SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-8186
Interra Financial Incorporated
(Exact name of registrant as specified in its charter)
DELAWARE 41-1228350
(State or other jurisdiction of (IRS Employer
incorporation of organization) Identification Number)
Dain Bosworth Plaza, 60 South Sixth Street,
Minneapolis, Minnesota 55402-4422
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (612) 371-7750
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- ---------------------
Common Stock, par value $.125 New York Stock
per share Exchange, Inc.
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
and (2) has been subject to such filing requirements for the past
90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K (Section 229.405 of this
chapter) is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K. [ X]
As of March 3, 1997, 12,239,145 shares of common stock were
outstanding, and the aggregate market value of the common shares
(based upon the closing price at March 3, 1997, on the New
York Stock Exchange ) of Intera Financial Incorporated
held by non-affiliates was approximately $319,319,097.
Documents Incorporated by Reference
Portions of the Proxy Statement of Registrant to be
filed within 120 days of December 31, 1995 are
incorporated in Part III of this report.
<PAGE>
PART I
ITEM 1. BUSINESS:
(a) General Development of Business.
Interra Financial Incorporated (the "Company" or "Interra")
is a holding company formed in 1973 and based in Minneapolis,
Minnesota. Prior to its name change in February 1997, the
Company was known as Inter-Regional Financial Group, Inc. The
Company offers regional securities broker-dealer and investment
banking services through its wholly owned subsidiaries, Dain
Bosworth Incorporated ("Dain Bosworth"), headquartered in
Minneapolis, Minnesota, and Rauscher Pierce Refsnes, Inc.
("Rauscher Pierce Refsnes"), headquartered in Dallas, Texas. The
Company's largest subsidiary, Dain Bosworth, serves the Midwest,
Rocky Mountain and Pacific Northwest regions of the United
States. At December 31, 1996, Dain Bosworth had 1,959 employees
located in 18 states. Rauscher Pierce Refsnes primarily serves
the Southwest region of the United States. At December 31, 1996,
Rauscher Pierce Refsnes had 1,008 employees located in eight
states. Each of Dain Bosworth and Rauscher Pierce Refsnes, as
well as 178 correspondent brokerage firms serviced through
Rauscher Pierce Refsnes' RPR Correspondent Services unit
("Correspondent Services"), based in St. Louis, Missouri, clears
and settles all securities trades on a fully disclosed basis
through Interra Clearing Services Inc. ("Interra Clearing"), a
third wholly owned subsidiary and registered broker-dealer based
in Minneapolis. Prior to February 1997, Interra Clearing was
known as Regional Operations Group, Inc. Interra Clearing, which
also provides technology and information services to Interra and
its subsidiaries, had 394 employees at December 31, 1996.
Interra Advisory Services Inc. ("Interra Advisory"), the
Company's wholly owned investment advisory services subsidiary,
provides product development, administration, research, marketing
and general support services relating to a variety of investment
advisory products and services offered through Dain Bosworth and
Rauscher Pierce Refsnes. These products and services principally
include externally-sponsored and managed mutual funds, insurance
and annuity products, mutual fund asset allocation programs, wrap
fee advisory programs and cash management products and services.
Through its Insight Investment Management division ("Insight
Management"), Interra Advisory serves as the investment adviser
to the Great Hall Investment Funds (three open-end money market
mutual funds) and provides fixed income portfolio management
services to a variety of private accounts. Prior to February
1997, Interra Advisory was known as IFG Asset Management
Services, Inc. The Company is a Delaware corporation with its
executive offices located at Dain Bosworth Plaza, 60 South Sixth
Street, Minneapolis, Minnesota 55402-4422. Its telephone number
is (612) 371-7750.
(b) Financial Information About Industry Segments
The Company, through its principal subsidiaries, operates in
a single segment, the securities broker-dealer and investment
banking business.
The following table lists the Company's revenues by source
for the last three years. Because these classes of services use
the same distribution personnel and facilities and the same
support services, it is impractical to identify the cost,
expenses and profitability of each class of service.
<TABLE>
INTERRA FINANCIAL INCORPORATED AND SUBSIDIARIES
REVENUES BY SOURCE
(Dollars in thousands)
<CAPTION>
Year Ended December 31,
----------------------------------------------------
1996 1995 1994
----------------------------------------------------
Percen- Percen- Percen-
Amount tage Amount tage Amount tage
----------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Commissions:
Listed securities. $87,862 12.9% $79,6341 3.1% $68,037 13.7%
Mutual funds...... 62,679 9.2 45,198 7.4 41,717 8.4
Over-the-counter
securities....... 46,845 6.8 29,507 4.9 16,033 3.2
Insurance and
annuity products. 15,399 2.2 12,703 2.1 11,241 2.3
Options........... 7,065 1.0 5,845 1.0 4,434 0.9
Commodities and
other............ 3,234 0.5 3,100 0.5 1,422 0.3
------- ----- ------- ----- ------- -----
Total............ 223,084 32.6 175,987 29.0 142,884 28.8
------- ----- ------- ----- ------- -----
Principal Transactions:
Equity securities. 89,251 13.1 87,381 14.4 68,466 13.8
Municipal
securitiess...... 29,451 4.3 33,245 5.5 26,343 5.3
Government
securities....... 20,826 3.0 27,021 4.4 17,351 3.5
Corporate fixed
income securities. 20,371 3.0 20,025 3.3 18,359 3.7
Mortgage-backed and
other securities. 9,141 1.3 11,508 1.9 8,608 1.7
------- ----- ------- ----- ------- -----
Total............ 169,040 24.7 179,180 29.5 139,127 28.0
------- ----- ------- ----- ------- -----
Investment Banking and Underwriting:
Corporate......... 67,749 9.9 44,432 7.3 44,775 9.0
Municipal......... 41,211 6.0 42,262 7.0 49,433 10.0
Other............. 2,431 .4 3,069 0.5 2,503 0.5
------- ----- ------- ----- ------- -----
Total............ 111,391 16.3 89,763 14.8 96,711 19.5
------- ----- ------- ----- ------- -----
Interest:
Customer margin
accounts......... 66,770 9.8 55,60 3 9.2 37,307 7.5
Trading inventories
and other........ 28,250 4.1 30,596 5.0 20,477 4.1
Deposits and
short-term
investments...... 15,531 2.3 23,194 3.8 17,386 3.5
------- ----- ------- ----- ------- -----
Total............ 110,551 16.2 109,393 18.0 75,170 15.1
------- ----- ------- ----- ------- -----
Asset Management:
Individual and
institutional
accounts.......... 21,697 3.2 16,521 2.7 11,349 2.3
Money market funds. 13,821 2.0 9,972 1.7 7,115 1.4
Other mutual funds. 372 0.1 595 0.1 489 0.1
------- ----- ------- ----- ------- -----
Total............ 35,890 5.3 27,088 4.5 18,953 3.8
------- ----- ------- ----- ------- -----
Correspondent
Clearing........... 15,806 2.3 12,484 2.1 11,590 2.4
Other............... 17,554 2.6 12,852 2.1 11,854 2.4
------- ----- ------- ----- ------- -----
Total revenues.....$683,316 100.0% $606,747 100.0% $496,289 100.0%
======= ===== ======= ===== ======= =====
</TABLE>
(c) Narrative Description of Business
Securities Business
General. The securities broker-dealer and investment
banking activities of the Company are conducted through Dain
Bosworth and Rauscher Pierce Refsnes. Both Dain Bosworth and
Rauscher Pierce Refsnes deal in securities of and are market-
makers for entities based throughout the United States. In
general research and investment banking activities are
concentrated on entities based in their respective regions. At
December 31, 1996 Dain Bosworth had 853 retail sales
representatives and 78 institutional sales representatives in 65
offices located in 18 states and Rauscher Pierce Refsnes had 304
retail sales representatives and 38 institutional sales
representatives in 26 offices located in six states. Both firms
are member firms of the New York Stock Exchange, Inc. ("NYSE")
and are registered in the NASDAQ system as market makers. At
December 31, 1996, Dain Bosworth was registered as a market maker
for 292 companies and Rauscher Pierce Refsnes was registered as a
market maker for 231 companies.
Dain Bosworth's and Rauscher Pierce Refsnes' 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
Bosworth and Rauscher Pierce Refsnes operate also affect
operating results.
Commission Business. As securities brokers, Dain Bosworth
and Rauscher Pierce Refsnes act as agents 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 Bosworth and Rauscher
Pierce Refsnes charge a brokerage commission when acting as agent
for the purchaser or seller of a security. If the security is
listed on an exchange, the transaction is generally effected
through Dain Bosworth's or Rauscher Pierce Refsnes' own floor
broker or a floor broker who is unaffiliated with either of them.
If the security is traded in the OTC market, transactions are
generally effected with a market maker in the security. In
addition, Dain Bosworth and Rauscher Pierce Refsnes also earn
commissions from transactions involving various other financial
products including mutual funds. Dain Bosworth's and Rauscher
Pierce Refsnes' commission business is derived primarily from
individual investors. However, commission revenues from
institutional investors have increased in recent years and both
companies are investing resources to more fully develop their
institutional businesses.
Principal Transactions. Dain Bosworth and Rauscher Pierce
Refsnes are dealers in corporate, tax-exempt and governmental
fixed income securities and corporate equity securities and
recognize profits or losses on transactions in, or fluctuations
in the value of, such securities held in inventory. While nearly
all of the Company's principal transactions are executed to
facilitate customer trades, Dain Bosworth 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 and
interest-rate option contracts in order to mitigate market risk.
These inventories require the commitment of substantial capital
and expose the companies 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 price 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
Bosworth and Rauscher Pierce Refsnes earn 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 departments coordinate the distribution
of managed and co-managed corporate equity underwritings, accept
invitations to participate in competitive or negotiated
underwritings managed by other investment banking firms, and
allocate and merchandise Dain Bosworth's and Rauscher Pierce
Refsnes' selling allotments to their branch office systems, to
institutional clients and to other broker-dealers. Both
companies are also among the leaders in their respective 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 companies to material risk since the
possibility exists that securities they have 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 Bosworth and Rauscher Pierce Refsnes
provide 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
Bosworth's and Rauscher Pierce Refsnes' 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. Interra Clearing
carries all customer balances of each of Dain Bosworth, Rauscher
Pierce Refsnes and the introducing correspondent firms serviced
by RPR Correspondent Services and allocates interest income and
expense related to customers, as well as uncollectible amounts
due from customers, back to Dain Bosworth and Rauscher Pierce
Refsnes and, through Rauscher Pierce Refsnes, to such introducing
correspondent firms. Both Dain Bosworth and Rauscher Pierce
Refsnes are 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
Bosworth or Rauscher Pierce Refsnes, through Interra Clearing,
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 Bosworth, Rauscher Pierce Refsnes and Interra Clearing,
which are generally more stringent than applicable rules and
regulations. In permitting customers to purchase on margin, Dain
Bosworth and Rauscher Pierce Refsnes, through Interra Clearing,
take the risk that a market decline could reduce the value of the
collateral securing the margin loan below the amount of the
customer's indebtedness and that the customer might be unable to
repay the indebtedness. 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.
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, Interra Clearing pays interest on
those credit balances on behalf of Dain Bosworth and Rauscher
Pierce Refsnes. Interra Clearing uses available credit balances
to lend funds to Dain Bosworth and Rauscher Pierce Refsnes
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. Both Dain Bosworth and Rauscher
Pierce Refsnes generate net interest income through Interra
Clearing 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 Bosworth, Rauscher Pierce Refsnes and Interra Clearing
are members of the Securities Investor Protection Corporation
("SIPC"), which insures customer accounts up to specified limits
in the event of liquidation. Also, all three firms maintain
additional coverage in order to protect customer accounts to
specified amounts in excess of SIPC coverage.
Security Repurchase Activities. Dain Bosworth and Rauscher
Pierce Refsnes act as principals in the purchase and sale to
their customers of securities of the United States Government and
its agencies, including repurchase agreements in such securities
and certain other money market instruments. Dain Bosworth and
Rauscher Pierce Refsnes may match purchases and sales of these
securities and are at risk to the extent that they do not
properly match the contracts or their 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 Bosworth and Rauscher
Pierce Refsnes generally take physical possession of securities
purchased under agreements to resell. Such agreements provide
Dain Bosworth and Rauscher Pierce Refsnes 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 credit-
worthiness. Dain Bosworth and Rauscher Pierce Refsnes also
periodically utilize securities sold under repurchase agreements
as a means of financing portions of their trading inventories and
facilitating hedging transactions.
