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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
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[ ] TRANSITION REPORT PURSUANT TO SECTION 10 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 1-13940
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EVEREN CAPITAL CORPORATION
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(Exact name of registrant as specified in its charter)
DELAWARE 36-4019175
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
77 West Wacker Drive, Chicago, Illinois 60601
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (312) 574-6000
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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
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Common Stock New York Stock Exchange, Inc.
Securities registered pursuant to Section 12(g) of the Act: None
Indicated by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
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Indicated by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment on this Form 10-K. [ ]
As of March 14, 1997, the aggregate market value of the voting stock held by
non-affiliates of the registrant was approximately $147,250,135 (based on the
closing price on the New York Stock Exchange and on the assumption that the
10,688,606 shares held by the trustee of the registrant's 401(k) and stock
ownership plan are considered held by an "affiliate").
As of March 14, 1997 the following number of shares were outstanding for each
class of the registrant's common stock:
Common Stock, $.01 par value - 17,085,969
Documents Incorporated by Reference - Certain sections of the Registrant's
Proxy Statement dated April 4, 1997 for Annual Meeting of Stockholders to be
held May 6, 1997 are incorporated into Part III of this Form 10-K.
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INDEX
PART I
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Page
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Item 1. Business 3
Item 2. Properties 16
Item 3. Legal Proceedings 16
Item 4. Submission of Matters to a Vote of
Security Holders 18
PART II
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Item 5. Market for Registrant's Common Equity
and Related Stockholder Matters 18
Item 6. Selected Financial Data 20
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 21
Item 8. Financial Statements and Supplementary Data 38
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 63
PART III
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Item 10. Directors and Executive Officers of the
Registrant 63
Item 11. Executive Compensation 67
Item 12. Security Ownership of Certain Beneficial
Owners and Management 67
Item 13. Certain Relationships and Related
Transactions 67
PART IV
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Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K 67
POWER OF ATTORNEY AND SIGNATURES S-1
EXHIBIT INDEX E-4
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PART I
ITEM 1.BUSINESS
General
EVEREN Capital Corporation and its subsidiaries ("EVEREN" or the
"Company") is a full-service securities brokerage firm that provides a broad
range of investment services and products primarily to individuals and also to
institutions, corporations and municipalities. The Company's core strength is
its retail operations, which are focused on individual investors and which
generated more than 70% of the Company's net revenues in each of the last
three years. The Company also engages in capital markets, asset management
and clearing activities that complement and capitalize on the strength of the
Company's retail operations.
In its retail business, conducted primarily through its wholly- owned
subsidiary, EVEREN Securities, Inc. ("EVEREN Securities"), the Company focuses
on maintaining and developing strong client relationships in local and
regional markets while providing the breadth and quality of services and
products offered by national brokerage firms. Headquartered in Chicago, the
Company operates its retail business through an integrated network of
approximately 1,220 investment consultants located in approximately 140
offices in 27 states. As of January 1, 1996, EVEREN was ranked as the twelfth
largest brokerage firm in the United States based on number of retail
investment consultants, according to the Securities Industry Association. At
year end, EVEREN held over $40 billion of customer assets in approximately
500,000 client accounts.
EVEREN enjoys strong market positions in targeted regional markets with
approximately 74% of branch offices and 75% of its investment consultants
located in the states of Illinois, California, Ohio, Wisconsin, Colorado and
Texas. EVEREN's market penetration is primarily the result of the
consolidation and integration in 1990 of five prominent predecessor firms to
form a network of seasoned investment consultants.
The Company also provides a full range of equity and fixed income
products, investment banking services and other capital markets products and
services through approximately 230 professionals located in 19 offices in
major cities in the United States. The Company is increasing the coordination
of its investment banking, syndicate and trading activities and focusing those
activities on middle market and growth companies in selectively targeted
industries in which management believes the Company has specialized expertise.
In addition, EVEREN is expanding its asset management business through a joint
venture with Mentor Investment Group, Inc. ("Mentor"), an asset management
company that had approximately $10 billion of assets under management at year
end 1996. Through its subsidiary, EVEREN Clearing Corp. ("EVEREN Clearing"),
the Company also provides securities clearing services to its trading and
brokerage areas and approximately 30 correspondent firms.
In September 1995, the Company became independent when the EVEREN Capital
Corporation 401(k) and Employee Stock Ownership Plan ("KSOP") purchased 96.6%
of the Company's then outstanding Common Stock (the "Buy- out") from Kemper
Corporation ("Kemper") for an aggregate cash price of $71.4 million ($55.0
million of which was funded by bank borrowings) plus $30.0 million of the
Company's Exchangeable Preferred Stock. In October 1996, the Company
completed its initial public offering whereby 4.6 million shares of its Common
Stock were sold at a price of $18.50 per share. Approximately 75% of the
Company's
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Common Stock is currently employee-owned, with approximately 90% of the
Company's current employees having an ownership interest. The Company
experienced net losses in 1992, 1993, 1994 and 1995 of $38.4 million, $3.7
million, $2.2 million and $15.9 million, respectively. Since the Buy-out,
EVEREN has experienced improved growth and profitability relative to prior
periods. For the fourth quarter of 1995, its first full quarter as an
independent entity, the Company reported net income of $6.2 million on net
revenues of $131.3 million compared to net income of $0.7 million on net
revenues of $114.2 million for the fourth quarter of 1994. For the year ended
December 31, 1996, the Company generated net income of $62.5 million,
including a $30.2 million after-tax gain on the sale of a subsidiary, on net
revenues of $536.6 million compared to a net loss of $15.9 million on net
revenues of $490.7 million for 1995. Management believes that the Company's
independence and employee ownership have resulted in high levels of employee
motivation, confidence and commitment, which have in turn contributed
significantly to the Company's improved performance.
Strategy
EVEREN is dedicated to expanding its retail brokerage franchise while
increasing the proportion of revenues and profits contributed by its capital
markets and asset management businesses. The Company continually focuses on
enhancing its profitability through revenue growth and strict cost controls.
Key elements of the Company's strategy include actions to:
- Provide a high level of value-added service to clients. Management
seeks to provide its retail investment consultants with a work
environment and resources that enable them to offer clients service
superior to that provided by most national brokerage firms and a range
of products and services broader than those offered by most competing
regional brokerage firms. Management believes that the Company's
ability to provide clients with superior service is primarily
attributable to the long average tenure and experience of its
investment consultants, a high average level of support staff per
investment consultant and the breadth of the Company's service and
product offerings. The Company is also actively seeking to enhance the
consultative, as opposed to transactions-oriented, nature of its
approach in an effort to meet and serve its clients' needs more
effectively.
- Increase penetration in existing markets. EVEREN targets select local
markets in which its presence often equals or exceeds that of larger
national brokerage firms. The Company is focused on achieving target
market penetrations (generally 10% -15% market share) in most of its
markets to realize operating efficiencies and develop a meaningful
presence in such communities. To achieve desired market penetration,
the Company is building its investment consultant base by recruiting
experienced investment consultants in appropriate markets, as well as
selectively hiring and training new investment consultants. Newly
recruited investment consultants typically occupy available space
within existing offices, although the Company may selectively open new
offices in locations in which it believes it can reach desired
penetration levels.
- Grow client assets and increase asset management activity. The Company
seeks to increase the level of client wealth maintained at the Company
by encouraging existing clients to maintain an increasing proportion of
their financial assets with the Company and by attracting new clients.
