ITEM 1. BUSINESS:
(a) General Development of Business.
Inter-Regional Financial Group, Inc. (the "Company") is a holding company, formed in 1973 and based in Minneapolis, Minnesota. The Company offers regional securities brokerage 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, 1993, Dain Bosworth had 1,700 employees located in 16 states. Rauscher Pierce Refsnes primarily serves the Southwest region of the United States. At December 31, 1993, Rauscher Pierce Refsnes had 920 employees located in eight states. Rauscher Pierce Refsnes also serves as clearing agent for approximately 125 correspondent brokerage firms through its RPR Clearing Services unit ("RPRC") based in St. Louis, Missouri. In April 1993 the Company consolidated the securities operations and settlement activities previously performed by each of Dain Bosworth and Rauscher Pierce Refsnes as self-clearing firms into a third wholly owned subsidiary, Regional Operations Group, Inc. ("ROG"), which was registered as a broker-dealer. Each of Dain Bosworth and Rauscher Pierce Refsnes, as well as the RPRC correspondents and other broker- dealers previously clearing through them, now clears on a fully disclosed basis through ROG. ROG, which was previously named IFG Information Services, Inc., also provides data processing and information services to IFG and its subsidiaries. Insight Investment Management, Inc., the Company's wholly owned money management subsidiary ("Insight Management"), manages a series of mutual funds, Great Hall Investment Funds, and also provides fixed income portfolio management services. Dain Corporation, another wholly owned subsidiary of the Company, engages in real estate services. 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 brokerage 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.
(c) Narrative Description of Business
Securities Business
General. The securities brokerage 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, 1993, Dain Bosworth had 745 retail sales representatives and 55 institutional sales representatives in 60 offices located in 16 states and Rauscher Pierce Refsnes had 287 retail sales representatives and 45 institutional sales representatives in 23 offices located in seven states. Both firms are member firms of the New York Stock Exchange ("NYSE") and are registered in the NASDAQ system as market makers. At December 31, 1993, Dain Bosworth was registered as a market maker for 369 companies and Rauscher Pierce Refsnes was registered as a market maker for 275 companies.
Dain Bosworth's and Rauscher Pierce Refsnes' operating results are sensitive to many factors outside the control of the Company, including 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.
Principal Transactions. 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 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.
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 develop more fully their institutional businesses.
Investment Banking 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 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 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 appraising securities, 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 fifth business day following the transaction date. Beginning in April 1993, ROG began carrying all customer balances of each of Dain Bosworth and Rauscher Pierce Refsnes and allocating interest income and expense related to customers, as well as uncollectible amounts due from customers, back to Dain Bosworth and Rauscher Pierce Refsnes. 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 ROG, 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 ROG, which are generally more stringent than applicable regulations. In permitting customers to purchase on margin, Dain Bosworth and Rauscher Pierce Refsnes, through ROG, 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, ROG pays interest on those credit balances on behalf of Dain Bosworth and Rauscher Pierce Refsnes. ROG 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 ROG 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 ROG are members of the Securities Investor Protection Corporation ("SIPC"), which insures customer accounts up to specified limits in the event of liquidation of either firm. Additionally, all three firms maintain insurance coverage in order to insure 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. Dain Bosworth and Rauscher Pierce Refsnes 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.
Securities Lending and Borrowing Activities. Securities brokers and dealers, including ROG, borrow securities from and lend securities to other brokers and dealers to facilitate clearance and delivery of securities that have been sold when customers fail to deliver securities prior to settlement date. ROG 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, ROG 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 ROG. In all securities lending transactions, ROG 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. ROG is also at risk to the extent that securities it borrows decline in value and the loaning broker fails to return ROG'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, 1993, Dain Bosworth had 20 securities analysts and Rauscher Pierce Refsnes had 10. 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 self-regulatory bodies. The regulations cover all aspects of the securities business including sales methods, 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 and revocation of the right to do business. Dain Bosworth, Rauscher Pierce Refsnes, ROG and Insight Investment Management believe they have operated in compliance with such 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 ROG are subject to the Uniform Net Capital Rule (the "Rule") promulgated by the Securities and Exchange Commission (the "Commission"). The Rule is designed to measure the general financial integrity and liquidity of a broker-dealer and the minimum net capital deemed necessary to meet the broker-dealer's continuing commitments to its customers. The Rule provides for two methods of computing net capital. ROG 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 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 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 million each. At all times, Dain Bosworth, Rauscher Pierce Refsnes and ROG have maintained their net capital above the required levels. See Note K to "Consolidated Financial Statements."
Money Management
Insight Management currently sponsors and serves as investment adviser to Great Hall Investment Funds, Inc. ("Great Hall"), an open-end management investment company currently offering its shares in five series each of which, in essence, is a separate mutual fund with its own portfolio of assets and liabilities. Three of the series are money market funds which were introduced to Dain Bosworth and Rauscher Pierce Refsnes customers in 1991 as a replacement for comparable funds managed by Carnegie Capital Management Company ("Carnegie"), 48 percent of which was then owned by Dain Bosworth and Rauscher Pierce Refsnes. The two remaining series of Great Hall invest primarily in longer-term municipal securities and were initially capitalized in June 1992 with the transfer of assets and liabilities of comparable funds managed by Carnegie for which Insight Management acted as sub-adviser. Also in June 1992, the assets and liabilities of six other mutual funds then managed by Carnegie were transferred to comparable funds managed by Fortis Advisers, Inc. ("Fortis"). In connection with this transfer, the Company entered into certain agreements to perform or cause its affiliates to perform future marketing and other services for Fortis and to refrain from sponsoring or acting as investment adviser of any open-end, domestic equity or taxable bond investment company for periods ranging from two to three years. Under these agreements, the Company is entitled to receive fees based upon the level of assets transferred to the Fortis funds and certain other factors in exchange for such services and agreements. Following these transactions, the shares of Carnegie's stock then owned by Dain Bosworth and Rauscher Pierce Refsnes were redeemed.
In addition to its mutual fund operations, Insight Management provides private portfolio management services to individuals and institutions. Although Insight Management's expertise historically has been in the tax-exempt fixed-income area, a major initiative of Insight Management in 1994 and beyond will be building its portfolio management business through the expansion of its taxable fixed income management capabilities, which Insight Management anticipates will be marketed primarily to institutional investors.
During 1993 Insight Management introduced and sponsored two series of Great Hall Value Ten Trusts, "unit investment trusts" which each offered units in a portfolio of "blue-chip" equity securities. In 1994 Insight Management plans to sponsor three or four additional equity unit investment trusts.
Additionally, in 1994 and beyond, Insight Management expects to implement a comprehensive new program that enables sales representatives of Dain Bosworth, Rauscher Pierce Refsnes and RPR Clearing to offer their clients a full spectrum of high quality mutual funds under flexible new pricing arrangements.
Real Estate Services
Minneapolis-based Dain Corporation provides real estate investment services. In so doing, it generates revenues from property management activities and may generate fees from refinancing and property disposal activities performed for limited partnerships in which it serves as the general partner. Prior to 1989, Dain Corporation sold participation interests in the partnerships to individual and institutional investors primarily through the sales representatives of Dain Bosworth, Rauscher Pierce Refsnes and other financial services firms. However, federal tax reform, depressed market values and extremely tight credit conditions have dramatically affected the real estate industry in recent years and, as a result, Dain Corporation has not raised capital for new property syndications since 1988. It is currently focusing its resources on managing the portfolios of properties owned by partnerships in which it serves as general partner and on selling certain partnership properties as it deems appropriate.
At December 31, 1993, Dain Corporation was a general partner in 10 operating public and private partnerships which own 21 properties consisting primarily of garden apartment complexes and suburban office developments in major metropolitan areas in the United States. Until February 28, 1993, Dain Corporation managed most of its syndicated properties indirectly through its 50- percent ownership of Griffin Dain Property Management Company, a joint venture established in 1990 with Griffin Real Estate Company. On February 28, 1993, Dain Corporation sold its partnership interest to The Griffin Group and terminated the joint venture. The Griffin Group continues to manage certain Dain Corporation multi-family properties. Remaining properties are managed indirectly through third-party management contracts. At December 31, 1993, Dain Corporation had approximately 2,200 apartment units, 5 office buildings and 3 shopping centers under management.