Securities Lending and Borrowing Activities. Securities
brokers and dealers, including Interra Clearing, borrow
securities from and lend securities to other brokers and dealers
to facilitate short sales and clearance and delivery of
securities that have been sold by their customers when such
customers fail to deliver securities prior to settlement date.
Interra Clearing also will act as a conduit by arranging
securities lending transactions between brokers wishing to lend
securities and those wishing to borrow the same securities. 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,
Interra Clearing 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
Interra Clearing. In all securities lending transactions,
Interra Clearing 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. Interra Clearing
is also at risk to the extent that securities it borrows decline
in value and the loaning broker fails to return Interra
Clearing's cash deposit.
Research Activities. Both Dain Bosworth and Rauscher Pierce
Refsnes have research departments which provide analysis,
investment recommendations and market information with an
emphasis on companies located in their respective regions. At
December 31, 1996, Dain Bosworth had 23 securities analysts and
Rauscher Pierce Refsnes had 16. Both companies also purchase
certain research products from independent research organizations
to supplement their 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 methods, 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 Bosworth, Rauscher
Pierce Refsnes, Interra Clearing and Interra Advisory believe
they have operated in compliance with applicable rules and
regulations in all material respects.
Uniform Net Capital Rule. As broker-dealers and member
firms of the NYSE, Dain Bosworth, Rauscher Pierce Refsnes and
Interra Clearing are subject to the Uniform Net Capital Rule (the
"Rule") promulgated by the Securities and Exchange 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. Interra Clearing, which carries all of
the customer accounts of Dain Bosworth, Rauscher Pierce Refsnes
and the correspondent firms serviced through RPR Correspondent
Services, 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 a company's trading securities. Failure to maintain the
required net capital may subject a firm to suspension or
expulsion by the NYSE, the Securities and Exchange Commission and
other regulatory bodies and may ultimately require its
liquidation. Dain Bosworth and Rauscher Pierce Refsnes, which do
not carry customer accounts, must maintain minimum net capital of
$1.0 million. At all times, Dain Bosworth, Rauscher Pierce
Refsnes and Interra Clearing have maintained their net capital
above the required levels. See Note J to "Consolidated Financial
Statements."
Money Management
Interra Advisory Services Inc. (formerly known as IFG Asset
Management Services, Inc.) was restructured in January 1995 into
a new financial services organization supporting all mutual fund
and cash management products sold by Dain Bosworth and Rauscher
Pierce Refsnes. This shared service strategy was expanded in
early 1996 to include product management responsibility for all
externally managed products and services sold by Dain Bosworth
and Rauscher Pierce Refsnes. In addition Interra Advisory, a
registered investment advisor, continues to conduct the portfolio
management business of Insight Investment Management, a division
of Interra Advisory, including the provision of fixed income
portfolio management services to Great Hall Investment Funds,
Inc. ("Great Hall"), and to individual and institutional clients.
Great Hall is an open-end management investment company that
currently offers shares in three series, each of which is, in
essence, a separate money market mutual fund. Until November
1996 Interra Advisory offered five series. However, in that
month Interra Advisory sold two of its Great Hall Series, which
invest primarily in longer-term municipal securities. All three
of the remaining Great Hall Series are money market funds.
Clearing and Other Services
Interra Clearing clears and settles trades on a fully
disclosed basis for Dain Bosworth, Rauscher Pierce Refsnes and
the introducing correspondent firms clearing through them.
Correspondent Services, currently a division of Rauscher Pierce
Refsnes, is in the business of marketing correspondent clearing
services provided by Interra Clearing. As of December 31, 1996,
Interra Clearing provided clearing services to 178 introducing
correspondent firms introduced through Correspondent Services and
one correspondent firm introduced through Dain Bosworth. Interra
Clearing also provides data processing and technology services to
the Company and its subsidiaries. Correspondent firms introduced
through Correspondent Services or otherwise and cleared through
Interra Clearing are charged fees based on their use of services.
Competition
Dain Bosworth, Rauscher Pierce Refsnes and Interra Advisory
encounter intense competition in their businesses and compete
directly with numerous firms, many of which have substantially
greater capital and other resources. Such subsidiaries also
encounter competition from banks, insurance companies and
financial institutions in many elements of their businesses. For
example, with the prior approval of the Federal Reserve,
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 firm's total revenues. Legislative proposals
currently under consideration would eliminate this limit on such
activities and would permit 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. Additionally, competition among
securities firms and other competitors for successful sales
representatives, securities traders, securities analysts and
investment bankers is intense and continuous.
Dain Bosworth and Rauscher Pierce Refsnes compete 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 Bosworth and Rauscher Pierce Refsnes operate at a
price disadvantage to discount brokerage firms that do not offer
equivalent services.
Correspondent Services competes for the business of
introducing correspondent brokers on the basis of service,
product selection, reputation and price.
Interra Advisory's Insight Management division competes with
other fixed income portfolio managers principally on the basis of
portfolio performance, price and service.
Employees
At December 31, 1996, the Company had approximately 3,474
full-time employees. Of these, 1,959 were employed by Dain
Bosworth, 1,008 were employed by Rauscher Pierce Refsnes, 394
were employed by Interra Clearing and the rest were employed by
Interra Advisory or the holding company. None of the Company's
employees is represented by a collective bargaining unit.
ITEM 2. PROPERTIES:
The headquarters and administrative offices of the Company,
Dain Bosworth, Interra Advisory and Interra Clearing are
presently located in four buildings in downtown Minneapolis,
Minnesota, including the Dain Bosworth Plaza. The Company began
occupying space in the Dain Bosworth Plaza under a long-term
operating lease in January 1992. In early 1997, the Company
relocated its data processing operation to a fourth building in
downtown Minneapolis. The Company's office space in a second
building remains under a long-term lease commitment and was
renovated in 1992 to facilitate the consolidation of the
Company's clearance and settlement functions into Interra
Clearing (see "Clearing and Other Services"). Additional space
in a third building in Minneapolis was obtained in 1994 by
Interra Clearing under an operating lease to facilitate growth.
During the fourth quarter of 1996, the Company entered into a
long-term operating lease for space adjacent to the Dain Bosworth
Plaza that will be used to consolidate all Interra Clearing
operations except data processing. Interra Clearing will begin
to occupy this space in the 1997 fourth quarter. During 1994
Rauscher Pierce Refsnes entered into a long-term operating lease
for new headquarters space in Dallas, Texas which it began to
occupy during the 1995 third quarter. Both Dain Bosworth and
Rauscher Pierce Refsnes have extensive branch office systems
utilizing leased office space in various locations throughout
their regions. The Company believes that its facilities are
suitable and adequate to meet its needs and that such facilities
have sufficient productive capacity and are appropriately
utilized.
Further information about the lease obligations of the
Company is provided in Note H to the "Consolidated Financial
Statements."
ITEM 3. LEGAL PROCEEDINGS:
The Company and/or its securities subsidiaries are
defendants in various civil actions and arbitrations incidental
to their businesses involving alleged violations of federal and
state securities laws and other laws. Some of these actions,
including the actions described in more detail below, claim
substantial damages. Some of these actions have also been
brought on behalf of purported classes of plaintiffs and relate
to underwritings of securities.
Midwest Life Insurance Litigation
The Company and Dain Bosworth have been named as
defendants in ten actions brought by insurance guaranty
associations and certain individuals 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 been reimbursed for their
losses up to $100,000 per holder by the state guaranty
funds. The plaintiffs (or real parties in interest) in
these cases are certain individual policyholders and/or 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. Plaintiffs in the aggregate seek to recover in
excess of $64 million in compensatory damages, as well as
punitive damages, interest, costs, attorneys' fees and other
relief.
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 and named
Rauscher Pierce Refsnes as an additional defendant. The
court has since held, however, that there are no proper
class claims and the claims against Rauscher Pierce Refsnes
have been dismissed. The plaintiffs in this action seek
approximately $10.7 million in compensatory damages. They
initially alleged common law fraud, breach of fiduciary
duty, negligence and negligent misrepresentation, civil
conspiracy, RICO claims, breach of contract, and claims
under the Investment Advisors Act of 1940 and various state
laws. However, the RICO, breach of contract, and Investment
Advisors Act claims were dismissed by the trial court along
with the class claims in July 1995.
The other nine actions, which were brought in April and
May 1995, 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. Eight 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.) ($32.2
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) ($1.7 million)
Washington Life and Health Insurance Guaranty Ass'n v.
Inter-Regional Financial Group, Inc. and Dain Bosworth
Incorporated, (Washington Superior Court for King County)
($2.1 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 ninth such action, captioned 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
$0.5 million 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.
The Company and Dain Bosworth believe that they have
substantial and meritorious defenses available in all of the
foregoing actions and they are defending themselves
vigorously.
The Resolution Trust Corporation
Rauscher Pierce Refsnes and Robert H. Brown, Jr.,
Rauscher Pierce Refsnes' executive vice president of equity
capital markets, have been named as defendants in an action
captioned Federal Deposit Insurance Corporation, as receiver
for Western Savings & Loan Association, F.A. vs. 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. In addition to the corporate defendants and Mr.
Brown, 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.
Rauscher Pierce Refsnes understands that the Federal Deposit
Insurance Corporation, which became the plaintiff in this
action when the RTC was merged into it effective January 1,
1996, has reached settlement agreements in principle with
Smith Barney and the Express America and WESAV defendants.
The plaintiff 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. Rauscher Pierce Refsnes and Mr. Brown believe
that they have substantial and meritorious defenses
available, and they are defending themselves vigorously in
this action.
Orange County v. RPR
Rauscher Pierce Refsnes was also named in an adversary
proceeding commenced by the County of Orange ("the County"),
captioned County of Orange, a political subdivision of the
State of California v. Rauscher Pierce Refsnes, Inc., a
corporation and filed in the Chapter 9 proceeding entitled
In re County of Orange, a political subdivision of the State
of California in the United States Bankruptcy Court for the
Central District of California. The case was filed in June
1996 simultaneously with the filing of adversary proceedings
against Morgan Stanley & Co., Inc., Student Loan Marketing
Association ("Sallie Mae"), LeBouef, Lamb, Greene & MacRae,
and McGraw-Hill Companies, Inc. d/b/a Standard & Poors.
Previously, the County had filed adversary proceedings
against Merrill Lynch & Co., Inc. and KPMG Peat Marwick, and
in September 1996 the county filed an adversary proceeding
against Fuji Securities Inc. In each of these proceedings,
the County seeks at least $500 million in losses allegedly
incurred in the Orange County Investment Pool ("OCIP")
except that it seeks a lesser amount (approximately $120
million) from Fuji. All of the foregoing proceedings have
been transferred from the bankruptcy court to the United
States District Court for the Central District of California
upon the request of Rauscher Pierce Refsnes and other
defendants. The County has brought similar proceedings
against over 30 other defendants which are subject to a
stay.
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. Rauscher Pierce Refsnes, denies
these allegations, including those relating to Rauscher's
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. 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 consolidated
financial condition or results of operations of the Company as
set forth in the consolidated financial statements contained
herein.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS:
No matters were submitted to a vote of security holders
during the fourth quarter ended December 31, 1996.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following officers have been designated by the Board of
Directors of the Company as its current "executive officers" for
SEC reporting purposes. All officers are generally elected
annually at the Board meeting held in conjunction with the
Company's annual stockholders meeting and hold such offices until
the following year, subject to their earlier death, resignation
or removal.
Principal Occupation and
Business Experience
Name Age for the Past Five Years
- - - -----------------------------------------------------------------
John C. Appel........... 48 Chief Executive Officer, Dain
Bosworth, since February 1997;
President, Dain Bosworth, since
1994. Executive Vice President,
Interra, since 1990; Director,
Interra, since 1995. Executive
Vice President and Chief Financial
Officer, Dain Bosworth, 1990 to
1994. Senior Vice President,
Interra, from 1986 to 1990; Chief
Financial Officer, Interra, from
1986 to 1994. Member of Interra
Executive Committee.
Mary Alice Brophy....... 50 Senior Vice President and
Compliance Director, Interra, since
May 1996. Director of Compliance,
Dain Bosworth, since 1988.
