
securities. Failure to maintain the required net capital may subject a firm to
suspension or expulsion by the NYSE, the Commission and other regulatory bodies
and may ultimately require its liquidation. At all times, Dain Rauscher has
maintained its net capital above the required levels. See Note K to
"Consolidated Financial Statements."
CLEARING SERVICES
RPR Correspondent Clearing is in the business of marketing correspondent
clearing services provided on a fully disclosed basis by Dain Rauscher. As of
March 31, 1998, the Company provided clearing services to 177 correspondent
firms introduced through RPR Correspondent Clearing and one correspondent firm
introduced through Dain Rauscher. Correspondent firms are charged fees based on
their use of services.
MONEY MANAGEMENT AND OTHER SERVICES
Insight Management is a registered investment advisor that was restructured
in January 1998 to provide solely fixed income portfolio management services to
the Great Hall Investment Funds, Inc. ("Great Hall") and to individual and
institutional clients. Great Hall is an open-end investment company that
currently offers shares in four series, each of which is, in essence, a separate
money market mutual fund.
COMPETITION
Dain Rauscher encounters intense competition in its business and competes
directly with numerous firms, many of which have substantially greater capital
and other resources. The Company also encounters competition from banks,
insurance companies and financial institutions in many elements of its business.
16
For example, with the prior approval of the Federal Reserve Board, securities
subsidiaries of bank holding companies may now underwrite and deal in corporate
debt and equity securities, provided that they comply with certain "firewalls"
and that the revenues from such activities do not exceed 25 percent of the
securities subsidiary's total revenues. Legislative proposals also under
consideration would eliminate this limit on such activities and would permit
commercial banks, bank holding companies and their subsidiaries and affiliates
to offer additional services which have traditionally been provided only by
securities and money management firms.
During 1997 and 1998, a number of banks acquired securities firms and, in so
doing, gained unprecedented entry into the securities industry. While the effect
of such acquisitions cannot yet be determined, they have brought entirely new
sources of capital into the securities industry, resulting in more formidable
competitors for the Company.
Additionally, competition among securities firms and other competitors for
successful sales representatives, securities traders, securities analysts and
investment bankers is intense and continuous.
Dain Rauscher competes with other securities firms and with banks, insurance
companies and other financial institutions principally on the basis of service,
product selection, price, location and reputation in local markets. Dain
Rauscher operates at a price disadvantage to discount brokerage firms that do
not offer equivalent services.
RPR Correspondent Clearing competes for the business of introducing
correspondent brokers on the basis of service, price, technology, product
selection and reputation.
Insight Management competes with other fixed income portfolio managers
principally on the basis of portfolio performance, price and service.
EMPLOYEES
At March 31, 1998, the Company had approximately 3,600 full-time employees.
None of the Company's employees is represented by a collective bargaining unit.
LEGAL PROCEEDINGS
The Company and/or its securities subsidiaries are or have been threatened
to be made defendants in various actions, suits and proceedings before a court
or arbitrator or by a governmental agency. Such matters involve alleged
violations of federal and state securities laws and other laws. Certain of these
actions, including certain of the actions described in more detail below, claim
substantial damages and, if resolved adversely to the Company and/or its
subsidiaries, could have a material adverse effect on the consolidated financial
condition or results of operations of the Company. While the outcome of any
legal or regulatory proceeding is uncertain, management, based in part upon
consultation with legal counsel as to certain of the aforementioned actions
pending against the Company and/or its subsidiaries, believes that the
resolution of all matters pending or threatened against the Company and its
subsidiaries will not have a material adverse effect on the consolidated
financial condition or results of operations of the Company as set forth in the
consolidated financial statements contained herein.
MIDWEST LIFE INSURANCE LITIGATION
The Company and Dain Bosworth have been named as defendants in eleven
actions brought in connection with losses suffered under single premium
deferred annuities issued by Midwest Life Insurance Company ("MWL"), a
former subsidiary acquired by the Company in 1980 and sold by it in early
1986. Such annuities were sold primarily through the private client sales
force of Dain Bosworth. MWL, which was sold two times subsequent to its sale
by the Company in 1986 and was relocated from Nebraska to Louisiana by the
final owners, Southshore Holding Corp., was declared insolvent and ordered
liquidated by the State of Louisiana in August 1991. Generally, MWL
policyholders have
17
been reimbursed for their losses up to $100,000 per holder by the state
guaranty associations, and the policyholders and state guaranty
associations, between them, have received approximately $.30 for each $1.00
of loss in liquidation payments from the liquidator of MWL's estate.
The plaintiffs (or real parties in interest) in the first ten of these
cases are the Life and Health Guaranty Associations of each of Colorado,
Iowa, Minnesota, Montana, Nebraska, North Dakota, Oregon, South Dakota,
Washington and Wyoming, which claim to have succeeded to the rights of
policyholders they reimbursed for MWL losses, and/or certain individual
policyholders. The plaintiff in the eleventh action is the liquidator of
MWL's estate. The plaintiff guaranty associations and individuals seek to
recover in excess of $64 million in compensatory damages, as well as
punitive damages, interest, costs, attorneys' fees and other relief. The
liquidator of MWL's estate also seeks to recover treble damages.
COLORADO ACTION
The first of these actions, KARSIAN, ET AL. V. INTER-REGIONAL FINANCIAL
GROUP, INC., AND DAIN BOSWORTH INCORPORATED, is pending in the United States
District Court for the District of Colorado. This action was initially
brought in August 1993 as a purported class action, but the court has since
held that there are no proper class claims. The 232 individual plaintiffs in
this action seek approximately $10.7 million in compensatory damages, as
well as punitive damages, damages for emotional distress, costs, prejudgment
interest and attorneys' fees. In Colorado, unlike other states, no guaranty
association coverage was in place at the time MWL became insolvent. Although
such coverage was adopted in 1994 as a result of Dain Bosworth's lobbying
efforts and each of the policyholders was reimbursed for his or her losses
up to $100,000 plus accrued interest, many of the policyholders had already
filed suit. The plaintiffs in this case allege common law fraud, breach of
fiduciary duty, negligence and negligent misrepresentation.
In July 1997, a Colorado jury returned a verdict awarding 12 of the 232
plaintiffs damages of $4.75 million, including $1.3 million in compensatory
damages, $1.65 million in emotional distress damages and $1.8 million in
punitive damages, for breach of fiduciary duty, negligent performance of an
assumed duty to monitor and advise as to the safety of their MWL annuity
contracts, negligent misrepresentation, deceit based on fraudulent
misrepresentation and fraudulent concealment. In addition, the court entered
judgment for prejudgment interest of approximately $1.5 million.
The Company and Dain Bosworth filed post-trial motions seeking to have
the verdict in favor of these plaintiffs set aside; such motions were
denied. The Company and Dain Bosworth have appealed. The Company believes
that the trial court erred by, among other things, withholding key evidence
from the jury, including evidence concerning Dain Bosworth's efforts to
obtain guaranty association coverage for plaintiffs' losses and evidence
concerning the reimbursements plaintiffs received for the losses.
WASHINGTON ACTION
A second of these actions, WASHINGTON LIFE AND HEALTH INSURANCE GUARANTY
ASS'N V. INTER-REGIONAL FINANCIAL GROUP, INC. AND DAIN BOSWORTH
INCORPORATED, brought in April 1995, was tried in the Washington Superior
Court for King County in October and November 1997 and again in April and
May of 1998. Plaintiffs in this action allege similar claims to the Colorado
action. A mistrial was declared in the 1997 trial when the jury was unable
to reach a verdict. In the retrial in May, 1998, the jury returned a verdict
in the amount of approximately $1.5 million against the defendants for
negligent nondisclosure and violations of the Washington Consumer Protection
Act ("WCPA"). The jury returned a verdict in favor of defendants on the
claim of fraudulent nondisclosure and plaintiff withdrew the claim of breach
of fiduciary duty before the case was submitted to the jury. The plaintiff
will also seek prejudgment interest, costs and, under the WCPA, attorney's
fees.
18
The Company and Dain Rauscher, as successor to Dain Bosworth, intend to
file post-trial motions to have the verdict in favor of plaintiff set aside
and, if such motions are unsuccessful, to appeal. The Company believes the
trial court made significant errors of law and that there are strong grounds
for reversal. The Company anticipates that plaintiffs in other jurisdictions
will seek to obtain collateral estoppel based on the Washington jury's
verdict. The Company intends to vigorously oppose such requests.
OTHER GUARANTEE ASSOCIATION CASES
The other eight guarantee association and individual actions were also
brought in April and May of 1995 and allege similar claims to the Colorado
action. In certain states, the plaintiffs also allege intentional infliction
of economic harm, interference with contractual relations and/or aiding and
abetting the breaches of duty by the final sets of owners of MWL. Seven of
such actions are captioned and pending as follows, and the plaintiffs in
each action seek the amount of compensatory damages indicated in
parentheses:
IOWA LIFE AND HEALTH INSURANCE GUARANTY ASS'N V. INTER-REGIONAL
FINANCIAL GROUP, INC. AND DAIN BOSWORTH INCORPORATED (Iowa Dist. Ct., Polk
County) ($5.7 million)
C. RANDOLPH, L. SCHNOBRICH, V. TROUMBLY, P. DUMKE, E. DAVIS AND
MINNESOTA LIFE AND HEALTH INSURANCE GUARANTY ASS'N V. INTER-REGIONAL
FINANCIAL GROUP, INC. AND DAIN BOSWORTH INCORPORATED (Hennepin County,
Minnesota Dist. Ct.) ($23.4 million)
MONTANA LIFE AND HEALTH INSURANCE GUARANTY ASS'N V. INTER-REGIONAL
FINANCIAL GROUP, INC. AND DAIN BOSWORTH INCORPORATED, (Montana First
Judicial Court, Lewis & Clark County) ($3.4 million)
NEBRASKA LIFE AND HEALTH INSURANCE GUARANTY ASS'N V. INTER-REGIONAL
FINANCIAL GROUP, INC. AND DAIN BOSWORTH INCORPORATED, (Nebraska Dist. Ct.,
Lancaster County) ($2.8 million)
NORTH DAKOTA LIFE AND HEALTH INSURANCE GUARANTY ASS'N V. INTER-REGIONAL
FINANCIAL GROUP, INC. AND DAIN BOSWORTH INCORPORATED, (District Court, Cass
County, North Dakota) ($2.1 million)
SOUTH DAKOTA LIFE AND HEALTH INSURANCE GUARANTY ASS'N V. INTER-REGIONAL
FINANCIAL GROUP, INC. AND DAIN BOSWORTH INCORPORATED, (South Dakota Second
Judicial Circuit, Minnehaha County) ($1.5 million)
WYOMING LIFE AND HEALTH INSURANCE GUARANTY ASS'N V. INTER-REGIONAL
FINANCIAL GROUP, INC. AND DAIN BOSWORTH INCORPORATED, (Wyoming District
Court for Laramie County) ($2.7 million)
The eighth such guarantee association action, OREGON LIFE AND HEALTH
INSURANCE GUARANTY ASS'N V. INTER-REGIONAL FINANCIAL GROUP, INC. AND DAIN
BOSWORTH INCORPORATED, was filed in the Oregon Circuit Court of Multnomah
County and sought approximately $500,000 in damages. Such action was
dismissed in October 1996 following a partial summary judgment ruling in
favor of the Company on statute of limitations grounds. Plaintiff has
appealed such ruling.
MWL LIQUIDATOR ACTION
The eleventh action, captioned JOHN A. DIXON, JR., AS COMMISSIONER OF
INSURANCE AD HOC. FOR THE STATE OF LOUISIANA V. THE MIDWEST LIFE INSURANCE
COMPANY/MIDWEST LIFE INSURANCE COMPANY, IN LIQUIDATION V. INTERRA FINANCIAL
INCORPORATED, DAIN BOSWORTH INCORPORATED AND THE CENTRAL NATIONAL LIFE
INSURANCE COMPANY OF OMAHA, was brought in June 1997 in the Nineteenth
Judicial District Court of the State of Louisiana. The case has since been
removed to the United States District Court for the Middle District of
Louisiana. In this action, the liquidator of the MWL estate alleges RICO
violations, breach of fiduciary duty and conspiracy to breach fiduciary
duty, and is seeking to recover in excess of $59 million in compensatory
damages, treble damages, interest, costs, attorneys' fees and other relief.
The plaintiff challenges certain coinsurance transactions entered into by
MWL and Central National
19
Life Insurance Company beginning in 1980. By Louisiana statute, the
compensatory damages sought in this case would in large part be distributed
to the insurance guaranty associations and individual policyholders who are
plaintiffs or real parties in interest in the ten actions described above.
The Company and Dain Rauscher, as successor to Dain Bosworth, believe that
they have substantial and meritorious defenses available in all of the foregoing
actions and they are defending themselves vigorously in such actions.
FEDERAL DEPOSIT INSURANCE CORPORATION LITIGATION
Rauscher Pierce Refsnes and one of its executives were named as defendants
in an action captioned FEDERAL DEPOSIT INSURANCE CORPORATION, AS RECEIVER FOR
WESTERN SAVINGS & LOAN ASSOCIATION, F.A. V. EXPRESS AMERICA HOLDINGS
CORPORATION, SMITH BARNEY HARRIS UPHAM & CO.; RAUSCHER PIERCE REFSNES, INC., ET
AL. This action was brought in the U.S. District Court in Phoenix, Arizona in
December 1995 by The Resolution Trust Corporation (the "RTC") and arose out of
the RTC's sale through an auction process conducted in the fall of 1990 of the
stock of WESAV Mortgage Corporation ("WESAV"), a subsidiary of Western Savings &
Loan Association, F.A. Rauscher Pierce Refsnes acted as broker for the sale and
Smith Barney Harris Upham & Co. ("Smith Barney") acted as the RTC's financial
advisor. WESAV was eventually sold to First Western Partners, the predecessor to
Express America Holdings Corporation ("Express America"), in May 1991 for a
gross acquisition price of approximately $45 million, including the assumption
of approximately $19 million in liabilities. The RTC alleged that Rauscher
Pierce Refsnes, as broker, improperly favored Express America over other
allegedly higher bidders, and that Rauscher Pierce Refsnes and Smith Barney
committed fraud in connection with the auction and sale, were negligent in their
analysis and communication of bids to the RTC, and breached their contracts with
and fiduciary duties to the RTC. The RTC also named as defendants in the action
Express America's chief executive officer and chief financial officer, the
former chief executive officer and former chief financial officer of WESAV, and
certain other individuals. It alleged such officers of Express America and WESAV
were guilty of mismanagement between the conclusion of the auction process and
closing of the sale. The Federal Deposit Insurance Corporation ("FDIC"), which
became the plaintiff in this action when the RTC was merged into it effective
January 1, 1996, has settled with Smith Barney and the Express America and WESAV
defendants. The FDIC seeks compensatory damages of approximately $15 million and
punitive damages of $60 million, along with interest, costs and other relief.
Defendants' motions to dismiss the case on the face of the complaint were denied
in August 1996. Dain Rauscher, as successor to Rauscher Pierce Refsnes, believes
that it has substantial and meritorious defenses available, and is defending
itself vigorously in this action.
ORANGE COUNTY RELATED CLAIMS
ORANGE COUNTY BANKRUPTCY LITIGATION
Dain Rauscher, as successor to Rauscher Pierce Refsnes, is a defendant
in an action captioned COUNTY OF ORANGE, A POLITICAL SUBDIVISION OF THE
STATE OF CALIFORNIA V. RAUSCHER PIERCE REFSNES, INC., A CORPORATION,
originally filed in June 1996 in the Chapter 9 proceeding entitled IN RE:
COUNTY OF ORANGE, A POLITICAL SUBDIVISION OF THE STATE OF CALIFORNIA in
United States Bankruptcy Court but now pending in the United States District
Court for the Central District of California. The case was consolidated for
discovery purposes with actions by the County against Merrill Lynch & Co.,
Inc., KPMG Peat Marwick LLP, Morgan Stanley & Co., Inc., Student Loan
Marketing Association ("Sallie Mae"), Federal National Mortgage Association
("Fannie Mae"), LeBouef, Lamb, Greene & MacRae, McGraw-Hill Companies, Inc.
d/b/a Standard & Poors, Fuji Securities Inc., and twelve Federal Home Loan
Banks. The County filed proceedings against 16 other parties, which are
subject to a stay. The County reportedly has reached settlements with KPMG
Peat Marwick LLP, LeBouef, Lamb, Greene & MacRae, and Credit Suisse First
Boston Corporation (one of the parties to the stayed proceedings).
20
The County seeks in excess of $500 million in losses allegedly incurred in
the Orange County Investment Pool ("OCIP").
The County alleges that Rauscher Pierce Refsnes was a financial advisor
on five note offerings by the County that took place in June through August
of 1994, for an aggregate of $975 million, including an offering of $600
million in taxable one-year notes in July 1994. The County alleges that by
failing to apprise the County of the risks involved in the OCIP and in the
County's 1994 note offering program, and by failing to prevent the issuance
of allegedly inaccurate official statements, Rauscher Pierce Refsnes became
liable for breach of contract, professional negligence, breach of fiduciary
duty and aiding and abetting breaches of fiduciary duty committed by the
County Treasurer and Assistant Treasurer. Dain Rauscher, as successor to
Rauscher Pierce Refsnes, denies these allegations, including those relating
to Rauscher Pierce Refsnes' role in connection with these transactions. In
each of the five transactions in question, Rauscher Pierce Refsnes was
retained solely to determine whether the underwriter's spread (including the
portion to be received by the financial and marketing specialist) and
proposed interest rate were appropriate. Dain Rauscher, as successor to
Rauscher Pierce Refsnes, believes it has substantial and meritorious
defenses available and is defending itself vigorously in this action.
THREATENED SEC PROCEEDING
During second quarter 1997, the SEC authorized an action against
Rauscher Pierce Refsnes and one current and one former employee for alleged
violation of certain anti-fraud provisions under the Securities Act of 1933
and the Securities Exchange Act of 1934 in connection with an additional 12
taxable one-year note offerings for an aggregate of $580 million and one
pooled Tax and Revenue Anticipation Note offering for $300 million. The
offerings were made by certain school districts and cities during 1993 and
1994 and the proceeds were invested in the OCIP. Rauscher Pierce Refsnes
acted either as underwriter or financial advisor in connection with each of
these transactions. The SEC has indicated that it intends to file this
action in the United States District Court for the Central District of
California and to seek injunctive and other ancillary relief. It is not
clear at this time when the SEC will file this threatened action. Dain
Rauscher, as successor to Rauscher Pierce Refsnes, has been engaged in
discussions with the SEC in an effort to resolve this matter on satisfactory
terms prior to or in lieu of the filing of a federal complaint. If an action
is brought, Dain Rauscher believes that it has substantial and meritorious
defenses available and intends to defend itself vigorously in such action.
SEC PROCEEDING CONCERNING STATE OF ARIZONA REFUNDING TRANSACTION
In January 1998, the SEC filed a proceeding captioned, SECURITIES AND
EXCHANGE COMMISSION V. RAUSCHER PIERCE REFSNES, INC. AND JAMES FELTHAM, in
United States District Court in Phoenix, Arizona, against Rauscher Pierce
Refsnes and a former employee seeking injunctive and other ancillary relief. The
complaint alleges violation of the anti-fraud provisions under the Securities
Act of 1933, the Securities Exchange Act of 1934 and the Investment Advisors Act
of 1940 in connection with a $130 million refunding issue by the State of
Arizona in 1992, on which Rauscher Pierce Refsnes served as financial advisor.
Rauscher Pierce Refsnes purchased government securities and sold them to the
escrow trustee in the transaction at a markup of approximately 0.55 percent of
their cost to Rauscher Pierce Refsnes. The SEC alleges that Rauscher Pierce
Refsnes had an obligation to disclose, but failed to disclose, that it purchased
and sold the government securities as a principal, that it expected to make a
profit, and the amount of the profit. The SEC also alleges that the markup was
excessive and that Rauscher Pierce Refsnes falsely represented that the
securities were sold to the trustee at fair market value. Dain Rauscher, as
successor to Rauscher Pierce Refsnes, believes that it has substantial and
meritorious defenses available and intends to defend itself vigorously in this
action.
21
PRICE RANGE OF COMMON STOCK
The Common Stock is listed on the NYSE under the symbol "DRC." Prior to
January 1, 1998, the Company's NYSE trading symbol was "IFI" and prior to
February 10, 1997, the Company's NYSE trading symbol was "IFG." The following
table sets forth for the periods indicated the high and low sales prices per
share of the Common Stock on the NYSE composite tape as reported by the National
Quotation Bureau, Inc.
[Enlarge/Download Table]
HIGH LOW
-------- --------
1996
First Quarter............................................................... $ 25 1/4 $ 20 1/2
Second Quarter.............................................................. 26 7/8 20 3/4
Third Quarter............................................................... 33 1/2 22
Fourth Quarter.............................................................. 36 7/8 31 1/4
1997
First Quarter............................................................... 42 5/8 34 3/4
Second Quarter.............................................................. 45 5/8 41 15/16
Third Quarter............................................................... 60 1/16 43 1/2
Fourth Quarter.............................................................. 69 3/16 56 15/16
1998
First Quarter............................................................... 69 53 1/2
DIVIDENDS
Cash dividends per common share paid by the Company by quarter for the last
two years were as follows:
[Enlarge/Download Table]
QUARTER 1998 1997 1996
------------------------------------------------------------------------ --------- --------- ---------
First................................................................... $ .22 $ .18 $ .11
Second.................................................................. $ .22 $ .18 .15
Third................................................................... $ .18 .15
Fourth.................................................................. $ .18 .15
The Company increased its regular quarterly cash dividend to $.22 per share
in February 1998. The regular first quarter dividend was paid in March 1998, and
the regular second quarter dividend will be paid in June 1998. The determination
of the amount of future cash dividends, if any, to be declared and paid will
depend on the Company's future financial condition, earnings and available
funds.
22
CAPITALIZATION
The following table sets forth the capitalization of the Company as of March
31, 1998 (in thousands).
[Enlarge/Download Table]
Long-term debt:
Subordinated debt............................................................... $ 101,657
Capital lease obligations and Other............................................. 6,659
----------
Total long-term debt.......................................................... 108,316
----------
Shareholders' equity
Common stock, par value $.125 per share, authorized 30,000,000 shares (issued
12,448,595 shares and outstanding
12,355,852 shares).......................................................... 1,556
Additional paid-in capital...................................................... 94,859
Retained earnings............................................................... 228,665
Treasury stock at cost.......................................................... (5,195)
----------
Total shareholders' equity.................................................... 319,885
----------
Total capitalization........................................................ $ 428,201
----------
----------
23
SELECTED CONSOLIDATED FINANCIAL DATA
This summary is qualified in its entirety by more detailed information and
financial statements included in this Prospectus and in the documents
incorporated by reference in this Prospectus. See "Index to Consolidated
Financial Statements" and "Index to Consolidated Financial Statements." The
following consolidated financial data of the Company, as of and for the five
years ended December 31, 1997, are derived from the Company's consolidated
financial statements which have been audited by KPMG Peat Marwick LLP,
independent auditors. The financial data for the three months ended March 31,
1998 have been derived from the Company's unaudited financial statements which,
in the opinion of management, include all adjustments necessary for a fair
presentation of the results of operations and financial position for the periods
and as of the dates presented. The results of operations for the three months
ended March 31, 1998 are not necessarily indicative of the results to be
anticipated for the entire fiscal year. The table should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Financial Statements and the notes thereto contained
elsewhere in this Prospectus.
SELECTED FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER-SHARE MOUNTS)
[Enlarge/Download Table]
THREE MONTHS ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
-------------------- -----------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
--------- --------- --------- --------- --------- --------- ---------
("UNAUDITED")
STATEMENT OF OPERATIONS DATA
Net revenues (A)......................... $ 172,447 $ 165,962 $ 692,102 $ 625,756 $ 541,970 $ 457,351 $ 482,960
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Revenues................................. $ 188,014 $ 180,072 $ 750,675 $ 683,316 $ 606,747 $ 496,289 $ 511,615
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Operating earnings before income taxes... $ 16,837 $ 24,389 $ 76,755 $ 87,402 $ 56,271 $ 39,795 $ 77,353
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Operating earnings (net of tax).......... $ 10,776 $ 15,755 $ 58,905 $ 56,811 $ 35,873 $ 25,453 $ 47,649
Merger and restructuring charges (net of
tax)................................... (12,800) -- (9,630) -- -- -- --
--------- --------- --------- --------- --------- --------- ---------
Net earnings (loss)...................... $ (2,024) $ 15,755 $ 49,275 $ 56,811 $ 35,873 $ 25,453 $ 47,649
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
FINANCIAL RATIOS/MEASURES
Diluted earnings per share............... $ (0.16) $ 1.22 $ 3.77 $ 4.49 $ 2.85 $ 2.03 $ 3.78
Pretax margin on net revenues............ NM 14.7% 11.1% 14.0% 10.4% 8.7% 16.0%
Annualized net return on average
equity................................. NM 20.6% 16.5% 22.8% 17.3% 13.5% 31.0%
FINANCIAL RATIOS/MEASURES EXCLUDING
MERGER AND RESTRUCTURING CHARGES
Diluted earnings per share............... $ 0.82 $ 1.22 $ 4.51 $ 4.49 $ 2.85 $ 2.03 $ 3.78
Pretax margin on net revenues............ 9.8% 14.7% 8.5% 9.1% 6.6% 5.6% 9.9%
Net return on average equity............. 13.0% 20.6% 19.4% 22.8% 17.3% 13.5% 31.0%
24
SELECTED FINANCIAL DATA
(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER-SHARE MOUNTS)
[Enlarge/Download Table]
THREE MONTHS ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
-------------------- -----------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
--------- --------- --------- --------- --------- --------- ---------
(UNAUDITED)
OTHER DATA
Total assets.................. 2,528,342 2,172,110 2,304,401 1,827,425 2,021,908 1,952,611 1,786,022
Long-term debt................ 108,316 23,855 15,659 27,290 41,410 47,023 22,166
Shareholder's equity.......... 319,885 292,798 319,091 275,886 222,494 195,420 177,683
Equity per common share....... $ 25.89 $ 23.88 $ 26.00 $ 22.66 $ 18.44 $ 16.20 $ 14.57
Common shares outstanding..... 12,356 12,261 12,275 12,175 12,065 12,062 12,197
Cash dividends per common
share....................... $ 0.22 $ 0.18 $ 0.72 $ 0.56 $ 0.43 $ 0.37 $ 0.19
Long-term debt/equity ratio... 33.9% 8.1% 4.9% 9.9% 18.6% 24.1% 12.5%
Average number of employees... 3,565 3,460 3,525 3,379 3,285 3,133 2,806
Average number of investment
executives.................. 1,271 1,264 1,267 1,263 1,271 1,205 1,084
Number of office locations.... 96 91 96 91 91 95 81
------------------------------
(A) Net revenues equal total revenues less interest expense.