Clearing and Other Services
In April 1993, ROG, a wholly owned subsidiary of the Company based in Minneapolis, Minnesota, began clearing and settling trades for Dain Bosworth, and Rauscher Pierce Refsnes, and the correspondent brokerage firms clearing through them on a fully disclosed basis. Previously, Dain Bosworth and Rauscher Pierce Refsnes cleared and settled their own trades and the trades of correspondent firms clearing through them. RPR Clearing Services, a division of Rauscher Pierce Refsnes, is in the business of marketing correspondent clearing services and as of December 31, 1993, provided clearing services with ROG to approximately 125 correspondent brokerage firms.
A single operations subsidiary has as one of its objectives, positioning the Company to grow its core brokerage business more effectively in the future. ROG also continues to provide data processing services to the Company and its subsidiaries. ROG's costs are allocated to the Company and its other subsidiaries based on their use of its services. Correspondent brokerage firms clearing through RPR Clearing Services and ROG are charged fees based on their use of services.
Competition
Dain Bosworth, Rauscher Pierce Refsnes and Insight Management 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. Legislative proposals currently under consideration would permit banks 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 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, 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.
Insight Investment competes with other fixed income money managers principally on the basis of portfolio performance, price and convenience.
Employees
At December 31, 1993, the Company had approximately 2,950 full-time employees. Of these, 1,700 were employed by Dain Bosworth, 920 were employed by Rauscher Pierce Refsnes, 275 were employed by ROG and the rest were employed in other activities. None of the Company's employees is represented by a collective bargaining unit.
ITEM 2.
ITEM 2. PROPERTIES:
The headquarters and administrative offices of the Company, Dain Bosworth, Insight Management, Dain Corporation and ROG are located in two buildings in downtown Minneapolis, Minnesota. The Company began occupying space in the new Dain Bosworth Plaza under a long-term operating lease in January 1992. The Company's office space in the second building remains under a long-term lease commitment and was renovated in 1992 to facilitate the consolidation of Dain Bosworth's and Rauscher Pierce Refsnes' clearance and settlement functions into ROG (see "Clearing and Other Services"). Rauscher Pierce Refsnes leases office space in Dallas, Texas that is used as its corporate headquarters. Both Dain Bosworth and Rauscher Pierce Refsnes have extensive branch office systems which lease 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 I to the "Consolidated Financial Statements."
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS:
Dain Bosworth and Rauscher Pierce Refsnes are defendants in various civil actions and arbitrations incidental to their business involving alleged violations of federal and state securities laws and other laws. Some of these actions, including certain actions against Rauscher Pierce Refsnes that are described in more detail below, have been brought on behalf of purported classes of plaintiffs claiming substantial damages relating to underwritings of securities.
Rauscher Pierce Refsnes is named as a defendant in a number of class action complaints that have been consolidated in a multi-district proceeding, In Re Taxable Municipal Bond Securities Litigation (MDL 863), in the Eastern District of Louisiana, as well as in certain Texas state court actions and arbitrations that have either been consolidated into such proceeding or stayed pending its resolution. Such actions have been described in detail in periodic reports previously filed by the Company on Forms 10-K and 10-Q. Such actions resulted from Rauscher Pierce Refsnes participation as a member of the underwriting syndicates in seven taxable municipal bond offerings for an aggregate of $1.55 billion in 1986. The proceeds of such bond offerings were invested in guaranteed investment contracts issued by Executive Life Insurance Company which was placed in conservatorship by the State of California in 1991. Rauscher Pierce Refsnes has also been named as a defendant in a contingent claim for damages in state court in California in connection with the conservatorship proceeding. This claim was contingent upon the determination of the priority status of the investment contracts, which issue has been favorably resolved. Rauscher Pierce Refsnes underwrote an aggregate of $57.8 million of bonds in all of such offerings, and served as co-manager of one $200 million bond offering. Drexel Burnham Lambert Incorporated, the lead managing underwriter for all of such offerings, and one other member of the underwriting syndicates, filed for reorganization under the bankruptcy laws and have failed to honor their syndicate obligations in connection with those claims. Plaintiffs in certain of these actions allege violations of federal and state securities laws, common law fraud, negligence and various other claims. Plaintiffs in certain of these actions also alleged violations of the Racketeer Influenced and Corrupt Practices Act, but such claims have been dismissed. Rauscher Pierce Refsnes believes that it has substantial and meritorious defenses to the claims raised by plaintiffs and will defend itself vigorously against these 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 Dain Bosworth and Rauscher Pierce Refsnes, believes that the resolution of all such matters will not have a material adverse effect on the Company's consolidated financial condition.
ITEM 4.
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, 1993.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following officers have been designated by the Board of Directors of the Company as its current Executive Officers. 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............45 President and Chief Operating Officer, Dain Bosworth Incorporated since February 1994; Executive Vice President and Chief Financial Officer, Dain Bosworth Incorporated April 1990 to February 1994; Executive Vice President, IFG since April 1990; Senior Vice President of IFG from May 1986 to April 1990; Chief Financial Officer of IFG from May 1986 to February 1994. Member of IFG Executive Committee.
Richard D. McFarland.....64 Chairman of the Board, IFG since June 1985; Chief Executive Officer of IFG from June 1985 to December 1989; President of IFG from January 1982 to June 1985.
Daniel J. Reuss..........38 Senior Vice President, IFG since May 1991; Vice President, IFG April 1987 to May 1991; Treasurer, IFG since May 1989; Corporate Controller, IFG since February 1985.
David A. Smith...........47 Chief Executive Officer, Rauscher Pierce Refsnes since May 1983; President, Rauscher Pierce Refsnes since January 1985; Chairman of the Board, Rauscher Pierce Refsnes since January 1990; Executive Vice President of IFG since May 1991; Member of IFG Executive Committee.
J. Scott Spiker..........38 Senior Vice President and Director of Strategic Planning and Corporate Development, IFG since February 1994; Senior Vice President and Manager Employee Benefit Services, Norwest Bank Minnesota, N.A. June 1989 to January 1994; Vice President, Strategic Planning and Acquisitions, Norwest Corporation, December 1987 to June 1989.
Irving Weiser............46 Chief Executive Officer, IFG since January 1990; President, IFG since July 1985; Chief Executive Officer, Dain Bosworth Incorporated since April 1990; Chairman of the Board, Dain Bosworth Incorporated since April 1990; President, Dain Bosworth Incorporated April 1990 to February 1994. Member of IFG Executive Committee.
PART II
ITEM 5.
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 "IFG." The high and low sales prices per share of the Company's common stock by quarter for the last two years were as follows:
(b) Holders.
At February 28, 1994, 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 by quarter for the last two years were as follows:
The Company paid a special cash dividend of $.16 per share on its common stock during the first quarter of 1992 and regular quarterly cash dividends of $.04 per share each quarter thereafter through the first quarter of 1993. Beginning in the second quarter of 1993, the regular quarterly dividend was increased to $.08 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. Prior to 1992 the Company was prevented from paying cash dividends on its common stock by a cumulative net earnings test contained in its convertible subordinated debt agreements.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA:
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS:
Business Environment
The Company's subsidiaries are principally 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 in which the Company does business, income tax legislation and demand for investment banking services. While revenues are dependent upon the level of trading 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, 1993
Summary of Operating Results
During 1993 net earnings totaled $47.6 million, an increase of $13.1 million or 38 percent over the prior year. Net earnings and net revenues (revenues less interest expense) for 1993 represent the highest achieved in the Company's history. The Company, along with the rest of the securities industry, benefited in 1993 from continued strong financial markets, low interest rates, high securities prices and increased levels of municipal and corporate underwritings. As a result of the favorable economic environment and, in management's opinion, actions taken during the past several years, the Company's core securities brokerage and investment banking businesses within Dain Bosworth and Rauscher Pierce Refsnes all posted record results for 1993.