Chairman of the Board of Governors,
National Association of Securities
Dealers, Inc., January to April
1996. Chairman of the Board, NASD
Regulation, Inc., April 1996 to
January 1997.
B. J. French............ 60 Senior Vice President, Interra,
since May 1996; Director of
Corporate and Investor
Communications, Interra, since
1991; Vice President, Interra, 1991
to May 1996. Director of Corporate
Communications and Investor
Relations, Tonka Corporation, from
1989 to 1991.
Louis C. Fornetti....... 47 Executive Vice President and Chief
Financial Officer, Interra, since
1995. Chief Executive Officer of
Interra Clearing Services Inc.
since September 1996. Treasurer,
Interra, 1995 to April 1996.
Senior Vice President and Chief
Financial Officer, American Express
Financial Advisors, Inc. (formerly
IDS), from 1993 to 1995; Senior
Vice President and Corporate
Controller, American Express
Financial Advisors, Inc., from 1988
to 1993. Member of Interra
Executive Committee.
William A. Johnstone.... 52 President and Chief Executive
Officer of Rauscher Pierce Refsnes
since June 1996. Executive Vice
President, Interra, since June
1996; Director, Interra, since June
1996. Partner, Dorsey & Whitney,
LLP, 1975 to June 1996; Member,
Dorsey & Whitney, LLP, Management
Committee from 1988 to June 1996.
Member of Interra Executive
Committee.
Sharon R. Quay.......... 62 Executive Vice President, Director
of Human Resources, Interra, since
June 1996. Executive Vice
President, Director of Education,
Everen Securities (formerly Kemper
Securities), from January 1996 to
June 1996. Vice President,
Director of Human Resources, Kemper
Corporation, 1994 to January 1996.
Senior Vice President, Director of
Human Resources, Kemper Securities
from 1990 to 1994. Senior Vice
President, Director of Human
Resources, Boettcher & Company,
1981 to 1990. Member of Interra
Executive Committee.
Senior Vice President, Interra
Daniel J. Reuss......... 41 since April 1996 and 1991 to 1995;
Corporate Controller, Interra,
since April 1996 and 1985 to 1995;
Treasurer, Interra, since April
1996 and 1989 to 1995. Executive
Vice President, Dain Bosworth,
since 1995; Chief Financial
Officer, Dain Bosworth, 1995 to
April 1996.
Carla J. Smith.......... 39 Senior Vice President, Interra,
since 1994; General Counsel and
Secretary, Interra, since 1991.
Partner, Dorsey & Whitney, from
1989 to 1990; Associate, Dorsey &
Whitney, from 1981 to 1988.
J. Scott Spiker......... 41 President and Chief Executive
Officer, Interra Advisory Services
Inc., since 1995. Executive Vice
President, Interra, since May 1996;
Senior Vice President and Director
of Strategic Planning and Corporate
Development, Interra, 1994. Senior
Vice President and Manager Employee
Benefit Services, Norwest Bank
Minnesota, N.A., from 1989 to 1994.
Vice President, Strategic Planning
and Acquisitions, Norwest
Corporation, from 1987 to 1989.
Member of Interra Executive
Committee.
Irving Weiser........... 49 Chairman of the Board, Interra,
since 1995; Chief Executive
Officer, Interra, since 1990;
President and Director, Interra,
since 1985. Chairman of the Board,
Dain Bosworth, since 1990; Chief
Executive Officer, Dain Bosworth,
1990 to February 1997. Chairman of
the Board, Rauscher Pierce Refsnes,
since 1995; Acting President and
Chief Executive Officer, Rauscher
Pierce Refsnes, 1995 to June 1996.
President, Dain Bosworth, from 1990
to 1994. Member of Interra
Executive Committee.
PART II
ITEM 5. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON
EQUITY AND RELATED STOCKHOLDER MATTERS:
(a) Market Information.
The Company's common stock trades on the NYSE under the
symbol "IFI" (prior to February 10, 1997, the Company's NYSE
trading symbol was "IFG"). The high and low sales prices per
share of the Company's common stock, with 1995 amounts adjusted
for the 3-for-2 split effected on December 20, 1995, by quarter
for the last two years were as follows:
<TABLE>
<CAPTION>
1996 1995
----------------- --------------------
QUARTER HIGH LOW HIGH LOW
----------------- --------------------
<S> <C> <C> <C> <C>
First $25-1/4 $20-1/2 $17 $14-27/32
Second 26-7/8 20-3/4 19-27/32 16-5/32
Third 33-1/2 22 24-5/32 19
Fourth 36-7/8 31-1/4 27-5/32 23
</TABLE>
(b) Holders.
At February 28, 1997, there were approximately 5,700
shareholders of the Company's common stock. The number of
shareholders was determined by adding the number of recordholders
to the estimated number of proxies to be sent to street name
holders.
(c) Dividends.
Cash dividends per common share paid by the Company, with
1995 amounts adjusted for the 3-for-2 split effected December 20,
1995, by quarter for the last two years were as follows:
<TABLE>
<CAPTION>
Quarter 1996 1995
-------------------------------
<S> <C> <C>
First $.11 $.10-2/3
Second .15 .10-2/3
Third .15 .10-2/3
Fourth .15 .10-2/3
</TABLE>
The Company declared an increased regular quarterly cash
dividend of $.18 per share in February 1997, which was paid in
March 1997. 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.
ITEM 6. SELECTED FINANCIAL DATA:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------
1996 1995 1994 1993 1992
-----------------------------------------------------
(Dollars in
thousands,
except per-
share amounts)
<S> <C> <C> <C> <C> <C>
Net revenues (A) $625,756 $541,970 $457,351 $482,960 $405,908
========= ========= ========= ========= =========
Revenues $683,316 $606,747 $496,289 $511,615 $438,261
========= ========= ========= ========= =========
Earnings before
income taxes $87,402 $56,271 $39,795 $77,353 $53,691
========= ========= ========= ========= =========
Net earnings $56,811 $35,873 $25,453 $47,649 $34,523
========= ========= ========= ========= =========
Earnings per
common and common
equivalent share:
Primary $4.46 $2.86 $2.03 $3.78 $2.68
========= ========= ========= ========= =========
Fully diluted $4.39 $2.81 $2.03 $3.75 $2.61
========= ========= ========= ========= =========
Total assets $1,827,425 $2,021,908 $1,952,611 $1,786,022 $1,270,945
========= ========= ========= ========= =========
Long-term debt $27,290 $41,410 $47,023 $22,166 $16,364
========= ========= ========= ========= =========
Shareholders'
equity $275,886 $222,494 $195,420 $177,683 $131,953
========= ========= ========= ========= =========
Other information:
Equity per
common share $22.66 $18.44 $16.20 $14.57 $10.88
Cash dividends
per common
share (B) $.56 $.42-2/3 $.37-1/3 $.18-2/3 $.08
Common shares
outstanding
at year-end,
in thousands 12,175 12,065 12,062 12,197 12,122
Pretax margin
based on net
revenues 14.0% 10.4% 8.7% 16.0% 13.2%
Net return on
average equity 22.8% 17.3% 13.5% 31.0% 28.9%
Long-term debt-
to-equity ratio 9.9% 18.6% 24.1% 12.5% 12.4%
Average number of
employees 3,379 3,285 3,133 2,806 2,591
Average number
of investment
executives 1,263 1,271 1,205 1,084 1,009
Operating office
locations at
year end 91 91 9 81 78
<FN>
(A) Net revenues equal total revenues less interest expense.
(B) 1992 dividends exclude a $.10-2/3 per share special dividend
paid in February 1992.
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS:
Business Environment
The Company's subsidiaries are primarily engaged in
securities brokerage, investment banking and trading as
principals 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 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 Years Ended December 31, 1996
Summary of Operating Results
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, benefited 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 to increase its revenues at a greater rate
than its expenses and to better concentrate its resources in its
higher-margin businesses, primarily corporate underwriting and
institutional equity sales.
During 1995 net earnings totaled $35.9 million, an increase
of $10.4 million or 41 percent over 1994. Net revenues for 1995
reached a then - Company record $542.0 million. The Company,
along with the rest of the securities industry, benefited in 1995
from the resurgence in the financial markets in the third and
fourth quarters and accompanying stabilization of interest rates
and higher securities prices. The Company also benefited in
1995 from the substantial investments in growth made during 1994,
including investments in the size and quality of Dain Bosworth's
and Rauscher Pierce Refsnes' private client sales forces and
operating office locations, as well as Dain Bosworth's
integration of its October 1994 acquisition, Chicago-based
Clayton Brown Holding Company, Inc. ("Clayton Brown"). Such 1994
growth investments positioned the Company to capitalize on
opportunities afforded by 1995's more favorable operating
environment. While the Company generated record revenues in
1995, net earnings were 25-percent less than 1993 due to the
effects of a larger expense structure and a change in business
mix from higher margin investment banking activities to lower
margin commission and principal transaction activities.
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:
<TABLE>
<CAPTION>
1996 vs. 1995 1995 vs. 1994
(Dollars in thousands) Amount Percent Amount Percent
----------------------------------------
<S> <C> <C> <C> <C>
Net Revenues:
Commissions............. $47,097 27% $33,103 23%
Principal transactions.. (10,140) (6) 40,053 29
Investment banking and
underwriting........... 21,628 24 (6,948) (7)
Net interest............ 8,375 19 8,384 23
Asset management........ 8,802 32 8,135 43
Correspondent clearing.. 3,322 27 894 8
Other................... 4,702 37 998 8
------- -- ------- --
83,786 15 84,619 19
------- -- ------- --
Expenses excluding
interest:
Compensation and
benefits............... 40,071 12 52,158 18
Communications.......... 2,677 7 3,601 10
Occupancy and
equipment rental....... 2,851 9 4,324 15
Travel and promotional.. 3,631 18 984 5
Floor brokerage and
clearing fees.......... 557 6 496 5
Other................... 2,868 8 6,580 22
------- -- ------- --
52,655 11 68,143 16
------- -- ------- --
Earnings before income
taxes.................. $31,131 55% $16,476 41%
======= == ======= ==
</TABLE>
Commissions
The $47.1 million or 27-percent increase in commission
revenues from 1995 to 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 (commissions per investment executive) improved
approximately 15 percent aided by a 19-percent rise in the New
York Stock Exchange's average daily trading volume.
Commission revenues increased $33.1 million or 23 percent
during 1995 as a result of higher sales of over-the-counter
equity securities sold on an agency basis, as well as higher
sales of listed securities, mutual funds and insurance and
annuity products to individual and institutional investors.
Contributing to the increase was a 5-percent rise in the average
number of investment executives and an 18-percent rise in the New
York Stock Exchange's average daily trading volume.
Principal Transactions
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.
Principal transaction revenues increased $40.1 million or 29
percent from 1994 to 1995 due primarily to more stable interest
rates, an improved trading environment and increased demand for
over-the-counter equity, taxable and tax-exempt fixed income
securities generated, in part, from comparatively larger sales
forces. Principal transaction revenues related to sales and
trading of over-the-counter equity, taxable fixed income and tax-
exempt fixed income securities, respectively, were 28 percent, 32
percent and 26 percent higher in 1995 than in the previous year.
Investment Banking and Underwriting
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 prior year 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.
Investment banking and underwriting revenues declined $6.9
million or 7 percent from 1994 to 1995 chiefly as a result of
lower levels of municipal underwriting activity, principally
municipal refunding transactions. A portion of this decline was
offset by increases in fee-based, financial advisory service
revenue earned from municipal, governmental and corporate
clients. Despite a significant industry-wide increase in
initial public offering transactions, underwriting revenues
earned from corporate clients were roughly equal in 1995 and
1994. Such result was due, in large part, to the 1995
reorganization of Dain Bosworth's Equity Capital Markets group,
which caused the group's initial public offering market share to
decline in 1995 relative to 1994.