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Toward this end, the Company undertook two significant initiatives in
1996. The first initiative was the introduction of new cash management
products that allow clients to consolidate their financial assets into
one, full service integrated account with a variety of features. The
second initiative was a joint venture with Mentor, which provides the
Company's investment consultants with proprietary mutual funds to sell
to existing and new clients. The arrangement expands the Company's
product offerings while also allowing the Company to diversify and
potentially increase its earnings through direct participation in
Mentor's earnings. The Company is seeking to increase the recurring,
fee-based revenues generally associated with asset management
activities.
- Expand capital markets activity. The Company intends to increase its
origination of equity products. To implement this strategy, the Company
is increasing the coordination of its research, investment banking,
syndicate and equity trading activities to focus those activities on
middle market and growth companies in a group of core industries. By
focusing its activities, the Company expects to enhance its reputation
in such industries and increase its penetration, thereby leading to the
execution of a greater volume of larger, higher margin transactions.
- Pursue opportunistic acquisitions consistent with the Company's overall
strategy. The Company intends to selectively pursue acquisition
opportunities that either deepen penetration in its existing markets or
add new, sufficiently penetrated, markets to its franchise. Management
intends to selectively pursue acquisitions, principally of smaller
brokerage firms that have full-service orientation similar to the
Company and that are likely to further leverage the Company's
infrastructure. The Company intends to continue to consider from time
to time the divestiture, elimination or resizing of other non-core
businesses, programs or assets in order to increase the focus on its
retail brokerage and capital markets businesses.
- Maintain rigorous cost discipline. The Company seeks to minimize
operating costs and to convert fixed costs to variable costs as
appropriate. The Company regularly reviews the expense levels in, and
profit contributions of, each retail branch office and business unit to
determine appropriate consolidation and other cost saving
opportunities. In addition, the Company has closely aligned the
compensation structure for branch managers and other managerial
personnel to profitability targets and the attainment of cost
minimization goals. The Company also seeks to reduce fixed cost by
divesting non-core businesses, such as BETA Systems, Inc. ("BETA"), a
wholly owned data processing and quote service subsidiary which was
sold on April 30, 1996 for $63.5 million, and resizing certain business
units, such as its municipal bond unit.
- Maintain conservative risk profile. The Company continues to control
the risk in each of its businesses. Securities inventories are
maintained at relatively low levels, hedged to the extent practicable
and subjected to strict risk management guidelines. The Company seeks
to limit its exposure to trading losses by focusing its trading
activity on facilitating its retail and institutional businesses rather
than on trading for its own account. Management seeks to foster a
conservative approach to risk through a number of mechanisms, including
the linking of trader compensation to production as
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a priority over trading profits, an emphasis on compliance, a focus on
education and the implementation of thorough risk management systems
monitored on a daily basis.
Nature of the Securities Brokerage Business
The securities brokerage business is subject to significant risks,
including the risk of losses resulting from the underwriting or ownership of
securities, trading losses, counterparty failure to meet commitments, customer
fraud, employee fraud, issuer fraud, errors and misconduct, failure in
connection with the processing of securities transactions and litigation. The
securities brokerage business is directly affected by many factors, including
economic and political conditions, broad trends in business and finance,
legislation and regulation affecting the national and international business
and financial communities, currency values, inflation, market conditions, the
availability and cost of short-term or long-term funding and capital, the
credit capacity or perceived creditworthiness of the securities industry in
the marketplace and the level and volatility of interest rates. Such factors
can lead to lower price levels for securities and illiquid markets.
Lower price levels of securities may result in (a) reduced volume of
securities, options and futures transactions, with a consequent reduction in
commission revenues, (b) losses from declines in the market value of
securities held in trading, investment and underwriting positions and (c)
reduced management fees calculated as a percentage of assets managed. In
periods of low volume, levels of profitability are further adversely affected
because certain expenses remain relatively fixed. Illiquid markets may result
in the Company having difficulty selling securities, hedging its securities
positions and investing funds under its management. The Company believes its
trading strategy and risk management procedures reduce its exposure to losses
resulting from such risks, although there can be no assurance that such losses
will not occur or if they do, that they will not be material.
Dependence on Outside Sources of Financing
The Company, like others in the securities industry, relies on external
sources to finance a significant portion of its day-to-day operations,
principally to finance customer margin account balances and certain other
transactions. The principal sources of the Company's cash and liquidity are
commissions, repurchase agreements and collateralized bank loans. EVEREN
Clearing, the Company's clearing subsidiary, maintains credit lines
aggregating approximately $600 million with several banks, of which $140
million (including $40 million of unsecured credit arrangements) had been
drawn down as of December 31, 1996.
Retail Brokerage Activities
EVEREN's retail business offers clients a complete range of investment
products, such as stocks, bonds and mutual funds, and investment services,
including investment advice, financial planning and asset management.
Management believes that the breadth and quality of the Company's products and
services, coupled with the productivity, tenure and experience of its
investment consultants, allow it to provide superior service to its clients
and help to distinguish EVEREN from its competitors.
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Markets
EVEREN's investment products and services are marketed to clients by a
network of approximately 1,220 investment consultants operating out of
approximately 140 retail branch offices in 27 states. Although EVEREN
Securities' single largest office in terms of revenue in 1996 was in New York
City, approximately three-quarters of the Company's investment consultants are
located in branch offices in California (286 investment consultants), Ohio
(155), Illinois (149), Wisconsin (118), Colorado (100) and Texas (96). Many
of EVEREN's retail offices are located in smaller cities or suburban areas.
The Company's top fifteen performing branch offices accounted for 35% of
retail sales revenues in 1996.
Retail Products and Services
EVEREN offers a full line of investment products to its retail clients.
These include cash management accounts, listed and over-the- counter stocks,
government and corporate bonds, tax-exempt state and local government bonds,
open-and closed-end mutual funds, unit investment trusts, commodities,
individual retirement accounts ("IRAs") and a wide variety of investment
advisory products. Service offerings include investment advisory services,
financial planning services such as retirement planning and planning for
college funding, asset allocation advice, margin loans and prototype 401(k)
plans and services.
The table below sets forth the percentage contribution of various retail
investment products and services to EVEREN's 1996 retail revenues:
<TABLE>
<CAPTION>
Percentage of
Product/Service Retail Revenues (1)
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<S> <C>
Equities 39%
Asset management 13
Margin interest 13
Mutual funds 13
Other 11
Taxable fixed income 8
Municipals 3
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Total 100%
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(1) Retail revenues include commissions, principal sales credits, 12b-1 and
managed account fees credited to the production of an individual
investment consultant, as well as asset management and margin interest
income earned on related client assets.
In May 1996 as part of its strategy to grow client assets and increase
asset management activity, EVEREN introduced two new forms of cash management
accounts, the EVEREN Automatic Access Account(R) ("AAA") and the EVEREN
Advantage(SM) account ("Advantage"). AAA and Advantage are designed to allow
clients to consolidate their financial assets in a full service, integrated
account. AAA accounts feature numerous services, including a daily sweep of
any cash in the client's account to a money market mutual fund, unlimited free
checking, debit cards, margin account access and automatic bill payment.
Advantage account holders also will
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receive customized statements showing gain and loss information, complimentary
IRA and EVEREN Online Service, a service that will provide the client with
direct access to his or her account information via computer modem.
Investment Advisory Services
The Company's investment advisory services include performance
monitoring, selection of third party investment managers and, to a limited
extent, discretionary asset management. The investment advisory services
offered by the Company are tailored for a variety of clients, including
individuals, pension and profit-sharing plans, trusts and estates, charitable
organizations, corporations and other business and governmental entities.
These services are provided by approximately 425 investment consultants
located in 115 of the Company's branch offices. Investment advisory services
are typically rendered on a fixed or "wrap" fee basis, such that all services,
including execution services, are provided by EVEREN for a fixed fee, payable
quarterly, usually a percentage of assets under management.
