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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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, 1997
OR
/ / TRANSACTIONS 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 (IRS Employer Identification
of incorporation or organization) 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
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As of October 31, 1997, the Company has 12,364,472 shares of common stock
outstanding.
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INTERRA FINANCIAL AND SUBSIDIARIES
REPORT ON FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1997
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. . . . . . . . . . . . . 6
II. OTHER INFORMATION:
ITEM 1. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . 11
ITEM 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . 12
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . 13
Index of Exhibits. . . . . . . . . . . . . . . . . . . . . . 14
Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . . 15
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INTERRA FINANCIAL AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
(UNAUDITED)
Assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . $ 36,605 $ 34,387
Cash and short-term investments segregated for regulatory purposes. . . 75,000 15,000
Receivable from customers . . . . . . . . . . . . . . . . . . . . . . . 1,076,264 1,035,847
Receivable from brokers and dealers . . . . . . . . . . . . . . . . . . 277,506 202,040
Securities purchased under agreements to resell . . . . . . . . . . . . 336,640 81,631
Trading securities owned, at market . . . . . . . . . . . . . . . . . . 525,750 288,824
Equipment, leasehold improvements and buildings, at cost, net . . . . . 39,245 32,946
Other receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . 74,865 75,685
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . 42,026 39,704
Other assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,992 21,361
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$2,503,893 $1,827,425
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------------- ------------
Liabilities and Shareholders' Equity:
Liabilities:
Short-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . $ 95,000 $ 25,000
Drafts payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61,998 69,989
Payable to customers. . . . . . . . . . . . . . . . . . . . . . . . . . 956,144 869,641
Payable to brokers and dealers. . . . . . . . . . . . . . . . . . . . . 373,210 229,852
Securities sold under repurchase agreements . . . . . . . . . . . . . . 162,046 57,967
Trading securities sold, but not yet purchased, at market . . . . . . . 316,636 58,805
Accrued compensation. . . . . . . . . . . . . . . . . . . . . . . . . . 101,797 119,244
Other accrued expenses and accounts payable . . . . . . . . . . . . . . 111,200 93,751
Subordinated and other debt . . . . . . . . . . . . . . . . . . . . . . 18,671 27,290
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2,196,702 1,551,539
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Shareholders' equity:
Common stock. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,537 1,522
Additional paid-in capital. . . . . . . . . . . . . . . . . . . . . . . 85,284 81,316
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . 220,370 193,048
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307,191 275,886
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$2,503,893 $1,827,425
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See accompanying notes to consolidated financial statements.
1
INTERRA FINANCIAL AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED, IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ -------------------------
1997 1996 1997 1996
--------- --------- ---------- ----------
Revenues:
Commissions . . . . . . . . . . . . . . . . . . . $ 74,237 $ 50,808 $ 200,924 $ 163,993
Principal transactions. . . . . . . . . . . . . . 39,430 40,353 115,944 129,280
Investment banking and underwriting . . . . . . . 25,016 30,226 74,086 80,244
Interest. . . . . . . . . . . . . . . . . . . . . 33,315 27,514 88,524 80,470
Asset management. . . . . . . . . . . . . . . . . 12,154 9,269 33,263 25,849
Correspondent clearing. . . . . . . . . . . . . . 5,668 3,447 15,315 11,954
Other . . . . . . . . . . . . . . . . . . . . . . 6,785 3,888 17,125 12,070
--------- --------- ---------- ----------
Total revenues. . . . . . . . . . . . . . . . . . 196,605 165,505 545,181 503,860
Interest expense . . . . . . . . . . . . . . . . . . (15,237) (14,470) (41,720) (42,948)