25
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The following discussion and analysis is intended to provide greater details
of the results of operations and financial condition of the Company. The
following discussion should be read in conjunction with the information under
"Selected Financial Data" and the Company's consolidated financial statements,
including the notes, thereto, and other financial data appearing elsewhere in
this Prospectus. Certain statements included in the following discussion
constitute "forward-looking statements" which involve various risks and
uncertainties. The Company's actual results may differ from those anticipated in
such forward looking statements. For additional information concerning such
risks see "Risk Factors."
BUSINESS ENVIRONMENT
The Company is primarily engaged in securities brokerage, investment banking
and trading as a principal in equity and fixed income securities. All of these
activities are highly competitive and sensitive to many factors outside the
control of the Company, including volatility of securities prices and interest
rates; trading volume of securities; economic conditions, including economic
conditions in the regions where the Company does business; income tax
legislation; and demand for investment banking and securities brokerage
services. While revenues are dependent upon the level of trading and
underwriting volume, which may fluctuate significantly, a large portion of the
Company's expenses remain fixed. Consequently, net earnings can vary
significantly from period to period.
THREE MONTHS ENDED MARCH 31, 1997
SUMMARY OF OPERATING RESULTS
The following is a consolidated summary of the Company's results of
operations for the three months ended March 31, 1998 and 1997:
[Enlarge/Download Table]
THREE MONTHS ENDED
MARCH 31,
----------------------
1998 1997
---------- ----------
Revenues.............................................................. $ 188,014 $ 180,072
Interest expense...................................................... (15,567) (14,110)
---------- ----------
Net revenues.......................................................... 172,447 165,962
Expenses excluding interest and merger-related expenses............... 155,610 141,573
---------- ----------
Operating earnings before income taxes................................ 16,837 24,389
Income tax expense from operations.................................... (6,061) (8,634)
---------- ----------
Net operating earnings................................................ 10,776 15,755
Merger-related expenses (net of tax).................................. (12,800) --
---------- ----------
Net earnings (loss)................................................... $ (2,024) $ 15,755
---------- ----------
---------- ----------
Earnings per share:
From net operating earnings:
Basic............................................................. $ 0.87 $ 1.29
Diluted........................................................... 0.82 1.22
Net:
Basic............................................................. $ (0.16) $ 1.29
Diluted........................................................... (0.16) 1.22
26
Consolidated net operating earnings were $10.8 million, or $.82 per share
diluted, during the first quarter of 1998 compared with $15.8 million, or $1.22
per share, for the first quarter of 1997. During the quarter, the Company's
Private Client Group posted a 26 percent increase in pretax profitability,
primarily due to strong sales of investment products to individual investors,
and the Fixed Income Capital Markets Group posted a 17 percent increase in
pretax profitability, principally the result of higher fees earned underwriting
securities for municipal and governmental clients. These increases, however,
were more than offset by a decline in the profitability of the Dain Rauscher
Wessels equity capital markets division of Dain Rausher ("ECM") from the first
quarter of 1997. A significant portion of this decline resulted from uncertainty
surrounding the Company's February 9, 1998 announcement that it would purchase
WAH. This announcement, coupled with the disruption brought about by the October
1997 announcement of the merger of the Company's former broker-dealer
subsidiaries into a single company, effectively was the second reorganization of
ECM within a four-month period that included, among other things, job
eliminations, managerial changes and changes in assignments of customer
accounts, research coverage and trading coverage.
In conjunction with the acquisition of WAH, the Company recorded a $20.0
million merger-related charge in the 1998 first quarter to cover severance,
space consolidation, systems/operations expenses and other costs of integration.
As a result of the charge, the Company incurred a net loss of $2.0 million, or
$.16 cents per share diluted, for the quarter ended March 31, 1998. The $20.0
million charge exceeded management's previous estimate of up to $15.0 million
due to strategic decisions to focus on certain industry sectors within ECM's
business. As a result, approximately 150 jobs were eliminated, more than
originally anticipated. Excluding the merger-related charge, the Company expects
the acquisition to have minimal impact on earnings in 1998, and to be accretive
to earnings in the first full year of operations.
RESULTS OF OPERATIONS
Commission revenues increased $9.3 million or 15 percent during the 1998
first quarter over the first quarter of 1997 as a result of higher sales of
listed securities, mutual funds and insurance and annuity products. Contributing
also to the increase were higher securities prices, particularly during February
and March of 1998, and higher volumes of securities trades including an 11
percent rise in the NYSE's average daily trading volume in the 1998 first
quarter.
Revenues from principal transactions declined $5.2 million or 12 percent
primarily due to lower trading revenues in over-the-counter equity securities.
The decline was primarily related to lower spreads earned trading OTC equity
securities resulting from management's decision to provide increased liquidity
in order to facilitate institutional trading as well as smaller fractions used
in share price posting. Also contributing was the impact of the merger of the
Company's broker-dealer subsidiaries and the WAH acquisition (see "Summary of
Operating Results" above), as well as lower sales and trading of tax-exempt
fixed income securities. These declines were partially offset by increases in
sales and trading of taxable fixed income securities.
Similarly, investment banking and underwriting revenues declined $3.6
million or 14 percent during the first quarter from the same quarter of 1997 due
primarily to lower underwriting transaction levels for ECM. Management believes
the lower revenue production was due largely to the restructuring changes made
as a result of the merger of Dain Bosworth and Rauscher Pierce Refsnes,
effective on January 2, 1998, and the acquisition of WAH (see "Summary of
Operating Results" above). Offsetting some of this decline, however, were
increases in fees earned from underwriting securities for municipal and
governmental clients.
Net interest income increased $1.6 million or 11 percent during the quarter,
primarily due to a 17 percent increase in average margin loan balances. The
margin loan increase can be attributed to favorable market conditions coupled
with comparatively low interest rates. The resulting increase in net interest
income was partially offset by the effects of a 50 percent decline in customer
credit balances in the
27
1998 first quarter versus the 1997 first quarter, due primarily to transfers of
certain customers' credit balances to Company-sponsored money market funds.
Asset management revenues increased $2.8 million or 27 percent in the first
quarter over the prior year due to increased levels of assets in fee-based,
managed account programs at Dain Rauscher and, to a lesser degree, a 33 percent
increase in assets under management at the Company's money management
subsidiary, Insight Management.
Other revenues increased $1.6 million or 32 percent over the 1997 quarter
primarily due to gains related to the sale of securities previously obtained in
connection with corporate underwriting activities.
During the 1998 first quarter, compensation and benefits increased $9.5
million or 9 percent due principally to increased commissions associated with
higher levels of operating revenues and higher incentive compensation. Also
contributing to the increase were higher salary levels and a 3 percent rise in
the average number of employees.
Expenses other than compensation and benefits increased $4.5 million or 11
percent over the 1997 first quarter principally due to : (1) increased occupancy
costs associated with office expansions and office operating costs, including
real estate taxes; (2) volume-driven increases in communications market-data and
clearing services; (3) travel and promotional costs associated with the
generation of new business; (4) increased information system contractor and
development costs; and (5) increased litigation related expenses.
THREE YEARS ENDED DECEMBER 31, 1997
SUMMARY OF OPERATING RESULTS
During 1997, net earnings totaled $49.3 million, a decrease of $7.5 million
or 13 percent from 1996. Excluding the effect of the $15.0 million pretax
restructuring charge in the 1997 third quarter ($9.6 million after-tax or $.74
per share diluted), net earnings for 1997 would have been a Company record (see
"October 1997 Restructuring Announcement" below). The Company's Private Client
Group was the primary driver of the Company's strong operating results for 1997
as this business unit took advantage of market conditions that were favorable to
individual investors and sold increased quantities of mutual funds, listed
securities, and insurance and annuity products. The Company generated increased
net interest income during 1997, primarily due to higher levels of margin
borrowing by individual investors, and also benefitted from increased account
and transaction fees from individual investors. The Company's Equity Capital
Markets Group generated similar revenue levels in 1997 as in 1996 as increases
in corporate underwriting and institutional equity sales activity were offset by
declines in over-the-counter equity trading, mergers and acquisitions and
syndicate activity. Profitability of the Equity Capital Markets Group dropped
sharply in 1997 from 1996 due to increased expenses incurred in attempting to
grow this business. The Company believes that its acquisition of WAH will
increase the productivity and market share of this business unit. See "--1998
Acquisition of Wessels, Arnold & Henderson." Finally, the Company's Fixed Income
Group posted improved revenues and profits in 1997 versus 1996 due, in part, to
the downsizing performed in this business unit during 1996 as well as from
increased tax-exempt fixed income sales, trading and underwriting revenues.
In 1996 net earnings totaled $56.8 million, a Company record and an increase
of $21.0 million or 58 percent over 1995. Net revenues (revenues less interest
expense) also reached a record $625.8 million, $83.8 million or 15 percent more
than the prior year. The Company, along with the rest of the securities
industry, benefitted from relatively low interest rates, as well as steadily
increasing security prices and trade volumes. While 1996 growth in the size of
the Company's business units was modest compared with 1995 and 1994, the Company
was prepared to take advantage of favorable equity securities market conditions
with a larger, more productive organization. Additionally, the Company
contracted the size of its fixed income business amid difficult fixed income
market conditions. Accordingly, in 1996 the Company was able
28
to increase its revenues at a greater rate than its expenses and to better
concentrate its resources in its higher-margin businesses, primarily corporate
investment banking and institutional equity sales.
OCTOBER 1997 RESTRUCTURING ANNOUNCEMENT
On October 14, 1997, the Company announced that it would combine Dain
Bosworth, Rauscher Pierce Refsnes and its operations subsidiary into a new firm,
Dain Rauscher Incorporated, during the first quarter of 1998. The Company
changed its name to Dain Rauscher Corporation on January 2, 1998, and the
Company's trading symbol on the New York Stock Exchange changed to "DRC" on that
date. Upon completion of the combination on March 2, 1998, Dain Rauscher became
the largest regional brokerage firm in the western half of the United States
with more than 1,200 private client and institutional investment executives and
1997 net revenues of almost $700 million.
The restructuring represents a strategic change made necessary by the
dramatic changes in the competitive environment in which the Company operates.
These changes were triggered in February 1997 by Federal Reserve Board rulings
that affectively permitted bank holding companies to acquire investment banks.
Such acquisitions and mergers by commercial banks increased the price of
securities firms in 1997 such that acquisitions of major additional firms as
contemplated by the Company under its previous strategy no longer appeared to be
possible. The restructuring, management believes, allows the Company to combine
its two regional firms into a single, more powerful brand and will enable it to
simplify its management structure and become more responsive to competitive
changes. The Company may continue to acquire smaller securities firms in or near
its current markets and to expand its correspondent clearing business, and
expects to continue to explore new business opportunities in other
securities-related businesses.
The Company, which employs 3,600 people, eliminated approximately 120
management, business-line and staff positions, in connection with the
restructuring. The Company does not expect that such job eliminations will
materially affect future revenues. Overall, the restructuring is expected to
reduce non-interest expense levels by approximately $10 million annually.
The Company recorded a one-time, after-tax charge of $9.6 million ($15.0
million before taxes), or 74 cents per share diluted, against third-quarter 1997
earnings to cover severance and other restructuring costs. Substantially all of
the $15.0 million of the restructuring costs resulted in cash outflows,
primarily during the fourth quarter of 1997 and first quarter of 1998. The
composition of the $15.0 million charge was as follows: $12.0 million for
severance and short-term retention payments to terminated employees; $0.7
million for space consolidation expenditures; and the remaining $2.2 million for
other expenditures including costs of changing the Company's name, relocation,
outplacement services and professional fees related to the restructuring. The
Company believes that the $15.0 million charge will be adequate to cover the
costs of the restructuring.
1998 ACQUISITION OF WESSELS, ARNOLD & HENDERSON
On March 31, 1998, the Company acquired WAH. The approximate purchase price
of $150 million includes $120 million in cash, up to $30 million face amount in
five-year, subordinated debentures and other direct costs of the acquisition.
The cash portion of the purchase price was paid from available cash and a new
subordinated credit facility. The transaction is expected to significantly
increase Dain Rauscher equity capital markets capabilities. The acquisition is
expected to slightly dilute 1998 earnings before consideration of a
restructuring charge of $20 million recorded in the first quarter of 1998.
Management expects the acquisition to be accretive to earnings in the first full
calendar year of operation.
29
COMPARATIVE NET REVENUES AND EXPENSES SUMMARY. The following is a summary
of the year-to-year increases (decreases) in categories of net revenues and
operating expenses:
[Enlarge/Download Table]
1997 V. 1996 1996 V. 1995
----------------------- -----------------------
AMOUNT PERCENT AMOUNT PERCENT
---------- ----------- ---------- -----------
(DOLLARS IN THOUSANDS)
Net Revenues:
Commissions...................................................... $ 51,763 23% $ 47,097 27%
Principal transactions........................................... (16,890) (10) (10,140) (6)
Investment banking and underwriting.............................. (111) -- 21,628 24
Net interest..................................................... 10,928 21 8,375 19
Asset management................................................. 10,414 29 8,802 32
Correspondent clearing........................................... 4,021 25 3,322 27
Other............................................................ 6,221 35 4,702 37
---------- ----- ---------- -----
66,346 11 83,786 15
---------- ----- ---------- -----
Expenses excluding interest:
Compensation and benefits........................................ 41,694 11 40,071 12
Communications................................................... 3,149 7 2,677 7
Occupancy and equipment rental................................... 5,642 16 2,851 9
Travel and promotional........................................... 5,997 25 3,631 18
Floor brokerage and clearing fees................................ 2,057 20 557 6
Other............................................................ 3,454 9 2,868 8
Restructuring charge............................................. 15,000 -- -- --
---------- ----- ---------- -----
76,993 14 52,655 11
---------- ----- ---------- -----
Earnings before income taxes....................................... $ (10,647) (12)% $ 31,131 55%
---------- ----- ---------- -----
---------- ----- ---------- -----
COMMISSIONS
Commission revenues increased $51.8 million or 23 percent from 1996 to 1997,
principally as a result of higher sales to individual and institutional
investors of: (1) mutual funds; (2) listed equity securities; and (3) insurance
and annuity products. While the average number of investment executives remained
constant in 1997 relative to 1996, Private Client Group investment executive
productivity (commissions per investment executive) improved approximately 13
percent. A 25 percent rise in the NYSE's average daily trading volume also
contributed to the productivity increase.
The $47.1 million or 27 percent increase in commission revenues during 1996
was due principally to increased sales to individual and institutional investors
of: (1) mutual funds; (2) over-the-counter equity securities sold on an agency
basis; (3) listed equity securities; and (4) insurance and annuity products.
While the average number of investment executives declined slightly in 1996 from
1995, investment executive productivity improved approximately 15 percent, aided
by a 19 percent rise in the NYSE's average daily trading volume.
PRINCIPAL TRANSACTIONS
Principal transactions revenues declined $16.9 million or 10 percent from
1996 to 1997. The largest component of the revenue decrease was lower sales and
trading results in over-the-counter equity securities, which became less popular
investments for individual and institutional investors beginning with the
Federal Reserve Board's increase in short-term interest rates in March 1997.
This action led to lower volumes, prices and spreads earned trading such
securities. Spreads earned trading over-the-counter equity securities were also
negatively impacted in 1997 by new order-handling regulations, increased
liquidity
30
provided to facilitate institutional trading and smaller fractions used in share
price posting. Also contributing to the decline in principal transactions
revenues were declines in sales and trading results of taxable fixed income
securities. Partially offsetting this decline were increases in sales and
trading of tax-exempt fixed income securities.
Principal transaction revenues declined $10.1 million or 6 percent from 1995
to 1996. The decline resulted from reduced trading revenues on taxable and
tax-exempt fixed income products and was partially offset by increases in
over-the-counter equity trading revenues. The reductions in fixed income trading
revenues were due primarily to the existence of a difficult 1996 fixed income
trading environment and the relatively low level of individual investor demand
for fixed income products due to the comparatively larger returns experienced by
investors in equity instruments in 1996.
INVESTMENT BANKING AND UNDERWRITING
Investment banking and underwriting revenue levels were flat in 1997 to 1996
as increases in corporate underwriting activity were roughly offset by declines
in corporate mergers and acquisitions and municipal underwriting activity.
Investment banking and underwriting revenues increased $21.6 million or 24
percent during 1996 primarily due to increased corporate underwriting activity.
In addition to the strong corporate underwriting markets that existed in 1996,
management believes that the 1995 reorganization and refocusing of its Equity
Capital Markets groups around specialized industry segments enabled Dain
Bosworth and Rauscher Pierce Refsnes to attract and underwrite higher levels of
corporate securities. Additionally, financial advisory service fees earned from
corporate clients increased in 1996 relative to 1995.
Beginning in 1995 and continuing into 1996 and 1997, regulatory requirements
and scrutiny related to municipal underwriting activities throughout the
securities industry increased. Uncertainty caused by such heightened regulation
and scrutiny could negatively impact future levels of municipal
underwriting-related activities and could also increase costs related to such
activities for both the Company and the securities industry as a whole.
NET INTEREST INCOME
The major sources of interest revenues and expenses for the past three years
are:
[Enlarge/Download Table]
YEAR ENDED DECEMBER 31,
----------------------------------
1997 1996 1995
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
Revenues:
Customer margin accounts................................................... $ 78,945 $ 66,770 $ 55,603
Trading inventories and other.............................................. 28,705 28,250 30,596
Deposits and short-term investments........................................ 14,842 15,531 23,194
---------- ---------- ----------
$ 122,492 $ 110,551 $ 109,393
---------- ---------- ----------
Expenses:
Customer funds on deposit.................................................. 23,577 29,067 35,922
Short-term bank loans and other............................................ 32,943 25,526 25,154
Subordinated and other long-term debt...................................... 2,053 2,967 3,701
---------- ---------- ----------
58,573 57,560 64,777
---------- ---------- ----------
Net interest income........................................................ $ 63,919 $ 52,991 $ 44,616
---------- ---------- ----------
---------- ---------- ----------
Margin loans to customers, financed by credit balances in customer accounts,
short-term bank borrowings and securities lending activities, comprise the
majority of the Company's interest-earning
31
assets. Fixed income trading inventories, which are generally financed with
short-term bank borrowings, repurchase agreements or deposits from securities
loaned, also generated significant net interest income. The Company's net
interest income is dependent upon the level of customer balances and trading
inventories, as well as the spread between the rate it earns on those assets
compared with its cost of funds.
Beginning in 1996 and continuing through 1997, a growing proportion of the
Company's net interest income was earned from customer margin loans as favorable
market conditions coupled with comparatively low interest rates made margin
borrowing popular.
Net interest income accounted for approximately 9 percent of the Company's
net revenues in 1997 versus 8 percent in 1996 and 1995. In 1997 the 21 percent
increase in net interest income resulted primarily from the 16 percent increase
in average margin loan balances as well as a third-quarter increase in margin
interest rates charged to certain customers. In 1996 the 19 percent increase in
net interest income resulted primarily from the 29 percent rise in average
margin loan balances. The 1996 margin loan increase was due principally to the
transfer of several large customer accounts from competitors during the 1996
third quarter. The resulting increase in net interest income was partially
offset by the effects of a 10 percent decline in customer credit balances from
1995, along with the corresponding decline in short-term investments segregated
for regulatory purposes precipitated by the 1996 second-half transfer of
approximately $340 million of customer credit balances to Company-sponsored
money market funds. The transfers occurred as a result of the Company offering
new cash management products to certain segments of its customers.
As long as favorable interest-rate spreads are maintained and the level of
interest-bearing accounts remains stable, the Company expects net interest
income to continue to be a significant component of its earnings. Management
believes that the 1996 introduction of new cash management products and services
resulted in increased asset management revenues, but was offset by lower net
interest income derived from customer balances and, accordingly, did not have a
material effect on net earnings.
Average balances and interest rates for 1995 through 1997 are:
[Enlarge/Download Table]
YEAR ENDED DECEMBER 31,
----------------------------------
1997 1996 1995
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
Interest Revenues:
Margin loans to customers
Average balance............................................................ $ 934,833 $ 810,693 $ 628,392
Average interest rate...................................................... 8.4% 8.2% 8.8%
---------- ---------- ----------
$ 78,945 $ 66,770 $ 55,603
---------- ---------- ----------
---------- ---------- ----------
Deposits and short-term investments:
Average balance............................................................ $ 279,888 $ 293,081 $ 398,027
Average interest rate...................................................... 5.3% 5.3% 5.8%
---------- ---------- ----------
$ 14,842 $ 15,531 $ 23,194
---------- ---------- ----------
---------- ---------- ----------
Interest expense:
Interest-bearing customer funds on deposit
Average balance............................................................ $ 524,201 $ 649,443 $ 723,803
Average interest rate...................................................... 4.5% 4.5% 5.0%
---------- ---------- ----------
$ 23,577 $ 29,067 $ 35,922
---------- ---------- ----------
---------- ---------- ----------
32
ASSET MANAGEMENT
Asset management revenues increased 29 percent from 1996 to 1997 and 32
percent in 1996 from 1995 due to increased revenues from larger volumes of
assets in fee-based, managed account programs at Dain Rauscher and, to a lesser
degree, 17 and 41 percent increases in assets under management at Insight
Management.
CORRESPONDENT CLEARING
Revenues from correspondent clearing rose $4.0 million or 25 percent in 1997
from 1996 as RPR Clearing, the Dain Rauscher unit that markets and coordinates
correspondent clearing services, benefitted from a 33 percent increase in
correspondent firm trade volumes. The positive effects of such increased trade
volumes, however, were partially offset by a 9 percent reduction in per-trade
revenues caused primarily by competitive pricing pressures.
Correspondent clearing revenues increased $3.3 million or 27 percent in 1996
from the previous year as RPR Clearing benefitted from a 49 percent increase in
correspondent firm trade volumes. Additionally, RPR Clearing benefitted from a 5
percent increase to 178 in the number of correspondent brokerage firms for which
it does business.
OTHER REVENUES
Other revenues increased by approximately $6.2 million or 35 percent in 1997
and $4.7 million or 37 percent in 1996 versus previous years principally due to
increased transaction and account fee revenues. The increased transaction fees
resulted from larger trade volumes in 1997 versus 1996, and the increased
account fees stem from increased numbers of Individual Retirement Accounts, cash
management accounts, account transfer fees and the like. Additionally, in each
of 1997 and 1995, other revenues included approximately $1.8 million in gains
related to the sale of securities previously obtained as a portion of
compensation for certain corporate underwriting activity. In 1996 other revenues
include approximately $1.1 million in gains associated with the fourth-quarter
sale of two tax-exempt mutual funds.
COMPENSATION AND BENEFITS
Compensation and benefits expense is generally affected by the level of
operating revenues, earnings and the number of employees. During 1997 and 1996
compensation and benefits expense increased 11 percent and 12 percent,
respectively, from the previous years. The 1997 increase was primarily the
result of: (1) increased commissions and benefits paid to revenue-producing
employees generating higher levels of operating revenues; (2) the effects of a 4
percent increase in the average number of employees; (3) increased incentive
compensation accruals; and (4) general salary increases. The 1996 increase was
largely the result of increased commissions, incentive compensation and related
benefits that rose in conjunction with operating revenues and earnings. Also
contributing to the 1996 increase was a 3 percent increase in the average number
of employees and general salary increases.
OTHER EXPENSES
Expenses other than compensation and benefits and the restructuring charge
increased $20.3 million or 13 percent from 1996 to 1997 principally due to: (1)
increased travel and promotional costs associated with the generation of new
business and the upcoming merger of the Company's broker-dealer subsidiaries in
January 1998; (2) increased occupancy costs associated with office expansions
and office operating costs, including real estate taxes, and equipment upgrades;
(3) costs associated with information system upgrades; (4) volume-driven
increases in communications, market-data and clearing services; and (5) bad debt
expenses.
33
During 1996, expenses other than compensation and benefits increased $12.5
million or 9 percent primarily due to: (1) increased travel and promotional
costs associated with the generation of new business; (2) increased occupancy
costs stemming from expansion of several operating office locations, including
operating costs and real estate taxes associated with such locations; (3)
increased communications costs resulting from the 1996 rollout of improved
investment executive workstations; and (4) increased professional services fees.