Earnings before extraordinary items totaled $34.5 million in 1992, an increase of $13.4 million or 63 percent over 1991. Net earnings increased 24 percent over the $27.7 million earned in the prior year. 1991 net earnings included $6.6 million of extraordinary gains, primarily tax benefits from the utilization of net operating loss carryforwards. As was the case throughout the securities industry, all facets of Dain Bosworth's and Rauscher Pierce Refsnes' broker-dealer operations generated significantly higher revenues and profits in 1992 than in the prior year. However, the traditional strengths of the two securities firms, the retail brokerage business at Dain Bosworth and the fixed income business at Rauscher Pierce Refsnes, were the primary reasons for the improved operating results. Additionally, the Company believes that actions taken to strengthen the firms' core securities brokerage and investment banking operations, as well as actions taken to reduce long-term debt levels at the parent company, favorably impacted 1992 and 1991 earnings.
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:
Net interest income accounted for 5 percent of the Company's net revenues in 1993 and 6 percent in each of 1992 and 1991. Short-term investments segregated for regulatory purposes and margin loans to customers, 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.
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. The Company continues to examine alternative cash management products and services that it may offer to customers with credit balances in their accounts. Management believes that implementation of new cash management products and services would not have a material effect on net earnings. Average balances and interest rates for 1991 through 1993 are:
The $3.1 million increase in net interest income in 1993 over 1992 was principally attributable to an increase in average margin loan balances to customers of $89.0 million resulting from increased individual investor participation in the financial markets. See "Liquidity and Capital Resources."
The $4.1 million increase in net interest income in 1992 is due primarily to decreased interest expense from lower interest rates on bank borrowings and from reduced levels of subordinated and other long-term debt. See "Liquidity and Capital Resources." These positive factors were partially offset by the negative effect of slightly reduced spreads on customer balances.
Asset Management
During 1993 asset management revenues increased $3.4 million or 36 percent from 1992, as a result of a 12-percent increase in assets under management at Insight Management, as well as increased revenues from larger volumes of assets in fee-based, managed account programs at Dain Bosworth and Rauscher Pierce Refsnes.
Asset management revenues increased $6.6 million from 1991 to 1992, primarily due to increased revenues from Insight Management's first full year of operation and, to a lesser extent, increases in revenues from fee-based, managed account programs at Dain Bosworth and Rauscher Pierce Refsnes.
Correspondent Clearing and Other Revenues
Correspondent clearing revenues increased $1.9 million or 19 percent from 1992 to 1993 primarily as a result of increased trade volumes and a 13-percent increase in the number of correspondents handled by RPR Clearing, the Rauscher Pierce Refsnes unit that serves as clearing agent for approximately 125 correspondent brokerage firms. Approximately $5.2 million of the increase in other revenues from 1992 to 1993 was the result of a one-time gain recorded during the third quarter of 1993 from the sale of the Minneapolis Energy Center, a district heating and cooling company owned by a partnership in which Dain Bosworth was the general partner. Net of expenses, this transaction increased the Company's pretax earnings by $4.0 million, net earnings by $2.4 million and earnings per share by $.29.
Correspondent clearing revenues increased $2.7 million from 1991 to 1992 as a result of increased trade volumes handled by RPR Clearing. Other revenues declined $2.6 million in 1992 from 1991 due primarily to the loss of $3.2 million in fees paid by Carnegie to the Company for Dain Bosworth and Rauscher Pierce Refsnes customer balances held in funds managed by Carnegie before their transfer to money market funds managed by Insight Management. As of December 31, 1992, substantially all of Dain Bosworth and Rauscher Pierce Refsnes customers' money market fund balances previously held in funds managed by Carnegie had been transferred to funds managed by Insight Management.
Compensation and Benefits
Compensation and benefits expense is generally affected by the level of operating revenues, earnings and the number of employees. The 1993 and 1992 increases in compensation and benefits expense of 16 percent and 25 percent, respectively, were comprised primarily of increased commissions, incentive compensation and related benefits that rose in conjunction with increased operating revenues and earnings. The increases for 1993 and 1992 were also partially the result of increases in the average number of employees of 8 percent each year.
Other Expenses
During 1993 expenses other than compensation and benefits and interest increased $13.6 million or 14 percent principally as a result of volume-driven increases in the use of communications, market data and clearing services; increased travel costs associated with the generation of new business; increased reserves; and increased occupancy expenses related to higher real estate and operating costs at the Company's Minneapolis headquarters, the net addition of nine operating office locations and the expansion of several others.
During 1992 expenses other than compensation and benefits and interest rose $12.0 million or 14 percent, due primarily to higher usage of communications and market data services; increased occupancy costs related to the Company's new headquarters and moving or opening several branch locations; increased travel and promotional costs from the larger number of investment executives qualifying for incentive awards; higher floor brokerage and clearing costs due to heavier trade volumes; and increased expenses associated with preparations for the April 1993 consolidation of Dain Bosworth's and Rauscher Pierce Refsnes' operations areas into Regional Operations Group.
Management anticipates higher operating expenses in 1994 and subsequent years as the Company expects to make additional investments in new or expanded operating offices, hire additional employees, and make additional investments in systems, training and other areas in connection with the Company's strategic growth initiatives over the next five years.
Effect of Recent Accounting Standards
In November 1992 the Financial Accounting Standards Board issued a new statement on accounting for post-employment benefits other than pensions. The standard will be adopted as required in 1994. The Company does not expect the statement to have a material effect on financial results.
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 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, Regional Operations Group 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. These uncommitted lines of credit are collateralized by trading securities and customers' excess margin securities. Also, the Company has a $15 million, committed, unsecured revolving credit facility that is used for advances to its subsidiaries and general corporate purposes. On February 28, 1994, $15 million of this revolving credit facility was unused.
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. In April 1993 the Company's new operations subsidiary, Regional Operations Group, began clearing and settling trades for Dain Bosworth and Rauscher Pierce Refsnes (including the accounts of RPR Clearing). Regional Operations Group now 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, Regional Operations Group is subject to similar Securities and Exchange Commission regulations. During 1993 Dain Bosworth, Rauscher Pierce Refsnes and Regional Operations Group all operated above the minimum net capital standards. At December 31, 1993, regulatory net capital was $46.2 million at Regional Operations Group, which was 8.2 percent of aggregate debit balances and $18.2 million in excess of the 5-percent requirement. Beginning in April 1993, Dain Bosworth's and Rauscher Pierce Refsnes' net capital requirement was reduced to $1 million for each company because neither carries customer balances on its balance sheet. At December 31, 1993, Dain Bosworth and Rauscher Pierce Refsnes had net capital of $18.4 million and $19.0 million, respectively, in excess of the $1 million requirement.
The Company paid a special cash dividend of $.16 per share on the Company's common stock during the first quarter of 1992 and regular quarterly cash dividends of $.04 per share thereafter through the first quarter of 1993. Beginning in the second quarter of 1993, the regular quarterly dividend was increased to $.08 per share. 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. Prior to 1992 the Company had been prevented from paying cash dividends on its common stock by a cumulative net earnings test contained in its subordinated debt agreements.
In 1993 the Company purchased automated workstations totaling approximately $4.6 million in conjunction with the rollout of the Client Management System, which is designed to improve the productivity and client service of Dain Bosworth and Rauscher Pierce Refsnes investment executives. The purchases were financed with a series of secured notes which require the Company to make 48 equal monthly payments of principal plus interest.
Rauscher Pierce Refsnes entered into a $3.0 million, five- year subordinated bank loan during the first quarter of 1993. Proceeds of the loan qualify as regulatory capital and will be used for general corporate purposes.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements As of December 31, 1993 and 1992, and for each of the years in the three-year period ended December 31, 1993 and Supplementary Data
Page
Independent Auditors' Report............................... 18
Consolidated Financial Statements:
Consolidated statements of operations................. 19
Consolidated balance sheets........................... 20
Consolidated statements of shareholders' equity....... 21
Consolidated statements of cash flows................. 22
Notes to consolidated financial statements............ 23
Quarterly Financial Information............................ 31
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders Inter-Regional Financial Group, Inc.:
We have audited the accompanying consolidated balance sheets of Inter-Regional Financial Group, Inc. and subsidiaries as of December 31, 1993 and 1992, 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, 1993. In connection with our audits of the consolidated financial statements, we have also audited the financial statement schedules as listed in the table of contents on page 36 hereof. These consolidated financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedules 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 Inter-Regional Financial Group, Inc. and subsidiaries as of December 31, 1993 and 1992, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1993, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.