Investment Consultants
Productivity and Tenure. One of the strengths of the Company's retail
business is the experience and productivity of its investment consultants.
Management believes that average production and average client assets per
investment consultant are important measures of productivity.
Per Investment Consultant 1996 1995 1994 1993
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Average production for $306,000 $275,000 $258,000 $295,000
period (1)
Average client assets at
period end $32.8 $27.8 $23.2 $26.5
(in millions) (2)
(1) Average production is calculated by dividing the aggregate commissions,
principal sales credits and 12b-1 and managed account fees credited to
the production of all investment consultants by the average number of
investment consultants during the period.
(2) Average client assets equals total assets held in retail client accounts
divided by number of investment consultants. Excludes certain annuity
and mutual funds and other assets not actually held in the client's
account but on which commissions or similar payments are received.
Based upon a confidential industry survey conducted by a third party,
management believes that the average production generated by the Company's
investment consultants exceeded the industry average of $275,199 for regional
firms in 1996 and was slightly below the industry average of $325,691 for all
firms. In 1994, 1995 and 1996, the Company had 19, 27 and 38 investment
consultants, respectively, whose production exceeded $1,000,000. Management
believes that the increase in investment consultant productivity from 1994 to
date is attributable, in part, to the departure of lower revenue-producing
investment consultants during this period and the recruitment of higher
revenue producing investment consultants. On average, EVEREN's investment
consultants have more than eight years of tenure with the Company and 16 years
of experience in the securities brokerage industry.
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Recruiting. In order to achieve its desired market share penetrations,
EVEREN is building its investment consultant base by recruiting experienced
investment consultants in targeted markets, as well as selectively training
new investment consultants. The Company added a net of 69 new investment
consultants in 1996, compared to a net decline of 83 investment consultants
for 1995. The Company faces significant competition from other firms seeking
to recruit qualified investment consultants, and there can be no assurance
that the Company's recruiting and retention efforts will be successful.
Training. The Company intends to strengthen its base of investment
consultants by means of its ongoing training programs. Through EVEREN
University, which provides coordinated training and educational programs, a
core curriculum is being developed to help experienced investment consultants
gather more client assets and serve clients more effectively. Trainee
investment consultants will participate in a completely revamped program that
will focus on a consultative rather than transactions-oriented approach, asset
gathering, technology and overall financial planning for clients. See
"_EVEREN University and EVEREN Foundation."
SIPC Insurance
The Company maintains insurance provided by the Securities Investors
Protection Corporation ("SIPC") for up to $500,000 per customer account, as
well as excess SIPC coverage for up to an additional $9.5 million ($10.0
million total protection) per client account. Coverage up to an additional
$49.5 million ($50.0 million total protection) is available for clients
electing specialized account services.
Capital Markets Activities
The Company engages in a full range of capital markets activities,
including product origination, trading and research of equity, taxable fixed
income and municipal securities. The Company's capital markets activities are
primarily client-driven, in contrast to those of many other securities firms
which emphasize proprietary trading, and currently account for approximately
25% of the Company's net revenues. Capital markets activities are conducted
through approximately 230 professionals in 19 offices located in major cities
across the United States.
Equities
The Company seeks to focus its equity capital markets activities
increasingly on institutional clients because of their greater share volumes
and resulting revenues. The Company is therefore seeking to coordinate its
equity securities research, investment banking, syndicate and trading
activities by industry group and focus those activities on middle market and
growth companies in a group of core industries. These industries currently
include financial services (primarily thrifts, insurance companies and finance
companies), real estate, technology (primarily computer hardware and
software), consumer goods (primarily retail, catalogues and restaurants),
industrials (primarily specialty chemicals, capital goods and selected
manufacturing), telecommunications (primarily equipment and wireless and
landline services) and health care.
Research. The Company provides equity research coverage on a group of
middle-market and growth companies in the Company's core industries. The
Company's research staff prepares periodic reports on approximately 245
publicly traded companies and uses a team approach that is
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designed to allow depth of coverage. In addition, the Company purchases
research coverage from two well-regarded investment banks. This out-sourcing
of research provides the broad services needed by retail investment
consultants and clients and allows the Company's in-house analysts to focus
where they can add value. The Company also maintains a research liaison desk
to provide responsive support service to its investment consultants and retail
clients.
Investment Banking. The Company offers a broad range of investment
banking services primarily relating to equity offerings and private placements
to middle market and growth companies, principally in the Company's core
industries. The Company has approximately 40 investment banking professionals
in 7 locations. The Company also offers other investment banking services,
including mergers and acquisitions advisory and debt origination.
Institutional Sales. The Company distributes equity securities through
an institutional equity sales force that primarily serves mid- size and large
institutional clients. The Company has approximately 30 institutional equity
sales professionals located in 4 offices. In 1996, the institutional equity
sales force generated $19.3 million of revenues.
Trading. The Company makes a market in approximately 450 over-the-
counter stocks, including most of those covered by the Company's research
department. EVEREN employs approximately 25 trading professionals who execute
transactions in both over-the-counter and listed securities primarily for
retail and institutional clients. Traders are paid based on a formula that
encourages them to work with the Company's investment consultants and
institutional sales professionals to generate sales revenues as a priority
over trading profits. The Company seeks to limit its exposure to trading
losses by focusing its trading activity on facilitating its retail and
institutional businesses rather than on trading for its own account. The
Company imposes low position limits for its traders.
Taxable Fixed Income
The Company provides a broad range of government, government agency and
corporate fixed income securities to its retail and generally smaller
institutional clients. A relatively small amount of the taxable fixed income
securities offered by the Company are originated internally, most being
obtained in the secondary market. The taxable fixed income department employs
approximately 80 professionals, including fixed income research personnel who
primarily provide investment ideas and credit oversight. To facilitate
taxable fixed income sales, the Company enters into standard repurchase and
reverse repurchase agreements with qualified institutional clients.
Municipals
The Company provides underwriting and financial advisory services to, and
distributes securities of, tax-exempt municipalities principally in the
Midwest. The Company's municipal securities business includes approximately
11 public finance investment bankers and analysts that provide underwriting
and financial advisory services. As part of its cost reduction strategy, the
Company realigned and downsized its municipal business in the third quarter of
1996, eliminating 34 out of 94 positions.
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Gateway Mortgage Acceptance Corporation
Gateway Mortgage Acceptance Corporation ("Gateway") is a wholly- owned
limited purpose subsidiary whose business activities are limited to issuing
series of collateralized mortgage obligations, directly or through one or more
trusts beneficially owned by it, to retail investors and purchasing, owning
and selling other mortgage-related assets associated with collateralized
mortgage obligations. In the fiscal year ended December 31, 1996, Gateway, as
a pass-through entity, accounted for approximately $11.9 million of interest
income and approximately $11.6 million of interest expense of the Company.
Gateway has no employees. Gateway retains the right to call, beginning four
years after issuance, the collateralized mortgage obligations it issues and
may realize a gain, if any, between the call price of such securities and the
underlying value of the collateral. See Notes 2, 7 and 8 of Notes to
Consolidated Financial Statements.
Mentor Joint Venture
In 1996, the Company entered into a joint venture (the "Joint Venture")
pursuant to which it acquired an initial 20% ownership interest in Mentor, the
asset management subsidiary of Wheat First, Butcher Singer, Inc. ("Wheat"), a
Mid-Atlantic based securities brokerage firm, for no direct cash
consideration. The Joint Venture Agreement ("JVA") provides the Company with
an opportunity not later than late 1998 to increase its ownership stake in
Mentor up to a maximum 50% equity interest (or such lesser equity interest
equal to Wheat's equity interest if another firm is added to the Joint
Venture).