EFFECT OF RECENT ACCOUNTING STANDARDS
RECENT ACCOUNTING PRONOUNCEMENTS: In June 1996 the Financial Accounting
Standards Board issued SFAS 125 ("SFAS 125"), "Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities." The Company adopted the
provisions of SFAS 125 on January 1, 1998. The adoption of SFAS 125 did not have
a material effect on the Company's consolidated financial statements.
INFLATION
Since the Company's assets are primarily liquid in nature and experience a
high rate of turnover, they are not significantly affected by inflation.
However, the rate of inflation does affect many of the Company's operating
costs, which may not be readily recoverable through price increases on services
offered by the Company.
YEAR 2000 ISSUE & TECHNOLOGY
The Company's business is highly dependent on communications, trading,
information and data processing systems. As with other areas, the Company's
technology demands have grown considerably in recent years and are anticipated
to continue to grow dramatically in the years ahead. Investor interest and
competitive forces in areas such as electronic order entry and access to
customer statements (including through the Internet) could strain the Company's
technology resources or force it to incur substantial expenses in expanding
these resources. New regulations imposing additional audit trail and other data
capture and retention requirements will cause the Company to incur further
significant expenses. The Company has outsourced certain communications and
quotations and trading systems services, and currently maintains its own
back-office processing system. Although the Company and its vendors have in
place tested disaster recovery systems, any failure or interruption of the
Company's or a vendor's systems could cause delays in the Company's securities
trading and processing activities and an inability to execute client
transactions, which could have a material adverse effect on the Company's
operating results. There can be no assurance that the Company or a vendor will
not suffer any such systems failure or interruption or that the Company's or a
vendor's backup procedures and disaster recovery capabilities will be adequate.
As technology develops and industry practices and regulations change, the
Company must periodically update or replace various of its key systems,
including, in particular, its back-office data processing system, in order to
remain competitive. The Company has committed to upgrade its current back-office
processing system via an internal development process between 1998 and 2002 at
an expected cost of approximately $17 million. There can be no assurance that
the Company, during the process of upgrading its current back-office processing
system, will not encounter technological difficulties, cost overruns, problems
obtaining the necessary quantity and quality of development personnel, or
difficulties in purchasing necessary components of such a system from outside
vendors. Further, there can be no assurance that the back-office processing
system, upon completion, will be state-of-the-art and that the system upgrade or
implementation process will not result in interruption of the Company's business
or delivery of its products and services to customers.
It has become widely known that certain technological problems may arise in
connection with reaching the Year 2000. Beginning with the Company's
consolidation of the back-office brokerage operations of Dain Bosworth and
Rauscher Pierce Refsnes in 1993, the Company has upgraded and/or
34
replaced the bulk of its mission-critical data processing systems. Such upgrade
and replacement projects were performed primarily for competitive reasons,
though they included the added benefit of making such systems Year 2000
compliant. Upgrades or replacements necessary to achieve Year 2000 compliance
for the Company's remaining mission-critical systems are expected to be
completed in 1998, and the costs related to such upgrades or replacements are
not expected to have a material effect on the Company's consolidated financial
statements. During 1999, the Company, along with the rest of the securities
industry, expects to test systems interdependencies with outside parties. While
there can be no assurance, the Company believes that its internal systems will
not experience significant disruption in connection with the Year 2000. There
can be no assurance that another entity's failure to ensure Year 2000 readiness
would not have an adverse effect on the Company. In particular, if the Company's
internal systems or if the Company's vendors and other information providers or
the securities exchanges, clearing agencies and other securities firms or
financial institutions with which the Company transacts business experience any
significant disruption in connection with the Year 2000, such disruption could
affect the Company's ability to conduct business and may have a material adverse
effect on the Company's results of operations.
Though the Company currently maintains its own back-office processing
system, it has made a commitment to internally develop an upgraded system
between 1998 and 2002. This project is expected to cost approximately $17
million and yield increased productivity and technological competitiveness by
improving investment executives' and correspondents' ability to serve clients,
and enhance investment executive and correspondent recruiting and retention.
LIQUIDITY AND CAPITAL RESOURCES
The Company's assets are substantially liquid in nature and consist mainly
of cash or assets readily convertible into cash. These assets are financed
primarily by interest-bearing and non-interest-bearing customer credit balances,
repurchase agreements, deposits for securities loaned, other payables,
short-term and subordinated bank borrowings and equity capital. Changes in the
amount of trading and underwriting securities owned by the Company, customer and
broker receivables and securities purchased under agreements to resell directly
affect the amount of the Company's financing requirements.
The Company has various sources of capital for operations and growth. In
addition to capital provided by earnings, Dain Rauscher maintains uncommitted
lines of credit from a number of banks to finance transactions (principally
trading and underwriting positions) when internally generated capital is not
sufficient. The majority of these uncommitted lines of credit are collateralized
by trading securities and customers' margin securities. On March 31, 1998,
approximately $575 million of a total of $433 million in uncommitted lines of
credit was unused. Also, the Company has a $50 million, committed, unsecured
revolving credit facility that is used for advances to its subsidiaries,
irrevocable letters of credit and general corporate purposes. The revolving
credit facility contains certain financial covenants standard for revolving
credit facilities of this type, including minimum net worth, net capital and a
limitation on indebtedness. The maximum indebtedness permitted thereunder,
excluding debt incurred under said facility and certain corporate guarantees,
but including the subordinated debentures issued to former WAH shareholders, may
not exceed $125 million in aggregate, unless terminated or amended. On March 31,
1998, all of this revolving credit facility was unused. On March 31, 1998, the
Company also issued $30 million (face amount) in 5-year zero coupon subordinated
debentures related to the acquisition of WAH. The debentures were recorded at a
discounted present value of $21.7 million.
Dain Rauscher borrowed $80 million from a bank on a subordinated basis over
four years in order to fund a portion of the purchase price for the acquisition
of WAH. See "--1998 Acquisition of Wessels, Arnold & Henderson, LLC."
Dain Rauscher is subject to the Commission's Net Capital Rule measuring
capitalization and liquidity and restricting amounts of capital that may be
transferred to affiliates. During 1997 and the first quarter of
35
1998, Dain Rauscher and its predecessor broker-dealers all operated above
minimum net capital standards. At March 31, 1998, regulatory net capital was
$114.8 million, which was 9.5 percent of aggregate debit balances and $54.5
million in excess of the 5 percent requirement.
Dain Rauscher is a dealer in corporate, tax-exempt and governmental fixed
income securities. While many of the Company's principal transactions are
executed to facilitate customer trades, Dain Rauscher also maintains certain
inventory positions for its own account. These positions typically include U.S.
government or U.S. government agency securities and are usually hedged with a
combination of short sales of similar securities, financial futures contracts or
option contracts in order to mitigate market and interest rate risk. Holdings of
high-yield securities are not material. Dain Rauscher maintains comprehensive
risk management policies including position limits, aging, duration and credit
requirements. These policies are intended to limit the size of and risk in the
Company's trading inventories.
The Company periodically hedges its fixed income trading inventories with
financial futures or option contracts. At March 31, 1998, the Company had open
commitments to sell under financial futures contracts with notional amounts of
$15.5 million. At March 31, 1998, the Company also had open commitments to
purchase $6.0 million and to sell $6.0 million of treasury securities under
option contracts. Additionally, the Company had open commitments to sell under
interest rate option contracts of $1.0 million on March 31, 1998. The fair
market values of these contracts was not material at March 31, 1998. In
addition, the average fair market value and trading revenues associated with
these contracts during 1997 and the first quarter of 1998 was not material. Such
option and financial futures contracts expose the Company to off-balance-sheet
market risk in the event that the changes in interest rates do not closely
correlate with the change in the security price. Transactions in futures
contracts are conducted through regulated exchanges which guarantee performance
of counterparties and are settled in cash on a daily basis, thereby minimizing
credit risk. Maintaining futures contracts typically requires the Company to
deposit cash or securities with an exchange or other financial intermediary as
security for its obligations. Additional cash or securities may be required to
be deposited thereafter due to fluctuations in the market value of the futures
contract. In writing option contracts, the Company receives a premium from the
purchaser in exchange for incurring an obligation to purchase or sell securities
upon exercise of the option. These obligations may require the Company to
purchase securities at prices higher than prevailing market prices or sell
securities at prices below prevailing market prices in order to fulfill its
obligations under the contracts. Other than as described, the Company does not
enter into other derivative financial instruments with off-balance-sheet risk.
Derivative financial instruments held or issued for trading purposes were
immaterial to the consolidated financial statements. The Company's exposure to
credit risk is represented by the fair value of trading securities owned.
In December 1997 and August 1996, respectively, the Company's Board of
Directors authorized additional programs to repurchase up to 600,000 and 100,000
shares of the Company's common stock. Purchases of the common stock may be made
from time to time at prevailing prices in the open market, by block purchases,
or in privately negotiated transactions. The repurchased shares will be held as
treasury stock and used for the Company's employee stock option and other
benefit plans, or for other corporate purposes. No shares were repurchased
during the first quarter of 1998. In 1997, the Company repurchased 87,568 shares
of common stock at a total cost of $4.8 million pursuant to the 100,000 share
program and no shares pursuant to the 600,000 share program. In 1996, the
Company completed the repurchase of 600,000 shares of common stock at a total
cost of $11.8 million under a program that was initiated in 1994. During 1996,
no shares were repurchased pursuant to the 100,000 share program.
In conjunction with the acquisition of WAH, the Company issued options for
approximately 509,554 shares of the Company's stock. The options were priced at
fair market value and will vest over a three-year period.
The Company paid a regular quarterly cash dividend of $.18 per share in each
quarter of 1997. The Company increased its regular quarterly cash dividend to
$.22 per share in February 1998. During the 1998
36
first quarter, the Company declared and paid a regular quarterly dividend on its
common stock of $.22 per share, an increase of $.04 per share over the previous
rate of $.18 per share. The determination of the amount of future cash
dividends, if any, to be declared and paid will depend on the Company's future
financial condition, earnings and available funds.
On April 30, 1997, the Company's Board of Directors adopted a Shareholder
Rights Plan ("the Plan"). Under the Plan, the Board declared a dividend of one
preferred share purchase right ("Right") for each outstanding share of common
stock of the Company. The dividend was payable to the shareholders of record as
of May 12, 1997. The Rights are attached to and automatically trade with the
outstanding shares of the Company's common stock until they are distributed and
become exercisable under the terms of the Plan.
37
MANAGEMENT
The following table provides certain information about each of the Company's
current directors and executive officers.
[Enlarge/Download Table]
PRINCIPAL OCCUPATION AND BUSINESS EXPERIENCE FOR THE PAST FIVE
NAME AGE YEARS
--------------------------------------- --- ------------------------------------------------------------------
Irving Weiser.......................... 50 Chairman of the Board, President, Chief Executive Officer and
Director of the Company; Chairman of the Board and Chief
Executive Officer, Dain Rauscher; member of the Company's
Executive Committee
John C. Appel.......................... 49 Vice Chairman and Chief Financial Officer of the Company; Vice
Chairman and Chief Financial Officer, Dain Rauscher; member of
the Company's Executive Committee
Nelson D. Civello...................... 52 Senior Executive Vice President of the Company; Senior Executive
Vice President, Fixed Income Capital Markets, Dain Rauscher;
member of the Company's Executive Committee
J. Scott Spiker........................ 42 Senior Executive Vice President of the Company; Senior Executive
Vice President, Business Services Group, Dain Rauscher; Chairman
of the Board and Chief Executive Officer, Insight Management;
member of the Company's Executive Committee
Kenneth J. Wessels..................... 55 Senior Executive President of the Company; Senior Executive Vice
President, Dain Rauscher Wessels division; member of the
Company's Executive Committee
Ronald A. Tschetter.................... 56 Senior Executive Vice President of the Company; Senior Executive
Vice President, Private Client Group, Dain Rauscher; member of
the Company's Executive Committee
David J. Parrin........................ 43 Senior Vice President and Controller of the Company
Douglas J. Strachan.................... 52 Senior Vice President, Senior Vice President and Director,
Information Systems, and Chief Information Officer of the
Company
Carla J. Smith......................... 40 Senior Vice President, General Counsel and Secretary of the
Company; Senior Vice President, General Counsel and Secretary,
Dain Rauscher
B. J. French........................... 62 Senior Vice President and Director of Corporate and Investor
Communications of the Company; Senior Vice President, Dain
Rauscher
J. Evans Attwell....................... 67 Director
Susan S. Boren......................... 51 Director
F. Gregory Fitz-Gerald................. 56 Director
Walter F. Mondale...................... 70 Director
C. A. Rundell, Jr...................... 66 Director
Robert L. Ryan......................... 55 Director
Arthur R. Schulze, Jr.................. 67 Director
38
Mr. Weiser has been Chairman of the Board of the Company, since 1995; Chief
Executive Officer of the Company since, 1990; President and Director of the
Company, since 1985; Chairman of the Board and Chief Executive Officer, Dain
Rauscher, since January 1998; Chairman of the Board, Dain Bosworth, 1990 to
December 1997; and Chairman of the Board, Rauscher Pierce Refsnes, 1995 to
December 1997. Mr. Weiser also served as President, Dain Bosworth, from 1990 to
1994; and Acting President and Chief Executive Officer, Rauscher Pierce Refsnes,
from 1995 to June 1996. Mr. Weiser is a member of the of the Company's Executive
Committee.
Mr. Appel has been Vice Chairman and Chief Financial Officer of the Company,
since October 1997; Vice Chairman and Chief Financial Officer, Dain Rauscher,
since January 1998; Chief Executive Officer, Dain Bosworth, February 1997 to
December 1997; President, Dain Bosworth, since 1994; Executive Vice President of
the Company, 1990 to December 1997; and Director of the Company, since 1995. Mr.
Appel also served as Executive Vice President and Chief Financial Officer, Dain
Bosworth, from 1990 to 1994; Senior Vice President of the Company, 1986 to 1990
and Chief Financial Officer of the Company, from 1986 to 1994. Mr Appel is a
member of the Company's Executive Committee.
Mr. Civello has been Senior Executive Vice President, Fixed Income Capital
Markets, Dain Rauscher, since October 1997; Senior Executive Vice President of
the Company, since October 1997; and Executive Vice President, Fixed Income
Group, Dain Bosworth, 1990 to December 1997. Prior to 1990, Mr Civello was
Executive Vice President, Capital Markets Group, US Bancorp. Mr. Civello is a
member of the Company's Executive Committee.
Mr. Spiker has been Senior Executive Vice President, Business Services
Group, Dain Rauscher, since January 1998; Senior Executive Vice President of the
Company, since October 1997; Chairman of the Board and Chief Executive Officer,
Insight Management, since January 1998; President and Chief Executive Officer,
Interra Advisory Services, 1995 to December 1997; Executive Vice President of
the Company, May 1996 to October 1997; and Senior Vice President and Director of
Strategic Planning and Corporate Development of the Company, 1994 to 1995. Mr.
Spiker was Senior Vice President and Manager Employee Benefit Services, Norwest
Bank Minnesota, N.A., from 1989 to 1994. Mr. Spiker is a member of the Company's
Executive Committee.
Mr. Wessels has been Senior Executive Vice President of the Company, since
March 1998; Senior Executive Vice President of Dain Rauscher, since March 1998;
and Director of the Company, since March 1998. Mr. Wessels was Chief Executive
Officer and a Managing Director of WAH, since 1986, and Chief Executive Officer
and a Managing Director of Wessels, Arnold and Henderson Group L.L.C., since
1995. Mr. Wessels is a member of the Company's Executive Committee.
Mr. Tschetter has been Senior Executive Vice President, Private Client
Group, Dain Rauscher, since October 1997; Senior Executive Vice President of the
Company, since October 1997; and Executive Vice President, Private Client Group,
Dain Bosworth, 1991 to December 1997. Mr. Tschetter is a member of the Company's
Executive Committee.
Mr. Parrin has been Senior Vice President and Controller of the Company,
since April 1998. Mr. Parrin was Senior Vice President and Controller, U.S.
Bancorp, from 1994 to 1998. Prior to 1994, Mr. Parrin was a partner at Ernst &
Young LLP.
Mr. Strachan has been Senior Vice President of the Company, since 1997;
Chief Information Officer of the Company, since 1996; Senior Vice President and
Director, Information Systems of the Company, since 1993. Mr. Strachan was
Senior Vice President and Director of the Business Technology Center, First Bank
System, Inc., from June 1988 to March 1993.
Ms. Smith has been Senior Vice President of the Company, since 1994; General
Counsel and Secretary of the Company, since 1991; Senior Vice President General
Counsel and Secretary, Dain Rauscher, since January 1998.
39
Ms. French has been Senior Vice President of the Company, since May 1996;
Senior Vice President, Dain Rauscher, since January 1998; Director of Corporate
and Investor Communications of the Company, since 1991; and Vice President of
the Company, from 1991 to May 1996.
Mr. Attwell has been a director of the Company since 1996. Mr. Attwell is Of
Counsel, Vinson & Elkins LLP, a Houston-based law firm. Mr. Attwell was a
partner, Vinson & Elkins LLP, from 1965 through 1995 and Managing Partner from
1981 through 1991. Mr. Attwell also serves as a director of American General
Corporation and Seagull Energy Corporation.
Ms. Boren has been a director of the Company since 1993. Ms. Boren is
President, Trillium Advisors, Inc., a firm she founded in 1996 to advise
executives and boards on the strategic integration of leadership, governance and
organization values. Ms. Boren was an executive with Dayton Hudson Corporation
in financial, human resources and operating roles from 1981 through 1995. Ms.
Boren also serves as a director of Valspar Corporation.
Mr. Fitz-Gerald has been a director of the Company since 1987. Mr.
Fitz-Gerald is President, The ANSR Company, LLC, a private company engaged in
investment research using genetic algorithms and evolutionary computation. Mr.
Fitz-Gerald was a private investor and financial consultant from 1991 to 1995.
Previously, Mr. Fitz-Gerald held senior executive positions with Commercial
Credit Company and Primerica Corporation, American Express Company, American
Express Credit Corporation, and Merrill Lynch & Co., Inc.
Mr. Mondale has been a director of the Company since May 1997. Mr. Mondale
is a partner, Dorsey & Whitney LLP, a Minneapolis-based law firm. Mr. Mondale
was the U.S. Ambassador to Japan, from 1993 through 1996. Mr. Mondale was also
the Democratic Party's nominee for President in 1984, Vice President of the
United States from 1976 to 1980, a U.S. Senator from 1964 to 1976, and Attorney
General for the State of Minnesota from 1960 to 1964. Mr. Mondale also serves as
a director of the Mayo Foundation; CNA Financial Corp; University of Minnesota
Foundation; United HealthCare Corp.; St. Jude Medical, Inc.; and 23 Blackrock
Funds.
Mr. Rundell has been a director of the Company since 1994. Mr. Rundell has
been a private investor and financial consultant, doing business as Rundell
Enterprises, since he retired as the Chairman of the Board, President and Chief
Executive Officer, Cronus Industries, in 1988, positions that he had held since
1977. Mr. Rundell also serves as chairman of NCI Building Systems, Inc., as
chairman of Tyler corporation and as a director of Tandy Brands Accessories,
Inc.
Mr. Ryan has been a director of the Company since 1994. Mr. Ryan has been
Senior Vice President and Chief Financial Officer, Medtronic, Inc., since 1993.
Mr. Ryan had been Vice President, Finance, and Chief Financial Officer, Union
Texas Petroleum Corp., from 1984 to 1993. Mr. Ryan also is a director of TECO
Energy, Inc., Tampa Electric Company and United HealthCare Corporation.
Mr. Schulze has been a director of the Company since 1987. Mr. Schulze
retired from his position as Vice Chairman of the Board of General Mills, Inc.
in 1993, a position he had held since 1989. He previously served as Executive
Vice President of General Mills, Inc. and President of its Grocery Products Food
Group. Mr. Schulze is also a director of Sealright Co., Inc.
USE OF PROCEEDS
The net proceeds from the sale of the Securities will be used for general
corporate purposes, including, without limitation, repayment of outstanding
indebtedness of the Company, investments in, or extensions of credit to, the
Company's subsidiaries and possible acquisitions and other general corporate
purposes. Specific allocations of the proceeds to such purposes may not have
been made at the date of the applicable Prospectus Supplement, although
management of the Company will have determined that funds should be obtained at
that time in anticipation of future funding requirements. The precise amount and
timing of the application of such proceeds will depend upon the funding
requirements of the Company and
40
the availability and cost of other funds. Pending such application, such net
proceeds may be temporarily invested or applied to the reduction of short-term
indebtedness.
RATIOS OF EARNINGS TO FIXED CHARGES
(UNAUDITED, DOLLARS IN THOUSANDS)
The following are the consolidated ratios of earnings to fixed charges for
the periods presented.
[Enlarge/Download Table]
THREE
MONTHS
ENDED MARCH
31, FISCAL YEAR ENDED DECEMBER 31,
----------- ---------------------------------------------------------
1998 1997 1996 1995 1994 1993
----------- ---------- ---------- ---------- --------- ----------
Computation of earnings:
Earnings (loss ) before income taxes*... $ (3,163) $ 76,755 $ 87,402 $ 56,271 $ 39,795 $ 77,353
Fixed charges........................... 17,833 67,799 66,079 73,367 46,409 35,017
----------- ---------- ---------- ---------- --------- ----------
EARNINGS FOR COMPUTATION.................. $ 14,670 $ 144,554 $ 153,481 $ 129,638 $ 86,204 $ 112,370
----------- ---------- ---------- ---------- --------- ----------
----------- ---------- ---------- ---------- --------- ----------
COMPUTATION OF FIXED CHARGES:
Net rental expense........................ $ 6,797 $ 27,679 $ 25,558 $ 25,771 $ 22,414 $ 19,085
----------- ---------- ---------- ---------- --------- ----------
----------- ---------- ---------- ---------- --------- ----------
Portion of rentals deemed representative
of interest............................. $ 2,266 $ 9,226 8,519 $ 8,590 $ 7,471 $ 6,362
Interest expense:
Customer funds on deposit............... 3,264 23,577 29,067 35,922 22,125 16,249
Short-term bank loans and other......... 12,154 32,943 25,526 25,154 14,946 10,850
Subordinated and other long-term debt... 149 2,053 2,967 3,701 1,867 1,556
----------- ---------- ---------- ---------- --------- ----------
Total interest expense.................. 15,567 58,573 57,560 64,777 38,938 28,655
----------- ---------- ---------- ---------- --------- ----------
TOTAL FIXED CHARGES FOR COMPUTATION....... $ 17,833 $ 67,799 $ 66,079 $ 73,367 $ 46,409 $ 35,017
----------- ---------- ---------- ---------- --------- ----------
----------- ---------- ---------- ---------- --------- ----------
RATIO OF EARNINGS TO FIXED CHARGES*....... .82x 2.13x 2.32x 1.77x 1.86x 3.21x
----------- ---------- ---------- ---------- --------- ----------
----------- ---------- ---------- ---------- --------- ----------
------------------------
* For the three months ended March 31, 1998, the ratio of earnings to fixed
charges is less than 1.0 due to a $20 million merger-related charge.
Excluding the merger-related charge, the ratio is 1.94.
DESCRIPTION OF DEBT SECURITIES
The following description of the terms of the Debt Securities sets forth
certain general terms and provisions of the Debt Securities to which any
Prospectus Supplement may relate. Particular terms of the Debt Securities
offered by any Prospectus Supplement and the extent, if any, to which such
general and specific provisions may apply to the Debt Securities so offered will
be described in the Prospectus Supplement relating to such Debt Securities. If
so incorporated in the Prospectus Supplement, the terms of the Debt Securities
may differ from the terms set forth below. The Debt Securities may be issued
either separately, or together.
The Senior Notes will be issued under an Indenture dated as of May 15, 1998
(the "Senior Note Indenture") between the Company and Norwest Bank Minnesota,
National Association, as Trustee (the "Senior Note Trustee"), and the
Subordinated Notes will be issued under an Indenture dated as of May 15, 1998
(the "Subordinated Note Indenture" and, together with the Senior Note Indenture,
the "Indentures") between the Company and Norwest Bank Minnesota, National
Association, as Trustee (the "Subordinated Note Trustee"). Copies of the
Indentures have been filed as exhibits to the Registration
41
Statement of which this Prospectus is a part. The following brief summary of
certain provisions of the Indentures does not purport to be complete and is
subject to, and is qualified in its entirety by reference to, all of the
provisions of the Indentures, and is further qualified by any description
contained in the applicable Prospectus Supplement or Prospectus Supplements.
Certain terms capitalized and not otherwise defined herein are defined in the
Indentures. Wherever particular sections or defined terms of the Indentures are
referred to, such sections or defined terms are incorporated herein by
reference. The Debt Securities may be issued from time to time in one or more
series. The terms of each series of Debt Securities, including, without
limitation, any restrictive covenants with respect thereto, will be established
by or pursuant to a resolution of the Board of Directors of the Company and set
forth or determined in the manner provided in an Officers' Certificate or by a
supplemental indenture. The particular terms of the Debt Securities offered
pursuant to any Prospectus Supplement or Prospectus Supplements will be
described in such Prospectus Supplement or Prospectus Supplements.
GENERAL
The Indentures do not limit the aggregate principal amount of Debt
Securities which may be issued thereunder nor the amount of other debt which may
be issued by the Company. The Debt Securities will be unsecured obligations of
the Company and those issued under the Senior Note Indenture will rank on a
parity with all other unsecured and unsubordinated indebtedness of the Company,
while those issued under the Subordinated Note Indenture will be subordinated as
hereinafter described under "SUBORDINATION OF SUBORDINATED NOTES."