--------- --------- ---------- ----------
Net revenues . . . . . . . . . . . . . . . . . . . . 181,368 151,035 503,461 460,912
--------- --------- ---------- ----------
Expenses Excluding Interest:
Compensation and benefits . . . . . . . . . . . . 110,233 94,051 308,166 286,914
Communications. . . . . . . . . . . . . . . . . . 12,130 10,440 34,767 31,305
Occupancy and equipment . . . . . . . . . . . . . 10,507 8,947 30,546 26,275
Travel and promotional. . . . . . . . . . . . . . 7,085 5,913 21,137 17,305
Floor brokerage and clearing fees . . . . . . . . 3,258 2,870 8,975 8,174
Other . . . . . . . . . . . . . . . . . . . . . . 12,164 8,830 31,991 27,712
Restructuring charge. . . . . . . . . . . . . . . 15,000 - 15,000 -
--------- --------- ---------- ----------
Total expenses excluding interest. . . . . . . . . . 170,377 131,051 450,582 397,685
--------- --------- ---------- ----------
Earnings:
Earnings before income taxes. . . . . . . . . . . 10,991 19,984 52,879 63,227
Income tax expense. . . . . . . . . . . . . . . . (3,935) (6,994) (18,931) (22,129)
--------- --------- ---------- ----------
Net earnings . . . . . . . . . . . . . . . . . . . . $ 7,056 $ 12,990 $ 33,948 $ 41,098
--------- --------- ---------- ----------
--------- --------- ---------- ----------
Earnings per common and common equivalent share:
Primary . . . . . . . . . . . . . . . . . . . . . $ .53 $ 1.02 $ 2.58 $ 3.24
--------- --------- ---------- ----------
--------- --------- ---------- ----------
Fully diluted . . . . . . . . . . . . . . . . . . $ .53 $ 1.01 $ 2.54 $ 3.19
--------- --------- ---------- ----------
--------- --------- ---------- ----------
See accompanying notes to consolidated financial statements.
2
INTERRA FINANCIAL AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED, IN THOUSANDS)
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------
1997 1996
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Cash flows from operating activities:
Net earnings. . . . . . . . . . . . . . . . . . . . . . . . $ 33,948 $ 41,098
Adjustments to reconcile earnings to cash provided
(used) by operating activities:
Depreciation and amortization . . . . . . . . . . . . 5,843 7,046
Deferred income taxes . . . . . . . . . . . . . . . . (2,322) (1,229)
Non-cash restructuring charge, net of tax . . . . . . 9,630 -
Other non-cash items. . . . . . . . . . . . . . . . . 9,031 6,507
Cash and short-term investments segregated
for regulatory purposes. . . . . . . . . . . . . . (60,000) 350,991
Net payable to brokers and dealers. . . . . . . . . . 67,892 101,643
Securities purchased under agreements to resell . . . (255,009) (128,264)
Net trading securities owned and trading
securities sold, but not yet purchased . . . . . . 20,905 80,987
Short-term borrowings and drafts payable
of securities companies. . . . . . . . . . . . . . 12,009 115,136
Net receivable from customers . . . . . . . . . . . . 46,086 (540,128)
Securities sold under repurchase agreements . . . . . 104,079 (16,429)
Accrued compensation. . . . . . . . . . . . . . . . . (17,447) 3,040
Other . . . . . . . . . . . . . . . . . . . . . . . . 3,230 11,200
--------- ---------
Cash provided (used) by operating activities . . . . . . . . . (22,125) 31,598
--------- ---------
Cash flows from financing activities:
Proceeds from:
Revolving credit agreement, net. . . . . . . . . . . . . 50,000 -
Issuance of common stock . . . . . . . . . . . . . . . . 1,811 1,243
Payments for:
Subordinated and other debt. . . . . . . . . . . . . . . (9,925) (10,934)
Dividends on common stock. . . . . . . . . . . . . . . . (6,627) (4,968)
Purchase of common stock . . . . . . . . . . . . . . . . - (1,341)
--------- ---------
Cash provided (used) by financing activities . . . . . . . . . 35,259 (16,000)
--------- ---------
Cash flows from investing activities:
Proceeds from investment dividends and sales. . . . . . . . 1,768 126
Payments for equipment, leasehold improvements and other. . (12,684) (12,333)
--------- ---------
Cash (used) by investing activities. . . . . . . . . . . . . . (10,916) (12,207)
--------- ---------
Increase/(decrease) in cash and cash equivalents . . . . . . . 2,218 3,391
Cash and cash equivalents:
At beginning of period . . . . . . . . . . . . . . . . . 34,387 26,167
--------- ---------
At end of period . . . . . . . . . . . . . . . . . . . . $ 36,605 $ 29,558
--------- ---------
--------- ---------
Income tax payments totaled $25,852,000 and $25,332,000 and interest payments
totaled $37,937,000 and $38,503,000 during the nine months ended September 30,
1997 and 1996, respectively.