Beginning in 1995 and continuing in 1996, 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:
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------
(In thousands) 1996 1995 1994
---------------------------
<S> <C> <C> <C>
Revenues:
Customer margin accounts...... $66,770 $55,603 $37,307
Trading inventories and other. 28,250 30,596 20,477
Deposits and short-term
investments.................. 15,531 23,194 17,386
------- ------- -------
110,551 109,393 75,170
Expenses:
Customer funds on deposit..... 29,067 35,922 22,125
Short-term bank loans and
other........................ 25,526 25,154 14,946
Subordinated and other
long-term debt............... 2,967 3,701 1,867
------- ------- -------
57,560 64,777 38,938
------- ------- -------
Net interest income........... $52,991 $44,616 $36,232
======= ======= =======
</TABLE>
Margin loans to customers and short-term investments
segregated for regulatory purposes, both financed primarily by
credit balances in customer accounts, comprise the majority of
the Company's interest-earning assets. Fixed income trading
inventories, which are generally financed with short-term bank
borrowings or repurchase agreements, 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.
During 1996 a larger proportion of the Company's net
interest income was earned from customer margin loans than in
previous years. Management believes that this trend will likely
continue into 1997.
Net interest income accounted for approximately 8 percent of
the Company's net revenues in 1996, 1995 and 1994. In 1996 the
19-percent increase in net interest income resulted primarily
from the 29-percent rise in average margin loan balances. The
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. See "Liquidity and Capital
Resources."
The majority of the 1995 and 1994 increases in net interest
income were due to 19-percent and 35-percent rises in margin loan
balances, respectively, which resulted largely from the 5-percent
and 11-percent increases in the average number of investment
executives. Also, a portion of the 1994 increase was the result
of increasing spreads on all customer balances.
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 1994 through 1996
are:
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------
(Dollars in thousands) 1996 1995 1994
------------------------------
<S> <C> <C> <C>
Interest revenues:
Margin loans to customers
Average balance.............. $810,693 $628,392 $526,088
Average interest rate........ 8.2% 8.8% 7.1%
-------- -------- --------
$66,770 $55,603 $37,307
======== ======== ========
Deposits and short-term
investments
Average balance.............. $293,081 $398,027 $409,648
Average interest rate........ 5.3% 5.8% 4.2%
-------- -------- --------
$15,531 $23,194 $17,386
======== ======== ========
Interest expense:
Interest-bearing customer funds
on deposit
Average balance.............. $649,443 $723,803 $679,305
Average interest rate........ 4.5% 5.0% 3.3%
-------- -------- --------
$29,067 $35,922 $22,125
======== ======== ========
</TABLE>
Asset Management
Asset management revenues increased 32 percent in 1996 from
1995 due to increased revenues from larger volumes of assets in
fee-based, managed account programs at Dain Bosworth and Rauscher
Pierce Refsnes and, to a lesser degree, a 41-percent increase in
assets under management at Interra Advisory.
In 1995 asset management revenues increased 43 percent from
1994 as a result of a 47-percent increase in assets under
management at Interra Advisory, as well as increased revenues
from larger volumes of assets in fee-based, managed account
programs at Dain Bosworth and Rauscher Pierce Refsnes.
Correspondent Clearing
Correspondent clearing revenues increased $3.3 million or 27
percent in 1996 from the previous year as Correspondent Services,
the Rauscher Pierce Refsnes unit that markets and coordinates
correspondent clearing services, benefited from increased trade
volumes associated with such correspondents. Additionally,
Correspondent Services benefited from a 5-percent increase to 178
in the number of correspondent brokerage firms for which it does
business.
Revenues from correspondent clearing rose $0.9 million or 8
percent during 1995 as Correspondent Services increased the
number of its correspondent brokerage firms from 130 to 169 and
benefited from increased trade volumes from such correspondents.
Other Revenues
Other revenues increased approximately $4.7 million or 37
percent in 1996 from 1995 principally due to increased fee
revenues from larger volumes of Individual Retirement Accounts,
cash management accounts and transactional fees charged
customers. In 1996 other revenues include approximately $1.1
million in gains associated with Interra Advisory's fourth-
quarter sale of two tax-exempt mutual funds. In 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. No
such significant gains were included in other revenues in 1994.
Compensation and Benefits
Compensation and benefits expense is generally affected by
the level of operating revenues, earnings and the number of
employees. During 1996 and 1995 compensation and benefits
expense increased 12 percent and 18 percent, respectively, from
the previous year, largely the result of increased commissions,
incentive compensation and related benefits that rose in
conjunction with operating revenues and earnings. Also
contributing to the increases were 3-percent and 5-percent
increases, respectively, in the average number of employees, as
well as general salary increases.
Other Expenses
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.
Expenses other than compensation and benefits increased
$16.0 million or 13 percent from 1994 to 1995 principally due to:
(1) increased litigation-related expenses; (2) increased
occupancy costs related to the full-year effect of a significant
number of operating office additions during the previous year,
the move of Rauscher Pierce Refsnes into a new headquarters and
the expansion of numerous operating office locations during 1995;
and (3) volume-driven increases in communications, market-data
and clearing services and increased travel costs associated with
the generation of new business.
During the first half of 1995, management took steps to
selectively reduce expenses or defer spending in light of the
market uncertainty that characterized the time period. During
the second half of 1995, expense levels increased somewhat as
management began to selectively make investments to grow certain
parts of the business, primarily Interra Advisory and the Equity
Capital Markets groups within Dain Bosworth and Rauscher Pierce
Refsnes, and to improve its infrastructure. In 1996 the Company
continued growth investments in the same areas of the business
and, at the same time, reduced the cost structure of the Dain
Bosworth and Rauscher Pierce Refsnes Fixed Income groups.
Management continues to emphasize prudent expense management
throughout the organization.
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.
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,
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, Interra
Clearing maintains uncommitted lines of credit from a number of
banks to finance transactions (principally trading and
underwriting positions of Dain Bosworth and Rauscher Pierce
Refsnes) 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 February 28, 1997, approximately $311 million of a
total of $468 million in uncommitted lines of credit were unused.
Also, the Company has a $15 million, committed, unsecured
revolving credit facility that is used for advances to its
subsidiaries, irrevocable letters of credit and general corporate
purposes. On February 28, 1997, all of this revolving credit
facility was unused. The Company expects to renew this revolving
credit facility prior to its scheduled expiration on June 30,
1997.
Dain Bosworth and Rauscher Pierce Refsnes must comply with
certain regulations of the Securities and Exchange Commission
measuring capitalization and liquidity and restricting amounts of
capital that may be transferred to affiliates. Interra Clearing
clears and settles trades for Dain Bosworth and Rauscher Pierce
Refsnes (including the accounts of Correspondent Services).
Interra Clearing carries all customer accounts, extends margin
credit to customers, pays interest on credit balances of
customers and invests any excess customer balances. As a result,
Interra Clearing is subject to similar Securities and Exchange
Commission regulations. During 1996 Dain Bosworth, Rauscher
Pierce Refsnes and Interra Clearing all operated above the
minimum net capital standards. At December 31, 1996, regulatory
net capital was $74.9 million at Interra Clearing, which was 7.5
percent of aggregate debit balances and $25.0 million in excess
of the 5-percent requirement. Dain Bosworth's and Rauscher
Pierce Refsnes' net capital requirements are $1.0 million each as
neither firm carries customer balances on its balance sheet. At
December 31, 1996, Dain Bosworth and Rauscher Pierce Refsnes had
net capital of $43.6 million and $22.6 million, respectively, in
excess of their minimum requirements.
Late in the 1996 second quarter, the Company began offering
new cash management products to certain segments of its customers
that resulted in the July through December transfer of
approximately $340 million of customer credit balances to
Company-sponsored money market mutual funds. Additionally, the
Company experienced a $146.8 million increase in customer
receivables during the third quarter due mainly to the transfer
of several large customer accounts to the Company's broker-
dealers. As a result of these developments, the Company's short-
term borrowings increased during the third and early fourth
quarters, in part to support the increase in margin debits and
the temporary reduction in customer credits as a funding source.
Dain Bosworth and Rauscher Pierce Refsnes are dealers in
corporate, tax-exempt and governmental fixed income securities.
While nearly all of the Company's principal transactions are
executed to facilitate customer trades, Dain Bosworth 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
and interest-rate option contracts in order to mitigate market
risk. Holdings of high-yield securities are not material. Each
of the Company's securities subsidiaries 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 interest-rate option
contracts. The Company may also trade treasury option contracts
for its own account to minimize interest rate risk. At December
31, 1996, the Company had open commitments under financial
futures contracts with notional amounts of $6.9 million. At
December 31, 1996, the Company owned no interest rate option
contracts. The fair market value of these option and financial
futures contracts was not material at December 31, 1996. In
addition, the average fair market value and trading revenues
associated with these contracts during 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
inventory 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 foreign currency
contracts or other derivative financial instruments with off-
balance-sheet risk.
.
In January 1996 the Company entered into a $4.6 million
operating lease agreement to finance the acquisition of state-of-
the-art technology in the form of investment executive
workstations. Minimum lease payments for the three-year term are
included under "operating leases" in Note H to the Consolidated
Financial Statements. In conjunction with this project, the
Company also purchased with cash an additional $2.8 million of
related equipment during 1996.
In November 1996 the Company entered into a $7.4 million
operating lease agreement for office space in Minneapolis,
Minnesota which will house the securities clearing and
information technology divisions of Interra Clearing beginning in
late 1997. Minimum lease payments for the nine-year term are
included under "operating leases" in Note H to the Consolidated
Financial Statements.
In April 1994 the Company's Board of Directors authorized a
plan to repurchase up to 600,000 shares of the Company's common
stock. The final 59,000 shares associated with this program were
purchased in July 1996. The total cash cost of this program was
$11.8 million. In August 1996 the Company's Board of Directors
approved a 100,000 share extension of the common stock repurchase
plan. 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 used for the Company's employee stock incentive and other
benefit plans, or for other corporate purposes. Through February
28, 1997, no shares had been repurchased pursuant to this
extension.
The Company paid a regular quarterly cash dividend of $.11
per share in the first quarter of 1996 and $.15 per share in each
of the remaining quarters of 1996. In the first quarter of 1997,
the Company declared and paid an increased regular quarterly cash
dividend 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.