KPMG Peat Marwick
Minneapolis, Minnesota February 1, 1994
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years ended December 31, 1993, 1992 and 1991
Inter-Regional Financial Group, Inc. and Subsidiaries
A. Summary of Significant Accounting Policies
Basis of Presentation: The consolidated financial statements include the Company and its subsidiaries, all of which are wholly owned. All material inter-company balances and transactions have been eliminated in consolidation. Certain prior year amounts in the financial statements have been reclassified to conform to the 1993 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 and trading securities sold, but not yet purchased, are stated at market value. Unrealized gains and losses on such securities are recognized currently in revenues.
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.
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: Effective January 1, 1993, the Company adopted 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 difference 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. Financial statements for prior years have not been restated and the cumulative effect of the accounting change was not material. (See note M.)
Prior to 1993 the provision for income taxes was based on income and expenses included in the accompanying consolidated statements of operations. Differences between taxes so computed and taxes payable under applicable statutes and regulations were classified as deferred taxes arising from timing differences.
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 Company's borrowings, if recalculated based on current interest rates, would not differ significantly from the amounts recorded at December 31, 1993.
Recent Accounting Pronouncements: In November 1992 the Financial Accounting Standards Board issued Statement No. 112 - Employers' Accounting for Post-Employment Benefits Other Than Pensions (FAS 112). The Company expects to adopt the provisions of FAS 112 when required in 1994 and does not expect the statement to have a material effect on financial results.
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 and, in years prior to 1993, the assumed conversion of the Series 10% and 12% convertible preferred stock.
Fully diluted earnings per share for 1992 and 1991 reflect the additional dilutive effect of the assumed conversion of convertible subordinated debentures. The weighted average number of shares used in the primary and fully diluted computations, respectively, are: 1993 - 8,404,501 and 8,466,797; 1992 - 8,573,507 and 8,960,560; and 1991 - 8,463,211 and 10,066,831.
B. Extraordinary Items
During 1991 the Company recognized net extraordinary gains of $6,611,000. This amount was comprised of the realization of tax benefits from utilization of net operating loss carryforwards of $6,953,000 and a net loss from the redemption and buyback of the Company's 11-1/2% convertible subordinated debentures of $342,000.
C. Receivable From and Payable to Customers
The amounts receivable from and payable to customers result from cash and margin 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 $713 million and $687 million as of December 31, 1993 and 1992, respectively. The Company pays interest on such funds at varying rates, the weighted average of which was 2.4 percent at December 31, 1993.
D. Receivable From and Payable to Brokers and Dealers
Securities failed to deliver and receive represent the contract value of securities which have not been delivered or received subsequent to settlement date. Deposits paid for securities borrowed and deposits received for securities loaned approximate the market value of the related securities.
E. Trading Securities
The market values of trading security positions are summarized as follows:
F. Short-Term Borrowings
The loans to the securities subsidiaries consist primarily of bank borrowings on uncommitted lines of credit collateralized by trading securities owned and securities held in customer margin accounts, and have a floating rate of interest approximately .50 percent above the Federal Funds rate. The market value of trading securities pledged as collateral at December 31, 1993 was $113 million.
Revolving credit loan borrowings and irrevocable letters of credit are available under a commitment totaling $15 million (all of which was unused as of December 31, 1993) which expires June 30, 1995. Loans under this facility are unsecured and bear interest at a floating rate of Federal Funds plus 1.125 percent. The Company must maintain certain levels of net worth under the agreement.
G. Subordinated and Other Debt
Other debt is used primarily to finance equipment and building improvements and is payable in monthly or quarterly installments and bears interest at floating rates which approximated 5.8 percent at December 31, 1993. 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: 1994-$1,463,000; 1995- $3,782,000; 1996-$4,273,000; 1997-$3,908,000; 1998-$468,000.
H. Shareholders' Equity
Common Stock: The common stock has a par value of $.125 per share; 20,000,000 shares are authorized.
At December 31, 1993, 1,761,000 shares of the Company's common stock were reserved for the 1986 Stock Option Plan and 106,000 shares were reserved for issuance to the IFG Stock Bonus Plan.
Dividends: The Company paid a special cash dividend of $.16 per share during the first quarter of 1992 and regular quarterly cash dividends of $.04 per share each quarter thereafter through the first quarter of 1993. Beginning in the second quarter of 1993, the regular quarterly dividend was increased to $.08 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. Prior to 1992 the Company was prevented from paying cash dividends on its common stock by a cumulative net earnings test contained in its convertible subordinated debt agreements.
Stock Options: The Company maintains a stock option plan, under which key employees and outside directors may be granted options to purchase common stock at not less than 100 percent of the fair market value of the shares at the date of grant for incentive stock options or 50 percent for non-qualified options. Options granted to employees prior to December 31, 1989, generally become exercisable at the rate of 33-1/3 percent each year and expire five years from the grant date. Options granted to employees subsequent to December 31, 1989, 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 ten years from date of grant. Options granted to outside directors prior to December 31, 1991, become exercisable immediately and expire five years from grant date. Options granted to outside directors subsequent to December 31, 1991, become exercisable six months after grant date and expire five years after grant date. At December 31, 1993, 1,067,884 shares of common stock were available for grant.
The following table summarizes the activity related to the Company's stock option plan for each of the last three years:
All outstanding options were granted at 100 percent of the fair market value of the shares at the date of grant. The Company's closing stock price on December 31, 1993 was $27.875.
I. Commitments and Contingent Liabilities
Leases: The Company and its subsidiaries lease office space, furniture and communications and data processing equipment under several noncancelable leases. Most office space leases are subject to escalation and provide for the payment of real estate taxes, insurance and other expenses of occupancy, in addition to rent.
Aggregate minimum rental commitments as of December 31, 1993 are as follows:
Rental expense for operating leases was $19,085,000, $18,741,000 and $15,486,000, for the years ended December 31, 1993, 1992 and 1991, respectively. Included in net equipment, leasehold improvements and buildings at December 31, 1993 and 1992, is $5,952,000 and $6,915,000, respectively, for leases which have been capitalized.
Litigation: The Company's securities subsidiaries are defendants in various civil actions and arbitrations incidental to their business involving alleged violations of federal and state securities laws, and other laws. Some of these actions have been brought on behalf of purported classes of plaintiffs claiming substantial damages relating to underwritings of securities.
Several such actions resulted from Rauscher Pierce Refsnes' participation as a member of the underwriting syndicates in seven taxable municipal bond offerings for an aggregate of $1.55 billion in 1986. Rauscher Pierce Refsnes agreed to underwrite approximately $57.8 million of these bonds, and served as co- manager in one offering of $200 million of bonds. Drexel Burnham Lambert Incorporated, the lead managing underwriter for all seven of such offerings, and one other member of the underwriting syndicates for certain of such offerings have filed for reorganization under the bankruptcy laws and have failed to honor their syndicate obligations in connection with such claims. Plaintiffs in certain of these actions allege violations of federal and state securities laws, common law fraud, negligence, and various other claims. Plaintiffs in certain of the actions also alleged violations of the Racketeer Influenced and Corrupt Practices Act, but such claims have been dismissed. Plaintiffs seek an unspecified amount of actual and punitive damages, rescission and other relief. Rauscher Pierce Refsnes believes that it has substantial and meritorious defenses available and plans to defend itself vigorously against these actions.
While the outcome of any litigation is uncertain, management, based in part upon consultation with legal counsel as to certain of these actions, believes that the resolution of these matters will not have a material adverse effect on the Company's consolidated financial condition.
J. 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.
As part of its normal brokerage activities, the Company sells securities not yet purchased (short sales) for its own account. The establishment of short positions exposes the Company to off-balance-sheet risk in the event prices increase, as the Company may be obligated to acquire the securities at prevailing market prices.