By entering into the Joint Venture, the Company is seeking to grow client
assets under management by offering a greater range of asset management
products and, through its ownership interest in Mentor, to capture a portion
of earnings relating to client assets under management that would otherwise be
earned by third-party vendors.
Mentor is a regional asset management firm headquartered in Richmond,
Virginia that offers seven distinct investment styles (cash, active fixed
income, balanced, tactical asset allocation, large capitalization quality
growth, global/international equity growth and small/mid-capitalization equity
growth) through retail mutual funds, institutional mutual funds and separately
managed portfolios. As of December 31, 1996, Mentor had approximately $10.0
billion in assets under management compared to $1.0 billion in early 1993.
In 1996, the Company transferred approximately $3.1 billion of money
market mutual fund assets held in client accounts to Mentor- sponsored funds.
The JVA prohibits each of the Company and Wheat from engaging, directly or
indirectly, in the asset management business other than through Mentor or
through activities generally engaged in by broker- dealer firms.
EVEREN Clearing
The Company, through EVEREN Clearing, a broker-dealer registered with the
Securities and Exchange Commission (the "Commission") and a member firm of the
New York Stock Exchange ("NYSE") and other principal exchanges, provides
securities execution and clearing services on a fully-disclosed basis and
commodities clearing services for EVEREN Securities and other non-affiliated
broker-dealers.
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EVEREN Clearing was incorporated in Delaware in 1984 to service the
clearing needs of the broker-dealers then affiliated with Kemper. EVEREN
Clearing expanded its clearing services to outside broker-dealers in order to
leverage its clearing structure, thereby reducing EVEREN Securities' clearing
costs. As of December 31, 1996, EVEREN Clearing provided clearing services
for approximately 30 non-affiliated broker- dealers.
EVEREN University and EVEREN Foundation
In 1996, the Company established EVEREN University to provide coordinated
training, education and development programs for Company employees, clients
and others. Separate courses and programs are being developed for experienced
investment consultants, trainees, branch office managers and other employees
that will be designed to enhance their fundamental and professional skills and
improve their familiarity with the services and products the Company offers.
In conjunction with EVEREN University, the Company established the EVEREN
Foundation (the "Foundation"), a not-for-profit corporation through which the
Company's employee matching gift program, its annual retail "charity day" and
other charitable programs will be coordinated and funded. The Foundation's
focus is education. To provide initial funding for the Foundation, the
Company approved a seed grant of $250,000.
Employees
At December 31, 1996, the Company employed approximately 3,200 persons.
Of that number, approximately 2,840 were employed by EVEREN Securities and
approximately 360 were employed at EVEREN Clearing.
Competition
All aspects of the Company's business are highly competitive. The
Company competes directly with national and regional full service broker-
dealers and, to a lesser extent, with discount brokers, dealers, investment
banking firms, investment advisors and certain commercial banks and indirectly
for client assets with insurance companies and others. The financial services
industry has become considerably more concentrated as numerous securities
firms have either ceased operations or have been acquired by or merged into
other firms. Such mergers and acquisitions have increased competition from
these firms, many of whom have significantly greater equity capital, financial
and other resources than the Company. With respect to retail brokerage
activities, many of the regional firms with whom the Company competes have
operated in their regions significantly longer than has the Company and have
established long-standing client relationships. In addition, the Company
expects competition from domestic and international commercial banks to
increase as a result of recent and anticipated legislative and regulatory
initiatives in the United States to remove or relieve certain restrictions on
commercial banks relating to the sale of securities.
In addition, the Company faces competition for investment consultants.
Although the Company takes steps to maintain strong relationships with its
investment consultants, because of the significant emphasis on and importance
of its retail operations, the Company faces competition
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in attracting and retaining high-producing retail brokers. While many
competitors require their registered representatives to enter into restrictive
non-competition agreements which seek to prohibit the representatives from
being employed by any competitor, the Company has not implemented such a
requirement because it believes that the general use of such agreements is not
conducive to attracting valuable employees.
Management believes that the principal competitive factors influencing
the Company's business are the quality of its investment consultants and other
professional staff, the Company's reputation in and penetration of the local
markets in which it operates, its existing client relationships, its mix of
market capabilities and the incentives associated with employee ownership.
Regulation
The securities industry in the United States is subject to extensive
regulation under both federal and state laws. EVEREN Securities and EVEREN
Clearing are registered as broker-dealers, and EVEREN Securities is registered
as an investment adviser, with the Commission. They are subject to regulation
by the Commission and by self- regulatory organizations, principally the NASD
and Municipal Securities Rulemaking Board ("MSRB") and national securities
exchanges such as the NYSE. Securities firms are also subject to regulation
by state securities administrators in those states in which they conduct
business. EVEREN Securities is a registered broker-dealer in all 50 states,
the District of Columbia and the Commonwealth of Puerto Rico. Failure to
comply with the laws, rules or regulations of the Commission, such
self-regulatory organizations and state securities commissions may result in
censure, fine, the issuance of cease-and-desist orders or the suspension or
expulsion by such entities of a broker-dealer, an investment adviser, officers
or employees. The Company believes that it is currently in material
compliance with the regulations to which it is subject.
EVEREN Securities and EVEREN Clearing are registered with the Commodity
Futures Trading Commission ("CFTC") as futures commission merchants and are
subject to regulation as such by the CFTC and various domestic boards of trade
and other commodity exchanges. EVEREN Securities' commodity futures and
options business is also regulated by the National Futures Association
("NFA"), a not-for-profit membership corporation which has been designated as
a registered futures association by the CFTC.
Because financial services businesses are subject to extensive regulation
on the federal and state level, and because of the possibility of changes
resulting from numerous legislative and regulatory proposals that are advanced
each year and from judicial decisions, it is possible that changes will be
necessary to the way in which the Company and its affiliates conduct their
activities. While it is difficult to predict the impact of any new laws,
regulations or judicial decisions, the Company anticipates that regulation of
the securities and commodities industries will increase at all levels and that
compliance therewith will become more difficult. Monetary penalties and
restrictions on business activities by regulators resulting from compliance
deficiencies are also expected to become more severe.
14
<PAGE>
Capital Requirements
As registered broker-dealers, EVEREN Securities and EVEREN Clearing are
subject to the Commission's net capital rule, Rule 15c3-1 (the "Net Capital
Rule"), promulgated under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). The NYSE monitors the application of the Net Capital Rule.
EVEREN Securities and EVEREN Clearing each compute net capital under the
alternative method which requires minimum net capital equal to the greater of
$1 million for EVEREN Securities and $1.5 million for EVEREN Clearing or 2% of
aggregate items arising from customer transactions. A broker-dealer may be
required to reduce its business if its net capital is less than 4% of
aggregate debit balances and may also be prohibited from expanding its
business or paying cash dividends if resulting net capital would be less than
5% of aggregate debit balances. In addition, the Net Capital Rule does not
allow withdrawal of subordinated capital if net capital would be less than 5%
of such debit balances.
The Net Capital Rule also limits the ability of broker-dealers to
transfer large amounts of capital to parent companies and other affiliates.