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements
As of December 31, 1996 and 1995, and for each of
the years in the three-year period ended December 31, 1996
and Supplementary Data
Page
----
Independent Auditors' Report.................................22
Consolidated Financial Statements:
Consolidated statements of operations...................23
Consolidated balance sheets.............................24
Consolidated statements of shareholders' equity.........25
Consolidated statements of cash flows...................26
Notes to consolidated financial statements..............27
Quarterly Financial Information (unaudited)..................37
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
Interra Financial Incorporated:
We have audited the accompanying consolidated balance sheets
of Interra Financial Incorporated and subsidiaries (formerly
Inter-Regional Financial Group, Inc.) as of December 31, 1996 and
1995, 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, 1996. In connection with
our audits of the consolidated financial statements, we have also
audited the financial statement schedule listed in the table of
contents on page 42 hereof. These consolidated financial
statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility
is to express an opinion on these consolidated financial
statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally
accepted auditing standards. Those standards require that we
plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements
referred to above present fairly, in all material respects, the
financial position of Interra Financial Incorporated and
subsidiaries as of December 31, 1996 and 1995, and the results of
their operations and their cash flows for each of the years in
the three-year period ended December 31, 1996, in conformity with
generally accepted accounting principles. Also, in our opinion,
the related financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as
a whole, presents fairly, in all material respects, the
information set forth therein.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
February 4, 1997
<PAGE>
<TABLE>
INTERRA FINANCIAL INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per-share amounts)
<CAPTION>
Year ended December 31,
1996 1995 1994
----------------------------
<S> <C> <C> <C>
Revenues:
Commissions................... $223,084 $175,987 $142,884
Principal transactions........ 169,040 179,180 139,127
Investment banking and
underwriting................. 111,391 89,763 96,711
Interest...................... 110,551 109,393 75,170
Asset management.............. 35,890 27,088 18,953
Correspondent clearing........ 15,806 12,484 11,590
Other......................... 17,554 12,852 11,854
------- ------- -------
Total revenues................ 683,316 606,747 496,289
------- ------- -------
Interest expense.............. (57,560) (64,777) (38,938)
------- ------- -------
Net revenues.................. 625,756 541,970 457,351
------- ------- -------
Expenses excluding interest:
Compensation and benefits..... 385,905 345,834 293,676
Communications................ 43,301 40,624 37,023
Occupancy and equipment rental 35,870 33,019 28,695
Travel and promotional........ 24,296 20,665 19,681
Floor brokerage and clearing
fees......................... 10,271 9,714 9,218
Other......................... 38,711 35,843 29,263
------- ------- -------
Total expenses excluding
interest..................... 538,354 485,699 417,556
------- ------- -------
Earnings:
Earnings before income taxes.. 87,402 56,271 39,795
Income tax expense............ (30,591) (20,398) (14,342)
------- ------- -------
Net earnings ................. $56,811 $35,873 $25,453
======= ======= =======
Earnings per common and common
equivalent share:
Primary....................... $4.46 $2.86 $2.03
======= ======= =======
Fully diluted................. $4.39 $2.81 $2.03
======= ======= =======
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
INTERRA FINANCIAL INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<CAPTION>
December 31,
-----------------------------
1996 1995
-----------------------------
<S> <C> <C>
Assets:
Cash and cash equivalents............... $34,387 $26,167
Cash and short-term investments
segregated for regulatory purposes..... 15,000 411,000
Receivable from customers............... 1,035,847 763,793
Receivable from brokers and dealers..... 202,040 257,717
Securities purchased under agreements
to resell 81,631 80,233
Trading securities owned................ 288,824 322,892
Equipment, leasehold improvements and
buildings, net......................... 32,946 31,108
Other receivables....................... 75,685 80,838
Deferred income taxes................... 39,704 31,993
Other assets............................ 21,361 16,167
--------- ---------
$1,827,425 $2,021,908
========= =========
Liabilities and Shareholders' Equity:
Liabilities:
Short-term borrowings................... $25,000 $97,000
Drafts payable.......................... 69,989 50,431
Payable to customers.................... 869,641 982,098
Payable to brokers and dealers.......... 229,852 254,542
Securities sold under repurchase
agreements............................. 57,967 120,808
Trading securities sold, but not
yet purchased.......................... 58,805 61,050
Accrued compensation.................... 119,244 95,988
Other accrued expenses and accounts
payable................................ 77,366 84,973
Accrued income taxes.................... 16,385 11,114
Subordinated and other debt............. 27,290 41,410
--------- ---------
1,551,539 1,799,414
--------- ---------
Shareholders' equity:
Common stock (issued and outstanding,
12,174,968 and 12,064,969 shares,
respectively).......................... 1,522 1,508
Additional paid-in capital.............. 81,316 76,623
Retained earnings....................... 193,048 144,363
--------- ---------
275,886 222,494
--------- ---------
$1,827,425 $2,021,908
========= =========
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
INTERRA FINANCIAL INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands, except per-share amounts)
<CAPTION>
Addi-
tional Share-
Common Stock Paid-In Retained holders'
--------------
Shares Amount Capital Earnings Equity
-----------------------------------------
<S> <C> <C> <C> <C> <C>
Balances at December 31,
1993........................ 12,197 $1,525 $72,989 $103,169 $177,683
------ ----- ------ ------- -------
Net earnings................. - - - 25,453 25,453
Repurchase of common stock... (244) (30) - (3,608) (3,638)
Common stock issued upon
exercise of stock options... 109 13 445 - 458
Cash dividends on common
stock ($.37-1/3 per share).. - - - (4,536) (4,536)
------ ----- ------ ------- -------
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...................... 20 2 53 - 55
Stock credited to deferred
compensation plan
participants................ - - 859 - 859
Cash dividends on common
stock ($.42-2/3 per share).. - - - (5,177) (5,177)
------ ----- ------ ------- -------
Balances at December 31,
1995........................ 12,065 1,508 76,623 144,363 222,494
------ ----- ------ ------- -------
Net earnings................. - - - 56,811 56,811
Repurchase of common stock... (59) (7) - (1,334) (1,341)
Common stock issued upon
exercise of stock options... 136 17 1,217 - 1,234
Restricted common stock
issued...................... 33 4 342 - 346
Stock credited to deferred
compensation plan
participants................ - - 3,134 - 3,134
Cash dividends on common
stock ($.56 per share)...... - - - (6,792) (6,792)
------ ----- ------ ------- -------
Balances at December 31,
1996........................ 12,175 $1,522 $81,316 $193,048 $275,886
====== ===== ====== ======= =======
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
INTERRA FINANCIAL INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<CAPTION>
Year ended December 31,
---------------------------------
1996 1995 1994
---------------------------------
<S> <C> <C> <C>
Cash flows from operating
activities:
Net earnings.................. $56,811 $35,873 $25,453
Adjustments to reconcile net
earnings to cash provided by
operating activities, net of
effect of 1994 acquisition:
Depreciation and amortization. 9,563 8,973 8,415
Deferred income taxes......... (7,711) (2,992) (5,302)
Other non-cash items.......... 8,626 10,486 11,388
Cash and short-term investments
segregated for regulatory
purposes..................... 396,000 (73,000) 244,005
Securities purchased under
agreements to resell......... (1,398) 118,328 (25,737)
Net trading securities owned
and trading securities sold,
but not yet purchased........ 31,823 (59,503) 16,021
Other receivables............. 5,153 (2,051) (38,032)
Drafts payable and short-term
borrowings of securities
companies.................... (52,442) (22,783) (13,147)
Net receivable from/payable
to customers................. (384,511) 60,411 (174,425)
Net receivable from/payable
to brokers and dealers....... 30,987 (8,617) (99,114)
Securities sold under
repurchase agreements........ (62,841) (53,164) 89,994
Accrued compensation.......... 23,256 27,233 (14,884)
Other......................... (9,809) 3,412 (12,582)
------- ------- -------
Cash provided by operating
activities.................... 43,507 42,606 12,053
------- ------- -------
Cash flows from financing
activities:
Proceeds from:
Issuance of common stock...... 1,580 2,368 458
Subordinated and other debt... - - 27,237
Revolving credit agreement,
net.......................... - - 15,000
Payments for:
Subordinated and other debt... (14,120) (5,613) (2,380)
Dividends on common stock..... (6,792) (5,177) (4,536)
Purchase of common stock...... (1,341) (6,849) (3,638)
Revolving credit agreement,
net.......................... - (15,000) -
------- ------- -------
Cash provided (used) by
financing activities.......... (20,673) (30,271) 32,141
------- ------- -------
Cash flows from investing
activities:
Proceeds from investment
dividends and sales.......... 1,227 1,826 934
Payments for:
Equipment, leasehold
improvements and other....... (15,841) (10,758) (13,044)
Acquisition, net of cash
acquired - - (23,367)
------- ------- -------
Cash (used) by investing
activities.................... (14,614) (8,932) (35,477)
------- ------- -------
Increase in cash and cash
equivalents................... 8,220 3,403 8,717
Cash and cash equivalents:
At beginning of year......... 26,167 22,764 14,047
------- ------- -------
At end of year................. $34,387 $26,167 $22,764
======= ======= =======
<FN>
Cash income tax payments totaled $32,841,000 in 1996, $18,884,000
in 1995 and $19,916,000 in 1994. Cash interest payments totaled
$56,901,000, $64,592,000, and $37,959,000 in 1996, 1995, and
1994, respectively.
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1996, 1995 and 1994
Interra Financial Incorporated and Subsidiaries
A. Summary of Significant Accounting Policies
Nature of Business: Interra Financial Incorporated (the
"Company") is a holding company formed in 1973 and is based in
Minneapolis, Minnesota. Until February 1997 the Company was
known as Inter-Regional Financial Group, Inc. Through its wholly
owned subsidiaries, Dain Bosworth Incorporated, headquartered in
Minneapolis, Minnesota, and Rauscher Pierce Refsnes, Inc.,
headquartered in Dallas, Texas, the Company offers regional
securities broker-dealer and investment banking services to
individual, institutional, corporate and governmental clients
predominantly in the western half of the United States. The
Company is also parent to Interra Clearing Services Inc., which
provides brokerage operations and technology services to the
Company's broker-dealers and correspondent firms, and Interra
Advisory Services Inc., whose business is to develop services to
support the sale of non-affiliated mutual funds and cash
management and packaged products and which, through its Insight
Investment Management division, manages the Great Hall money
market funds and institutional fixed income accounts.
Basis of Presentation: The consolidated financial statements
include the Company and its subsidiaries, all of which are wholly
owned. 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 1996 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. Market value is determined by
using public market quotations, quote 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.
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.
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 life of
the lease. Buildings are depreciated using the straight-line
method over an estimated useful life of 25 years.
Income Taxes: The Company accounts for income taxes in
accordance with Statement of Financial Accounting Standards 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, 1996.
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, however, applies the disclosure provisions of
Statement of Financial Accounting Standards No. 123 (SFAS 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 Statement No. 125 (SFAS 125),
"Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities." The Company intends to adopt the applicable
portions of SFAS 125 when required in 1997 or 1998, respectively,
and does not expect SFAS 125 to have a material affect on the
Company's consolidated financial statements.
Earnings Per Share: Primary earnings per share are based upon
the weighted average number of common shares outstanding and the
dilutive effect of common stock options in 1996, 1995 and 1994
and shares credited to deferred compensation plan participants in
1996. The weighted average number of shares used in the primary
and fully diluted computations, respectively, are: 1996 -
12,751,922 and 12,945,841; 1995 - 12,546,290 and 12,744,593; and
1994 - 12,541,626 and 12,541,626.
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.
B. 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.
Included in payable to customers are customer funds on deposit
for reinvestment totaling $623 million and $706 million as of
December 31, 1996 and 1995, respectively. The Company pays
interest on such funds at varying rates, the weighted average of
which was 4.5 percent at December 31, 1996.
C. Receivable from and Payable to Brokers and Dealers
<TABLE>
<CAPTION>
December 31,
------------------
(In thousands) 1996 1995
------------------
<S> <C> <C>
Receivable from brokers and dealers:
Deposits for securities borrowed......... $158,246 $226,062
Securities failed to deliver............. 35,570 24,833
Clearing organizations, correspondent
brokers and other....................... 8,224 6,822
------- -------
$202,040 $257,717
======= =======
Payable to brokers and dealers:
Deposits for securities loaned........... $178,900 $223,685
Securities failed to receive............. 34,384 25,293
Clearing organizations, correspondent
brokers and other 16,568 5,564
------- -------
$229,852 $254,542
======= =======
</TABLE>
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.
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.
D. Trading Securities
The market values of trading security positions are summarized as
follows:
<TABLE>
<CAPTION>
December 31,
------------------
(In thousands) 1996 1995
------------------
<S> <C> <C>
Owned:
Government securities....................... $154,801 $185,268
Municipal securities........................ 67,474 76,209
Corporate fixed income and other securities 53,597 50,298
Equity securities........................... 12,952 11,117
------- -------
$288,824 $322,892
======= =======
Sold, but not yet purchased:
Government and municipal securities......... $52,328 $56,166
Corporate and other securities.............. 6,477 4,884
------- -------
$58,805 $61,050
======= =======
</TABLE>
E. Short-Term Borrowings
Short-term borrowings at December 31, 1996 and 1995, consist of
$25.0 million and $97.0 million, respectively, in bank loans to
the securities subsidiaries 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 (7.6 percent as of December 31, 1996). The
market value of trading securities pledged as collateral at
December 31, 1996 was $29.9 million. At December 31, 1996,
approximately $443 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 $15 million
which expires June 30, 1997. Loans under this facility are
unsecured and bear interest at a floating rate of Federal Funds
plus 1.125 percent. No amounts were outstanding under this
facility at December 31, 1996 or 1995. The Company must maintain
certain levels of net worth under the agreement.
F. Subordinated and Other Debt
<TABLE>
<CAPTION>
December 31,
-------------------
(In thousands) 1996 1995
-------------------
<S> <C> <C>
Subordinated debt of securities
subsidiaries............................. $20,667 $32,333
Other debt:
Capital lease obligations (Note H)...... 5,794 6,174
Other................................... 829 2,903
------ ------
$27,290 $41,410
====== ======
</TABLE>
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, 1996, the
weighted average interest rate on all of the Company's
subordinated debt was 8.3 percent.
Other debt is used primarily to finance equipment and building
improvements, is payable in monthly or quarterly installments and
bears interest at floating rates which approximated 6.9 percent
at December 31, 1996. The Company must maintain certain levels
of net worth under one of the debt agreements.
Annual principal payments on subordinated bank loans and other
debt (excluding obligations under capital leases) during the next
five years are as follows: 1997-$12,497,000; 1998-$8,999,000;
1999 and thereafter - $0.