Unless otherwise indicated in the applicable Prospectus Supplement or
Prospectus Supplements, the Debt Securities of any series will be issued only in
fully registered form in denominations of $1,000 or any amount in excess thereof
which is an integral multiple of $1,000. (Section 302) Debt Securities may be
issuable in the form of one or more Global Securities, as described below under
"GLOBAL SECURITIES." A Global Security will be issued in a denomination equal to
the aggregate principal amount of outstanding Debt Securities of the series
represented by such Global Security. The Debt Securities (other than those
issued in the form of a Global Security) are exchangeable or transferable
without charge therefor, but the Company may require payment of a sum sufficient
to cover any tax or other governmental charge payable in connection therewith
and require the holders to furnish appropriate endorsements and transfer
documents. (Section 305)
Debt Securities may be issued as Original Issue Discount Debt Securities to
be sold at a substantial discount below their principal amount. Special Federal
income tax and other considerations applicable thereto and special Federal tax
and other considerations applicable to any Debt Securities which are denominated
in a currency or currency unit other than United States dollars will be
described in the Prospectus Supplement or Prospectus Supplements relating
thereto.
Unless otherwise indicated in the applicable Prospectus Supplement or
Prospectus Supplements, principal of and any premium and interest on the Debt
Securities will be payable, and the transfer of the Debt Securities will be
registrable, at the principal corporate trust office of the applicable Trustee.
In addition, unless otherwise provided in the applicable Prospectus Supplement
or Prospectus Supplements, payment of interest may be made at the option of the
Company by check mailed to the address of the person entitled thereto as it
appears on the Security Register. (Sections 301, 305, 1001 and 1002)
The applicable Prospectus Supplement or Prospectus Supplements will describe
the terms of the Debt Securities offered thereby, including the following: (1)
the title of the offered Debt Securities; (2) whether the offered Debt
Securities are Senior Notes or Subordinated Notes; (3) any limit on the
aggregate principal amount of the offered Debt Securities; (4) the price or
prices (expressed as a percentage of the aggregate principal amount thereof) at
which the offered Debt Securities will be issued; (5) the date or dates on which
the offered Debt Securities will mature and any rights of extension; (6) the
rate or rates, if any (which may be fixed or variable), per annum at which the
offered Debt Securities will bear interest, if
42
any, or the formula pursuant to which such rate or rates shall be determined,
and the date from which any such interest will accrue; (7) the dates on which
any such interest on the offered Debt Securities will be payable and the regular
record dates therefor; (8) any mandatory or optional sinking fund or analogous
provisions; (9) the period or periods, if any, within which and the price or
prices at which the offered Debt Securities may be redeemed, pursuant to any
redemption provisions, at the option of the Company or of the holder thereof and
other detailed terms of any such optional redemption provision; (10) the
currency or currency units, including European Currency Units ("ECUs") or other
composite currencies, for the payment of principal of and any premium and
interest payable on the offered Debt Securities, if other than United States
dollars; (11) the place or places where the principal of and any premium and
interest on the offered Debt Securities will be payable; (12) any other event or
events of default applicable with respect to the offered Debt Securities in
addition to or in lieu of those described under "EVENTS OF DEFAULT"; (13) the
denominations in which any offered Debt Securities will be issuable, if other
than denominations of $l,000 or any amount in excess thereof which is an
integral multiple of 1,000; (14) whether such Debt Securities are to be issued
in whole or in part in the form of one or more Global Securities and, if so, the
identity of the Depositary for such Global Security or Securities and the
circumstance under which any such Global Security may be exchanged for
Securities registered in the name of, and any transfer of such Global Security
may be registered to, a Person other than such Depositary or its nominee; and
(15) any other terms of the offered Debt Securities not inconsistent with the
provisions of the Indenture.
The Debt Securities are obligations exclusively of the Company. The Company
is a holding company substantially all of whose consolidated assets are held by
its subsidiaries. Accordingly, the cash flow of the Company and the consequent
ability to service its debt, including the Debt Securities, are largely
dependent upon the earnings of such subsidiaries and the ability of the Company
to withdraw capital from such subsidiaries. Because the Company is a holding
company, the Debt Securities will be effectively subordinated to all existing
and future indebtedness, trade payables, guarantees, lease obligations and
letter of credit obligations of the Company's subsidiaries. See "Risk
Factors--Holding Company Structure; Effective Subordination."
GLOBAL SECURITIES
Unless otherwise provided in the Prospectus Supplement relating thereto, the
following description will apply to any series of Debt Securities issued, in
whole or in part, in the form of a Global Security or Global Securities
deposited with, or on behalf of, Depository Trust Company ("DTC") (each such
Debt Security represented by a Global Security being referred to herein as a
"Book-Entry Security"). Unless otherwise indicated in the applicable Prospectus
Supplement or Prospectus Supplements, Global Securities will be issued in
registered form. (Section 305)
Upon initial issuance, all Book-Entry Securities of the same series and
bearing interest, if any, at the same rate or pursuant to the same formula and
having the same date of issuance, redemption provisions, if any, repayment
provisions, if any, stated maturity and other terms will be represented by a
single Global Security. Each Global Security representing Book-Entry Securities
will be deposited with, or on behalf of, DTC and will be registered in the name
of DTC or a nominee of DTC. Unless otherwise specified in the applicable
Prospectus Supplement or Prospectus Supplements, all Book-Entry Securities will
be denominated in U. S. dollars.
Upon the issuance of a Global Security, DTC will credit accounts held with
it with the respective principal or face amounts of the Book-Entry Securities
represented by such Global Security. The accounts to be credited shall be
designated initially by the Agent through which the Debt Security was sold or,
to the extent that such Debt Securities are offered and sold directly, by the
Company. Ownership of beneficial interests in a Global Security will be limited
to institutions that have accounts with DTC ("participants") and to persons that
may hold interests through such participants. Ownership of beneficial interests
by participants in a Global Security will be shown on, and the transfer of that
ownership interest will be effected only through, records maintained by DTC for
such Global Security. Ownership of beneficial
43
interests in such Global Security by persons that hold through participants will
be shown on, and the transfer of that ownership interest by such participant
will be effected only through, records maintained by such participant.
Payment of principal of, premium, if any, and interest, if any, on
Book-Entry Securities represented by any such Global Security will be made to
DTC or its nominee, as the case may be, as the sole registered holder of the
Book-Entry Securities represented thereby for all purposes under the Indentures.
None of the Company, the Trustee, the Paying Agent or any agent of the Company
or the Trustee will have any responsibility or liability for any aspect of DTC's
records relating to or payments made on account of beneficial ownership
interests in a Global Security representing any Book-Entry Securities or any
other aspect of the relationship between DTC and its participants or the
relationship between such participants and the owner of beneficial interests in
a Global Security owning through such participants or for maintaining,
supervising or reviewing any of DTC's records relating to such beneficial
ownership interests.
The Company has been advised by DTC that, upon receipt of any payment of
principal of, premium, if any, or interest, if any, on any such Global Security,
DTC will immediately credit, on its book-entry registration and transfer system,
the accounts of participants with payments in amounts proportionate to their
respective beneficial interests in the principal amount of such Global Security
as shown on the records of DTC. Payments by participants to owners of beneficial
interests in a Global Security held through such participants will be governed
by standing instructions and customary practices, as is now the case with
securities held by such participants for customer accounts registered in "street
name," and will be the sole responsibility of such participants.
No Global Security may be transferred except as a whole by a nominee of DTC
to DTC or to another nominee of DTC, or by DTC or any such nominee to a
successor of DTC or a nominee of such successor.
Unless otherwise specified in the applicable Prospectus Supplement or
Prospectus Supplements, a Global Security representing Book-Entry Securities is
exchangeable for certificated Debt Securities of the same series and bearing
interest, if any, at the same rate or pursuant to the same formula, having the
same date of issuance, redemption provisions, if any, repayment provisions, if
any, stated maturity and other terms and of differing authorized denominations
aggregating a like amount, if any, if (x) DTC notifies the Company that it is
unwilling or unable to continue as depositary for such Global Security or if at
any time DTC ceases to be a clearing agency registered under the Exchange Act,
(y) the Company in its sole discretion determines that such Global Security
shall be exchangeable for certificated Debt Securities or (z) there shall have
occurred and be continuing an Event of Default with respect to the Book-Entry
Securities. Such certificated Debt Securities shall be registered in the names
of the owners of the beneficial interests in such Global Security as provided by
DTC's relevant participants (as identified by DTC).
Owners of beneficial interests in a Global Security will not be considered
the registered holders thereof for any purpose under the applicable Indenture,
and no Global Security representing Book-Entry Securities shall be exchangeable
or transferrable. Accordingly, each person owning a beneficial interest in such
a Global Security must rely on the procedures of DTC and, if such person is not
a participant, on the procedures of the participant through which such person
owns its interest, to exercise any rights of a registered holder under the
applicable Indenture. The laws of some jurisdictions require that certain
purchasers of securities take physical delivery of such securities in
certificated form. Such limits and such laws may impair the ability to transfer
beneficial interests in a Global Security.
DTC, as the registered holder of each Global Security, may appoint agents
and otherwise authorize participants to give or take any request, demand,
authorization, direction, notice, consent, waiver or other action which a
registered holder is entitled to give or take under the applicable Indenture.
The Company understands that, under existing industry practices, in the event
that the Company requests any action of registered holders or that an owner of a
beneficial interest in such a Global Security desires to give or take any action
which a registered holder is entitled to give or take under such Indenture, DTC
would authorize the participants holding the relevant beneficial interests to
give or take such action, and such participants
44
would authorize beneficial owners owning through such participants to give or
take such action or would otherwise act upon the instructions of beneficial
owners owning through them.
DTC has advised the Company that DTC is a limited-purpose trust company
organized under the laws of the State of New York, a member of the Federal
Reserve System, a "clearing corporation" within the meaning of the New York
Uniform Commercial Code and a "clearing agency" registered under the Exchange
Act. DTC was created to hold the securities of its participants and to
facilitate the clearance and settlement of securities transactions among its
participants in such securities through electronic book-entry changes in
accounts of the participants, thereby eliminating the need for physical movement
of securities certificates. DTC's participants include securities brokers and
dealers, banks (which may include the Trustee), trust companies, clearing
corporations, and certain other organizations some of whom (and/or their
representatives) own DTC. Access to DTC's book-entry system is also available to
others, such as banks, brokers, dealers and trust companies that clear through
or maintain a custodial relationship with a participant, either directly or
indirectly.
SUBORDINATION OF SUBORDINATED NOTES
The payment of the principal of and interest on the Subordinated Notes will,
to the extent set forth in the Subordinated Note Indenture, be subordinate in
right of payment to the prior payment in full of all Senior Debt of the Company.
(Section 1301) In certain events of insolvency, the payment of the principal of
and interest on the Subordinated Notes will, to the extent set forth in the
Subordinated Note Indenture, also be effectively subordinated in right of
payment to the prior payment in full of all General Obligations. No payment
pursuant to the Subordinated Notes may be made and no Holder of the Subordinated
Notes shall be entitled to demand or receive any such payment unless all amounts
of principal of, premium, if any, and interest then due on all Senior Debt of
the Company shall have been paid in full or duly provided for and, at the time
of such payment or immediately after giving effect thereto, there shall not
exist with respect to any such Senior Debt any Event of Default permitting the
holders thereof to accelerate the maturity thereof or any event which, with
notice or lapse of time or both, would become such an event of default. (Section
1302) Upon any payment or distribution of the assets of the Company in
connection with dissolution, winding-up, liquidation or reorganization, the
holders of Senior Debt of the Company will be entitled to receive payment in
full of principal, premium, if any, and interest in accordance with the terms of
such Senior Debt before any payment is made on the Subordinated Notes. (Section
1303) If upon any such payment or distribution of assets to creditors, there
remains, after giving effect to such subordination provisions in favor of the
holders of Senior Debt, any amount of cash, property or securities available for
payment or distribution in respect of Subordinated Notes (as defined in the
Subordinated Note Indenture, "Excess Proceeds"), and if, at such time, any
creditors in respect of General Obligations have not received payment in full of
all amounts due or to become due on or in respect of such General Obligations,
then such Excess Proceeds shall first be applied to pay or provide for the
payment in full of such General Obligations before any payment or distribution
may be made in respect of the Subordinated Notes. (Section 1314)
"Senior Debt" of the Company is defined in the Subordinated Note Indenture
to mean the principal of, premium, if any, and interest on (1) all indebtedness
of the Company for money borrowed, whether outstanding on the date of execution
of the Subordinated Note Indenture or thereafter created, assumed or incurred
(including, without limitation, any Senior Notes issued pursuant to the Senior
Note Indenture), except (a) such indebtedness as is by its terms expressly
stated to rank junior in the right of payment to the Subordinated Notes or to
rank PARI PASSU with the Subordinated Notes and (b) Senior Debt, and (2) any
deferrals, renewals or extensions of any such Senior Debt. "General Obligations"
of the Company are defined in the Subordinated Note Indenture to mean all
obligations of the Company to make payment on account of claims of general
creditors, other than (1) obligations on account of Senior Debt and (2)
obligations on account of the Subordinated Notes and indebtedness of the Company
for money borrowed ranking PARI PASSU with or subordinate to the Subordinated
Notes. The term "claim" as used in
45
the foregoing definition has the meaning assigned thereto in Section 101(5) of
the Bankruptcy Code of 1978, as amended to April 1, 1993. The term "indebtedness
of the Company for money borrowed" is defined to mean any obligation of, or any
obligation guaranteed by, the Company for the repayment of money borrowed,
whether or not evidenced by bonds, debenture notes or other written instruments,
and any deferred obligation for the payment of the purchase price of property or
assets. (Section 101)
By reason of the subordination described above, in the event of the
bankruptcy, insolvency or reorganization of the Company, holders of Senior Debt
of the Company may receive more, ratably, and Holders of the Subordinated Notes
may receive less, ratably, than creditors of the Company who are not holders of
Senior Debt or of the Subordinated Notes. Such subordination will not prevent
the occurrence of any Event of Default in respect of the Subordinated Notes.
The subordination provisions of the Subordinated Note Indenture described
herein are provided for the benefit of the holders of Senior Debt and are not
intended for the benefit of creditors in respect of General Obligations. The
Company and the Subordinated Note Trustee may amend the Subordinated Note
Indenture to reduce or eliminate the rights of creditors in respect of General
Obligations without the consent of such creditors or the Holders of the
Subordinated Notes. (Section 1315)
EVENTS OF DEFAULT
The following events are defined in the Indentures as "Events of Default"
with respect to any series of Debt Securities, unless otherwise provided with
respect to such series: (1) failure to pay any interest on any Debt Security of
that series when due and payable, continued for 30 days; (2) failure to pay
principal of or any premium on any Debt Security of that series when due and
payable; (3) failure to deposit any sinking fund payment, when due, in respect
of any Debt Security of that series; (4) failure to perform any other covenant
of the Company in the Indentures (other than a covenant included in the
Indentures solely for the benefit of a series of Debt Securities other than that
series), continued for 60 days after written notice as provided in the
Indentures; (5) certain events in bankruptcy, insolvency or reorganization
involving the Company; and (6) any other Event of Default provided with respect
to Debt Securities of that series.
If an Event of Default with respect to any series of Debt Securities
Outstanding under either Indenture occurs and is continuing, then either the
applicable Trustee or the Holders of at least 25% in aggregate principal amount
of the Outstanding Debt Securities of that series by notice as provided in the
applicable Indenture may declare the principal amount (or, if any of the Debt
Securities of that series are Original Issue Discount Debt Securities, such
lesser portion of the principal amount of such Debt Securities as may be
specified in the terms thereof) of all of the Debt Securities of that series to
be due and payable immediately. At any time after a declaration of acceleration
with respect to Debt Securities of any series has been made, but before a
judgment or decree for payment of money has been obtained by the applicable
Trustee, the Holders of a majority in aggregate principal amount of the
Outstanding Debt Securities of that series may, under certain circumstances,
rescind and annul such acceleration. (Section 502)
Each Indenture provides that, subject to the duty of the applicable Trustee
during default to act with the required standard of care, such Trustee will be
under no obligation to exercise any of its rights or powers under the applicable
Indenture at the request or direction of any of the Holders, unless such Holders
shall have offered to such Trustee reasonable indemnity. (Sections 601, 603)
Subject to such provisions for the indemnification of the Trustee, the Holders
of a majority in aggregate principal amount of the Outstanding Debt Securities
of any series will have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the applicable Trustee, or
exercising any trust or power conferred on such Trustee, with respect to the
Debt Securities of that series. (Section 512)
The Company is required to furnish to each Trustee annually a statement as
to the performance by the Company of certain of its obligations under the
applicable Indenture and as to any default in such performance. (Section 704)
46
MODIFICATION AND WAIVER
Modifications and amendments of the Indentures may be made by the Company
and the applicable Trustee with the consent of the Holders of not less than a
majority in aggregate principal amount of the Outstanding Debt Securities of
each series affected by such modification or amendment; PROVIDED HOWEVER, that
no such modification or amendment may, without the consent of the Holder of each
Outstanding Debt Security affected thereby; (1) change the Stated Maturity of
the principal of, or any installment of principal of or interest on, any Debt
Security; (2) reduce the principal amount of, or premium or interest on, any
Debt Security; (3) change any obligation of the Company to pay additional
amounts; (4) reduce the amount of principal of an Original Issue Discount Debt
Security due and payable upon acceleration of the Maturity thereof; (5) change
the place of payment where or coin or currency in which the principal of, or any
premium or interest on, any Debt Security is payable; (6) impair the right to
institute suit for the enforcement of any payment on or with respect to any Debt
Security; (7) reduce the percentage in principal amount of Outstanding Debt
Securities of any series, the consent of the Holders which is required for
modification or amendment of the Indenture or for waiver of compliance with
certain provisions of the applicable Indenture or for waiver of certain
defaults; (8) modify the provisions of the Subordinated Note Indenture with
respect to the subordination of any Subordinated Notes in a manner adverse to
the Holders thereof; or (9) modify any of the above provisions. (Section 902)
The Holders of not less than a majority in aggregate principal amount of the
Outstanding Debt Securities of each series may, on behalf of the Holders of all
Debt Securities of that series, waive, insofar as that series is concerned,
compliance by the Company with certain restrictive provisions of the applicable
Indenture. (Section 1009) The Holders of not less than a majority in aggregate
principal amount of the Outstanding Debt Securities of each series may, on
behalf of the Holders of all Debt Securities of that series, waive any past
default under the applicable Indenture with respect to Debt Securities of that
series, except a default (1) in the payment of principal of, or any premium or
interest on, any Senior Notes, or (2) in respect of a covenant or provision of
the applicable Indenture which cannot be modified or amended without the consent
of the Holders of each Outstanding Debt Security of such series affected.
(Section 513)
Each Indenture provides that, in determining whether the Holders of the
requisite principal amount of the Outstanding Debt Securities have given any
request, demand, authorization, direction, notice, consent or waiver thereunder
or whether a quorum is present at a meeting of Holders of Debt Securities, (1)
the principal amount of an Original Issue Discount Debt Security that will be
deemed to be Outstanding will be the amount of the principal thereof that would
be due and payable as of the date of such determination upon acceleration of the
Maturity thereof to such date, and (2) the principal amount of a Debt Security
denominated in a foreign currency or currency unit that will be deemed to be
Outstanding will be the United States dollar equivalent, determined as of the
date of original issuance of such Debt Security, of the principal amount of such
Debt Security (or, in the case of an Original Issue Discount Debt Security, the
United States dollar equivalent, determined as of the date of original issuance
of such Debt Security, of the amount determined as provided in (1) above).
(Section 101)
CONSOLIDATION, MERGER AND SALE OF ASSETS
The Company, without the consent of the Holders of any of the Outstanding
Debt Securities under either Indenture, may consolidate or merge with or into,
or convey, transfer or lease its properties and assets substantially as an
entirety to, any Person which is a corporation, partnership or trust organized
and validly existing under the laws of any domestic jurisdiction, provided that
any successor Person assumes the Company's obligations on the Debt Securities
and under such Indenture, that after giving effect to the transaction no Event
of Default, and no event which, after notice or lapse of time, would become an
Event of Default, shall have occurred and be continuing under such Indenture and
that certain other conditions are met. (Section 801)
47
CONVERTIBILITY
Unless otherwise indicated in the applicable Prospectus Supplement or
Prospectus Supplements, no series of Debt Securities offered hereby will be
convertible into, or exchangeable for, other securities or property.
REGARDING THE TRUSTEE
Norwest Bank Minnesota, National Association, is trustee under the Indenture
pursuant to which the Debt Securities are to be issued. The Trustee also
participates in an uncommitted line of credit with the Company, serves as the
transfer agent for the Company's Common Stock, the trustee and administrator for
the Company's Retirement Plan and Executive Deferred Compensation Plan and the
Rights Agent under the Company's Shareholder Rights Plan. The Trustee also
provides other banking and advisory services for the Company and purchases
products and services from the Company in the ordinary course of business.
GOVERNING LAW
The Indenture and the Debt Securities will be governed by, and construed in
accordance with the laws of Delaware, without giving effect to the conflicts of
law principles thereof.
48
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 60,000,000 shares of
Common Stock, par value $.125 per share, and 2,501,940 shares of Preferred
Stock, designated as follows: 2,000,000 shares of $1 per share par value,
designated as $1 Par Value Preferred Stock, 1,940 shares of $100 per share par
value, designated as 7% Convertible Preferred Stock, and 500,000 shares of $16
per share par value, designated as $16 Par Value Preferred Stock. The holders of
shares of Common Stock are entitled to one vote for each share held. Subject to
payment of dividends on outstanding shares of Preferred Stock, each share of
Common Stock is entitled to participate equally in dividends out of funds
legally available therefor, as and when declared by the Board of Directors.
After payment of the liquidation preferences on the outstanding shares of
Preferred Stock, the holders of shares of Common Stock are entitled to
participate equally in the distribution of assets in the event of liquidation.
The shares of Common Stock have no preemptive or conversion rights, redemption
provisions or sinking fund provisions. The outstanding shares of Common Stock
are duly and validly issued, fully paid and nonassessable.
On April 30, 1997, the Board of Directors of the Company adopted a
Shareholder Rights Plan (the "Plan"). Under the Plan, the Board declared a
dividend of one preferred share purchase right ("Right") for each outstanding
share of Common Stock of the Company. The Rights are attached to and
automatically trade with the outstanding shares of the Company's Common Stock.
The Plan provides that, if any person or group becomes a holder of 15% or more
of the outstanding shares of the Company's Common Stock, each Right not owned by
such person or group will entitle its holder to purchase, at the Right's
then-current purchase price ($140 per Right as of April 30, 1997), shares of
Common Stock of the Company having a value of twice the Right's purchase price.
The Rights would not be triggered, however, if the acquisition of 15% or more of
the Company's outstanding Common Stock is pursuant to a tender offer or exchange
for all outstanding shares of the Company's Common Stock which is determined by
the Board of Directors to be in the best interests of the Company and its
stockholders. The Rights are redeemable at a price of $0.01 per Right at any
time prior to the time they become exercisable. The Rights will expire on April
30, 2007, if not previously redeemed or exercised.
The Company's Certificate of Incorporation requires that certain "Business
Combinations" (as defined in the Certificate of Incorporation), including
mergers, consolidations and sales of a substantial amount of assets, between the
Company or a majority-owned subsidiary of the Company and an "Interested
Stockholder" (as defined in the Certificate of Incorporation) or its affiliates
or associates, be approved by the affirmative vote of the holders of at least
two-thirds of the outstanding shares of voting stock of the Company (excluding
any shares of voting stock held by such Interested Stockholder), unless such
Business Combination shall have been approved by a majority of "Continuing
Directors" (as defined in the Certificate of Incorporation) or shall satisfy
certain fair price and other conditions. In such event, a Business Combination,
in order to be approved, requires only such affirmative vote as may be required
by law, any other provision of the Certificate of Incorporation or the terms of
any other securities of the Company.
COMMON STOCK
As of May 6, 1998, 12,383,313 shares of Common Stock were outstanding. An
aggregate of 47,523,944 shares, $.125 par value, remain authorized and unissued.
As of May 6, 1998, an aggregate of 6,985,996 of such authorized, unissued shares
have been reserved for issuance to stock incentive and deferred compensation
plans. Subject to any prior rights of any Preferred Stock then outstanding,
holders of the Common Stock are entitled to receive such dividends as are
declared by the Board of Directors of the Company out of funds legally available
therefor. Subject to the rights, if any, of any Preferred Stock then
outstanding, all voting rights are vested in the holders of Common Stock, each
share being entitled to one vote. Subject to any prior rights of any such
Preferred Stock, in the event of liquidation, dissolution or winding up of the
Company, holders of shares of Common Stock are entitled to receive pro rata any
assets distributable to stockholders in respect of shares held by them. Holders
of shares of Common Stock do not
49
have any preemptive right to subscribe for any additional securities which may
be issued by the Company. The outstanding shares of Common Stock are fully paid
and nonassessable. The transfer agent and registrar for the Common Stock is
Norwest Bank Minnesota, National Association, Minneapolis, Minnesota.
PREFERRED STOCK
The following description of the terms of the Preferred Stock sets forth
certain general terms and provisions of the Preferred Stock to which any
Prospectus Supplement may relate. Certain other terms of any series of the
Preferred Stock offered by any Prospectus Supplement will be described in the
Prospectus Supplement relating to such series of the Preferred Stock. If so
indicated in the Prospectus Supplement, the terms of any such series may differ
from the terms set forth below. The description of certain provisions of the
Preferred Stock set forth below and in any Prospectus Supplement does not
purport to be complete and is subject to and qualified in its entirety by
reference to the Certificate of Designation relating to each series of the
Preferred Stock. Certain terms capitalized and not otherwise defined herein are
defined in the Certificate of Designation relating to each series of the
Preferred Stock.