Under the Net Capital Rule, equity capital cannot be withdrawn from a
broker-dealer without the prior approval of the Commission when net capital
after the withdrawal would be less than 25% of its securities position
haircuts (which are deductions from capital of certain specified percentages
of the market value of securities to reflect the possibility of a market
decline prior to disposition). In addition, the Net Capital Rule requires a
broker-dealer to notify the Commission and the appropriate self-regulatory
organization two business days before a withdrawal of excess net capital if
the withdrawal would exceed 30% of the broker-dealer's excess net capital, and
two business days after a withdrawal that exceeds 20% of excess net capital,
provided that no such notice need be given if the withdrawal is less than
$500,000. Finally, the Net Capital Rule authorizes the Commission to order a
freeze on the transfer of capital if a broker-dealer plans a withdrawal of
more than 30% of its excess net capital and the Commission believes that such
a withdrawal would be detrimental to the financial integrity of such
broker-dealer or would jeopardize the broker-dealer's ability to pay its
customers.
EVEREN Securities receives flow-through capital benefits from EVEREN
Clearing, to the extent available, in accordance with the Net Capital Rule. At
December 31, 1996, EVEREN Securities had net capital, as defined, of $124
million, which exceeded its minimum net capital requirement by $123 million.
EVEREN Clearing had net capital of $68.2 million at December 31, 1996, which
exceeded its minimum net capital requirement by $52 million.
Compliance with the Net Capital Rule could limit those operations of the
Company that require the intensive use of capital, such as underwriting and
trading activities and the financing of customer account balances, and also
could restrict its ability to pay dividends, repay debt and redeem or purchase
shares of its outstanding common stock.
The Commission, the NYSE, the CFTC and various other securities and
commodities exchanges and other regulatory bodies in the United States have
rules with respect to net capital requirements which affect the Company. A
change in such rules, or the imposition of new rules, affecting the scope,
coverage, calculation or amount of such net capital requirements, or a
significant operating loss or any unusually large charge against net capital,
could adversely affect the ability of the Company to expand or maintain
present levels of business or pay dividends or interest.
15
<PAGE>
ITEM 2. PROPERTIES
EVEREN Securities leases 241,000 square feet of office space (and an
additional 36,000 square feet of warehouse space) in Chicago, Illinois;
115,000 square feet in one location in Houston, Texas, a significant portion
of which is subleased; 41,000 square feet in two locations in Cleveland, Ohio;
30,000 square feet in one location in Los Angeles, California; 118,000 square
feet in two locations in Milwaukee, Wisconsin; 38,000 square feet in two
locations in New York City; and approximately 700,000 square feet in other
locations nationwide.
ITEM 3. LEGAL PROCEEDINGS
Many aspects of the Company's business involve substantial risks of
liability. In recent years there has been an increasing incidence of
litigation involving the securities brokerage industry, including class action
suits that generally seek substantial damages and other suits seeking punitive
damages. Underwriters are subject to substantial potential liability for
material misstatements and omissions in prospectuses and other communications
with respect to securities offerings. Like other securities brokerage firms,
the Company has been named as a defendant in class action and other suits and
has in the past been subject to substantial settlements and judgments.
Following are descriptions of certain of the lawsuits in which the
Company is currently a named defendant. The Company intends to vigorously
defend itself against the allegations in each of such actions. Although there
can be no assurances, the Company does not believe that the ultimate outcome
of any of this litigation, individually or in the aggregate, will have a
material adverse effect on its financial condition. Due, however, to the
relatively early stage of certain of these lawsuits and the lack of
information currently available, management cannot accurately make estimates
of potential loss, if any, or assure that such lawsuit will have no material
adverse effect on the Company's results of operations in any particular
period.
In Re NASDAQ Market-Maker Antitrust Litigation. In December 1994 a
consolidated amended class action complaint was filed in the United States
District Court for the Southern District of New York against thirty-three
broker-dealer market makers in The NASDAQ National Market System ("NASDAQ")
traded securities, including EVEREN Securities, alleging the defendants had
conspired to fix the "spread" between bid and asked prices for NASDAQ traded
securities in violation of Section 1 of the Sherman Act. In November 1996,
the Court certified a class of investors on behalf of whom the plaintiffs
purport to bring this action including customers of the defendants who
purchased or sold securities on NASDAQ during a period from May 1989 through
May 1994. Plaintiffs claim damage in that allegedly they paid more for
securities purchased on NASDAQ, or received less on securities sold, than they
would have but for the alleged conspiracy. Compensatory damages, treble
damages, attorneys' fees and costs and other relief are being sought against
each of the defendants on a joint and several basis. Plaintiffs' amended
complaint lists over 1,600 securities which are allegedly the subject of the
claimed conspiracy. Defendants have filed their answer denying the material
allegations of such complaint. Discovery is proceeding.
In addition, allegations of collusion among market-makers became the
subject of investigations by the Antitrust Division of the Department of
Justice ("DOJ"), the Commission and the NASD. EVEREN Securities and other
market makers have responded to Civil
16
<PAGE>
Investigative Demands by the DOJ and to subpoenas by the Commission. On July
17, 1996 DOJ filed a civil complaint against 24 market makers alleging that a
common understanding arose among the defendants and other market makers to
adhere to a quoting convention for the purpose of fixing the inside spread on
a substantial number of NASDAQ stocks in violation of the antitrust laws and
announced that the market makers named in that complaint had entered into a
settlement agreement with the DOJ. EVEREN Securities was not named as a
defendant in the DOJ complaint.
Cuyahoga County, Ohio Litigation (Jones, et al.v. McDonald & Co., et
al.). In August 1995 a lawsuit was filed in the Court of Common Pleas of
Cuyahoga County, Ohio on behalf of the County of Cuyahoga (the "County"), the
State of Ohio and the Board of County Commissioners against eight
broker-dealers and banks, including EVEREN Securities, relating to investment
losses suffered by the County and its Secured Assets Fund Earnings program
(the "S.A.F.E. Fund"). Plaintiffs' second amended complaint alleges that the
defendants facilitated and assisted the staff of the County's investment
department in engaging in certain investment activity that was risky and
speculative and that violated the S.A.F.E. Fund's policies and procedures and
certain state laws. The investments at issue consisted of fixed-income
securities, specifically U.S. Treasuries and government agency securities,
financed by reverse repurchase transactions. When interest rates rose
dramatically in 1994, resulting in a decline in the value of the County's
investment portfolio, the County terminated the S.A.F.E. program, liquidated
its portfolio and incurred losses. Thereafter, the County Treasurer was
convicted of dereliction of duty, but that conviction was overturned on
appeal. The County's Chief Investment Officer pled guilty to dereliction of
duty and falsification. The complaint seeks unspecified compensatory damages
and punitive damages, costs and attorneys' fees, alleging investment losses in
the "tens of millions of dollars." News reports have indicated that the
County incurred investment losses exceeding $100 million. The complaint
alleges breach of fiduciary duty and negligence by EVEREN Securities and the
other defendants. The complaint also alleges fraud, misrepresentation and
violation of the Ohio securities law by three defendants other than EVEREN
Securities in connection with certain of the County's securities issuances.
The Ohio Supreme Court has disqualified all Cuyahoga County judges from
hearing the case, and a retired judge from another Ohio county has been
assigned. The court has also disqualified the County Prosecutor's office from
serving as co-counsel for the plaintiff because of the office's alleged
misconduct in issuing illegal grand jury subpoenas and alleged destruction of
relevant documents. Discovery is proceeding.