The Company also periodically hedges its fixed income trading inventories with financial futures contracts. These contracts expose the Company to off-balance-sheet risk in the event that the change in the futures price does not closely correlate with the change in the inventory price. At December 31, 1993, the Company had open commitments under financial futures contracts with a notional amount of $2.0 million.
The Company does not enter into interest-rate swap agreements, foreign currency contracts or interest-rate option agreements.
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.
A portion of the Company's customer activity involves the sale of securities not yet purchased 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. 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, 1993, the market value of such securities pledged approximated the borrowings outstanding.
K. Regulatory Requirements
Dain Bosworth and Rauscher Pierce Refsnes are subject to the Securities and Exchange Commission's Uniform Net Capital Rule. In April 1993 the Company's new operations subsidiary, Regional Operations Group, began clearing and settling trades for Dain Bosworth and Rauscher Pierce Refsnes (including the accounts of RPR Clearing). Regional Operations Group now 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, Regional Operations Group 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, 1993, net capital was $46.2 million at Regional Operations Group, which was 8.2 percent of aggregate debit balances and $18.2 million in excess of the 5-percent requirement. Beginning in April 1993, Dain Bosworth's and Rauscher Pierce Refsnes' net capital requirement was reduced to $1 million for each company as neither firm carries customer balances on its balance sheet. At December 31, 1993, Dain Bosworth and Rauscher Pierce Refsnes had net capital of $18.4 million and $19.0 million, respectively, in excess of the $1 million requirement.
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, 1993, Regional Operations Group had $581.0 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.
L. Employee Benefit Plans
The Company and its participating subsidiaries have profit sharing and stock bonus plans which cover substantially all full- time employees who are at least 21 years of age and have been employed for at least one year.
Company contributions to the profit sharing plan are 3 percent of each participant's eligible compensation, plus a discretionary contribution determined by each participating company's board of directors based on profits. Employees may contribute on a pretax basis up to 10 percent of their eligible compensation to the plan, less any amounts contributed to the stock bonus plan and subject to certain aggregate limitations under federal regulations.
Stock bonus plan contributions are used to purchase common stock of the Company. Employees may allot on a pretax basis up to 5 percent of their eligible compensation to the plan, subject to certain aggregate limitations with contributions to the profit sharing plan under federal regulations. The Company and its participating subsidiaries match 50 percent of their employees' contributions to the stock bonus plan. The Company also makes matching contributions to the stock bonus plan equal to 25 percent of employee pretax contributions of up to 5 percent of eligible compensation (less any amount contributed to the stock bonus plan) to the profit sharing plan. Only aggregate employee pretax contributions of up to 5 percent for both the stock bonus plan and profit sharing plan are eligible for Company matching contributions.
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:
M. Income Taxes
Income tax expense consists of the following:
A reconciliation of ordinary federal income taxes (based on rates of 35 percent for 1993 and 34 percent for 1992 and 1991) with the actual tax expense provided on earnings is as follows:
Deferred income tax expenses/benefits result from differences in the timing of revenue and expense recognition for financial statement and tax reporting purposes. The sources and tax effect of the changes in deferred taxes are:
The tax effects of temporary differences that give rise to the deferred tax assets and deferred tax liabilities are:
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.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE:
None.
PART III
ITEM 10.
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.
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.
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.
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.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES 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 schedules hereinafter contained 36
2. Financial statement schedules: Reference is made to the table of contents to financial statements and financial statement schedules hereinafter contained for all other financial statement schedules 36
3. Exhibits:
Item No. Item Method of Filing - -------- ---- ----------------
3(a) Certificate of Incorporated by Incorporation of the reference to Exhibit Company, as amended. 3(a) to the Company's Annual Report on Form 10-K for the year ended December 31, 1988.
3(b) Bylaws of the Company, as Incorporated by amended. reference to Exhibit 3(b) to the Company's Annual Report on Form 10-K for the year ended December 31, 1989.
4(a) Credit Agreement dated Incorporated by June 23, 1994. reference to Exhibit 4(a) to the Company's Current Report on Form 8-K dated July 15, 1993.
4(b) First Amendment to Credit Incorporated by Agreement dated November reference to Exhibit 30, 1993. 4(a) to the Company's Current Report on Form 8-K dated February 11, 1994.
4(c) Term Loan Agreement dated Incorporated by October 16, 1992. reference to Exhibit 4(e) to the Company's Annual Report on Form 10-K for the year ended December 31, 1992.
4(d) First Amendment to Term Incorporated by Loan Agreement dated reference to Exhibit March 12, 1993. 4(g) to the Company's Annual Report on Form 10-K for the year ended December 31, 1992.
4(e) Second Amendment to Term Incorporated by Loan Agreement dated June reference to Exhibit 23, 1993. 4(b) to the Company's Current Report on Form 8-K dated July 15, 1993.
4(f) Third Amendment to Term Incorporated by Loan Agreement dated reference to Exhibit November 30, 1993. 4(b) to the Company's Current Report on Form 8-K dated February 11, 1994.
10(a)* 1986 Stock Option Incorporated by Plan, as amended on April reference to Exhibit 24, 1987, May 9, 1990, 10(b) to the Company's March 3, 1993 and April Current Report on Form 27, 1993. 8-K dated July 15, 1993.
10(b) Form of Indemnity Incorporated by Agreement with Directors reference to Exhibit and Officers of the 10(c) to the Company's Company. Annual Report on Form 10-K for the year ended December 31, 1990.
10(c)* Retirement Agreement Incorporated by between the Company and reference to Exhibit Richard D. McFarland 10(f) to the Company's dated January 1, 1990. Annual Report on Form 10-K for the year ended December 31, 1989.
10(d)* Form of Non-Employee Incorporated by Director Retirement reference to Exhibit Compensation Agreement. 10(g) to the Company's Annual Report on Form 10-K for the year ended December 31, 1992.
10(e)* IFG Executive Deferred Incorporated by Compensation Plan dated reference to Exhibit March 31, 1993. 10(a) to the Company's Current Report on Form 8-K dated July 15, 1993.
10(f) Trust Agreement for Filed herewith. Executive Deferred Compensation Plan dated February 11, 1994.
11 Computation of net Filed herewith. earnings per share.
21 List of subsidiaries. Filed herewith.
23 Independent Auditors' Filed herewith. consent.
24 Power of attorney. 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 1993.
REPORT FOR EMPLOYEE STOCK PURCHASE PLAN:
The financial statements required by Form 11-K with respect to the Company's Stock Bonus Plan will be filed by amendment hereto within 180 days of such plan's fiscal year end as permitted by Rule 15d-21.
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.
INTER-REGIONAL FINANCIAL GROUP, INC.
By Daniel J. Reuss __________________________ Daniel J. Reuss Senior Vice President, Corporate Controller and Treasurer
Dated: March 21, 1994
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 President, Chief Executive _____________________ Officer (Principal Executive Irving Weiser Officer) and Director
Daniel J. Reuss Senior Vice President, Controller _____________________ and Treasurer (Principal Daniel J. Reuss Financial and Accounting Officer)
Susan S. Boren Director _____________________ Susan S. Boren
F. Gregory Fitz-Gerald Director By Daniel J. Reuss _____________________ _________________ F. Gregory Fitz-Gerald Daniel J. Reuss Pro Se and as Attorney-in-Fact Richard D. McFarland Chairman of the Dated: March 21, 1994 _____________________ Board and Richard D. McFarland Director
Lawrence Perlman Director _____________________ Lawrence Perlman
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.
David A. Smith Executive Vice President _____________________ and Director David A. Smith
INTER-REGIONAL FINANCIAL GROUP, INC. AND SUBSIDIARIES
FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES As of December 31, 1993 and 1992 and for each of the years in the three-year period ended December 31, 1993
Page ---- Independent Auditors' Report 18
Consolidated Financial Statements:
Consolidated statements of operations 19
Consolidated balance sheets 20
Consolidated statements of shareholders' equity 21
Consolidated statements of cash flows 22
Notes to consolidated financial statements 23
Financial Statement Schedules:
Schedule III - Condensed financial information of the registrant 37
Schedule IX - Short-term borrowings 41
___________
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.
