SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
- --- OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended September 30, 1996
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
- --- OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-8186
Inter-Regional Financial Group, Inc.
(Exact name of registrant as specified in its charter)
DELAWARE 41-1228350
(State or other jurisdiction (IRS Employer
of 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
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
As of October 31, 1996, the Company had 12,159,993 shares of
common stock outstanding.
INTER-REGIONAL FINANCIAL GROUP, INC. AND SUBSIDIARIES
REPORT ON FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1996
INDEX
Page
----
I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Consolidated Balance Sheets.................... 1
Consolidated Statements of Operations.......... 2
Consolidated Statements of Cash Flows.......... 3
Notes to Consolidated Financial Statements..... 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............ 5
II. OTHER INFORMATION:
Item 1. Legal Proceedings.............................. 8
Item 6. Exhibits and Reports on Form 8-K............... 11
Signatures..................................... 12
Index of Exhibits.............................. 13
Exhibits....................................... 14
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INTER-REGIONAL FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
September 30, December 31,
1996 1995
----------------------------
(Unaudited)
Assets:
Cash and cash equivalents.............. $29,558 $26,167
Cash and short-term investments
segregated for regulatory purposes.... 60,009 411,000
Receivable from customers.............. 972,487 763,793
Receivable from brokers and dealers.... 212,579 257,717
Securities purchased under agreements
to resell............................. 208,497 80,233
Trading securities owned, at market.... 387,415 322,892
Equipment, leasehold improvements
and buildings, at cost, net........... 33,137 31,108
Other receivables...................... 82,192 80,838
Deferred income taxes.................. 33,222 31,993
Other assets........................... 14,201 16,167
--------- ---------
$2,033,297 $2,021,908
========= =========
Liabilities and Shareholders' Equity:
Liabilities:
Short-term borrowings.................. $223,258 $97,000
Drafts payable......................... 39,309 50,431
Payable to customers................... 650,664 982,098
Payable to brokers and dealers......... 311,047 254,542
Securities sold under repurchase
agreements............................ 104,379 120,808
Trading securities sold, but not yet
purchased, at market.................. 206,560 61,050
Accrued compensation................... 99,028 95,988
Other accrued expenses and accounts
payable............................... 99,833 84,973
Accrued income taxes................... 8,538 11,114
Subordinated and other debt............ 30,476 41,410
--------- ---------
1,773,092 1,799,414
--------- ---------
Shareholders' equity:
Common stock........................... 1,520 1,508
Additional paid-in capital............. 79,527 76,623
Retained earnings...................... 179,158 144,363
--------- ---------
260,205 222,494
--------- ---------
$2,033,297 $2,021,908
========= =========
<FN>
See accompanying notes to consolidated financial statements.
INTER-REGIONAL FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in thousands, except per-share amounts)
Three Months Ended Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
--------------------------------------
Revenues:
Commissions............. $50,808 $48,201 $163,993 $127,127
Principal transactions.. 40,353 44,608 129,280 135,084
Investment banking and
underwriting........... 30,226 23,059 80,244 59,935
Interest................ 27,514 28,622 80,470 81,031
Asset management........ 9,269 7,285 25,849 19,384
Correspondent clearing.. 3,447 3,525 11,954 9,048
Other................... 3,888 4,864 12,070 9,797
------- ------- ------- -------
Total revenues.......... 165,505 160,164 503,860 441,406
Interest expense........ (14,470) (17,058) (42,948) (49,086)
------- ------- ------- -------
Net revenues............ 151,035 143,106 460,912 392,320
------- ------- ------- -------
Expenses Excluding Interest:
Compensation and
benefits............... 94,051 91,956 286,914 253,342
Communications.......... 10,440 10,127 31,305 30,039
Occupancy and equipment. 8,947 8,186 26,275 24,341
Travel and promotional.. 5,913 4,890 17,305 14,188
Floor brokerage and
clearing fees.......... 2,870 2,713 8,174 7,734
Other................... 8,830 8,268 27,712 23,437
------- ------- ------- -------
Total expenses
excluding interest..... 131,051 126,140 397,685 353,081
------- ------- ------- -------
Earnings:
Earnings before income
taxes.................. 19,984 16,966 63,227 39,239
Income tax expense...... (6,994) (6,150) (22,129) (14.224)
------- ------- ------- -------
Net earnings............ $12,990 $10,816 $41,098 $25,015
======= ======= ======= =======
Earnings per common and
common equivalent share:
Primary................. $1.02 $0.86 $3.24 $2.00
======= ======= ======= =======
Fully diluted........... $1.01 $0.85 $3.19 $1.96
======= ======= ======= =======
<FN>
See accompanying notes to consolidated financial statements.