GENERAL. Pursuant to the Company's Restated Certificate of Incorporation,
as amended, the Board of Directors of the Company has the authority, without
further stockholder action, to issue from time to time a maximum of 2,501,940
shares of preferred stock ("Preferred Stock"), including shares issued or
reserved for issuance, in one or more series and with such terms and at such
times and for such consideration as the Board of Directors of the Company may
determine. The authority of the Board of Directors of the Company includes the
determination or fixing of the following with respect to shares of any series
thereof: (i) the number of shares and designation or title thereof; (ii) rights
as to dividends; (iii) whether and upon what terms the shares are to be
redeemable; (iv) whether and upon what terms the shares shall have a purchase,
retirement or sinking fund; (v) whether and upon what terms the shares are to be
convertible; (vi) the voting rights, if any, which shall apply; (vii)
restrictions, if any, on the issue or reissue of any Preferred Stock; (viii) the
rights of the holders upon the dissolution, or upon the distribution of assets,
of the Company; and (ix) any other preferences and relative, participating,
optional or other special rights, and qualifications, limitations or
restrictions of such series. At March 31, 1998, no shares of Preferred Stock
were outstanding.
The Preferred Stock shall have the dividend, liquidation, redemption and
voting rights set forth below unless otherwise provided in the Prospectus
Supplement relating to a particular series of the Preferred Stock. Reference is
made to the Prospectus Supplement relating to the particular series of the
Preferred Stock offered thereby for specific terms, including: (i) the title,
stated value and liquidation preferences of such Preferred Stock and the number
of shares offered; (ii) the initial public offering price at which such
Preferred Stock will be issued; (iii) the dividend rate or rates (or method of
calculation), the dividend periods, the dates on which dividends shall be
payable and whether such dividends shall be cumulative or noncumulative and, if
cumulative, the dates from which dividends shall commence to cumulate; (iv) any
redemption or sinking fund provisions; (v) any additional dividend, liquidation,
redemption, sinking fund and other rights, preferences, privileges, limitations
and restrictions.
The Preferred Stock will, when issued, be fully paid and nonassessable.
Unless otherwise specified in the Prospectus Supplement relating to a particular
series of the Preferred Stock, each series of the Preferred Stock will rank on a
parity in all respects with the outstanding shares of the Company's Preferred
Stock described below and each other series of the Preferred Stock. The
Preferred Stock will have no preemptive rights to subscribe for any additional
securities which may be issued by the Company. Unless otherwise specified in the
applicable Prospectus Supplements, Norwest Bank Minnesota, National Association,
South St. Paul, Minnesota will be the transfer agent and registrar for the
Preferred Stock.
DIVIDENDS. The holders of the Preferred Stock of each series will be
entitled to receive, when, as and if declared by the Board of Directors of the
Company or a duly authorized committee thereof, out of funds
50
legally available therefor, cash dividends at such rates and on such dates as
will be set forth in the Prospectus Supplement relating to such series. Such
rates may be fixed or variable or both. If variable, the formula used for
determining the dividend rate for each dividend period will be set forth in the
Prospectus Supplement. Dividends will be payable to the holders of record as
they appear on the stock books of the Company on such record dates as will be
fixed by the Board of Directors of the Company or a duly authorized committee
thereof.
Dividends on any series of the Preferred Stock will be cumulative as
provided in, or except as otherwise specified in, the applicable Prospectus
Supplement. No full dividends will be declared or paid or set apart for payment
on any stock of the Company ranking, as to dividends, on a parity with or junior
to the Preferred Stock for any period unless full dividends on the Preferred
Stock of each series (including any accumulated dividends) have been or
contemporaneously are declared and paid or declared and a sum sufficient for the
payment thereof set apart for such payment. When dividends are not paid in full
upon any series of Preferred Stock and any other Preferred Stock ranking on a
parity as to dividends with the Preferred Stock, all dividends declared or made
upon Preferred Stock of each series and any other Preferred Stock ranking on a
parity as to dividends with the Preferred Stock shall be declared pro rata so
that the amount of dividends declared per share on Preferred Stock of each
series and such other Preferred Stock shall in all cases bear to each other the
same ratio that accrued dividends per share on shares of each series of the
Preferred Stock and such other Preferred Stock bear to each other. Except as
provided in the preceding sentence, no dividend (other than dividends or
distributions paid in shares of, or options, warrants or rights to subscribe for
or purchase shares of, Common Stock or any other stock of the Company ranking
junior to the Preferred Stock as to dividends and upon liquidation) shall be
declared or paid or set aside for payment or other distribution declared or made
upon the Common Stock or any other stock of the Company ranking junior to or on
a parity with the Preferred Stock as to dividends or upon liquidation, nor shall
any Common Stock nor any other stock of the Company ranking junior to or on a
parity with the Preferred Stock as to dividends or upon liquidation be redeemed,
purchased or otherwise acquired for any consideration (or any moneys be paid to
or made available for a sinking fund for the redemption of any share of any such
stock) by the Company (except by conversion into or exchange for stock of the
Company ranking junior to the Preferred Stock as to dividends and upon
liquidation) unless, in each case, the full dividends on each series of the
Preferred Stock shall have been paid or declared and set aside for payment. No
interest, or sum of money in lieu of interest, shall be payable in respect of
any dividend payment or payments on any series of the Preferred Stock which may
be in arrears.
VOTING RIGHTS. If, at the time of any annual meeting of shareholders for
the election of directors, the amount of accrued but unpaid dividends on any
preferred stock of the Company is equal to at least six quarterly dividends on
such series of preferred stock of the Company, the number of the directors of
the Company will be increased by two and the holders of all outstanding series
of preferred stock of the Company, voting as a single class without regard to
series, will be entitled to elect such additional two directors until all
dividends in default on all preferred stock of the Company have been paid or
declared and set apart for payment.
The affirmative vote or consent of the holders of at least two-thirds of the
outstanding shares of any series of the preferred stock of the Company, voting
as a class, will be required for any amendment of the Company's Certificate of
Incorporation (including any certificate of designation or any similar document
relating to any series of preferred stock of the Company) which will adversely
affect the powers, preferences, privileges or rights of such series of preferred
stock. The affirmative vote or consent of the holders of at least two-thirds of
the outstanding shares of any series of preferred stock of the Company, voting
as a single class without regard to series, will be required to issue,
authorize, or increase the authorized amount of, or issue or authorize any
obligation or security convertible into or evidencing a right to purchase, any
additional class or series of stock ranking prior to such series of preferred
stock as to dividends or upon liquidation.
51
REDEMPTION. A series of the Preferred Stock may be redeemable, in whole or
in part, at the option of the Company, and may be subject to mandatory
redemption pursuant to a sinking fund or otherwise, in each case upon terms, at
the times and at the redemption prices set forth in the Prospectus Supplement
relating to such series. Preferred Stock redeemed by the Company will be
restored to the status of authorized but unissued shares of Preferred Stock.
The Prospectus Supplement relating to a series of the Preferred Stock which
is subject to mandatory redemption will specify the number of shares of such
series of the Preferred Stock which shall be redeemed by the Company in each
year commencing after a date to be specified, at a redemption price per share to
be specified, together with an amount equal to all accrued and unpaid dividends
thereon to the date of redemption. The redemption price may be payable in cash
or other property, as specified in the Prospectus Supplement relating to such
series of the Preferred Stock. If the redemption price is payable only from the
net proceeds of the issuance of capital stock of the Company, the terms of such
series may provide that, if no such capital stock shall have been issued or to
the extent the net proceeds from any issuance are insufficient to pay in full
the aggregate redemption price then due, the applicable shares of such series of
the Preferred Stock shall automatically and mandatorily be converted into shares
of the applicable capital stock of the Company pursuant to conversion provisions
specified in the Prospectus Supplement relating to such series of the Preferred
Stock.
If fewer than all of the outstanding shares of any series of the Preferred
Stock are to be redeemed, the number of shares to be redeemed will be determined
by the Board of Directors of the Company and such shares shall be redeemed pro
rata from the holders of record of such shares in proportion to the number of
such shares held by such holders (with adjustments to avoid redemption of
fractional share).
Notwithstanding the foregoing, if any dividends, including any accumulation,
on Preferred Stock of any series are in arrears, no Preferred Stock of such
series shall be redeemed unless all outstanding Preferred Stock of such series
are simultaneously redeemed, and the Company shall not purchase or otherwise
acquire any Preferred Stock of such series; PROVIDED, HOWEVER, that the
foregoing shall not prevent the purchase or acquisition of Preferred Stock of
such series pursuant to a purchase or exchange offer provided such offer is made
on the same terms to all holders of such series of the Preferred Stock.
Notice of redemption shall be given by mailing the same to each record
holder of the shares to be redeemed, not less than 30 nor more than 60 days
prior to the date fixed for redemption thereof, to the respective addresses of
such holders as the same shall appear on the stock books of the Company. Each
such notice shall state: (i) the redemption date; (ii) the number of shares and
series of the Preferred Stock to be redeemed; (iii) the redemption price; (iv)
the place or places where certificates for such Preferred Stock are to be
surrendered for payment of the redemption price; and (v) that dividends on the
shares to be redeemed will cease to accrue on such redemption date. If fewer
than all shares of any series of the Preferred Stock held by any holder are to
be redeemed, the notice mailed to such holder shall also specify the number of
shares to be redeemed from such holder.
If notice of redemption has been given, from and after the redemption date
for the shares of the series of the Preferred Stock called for redemption
(unless default shall be made by the Company in providing money for the payment
of the redemption price of the shares so called for redemption), dividends on
the Preferred Stock so called for redemption shall cease to accrue and such
shares shall no longer be deemed to be outstanding and all rights of the holders
thereof as stockholders of the Company (except the right to receive the
redemption price) shall cease. Upon surrender in accordance with such notice of
the certificates representing any shares so redeemed (properly endorsed or
assigned for transfer, if the Board of Directors of the Company shall so require
and the notice shall so state), the redemption price set forth above shall be
paid out of funds provided by the Company. If fewer than all of the shares
represented by any such certificate are redeemed, a new certificate shall be
issued representing the unredeemed shares without cost to the holder thereof.
52
CONVERSION. Unless otherwise specified in the applicable Prospectus
Supplement, the Preferred Stock will not be convertible into any other class or
series of capital stock of the Company.
RIGHTS UPON LIQUIDATION. In the event of any voluntary or involuntary
liquidation, dissolution or winding up of the Company, the holders of shares of
each series of the Preferred Stock and any other stock ranking on a parity with
such series of Preferred Stock upon liquidation will be entitled to receive out
of the assets of the Company available for distribution to stockholders, before
any distribution of assets is made to holders of the Common Stock or any other
class or series of stock of the Company ranking junior to such series of the
Preferred Stock upon liquidation, liquidation distributions in the amount set
forth in the Prospectus Supplement relating to such series of the Preferred
Stock plus an amount equal to the sum of all accrued and unpaid dividends
(whether or not earned or declared) for the then-current dividend period and, if
such series of the Preferred Stock is cumulative, for all dividend periods prior
thereto. Neither the sale of all or any part of the property and business of the
Company, nor the merger or consolidation of the Company into or with any other
corporation nor the merger or consolidation of any other corporation into or
with the Company, shall be deemed to be a dissolution, liquidation or winding
up. If, upon any voluntary or involuntary liquidation, dissolution or winding up
of the Company, the assets of the Company available for distribution to the
holders of the Preferred Stock of any series and any other shares of stock of
the Company ranking as to any such distribution on a parity with such series of
the Preferred Stock shall be insufficient to pay in full all amounts to which
such holders are entitled, no such distribution shall be made on account of any
shares of any other series of the Preferred Stock or other securities of the
Company ranking as to any such distribution on a parity with the Preferred Stock
of such series upon such dissolution, liquidation or winding up unless
proportionate distributive amounts shall be paid on account of the Preferred
Stock of such series, ratably, in proportion to the full distributive amounts
for which holders of all such parity shares are respectively entitled upon such
dissolution, liquidation or winding up. After payment of the full amount of the
liquidation distribution to which they are entitled, the holders of such series
of the Preferred Stock will have no right or claim to any of the remaining
assets of the Company.
DESCRIPTION OF SECURITIES WARRANTS
The Company may issue Securities Warrants for the purchase of Debt
Securities, Preferred Stock or Common Shares. Securities Warrants may be issued
independently or together with other Securities offered by any Prospectus
Supplement and may be attached to or separate from such other Securities. Each
series of Securities Warrants will be issued under a separate warrant agreement
(a "Securities Warrant Agreement") to be entered into between the Company and a
bank or trust company, as Securities Warrant Agent, all as set forth in the
Prospectus Supplement relating to the particular issue of offered Securities
Warrants. The Securities Warrant Agent will act solely as an agent of the
Company in connection with the Securities Warrant Certificates and will not
assume any obligation or relationship of agency or trust for or with any holders
of Securities Warrant Certificates or beneficial owners of Securities Warrants.
Copies of the forms of Securities Warrant Agreements, including the forms of
Securities Warrant Certificates representing the Securities Warrants, will be
filed or incorporated by reference as exhibits to the Registration Statement to
which this Prospectus pertains. The following summaries of certain provisions of
the forms of Securities Warrant Agreements and Securities Warrant Certificates
do not purport to be complete and are subject to, and are qualified in their
entirety by reference to, all the provisions of the Securities Warrant
Agreements and the Securities Warrant Certificates. Certain terms capitalized
and not otherwise defined herein are defined in the Securities Warrant
Agreements.
GENERAL
If Securities Warrants are offered, the applicable Prospectus Supplement
will describe the terms of such Securities Warrants, including, without
limitation, in the case of Securities Warrants for the purchase of Debt
Securities, the following where applicable: (i) the offering price; (ii) the
Currencies in which such
53
Securities Warrants are being offered; (iii) the designation, aggregate
principal amount, Currencies, denominations and terms of the series of Debt
Securities purchasable upon exercise of such Securities Warrants; (iv) the
designation and terms of any series of Securities with which such Securities
Warrants are being offered and the number of such Securities Warrants being
offered with each such Security; (v) the date on and after which such Securities
Warrants and the related series of Securities will be transferable separately;
(vi) the principal amount of the series of Debt Securities purchasable upon
exercise of each such Securities Warrant and the price at which and currencies
in which such principal amount of Debt Securities of such series may be
purchased upon such exercise; (vii) the date on which the right to exercise such
Securities Warrants shall commence and the date (the "Expiration Date") on which
such right shall expire; (viii) whether the Securities Warrants will be issued
in registered or bearer form; (ix) a discussion of any material United States
federal income tax consequences; and (x) any other terms of such Securities
Warrants.
In the case of Securities Warrants for the purchase of Preferred Stock or
Common Stock, the applicable Prospectus Supplement will describe the terms of
such Securities Warrants, including the following where applicable: (i) the
offering price; (ii) the aggregate number of shares purchasable upon exercise of
such Securities Warrants and, in the case of Securities Warrants for Preferred
Stock, the designation, aggregate number and terms of the series of Preferred
Stock purchasable upon exercise of such Securities Warrants; (iii) the
designation and terms of the series of Securities with which such Securities
Warrants are being offered and the number of such Securities Warrants being
offered with each such Security; (iv) the date on and after which such
Securities Warrants and the related series of Securities will be transferable
separately; (v) the number of Preferred Stock or shares of Common Stock
purchasable upon exercise of each such Securities Warrant and the price at which
such number of Preferred Stock or shares of Common Stock may be purchased upon
each exercise; (vi) the date on which the right to exercise such Securities
Warrants shall commence and the expiration date thereof; (vii) a discussion of
any material United States federal income tax consequences; and (viii) any other
terms of such Securities Warrants. Securities Warrants for the purchase of
Preferred Stock or Common Stock will be offered and exercisable for U.S. dollars
only and will be in registered form only.
Securities Warrant Certificates may be exchanged for new Securities Warrant
Certificates of different denominations, may (if in registered form) be
presented for registration or transfer and may be exercised at the corporate
trust office of the Securities Warrant Agent or any other office indicated in
the applicable Prospectus Supplement. Prior to the exercise of any Securities
Warrant to purchase Debt Securities, holders of such Securities Warrants will
not have any of the rights of holders of the Debt Securities purchasable upon
such exercise, including the right to receive payments of principal of, premium,
if any, or interest, if any, on the Debt Securities purchasable upon such
exercise or to enforce covenants in the applicable indenture. Prior to the
exercise of any Securities Warrants to purchase Preferred Stock or Common Stock,
holders of such Securities Warrants will not have any rights of holders of the
Preferred Stock or Common Stock purchasable upon such exercise, including the
right to receive payments of dividends, if any, on the Preferred Stock or Common
Stock purchasable upon such exercise or to exercise any applicable right to
vote.
EXERCISE OF SECURITIES WARRANTS
Each Securities Warrant will entitle the holder thereof to purchase such
principal amount of Debt Securities or number of Preferred Stock or shares of
Common Stock, as the case may be, at such exercise price as shall in each case
be set forth in, or calculable from, the Prospectus Supplement relating to the
offered Securities Warrants. After the close of business on the Expiration Date
(or such later date to which such Expiration Date may be extended by the
Company), unexercised Securities Warrants will become void.
Securities Warrants may be exercised by delivering to the Securities Warrant
Agent payment as provided in the applicable Prospectus Supplement of the amount
required to purchase the Debt Securities,
54
Preferred Stock or Common Stock, as the case may be, purchasable upon such
exercise together with certain information set forth on the reverse side of the
Securities Warrant Certificate. Securities Warrants will be deemed to have been
exercised upon receipt of payment of the exercise price, subject to the receipt
of the Securities Warrant Certificate evidencing such Securities Warrants. Upon
receipt of such payment and the Securities Warrant Certificate properly
completed and duly executed at the corporate trust office of the Securities
Warrant Agent or any other office indicated in the applicable Prospectus
Supplement, the Company will, as soon as practicable, issue and deliver the Debt
Securities, Preferred Stock or Common Stock, as the case may be, purchasable
upon exercise. If fewer than all of the Securities Warrants represented by such
Securities Warrant Certificate are exercised, a new Securities Warrant
Certificate will be issued for the remaining amount of Securities Warrants.
AMENDMENTS AND SUPPLEMENTS TO SECURITIES WARRANT AGREEMENTS
The Securities Warrant Agreements may be amended or supplemented without the
consent of the holders of the Securities Warrants issued thereunder to effect
changes that are not inconsistent with the provisions of the Securities Warrants
and that do not adversely affect the interests of the holders of the Securities
Warrants.
COMMON STOCK WARRANT ADJUSTMENTS
Unless otherwise indicated in the applicable Prospectus Supplement, the
exercise price of, and the number of shares of Common Stock covered by, a Common
Stock Warrant are subject to adjustment in certain events, including: (i) the
issuance of capital stock as a dividend or distribution on the Common Stock;
(ii) subdivisions and combinations of the Common Stock; (iii) the issuance to
all holders of Common Stock of certain rights or warrants entitling them to
subscribe for or purchase Common Stock within 45 days after the date fixed for
the determination of the stockholders entitled to receive such rights or
warrants, at less than the current market price (as defined in the Warrant
Agreement for such series of Common Stock Warrants); or (iv) the distribution to
all holders of Common Stock of evidences of indebtedness or assets of the
Company (excluding certain cash dividends and distributions described below) or
rights or warrants (excluding those referred to above). In the event that the
Company shall distribute any rights or warrants to acquire capital stock
pursuant to clause (iv) above (the "Capital Stock Rights"), pursuant to which
separate certificates representing such Capital Stock Rights will be distributed
subsequent to the initial distribution of such Capital Stock Rights (whether or
not such distribution shall have occurred prior to the date of the issuance of a
series of Common Stock Warrants), such subsequent distribution shall be deemed
to be the distribution of such Capital Stock Rights; PROVIDED, HOWEVER, that the
Company may, in lieu of making any adjustment in the exercise price of and the
number of shares of Common Stock covered by a Common Stock Warrant upon a
distribution of separate certificates representing such Capital Stock Rights,
make proper provision so that each holder of such a Common Stock Warrant who
exercises such Common Stock Warrant (or any portion thereof) (a) before the
record date for such distribution of separate certificates shall be entitled to
receive upon such exercise shares of Common Stock issued with Capital Stock
Rights and (b) after such record date and prior to the expiration, redemption or
termination of such Capital Stock Rights shall be entitled to receive upon such
exercise, in addition to the shares of Common Stock issuable upon such exercise,
the same number of such Capital Stock Rights as would a holder of the number of
shares of Common Stock that such Common Stock Warrant so exercised would have
entitled the holder thereof to acquire in accordance with the terms and
provisions applicable to the Capital Stock Rights if such Common Stock Warrant
was exercised immediately prior to the record date for such distribution. Common
Stock owned by or held for the account of the Company or any majority-owned
subsidiary shall not be deemed outstanding for the purpose of any adjustment.
No adjustment in the exercise price of and the number of shares of Common
Stock covered by a Common Stock Warrant will be made for regular quarterly or
other periodic or recurring cash dividends or
55
distributions or for cash dividends or distributions to the extent paid from
retained earnings. No adjustment will be required unless such adjustment would
require a change of at least 1% in the exercise price then in effect; PROVIDED,
HOWEVER, that any such adjustment not so made will be carried forward and taken
into account in any subsequent adjustment; and PROVIDED FURTHER that any such
adjustment not so made shall be made no later than three years after the
occurrence of the event requiring such adjustment to be made or carried forward.
Except as stated above, the exercise price of and the number of shares of Common
Stock covered by a Common Stock Warrant will not be adjusted for the issuance of
Common Stock or any securities convertible into or exchangeable for Common
Stock, or securities carrying the right to purchase any of the foregoing.
In the case of (i) a reclassification of or change to the Common Stock,
other than changes in par value, (ii) a consolidation or merger involving the
Company, other than where the Company is the continuing corporation and
reclassification or change, as described in (i) above, is involved, or (iii) a
sale or conveyance to another corporation of the property and assets of the
Company as an entirety or substantially as an entirety, the holders of the
Common Stock Warrants then outstanding will be entitled thereafter to convert
such Common Stock Warrants into the kind and amount of shares of stock and other
securities or property which they would have received upon such
reclassification, change, consolidation, merger, sale or conveyance had such
Common Stock Warrants been exercised immediately prior to such reclassification,
change, consolidation, merger, sale or conveyance.
FOREIGN CURRENCY RISKS
GENERAL
The Securities of a series may be denominated in and the principal of, and
any interest or premium on, such Securities may be payable in such foreign
currencies or currency units as may be designated by the Company at the time of
offering (the "Foreign Currency Securities").
THIS PROSPECTUS DOES NOT DESCRIBE ALL THE RISKS OF AN INVESTMENT IN FOREIGN
CURRENCY SECURITIES THAT RESULT FROM SUCH SECURITIES BEING DENOMINATED OR
PAYABLE IN A FOREIGN CURRENCY OR CURRENCY UNIT, EITHER AS SUCH RISKS EXIST AT
THE DATE OF THIS PROSPECTUS OR AS SUCH RISKS MAY CHANGE FROM TIME TO TIME.
PROSPECTIVE PURCHASERS SHOULD CONSULT THEIR FINANCIAL AND LEGAL ADVISORS AS TO
THE RISKS ENTAILED BY AN INVESTMENT IN FOREIGN CURRENCY SECURITIES. FOREIGN
CURRENCY SECURITIES ARE NOT AN APPROPRIATE INVESTMENT FOR INVESTORS WHO ARE
UNSOPHISTICATED WITH RESPECT TO FOREIGN CURRENCY TRANSACTIONS.
The information set forth below is by necessity incomplete. Prospective
purchasers of Foreign Currency securities should consult their own financial and
legal advisors with respect to any matters that may affect the purchase or
holding of a Foreign Currency Security or the receipt of payments of principal
of and any premium and interest on a Foreign Currency Security in a Specified
Currency (as defined below).
EXCHANGE RATES AND EXCHANGE CONTROLS
An investment in Foreign Currency Securities entails significant risks that
are not associated with a similar investment in a security denominated in United
States dollars. Such risks include, without limitation, the possibility of
significant changes in the rate of exchange between the United States dollar and
the currency or currency unit designated in the applicable Prospectus Supplement
(the "Specified Currency") the inconvertibility of the foreign currency or
currencies due to act of war, natural disaster, adverse foreign governmental
legislation or executive action or other cause, and the possibility of the
imposition or modification of foreign exchange controls by either the United
States or foreign governments. Such risks generally depend on economic and
political events over which the Company has no
56
control. In recent years, rates of exchange between the United States dollar and
certain foreign currencies have been highly volatile and such volatility may be
expected in the future. Fluctuations in any particular exchange rate that have
occurred in the past are not necessarily indicative, however, of fluctuations in
the rate that may occur during the term of any Foreign Currency Security.
Depreciation of the Specified Currency applicable to a Foreign Currency Security
against the United States dollar would result in a decrease in the United States
dollar-equivalent yield of such Security (or the Debt Security purchasable upon
exercise of any Debt Warrant), in the United States dollar-equivalent value of
the principal repayable at maturity of such Security (or the Security
purchasable upon exercise of such Debt Warrant) and, generally, in the United
States dollar-equivalent market value of such Security.