SCHEDULE IX - SHORT-TERM BORROWINGS
Exhibit 10(f)
TRUST AGREEMENT IFG EXECUTIVE DEFERRED COMPENSATION PLAN First Effective February 11, 1994
Page ---- SECTION 1 INTRODUCTION 2
SECTION 2 ESTABLISHMENT OF TRUST 4
SECTION 3 PAYMENTS TO PLAN PARTICIPANTS AND THEIR BENEFICIARIES 4
SECTION 4 PAYMENTS TO COMPANY 5
SECTION 5 TRUSTEE RESPONSIBILITY REGARDING PAYMENTS TO TRUST BENEFICIARY WHEN COMPANY IS INSOLVENT 5
SECTION 6 INVESTMENT AUTHORITY 6
SECTION 7 DISPOSITION OF INCOME 6
SECTION 8 ACCOUNTING BY TRUSTEE 6
SECTION 9 RESPONSIBILITY OF TRUSTEE 7
SECTION 10 COMPENSATION AND EXPENSES OF TRUSTEE 7
SECTION 11 RESIGNATION AND REMOVAL OF TRUSTEE 7
SECTION 12 APPOINTMENT OF SUCCESSOR 8
SECTION 13 AMENDMENT OR TERMINATION 8
SECTION 14 MISCELLANEOUS 9
SECTION 15 EFFECTIVE DATE 9
SIGNATURES 9
TRUST AGREEMENT IFG EXECUTIVE DEFERRED COMPENSATION PLAN
THIS TRUST AGREEMENT, Made and entered into as of February 11, 1994, by and between INTER-REGIONAL FINANCIAL GROUP, INC., a Delaware corporation (hereinafter sometimes referred to as "IFG"), and First Trust National Association , a national banking association, as trustee (said trustee and its successor or successors in trust from time to time being hereinafter collectively referred to as the "Trustee"):
WHEREAS, IFG has established a nonqualified deferred compensation plan for the benefit of its eligible employees and eligible employees of affiliated corporations by the adoption of a document known as the "IFG EXECUTIVE DEFERRED COMPENSATION PLAN" (the "Plan"); and
WHEREAS, IFG may from time to time hereafter amend, renew and extend such Plan; and
WHEREAS, the Plan is unfunded and is maintained by IFG primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees for purposes of Title I of the Employee Retirement Income Security Act of 1974; and
WHEREAS, IFG has determined that it will establish a trust fund which, subject to the claims of creditors of IFG, shall be held to pay such portion of the benefits under the Plans which IFG does not directly pay; and
WHEREAS, the creation of such a trust fund requires that IFG select a Trustee and enter into a Trust Agreement; and
WHEREAS, this is the Trust Agreement so contemplated; and
WHEREAS, the Trustee has agreed to serve as Trustee according to the terms of this Trust Agreement and the officers of IFG are authorized to execute this Trust Agreement on behalf of IFG;
NOW, THEREFORE, in consideration of the premises, the parties hereto do hereby agree as follows:
SECTION 1 INTRODUCTION
1.1. Definitions. When used herein with initial capital letters, the following words have the following meanings:
1.1.1. Beneficiary - a person designated by a Participant (or automatically by operation of the Plan Statement) to receive any benefit remaining at the death of a Participant under the terms of the Plan Statement.
1.1.2. Change in Control -
(1) the public announcement (which, for purposes of this definition), shall include, without limitation, a report filed pursuant to Section 13(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") that any person, entity or "group," within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act, other than IFG or any of its subsidiaries, or the IFG Stock Bonus Plan or any other employee benefit plan of IFG or any of its subsidiaries, or any entity holding shares in IFG's Common Stock organized, appointed or established for, or pursuant to the terms of, any such plan, has become the beneficial owner (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 35% or more of the combined voting power of IFG's then outstanding voting securities in a transaction or series of transactions;
(2) the Continuing Directors cease to constitute a majority of IFG's Board of Directors;
(3) the shareholders of IFG approve (1) any consolidation or merger of IFG in which IFG is not the continuing or surviving corporation or pursuant to which shares of IFG's stock would be converted into cash, securities or other property, other than a merger of IFG in which shareholders immediately prior to the merger have the same proportionate ownership of stock of the surviving corporation immediately after the merger; (2) any sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all or substantially all of the assets of IFG; or (3) any plan of liquidation or dissolution of IFG; or
(4) the majority of the Continuing Directors determine in their sole and absolute discretion that there has been a change in control of IFG.
"Continuing Director" shall mean any person who is a member of the Board of Directors of IFG, while such a person is a member of the Board of Directors, who is not an Acquiring Person (as hereinafter defined) or an Affiliate or Associated (as hereinafter defined) of an Acquiring Person, or a representative of an Acquiring Person or of any such Affiliate or Associate, and who (A) was a member of the Board of Directors on the date of this Agreement or (B) subsequently becomes a member of the Board of Directors, if such person's initial nomination for election or initial election to the Board of Directors is recommended or approved by a majority of the Continuing Directors.
For purposes of this Section, "Acquired Person" shall mean any "person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act) who or which, together with all Affiliates and Associates of such person, is the "beneficial owner" (as defined in Rule 13d-3 promulgated under the Exchange Act), directly or indirectly, of securities of IFG representing 35% or more of the combined voting power of IFG's then outstanding securities, but shall not include IFG, any subsidiary of IFG or any employee benefit plan of IFG or of any subsidiary of IFG or any entity holding shares of IFG's Common Stock organized, appointed or established for, or pursuant to the terms of, any such plan; and "Affiliate" and "Associate" shall have the respective meanings ascribed to such terms in Rule 12b-2 promulgated under the Exchange Act.
1.1.3. Company - Inter-Regional Financial Group, Inc., a Delaware corporation, and any successor thereof that adopts the Plan.
1.1.4. Compensation Committee - the Compensation and Organization Committee of the Board of Directors of IFG or any successor Committee thereto established by such Board of Directors.
1.1.5. Fund - the assets held under this Trust Agreement by the Trustee from time to time, including all contributions of the Company and the investments and reinvestments, earnings and profits thereon.
1.1.6. Insolvent, Insolvency - the condition which exists when Company is: (i) generally unable to pay its debts when they are due, or (ii) subject to a pending proceeding as a debtor under the United States Bankruptcy Code.
1.1.7. Participant - an employee of the Company who has become and remains a participant in the Plan in accordance with the provisions of the Plan Statement.
1.1.8. Plan - the unfunded, nonqualified "IFG Executive Deferred Compensation Plan" of the Company which is established for the benefit of a select group of management or highly compensated employees eligible to participate therein, as set forth in the Plan Statement and as amended, renewed or extended from time to time.
1.1.9. Plan Statement - the separate written documents, as adopted by Company which sets forth the terms, conditions and provisions of the Plan, as the same may be amended, renewed or extended from time to time thereafter.
1.1.10. Trust Agreement - this written document entitled "TRUST AGREEMENT, IFG EXECUTIVE DEFERRED COMPENSATION PLAN" entered into by and between Company and the Trustee effective as of February 11, 1994, as the same may be amended from time to time thereafter.
1.1.11. Trustee - the Trustee originally named hereunder and its successor in trust.
1.1.12. Valuation Date - each December 31.
1.2. Rules of Interpretation. Whenever appropriate, words used herein in the singular may be read in the plural, or words used herein in the plural may be read in the singular; the masculine may include the feminine; and the words "hereof," "herein" or "hereunder" or other similar compounds of the word "here" shall mean and refer to this entire Trust Agreement and not to any particular paragraph or section of this Trust Agreement unless the context clearly indicates to the contrary. The titles given to the various sections of this Trust Agreement are inserted for convenience of reference only and are not part of this Trust Agreement, and they shall not be considered in determining the purpose, meaning or intent of any provision hereof. Any reference in this Trust Agreement to a statute or regulation shall be considered also to mean and refer to any subsequent amendment or replacement of that statute or regulation. This instrument has been executed and delivered in the State of Minnesota and has been drawn in conformity to the laws of that State and shall be construed and enforced in accordance with the laws of the State of Minnesota.