INTER-REGIONAL FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
Nine Months Ended
September 30,
1996 1995
----------------------
Cash flows from operating activities:
Net earnings............................. $41,098 $25,015
Adjustments to reconcile earnings to
cash provided (used) by operating
activities:
Depreciation and amortization........... 7,046 6,725
Deferred income taxes.................... (1,229) (1,005)
Other non-cash items..................... 6,507 6,558
Cash and short-term investments
segregated for regulatory purposes...... 350,991 (121,000)
Net receivable from/payable to brokers
and dealers............................. 101,643 10,965
Securities purchased under agreements
to resell............................... (128,264) (101,635)
Net trading securities owned and
trading securities sold, but not
yet purchased........................... 80,987 (24,762)
Short-term borrowings and drafts
payable of securities companies......... 115,136 50,252
Net receivable from/payable to customers. (540,128) 73,646
Securities sold under repurchase
agreements.............................. (16,429) 94,979
Accrued compensation..................... 3,040 8,030
Other.................................... 11,200 929
------ ------
Cash provided by operating activities.... 31,598 28,697
------ ------
Cash flows from financing activities:
Proceeds from:
Issuance of common stock................. 1,243 643
Payments for:
Subordinated and other debt.............. (10,934) (4,326)
Dividends on common stock................ (4,968) (3,882)
Purchase of common stock................. (1,341) (2,705)
Revolving credit agreement, net.......... - (15,000)
------ ------
Cash (used) by financing activities...... (16,000) (25,270)
------ ------
Cash flows from investing activities:
Proceeds from investment dividends
and sales............................... 126 1,776
Payments for equipment, leasehold
improvements and other.................. (12,333) (7,947)
------ ------
Cash (used) by investing activities...... (12,207) (6,171)
------ ------
Increase/(decrease) in cash and cash
equivalents............................. 3,391 (2,744)
Cash and cash equivalents:
At beginning of period................... 26,167 22,764
------ ------
At end of period......................... $29,558 $20,020
====== ======
Income tax payments totaled $25,332,000 and $13,967,000 and
interest payments totaled $38,503,000 and $47,620,000 during the
nine months ended September 30, 1996 and 1995, respectively.
<FN>
See accompanying notes to consolidated financial statements.
INTER-REGIONAL FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
A. Condensed Consolidated Financial Statements
The accompanying unaudited interim consolidated financial
statements have been prepared in accordance with the instructions
for Form 10-Q and do not include all the information and
footnotes required by generally accepted accounting principles
for complete financial statements and should be read in
conjunction with the consolidated financial statements and
related notes included in the Company's Annual Report on Form 10-
K for the year ended December 31, 1995. In the opinion of
management, all adjustments necessary for a fair presentation of
such interim consolidated financial statements have been
included. All such adjustments are of a normal recurring nature.
The results of operations for the three-month and nine-month
periods ended September 30, 1996, are not necessarily indicative
of results expected for subsequent periods.
Certain prior year amounts in the financial statements have
been reclassified to conform to the 1996 presentation.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This discussion should be read in conjunction with Item 7
(Management's Discussion and Analysis) of the Company's Annual
Report on Form 10-K for the year ended December 31, 1995.