G. 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 under
a program that was initiated in 1994. Under this program the
Company repurchased 59,000, 297,000 and 244,000 shares in 1996,
1995 and 1994, respectively, at a total cost of $11.8 million.
In August 1996 the Company's Board of Directors authorized an
additional program to repurchase up to 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 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.
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, 1996, 2,967,000 shares of the Company's common
stock were reserved for issuance under the 1996 Stock Incentive
Plan, 2,084,000 shares were reserved for issuance under the 1986
Stock Option Plan and 159,000 shares were reserved for issuance
to the Company's stock bonus plan (which was merged, along with
the Company's profit sharing plan, into a single plan on January
1, 1997).
Stock Compensation Plans: The Company maintains two fixed
stock compensation plans, the 1986 Stock Option Plan and the 1996
Stock Incentive 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, 1996, 2,869,369 shares of common stock were available for
grant under the 1996 Plan.
The Company applies APB 25 and related Interpretations in
accounting for its stock option 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
grant date for 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:
<TABLE>
<CAPTION>
(In thousands, except per-share amounts) 1996 1995
------------------
<S> <C> <C>
Net earnings:
As reported........................... $56,811 $35,873
Pro forma............................. 56,392 35,681
Earnings per share:
Primary:
As reported........................... $4.46 $2.86
Pro forma............................. 4.42 2.84
Fully diluted:
As reported........................... 4.39 2.81
Pro forma............................. 4.36 2.80
</TABLE>
The weighted average per-share fair value of options granted
during 1996 and 1995, based on the following assumptions, was
$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 1996 and 1995, respectively:
dividend yields of 2.3 percent and 2.7 percent; expected
volatility of 30.2 percent for both years; risk-free interest
rates of 5.0 percent and 5.9 percent; and expected lives of five
years for both years. Pro forma amounts may not be indicative of
future results.
The following table summarizes the activity related to the
Company's stock option plans for each of the last three years:
<TABLE>
<CAPTION>
1996 1995 1994
---------------- ---------------- ----------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ -------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Options
outstanding
at beginning
of year........ 1,243,987 $14.7 11,303,500 $13.11 1,040,250 $9.36
Granted........ 260,600 24.86 357,900 16.38 402,000 20.44
Exercised...... (140,492) 9.66 (298,493) 8.73 (109,425) 5.18
Canceled....... (60,050) 17.86 (118,920) 17.19 (29,325) 10.03
--------- ----- --------- ----- --------- -----
Options
outstanding
at end of
year.......... 1,304,045 $17.14 1,243,987 $14.71 1,303,500 $13.11
========= ===== ========= ===== ========= =====
Options
exercisable
at end of
year.......... 405,980 268,837 301,410
========= ========= =========
Price range
of outstanding
options....... $4.58-$33.38 $4.58-$20.83 $4.33-$20.83
Price range
of exercised
options...... $4.58-$20.83 $4.33-$20.83 $4.58-$11.75
</TABLE>
The following table summarizes currently outstanding and
exercisable options at December 31, 1996:
<TABLE>
<CAPTION>
Options Outstanding Options Exerciseable
------------------- --------------------
Weighted
Average
Remaining Weighted Weighted
Range of Number Contrac- Average Number Average
Exercise Outstanding tual Exercise Exercisable Exercise
Prices at 12/31/96 Life Price at 12/31/96 Price
- - - ------------- ----------- --------- -------- ----------- --------
<C> <C> <C> <C> <C> <C>
$4.58-$4.67 105,850 3.5 years $4.63 105,850 $4.63
$10.00-$15.83 585,925 6.7 14.18 210,100 12.79
$16.83-$22.38 526,770 7.7 20.86 90,030 20.01
$25.25-$33.38 85,500 7.0 30.03 0 0
--------- ----- ------- -----
1,304,045 $17.14 405,980 $12.26
========= ===== ======= =====
</TABLE>
The Company's closing stock price on December 31, 1996 was $35.25.
The Company issued 33,131 and 19,743 shares of common stock to
key employees and outside directors in 1996 and 1995,
respectively, which were restricted in that such shares were
subject to certain vesting provisions. The restricted shares
awarded had weighted average per share fair values at grant date
of $25.07 and $20.18 in 1996 and 1995, respectively, and resulted
in compensation expense of $355,000 and $20,000 being recorded in
the consolidated financial statements in 1996 and 1995,
respectively.
H. 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, 1996,
are as follows:
<TABLE>
<CAPTION>
Capital Operating
(In thousands) leases leases
------- ---------
<S> <C> <C>
1997....................................... $1,336 $18,493
1998....................................... 1,076 14,848
1999....................................... 940 11,822
2000....................................... 940 8,873
2001....................................... 940 6,897
Thereafter................................. 5,953 37,570
------ ------
Total minimum lease payments............... 11,185 $98,503
Less amount representing interest.......... (5,391)
------
Present value of minimum lease payments.... $5,794
======
</TABLE>
Rental expense for operating leases was $25,558,000,
$25,771,000 and $22,414,000, for the years ended December 31,
1996, 1995 and 1994, respectively. Included in net equipment,
leasehold improvements and buildings at December 31, 1996 and
1995, is $3,837,000 and $4,483,000, respectively, for leases
which have been capitalized.
Litigation: The Company and/or its securities subsidiaries are
defendants in various civil actions and arbitrations incidental
to their businesses involving alleged violations of federal and
state securities laws and other laws. Some of these actions,
including the actions described in more detail below, claim
substantial damages. Some of these actions have also been
brought on behalf of purported classes of plaintiffs and relate
to underwritings of securities.
The Company and Dain Bosworth have been named as defendants in
ten actions brought by insurance guaranty associations and
certain individuals in connection with losses suffered under
single premium deferred annuities issued by The Midwest Life
Insurance Company ("MWL") and sold primarily through the private
client sales force of Dain Bosworth. MWL was a subsidiary that
the Company acquired in 1980 and sold in 1986. MWL was sold twice
more thereafter, relocated to Louisiana and ultimately declared
insolvent and placed in liquidation by the State of Louisiana in
August 1991. Generally, MWL policyholders have been reimbursed
for their losses up to $100,000 per holder by the state guaranty
funds which claim to have succeeded to the rights of the
policyholders they reimbursed. Plaintiffs allege common law
fraud, breach of fiduciary duty, negligence and negligent
misrepresentation, civil conspiracy and various state law
violations and seek in the aggregate in excess of $64 million in
compensatory damages, as well as punitive damages, interest,
costs, attorney's fees and other relief. The Company and 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 have been named
as defendants in an action brought by the Federal Deposit
Insurance Corporation ("FDIC"), as successor to The Resolution
Trust Corporation (the "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; however, the Company understands such defendants
reached settlements in principle with the FDIC in late February
1997. The plaintiff seeks alleged damages of approximately $15
million and punitive damages of $60 million. 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.
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.
I. Trading Activities and Financial Instruments with Off-Balance-
Sheet Risk
Dain Bosworth and Rauscher Pierce Refsnes are dealers 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
positioned primarily for distribution to Dain Bosworth's and
Rauscher Pierce Refsnes' individual and institutional clients in
order to meet those clients' needs. Revenues from principal
transactions for the two years ended December 31, 1996, originate
from the following:
<TABLE>
<CAPTION>
December 31,
------------------
(In thousands) 1996 1995
------------------
<S> <C> <C>
Equity securities.......................... $89,251 $87,381
Municipal securities....................... 29,451 33,245
Government securities...................... 20,826 27,021
Corporate fixed income securities.......... 20,371 20,025
Mortgage-backed and other securities....... 9,141 11,508
------- -------
$169,040 $179,180
======= =======
</TABLE>
Dain Bosworth and Rauscher Pierce Refsnes sell securities not
yet purchased (short sales) for their own accounts primarily to
hedge their fixed income trading inventories. 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 interest-rate option
contracts. The Company may also trade treasury option contracts
for its own account to minimize interest rate risk. At December
31, 1996 and 1995, respectively, the Company had open commitments
under financial futures contracts with notional amounts of $6.9
million and $3.0 million. At December 31, 1995, the Company had
open commitments to purchase $27.5 million and sell $25.0 million
of treasury securities under option contracts. The Company had
no such open option contracts at December 31, 1996 and owned no
interest rate option contracts at December 31, 1996 or 1995. The
fair market value of these option and financial futures contracts
was not material at December 31, 1996 or 1995. In addition, the
average fair market value and trading revenues associated with
these contracts during 1996 and 1995 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
inventory 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 foreign currency
contracts or other derivative financial instruments with off-
balance-sheet risk.
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 securities subsidiaries
enter 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.
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, 1996, the market value of such
securities pledged approximated the borrowings outstanding.
J. Regulatory Requirements
Dain Bosworth and Rauscher Pierce Refsnes are subject to the
Securities and Exchange Commission's Uniform Net Capital Rule.
Interra Clearing, the Company's operations subsidiary, clears and
settles trades for Dain Bosworth and Rauscher Pierce Refsnes
(including the customers of Correspondent Services). Interra
Clearing carries all customer accounts, extends margin credit to
customers, pays interest on credit balances of customers and
invests any excess customer balances. As a result Interra
Clearing is 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, 1996, net capital was $74.9 million at Interra
Clearing, which was 7.5 percent of aggregate debit balances and
$25.0 million in excess of the 5-percent requirement. Dain
Bosworth's and Rauscher Pierce Refsnes' net capital requirements
are $1.0 million each as neither firm carries customer balances
on its balance sheet. At December 31, 1996, Dain Bosworth and
Rauscher Pierce Refsnes had net capital of $43.6 million and
$22.6 million, respectively, in excess of their minimum
requirements.
Rule 15c3-3 of the Securities Exchange Act of 1934 specifies
certain conditions under which brokers and dealers carrying
customer accounts are 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
accordance with a formula defined in the Rule. At December 31,
1996, Interra Clearing had $15.0 million segregated in special
reserve accounts. This amount consisted of qualified securities
purchased under agreements to resell and was collateralized by
U.S. government or government agency securities.
K. Employee Benefit Plans
Until December 31, 1996, the Company and its participating
subsidiaries had profit sharing and stock bonus plans which
covered substantially all full-time employees who were at least
21 years of age and had been employed for at least six months.
Participants could contribute on a pretax basis up to 12 percent
of eligible compensation to the stock bonus plan and/or the
profit sharing plan subject to certain aggregate limitations; the
Company then matched up to 5 percent of eligible compensation at
a 40-percent rate. Matching contributions were limited to $3,000
per employee annually and were paid to the stock bonus plan. At
the end of each calendar year, a contribution to the profit
sharing plan is determined by each participating company's board
of directors. The minimum contribution is 3 percent of eligible
compensation. On January 1, 1997, the Company combined the
Profit Sharing and Stock Bonus Plans into a single plan.
The Company's policy is to fund currently profit sharing and
stock bonus plan costs. Earnings have been charged for
contributions, net of forfeitures, to the above plans as follows:
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------
(In thousands) 1996 1995 1994
--------------------------
<S> <C> <C> <C>
Profit sharing plan............... $15,993 $14,168 $11,489
Stock bonus plan.................. 2,908 2,712 2,763
------ ------ ------
$18,901 $16,880 $14,252
====== ====== ======
</TABLE>
L. Income Taxes
Income tax expense consists of the following:
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------
(In thousands) 1996 1995 1994
--------------------------
<S> <C> <C> <C>
Current:
Federal........................ $33,693 $20,183 $16,526
State.......................... 4,609 3,207 3,118
Deferred:
Federal........................ (6,783) (2,410) (4,287)
State.......................... (928) (582) (1,015)
------ ------ ------
$30,591 $20,398 $14,342
====== ====== ======
</TABLE>
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:
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------
(Dollars in thousands) 1996 1995 1994
--------------------------
<S> <C> <C> <C>
Ordinary federal income tax
expense.......................... $30,571 $19,695 $13,928
State income taxes, net of
federal tax benefit.............. 2,504 1,599 1,367
Tax-exempt interest, net of
related interest expense......... (872) (1,324) (863)
Other............................. (1,612) 428 (90)
------ ------ ------
$30,591 $20,398 $14,342
====== ====== ======
Effective tax rate................ 35.0% 36.3% 36.0%
====== ====== ======
</TABLE>
The tax effects of temporary differences that give rise to the
deferred tax assets and deferred tax liabilities are:
<TABLE>
<CAPTION>
December 31,
-------------------
(In thousands) 1996 1995
-------------------
<S> <C> <C>
Deferred tax assets:
Accruals not currently deductible........ $36,025 $27,473
Tax attributes acquired.................. 1,632 2,443
Fixed assets............................. 1,573 1,516
Other.................................... 514 575
------ ------
39,744 32,007
------ ------
Deferred tax liabilities:
Other.................................... (40) (14)
------ ------
$39,704 $31,993
====== ======
</TABLE>
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,
and 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 $185 million in the carryback period, substantial state
taxable income in the carryback period, as well as prospects for
continued earnings.