During the nine months ended September 30, 1997 and 1996, respectively, the
Company had non-cash financing activity of $2,173,000 and $1,681,000 associated
with the crediting of common stock to deferred compensation plan participants.
See accompanying notes to consolidated financial statements.
3
INTERRA FINANCIAL 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, 1996. In the opinion of management, all adjustments necessary for a fair
presentation of such interim consolidated financial statements have been
included. All such adjustments, except for the restructuring charge
discussed in Note B below, are of a normal recurring nature. The results
of operations for the three-month period ended September 30, 1997, are not
necessarily indicative of results for subsequent periods.
Certain prior year amounts in the financial statements have been
reclassified to conform to the 1997 presentation.
B. RESTRUCTURING RESERVE
In conjunction with the adoption of a formal restructuring plan whereby
the Company intends to combine Dain Bosworth, Rauscher Pierce Refsnes and its
operations subsidiary into a single broker-dealer during the first quarter of
1998, the Company recorded a one-time, after-tax charge of $9.6 million
($15.0 million before taxes), or 72 cents per share, against third-quarter
1997 earnings to cover severance and other restructuring costs. Substantially
all of the $15.0 million of the restructuring costs will result in cash
outflows, primarily during the fourth quarter of 1997 and first quarter of
1998. The composition of the $15.0 million charge was as follows: $8.6
million for severance and short-term retention payments to terminated
employees; $2.5 million for space consolidation expenditures, and the
remaining $3.9 million for other expenditures including costs of changing the
Company's name, relocation, outplacement services and professional fees
related to the restructuring.
C. 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.
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. 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. The Company
does not enter into foreign currency contracts or, other than as described,
other derivative financial instruments with off-balance-sheet risk.
Derivative financial instruments held or issued are immaterial to the
consolidated financial statements. The Company's exposure to credit risk is
represented by the fair value of trading securities owned.
In the normal course of business the Company's activities involve the
execution, settlement and financing of various securities transactions. These
activities may expose the Company to off-balance-sheet credit and market risks
in the event the customer or counterparty is unable to fulfill its contractual
obligations. Such risks may be increased by volatile trading markets.
In the normal course of business Dain Bosworth and Rauscher Pierce Refsnes
enter into when-issued underwriting and purchase commitments. Transactions
relating to such commitments open at September 30, 1997 and subsequently settled
had no material effect on the consolidated financial statements.
4
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 in the event the customer fails to perform.
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.
5
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, 1996.
SUMMARY
Consolidated net earnings declined $5.9 million or 46 percent during the
1997 third quarter and $7.2 million or 17 percent for the first nine months
of 1997 versus the comparable periods of the previous year. Net earnings for
the 1997 periods included the effects of a one-time, after-tax charge of $9.6
million related to the Company's announcement that it intends to restructure
by combining its broker-dealers into a single subsidiary and also change its
name (see "Restructuring Announcement" below). Excluding the effects of the
restructuring charge, third quarter 1997 earnings were a record for the
Company. Net revenues increased 20 percent for the quarter and 9 percent
year-to-date over 1996 levels, driven primarily by higher levels of
commission and net interest revenues stemming from individual investor
activity within the Company's Private Client Groups, as well as institutional
investor activity within the Company's Institutional Equity Sales Groups.