Summary
Consolidated net earnings increased $2.2 million and net
revenues increased $7.9 million during the 1996 third quarter
over the same quarter of 1995. Activity in the Company's private
client group business lines slowed during the 1996 third quarter
from record levels experienced during the second quarter.
However, the Company's equity capital markets business lines'
revenues surged during the third quarter, posting results 39
percent higher than the previous quarter and 36 percent higher
than the third quarter of 1995. The Company, along with the rest
of the securities industry, continued to benefit from relatively
strong equity markets. Fixed income markets, however, remained
difficult due to uncertainty caused by interest rate volatility.
Consolidated net earnings increased $16.1 million while net
revenues increased $68.6 million during the first nine months of
1996 versus the same period of 1995.
Results of Operations:
Three Months ended September 30,
Nine Months ended September 30,
(Unaudited, in thousands) 1996 1995 1996 1995
----------------------------------
Net Revenues:
Dain Bosworth
Incorporated $99,705 $93,045 $301,210 $256,336
Rauscher Pierce
Refsnes, Inc. 50,454 49,020 156,741 133,805
Corporate, other and
eliminations 876 1,041 2,961 2,179
------- ------- ------- -------
$151,035 $143,106 $460,912 $392,320
======= ======= ======= =======
Earnings (Loss) before
income taxes:
Dain Bosworth
Incorporated $15,242 $13,501 $45,651 $29,355
Rauscher Pierce
Refsnes, Inc. 6,976 5,320 22,680 12,740
Corporate, other and
eliminations (2,234) (1,855) (5,104) (2,856)
------- ------- ------- -------
$19,984 $16,966 $63,227 $39,239
======= ======= ======= =======
Commission revenues increased $2.6 million, or 5 percent,
from the 1995 third quarter as a result of increased sales to
individual and institutional investors of: (1) mutual funds; (2)
over-the-counter equity securities sold on an agency basis; and
(3) insurance and annuity products. These increases were
partially offset by a decrease in listed equity securities to
individual and institutional investors. For the first nine
months, revenues increased $36.9 million, or 29 percent, over
1995 due to increased sales to individual and institutional
investors of: (1) over-the-counter equity securities sold on an
agency basis; (2) mutual funds; (3) listed equity securities; and
(4) insurance and annuity products. Contributing to the revenue
increases were 11 percent and 20 percent increases, respectively,
in the New York Stock Exchange's average daily trading volumes
for the quarter and year-to-date over the comparable 1995
periods.
Revenues from principal transactions declined $4.3 million,
or 10 percent, and $5.8 million, or 4 percent, during the third
quarter and first nine months, respectively, from the comparable
1995 periods. For the quarter the revenue declines were due
primarily to reduced over-the-counter equity trading results and,
to a lesser degree, poorer trading results in taxable fixed
income securities. The decline in over-the-counter equity
trading results was brought about by narrower spreads earned in
trading such products compared with the third quarter of 1995.
For the year-to-date period, the revenue declines were chiefly
the result of poorer trading results in taxable and tax-exempt
securities, which were precipitated by the development of an
increasing interest rate environment during the 1996 second
quarter, and were partially offset by increased trading revenues
from over-the-counter equity securities.
Investment banking and underwriting revenues increased $7.2
million, or 31 percent, in the third quarter and $20.3 million,
or 34 percent, year-to-date due primarily to higher levels of
equity underwriting and mergers and acquisitions services
performed for the Company's corporate clients, as well as
increases in syndicate participation revenues. Such revenue
increases were partially offset by decreases in underwriting and
fee revenues earned from the Company's municipal and governmental
clients. These declines resulted primarily from a continuation
of difficult fixed income security market conditions.