<TABLE>
INTERRA FINANCIAL INCORPORATED
QUARTERLY FINANCIAL INFORMATION
(Unaudited, in thousands, except per-share amounts)
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
--------------------------------------
<S> <C> <C> <C> <C>
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:
Primary net earnings
per share............ $1.20 $1.03 $1.02 $1.21
======= ======= ======= =======
Fully diluted net
earnings per share... $1.20 $1.03 $1.01 $1.21
======= ======= ======= =======
Dividends............ $.11 $.15 $.15 $.15
======= ======= ======= =======
1995
Net revenues.......... $118,841 $130,373 $143,106 $149,650
======= ======= ======= =======
Earnings before
income taxes......... $8,726 $13,547 $16,966 $17,032
======= ======= ======= =======
Net earnings.......... $5,563 $8,636 $10,816 $10,858
======= ======= ======= =======
Per share data:
Primary net earnings
per share............ $.45 $.69 $.86 $.86
======= ======= ======= =======
Fully diluted net
earnings per share... $.45 $.69 $.85 $.86
======= ======= ======= =======
Dividends............. $.10-2/3 $.10-2/3 $.10-2/3 $.10-2/3
======= ======= ======= =======
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE:
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT:
See Part I, Item 4 of this Annual Report for information
with respect to executive officers of the Company. Other
information required in Item 10 will be contained in the
Company's definitive Proxy Statement to be filed pursuant to
Regulation 14A within 120 days after the close of the fiscal year
for which this Report is filed and is incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION:
The information required in Item 11 will be contained in the
Company's definitive Proxy Statement to be filed pursuant to
Regulation 14A within 120 days after the close of the fiscal year
for which this Report is filed and is incorporated herein by
reference, except that, pursuant to Item 402(a)(8) of Regulation
S-K, the information to be contained in the Company's definitive
Proxy Statement in response to paragraphs (k) and (l) of Item 402
is not incorporated by reference herein.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT:
The information required in Item 12 will be contained in the
Company's definitive Proxy Statement to be filed pursuant to
Regulation 14A within 120 days after the close of the fiscal year
for which this Report is filed and is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS:
The information required in Item 13 will be contained in the
Company's definitive Proxy Statement to be filed pursuant to
Regulation 14A within 120 days after the close of the fiscal year
for which this Report is filed and is incorporated herein by
reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON
FORM 8-K:
(a) Documents filed as part of this Report:
Page
----
1. Financial statements:
Reference is made to the table of contents to
financial statements and financial statement
schedule hereinafter contained....................... 42
2. Financial statement schedules:
Reference is made to the table of contents to
financial statements and financial statement
schedule hereinafter contained for all other
financial statement schedules........................ 42
3. Exhibits:
Item No. Item Method of Filing
- - - ----------------------------------------------------------------------
3.1 Restated Certificate of Incorporated by reference to
Incorporation of the Company. Exhibit 4.1 to the Company's
Registration Statement on Form
S-8 dated March 14, 1995, File
No. 33-58069.
3.2 Amended and Restated Bylaws Incorporated by reference to
of the Company. Exhibit 3.1 to the Company's
Quarterly Report on Form 10-Q
dated September 30, 1996.
4.1 Credit Agreement dated June Incorporated by reference to
29, 1995. Exhibit 4.1 to the Company's
Quarterly Report on Form 10-Q
dated June 30, 1995.
4.2 First Amendment to Credit Incorporated by reference to
Agreement dated March 14, Exhibit 4.2 to the Company's
1996. Annual Report on Form 10-K for
the year ended December 31,
1995.
4.3 Term Loan Agreement dated Incorporated by reference to
October 16, 1992. Exhibit 4(e) to the Company's
Annual Report on Form 10-K for
the year ended December 31,
1992.
4.4 First Amendment to Term Incorporated by reference to
Loan Agreement dated March Exhibit 4(g) to the Company's
12, 1993. Annual Report on Form 10-K for
the year ended December 31,
1992.
4.5 Second Amendment to Term Incorporated by reference to
Loan Agreement dated June Exhibit 4(b) to the Company's
23, 1993. Current Report on Form 8-K
dated July 15, 1993.
4.6 Third Amendment to Term Incorporated by reference to
Loan Agreement dated Exhibit 4(b) to the Company's
November 30, 1993. Current Report on Form 8-K
dated February 11, 1994.
4.7 Fourth Amendment to Term Incorporated by reference to
Loan Agreement dated June Exhibit 4 (b) to the Company's
27, 1994. Quarterly Report on Form 10-Q
dated June 30, 1994.
4.8 Fifth Amendment to Term- Incorporated by reference to
Loan Agreement dated Exhibit 4 (b) to the Company's
September 30, 1994. Current Report on Form 8-K
dated September 26, 1994.
4.9 Sixth Amendment to Term- Incorporated by reference to
Loan Agreement dated June Exhibit 4 (b) to the Company's
29, 1995. Quarterly Report on form 10-Q
dated June 30, 1995.
4.10 Seventh Amendment to Incorporated by reference to
Term-Loan Agreement dated Exhibit 4.10 to the Company's
March 15, 1996. Annual Report on Form 10-K for
the year ended December 31,
1995.
10.1* 1986 Stock Option Plan, Incorporated by reference to
as amended on April 24, Exhibit 10(b) to the Company's
1987, May 9, 1990, March Current Report on Form 8-K
3, 1993 and April 27, 1993. dated July 15, 1993.
10.2 Form of Indemnity Incorporated by reference to
Agreement with Directors Exhibit 10(c) to the Company's
and Officers of the Annual Report on Form 10-K for
Company. the year ended December 31,
1990.
10.3* Form of Non-Employee Incorporated by reference to
Director Retirement Exhibit 10(g) to the Company's
Compensation Agreement. Annual Report on Form 10-K for
the year ended December 31,
1992.
10.4* IFG Executive Deferred Incorporated by reference to
Compensation Plan dated Exhibit 10(a) to the Company's
March 31, 1993. Current Report on Form 8-K
dated July 15, 1993.
10.5 Trust Agreement for IFG Incorporated by reference to
Executive Deferred Exhibit 10.5 to the Company's
Compensation Plan dated Annual Report on Form 10-K
February 11, 1994. dated December 31, 1994.
10.6* Offer of Employment and Incorporated by reference to
Restricted Stock Agreements Exhibit 10.7 to the Company's
between the Company and Annual Report on Form 10-K for
Louis C. Fornetti dated the year ended December 31,
July 14, 1995, and July 17, 1995.
1995, respectively.
10.7* 1996 Stock Incentive Plan Incorporated by reference to
Exhibit 10 to the Company's
Quarterly Report on Form 10-Q
dated March 31, 1996.
10.8* Agreement between the Incorporated by reference to
Company and David A. Smith Exhibit 10.1 to the Company's
dated September 26, 1995. Quarterly Report on Form 10-Q
dated September 30, 1995.
11* Computation of net earnings Filed herewith.
per share.
21 List of subsidiaries. Filed herewith.
23 Independent Auditors' Filed herewith.
consent.
24 Power of attorney. Filed herewith
27 Financial Data Schedule Filed herewith.
* Management contract or compensatory plan or arrangement required to
be filed as an exhibit pursuant to Item 14(c) of this report.
(b) No reports on Form 8-K were filed during the fourth quarter of
1996.
REPORT FOR EMPLOYEE STOCK PURCHASE PLAN:
The financial statements required by Form 11-K with respect to
the Company's Retirement Plan will be filed by amendment hereto within
180 days of such plan's fiscal year end as permitted by Rule 15d-21.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this
Report to be signed on its behalf by the undersigned thereunto duly
authorized.
INTERRA FINANCIAL INCORPORATED
By Louis C. Fornetti
--------------------------
Louis C. Fornetti
Executive Vice President and
Chief Financial Officer
Dated: March 21, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf
of the Registrant in the capacities and on the dates indicated:
Signature Title
- - - ---------------------------------------------------------------------
Irving Weiser Chairman of the Board, President,
- - - ------------------------- Chief Executive Officer and Director
Irving Weiser (Principal Executive Officer)
Louis C. Fornetti Executive Vice President,
- - - ------------------------- Chief Financial Officer
Louis C. Fornetti (Principal Financial Officer)
Daniel J. Reuss Senior Vice President, Controller and
- - - ------------------------- Treasurer
Daniel J. Reuss (Principal Accounting Officer)
John C. Appel Executive Vice President and Director
- - - -------------------------
John C. Appel
William A. Johnstone Executive Vice President and Director
- - - -------------------------
William A. Johnstone
J. Evans Attwell Director
- - - -------------------------
J. Evans Attwell
Susan S. Boren Director
- - - -------------------------
Susan S. Boren
F. Gregory Fitz-Gerald Director Louis C. Fornetti
- - - ------------------------- By ------------------
F. Gregory Fitz-Gerald Louis C. Fornetti
Pro Se and as Attorney-in-Fact
Dated: March 21, 1997
C.A. Rundell, Jr. Director
- - - -------------------------
C.A. Rundell, Jr.
Robert L. Ryan Director
- - - -------------------------
Robert L. Ryan
Arthur R. Schulze, Jr. Director
- - - -------------------------
Arthur R. Schulze, Jr.
<PAGE>
INTERRA FINANCIAL INCORPORATED AND SUBSIDIARIES
FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
As of December 31, 1996 and 1995 and for each
of the years in the three-year period
ended December 31, 1996
TABLE OF CONTENTS
Page
----
Independent Auditors' Report.......................................22
Consolidated Financial Statements:
Consolidated statements of operations.........................23
Consolidated balance sheets...................................24
Consolidated statements of shareholders' equity...............25
Consolidated statements of cash flows.........................26
Notes to consolidated financial statements....................27
Financial Statement Schedule:
Schedule III - Condensed financial information of
the registrant...............................................43
Schedules not listed above have been omitted because they are
either not applicable or the required information has been provided in
the consolidated financial statements or notes thereto.
<TABLE>
SCHEDULE III -- CONDENSED FINANCIAL INFORMATION
OF THE REGISTRANT
INTERRA FINANCIAL INCORPORATED
(Parent Company)
STATEMENTS OF OPERATIONS
(In thousands)
<CAPTION>
Year ended December 31,
-----------------------------
1996 1995 1994
-----------------------------
<S> <C> <C> <C>
Revenues:
Management fees.................. $9,373 $5,980 $3,650
Facilities rental................ 1,058 1,057 1,056
Interest......................... 1,743 1,365 1,126
------ ------ ------
12,174 8,402 5,832
------ ------ ------
Expenses:
Compensation and benefits........ 8,010 4,988 3,002
Interest......................... 2,011 1,947 1,386
Other operating expenses......... 8,619 5,960 3,967
------ ------ ------
18,640 12,895 8,355
------ ------ ------
Loss before income taxes and
equity in subsidiaries' earnings. (6,466) (4,493) (2,523)
Income tax benefit................ 2,520 1,929 953
------ ------ ------
Loss before equity in
subsidiaries' earnings........... (3,946) (2,564) (1,570)
Equity in subsidiaries' earnings.. 60,757 38,437 27,023
------ ------ ------
Net earnings...................... $56,811 $35,873 $25,453
====== ====== ======
See accompanying notes to condensed financial information.