Estate of Braunstein, et al.v. Merrill Lynch, Pierce, Fenner & Smith,
Inc., et al. EVEREN Securities is named as a defendant, together with ten
other broker-dealers, in a purported class action lawsuit filed in the Supreme
Court of the State of New York, County of New York, in May 1994. Plaintiffs
purport to state claims individually and on behalf of a class of all
individuals or entities who have had accounts with one or more of the
defendants in which they have had free credit balances from which the
defendants have derived economic benefit for which they have not accounted to
the plaintiffs. The complaint purports to assert causes of action for breach
of fiduciary duty and unjust enrichment. Plaintiffs allege that defendants
unlawfully retained interest earned on free credit balances in broker-dealer
accounts. Plaintiffs seek compensatory damages, the imposition of a
constructive trust, an injunction to require the payment of interest on free
credit balances, costs and attorneys' fees. In June 1995 the court granted
defendants' motion to dismiss for failure to state a cause of action.
Plaintiffs then filed an amended complaint containing similar claims.
Defendants' motion to dismiss the amended
17
<PAGE>
complaint was denied. Defendants have filed an answer in the case, and
discovery has commenced. In September 1996, the court denied without
prejudice plaintiffs' motion for class certification.
EVEREN Clearing v. Brod, et al. EVEREN Clearing initiated this New York
Stock Exchange arbitration proceeding seeking to recover from Brod, a failed
correspondent clearing firm, and its principals approximately $5.3 million in
losses primarily resulting from unsatisfied margin calls and other losses
incurred as a result of Brod's failure. Brod and its principals have asserted
various defenses to EVEREN Clearing's claims, and Brod and one of the
principals have filed counterclaims in which they seek to recover
approximately $25.7 million in alleged damages as the result of EVEREN
Clearing's termination of its clearing agreement with Brod. EVEREN Clearing
has asserted various defenses to such counterclaims. An arbitration hearing
began in September 1996 and was concluded in March 1997. The parties are
awaiting a decision.
In addition to the matters described above, the Company is currently a
defendant in various civil actions and arbitrations arising out of its
activities as a broker-dealer in securities. Some of such actions involve
allegations of misconduct by Company employees, and other actions involve
claims against the Company by current or former employees. The Company does
not believe that any such matters will have a material adverse effect on its
financial condition or results of operations.
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 of the 1996 fiscal year.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
a. Market Information
The Company's Common Stock is traded on the New York Stock Exchange under
the symbol "EVR". Since the initial public offering of the Company's Common
Stock on October 8, 1996, the Common Stock traded during the fourth quarter of
fiscal 1996 at a high of $23.375 and a low of $17.875.
b. Holders
As of March 12, 1997, there were 618 record holders of the Company's Common
Stock according to the records maintained by the Company's transfer agent.
c. Dividends
Since the initial public offering of the Company's Common Stock on October
8, 1996, the Company has paid a cash dividend of $.09 per share on December
17, 1996 and March 18, 1997. The Company's ability to pay dividends is
contingent upon the earnings of its subsidiaries, as well as their ability to
declare and pay dividends to the Company. Certain subsidiaries may be limited
in their ability to pay dividends by capital and other rules of regulatory
bodies, as well as certain covenants in instruments governing certain
indebtedness.
18
<PAGE>
Dividend distributions from securities brokerage firms are restricted by
federal and state securities laws, the rules and regulations thereunder and/or
the rules and regulations of exchanges of which the firms are members. As a
result, EVEREN Securities and EVEREN Clearing cannot lawfully pay dividends
that would either reduce their respective net capital amounts below the
minimum amounts required or cause certain net capital decreases without prior
regulatory approval.
19
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth summary historical consolidated
financial data for the Company which was derived from the consolidated
financial statements of the Company. The summary consolidated financial data
should be read together with the consolidated financial statements of the
Company and related notes and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere in this
report.
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF OPERATIONS DATA
(DOLLARS IN MILLIONS):
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenue:
Commissions $ 225.8 $190.4 $180.5 $241.1 $227.3
Principal transactions 115.3 122.1 119.1 158.5 166.0
Investment banking 55.9 47.1 61.9 105.3 120.7
Asset management 57.3 53.3 51.5 49.8 46.9
Other 42.2 49.1 43.2 44.9 35.7
Interest 74.1 81.2 73.8 74.1 80.9
------- ------ ------ ------ ------
Total revenue 570.6 543.2 530.0 673.7 677.5
Interest expense 34.0 52.5 44.8 46.9 53.0
------- ------ ------ ------ ------
Net revenue 536.6 490.7 485.2 626.8 624.5
------- ------ ------ ------ ------
Non-interest expenses
Compensation and benefits 331.4 335.5 328.0 387.1 403.7
Brokerage and clearance 14.5 11.4 11.5 15.1 17.9
Communications 38.3 41.8 41.3 49.2 50.1
Occupancy and Equipment 39.2 54.5 46.4 48.7 48.8
Promotional 17.8 13.5 18.9 22.4 25.0
Other 37.8 56.0 51.8 105.8 106.5
------- ------ ------ ------ ------
Total non-interest expenses 479.0 512.7 497.9 628.3 652.0
Gain on sale of subsidiary 50.2 - - - -
------- ------ ------ ------ ------
Income (loss) before income
taxes and extraordinary item
and cumulative effect of
changes in accounting 107.8 (22.0) (12.7) (1.5) (27.5)
Income tax provision (benefit) 42.4 (6.1) (10.5) (3.3) 0.9
------- ------ ------ ------ ------
Income (loss) before
extraordinary item and
cumulative effect of change
in accounting 65.4 (15.9) (2.2) 1.8 (28.4)
Extraordinary charge on early
retirement of debt, net of
income tax benefit of $1.5 (2.9) - - - -
Cumulative effect of change in
accounting- Postretirement
benefits-Jan 1, 1992 - - - - (10.0)
Income taxes-Jan 1, 1993 - - - (5.5) -
------- ------ ------ ------ ------
Net income (loss) $ 62.5 $(15.9) $ (2.2) $ (3.7) $(38.4)
======= ====== ====== ====== ======
Ratio of earnings to fixed
charges (a) 3.4 - - 1.0 -
======= ====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION DATA (AS OF DECEMBER 31):
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Total assets $1,824.3 $2,550.6 $1,554.7 $1,632.4 $2,007.3
Long-term obligations 137.7 160.7 289.4 285.7 389.1
</TABLE>
(a) For purposes of computing the ratio of earnings to fixed charges,
earnings consist of income before income taxes plus fixed charges. Fixed
charges consist of interest expense and the approximate portion of rental
expense representative of the approximate interest factor. For the years
ended December 31, 19965, 1994 and 1992, earnings were insufficient to
cover fixed charges by approximately $22.0 million, $12.7 million, and
$27.5 million, respectively.
20
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the "Selected
Financial Data" in Item 6 and the Company's consolidated financial statements
and notes thereto contained in Item 8 of this report. In addition to
historical information, the following Management's Discussion and Analysis of
Financial Condition and Results of Operations contains forward-looking
statements that involve risks and uncertainties. The Company's actual results
could differ significantly from those anticipated in these forward-looking
statements as a result of certain factors, including those discussed in
"Business Environment.".
BUSINESS ENVIRONMENT
The Company's principal business activity, retail broker-dealer
operations, as well as its investment banking, institutional sales, investment
advisory, clearing and other services, are highly competitive and subject to
various risks, volatile trading markets and fluctuations including economic
and securities market conditions, changes in interest rates, competitive
conditions within the industry and regulatory developments. Consequently, the
results of operations for a particular period may not be indicative of results
to be expected for other periods.
Industry market conditions were generally favorable during 1995 and 1996.
During 1995, interest rates stabilized and began to trend downward, positively
impacting fixed income securities prices and stimulated both the institutional
and the retail sectors of the securities industry. This and other favorable
economic conditions created a stronger retail demand for equity securities and
related products which continued through most of 1996. The market was
characterized by increased volatility in the third quarter of 1996 but
regained momentum in the fourth quarter of 1996.