SECTION 2 ESTABLISHMENT OF TRUST
2.1. Establishment Of Trust. Company hereby deposits with Trustee in trust $2,832,193.00, which shall become the principal of the Trust to be held, administered and disposed of by Trustee as provided in this Trust Agreement. The Company shall make additional deposits of cash or other property from time to time as it may determine in its sole and absolute discretion. Neither Trustee nor any Participant or beneficiary shall have any right to compel any additional deposits.
2.2. Fund Established. A Fund is hereby established by Company. The Fund shall be held by Trustee in trust and dealt with in accordance with the provisions of this Trust Agreement. This Trust Agreement is intended to create a trust which is a grantor trust within the meaning of section 671 of the Internal Revenue Code, as amended, and shall be construed accordingly. Subject to all other terms and provisions of this Trust Agreement, the Fund shall be held and disposed of:
2.2.1. For the purpose of paying benefits required to be paid under the Plan Statement to Participants and Beneficiaries, as provided in Section 3; and
2.2.2. To satisfy claims of creditors of Company in the event Company is determined to be Insolvent; and
2.2.3. To return assets to Company which both are requested by Company and are determined by the Trustee to be in excess of amounts reasonably believed necessary to satisfy the claims of all Participants and Beneficiaries under the terms of the Plan, as provided in Sections 3 and 4.
2.3. Valuation. Trustee shall value the Fund as of each Valuation Date, which valuation shall reflect, as nearly as possible, the then fair market value of the assets comprising the Fund (including income accumulations therein).
2.4. Irrevocability of Trust. The Trust hereby established shall be irrevocable by Company.
SECTION 3 PAYMENTS TO PLAN PARTICIPANTS AND THEIR BENEFICIARIES
3.1. Payments to Plan Participants -
3.1.1. Company shall deliver to Trustee from time to time one or more schedules (the "Payment Schedule") that indicate the amounts payable in respect of each Participant (and his or her Beneficiaries), that provides a formula or other instructions acceptable to Trustee for determining the amounts so payable, the form in which such amount is to be paid (as provided for or available under the Plan), and the time of commencement for payment of such amounts. Except as otherwise provided herein, Trustee shall make payments to the Participants and their Beneficiaries in accordance with the Payment Schedule. Trustee shall make provision for the reporting and withholding of any federal, state or local taxes that may be required to be withheld with respect to the payments of benefits pursuant to the terms of the Plan and shall pay amounts withheld to the appropriate taxing authorities or determine that such amounts have been reported, withheld and paid by Company.
3.1.2. The entitlement of a Participant or his Beneficiaries to benefits under the Plan shall be determined by Company or such party as it shall designate under the Plan, and any claim for such benefits shall be considered and reviewed under the procedures set forth in the Plan.
3.1.3. Company may make payment of benefits directly to Participants or their Beneficiaries as they become due under the terms of the Plan. Company shall notify Trustee of its decision to make payment of benefits directly prior to the time amounts are payable to Participants or their Beneficiaries. In addition, if the principal of the Trust, and any earnings thereon, are not sufficient to make payments of benefits in accordance with the terms of the Plan, Company shall make the balance of each such payment as it falls due. Trustee shall notify Company where principal and earnings are not sufficient. Trustee shall also notify the Company when and if any assets may be returned to the Company as provided in Section 2.2.3 hereof.
SECTION 4 PAYMENTS TO COMPANY
Except as provided in Section 2.2.3 and Section 3 hereof, Company shall have no right or power to direct Trustee to return to Company or to divert to others any of the Trust assets before all benefits have been paid to all Participants and Beneficiaries pursuant to the terms of the Plan.
SECTION 5 TRUSTEE RESPONSIBILITY REGARDING PAYMENTS TO TRUST BENEFICIARY WHEN COMPANY IS INSOLVENT
5.1. Cease Payments. Trustee shall cease payment of benefits to Participants and Beneficiaries if the Company is Insolvent.
5.2. Claims of Creditors. At all times during the continuance of this Trust, the principal and income of the Trust shall be subject to claims of general creditors of Company under federal and state law as set forth below.
5.2.1. The Compensation Committee shall have the duty to inform Trustee in writing of Company's Insolvency. If a person claiming to be a creditor of Company alleges in writing to Trustee that Company has become Insolvent, Trustee shall determine whether Company is Insolvent and, pending such determination, Trustee shall discontinue payment of benefits to Participants or Beneficiaries.
5.2.2. Unless Trustee has actual knowledge of Company's Insolvency, or has received notice from Company or a person claiming to be a creditor alleging that Company is Insolvent, Trustee shall have no duty to inquire whether Company is Insolvent. Trustee may in all events rely on such evidence concerning Company's solvency as may be furnished to Trustee and that provides Trustee with a reasonable basis for making a determination concerning Company's solvency.
5.2.3. If at any time Trustee has determined that Company is Insolvent, Trustee shall discontinue payments to Participants and Beneficiaries and shall hold the assets of the Trust for the benefit of Company's general creditors. Nothing in this Trust Agreement shall in any way diminish any rights of Participants and Beneficiaries to pursue their rights as general creditors of Company with respect to benefits due under the Plan or otherwise.
5.2.4. Trustee shall resume the payment of benefits to Participants and Beneficiaries in accordance with Section 3 of this Trust Agreement only after Trustee has determined that Company is not Insolvent (or is no longer Insolvent).
5.3. Resumption of Payments. Provided that there are sufficient assets, if Trustee discontinues the payment of benefits from the Trust pursuant to Section 5 hereof and subsequently resumes such payments, the first payment following such discontinuance shall include the aggregate amount of all payments due to Participants and Beneficiaries under the terms of the Plan for the period of such discontinuance, less the aggregate amount of payments, if any, made to Participants and Beneficiaries by Company pursuant to the Plan during any such period of discontinuance.
SECTION 6 INVESTMENT AUTHORITY
Trustee shall invest any funds transferred to it by Company in such manner as may reasonably be requested by Company. In the event Company fails to give such instructions to Trustee or Trustee determines such instructions are grossly unreasonable, Trustee shall then have full authority to invest any funds transferred to it by Company as Trustee sees fit, consistent with the terms and conditions of this Trust Agreement and the Plan. Trustee may invest in securities (including stock or rights to acquire stock) or obligations issued by Company. All rights associated with assets of the Trust, including voting rights with respect to any equity securities held by the Trust (including shares of IFG's Common Stock), shall be exercised by Trustee or the person designated by Trustee, and shall in no event be exercisable by or rest with Participants.
Company shall have the right at any time, and from time to time in its sole discretion, to substitute assets, acceptable to Trustee, of equal fair market value for any asset held by the Trust. This right is exercisable by Company in a nonfiduciary capacity without the approval or consent of any person in a fiduciary capacity.
SECTION 7 DISPOSITION OF INCOME
During the term of this Trust, all income received by the Trust, net of expenses and taxes, if any, shall be accumulated and reinvested in accordance with the terms hereof.
SECTION 8 ACCOUNTING BY TRUSTEE
Trustee shall keep accurate and detailed records of all investments, receipts, disbursements, and all other transactions required to be made, including such specific records as shall be agreed upon in writing between Company and Trustee. Within sixty (60) days following the close of each calendar year and within sixty (60) days after the removal or resignation of Trustee, Trustee shall deliver to Company a written account of its administration of the Trust during such year or during the period from the close of the last preceding year to the date of such removal or resignation, setting forth all investments, receipts, disbursements and other transactions effected by it, including a description of all securities and investments purchased and sold with the cost or net proceeds of such purchases or sales (accrued interest paid or receivable being shown separately), and showing all cash, securities and other property held in the Trust at the end of such year or as of the date of such removal or resignation, as the case may be.
SECTION 9 RESPONSIBILITY OF TRUSTEE
9.1 General Duty of Care. Trustee shall act with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent person acting in like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims, provided, however, that Trustee shall incur no liability to any person for any action taken pursuant to a direction, request or approval given by Company which is contemplated by, and in conformity, the terms of the Plan or this Trust and is given in writing by Company. In the event of a dispute between Company and any person, Trustee may apply to a court of competent jurisdiction to resolve the dispute.