Governments have imposed from time to time exchange controls and may in the
future impose or revise exchange controls at or prior to a Foreign Currency
Security's maturity (or the maturity of the Debt Security issuable upon exercise
of a Debt Warrant). Even if there are no exchange controls, it is possible that
the Specified Currency for any particular Foreign Currency Security would not be
available at such Debt Security maturity (or the maturity of the Debt Security
issuable upon exercise of a Debt Warrant) due to other circumstances beyond the
control of the Company.
JUDGMENTS
If an action based on Foreign Currency Securities were commenced in a court
of the United States, it is likely that such court would grant judgment relating
to such Securities only in United States dollars. It is not clear, however,
whether, in granting such judgment, the rate of conversion into United States
dollars would be determined with reference to the date of default, the date
judgment is rendered or some other date. Under current New York law, a state
court in the state of New York rendering a judgment on a Foreign Currency
Security would be required to render such judgment in the Specified Currency in
which such Foreign Currency Security is denominated, and such judgment would be
converted into United States dollars at the exchange rate prevailing on the date
of entry of the judgment. Holders of Foreign Currency Securities would bear the
risk of exchange rate fluctuations between the time the amount of the judgment
is calculated and the time the applicable Trustee converts United States dollars
to the Specified Currency for payment of the judgment.
LIMITED FACILITIES FOR CONVERSION
Currently, there are limited facilities in the United States for conversion
of U.S. dollars into foreign currencies, and vice versa. In addition, banks
generally do not offer non-U.S. dollar denominated checking or savings account
facilities in the United States. Accordingly, payments on Foreign Currency
Securities will, unless otherwise specified in the applicable Prospectus
Supplement or Prospectus Supplements, be made from an account with a bank
located in the country issuing the Specified Currency (or, with respect to
Foreign Currency Securities denominated in ECUs, Brussels).
PLAN OF DISTRIBUTION
The Company may offer and sell the Securities in any combination of three
ways: (i) through agents; (ii) through underwriters or dealers; or (iii)
directly to one or more purchasers. The Prospectus Supplement or Prospectus
Supplements with respect to any of the Securities offered thereby will set forth
the terms of the offering of such Securities, including the name or names of any
underwriters or agents, the purchase price of such Securities, the proceeds to
the Company from such sale, any underwriting discounts or agency fees and other
items constituting underwriters' or agents' compensation, the initial public
offering price, any discounts or concessions allowed or reallowed or paid to
dealers, and any securities exchanges on which such Securities may be listed.
Accordingly, if so indicated in the Prospectus Supplement or Prospectus
Supplements, the term of the distribution may differ from the terms set forth
below.
57
The distribution of the Securities may be effected from time to time in one
or more transactions at a fixed price or prices, which may be changed, at market
prices prevailing at the time of sale, at prices related to such prevailing
market prices or at negotiated prices.
If so indicated in the Prospectus Supplement relating to any Securities
offered thereby, the Company will authorize underwriters, dealers and agents to
solicit offers by certain specified institutions to purchase such Securities
from the Company at the public offering price set forth in such Prospectus
Supplement pursuant to delayed delivery contracts providing for payment and
delivery on a specified date in the future. Such contracts will be subject only
to those conditions set forth in such Prospectus Supplement, and such Prospectus
Supplement will set forth the commission payable for solicitation of such
contracts.
Any underwriter, dealer or agent participating in the distribution of an
offering of Securities may be deemed to be an underwriter, and any discounts or
commissions received by it on the sale or resale of Securities may be deemed to
be underwriting discounts and commissions under the Securities Act.
Underwriters, dealers and agents may be entitled, under agreements entered into
with the Company, to indemnification by the Company against certain civil
liabilities, including liabilities under the Securities Act, or to contributions
with respect to payments which the underwriters or agents may be required to
make in respect thereof. Underwriters and agents, and affiliates thereof, may be
customers of, engage in transactions with, or perform services for the Company
and its affiliates in the ordinary course of business.
Any underwriter, dealer or agent participating in the distribution of an
offering of Common Stock may engage in "passive market-making" in the Common
Stock on the Nasdaq in accordance with Rule 10b-6A under the Exchange Act. Rule
10b-6A permits, upon the satisfaction of certain conditions, underwriters and
selling group members participating in a distribution that are also Nasdaq
market-makers in the security being distributed to engage in limited
market-making transactions during the period when Rule 10b-6 under the Exchange
Act would otherwise prohibit such activity. Rule 10b-6A prohibits underwriters
and selling group members engaged in passive market-making generally from
entering a bid or effecting a purchase at a price that exceeds the highest bid
for those securities displayed on Nasdaq by a market-marker that is not
participating in the distribution. Under Rule 10b-6A, each underwriter or
selling group member engaged in passive market-making is subject to a daily net
purchase limitation equal to 30% of such entity's average daily trading volume
during the two full consecutive calendar months immediately preceding the date
of the filing of the registration statement under the Securities Act pertaining
to the security to be distributed.
Unless otherwise indicated in the applicable Prospectus Supplement, all
Securities (other than the Common Stock) will be new issues of securities with
no established trading market. Any underwriters to whom Securities are sold by
the Company for public offering and sale may make a market in such Securities,
but such underwriters will not be obligated to do so and may discontinue any
market-making at any time without notice. No assurance can be given concerning
the liquidity of the trading market for any Securities.
In connection with the offering of the Securities, the Underwriters may
engage in transactions that stabilize, maintain or otherwise affect the price of
the Securities during and after the offering. Specifically, the Underwriters may
over-allot or otherwise create a short position in the Securities for their own
account by selling more Securities than have been sold to them by the Company.
The Underwriters may elect to cover any such short position by purchasing
Securities in the open market. In addition, the Underwriters may stabilize or
maintain the price of the Securities by bidding for or purchasing Securities in
the open market and may impose penalty bids, under which selling concessions
allowed to syndicate members or other broker-dealers participating in the
offering are reclaimed if Securities previously distributed in the offering are
repurchased in connection with stabilization transactions or otherwise. The
effect of these transactions may be to stabilize or maintain the market price of
the Securities at a level above that which might otherwise prevail in the open
market. The imposition of a penalty bid may also affect the price of the
Securities to the extent that it discourages resales thereof. No representation
is made as to the magnitude
58
or effect of any stabilization or other transactions. Such transactions, if
commenced, may be discontinued at any time.
VALIDITY OF SECURITIES
The validity of the Securities will be passed upon for the Company by Dorsey
& Whitney LLP, Minneapolis, Minnesota.
EXPERTS
The consolidated financial statements included in this Prospectus and
incorporated by reference in this Prospectus and elsewhere in the Registration
Statement have been audited by KPMG Peat Marwick LLP, independent auditors, as
set forth in their report thereon included therein and incorporated herein by
reference. Such consolidated financial statements are included or incorporated
herein by reference in reliance upon such report given upon the authority of
such firm as experts in accounting and auditing.
59
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1997 AND 1996, AND FOR EACH OF
THE YEARS IN THE THREE-YEAR PERIOD ENDED DECEMBER 31, 1997
[Enlarge/Download Table]
PAGE
---------
Independent Auditors' Report............................................................................... F-1
Consolidated Financial Statements:
Consolidated Statements of Operations.................................................................... F-2
Consolidated Balance Sheets.............................................................................. F-3
Consolidated Statements of Shareholders' Equity.......................................................... F-4
Consolidated Statements of Cash Flows.................................................................... F-5
Notes to Consolidated Financial Statements............................................................... F-6
Quarterly Financial Information (unaudited)................................................................ F-20
AS OF MARCH 31, 1998 AND FOR THE THREE-MONTH
PERIODS ENDED MARCH 31, 1998 AND 1997
Consolidated Financial Statements:
Consolidated Balance Sheets.............................................................................. F-21
Consolidated Statements of Operations.................................................................... F-22
Consolidated Statements of Cash Flows.................................................................... F-23
Notes to Consolidated Financial Statements............................................................... F-24
60
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
Dain Rauscher Corporation:
We have audited the accompanying consolidated balance sheets of Dain
Rauscher Corporation (formerly Interra Financial Incorporated) as of December
31, 1997 and 1996 and the related consolidated statements of operations,
shareholders' equity and cash flows for each of the years in the three-year
period ended December 31, 1997. These consolidated financial statements and
financial statement schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Dain
Rauscher Corporation as of December 31, 1997 and 1996, and the results of its
operations and its cash flows for each of the years in the three-year period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
February 5, 1998, except for Note N,
which is as of February 9, 1998
F-1
DAIN RAUSCHER CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
[Enlarge/Download Table]
YEAR ENDED DECEMBER 31,
----------------------------------
1997 1996 1995
---------- ---------- ----------
Revenues:
Commissions................................................................ $ 274,847 $ 223,084 $ 175,987
Principal transactions..................................................... 152,150 169,040 179,180
Investment banking and underwriting........................................ 111,280 111,391 89,763
Interest................................................................... 122,492 110,551 109,393
Asset management........................................................... 46,304 35,890 27,088
Correspondent clearing..................................................... 19,827 15,806 12,484
Other...................................................................... 23,775 17,554 12,852
---------- ---------- ----------
Total revenues............................................................... 750,675 683,316 606,747
Interest expense............................................................. (58,573) (57,560) (64,777)
---------- ---------- ----------
Net revenues................................................................. 692,102 625,756 541,970
---------- ---------- ----------
Expenses excluding interest:
Compensation and benefits.................................................. 427,599 385,905 345,834
Communications............................................................. 46,450 43,301 40,624
Occupancy and equipment rental............................................. 41,512 35,870 33,019
Travel and promotional..................................................... 30,293 24,296 20,665
Floor brokerage and clearing fees.......................................... 12,328 10,271 9,714
Other...................................................................... 42,165 38,711 35,843
Restructuring charge....................................................... 15,000 -- --
---------- ---------- ----------
Total expenses excluding interest............................................ 615,347 538,354 485,699
---------- ---------- ----------
Earnings:
Earnings before income taxes............................................... 76,755 87,402 56,271
Income tax expense......................................................... (27,480) (30,591) (20,398)
---------- ---------- ----------
Net earnings................................................................. $ 49,275 $ 56,811 $ 35,873
---------- ---------- ----------
---------- ---------- ----------
Earnings per share:
Basic...................................................................... $ 4.01 $ 4.68 $ 2.96
---------- ---------- ----------
---------- ---------- ----------
Diluted.................................................................... $ 3.77 $ 4.49 $ 2.85
---------- ---------- ----------
---------- ---------- ----------
See accompanying notes to consolidated financial statements.
F-2
DAIN RAUSCHER CORPORATION
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
[Enlarge/Download Table]
DECEMBER 31,
--------------------------
1997 1996
------------ ------------
Assets:
Cash and cash equivalents........................................................... $ 35,909 $ 34,387
Cash and short-term investments segregated for regulatory purposes.................. -- 15,000
Receivable from customers........................................................... 1,170,160 1,035,847
Receivable from brokers and dealers................................................. 229,421 202,040
Securities purchased under agreements to resell..................................... 135,777 81,631
Trading securities owned............................................................ 541,511 288,824
Equipment, leasehold improvements and buildings, at cost, less accumulated
depreciation of $42,800 and $31,330, respectively................................. 42,376 32,946
Other receivables................................................................... 80,867 75,685
Deferred income taxes............................................................... 44,868 39,704
Other assets........................................................................ 23,512 21,361
------------ ------------
$ 2,304,401 $ 1,827,425
------------ ------------
------------ ------------
Liabilities and Shareholders' Equity:
Liabilities:
Short-term borrowings............................................................... $ 179,000 $ 25,000
Drafts payable...................................................................... 83,499 69,989
Payable to customers................................................................ 601,949 869,641
Payable to brokers and dealers...................................................... 580,970 229,852
Securities sold under repurchase agreements......................................... 170,906 57,967
Trading securities sold, but not yet purchased...................................... 127,364 58,805
Accrued compensation................................................................ 128,463 119,244
Other accrued expenses and accounts payable......................................... 97,500 93,751
Subordinated and other debt......................................................... 15,659 27,290
------------ ------------
1,985,310 1,551,539
------------ ------------
------------ ------------
Shareholders' equity:
Common stock (1997: issued 12,367,447 and outstanding 12,275,104 shares; 1996:
issued and outstanding 12,174,968 shares)......................................... 1,546 1,522
Additional paid-in capital.......................................................... 89,321 81,316
Retained earnings................................................................... 233,419 193,048
Treasury stock, at cost............................................................. (5,195) --
------------ ------------
319,091 275,886
------------ ------------
$ 2,304,401 $ 1,827,425
------------ ------------
------------ ------------
See accompanying notes to consolidated financial statements.
F-3
DAIN RAUSCHER CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
[Enlarge/Download Table]
COMMON STOCK
---------------------- ADDITIONAL
SHARES PAID-IN RETAINED TREASURY SHAREHOLDERS'
OUTSTANDING AMOUNT CAPITAL EARNINGS STOCK EQUITY
----------- --------- ----------- ---------- --------- -------------
Balances at December 31, 1994......................... 12,062 $ 1,508 $ 73,434 $ 120,478 $ -- $ 195,420
----------- --------- ----------- ---------- --------- -------------
Net earnings.......................................... -- -- -- 35,873 -- 35,873
Repurchase of common stock............................ (297) (38) -- (6,811) -- (6,849)
Common stock issued upon exercise of stock options.... 280 36 2,277 -- -- 2,313
Restricted common stock issued and amortized.......... 20 2 53 -- -- 55
Stock credited to deferred compensation plan
participants........................................ -- -- 859 -- -- 859
Cash dividends on common stock
($.42 2/3 per share)................................ -- -- -- (5,177) -- (5,177)
----------- --------- ----------- ---------- --------- -------------
Balances at December 31, 1995......................... 12,065 1,508 76,623 144,363 -- 222,494
----------- --------- ----------- ---------- --------- -------------
Net earnings.......................................... -- -- -- 56,811 -- 56,811
Repurchase of common stock............................ (59) (7) -- (1,334) -- (1,341)
Common stock issued upon exercise of stock options.... 136 17 1,217 -- -- 1,234
Restricted common stock issued and amortized.......... 33 4 342 -- -- 346
Stock credited to deferred compensation plan
participants........................................ -- -- 3,134 -- -- 3,134
Cash dividends on common stock
($.56 per share).................................... -- -- -- (6,792) -- (6,792)
----------- --------- ----------- ---------- --------- -------------
Balances at December 31, 1996......................... 12,175 1,522 81,316 193,048 -- 275,886
----------- --------- ----------- ---------- --------- -------------
Net earnings.......................................... -- -- -- 49,275 -- 49,275
Treasury stock purchased.............................. (92) -- -- -- (5,195) (5,195)
Common stock issued upon exercise of stock options.... 146 18 1,761 -- -- 1,779
Restricted common stock issued and amortized.......... 46 6 393 -- -- 399
Stock credited to deferred compensation plan
participants........................................ -- -- 4,941 -- -- 4,941
Cash dividends on common stock
($.72 per share).................................... -- -- -- (8,904) -- (8,904)
Tax benefits from stock incentive plans............... -- -- 910 -- -- 910
----------- --------- ----------- ---------- --------- -------------
Balances at December 31, 1997......................... 12,275 $ 1,546 $ 89,321 $ 233,419 $ (5,195) $ 319,091
----------- --------- ----------- ---------- --------- -------------
----------- --------- ----------- ---------- --------- -------------
See accompanying notes to consolidated financial statements.
F-4
DAIN RAUSCHER CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
[Enlarge/Download Table]
YEAR ENDED DECEMBER 31,
---------------------------------
1997 1996 1995
---------- ---------- ---------
Cash flows from operating activities:
Net earnings................................................................. $ 49,275 $ 56,811 $ 35,873
Adjustments to reconcile net earnings to cash provided by operating
activities:
Depreciation and amortization.............................................. 11,764 9,563 8,973
Deferred income taxes...................................................... (5,164) (7,711) (2,992)
Other non-cash items....................................................... 16,200 8,626 10,486
Cash and short-term investments segregated for regulatory purposes......... 15,000 396,000 (73,000)
Securities purchased under agreements to resell............................ (54,146) (1,398) 118,328
Net trading securities owned and trading securities sold, but not yet
purchased................................................................ (184,128) 31,823 (59,503)
Other receivables.......................................................... (5,182) 5,153 (2,051)
Drafts payable and short-term borrowings of securities companies........... 117,510 (52,442) (22,783)
Net receivable from/payable to customers................................... (402,005) (384,511) 60,411
Net receivable from/payable to brokers and dealers......................... 323,737 30,987 (8,617)
Securities sold under repurchase agreements................................ 112,939 (62,841) (53,164)
Accrued compensation....................................................... 9,219 23,256 27,233
Other...................................................................... (8,331) (9,809) 3,412
---------- ---------- ---------
Cash provided (used) by operating activities................................... (3,312) 43,507 42,606
---------- ---------- ---------
Cash flows from financing activities:
Proceeds from:
Revolving credit agreement, net............................................ 50,000 -- --
Issuance of common stock................................................... 1,779 1,580 2,368
Payments for:
Subordinated and other debt................................................ (11,631) (14,120) (5,613)
Dividends on common stock.................................................. (8,904) (6,792) (5,177)
Purchase of common stock................................................... (5,195) (1,341) (6,849)
Revolving credit agreement, net............................................ -- -- (15,000)
---------- ---------- ---------
Cash provided (used) by financing activities................................... 26,049 (20,673) (30,271)
---------- ---------- ---------
Cash flows from investing activities:
Proceeds from investment dividends and sales................................. 1,768 1,227 1,826
Payments for equipment, leasehold improvements and other..................... (22,983) (15,841) (10,758)
---------- ---------- ---------
Cash (used) by investing activities............................................ (21,215) (14,614) (8,932)
---------- ---------- ---------
Increase in cash and cash equivalents.......................................... 1,522 8,220 3,403
Cash and cash equivalents:
At beginning of year..................................................... 34,387 26,167 22,764
---------- ---------- ---------
At end of year........................................................... $ 35,909 $ 34,387 $ 26,167
---------- ---------- ---------
---------- ---------- ---------
Cash income tax payments totaled $32,110,000 in 1997, $32,841,000 in 1996,
and $18,884,000 in 1995. Cash interest payments totaled $57,396,000,
$56,901,000, and $64,592,000 in 1997, 1996 and 1995, respectively.
During the years ended December 31, 1997, 1996 and 1995, respectively, the
Company had non-cash financing activity of $4,941,000, $3,134,000 and $859,000
associated with the crediting of common stock to deferred compensation plan
participants.
See accompanying notes to consolidated financial statements.
F-5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
DAIN RAUSCHER CORPORATION
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS: Dain Rauscher Corporation (the "Company") is a
Minneapolis, Minnesota-based holding company that provides advice and services
to individual investors in the western United States and investment banking
services to corporate and governmental clients nationwide through its principal
subsidiary, Dain Rauscher Incorporated ("Dain Rauscher"). The Company is also
parent to Insight Investment Management, Inc., which manages the Great Hall
money market funds and institutional fixed income accounts, and Dain Rauscher
Lending Services Inc., which was formed in 1997 to make certain types of loans
that are collateralized by customers' control and restricted securities. On
January 2, 1998, the Company's name was changed to Dain Rauscher Corporation
from Interra Financial Incorporated, and two of the Company's broker-dealer
subsidiaries, Dain Bosworth Incorporated ("Dain Bosworth") and Rauscher Pierce
Refsnes, Inc. ("Rauscher Pierce Refsnes"), were merged and renamed Dain
Rauscher. The Company's third broker-dealer, Interra Clearing Services Inc.
("Clearing"), will be merged with Dain Rauscher on March 2, 1998.
BASIS OF PRESENTATION: The consolidated financial statements include the
Company and its subsidiaries as of December 31, 1997: Dain Bosworth, Rauscher
Pierce Refsnes, Clearing, Interra Advisory Services Inc. and Interra Lending
Services Inc. All subsidiaries are wholly owned and all inter-company balances
and transactions have been eliminated in consolidation. Certain prior-year
amounts in the consolidated financial statements have been reclassified to
conform to the 1997 presentation.
CASH AND CASH EQUIVALENTS: Cash and cash equivalents include cash on hand,
cash in depository accounts with other financial institutions and money market
investments with original maturities of 90 days or less.
SECURITIES: Securities transactions and the related commission revenues and
expenses are recorded on settlement date, which is not materially different than
if transactions were recorded on trade date.
Trading securities owned, trading securities sold, but not yet purchased,
and derivative financial instruments are stated at market value. Unrealized
gains and losses on such securities are recognized currently in revenues from
principal transactions. Market value is determined by using public market
quotations, quoted prices from dealers or recent market transactions, depending
upon the underlying security.
The Company may, from time to time, receive equity instruments as a portion
of its compensation for certain underwriting activity. Such instruments are
accounted for as investments and are recorded at the lower of cost or market,
which is generally zero. The Company also owns certain non-marketable
investments accounted for at lower of cost or market, which are included in
other assets.
REPURCHASE TRANSACTIONS: Securities purchased under agreements to resell
(reverse repurchase agreements) and securities sold under repurchase agreements
are accounted for as financing transactions and are recorded at the contract
amount at which the securities will subsequently be resold or reacquired, plus
accrued interest. Generally, these transactions may be terminated on short
notice by the Company or its counterparties.
OTHER RECEIVABLES: Included in other receivables are forgivable loans made
to investment executives and other revenue-producing employees, typically in
connection with their recruitment. Such loans are forgivable based on continued
employment and are amortized over the life of the loan, which is generally three
to five years, using the straight-line method.
F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
TREASURY STOCK: Treasury stock is recorded at cost and includes common
shares repurchased by the Company subsequent to December 31, 1996, as well as
shares purchased from stock incentive plan participants.
DEPRECIATION AND AMORTIZATION: Equipment is depreciated using the
straight-line method over estimated useful lives of two to eight years.
Leasehold improvements are amortized over the lesser of the estimated useful
life of the improvement or the term of the lease.
INCOME TAXES: The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for
Income Taxes." Under this method, deferred tax liabilities and assets and the
resultant provision for income taxes are determined based on the differences
between the financial statement and tax bases of assets and liabilities using
enacted tax rates in effect for the year in which the differences are expected
to reverse.
FAIR VALUES OF FINANCIAL INSTRUMENTS: Substantially all of the Company's
financial assets and liabilities are carried at market value or at amounts
which, because of their short-term nature, approximate current fair value. The
fair value of the Company's borrowings, if recalculated based on current
interest rates, would not differ significantly from the amounts recorded at
December 31, 1997.
STOCK-BASED COMPENSATION: The Company accounts for stock option grants
under APB Opinion No. 25 (APB 25) and, accordingly, does not recognize
compensation expense related to option grants. The Company applies the
disclosure provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation." For grants of restricted stock, the Company amortizes the value
of such shares as determined on grant date to compensation expense and equity
over the vesting period.
RECENT ACCOUNTING PRONOUNCEMENTS: In June 1996, the Financial Accounting
Standards Board issued SFAS 125, "Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities." The Company adopted the provisions of SFAS
125 on January 1, 1998. The adoption of SFAS 125 did not have a material effect
on the Company's consolidated financial statements.
USE OF ESTIMATES: Management of the Company has made certain estimates and
assumptions relating to the reporting of assets and liabilities and the
disclosure of contingent liabilities in preparing these financial statements in
conformity with generally accepted accounting principles. Actual results could
differ from those estimates.
EARNINGS PER SHARE: The Company adopted SFAS 128, "Earnings per Share,"
during the fourth quarter of 1997 and has restated prior-year amounts. SFAS 128
requires the reporting of basic and diluted earnings per share amounts. Basic
earnings per share are based upon the weighted average number of common shares
outstanding during the reporting period. Diluted earnings per share take into
account the dilutive effect, if any, of stock options and other dilutive
potential common shares outstanding during the period.
F-7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The following reconciliation illustrates the computation of basic and
diluted earnings per share as prescribed under SFAS 128:
[Enlarge/Download Table]
YEAR ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
(IN THOUSANDS, EXCEPT PER-SHARE
DATA)
Net earnings.............................................. $ 49,275 $ 56,811 $ 35,873
--------- --------- ---------
--------- --------- ---------
Weighted average common shares outstanding................ 12,277 12,132 12,115
Dilutive effect of stock options (net of tax benefits).... 579 435 470
Shares credited to deferred compensation plan
participants............................................ 204 98 --
--------- --------- ---------
13,060 12,665 12,585
--------- --------- ---------
--------- --------- ---------
Basic earnings per share.................................. $ 4.01 $ 4.68 $ 2.96
--------- --------- ---------
--------- --------- ---------
Diluted earnings per share................................ $ 3.77 $ 4.49 $ 2.85
--------- --------- ---------
--------- --------- ---------
Options to purchase 186,400, 50,500, and 0 shares for 1997, 1996, and 1995,
respectively, were not included in the computation of diluted earnings per share
because options' exercise prices were greater than the average market price of
the common shares for the period.
B. RESTRUCTURING RESERVE
In conjunction with the adoption of a formal restructuring plan to combine
Dain Bosworth, Rauscher Pierce Refsnes and Clearing into a single broker-dealer
during the first quarter of 1998, the Company recorded a one-time, after-tax
charge of $9.6 million ($15.0 million before taxes), or 74 cents per share
diluted, against third-quarter 1997 earnings to cover severance and other
restructuring costs. Substantially all of the $15.0 million of the restructuring
costs will result in cash outflows, primarily during the fourth quarter of 1997
and first quarter of 1998. The Company expects that the restructuring will
result in the elimination of approximately 120 positions, of which 87 had been
eliminated by December 31, 1997. The composition of the $15.0 million charge was
as follows: $12.0 million for severance and short-term retention payments to
terminated employees; $0.8 million for space consolidation expenditures, and the
remaining $2.2 million for other expenditures including costs of changing the
Company's name, relocation, outplacement services and professional fees related
to the restructuring. As of December 31, 1997, $4.1 million in expenditures had
been charged to the reserve, with approximately $3.1 million relating to
severance costs and the remaining $1.0 million relating to the name change,
relocation, outplacement services and professional fees. The Company believes
this charge will be adequate to cover all restructuring expenditures.