Net interest income increased $1.5 million, or 13 percent,
and $5.6 million, or 17 percent, for the quarter and year-to-
date, respectively, due principally to increases in customer
margin balances resulting from the third quarter transfer of
several large customer accounts from competitors to the Company's
broker-dealers, as well as continued growth in total margin
debits. Such increases in net interest income, however, were
partially offset by the effects of the third quarter transfer of
approximately $300 million in customer credit balances to
Company-sponsored money market funds as a result of the offering
of new cash management products to certain segments of its
customers. Management believes that implementation of new cash
management products and services will result in higher asset
management revenues, but will be offset by lower net interest
income and, accordingly, is not initially expected to have a
material effect on net earnings. As long as favorable interest
rate spreads are maintained and the level of interest-bearing
accounts remains significant, the Company expects net interest
income to continue to be a significant contributor to earnings
(see also "Liquidity and Capital Resources" below).
Asset management revenues increased $2.0 million, or 27
percent, for the quarter and $6.5 million, or 33 percent, for the
year-to-date period from higher levels of assets in fee-based
managed account programs at Dain Bosworth and Rauscher Pierce
Refsnes, as well as 34 percent and 23 percent increases in assets
under management at IFG Asset Management Services, Inc. ("AMS")
over the previous year's quarter and year-to-date periods,
respectively. The significant rise in assets under management at
AMS was the result of the aforementioned transfer of
approximately $300 million in customer credits from the Company's
balance sheet to money market funds managed by AMS (see also
"Liquidity and Capital Resources below).
Third quarter 1996 revenues from correspondent clearing
approximated those generated in the 1995 third quarter. Revenues
from correspondent clearing increased $2.9 million, or 32
percent, as the Company benefited from increased trade volumes,
primarily during the 1996 first half, for correspondent brokerage
firms served by RPR Correspondent Services, as well as an
increase in the number of correspondents.
Compensation and benefits expense increased $2.1 million,
or 2 percent, during the 1996 third quarter and $33.6 million, or
13 percent, over the first nine months of 1996 versus the
comparable periods of 1995. The increase for the quarter is due
primarily to increased incentive compensation accruals resulting
from higher levels of earnings and increased fixed compensation
expense related to increases in the salaried employee base and
salary rate increases. For the nine-month period, the expense
increase relates to increased commissions paid to revenue-
producing employees generating higher levels of operating
revenues and increased incentive compensation accruals due to
higher levels of earnings as well as increased fixed compensation
expense related to higher numbers of salaried employees and
salary increases.
Expenses other than compensation and benefits increased
$2.8 million, or 8 percent, over the third quarter of 1995
primarily as a result of: (1) increased travel and promotional
costs associated with the generation of new business; (2)
increased occupancy costs stemming from expansion of certain
operating office locations including increased operating costs
and real estate taxes associated with such locations; (3)
increased communications costs stemming from the 1996 rollout of
improved investment executive workstations; and (4) increased
litigation-related expenses. For the year-to-date period,
expenses other than compensation and benefits increased $11.0
million, or 11 percent, over 1995 as a result of: (1) increased
travel and promotional costs stemming from the generation of new
business; (2) increased litigation-related expenses; (3)
increased occupancy costs stemming from expansion of certain
operating office locations including increased operating costs
and real estate taxes associated with such locations; and (4)
increased communications costs stemming from the 1996 rollout of
improved investment executive workstations.
LIQUIDITY AND CAPITAL RESOURCES
Late in the 1996 second quarter, the Company began offering
new cash management products to certain segments of its customers
that resulted in the transfer of approximately $300 million of
customer credit balances to Company-sponsored money market funds
during the third quarter. Management anticipates additional
transfers of $50 million to $100 million in customer credits
during the fourth quarter. Additionally, the Company experienced
a $146.8 million increase in customer receivables during the
third quarter due largely to the transfer of several large
customer accounts from competitors to the Company's broker-
dealers during the quarter. As the result of these developments,
the Company's short-term borrowings increased, in part to support
the increase in margin debits and the reduction in customer
credits as a funding source. Management, however, believes that
its financing sources are sufficient to finance ongoing
operations.