9.2. Litigation Expenses. If Trustee undertakes or defends any litigation arising in connection with this Trust, Company agrees to indemnify Trustee against Trustee's costs, expenses and liabilities (including, without limitation, attorneys' fees and expenses) relating thereto and to be primarily liable for such payments. If Company does not pay such costs, expenses and liabilities in a reasonably timely manner, Trustee may obtain payment from the Trust.
9.3 Use of Counsel. Trustee may consult with legal counsel (who may also be counsel for Company generally) with respect to any of its duties or obligations hereunder.
9.4 Use of Agents. Trustee may hire agents, accountants, actuaries, investment advisors, financial consultants or other professionals to assist it in performing any of its duties or obligations hereunder.
9.5. General Grant of Authority. Trustee shall have, without exclusion, all powers conferred on trustees by applicable law, unless expressly provided otherwise herein.
9.6. No Business Obligation. Notwithstanding any powers granted to Trustee pursuant to this Trust Agreement or to applicable law, Trustee shall not have any power that could give this Trust the objective of carrying on a business and dividing the gains therefrom, within the meaning of Section 301.7701-2 of the Procedure and Administrative Regulations promulgated pursuant to the Internal Revenue Code of 1986, as amended.
SECTION 10 COMPENSATION AND EXPENSES OF TRUSTEE
Company shall pay all administrative and Trustee's fees and expenses. If not so paid, the fees and expenses shall be paid from the Trust.
SECTION 11 RESIGNATION AND REMOVAL OF TRUSTEE
11.1. Resignation. Trustee may resign at any time by written notice to Company, which shall be effective thirty (30) days after receipt of such notice unless Company and Trustee agree otherwise.
11.2. Removal. Trustee may be removed by Company on thirty (30) days notice or upon shorter notice accepted by Trustee
11.3. Change in Control. Upon a Change in Control, as defined herein, Trustee may not be removed by Company for ninety (90) days. If for any reason Trustee resigns or is removed within ninety (90) days of a Change in Control, Trustee shall select a successor Trustee in accordance with the provisions of Section 12.2 hereof prior to the effective date of Trustee's resignation or removal.
11.4. Transfer of Assets. Upon resignation or removal of Trustee and appointment of a successor Trustee, all assets shall subsequently be transferred to the successor Trustee. The transfer shall be completed within thirty (30) days after receipt of notice of resignation, removal or transfer, unless Company extends the time limit.
11.5. Court Appointment. If Trustee resigns or is removed, a successor shall be appointed, in accordance with the terms hereof. If no such appointment has been made, Trustee may apply to a court of competent jurisdiction for appointment of a successor or for instructions. All expenses of Trustee in connection with the proceeding shall be allowed as administrative expenses of the Trust.
SECTION 12 APPOINTMENT OF SUCCESSOR
12.1. New Trustee. If Trustee resigns or is removed in accordance with Section 11 hereof,the Compensation Committee may appoint any third party, such as a bank trust department or other party that may be granted corporate trustee powers under Minnesota law, as a successor to replace Trustee upon resignation or removal. The appointment shall be effective when accepted in writing by the new Trustee, who shall have all of the rights and powers of the former Trustee, including ownership rights in the Trust assets. The former Trustee shall execute any instrument necessary or reasonably requested by Company or the successor Trustee to evidence the transfer.
12.2. Change in Control. Upon a Change in Control, if Trustee resigns or is removed and selects a successor Trustee pursuant to Section 11.3, Trustee may appoint any third party such as a bank trust department or other party that may be granted corporate trustee powers under Minnesota law. The appointment of a successor Trustee shall be effective when accepted in writing by the new Trustee. The new Trustee shall have all the rights and powers of the former Trustee, including ownership rights in Trust assets. The former Trustee shall execute any instrument necessary or reasonably requested by the successor Trustee to evidence the transfer.
12.3. Successor Trustee Not Liable. The successor Trustee need not examine the records and acts of any prior Trustee and may retain or dispose of existing Trust assets, subject to the terms hereof. The successor Trustee shall not be responsible for and Company shall indemnify and defend the successor Trustee from any claim or liability resulting from any action or inaction of any prior Trustee or from any other past event, or any condition existing at the time it becomes successor Trustee.
SECTION 13 AMENDMENT OR TERMINATION
13.1. Amendment. This Trust Agreement may be amended by a written instrument executed by Trustee and Company. Notwithstanding the foregoing, no such amendment shall conflict with the terms of the Plan or shall make the Trust revocable. Notwithstanding the foregoing, after a Change in Control, and prior to the time that all liabilities to all Participants and all Beneficiaries under the Plan have been satisfied in full, no amendment to this Trust Agreement shall be effective without the affirmative, prior written concurrence of all Participants and all Beneficiaries of deceased Participants (determined as of the time any such amendment is to be adopted).
13.2. Termination. Subject to Company's powers set forth in Sections 13.1 hereof, which may not be exercised to commence an early termination of the Trust, the Trust shall not terminate until the date on which all Participants and Beneficiaries are no longer entitled to benefits pursuant to the terms of the Plan. Notwithstanding the foregoing, Company may terminate the Trust prior to the satisfaction of all such benefits if Company obtains the prior written concurrence of Participants and Beneficiaries of deceased Participants (determined as of the time of such termination) whose accounts are credited with seventy-five percent (75%) of all of the assets of the Trust. All assets remaining a part of the Trust at its termination shall be returned to Company.
SECTION 14 MISCELLANEOUS
14.1. Separability. Any provision of this Trust Agreement prohibited by law shall be ineffective to the extent of any such prohibition, without invalidating the remaining provisions hereof.
14.2. Spendthrift Provision. Benefits payable to Participants and Beneficiaries under this Trust Agreement may not be anticipated, assigned (either at law or in equity), alienated, pledged, encumbered or subjected to attachment, garnishment, levy, execution or other legal or equitable process.
SECTION 15 EFFECTIVE DATE
The effective date of this Trust Agreement shall be February 11, 1994.
IN WITNESS WHEREOF, each of the parties hereto has caused this Trust Agreement to be executed as of the day and year first above written.
INTER-REGIONAL FINANCIAL GROUP, INC.
By: Connie L. Bush By: Daniel J. Reuss Its: Vice President Its: Senior Vice President
FIRST TRUST NATIONAL ASSOCIATION
And: Beth A. Mega And: Dale Schumachar Its: Vice President Its: Vice President
EXHIBIT 11
EXHIBIT 22
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
Board of Directors Inter-Regional Financial Group, Inc.:
We consent to the incorporation by reference in Registration Statement No. 33-59426, Registration Statement No. 33-39261, 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 Inter-Regional Financial Group, Inc., and subsidiaries of our report dated February 1, 1994, relating to the consolidated balance sheets of Inter- Regional Financial Group, Inc. and subsidiaries as of December 31, 1993 and 1992, and the consolidated statements of operations, shareholders' equity and cash flows and related financial statement schedules for each of the years in the three-year period ended December 31, 1993, which report appears in the December 31, 1993 Annual Report on Form 10-K of Inter-Regional Financial Group, Inc.
KPMG Peat Marwick
Minneapolis, Minnesota March 21, 1994
Exhibit 24
POWER OF ATTORNEY
The undersigned hereby constitute and appoint IRVING WEISER 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 Inter-Regional Financial Group, Inc. for the fiscal year ending December 31, 1993 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 --------- ----
Susan S. Boren - -------------------------------- March 6, 1994 Susan S. Boren
F. Gregory Fitz-Gerald - -------------------------------- March 1, 1994 F. Gregory Fitz-Gerald
Richard D. McFarland - -------------------------------- March 7, 1994 Richard D. McFarland
Lawrence Perlman - -------------------------------- March 1, 1994 Lawrence Perlman
Daniel J. Reuss - -------------------------------- March 1, 1994 Daniel J. Reuss
C.A. Rundell, Jr. - -------------------------------- March 5, 1994 C.A. Rundell, Jr.
Robert L. Ryan - -------------------------------- March 7, 1994 Robert L. Ryan
Arthur R. Schulze, Jr. - -------------------------------- March 1, 1994 Arthur R. Schulze, Jr.
David A. Smith - -------------------------------- March 14, 1994 David A. Smith
Irving Weiser - -------------------------------- March 7, 1994 Irving Weiser