C. RECEIVABLE FROM AND PAYABLE TO CUSTOMERS
The amounts receivable from customers primarily represent margin balances.
Other customer receivables and payables result from cash transactions.
Securities owned by customers and held as collateral for receivables and
securities sold short by customers are not reflected in the consolidated
financial statements.
F-8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
D. RECEIVABLE FROM AND PAYABLE TO BROKERS AND DEALERS
[Enlarge/Download Table]
DECEMBER 31,
----------------------
1997 1996
---------- ----------
(IN THOUSANDS)
Receivable from brokers and dealers:
Deposits for securities borrowed.................................... $ 164,917 $ 158,246
Securities failed to deliver........................................ 58,673 35,570
Clearing organizations, correspondent brokers and other............. 5,831 8,224
---------- ----------
$ 229,421 $ 202,040
---------- ----------
---------- ----------
Payable to brokers and dealers:
Deposits for securities loaned...................................... $ 538,588 $ 178,900
Securities failed to receive........................................ 34,627 34,384
Clearing organizations, correspondent brokers and other............. 7,755 16,568
---------- ----------
$ 580,970 $ 229,852
---------- ----------
---------- ----------
Securities failed to deliver and receive represent the contract value of
securities which have not been delivered or received subsequent to settlement
date. Securities borrowed and securities loaned are recorded at the amount of
cash collateral advanced or received in connection with the transaction.
Generally, these transactions may be terminated on short notice by the Company
or its counterparties. Securities borrowed transactions require the Company to
deposit cash or other collateral with the lender. With respect to securities
loaned, the Company receives cash or other collateral. The initial collateral
advanced or received has a market value equal to or greater than the market
value of the securities borrowed or loaned. The Company monitors the market
value of the securities borrowed and loaned on a daily basis and requests
additional collateral or returns excess collateral, as appropriate.
E. TRADING SECURITIES
The market values of trading securities are summarized as follows:
[Enlarge/Download Table]
DECEMBER 31,
----------------------
1997 1996
---------- ----------
(IN THOUSANDS)
Owned:
U. S. government and government agency securities................... $ 320,646 $ 154,801
Municipal securities................................................ 157,336 67,474
Corporate fixed income and other securities......................... 42,957 53,597
Equity securities................................................... 20,572 12,952
---------- ----------
$ 541,511 $ 288,824
---------- ----------
---------- ----------
Sold, but not yet purchased:
U. S. government, government agency and municipal securities........ $ 122,265 $ 52,328
Corporate and other securities...................................... 5,099 6,477
---------- ----------
$ 127,364 $ 58,805
---------- ----------
---------- ----------
F-9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
F. SHORT-TERM BORROWINGS
Short-term borrowings of the securities subsidiaries at December 31, 1997
and 1996, consist of $129.0 million and $25.0 million, respectively, in bank
loans on uncommitted lines of credit. The majority of these borrowings are
collateralized by trading securities owned and customers' margin securities, and
have a floating rate of interest approximately 50 basis points above the Federal
Funds rate which was 6.5 percent at December 31, 1997. The market value of
trading securities pledged as collateral at December 31, 1997, was $151.4
million. At December 31, 1997, approximately $396 million of additional credit
was available under uncommitted credit lines.
Revolving credit loan borrowings and irrevocable letters of credit are
available under a commitment totaling $50 million. The facility expires June 25,
1998, and may be extended for up to three additional one-year periods. Loans
under this facility are unsecured and bear interest at a floating rate of
Federal Funds plus 85 basis points. Amounts outstanding under the revolving
credit facility at December 31, 1997, were $50.0 million and the applicable
interest rate was 7.0 percent. No amounts were outstanding as of December 31,
1996. The Company must maintain certain levels of net worth and regulatory net
capital under the agreement.
The Company also has a $50 million uncommitted credit facility available to
finance loans made to customers through Dain Rauscher Lending Services Inc. Such
customer loans are collateralized by customers' securities. The facility bears
interest at a floating rate approximating 75 basis points over the Federal Funds
rate. No amounts related to this facility were outstanding at December 31, 1997.
G. SUBORDINATED AND OTHER DEBT
[Enlarge/Download Table]
DECEMBER 31,
--------------------
1997 1996
--------- ---------
(IN THOUSANDS)
Subordinated debt of securities subsidiaries............................ $ 9,000 $ 20,667
Other debt:
Capital lease obligations (Note I).................................... 6,659 5,794
Other................................................................. -- 829
--------- ---------
$ 15,659 $ 27,290
--------- ---------
--------- ---------
The four-year subordinated bank loans of the securities subsidiaries qualify
as regulatory capital. The loans require monthly, interest-only payments
throughout the four-year terms, with equal quarterly principal payments during
years two through four. The outstanding subordinated debt bears a floating rate
of interest of approximately 2.5 percent to 2.75 percent above the London
Interbank Offered Rates. At December 31, 1997, the weighted average interest
rate on all of the Company's subordinated debt was 8.4 percent.
The subordinated bank loans and other debt are payable in 1998.
H. SHAREHOLDERS' EQUITY
COMMON STOCK: The common stock has a par value of $.125 per share;
30,000,000 shares are authorized. In 1996 the Company completed the repurchase
of 600,000 shares of common stock at a total cost of $11.8 million under a
program that was initiated in 1994. Under this program the Company
F-10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
H. SHAREHOLDERS' EQUITY (CONTINUED)
repurchased and subsequently retired 59,000 and 297,000 shares in 1996 and 1995,
respectively. In August 1996 and December 1997, respectively, the Company's
Board of Directors authorized additional programs to repurchase up to 100,000
and 600,000 shares of the Company's common stock. Purchases of the common stock
may be made from time to time at prevailing prices in the open market, by block
purchases, or in privately negotiated transactions. The repurchased shares will
be held as treasury stock and used for the Company's employee stock option and
other benefit plans, or for other corporate purposes. During 1996 no shares were
repurchased pursuant to the 100,000 share program. During 1997, the Company
repurchased 87,568 shares at a total cost of $4.8 million pursuant to the
100,000 share program and no shares pursuant to the 600,000 share program.
On October 31, 1995, the Company's Board of Directors declared a
three-for-two stock split effected in the form of a 50 percent stock dividend
payable on December 20, 1995, to shareholders of record at the close of business
on December 6. All references in the consolidated financial statements to
numbers of shares outstanding and related prices and per-share amounts have been
restated to reflect the split.
At December 31, 1997, 2,924,000 shares of the Company's common stock were
reserved for issuance under the 1996 Stock Incentive Plan; 1,930,212 shares were
reserved for issuance under the 1986 Stock Option Plan; and 159,000 shares were
reserved for issuance to the Company's retirement plan.
STOCK COMPENSATION PLANS: The Company maintains two fixed stock
compensation plans, the 1986 Stock Option Plan (1986 Plan) and the 1996 Stock
Incentive Plan (1996 Plan), which are used to provide stock incentives to key
employees and outside directors. Each plan authorizes the grant of incentive and
non-qualified options and the 1996 Plan also authorizes the grant of restricted
and other stock awards. The Company made its final grants under the 1986 Plan in
February 1996. The 1996 Plan requires and the Company under the 1986 Plan made,
but did not require, all option grants at 100 percent of the fair market value
of the shares at the date of grant. Options generally become exercisable at
rates of 20, 50 and 100 percent as of two, three and four years, respectively,
after the date of grant and expire 10 years from date of grant. Options granted
to outside directors become exercisable six months after grant date and expire
five years after grant date. At December 31, 1997, 2,523,100 shares of common
stock were available for grant under the 1996 Plan.
The Company applies APB 25 and its interpretations in accounting for its
stock incentive plans. Accordingly, no compensation expense has been recognized
in the consolidated financial statements for stock option grants. Had
compensation expense been determined based on the fair value of the options at
F-11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
H. SHAREHOLDERS' EQUITY (CONTINUED)
the grant date for 1997, 1996 and 1995 awards consistent with SFAS 123, the
Company's net earnings and earnings per share would have been reduced to the pro
forma amounts indicated below:
[Enlarge/Download Table]
YEAR ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
(IN THOUSANDS, EXCEPT PER-SHARE
AMOUNTS)
Net earnings:
As reported................................................ $ 49,275 $ 56,811 $ 35,873
Pro forma.................................................. 47,914 56,392 35,681
Earnings per share:
Basic:
As reported................................................ $ 4.01 $ 4.68 $ 2.96
Pro forma.................................................. 3.90 4.65 2.95
Diluted:
As reported................................................ 3.77 4.49 2.85
Pro forma.................................................. 3.67 4.45 2.84
The weighted average per-share fair value of options granted during 1997,
1996 and 1995, was $17.55, $7.96 and $4.51, respectively. The fair value of each
option granted is estimated on the date of grant using the Black-Scholes
option-pricing model with the following weighted average assumptions used for
grants in 1997, 1996 and 1995, respectively: dividend yields of 1.5 percent, 2.3
percent and 2.7 percent; expected volatility of 36.6 percent in 1997 and 30.2
percent for 1996 and 1995; risk-free interest rates of 4.8 percent, 5.0 percent
and 5.9 percent; and expected lives of five years. Pro forma amounts may not be
indicative of future results.
F-12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
H. SHAREHOLDERS' EQUITY (CONTINUED)
The following table summarizes the activity related to the Company's stock
option plans for each of the last three years:
[Enlarge/Download Table]
1997 1996 1995
--------------------------- --------------------------- ---------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
-------------- ----------- -------------- ----------- -------------- -----------
Options outstanding at beginning
of year........................ 1,304,045 $ 17.14 1,243,987 $ 14.71 1,303,500 $ 13.11
Granted.......................... 419,800 49.90 260,600 24.86 357,900 16.38
Exercised........................ (155,955) 12.90 (140,492) 9.66 (298,493) 8.73
Canceled......................... (98,565) 24.87 (60,050) 17.86 (118,920) 17.19
-------------- ----------- -------------- ----------- -------------- -----------
Options outstanding at end of
year........................... 1,469,325 $ 26.51 1,304,045 $ 17.14 1,243,987 $ 14.71
-------------- ----------- -------------- ----------- -------------- -----------
-------------- ----------- -------------- ----------- -------------- -----------
Options exercisable at end of
year........................... 551,700 405,980 268,837
-------------- -------------- --------------
-------------- -------------- --------------
Price range of outstanding
options........................ $ 4.58-$59.44 $ 4.58-$33.38 $ 4.58-$20.83
Price range of exercised
options........................ $ 4.67-$20.83 $ 4.58-$20.83 $ 4.33-$20.83
Weighted-average fair value of
options granted during the
year........................... $ 17.55 $ 7.96 $ 4.51
The following table summarizes currently outstanding and exercisable options
at December 31, 1997:
[Download Table]
OPTIONS OUTSTANDING
------------------------ OPTIONS EXERCISABLE
WEIGHTED ------------------------
AVERAGE WEIGHTED WEIGHTED
NUMBER REMAINING AVERAGE NUMBER AVERAGE
RANGE OF OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE EXERCISE
EXERCISE PRICES AT 12/31/97 LIFE PRICE AT 12/31/97 PRICE
--------------- ----------- ----------- ----------- ----------- -----------
$ 4.58-$ 4.67 69,250 2.6 years $ 4.61 69,250 $ 4.63
$ 10.00-$15.83 489,125 5.9 14.33 319,525 13.53
$ 16.83-$22.38 446,050 6.9 21.23 162,925 20.50
$ 25.38-$33.38 68,000 8.7 30.44 -- --
$ 42.75-$59.44 396,900 9.4 50.59 -- --
----------- ----------- ----------- ----------- -----------
1,469,325 $ 26.51 551,700 $ 14.47
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
The Company's closing stock price on December 31, 1997, was $69.00.
Net of cancellations, the Company issued 42,770, 33,131 and 19,743 shares of
common stock to key employees and outside directors in 1997, 1996 and 1995,
respectively, which are restricted in that such shares are subject to certain
vesting provisions. The restricted shares awarded had weighted average per-share
fair values at grant date of $58.80, $25.07 and $20.18 in 1997, 1996 and 1995,
respectively, and resulted in compensation expense of $399,000, $355,000 and
$20,000 being recorded in the consolidated financial statements in 1997, 1996
and 1995, respectively.
F-13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
I. COMMITMENTS AND CONTINGENT LIABILITIES
LEASES: The Company and its subsidiaries lease office space, furniture and
communications and data processing equipment under several noncancelable leases.
Most office space leases are subject to escalation and provide for the payment
of real estate taxes, insurance and other expenses of occupancy, in addition to
rent.
Aggregate minimum rental commitments as of December 31, 1997, are as
follows:
[Enlarge/Download Table]
CAPITAL OPERATING
LEASES LEASES
--------- ----------
(IN THOUSANDS)
1998.................................................................... $ 7,052 $ 19,000
1999.................................................................... -- 16,725
2000.................................................................... -- 13,370
2001.................................................................... -- 11,272
2002.................................................................... -- 9,720
Thereafter.............................................................. -- 50,550
--------- ----------
Total minimum lease payments............................................ 7,052 $ 120,637
----------
----------
Less amount representing interest....................................... (393)
---------
Present value of minimum lease payments................................. $ 6,659
---------
---------
Rental expense for operating leases was $27,679,000, $25,558,000, and
$25,771,000, for the years ended December 31, 1997, 1996 and 1995, respectively.
Included in net equipment, leasehold improvements and buildings at December 31,
1997 and 1996, is $2,230,000 and $3,837,000, respectively, for leases which have
been capitalized.
LITIGATION: The Company and/or its securities subsidiaries are defendants
in various actions, suits and proceedings before a court or arbitrator or by a
governmental agency. Such matters involve alleged violations of federal and
state securities laws and other laws. Certain of these actions, including
certain of the actions described in more detail below, claim substantial damages
and, if determined adversely to the Company and/or its subsidiaries, could have
a material adverse effect on the consolidated financial condition or results of
operations of the Company.
The Company and Dain Bosworth have been named as defendants in eleven
actions brought in connection with losses suffered under single premium deferred
annuities issued by Midwest Life Insurance Company ("MWL"), a former subsidiary
acquired by the Company in 1980 and sold by it in early 1986. Such annuities
were sold primarily through the private client sales force of Dain Bosworth.
MWL, which was sold by the Company in 1986 and was sold twice thereafter, was
declared insolvent and ordered liquidated in August 1991 by the State of
Louisiana, the jurisdiction to which its final owners relocated it. Generally,
MWL policyholders have been reimbursed for their losses up to $100,000 per
holder by the state guaranty associations, and the policyholders and state
guaranty associations, between them, have received approximately $.30 for each
$1.00 of loss in liquidation payments from the liquidator of MWL's estate. The
plaintiffs (or real parties in interest) in the first ten of these cases are the
Life and Health Guaranty Associations of each of Colorado, Iowa, Minnesota,
Montana, Nebraska, North Dakota, Oregon, South Dakota, Washington and Wyoming,
which claim to have succeeded to the rights of policyholders they reimbursed for
MWL losses, and/or certain individual policyholders. They allege common law
fraud, breach of fiduciary duty, negligence and negligent misrepresentation. The
plaintiff in the eleventh action is
F-14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
I. COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)
the liquidator of MWL's estate. It alleges RICO violations, breach of fiduciary
duty and conspiracy to breach fiduciary duty. The plaintiff guaranty
associations and individuals seek to recover in excess of $64 million in
compensatory damages, as well as punitive damages, interest, costs, attorneys'
fees and other relief. The liquidator of MWL's estate also seeks to recover
treble damages. By Louisiana statute, the compensatory damages sought by the
liquidator would in large part be distributed to the insurance guaranty
association and individual policyholders who are plaintiffs in the first ten
actions. The Company and Dain Rauscher, as successor to Dain Bosworth, believe
they have substantial and meritorious defenses available and are defending
themselves vigorously in these actions.
Rauscher Pierce Refsnes and one of its officers are named as defendants in
an action by the Federal Deposit Insurance Corporation ("FDIC"), as successor to
The Resolution Trust Corporation ("RTC"), alleging negligence, breach of
contract, breach of fiduciary duty and fraud in connection with the May 1991
sale by the RTC of the stock of WESAV Mortgage Corporation ("WESAV"). Rauscher
Pierce Refsnes acted as the broker for the sale. Smith Barney, which acted as
the RTC's financial advisor, Express America Holdings Corporation, the successor
to the winning bidder and certain individual officers of Express America and
WESAV were also named as defendants in this action but have since reached
settlement agreements with the FDIC. The plaintiff seeks alleged compensatory
damages of approximately $15 million and punitive damages of $60 million. Dain
Rauscher, as successor to Rauscher Pierce Refsnes, and its officer believe they
have substantial and meritorious defenses available and are defending themselves
vigorously in this action.
Rauscher Pierce Refsnes has also been named as a defendant in an action
brought by Orange County, California, in connection with five note offerings for
an aggregate of $975 million by the County in June through August of 1994. The
County alleges that Rauscher Pierce Refsnes acted as its financial advisor in
connection with these offerings and that, by failing to apprise it of the
alleged risks involved in the Orange County Investment Pool (the "OCIP") and
prevent the issuance of allegedly inaccurate official statements, Rauscher
Pierce Refsnes became liable for breach of contract, professional negligence,
breach of fiduciary duty and aiding and abetting breaches of fiduciary duty
committed by the County's Treasurer and Assistant Treasurer. Rauscher Pierce
Refsnes denies the County's allegations, including those relating to Rauscher's
role in connection with these transactions. The County seeks to recover at least
$500 million in damages for losses it allegedly suffered in the OCIP from
Rauscher Pierce Refsnes and defendants in other actions. Dain Rauscher, as the
successor of Rauscher Pierce Refsnes, believes it has substantial and
meritorious defenses available and is defending itself vigorously in this
action.
While the outcome of any litigation is uncertain, management, based in part
upon consultation with legal counsel as to certain of the actions pending
against the Company and/or its subsidiaries, believes that the resolution of all
such matters will not have a material adverse effect on the Company's
consolidated financial condition or results of operations of the Company as set
forth in the consolidated financial statements contained herein.
J. TRADING ACTIVITIES AND FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
Dain Rauscher is a dealer in corporate, tax-exempt and governmental fixed
income securities and corporate equity securities and may recognize profits or
losses on transactions in, or fluctuations in the value of, such securities held
in inventory. Internal guidelines intended to limit the size and risk of
inventories maintained have been established and are periodically reviewed.
These inventories are held primarily for distribution to Dain Rauscher's
individual and institutional clients in order to meet those
F-15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
J. TRADING ACTIVITIES AND FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
(CONTINUED)
clients' needs. Revenues from principal transactions for the two years ended
December 31, 1997, originate from the following:
[Enlarge/Download Table]
DECEMBER 31,
----------------------
1997 1996
---------- ----------
(IN THOUSANDS)
Equity securities..................................................... $ 75,699 $ 89,251
Municipal securities.................................................. 32,100 29,451
Government securities................................................. 19,289 20,826
Corporate fixed income securities..................................... 15,483 20,371
Mortgage-backed and other securities.................................. 9,579 9,141
---------- ----------
$ 152,150 $ 169,040
---------- ----------
---------- ----------
Dain Rauscher sells securities not yet purchased (short sales) for its own
account, primarily to hedge its fixed income trading securities. The
establishment of short positions exposes the Company to off-balance-sheet market
risk in the event prices increase, as the Company may be obligated to acquire
the securities at prevailing market prices.
The Company periodically hedges its fixed income trading inventories with
financial futures or option contracts. At December 31, 1997 and 1996,
respectively, the Company had open commitments to sell under financial futures
contracts with notional amounts of $20.6 million and $6.9 million. The Company
had no written option contracts at December 31, 1997 or 1996. The fair market
values of these contracts was not material at December 31, 1997 or 1996. In
addition, the average fair market values of these contracts during 1997 and 1996
were not material. Such option and financial futures contracts expose the
Company to off-balance-sheet market risk in the event that the changes in
interest rates do not closely correlate with the change in the security price.
Transactions in futures contracts are conducted through regulated exchanges
which guarantee performance of counterparties and are settled in cash on a daily
basis, thereby minimizing credit risk. Maintaining futures contracts typically
requires the Company to deposit cash or securities with an exchange or other
financial intermediary as security for its obligations. Additional cash or
securities may be required to be deposited thereafter due to fluctuations in the
market value of the futures contract. In writing option contracts, the Company
receives a premium from the purchaser in exchange for incurring an obligation to
purchase or sell securities upon exercise of the option. These obligations may
require the Company to purchase securities at prices higher than prevailing
market prices or sell securities at prices below prevailing market prices in
order to fulfill its obligations under the contracts. Other than as described,
the Company does not enter into other derivative financial instruments with
off-balance-sheet risk. Derivative financial instruments held or issued for
trading purposes were immaterial to the consolidated financial statements. The
Company's exposure to credit risk is represented by the fair value of trading
securities owned.
In the normal course of business, the Company's activities involve the
execution, settlement and financing of various securities transactions. These
activities may expose the Company to off-balance-sheet credit and market risks
in the event the customer or counterparty is unable to fulfill its contractual
obligations. Such risks may be increased by volatile trading markets.
In the normal course of business, the Company enters into when-issued
underwriting and purchase commitments. Transactions relating to such commitments
open at year end and subsequently settled had no material effect on the
consolidated financial statements.
F-16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
J. TRADING ACTIVITIES AND FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
(CONTINUED)
The Company seeks to control the risks associated with its customer
activities by requiring customers to maintain margin collateral in compliance
with various regulatory and internal guidelines. The Company monitors required
margin levels daily and, pursuant to such guidelines, requires customers to
deposit additional collateral or to reduce positions when necessary. Market
declines could, however, reduce the value of collateral below the amount loaned,
plus accrued interest, before the collateral could be sold.
A portion of the Company's customer activity involves the sale of securities
not yet purchased (short sales) and the writing of option contracts. Such
transactions may require the Company to purchase or sell financial instruments
at prevailing market prices in order to fulfill the customer's obligations.
The Company lends money subject to reverse repurchase agreements. All
positions are collateralized, primarily with U.S. government or U.S. government
agency securities. The Company generally takes physical possession of securities
purchased under agreements to resell. Such transactions may expose the Company
to risk in the event such borrowers do not repay the loans and the value of
collateral held is less than that of the underlying receivable. These agreements
provide the Company with the right to maintain the relationship between market
value of the collateral and the receivable.
The Company may pledge firm or customer margin securities for bank loans,
repurchase agreements, securities loaned or to satisfy margin deposits of
clearing organizations. All repurchase agreements are collateralized by cash or
securities delivered by the Company. In the event the counterparty is unable to
return such securities pledged, the Company may be exposed to the risks of
acquiring the securities at prevailing market prices or holding collateral
possessing a market value less than that of the related pledged securities. The
Company seeks to control these risks by monitoring the market value of
securities pledged and requiring adjustments of collateral levels where
necessary. At December 31, 1997, the market value of such securities pledged
approximated the borrowings outstanding.
K. REGULATORY REQUIREMENTS
The Company's securities subsidiaries are subject to the Securities and
Exchange Commission's Uniform Net Capital Rule. Clearing, the Company's
operations subsidiary until February 28, 1998, cleared and settled trades for
Dain Rauscher. Clearing carried all customer accounts, extended margin credit to
customers, paid interest on credit balances of customers and invested any excess
customer balances. As a result, Clearing was subject to the Uniform Net Capital
Rule whereby net capital of not less than 2 percent of aggregate debit items
must be maintained. The New York Stock Exchange, Inc. also may require a member
organization to reduce its business if regulatory net capital is less than 4
percent of such aggregate debit items, and may prohibit a member firm from
expanding its business and declaring cash dividends if its regulatory net
capital is less than 5 percent of such aggregate debit items. At December 31,
1997, net capital was $89.4 million at Clearing, which was 7.2 percent of
aggregate debit balances and $27.1 million in excess of the 5-percent
requirement. At December 31, 1997, Dain Bosworth and Rauscher Pierce Refsnes had
net capital requirements of $1.0 million each as neither firm carried customer
balances on its balance sheet. At December 31, 1997, Dain Bosworth and Rauscher
Pierce Refsnes had net capital of $33.9 million and $23.3 million, respectively,
in excess of their minimum requirements. Beginning in March 1998, only Dain
Rauscher, the Company's single remaining broker-dealer, is subject to the
Uniform Net Capital Rule and, accordingly, must maintain net capital of at least
2 percent of aggregate debit items.
Rule 15c3-3 of the Securities Exchange Act of 1934 specifies certain
conditions under which brokers and dealers carrying customer accounts may be
required to maintain cash or qualified securities in a special reserve account
for the exclusive benefit of customers. Amounts to be maintained are computed in
F-17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
K. REGULATORY REQUIREMENTS (CONTINUED)
accordance with a formula defined in the Rule. At December 31, 1997, the Company
was not required to have any amounts segregated in special reserve accounts.
L. EMPLOYEE BENEFIT PLANS
The Company sponsors a retirement plan which covers substantially all
full-time employees who are at least 21 years of age and have been employed for
at least six months. Participants may contribute on a pretax basis up to 12
percent of eligible compensation to the plan subject to certain aggregate
limitations; the Company then matches up to 5 percent of eligible compensation
at a 40-percent rate. Matching contributions are limited to $3,000 per employee
annually and are paid to the stock fund within the plan. Also, at the end of
each year, a profitability-based contribution, as determined by the Company's
Board of Directors, is made to the plan. The minimum required contribution is 3
percent of eligible compensation.