COMPANY DEVELOPMENTS
Management believes that three key factors positively impacted operating
results in 1996. First, favorable economic conditions resulted in strong
securities markets generally, and equities markets in particular, throughout
most of the year. Second, during its first full year as an independent,
employee owned firm, the Company was better able to attract new business,
retain and recruit quality professional and other employees and to implement
certain strategic initiatives than had been the case prior to the Company's
September 13, 1995 separation (the "Buy-out") from Kemper Corporation
("Kemper"). Prior to the Buy-out, ownership uncertainty had adversely
impacted the Company in a number of areas. Third, the Company continued its
strong emphasis on cost containment, reducing compensation expense as a
percentage of net revenues as well as other expenses. In anticipation of, and
in conjunction with the Buy-out, the Company incurred several non-recurring
charges during the third quarter of 1995 as discussed below under "-- Results of
Operations." Management believes ownership resolution has contributed to a
significant turnaround in the Company's profitability, aided in the retention
and recruiting of quality employees, and enabled the Company to implement
certain strategic initiatives.
Consistent with its strategy to focus on core businesses, the Company
completed the sale of BETA Systems, Inc. ("BETA"), a wholly- owned data
processing and quote service subsidiary, on April 30, 1996, for $63.5 million.
The sale, which resulted in an after-tax gain of
21
<PAGE>
approximately $30.2 million, is reflected in the Company's 1996 results of
operations. Based upon an internal financial analysies, management believes that
the loss of BETA's net income will be more than offset by increased net interest
income combined with reduced operating expenses resulting from new five-year
service agreements executed in connection with the sale.
On June 17, 1996 the Company exchanged all of its outstanding
Exchangeable Preferred Stock for an aggregate $32.2 million principal amount
of 13.5% Junior Subordinated Debentures due 2007 ("Debentures"). On July 30,
1996 the Company issued a notice calling all of the outstanding Debentures for
redemption on September 16, 1996 at a price of 112% of principal or $36.0
million, plus accrued interest. This early redemption was funded principally
through $36.0 million of bank borrowings and resulted in an extraordinary
charge of approximately $2.9 million after-tax for the year ended December 31,
1996.
On July 25, 1996 the Company entered into a joint venture agreement (the
"JVA"), pursuant to which it acquired an initial 20% ownership interest in
Mentor Investment Group, Inc. ("Mentor"), the asset management subsidiary of
Wheat First Butcher Singer, Inc., for no direct cash consideration. Under the
terms of the JVA, the Company's ownership interest may increase to as much as
50%. This joint venture is being accounted for as an equity investment and
the Company's proportionate share of the earnings or losses of Mentor from
November 1, 1996 (commencement of operations) through December 31, 1996 is
included in the Company's operating results.
On August 5, 1996 the Company paid a special purpose cash dividend of
$1.18 per share on its common shares outstanding as of July 23, 1996. This
dividend allowed the EVEREN Capital Corporation 401(k) and Employee Stock
Ownership Plan ("KSOP") to repay the balance of its loan to the Company,
incurred in connection with its separation from Kemper, and allowed the
release of substantially all of the remaining unallocated KSOP shares to
employee participant accounts. As a result of this dividend and the repayment
by the KSOP of the loan with the proceeds thereof, all shares held in the KSOP
have been treated as outstanding in the Company's financial statements at
December 31, 1996.
On October 8, 1996 the Company completed its initial public offering,
whereby 4.6 million shares of its $.01 par value common stock("Common Stock")
were sold at a price of $18.50 per share. The initial public offering
resulted in net proceeds of approximately $78 million to the Company. Such
proceeds were used to reduce bank loans payable. The Common Stock is listed
on the New York Stock Exchange under the symbol "EVR".
In keeping with its strategic initiative to concentrate on its core
businesses, the Company sold BETA in the second quarter of 1996 as noted
above, and exited certain portions of its municipal institutional sales and
trading and the unit investment trust origination businesses in the fourth
quarter of 1996.
Effective January 1, 1996, the Company implemented a quasi-
reorganization and revalued its assets and liabilities to fair value as of
that date. This revaluation resulted in a reduction in net assets of $3.7
million. The quasi-reorganization also resulted in the transfer of the
accumulated deficit as of January 1, 1996 of $306.5 million to additional
paid-in capital. Such revaluation has not had and in the future will not have
any significant impact on the operating results of the Company. The balance
in retained earnings at December 31, 1996 represents the accumulated net
22
<PAGE>
earnings available to common stockholders arising subsequent to the date of
the quasi-reorganization. The quasi- reorganization was effected in order to
reflect the emergence of the Company as a new organization, signal the end of
its transition from a wholly-owned subsidiary to a fully independent company
and enable the Company to present more accurately the new organization's
cumulative performance.
EQUITY PARTICIPATION OF EMPLOYEES
As of December 31, 1996, the Company's current employees and directors,
through the KSOP and otherwise, own approximately 75% of the outstanding Common
Stock. Management believes that significant employee ownership fosters a culture
that encourages strong performance, and provides employees the opportunity to
participate in the future performance of the Company.Company's position as a
major securities brokerage firm.
On September 13, 1995 the KSOP purchased 10,437,781 shares of Common Stock,
representing 96.6% of the then outstanding shares of Common Stock, from Kemper.
Immediately following the Buy-out, KSOP participants were given an opportunity
to acquire 3,654,685 shares of Common Stock held in the KSOP, but not yet
allocated to the account of any specific KSOP participant, in an aggregate
amount not to exceed $25.0 million (the "Founders' Offering"). The price per
share in the Founders' Offering of $6.8405 was equal to the price per share
initially paid by the KSOP. Employee subscription to the Founders' Offering
aggregated more than $25 million. As a result, in December 1995, the Company,
through the KSOP, offered additional shares of Common Stock at $6.8405 per share
to those KSOP participants who participated in the Founders' Offering up to the
amount oversubscribed. Through this offering, KSOP participants acquired an
additional 670,949 shares of Common Stock.
In the second quarter of 1996, the Company instituted three new employee
benefit plans to provide current and future employees the opportunity to acquire
Common Stock outside of the KSOP. In connection with these plans, the Company
recognizes additional compensation expense equal to the difference between the
fair value of the Common Stock issued and the amount of cash compensation
otherwise payable or cash paid under each respective plan.
COMPONENTS OF REVENUE AND EXPENSES
Revenue. Commissions include revenue generated by executing listed and
over-the-counter transactions as agent, as well as commissions earned on the
sales of mutual funds, insurance, annuities and certain other products.
Principal transactions consist of gains and losses from the trading of
securities by the Company as principal, including principal sales credits.
Investment banking revenue includes merger and acquisition fees, other
advisory fees and underwriting revenue, which is comprised of underwriting
selling concessions, management fees and underwriting fees. Asset management
revenue primarily includes managed account fees and 12b-1 distribution fees.
Other revenue includes transaction and account fees, correspondent clearing
and execution income and miscellaneous income. Interest income primarily
represents interest earned on customer margin accounts and interest income on
securities owned and investments in mortgage-backed certificates. Net
revenues equal total revenues less interest expense. Interest expense
includes interest paid on bank borrowings, collateralized securities
transactions with brokers and dealers and collateralized mortgage obligations.