The Federal Reserve Board's March 1997 increase in short-term interest rates
negatively impacted the 1997 second and, to a lesser degree, third quarter
prices and volumes of securities traded of and issued by corporations with
small to medium-sized market capitalizations, the predominant type of
corporate securities which Dain Bosworth and Rauscher Pierce Refsnes
underwrite, trade and sell. This event negatively impacted the underwriting
and trading results of the Company's Equity Capital Markets businesses.
During the same period, however, prices and volumes of listed securities,
which typically are issued by larger capitalized corporations, as well as
mutual funds, continued to increase from both 1997 first quarter levels and
comparable period levels and, accordingly, assisted the Company's
commission-generating Private Client and Institutional Equity Sales Groups to
post improved results in the third quarter and first nine months of 1997
versus the comparable periods of 1996.
RESTRUCTURING ANNOUNCEMENT
On October 14, 1997, the Company announced that it will combine Dain
Bosworth, Rauscher Pierce Refsnes and its operations subsidiary into a new
firm, Dain Rauscher Incorporated, during the first quarter of 1998. Pending
regulatory approval, the Company will change its name to Dain Rauscher
Corporation on January 2, 1998, and the Company's trading symbol on the New
York Stock Exchange will change to "DRC" on that date.
Upon completion of the combination, Dain Rauscher Incorporated is
expected to be the largest regional brokerage firm in the western half of the
United States with more than 1,200 private client and institutional
investment executives in 26 predominantly western states and annualized 1997
net revenues of almost $700 million.
The restructuring represents a strategic change made necessary by the
dramatic changes in the competitive environment in which the Company operates
which were triggered in February by Federal Reserve Board rulings that
effectively permitted bank holding companies to acquire investment banks.
Such bank acquisitions and mergers have driven up the price of securities
firms in recent months such that acquisitions of major additional firms as
contemplated by the Company under its previous strategy no longer appear to
be cost-effective. The restructuring, management believes, will allow the
Company to combine its two regional firms into a single, more powerful brand
and will enable it to simplify its structure and become more responsive to
competitive changes.
It is expected that through Dain Rauscher Incorporated, the Company will
focus on individual investors, predominantly in the western half of the
United States, and capital markets and correspondent services clients in
select markets throughout the country. The Company may continue to acquire
smaller securities firms in or near its current markets and to expand its
correspondent services business, and expects to continue to explore new
business opportunities in other securities-related businesses.
6
The Company, which employs 3,600 people, expects to eliminate
approximately 100 management, business-line and staff positions over the next
several months in connection with the restructuring. The Company does not
expect that such job eliminations will materially affect future revenues.
Overall, the reorganization is expected to reduce non-interest expense levels
by approximately $10 million annually, and improve pre-tax operating margins
by approximately 1.5 percentage points beginning in 1998.
The Company recorded a one-time, after-tax charge of $9.6 million ($15.0
million before taxes), or 72 cents per share, against third-quarter 1997
earnings to cover severance and other restructuring costs. Substantially all
of the $15.0 million of the restructuring costs will result in cash outflows,
primarily during the fourth quarter of 1997 and first quarter of 1998. The
composition of the $15.0 million charge was as follows: $8.6 million for
severance and short-term retention payments to terminated employees; $2.5
million for space consolidation expenditures, and the remaining $3.9 million
for other expenditures including costs of changing the Company's name,
relocation, outplacement services and professional fees related to the
restructuring.