</TABLE>
<TABLE>
SCHEDULE III -- CONDENSED FINANCIAL INFORMATION
OF THE REGISTRANT -- (Continued)
INTERRA FINANCIAL INCORPORATED
(Parent Company)
BALANCE SHEETS
(In thousands)
<CAPTION>
December 31,
-------------------
1996 1995
-------------------
<S> <C> <C>
Assets:
Cash.................................... $1,070 $918
Advances to subsidiaries (eliminated
in consolidation)...................... 28,419 28,130
Equipment, leasehold improvements and
building, at cost, less accumulated
depreciation of $12,498 and $8,484,
respectively........................... 16,428 13,976
Investment in subsidiaries, at cost,
plus equity in undistributed earnings
(eliminated in consolidation).......... 348,894 283,276
Other assets............................ 5,446 4,611
------- -------
$400,257 $330,911
======= =======
Liabilities and Shareholders' Equity:
Liabilities:
Advances from subsidiaries (eliminated
in consolidation)....................... $87,630 $72,144
Accounts payable and accrued expenses... 30,137 27,215
Capital lease obligations and other debt 6,604 9,058
------- -------
124,371 108,417
------- -------
Shareholders' equity:
Common stock............................ 1,522 1,508
Additional paid-in capital.............. 81,316 76,623
Retained earnings....................... 193,048 144,363
------- -------
275,886 222,494
------- -------
$400,257 $330,911
======= =======
See accompanying notes to condensed financial information.
</TABLE>
<TABLE>
SCHEDULE III -- CONDENSED FINANCIAL INFORMATION
OF THE REGISTRANT -- (Continued)
INTERRA FINANCIAL INCORPORATED
(Parent Company)
STATEMENTS OF CASH FLOWS
(In thousands)
<CAPTION>
Year ended December 31,
----------------------------
1996 1995 1994
----------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings.......................... $56,811 $35,873 $25,453
Non-cash items included in earnings:
Equity in net earnings of
subsidiaries......................... (60,788) (38,437) (27,023)
Depreciation and amortization........ 4,014 3,299 3,537
------ ------ ------
37 735 1,967
Change in operating assets and
liabilities.......................... 7,054 4,423 3,617
------ ------ ------
Cash provided by operating activities. 7,091 5,158 5,584
------ ------ ------
Cash flows from financing activities:
Proceeds from:
Advances from subsidiaries, net...... 15,197 15,829 -
Issuance of common stock............. 1,580 2,368 458
Revolving credit agreement........... - - 15,000
Long-term debt....................... - - 237
Payments for:
Dividends on common stock............ (6,792) (5,177) (4,536)
Capital leases and other debt....... (2,454) (2,473) (2,340)
Purchases of common stock............ (1,341) (6,849) (3,638)
Revolving credit agreement........... - (15,000) -
Advances to subsidiaries, net........ - - (5,763)
------ ------ ------
Cash provided (used) by financing
activities........................... 6,190 (11,302) (582)
------ ------ ------
Cash flows from investing activities:
Dividends from subsidiaries.......... 13,170 18,700 8,468
Investment in subsidiaries........... (18,000) (9,000) (8,300)
Purchases of fixed assets............ (8,299) (3,513) (4,340)
------ ------ ------
Cash provided (used) by investing
activities........................... (13,129) 6,187 (4,172)
------ ------ ------
Increase in cash...................... 152 43 830
Cash at beginning of year............. 918 875 45
------ ------ ------
Cash at end of year................... $1,070 $918 $875
====== ====== ======
See accompanying notes to condensed financial information.
</TABLE>
SCHEDULE III -- CONDENSED FINANCIAL INFORMATION
OF THE REGISTRANT -- (Continued)
INTERRA FINANCIAL INCORPORATED
(Parent Company)
NOTES TO CONDENSED FINANCIAL INFORMATION
A. The condensed financial statements of Interra Financial
Incorporated (Parent Company), should be read in conjunction with
the consolidated financial statements of Interra Financial
Incorporated, and the notes thereto beginning on Page 21.
B. Investments in subsidiaries are carried at cost plus equity in
undistributed earnings. See Note J to consolidated financial
statements for information regarding net capital requirements of
the broker-dealer subsidiaries which could result in restriction on
the ability of the subsidiaries to transfer funds to the parent in
the form of loans, advances or cash dividends.
The Parent Company utilizes loans from two of its subsidiary
broker-dealers, Dain Bosworth and Rauscher Pierce Refsnes, in order
to capitalize its third broker-dealer, Interra Clearing Services
Inc. During 1996 and 1995, respectively, the Parent received loans
totaling $17 million and $9 million from Dain Bosworth and Rauscher
Pierce Refsnes in order to add to Interra Clearing's capital. See
Item 1(c) "Securities Business - Customer Financing" and
"Securities Business - Uniform Net Capital Rule."
C. Other Debt:
Other debt is used primarily to finance equipment and building
improvements and is payable in monthly and quarterly installments
and bears interest at floating rates which approximated 8.3 percent
at December 31, 1996. The Parent Company must maintain certain
levels of net worth under one of the debt agreements.
Annual principal payments on other debt (excluding obligations
under capital leases) during the next four years are as follows:
1997 - $813,000; 1998 - $16,000; 1999 and thereafter - $0.
D. Commitments:
At December 31, 1996, the Parent Company has guaranteed the $20.7
million outstanding balance of four-year subordinated bank debt
incurred by Dain Bosworth and Rauscher Pierce Refsnes in September
and October 1994. See Note F to the consolidated financial
statements.
Aggregate minimum rental commitments as of December 31, 1996, are
as follows:
<TABLE>
<CAPTION>
(In thousands) Capital leases Operating leases
- - - ---------------------------------------------------------------------
<S> <C> <C>
1997.............................. $1,336 $2,268
1998.............................. 1,076 1,373
1999.............................. 940 833
2000.............................. 940 705
2001.............................. 940 705
Thereafter........................ 5,953 4,386
----- ------
11,185 $10,270
Less amount representing interest. (5,410) ======
Present value of minimum lease ------
payments........................ $5,775
======
</TABLE>
EXHIBIT 11
<TABLE>
INTERRA FINANCIAL INCORPORATED
COMPUTATION OF NET EARNINGS PER SHARE
(Amounts in thousands, except per share data)
<CAPTION>
Year ended December 31,
--------------------------
1996 1995 1994
--------------------------
<S> <C> <C> <C>
PRIMARY EARNINGS PER SHARE:
Net earnings....................... $56,811 $35,873 $25,453
====== ====== ======
Average number of common and
common equivalent shares
outstanding:
Average common shares outstanding. 12,132 12,115 12,155
Shares credited to deferred
compensation plan participants... 98 - -
Dilutive effect of stock options.. 522 431 387
------ ------ ------
12,752 12,546 12,542
------ ------ ------
Primary earnings per share......... $4.46 $2.86 $2.03
====== ====== ======
EARNINGS PER SHARE ASSUMING
FULL DILUTION:
Net earnings....................... $56,811 $35,873 $25,453
====== ====== ======
Average number of common and
common equivalent shares outstanding:
Average common shares outstanding. 12,132 12,115 12,155
Shares credited to deferred
compensation plan participants... 98 - -
Dilutive effect of stock options.. 716 630 387
------ ------ ------
12,946 12,745 12,542
====== ====== ======
Fully diluted earnings per share... $4.39 $2.81 $2.03
====== ====== ======
</TABLE>
EXHIBIT 21
INTERRA FINANCIAL INCORPORATED
(Formerly Inter-Regional Financial Group, Inc.)
LIST OF SUBSIDIARIES
December 31, 1996
Percentage
State in of Voting
Which Securities
Name Incorporated Owned
- - - ------------------------------------- ------------ ----------
Consolidated subsidiaries of Registrant:
Dain Bosworth Incorporated.............. Delaware 100%
Interra Advisory Services Inc.
(formerly IFG Asset Management
Services,Inc.)........................ Minnesota 100
Rauscher Pierce Refsnes, Inc............ Delaware 100
Interra Clearing Services Inc. (formerly
Regional Operations Group, Inc.)....... Minnesota 100
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Interra Financial Incorporated:
We consent to the incorporation by reference in
Registration Statement No. 333-03113, Registration
Statement No. 333-20487, Registration Statement No. 33-58069,
Registration Statement No. 33-54223, Registration Statement No.
33-54907, Registration Statement No. 33-59426, Registration
Statement No. 33-39182, Registration Statement No. 33-25979,
post-effective amendment No. 1 to Registration Statement No. 33-
13068, post-effective amendment No. 2 to Registration Statement
No. 33-10243, post-effective amendment No. 2 to Registration
Statement No. 33-10242, post-effective amendment No. 4 to
Registration Statement No. 2-90634, post-effective amendment No.
8 to Registration Statement No. 2-61514, post-effective amendment
No. 11 to Registration Statement No. 2-57759, post-effective
amendment No. 15 to Registration Statement No. 2-53289 and
post-effective amendment No. 16 to Registration Statement
No. 2-51150, on Form S-8 of Interra Financial Incorporated, and
subsidiaries of our report dated February 4, 1997, relating to
the consolidated balance sheets of Interra Financial
Incorporated (formerly known as Inter-Regional Financial
Group, Inc.) and subsidiaries as of December 31, 1996 and
1995, and the consolidated statements of operations,
shareholders' equity and cash flows and the related financial
statement schedule for each of the years in the three-year
period ended December 31, 1996, which report appears in the
December 31, 1996 Annual Report on Form 10-K of Interra
Financial Incorporated.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
March 21, 1997
Exhibit 24
POWER OF ATTORNEY
The undersigned hereby constitute and appoint IRVING
WEISER, LOUIS C. FORNETTI and DANIEL J. REUSS and each of them
his true and lawful attorneys-in-fact and agents, with full
powers of substitution and resubstitution, for him and in his
name, place and stead, in any and all capacities, to sign the
Annual Report on Form 10-K of Intera Financial Incorporated for
the fiscal year ending December 31, 1996 and all amendments
to such Annual Report on Form 10-K, and to file the same
with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting
unto said attorneys-in-fact and agents, each acting alone, full
power and authority to do and perform to all intents and purposes
as he might or could do in person, hereby ratifying all that
said attorneys-in-fact and agents, each acting alone, or his
substitutes, may lawfully do or cause to be done by virtue
thereof.
SIGNATURE DATE
- - - ------------------------- ----------------
John C. Appel February 4, 1997
- - - -------------------------
John C. Appel
J. Evans Attwell February 4, 1997
- - - -------------------------
J. Evans Attwell
Susan S. Boren February 4, 1997
- - - -------------------------
Susan S. Boren
F. Gregory Fitz-Gerald February 4, 1997
- - - -------------------------
F. Gregory Fitz-Gerald
Louis C. Fornetti February 4, 1997
- - - -------------------------
Louis C. Fornetti
William A. Johnstone February 4, 1997
- - - -------------------------
William A. Johnstone
Daniel J. Reuss February 4, 1997
- - - -------------------------
Daniel J. Reuss
C.A. Rundell, Jr. February 4, 1997
- - - -------------------------
C.A. Rundell, Jr.
Robert L. Ryan February 4, 1997
- - - -------------------------
Robert L. Ryan
Arthur R. Schulze, Jr. February 4, 1997
- - - -------------------------
Arthur R. Schulze, Jr.
Irving Weiser February 4, 1996
- - - -------------------------
Irving Weiser
<TABLE> <S> <C>
<ARTICLE> BD
<LEGEND>
This schedule contains summary financial information extracted from
Interra Financial Incorporated's December 31, 1996 Form 10-K and is qualified
in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 49,387
<RECEIVABLES> 1,313,572
<SECURITIES-RESALE> 81,631
<SECURITIES-BORROWED> 0<F1>
<INSTRUMENTS-OWNED> 288,824
<PP&E> 32,946
<TOTAL-ASSETS> 1,827,425
<SHORT-TERM> 25,000
<PAYABLES> 1,246,848
<REPOS-SOLD> 57,967
<SECURITIES-LOANED> 0<F2>
<INSTRUMENTS-SOLD> 58,805
<LONG-TERM> 27,290
<COMMON> 1,522
0
0
<OTHER-SE> 274,364
<TOTAL-LIABILITY-AND-EQUITY> 1,827,425
<TRADING-REVENUE> 169,040
<INTEREST-DIVIDENDS> 110,551
<COMMISSIONS> 223,084
<INVESTMENT-BANKING-REVENUES> 111,391
<FEE-REVENUE> 35,890<F3>
<INTEREST-EXPENSE> 57,560
<COMPENSATION> 385,905
<INCOME-PRETAX> 87,402
<INCOME-PRE-EXTRAORDINARY> 56,811
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 56,811
<EPS-PRIMARY> 4.46
<EPS-DILUTED> 4.39
<FN>
<F1>Included in receivables
<F2>Included in payables
<F3>Includes fees from Asset Management only
</FN>
</TABLE>