As described in Note J to the Consolidated Financial
Statements of the Company's 1995 Annual Report on Form 10-K,
Regional Operations Group, Dain Bosworth and Rauscher Pierce
Refsnes must comply with certain regulations of the Securities
and Exchange Commission and the New York Stock Exchange, Inc.,
measuring capitalization and liquidity. All three broker-dealers
continue to operate above minimum net capital standards. At
September 30, 1996, net capital was $75.3 million at Regional
Operations Group, which was 7.8 percent of aggregate debit
balances and $27.2 million in excess of the 5-percent
requirement. At September 30, 1996, Dain Bosworth and Rauscher
Pierce Refsnes had net capital of $32.0 million and $21.9
million, respectively, in excess of the $1 million requirement.
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. As of July 31, 1996 the Company had repurchased the
entire 600,000 shares in accordance with this program at a cost
of $11.8 million. On August 7, 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 market 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.
Through October 31, 1996, no shares had been repurchased pursuant
to this extension.
In January 1996 the Company entered into a three-year, $4.6
million operating lease agreement to finance the acquisition of
state-of-the-art technology in the form of investment executive
workstations, which the Company believes will improve
productivity and client service of Dain Bosworth and Rauscher
Pierce Refsnes investment executives. In conjunction with this
project, the Company also purchased with cash an additional $2.5
million of workstation equipment during the first nine months of
1996.
On May 1, 1996, the Company's Board of Directors announced
that it would increase the regular quarterly cash dividend paid
on the Company's common stock from $.11 per share to $.15 per
share beginning with the dividend paid in the 1996 second
quarter. The determination of future cash dividends, if any, to
be declared and paid will depend on the Company's future
financial condition, earnings and available funds.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company and/or its subsidiaries, Dain Bosworth and
Rauscher Pierce Refsnes, 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 the 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 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 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
$.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 indicated their intention to appeal 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 arises 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 alleges
that Rauscher, as broker, improperly favored Express America
over other allegedly higher bidders, and that Rauscher 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 alleges such officers of Express
America and WESAV were guilty of mismanagement between the
conclusion of the auction process and closing of the sale.
The RTC seeks from all parties compensatory damages in
excess of $20 million and punitive damages of $60 million,
along with interest, costs and other relief. Effective
January 1, 1996 the RTC was merged into the Federal Deposit
Insurance Corporation, which became the plaintiff in this
action.
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 and other defendants. The
County has signed tolling agreements with at least 14 other
potential defendants in similar proceedings.
The County alleges that Rauscher was a financial
advisor on five note offerings by the County that took place
in June through August of 1994, 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 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 denies these allegations,
including the allegation that it was a "financial advisor"
in connection with these transactions. In each of the five
transactions in question, Rauscher 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 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.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 3.1 - Amended and Restated Bylaws of the Company
Exhibit 11 - Computation of Net Earnings Per Share
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
One report on Form 8-K was filed during the quarter ended
September 30, 1996.
Items reported:
Item 5 - Other Events (Press release regarding a 15 cent
regular quarterly cash dividend and extension of share
repurchase plan).
Date of Report - August 7, 1996
Financial Statements Filed - None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
INTER-REGIONAL FINANCIAL GROUP, INC.
Registrant
Date: November 13, 1996 By Daniel J. Reuss
--------------------------
Daniel J. Reuss
Senior Vice President,
Corporate Controller and
Treasurer (Principal
Accounting Officer)
INTER-REGIONAL FINANCIAL GROUP, INC. AND SUBSIDIARIES
INDEX OF EXHIBITS TO QUARTERLY REPORT ON FORM 10-Q
FOR QUARTER ENDED SEPTEMBER 30, 1996
Exhibit 3.1 Amended and Restated Bylaws of the Company
Exhibit 11 Computation of Net Earnings Per Share
Exhibit 27 Financial Data Schedule