RESULTS OF OPERATIONS:
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- -------------------------------
(Unaudited, in thousands) 1997 1996 1997 1996
-------------------------------- -------------------------------
Net Revenues:
Dain Bosworth Incorporated $117,922 $ 99,705 $328,952 $301,210
Rauscher Pierce Refsnes, Inc. 53,526 44,419 147,128 138,729
Corporate, other and eliminations 9,920 6,911 27,381 20,973
-------- -------- -------- --------
$181,368 $151,035 $503,461 $460,912
-------- -------- -------- --------
-------- -------- -------- --------
Earnings (Loss) before income taxes:
Dain Bosworth Incorporated $ 17,761 $ 15,242 $ 45,719 $45,651
Rauscher Pierce Refsnes, Inc. 7,511 4,967 17,483 16,436
Corporate, other and eliminations (14,281) (225) (10,323) 1,140
-------- -------- -------- --------
$ 10,991 $ 19,984 $ 52,879 $ 63,227
-------- -------- -------- --------
-------- -------- -------- --------
Commission revenues increased $23.4 million or 46 percent from the 1996
third quarter and $36.9 million or 23 percent from the first nine months of
1996. The increase for the quarterly period resulted principally from
increased sales of listed securities, mutual funds and over-the-counter
equity securities sold on an agency basis to individual and institutional
investors. The year-to-date increases relate primarily to increased sales of
listed securities, mutual funds and insurance and annuity products to
individual and institutional investors. Contributing also to the commission
revenue increases were increases of 31 and 24 percent in the New York Stock
Exchange's average daily trading volumes as well as general increases in
securities prices for the quarter and year-to-date periods, respectively,
versus the comparable periods of 1996.
Revenues from principal transactions declined $.9 million or 2 percent
and $13.3 million or 10 percent from the 1996 third quarter and year-to-date
periods, respectively. The revenue decline for the quarter resulted from
decreased sales and trading results in tax-exempt fixed income and
over-the-counter equity securities that were partially offset with improved
sales and trading results in taxable fixed income securities. For the
nine-month period, the largest component of the revenue decrease was lower
sales and trading results in over-the-counter equity securities, which became
less popular investments for individual and institutional investors beginning
with the Federal Reserve Board's increase in short-term interest rates in
March 1997. This action led to lower volumes, prices and spreads earned
trading such securities, particularly during the second quarter of 1997.
Trading revenues from such securities, however, rebounded somewhat during the
1997 third quarter. Also contributing to the year-to-date decline in
principal transaction revenues were reduced revenues from taxable fixed
income sales and trading during the 1997 first half.
7
Investment banking and underwriting revenues declined $5.2 million or
17 percent during the third quarter primarily attributable to a reduction in
corporate underwriting and mergers and acquisitions transactions and declines
in syndicate participations of corporate securities offerings. These declines
were partially offset by an increase in municipal underwriting activity. For
the year-to-date period, investment banking revenues declined $6.2 million or
8 percent due principally to lower levels of syndicate participations as well
as lower levels of corporate mergers and acquisitions and municipal
underwriting activity. The year-to-date decline was partially offset by an
increase in corporate underwriting transactions during the first quarter.
Net interest income increased $5.0 million or 39 percent and $9.3 million
or 25 percent for the quarter and year-to-date period, respectively. The
increases were primarily due to 7-percent and 17-percent increases in average
margin loan balances, respectively. The margin loan increases were due
principally to continued favorable market conditions coupled with
comparatively low interest rates for individual investors/borrowers. Net
interest income also increased somewhat in the 1997 third quarter due to an
increase in margin interest rates charged to certain customers. The
resulting increases in net interest income were partially offset by the
effects of 1-percent and 31-percent declines, respectively, in customer
credit balances versus the comparable periods of 1996, 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.
Asset management revenues increased $2.9 million or 31 percent for the
quarter and $7.4 million or 29 percent for the year-to-date period due to
primarily to increased asset levels in fee-based, managed account programs at
Dain Bosworth and Rauscher Pierce Refsnes and, to a lesser degree, increases
of approximately 29 percent in assets under management at Interra Advisory.
Correspondent clearing revenues rose $2.2 million or 64 percent for the
quarter and $3.4 million or 28 percent year-to-date. The increases are
principally the result of increased correspondent trade volumes resulting
from favorable market conditions, growth in the size of such correspondents
and a slight increase in the number of correspondents.