The Company's policy is to fund plan costs currently. Earnings have been
charged for contributions, net of forfeitures, to the plan as follows:
$15,759,000, $18,901,000 and $16,880,000 for 1997, 1996 and 1995, respectively.
M. INCOME TAXES
Income tax expense consists of the following:
[Enlarge/Download Table]
YEAR ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
(IN THOUSANDS)
Current:
Federal.................................................... $ 27,561 $ 32,896 $ 20,183
State...................................................... 5,083 5,534 3,207
Deferred:
Federal.................................................... (4,360) (6,710) (2,410)
State...................................................... (804) (1,129) (582)
--------- --------- ---------
$ 27,480 $ 30,591 $ 20,398
--------- --------- ---------
--------- --------- ---------
A reconciliation of ordinary federal income taxes (based on a rate of 35
percent) with the actual tax expense provided on earnings is as follows:
[Enlarge/Download Table]
YEAR ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
(DOLLARS IN THOUSANDS)
Ordinary federal income tax expense.......................... $ 26,864 $ 30,590 $ 19,695
State income taxes, net of federal tax benefit............... 3,229 3,249 1,599
Tax-exempt interest, net of related interest expense......... (1,428) (872) (1,324)
Other........................................................ (1,185) (2,376) 428
--------- --------- ---------
$ 27,480 $ 30,591 $ 20,398
--------- --------- ---------
--------- --------- ---------
Effective tax rate........................................... 35.8% 35.0% 36.3%
--------- --------- ---------
--------- --------- ---------
F-18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
M. INCOME TAXES (CONTINUED)
The tax effects of temporary differences that give rise to the deferred tax
assets and deferred tax liabilities are:
[Enlarge/Download Table]
DECEMBER 31,
--------------------
1997 1996
--------- ---------
(IN THOUSANDS)
Deferred tax assets:
Accruals not currently deductible..................................... $ 40,873 $ 36,025
Tax attributes acquired............................................... 1,120 1,632
Fixed assets.......................................................... 2,506 1,573
Other................................................................. 597 514
--------- ---------
45,096 39,744
--------- ---------
Deferred tax liabilities:
Other................................................................. (228) (40)
--------- ---------
$ 44,868 $ 39,704
--------- ---------
--------- ---------
The Company has determined that it is not required to establish a valuation
allowance for the deferred tax asset since it is more likely than not that the
deferred tax asset will be realized principally through carryback to taxable
income in prior years, future reversals of existing taxable temporary
differences, and, to a lesser extent, future taxable income. The Company's
conclusion that it is more likely than not that the deferred tax asset will be
realized is based on federal taxable income of over $184 million in the
carryback period, substantial state taxable income in the carryback period, as
well as prospects for continued earnings.
N. SUBSEQUENT EVENT
On February 9, 1998, the Company announced that it had entered into an
agreement to acquire Wessels, Arnold & Henderson, LLC, a privately held
investment banking and institutional equity sales and trading firm based in
Minneapolis. The approximate purchase price of $150 million includes $120
million in cash, up to $30 million face amount in five-year, subordinated
debentures and other direct costs of the acquisition. The cash portion of the
purchase price is expected to be paid from available cash and a new subordinated
credit facility. The transaction will be accounted for as a purchase and is
expected to be completed on March 31, 1998, pending regulatory approval.
F-19
DAIN RAUSCHER CORPORATION
QUARTERLY FINANCIAL INFORMATION
(UNAUDITED, IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
[Enlarge/Download Table]
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
---------- ---------- ---------- ----------
1998
Net revenues..................................................... $ 172,447
----------
----------
Earnings before income taxes..................................... $ (3,163)
----------
----------
Net earnings (loss).............................................. $ (2,024)
----------
----------
Per-share data:
Basic net earnings (loss)...................................... $ (.16)
----------
----------
Diluted net earnings (loss).................................... $ (.16)
----------
----------
Dividends...................................................... $ .22
----------
----------
1997
Net revenues..................................................... $ 165,962 $ 156,131 $ 181,368 $ 188,641
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Earnings before income taxes..................................... $ 24,389 $ 17,499 $ 10,991 $ 23,876
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Net earnings..................................................... $ 15,755 $ 11,137 $ 7,056 $ 15,327
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Per-share data:
Base net earnings.............................................. $ 1.29 $ .91 $ .57 $ 1.24
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Diluted net earnings........................................... $ 1.22 $ .86 $ .54 $ 1.16
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Dividends...................................................... $ .18 $ .18 $ .18 $ .18
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
1996
Net revenues..................................................... $ 156,034 $ 153,843 $ 151,035 $ 164,844
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Earnings before income taxes..................................... $ 23,289 $ 19,954 $ 19,984 $ 24,175
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Net earnings..................................................... $ 15,080 $ 13,028 $ 12,990 $ 15,713
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Per-share data:
Basic net earnings............................................. $ 1.25 $ 1.07 $ 1.07 $ 1.29
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Diluted net earnings........................................... $ 1.21 $ 1.04 $ 1.02 $ 1.23
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Dividends...................................................... $ .11 $ .15 $ .15 $ .15
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
F-20
DAIN RAUSCHER CORPORATION
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
[Enlarge/Download Table]
DECEMBER 31,
1997
MARCH 31, ------------
1998
------------
(UNAUDITED)
Assets:
Cash and cash equivalents.......................................................... $ 51,815 $ 35,909
Receivable from customers.......................................................... 1,124,283 1,170,160
Receivable from brokers and dealers................................................ 274,901 229,421
Securities purchased under agreements to resell.................................... 327,822 135,777
Trading securities owned, at market................................................ 436,554 541,511
Equipment, leasehold improvements and buildings, at cost, net...................... 45,161 42,376
Other receivables.................................................................. 76,353 80,867
Deferred income taxes.............................................................. 44,922 44,868
Other assets....................................................................... 146,531 23,512
------------ ------------
$ 2,528,342 $2,304,401
------------ ------------
------------ ------------
Liabilities and Shareholders' Equity:
Liabilities:
Short-term borrowings.............................................................. $ 142,415 $ 179,000
Drafts payable..................................................................... 98,173 83,499
Payable to customers............................................................... 597,128 601,949
Payable to brokers and dealers..................................................... 557,887 580,970
Securities sold under repurchase agreements........................................ 158,756 170,906
Trading securities sold, but not yet purchased, at market.......................... 344,738 127,364
Accrued compensation............................................................... 71,732 128,463
Other accrued expenses and accounts payable........................................ 129,312 97,500
Subordinated and other debt........................................................ 108,316 15,659
------------ ------------
2,208,457 1,985,310
------------ ------------
Shareholders' equity:
Common stock....................................................................... 1,556 1,546
Additional paid-in capital......................................................... 94,859 89,321
Retained earnings.................................................................. 228,665 233,419
Treasury stock, at cost............................................................ (5,195) (5,195)
------------ ------------
319,885 319,091
------------ ------------
$ 2,528,342 $2,304,401
------------ ------------
------------ ------------
See accompanying notes to consolidated financial statements.
F-21
DAIN RAUSCHER CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED, IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
[Enlarge/Download Table]
THREE MONTHS ENDED
MARCH 31,
----------------------
1997 1997
---------- ----------
Revenues:
Commissions............................................................................. $ 72,924 $ 63,627
Principal transactions.................................................................. 36,795 42,024
Investment banking and underwriting..................................................... 22,229 25,868
Interest................................................................................ 31,797 28,734
Asset management........................................................................ 13,330 10,500
Correspondent clearing.................................................................. 4,466 4,428
Other................................................................................... 6,473 4,891
---------- ----------
Total revenues.......................................................................... 188,014 180,072
Interest expense.......................................................................... (15,567) (14,110)
---------- ----------
Net revenues.............................................................................. 172,447 165,962
---------- ----------
Expenses excluding interest:
Compensation and benefits............................................................... 110,960 101,484
Communications.......................................................................... 12,187 11,309
Occupancy and equipment................................................................. 11,519 9,763
Travel and promotional.................................................................. 7,213 6,577
Floor brokerage and clearing fees....................................................... 2,827 2,927
Other................................................................................... 10,904 9,513
Merger-related charge................................................................... 20,000 --
---------- ----------
Total expenses excluding interest......................................................... 175,610 141,573
---------- ----------
Earnings:
Earnings (loss) before income taxes..................................................... (3,163) 24,389
Income tax benefit (expense)............................................................ 1,139 (8,634)
---------- ----------
Net earnings (loss)....................................................................... $ (2,024) $ 15,755
---------- ----------
---------- ----------
Earnings (loss) per share:
Basic................................................................................... $ (0.16) $ 1.29
---------- ----------
---------- ----------
Diluted................................................................................. $ (0.16) $ 1.22
---------- ----------
---------- ----------
Dividends per share....................................................................... $ 0.22 $ 0.18
---------- ----------
---------- ----------
See accompanying notes to consolidated financial statements.
F-22
DAIN RAUSCHER CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED, IN THOUSANDS)
[Enlarge/Download Table]
THREE MONTHS ENDED
MARCH 31,
------------------------
1998 1997
----------- -----------
Cash flows from operating activities:
Net earnings (loss)................................................................... $ (2,024) $ 15,755
Adjustments to reconcile earnings to cash provided (used) by operating activities, net
of effect of acquisition:
Depreciation and amortization....................................................... 3,453 2,639
Deferred income taxes............................................................... (54) (1,060)
Other non-cash items................................................................ 2,106 1,872
Cash and short-term investments segregated for regulatory purposes.................. -- (51,000)
Net payable to brokers and dealers.................................................. (58,247) 46,162
Securities purchased under agreements to resell..................................... (192,044) (189,956)
Net trading securities owned and securities sold, but not yet purchased............. 328,404 36,782
Short-term borrowings and drafts payable of securities companies.................... 28,090 176,276
Net receivable from customers....................................................... 41,055 (6,643)
Securities sold under repurchase agreements......................................... (12,150) 10,594
Accrued compensation................................................................ (56,908) (50,987)
Other............................................................................... 12,653 24,332
----------- -----------
Cash provided by operating activities................................................... 94,334 14,766
----------- -----------
Cash flows from financing activities:
Proceeds from:
Issuance of common stock............................................................ 1,215 1,037
Subordinated and other debt......................................................... 80,000 --
Payments for:
Revolving credit agreement, net..................................................... (50,000) --
Subordinated and other debt......................................................... (9,000) (3,435)
Dividends on common stock........................................................... (2,713) (2,203)
----------- -----------
Cash provided (used) by financing activities............................................ 19,502 (4,601)
----------- -----------
Cash flows from investing activities:
Proceeds from investment dividends and sales.......................................... 1,532 --
Payments for:
Equipment, leasehold improvements and other......................................... (3,874) (3,509)
Acquisition, net of cash acquired................................................... (95,588) --
----------- -----------
Cash used by financing activities....................................................... (97,930) (3,509)
----------- -----------
Increase in cash and cash equivalents................................................... 15,906 6,656
Cash and cash equivalents:
At beginning of period.............................................................. 35,909 34,387
----------- -----------
At end of period.................................................................... $ 51,815 $ 41,043
----------- -----------
----------- -----------
Income tax payments totaled $2,651,000 and $6,453,000 and interest payments
totaled $11,489,000 and $12,430,000 during the three months ended March 31, 1998
and 1997, respectively.
During the three months ended March 31, 1998, the Company had non-cash
financing activity of $21,657,000 representing subordinated debentures issued as
a portion of the consideration paid for an acquisition. Also for the three
months ended March 31, 1998 and 1997, respectively, the Company had non-cash
financing activity of $4,149,000 and $2,323,000 associated with the crediting of
common stock to deferred compensation plan participants.
See accompanying notes to consolidated financial statements.
F-23
DAIN RAUSCHER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
A. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The accompanying unaudited interim consolidated financial statements have
been prepared in accordance with the instructions for Form 10-Q and do not
include all the information and footnotes required by generally accepted
accounting principles for complete financial statements and should be read in
conjunction with the consolidated financial statements and related notes
included in the Company's Annual Report on Form 10-K for the year ended December
31, 1997. In the opinion of management, all adjustments necessary for a fair
presentation of such interim consolidated financial statements have been
included. All such adjustments are of a normal recurring nature. The results of
operations for the three-month period ended March 31, 1998, are not necessarily
indicative of results for subsequent periods.
Certain prior year amounts in the financial statements have been
reclassified to conform to the 1998 presentation.
B. ACQUISITION
On March 31, 1998, the Company acquired Wessels, Arnold & Henderson, LLC
("WAH"), a privately held investment banking, institutional equity sales and
trading firm based in Minneapolis. The transaction was accounted for as a
purchase and, accordingly, the revenues and operating results of WAH are not
included in the consolidated statements of operations for the three months ended
March 31, 1998.
The consideration paid for the acquisition was $120 million of cash and
five-year subordinated debentures with a discounted value of $21.7 million ($30
million face amount). Goodwill of approximately $115 million was recorded and
will be amortized over an estimated life of 25 years.
The Company recorded a $20.0 million pretax charge ($12.8 million after tax)
during the 1998 first quarter for costs related to the merger. Substantially all
of the $20.0 million charge will result in cash outflows, primarily during the
second quarter of 1998. As a result of the merger, approximately 150 jobs were
eliminated. These non-recurring costs include the following: $16.0 million for
severance; $2.5 million for space consolidation; and the remaining $1.5 million
for other integration costs. As of March 31, 1998, approximately $2.8 million in
expenditures, primarily severance, had been incurred.
The following unaudited pro forma information has been prepared assuming
that the acquisition of WAH had occurred at the beginning of the periods
presented after including the impact of certain adjustments including
amortization of goodwill, increased interest expense on acquisition debt and the
related income tax effects. The pro forma financial information below does not
include the effect of the
F-24
DAIN RAUSCHER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
$20.0 million charge recorded by the Company in the quarter ended March 31, 1998
that was directly related to the acquisition of WAH.
[Enlarge/Download Table]
THREE MONTHS ENDED
MARCH 31,
----------------------
1998 1997
---------- ----------
Statement of Operations Data:
Revenues............................................................ $ 205,487 $ 194,843
Interest expense.................................................... (17,895) (16,194)
---------- ----------
Net revenues........................................................ 187,592 178,649
Expenses excluding interest......................................... 170,815 152,726
---------- ----------
Earnings before income taxes........................................ 16,777 25,923
Income tax expense.................................................. (5,916) (9,186)
---------- ----------
Net earnings........................................................ $ 10,861 $ 16,737
---------- ----------
---------- ----------
Basic earnings per share............................................ $ 0.88 $ 1.37
---------- ----------
---------- ----------
Diluted earnings per share.......................................... $ 0.82 $ 1.29
---------- ----------
---------- ----------
The pro forma financial information above is presented for informational
purposes only and is not necessarily indicative of the actual results that would
have been achieved had the merger been consummated prior to the dates or periods
indicated, nor are they necessarily indicative of future operating results.
C. SHORT-TERM BORROWINGS
On March 20, 1998, the Company entered into a $50 million committed,
revolving credit agreement to replace a similar facility dated June 27, 1997.
The facility expires March 19, 1999 and contains a one-year renewal option.
Loans under the facility are unsecured and bear interest at a floating rate of
the London Interbank Offering Rate (LIBOR) plus 61 basis points. No amounts were
outstanding under the facility at March 31, 1998. The Company must comply with
provisions in the agreement regarding net worth, regulatory net capital and
indebtedness.
D. SUBORDINATED AND OTHER DEBT
On March 31, 1998, the Company's broker-dealer subsidiary entered into an
$80 million subordinated term loan agreement with a group of banks in connection
with the acquisition of WAH. Proceeds from the loan qualify as regulatory
capital. Term loans under this agreement are unsecured, and consist of advances
bearing interest at either the current Eurodollar Interbank Rate plus 160 basis
points, or the lead bank's published Reference Rate, at the discretion of the
Company. Principal payments under the agreement consist of $5.0 million per
quarter beginning April 1, 1999 with the final payment due on December 31, 2002.
The Company must comply with provisions in the agreement regarding net worth and
regulatory net capital.
On March 31, 1998, the Company also issued $30 million (face amount) in
5-year zero coupon subordinated debentures in connection with the acquisition of
WAH. The debentures were recorded at a discounted present value of $21.7
million.
F-25
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--------------------------------------------------------------------------------
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS OR A PROSPECTUS
SUPPLEMENT OR PROSPECTUS SUPPLEMENTS IN CONNECTION WITH THE OFFERING DESCRIBED
HEREIN AND THEREIN, AND ANY INFORMATION OR REPRESENTATIONS NOT CONTAINED HEREIN
OR THEREIN MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED. THIS PROSPECTUS
MAY NOT BE USED TO CONSUMMATE SALES OF SECURITIES UNLESS ACCOMPANIED BY A
PROSPECTUS SUPPLEMENT OR PROSPECTUS SUPPLEMENTS. THE DELIVERY OF THIS PROSPECTUS
AND A PROSPECTUS SUPPLEMENT OR PROSPECTUS SUPPLEMENTS RELATING TO PARTICULAR
SECURITIES SHALL NOT CONSTITUTE AN OFFER OF ANY OF THE OTHER SECURITIES COVERED
BY THIS PROSPECTUS. THE DELIVERY OF THIS PROSPECTUS OR ANY PROSPECTUS SUPPLEMENT
OR PROSPECTUS SUPPLEMENTS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION
OF AN OFFER TO BUY THE SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR
SOLICITATION OF AN OFFER TO BUY THE SECURITIES IS UNLAWFUL.
------------------------
TABLE OF CONTENTS
[Download Table]
PAGE
----
Available Information..................................................... 3
Incorporation of Certain Documents by Reference........................... 3
Prospectus Summary........................................................ 4
Risk Factors.............................................................. 8
The Company............................................................... 13
Price Range of Common Stock............................................... 22
Dividends................................................................. 22
Capitalization............................................................ 23
Selected Consolidated Financial Data...................................... 24
Management's Discussion and Analysis of Financial Condition and Results of
Operations.............................................................. 26
Management................................................................ 38
Use of Proceeds........................................................... 40
Ratios of Earnings to Fixed Charges....................................... 41
Description of Debt Securities............................................ 41
Description of Capital Stock.............................................. 49
Description of Securities Warrants........................................ 53
Foreign Currency Risks.................................................... 56
Plan of Distribution...................................................... 57
Validity of Securities.................................................... 59
Experts................................................................... 59
Index to Consolidated Financial Statements................................ 60
DAIN RAUSCHER
CORPORATION
DEBT SECURITIES,
PREFERRED STOCK,
COMMON STOCK AND
SECURITIES WARRANTS
---------------------
PROSPECTUS
---------------------
, 1998
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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The table below sets forth estimated expenses in connection with the
issuance and distribution of the Common Stock being offered:
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SEC registration fee.............................................................. $ 59,000
Legal fees and expenses*.......................................................... 100,000
Trustee's and Depositary's fees and expenses*..................................... 30,000
Accounting fees and expenses*..................................................... 50,000
Printing expenses*................................................................ 75,000
Rating agency fees*............................................................... 250,000
Blue Sky and legal investment fees and related expenses*.......................... 35,000
Miscellaneous (including listing fees, if applicable)*............................ 101,000
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Total........................................................................... $ 700,000
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* Estimated pursuant to Item 5 of Regulations S-K.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law, as amended, provides
that, under certain circumstances, a corporation may indemnify any person who
was or is a party or is threatened to be made a party to any threatened, pending
or completed action, suit or proceeding, whether civil, criminal, administrative
or investigative, by reason for the fact that he or she is or was a director,
officer, employee or agent of the corporation or is or was serving at its
request in such capacity in another corporation or business association, against
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by him or her in connection with
such action, suit or proceeding if he or she acted in good faith and in a manner
he or she reasonably believed to be in or not opposed to the best interests of
the corporation and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his or her conduct was unlawful.
Article SEVENTH of the Company's Certification of Incorporation, as amended,
provides, in effect, that persons serving as officers and directors of a
corporation at the request of the Company shall be entitled to be indemnified by
the Company to the extent permitted by Section 145 of the Delaware General
Corporation Law, as amended.
The Company has purchased directors' and officers' liability insurance,
including a Company reimbursement policy. Subject to the policy conditions, the
insurance provides coverage for amounts payable by the Company to its directors
and officers pursuant to the Company's charter documents. In addition, the
Company has entered into indemnification agreements with its directors and
executive officers contractually obligating the Company to, among other things,
maintain the same level of such insurance coverage as was being provided at the
time of execution of such agreements.
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ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS.
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1.1 Form of Underwriting Agreement.*
4.1 Amended and Restated Certificate of Incorporation (incorporated by reference to
Exhibit 4.1 to the Company's Quarterly Report on Form 10-Q for the Quarter Ended
March 31, 1998 as amended May 27, 1998).
4.2 Amended and Restated Bylaws (incorporated by reference to Exhibit 3.1 to the Company's
Quarterly Report on Form 10-Q dated September 30, 1996).
4.3 Indenture dated as of May 15, 1998 between the Company and Norwest Bank Minnesota,
N.A., as Senior Note Trustee.*
4.4 Indenture dated as of May 15, 1998 between the Company and Norwest Bank Minnesota,
N.A., as Subordinated Note Trustee.*
4.5 Form of Senior Note (included as part of Exhibit 4.3).*
4.6 Form of Subordinated Note (included as part of Exhibit 4.4).*
4.7 Form of Common Stock Warrant Agreement.*
4.8 Form of Common Stock Warrant Certificate (included as part of Exhibit 4.7).*
4.9 Form of Preferred Stock Warrant Agreement.*
4.10 Form of Preferred Stock Warrant Certificate (included as part of Exhibit 4.9).*
4.11 Form of Debt Securities Warrant Agreement.*
4.12 Form of Debt Securities Warrant Certificate (included as part of Exhibit 4.11).*
4.13 Form of Certificate of Designations.*
4.14 Form of Certificate of Designations--convertible*
5.1 Opinion and consent of Dorsey & Whitney LLP regarding the legality of the Securities.*
12 Computation of ratio of earnings to fixed charges and to Combined Fixed Charges and
Preferred Stock Dividends.*
23.1 Consent of Dorsey & Whitney LLP (included in Exhibit 5.1).*
23.2 Consent of KPMG Peat Marwick LLP.*
24 Power of Attorney.*
25.1 Form T-1 Statement of Eligibility and Qualification under the Trust Indenture Act of
1939 Norwest Bank Minnesota, N.A.*
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* Filed herewith.
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
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(a) To include any prospectus required by section 10(a)(3) of the Securities
Act of 1933.
(b) To reflect in the prospectus any facts or events arising after the
effective date of this registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth in
this registration statement. Notwithstanding the foregoing, any increase
or decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering
range may be reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b) under the Securities Act if, in the
aggregate, the changes in volume and price represent no more than a 20%
change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective registration
statement; and
(c) To include any material information with respect to the plan of
distribution not previously disclosed in this registration statement or
any material change to such information in this registration statement;
PROVIDED, HOWEVER, that paragraphs (a) and (b) do not apply if the information
required to be included in a post-effective amendment by those paragraphs is
contained in periodic reports filed by the registrant pursuant to section 13 or
15(d) of the Securities Exchange Act of 1934 that is incorporated by reference
in the registration statement.
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at the time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
Company's annual report pursuant to section 13(a) or section 15(d) of the
Securities Exchange Act of 1934 that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Minneapolis, State of
Minnesota, on May 28, 1998.
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DAIN RAUSCHER CORPORATION
By: /s/ JOHN C. APPEL
-----------------------------------------
John C. Appel
VICE CHAIRMAN AND CHIEF FINANCIAL OFFICER
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the date indicated:
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NAME TITLE DATE
------------------------------ -------------------------- -------------------
Chairman of the Board,
/s/ IRVING WEISER* President, Chief
------------------------------ Executive Officer and May 6, 1998
Irving Weiser Director (Principal
executive officer)
Vice Chairman, Chief
/s/ JOHN C. APPEL* Financial Officer and
------------------------------ Director (Principal May 6, 1998
John C. Appel Financial Officer)
/s/ DAVID J. PARRIN* Senior Vice President,
------------------------------ Controller (Principal May 6, 1998
David J. Parrin Accounting Officer)
/s/ KENNETH J. WESSELS*
------------------------------ Senior Executive Vice May 6, 1998
Kenneth J. Wessels President and Director
/s/ J. EVANS ATTWELL*
------------------------------ Director May 6, 1998
J. Evans Attwell
/s/ SUSAN S. BOREN*
------------------------------ Director May 6, 1998
Susan S. Boren
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[Download Table]
NAME TITLE DATE
------------------------------ -------------------------- -------------------
/s/ F. GREGORY FITZ-GERALD*
------------------------------ Director May 6, 1998
F. Gregory Fitz-Gerald
/s/ WALTER F. MONDALE*
------------------------------ Director May 6, 1998
Walter F. Mondale
/s/ C.A. RUNDELL, JR.*
------------------------------ Director May 6, 1998
C.A. Rundell, Jr.
/s/ ROBERT L. RYAN*
------------------------------ Director May 6, 1998
Robert L. Ryan
/s/ ARTHUR R. SCHULZE, JR.*
------------------------------ Director May 6, 1998
Arthur R. Schulze, Jr.
/s/ JOHN C. APPEL
------------------------------
John C. Appel
*ATTORNEY-IN-FACT
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Dates Referenced Herein and Documents Incorporated by Reference
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