Compensation and benefits expense increased $16.2 million or 17 percent
during the third quarter and $21.3 million or 7 percent year-to-date versus
the comparable periods of 1996. The increase for both periods is primarily
the result of: (1) increased commissions paid to revenue-producing employees
generating higher levels of operating revenues; (2) the effects of 4-percent
and 5-percent increases in the average number of employees for the quarter
and year-to-date, respectively; (3) increased levels of incentive
compensation expense at Dain Bosworth and Rauscher Pierce Refsnes due to
higher levels of profitability; and (4) general salary increases.
Expenses other than compensation and benefits and the restructuring
charge increased $8.1 million or 22 percent and $16.6 million or 15 percent
over the 1997 third quarter and first nine months, respectively, due chiefly
to : (1) travel and promotional costs associated with the generation of new
business; (2) volume-driven increases in communications market-data and
clearing services; (3) increased occupancy and equipment costs associated
with office expansions and office operating costs, including real estate
taxes, and equipment upgrades; (4) costs associated with information systems
upgrades; and (5) bad debt expenses.
EFFECT OF RECENT ACCOUNTING STANDARDS
In June 1996 the Financial Accounting Standards Board (FASB) issued
Statement No. 125 (SFAS 125), "Accounting for Transfers and Servicing of
Financial Assets and Extinguishment of Liabilities." Subsequently the FASB
issued Statement No. 127 (SFAS 127), which deferred the effective date of
certain provisions of SFAS 125 until 1998. The Company intends to adopt the
applicable provisions of SFAS 125 when required in 1998 and does not expect
the adoption to have a material effect on its consolidated financial
statements.
In February 1997 the FASB issued Statement No. 128 (SFAS 128), "Earnings
Per Share." The Company intends to adopt SFAS 128 when required in the
fourth quarter of 1997 and does not expect the adoption to have a material
effect on reported earnings per share amounts.
8
In June 1997 the FASB issued Statement No. 130 (SFAS 130), "Reporting
Comprehensive Income." The Company intends to adopt SFAS 130 when required
in 1998 and does not expect the adoption to have a material effect on its
reported income.
LIQUIDITY AND CAPITAL RESOURCES
On April 30, 1997, the Company's Board of Directors adopted a Shareholder
Rights Plan ("the Plan"). Under the Plan, the Board declared a dividend of
one preferred share purchase right ("Right") for each outstanding share of
common stock of the Company. The dividend was payable to the shareholders of
record as of May 12, 1997. The Rights are attached to and automatically
trade with the outstanding shares of the Company's common stock until they
are distributed and become exercisable under the terms of the Plan.
On April 30, 1997, the Company's Board of Directors also approved the
filing of a universal "shelf registration" statement with the Securities and
Exchange Commission. It would have permitted the Company to sell at its
discretion up to $200 million in secured or unsecured debt, or equity
securities. The Company no longer plans to file the registration statement
or issue securities pursuant to the "shelf" registration statement.
On June 27, 1997, the Company entered into a $50 million committed,
unsecured revolving credit facility to replace the $15 million facility that
expired on June 30, 1997. The new facility expires on June 25, 1998 and may
be extended for up to three additional one-year periods.
As described in Note J of the Consolidated Financial Statements of the
Company's 1996 Annual Report on Form 10-K, Interra Clearing Services, Dain
Bosworth and Rauscher Pierce Refsnes must comply with certain regulations of
the Securities and Exchange Commission and New York Stock Exchange, Inc.
measuring capitalization and liquidity. All three broker-dealers continue to
operate above minimum net capital standards. At September 30, 1997, net
capital was $75.3 million at Interra Clearing, which was 6.7 percent of
aggregate debit balances and $18.8 million in excess of the 5-percent
requirement. At September 30, 1997, Dain Bosworth and Rauscher Pierce
Refsnes had net capital of $40.7 million and $25.8 million, respectively, in
excess of their minimum requirements.
During the 1997 first quarter, the Company increased its regular
quarterly dividend on its common stock to $.18 per share from the previous
rate of $.15 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.
In August 1996 the Company's Board of Directors approved a 100,000 share
extension of its previously completed 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 October 31, 1997, no shares had been repurchased pursuant to this
extension.
9
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995 (THE "ACT")
The foregoing Management's Discussion and Analysis of Financial Condition
and Results of Operations contains forward-looking statements within the
meaning of Section 27A of the Securities Act and Section 21E of the Exchange
Act, including statements regarding the Company's expectations, beliefs,
intentions and strategies regarding the future. All such forward-looking
statements involve inherent risks and uncertainties, including, without
limitation, those discussed below. All such forward-looking statements and
the description of the risks and uncertainties inherent in such
forward-looking statements are made based on information available to the
Company as of the date hereof. The Company assumes no obligation to update
any such forward-looking statements or the description of any risks and
uncertainties inherent therein. The Company's actual results may differ
materially from those anticipated in the forward-looking statements contained
herein. Factors that might cause such a difference include, but are not
limited to, the risks and uncertainties that follow: (1) expected cost
savings from the restructuring cannot be fully realized or realized within
the expected time frame; (2) revenues following the restructuring are lower
than expected; (3) competitive pressures among financial institutions
increase significantly; (4) costs or difficulties related to the operation of
the businesses or execution of the restructuring are greater than expected;
(5) general economic conditions, either nationally or in the states in which
the combined company will be doing business, are less favorable than
expected; and (6) legislation or regulatory changes adversely affect the
businesses in which the combined company is engaged.
10
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company and/or its 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 involve claims for substantial damages. A detailed description
of certain of such actions is included in Item 3 of the Company's Annual
Report on Form 10-K for the year ended December 31, 1996 and the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1997. The
following description of recent developments relating to pending and
threatened legal proceedings should be read in conjunction with such prior
reports.
MIDWEST LIFE INSURANCE LITIGATION
Post-trial motions filed by the Company and Dain Bosworth in
connection with the July Colorado jury verdict awarding $4.75 million
to twelve plaintiffs were denied. The Company and Dain Bosworth have
appealed. The Company believes that the trial court erred by, among
other things, withholding key evidence from the jury, including
evidence concerning Dain Bosworth's efforts to obtain guaranty
association coverage for plaintiffs' losses and evidence concerning
the reimbursements plaintiffs received for their losses.
WASHINGTON AND IOWA ACTIONS - Trial currently is proceeding in the
action brought by the guaranty association in Washington. Trial in
Iowa is scheduled to begin in early December.
The Company and Dain Bosworth believe that they have substantial and
meritorious defenses available in the above actions and in all of
the actions relating to the Midwest Life insolvency and they are
defending themselves vigorously in such actions.
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 matters pending against the Company and its subsidiaries will not have a
material adverse effect on the consolidated financial condition or results of
operations of the Company as set forth in the consolidated financial
statements contained herein.
11
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
ITEM NO. ITEM METHOD OF FILING
-------- ---- ----------------
11 Computation of Net Earnings Per Share. Filed herewith.
27 Financial Data Schedule. Filed herewith.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended September 30,
1997.
12
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.
INTERRA FINANCIAL INCORPORATED
Registrant
Date: November 13, 1997 By Daniel J. Reuss
----------------- ------------------------------------------
Daniel J. Reuss
Senior Vice President, Corporate Controller
and Treasurer
(Principal Accounting Officer)
13
INTERRA FINANCIAL AND SUBSIDIARIES
INDEX OF EXHIBITS TO QUARTERLY REPORT ON FORM 10-Q
FOR QUARTER ENDED SEPTEMBER 30, 1997
(a) Exhibits
ITEM NO. ITEM METHOD OF FILING
-------- ---- ----------------
11 Computation of Net Earnings Per Share. Filed herewith.
27 Financial Data Schedule. Filed herewith.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended September 30,
1997.
14