23
<PAGE>
Expenses. Compensation and benefits expense includes sales, trading and
incentive compensation, which are primarily variable based on revenue
production, and salaries, payroll taxes and employee benefits, which are
relatively fixed in nature. Brokerage and clearance expense includes the cost
of securities clearance, floor brokerage and exchange fees. Communications
expense includes charges for telecommunications, news and market data
services, customer statements and depreciation on data processing and
telecommunications equipment. Occupancy and equipment expense includes rent
and operating expenses forof the Company's facilities, expenditures for
repairs and maintenance, and depreciation of furniture, fixtures and leasehold
improvements. Promotional expense includes travel, entertainment and
advertising. Other expense includes professional services, litigation
expenses, office expenses, dues and assessments, and other miscellaneous
expenses.
RESULTS OF OPERATIONS
The following table sets forth certain financial data as a percentage of net
revenues:
Consolidated Statement of Operations Data:
Year Ended December 31,
--------------------------
1996 1995 1994
---- ---- ----
Revenue:
Commissions 42.1% 38.8% 37.2%
Principal transactions 21.5 24.9 24.5
Investment banking 10.4 9.6 12.8
Asset management 10.7 10.9 10.6
Other 7.8 10.0 8.9
Interest 13.8 16.5 15.2
----- ----- -----
Total revenue 106.3 110.7 109.2
Interest expense 6.3 10.7 9.2
----- ----- -----
Net revenue 100.0 100.0 100.0
----- ----- -----
Non-interest expenses:
Compensation and benefits 61.8 68.4 67.6
Brokerage and clearance 2.7 2.3 2.4
Communications 7.1 8.5 8.5
Occupancy and equipment 7.3 11.1 9.6
Promotional 3.3 2.8 3.9
Other 7.0 11.4 10.7
----- ----- -----
Total non-interest expenses 89.2 104.5 102.7
Gain on sale of subsidiary 9.4 - -
----- ----- -----
Income (loss) before income taxes
and extraordinary charge 20.2 (4.5) (2.7)
Income tax provision (benefit) 8.0 (1.2) (2.2)
----- ----- -----
Net income (loss) before
cumulative effect of accounting
change and extraordinary charge 12.2 (3.3) (0.5)
Extraordinary charge on early
retirement of debt, net of
income taxes (0.5) - -
----- ----- -----
Net income (loss) 11.7% (1) (3.3)% (2) (0.5)%
===== ===== =====
(1) Includes a $30.2 million after-tax gain on the sale of BETA (5.6% of net
revenues).
(2) Includes $22.0 million after-tax of non-recurring charges incurred in
connection with the Buy-out (4.5% of net revenues)
24
<PAGE>
1996 Compared to 1995
The Company experienced strong operating results for the year ended
December 31, 1996 compared to 1995. Revenues increased in most of the
Company's businesses, expenses as percentages of net revenues declined, and net
income (without giving effect to the gain realized from the sale of BETA)
improved significantly. Management attributes these results to several factors.
First, favorable conditions prevailed in the equity markets during most of 1996,
reflecting continued investor optimism concerning inflation and interest rate
stability. Second, this period reflects the continued benefits of ownership
resolution, which, in management's opinion, has enhanced employee morale, focus
and productivity, and has allowed management to concentrate on its key
strategic initiatives. Finally, the continued emphasis on cost containment has
contributed to the strong operating results.
Total revenue increased $27.4 million or 5% to $570.6 million for the
year ended December 31, 1996 from $543.2 million for the year ended December
31, 1995. Net revenues increased $45.9 million or 9% to $536.6 million for
the year ended December 31, 1996 from $490.7 million for the year ended
December 31, 1995. As previously noted, the Company exited certain
non-strategic businesses in 1996. Excluding the revenues from these
businesses, net revenues for 1996 increased by approximately $58 million or
13% over 1995.
Commission revenue increased $35.4 million or 19% to $225.8 million for
the year ended December 31, 1996 from $190.4 million for the year ended
December 31, 1995 due to increased business in both the retail and
institutional areas, consistent with the overall growth in listed share volume
on all major domestic equity exchanges and the heavy inflow of retail
investment into mutual funds in 1996.
Principal transactions revenue decreased $16.8 million or 6% to $115.3
million for the year ended December 31, 1996 from $122.1 million for the year
ended December 31, 1995 due to an overall shift in customer focus from fixed
income securities to listed equity business in 1996. The increase in listed
equity business resulted in lower numbers of principal transactions, and an
increased number of commissioned transactions.
Investment banking fees, revenue increased $8.8 million or 19% to $55.9
million for the year ended December 31, 1996 from $47.1 million for the year
ended December 31, 1995. The increase in investment banking revenue reflects
the increased underwriting activity seen throughout the industry and the
Company's participation in a larger number of transactions. In addition,
management believes that resolution of the Company's past ownership
uncertainties has increased the Company's ability to participate in this type of
business.
Asset management revenue increased $4.0 million or 7% to $57.3 million
for the year ended December 31, 1996 from $53.3 million for the year ended
December 31, 1995 due primarily to increased managed account fees and
increased 12b-1 distribution fees in 1996, which is consistent with the growth
in mutual fund inflows and growth in assets under control in 1996.
Other income decreased $6.9 million or 14% to $42.2 million for the year
ended December 31, 1996 from $49.1 million for the year ended December 31,
1995. This resulted primarily from reduced service fee revenue in the current
year due to the sale of BETA in the second quarter of 1996.
25
<PAGE>
Interest and dividend income decreased $7.1 million or 9% to $74.1 million
for the year ended December 31, 1996 from $81.2 million for the year ended
December 31, 1995 due to the maintenance of lower average inventory balances in
fixed income securities, and a lower average rate of interest on margin
accounts. The decline in interest and dividend income was more than offset by a
decrease in interest expense of $18.6 million or 35% to $33.9 million for the
year ended December 31, 1996 from $52.5 million for the year ended December 31,
1995. This decrease in interest expense was the result of reduced costs of
financing lower levels of securities inventories and customer margin accounts,
repayment of long-term debt, and reduced bank borrowings.
Total non-interest expenses decreased $33.7 million or 7% to $479 million
for the year ended December 31, 1996 from $512.7 million for the year ended
December 31, 1995. This decrease was primarily the result of non-recurring
charges totaling $33.3 million pre-tax incurred in connection with or as a
result of the Buy-out in the third quarter of 1995 and continued cost
containment efforts. The $33.3 million pre-tax ($22.0 million after-tax) of
non-recurring charges are made up of the following: (i) $6.0 million of expenses
related to changing and publicizing the Company's name, (ii) $10.6 million of
expenses associated with the Company's decisions to sublease a significant
portion of its 115,000 sq. ft. of office space in Houston, Texas and to move its
Denver, Colorado operations from a 153,000 sq. ft. owned building to a new
leased facility; (iii) $14.2 million for an initial contribution and a matching
contribution to the KSOP related to the Founders' Offering; and (iv) $2.5
million in compensation expense as a result of the vesting of previously
restricted stock issued to senior management as part of the Buy-out. Excluding
these non-recurring charges, total non-interest expenses decreased slightly to
$479 million in 1996 from $479.4 million in 1995. This decrease is the net
result of increased variable production-related expenses, resulting from the
increased transactional revenues, offset by cost reductions in other expense
categories.
Compensation and benefits expense decreased $4.1 million or 1% to $331.4
million for the year ended December 31, 1996 from $335.5 million for the year
ended December 31, 1995. Included in 1995 compensation and benefits expense are
non-recurring charges of $16.7 million identified previously. Excluding these
items, compensation and benefits expense increased $12.6 million or 4% for the
year ended December 31, 1996 compared to the same period in 1995 primarily as a
result of increased production-based compensation related to the increased
transactional revenues generated in 1996. Compensation and benefits as a
percentage of net revenues declined to 61.8% in 1996 from 68.4% (65% excluding
the non-recurring charges) in 1995. This decrease reflects the fixed nature of a
significant portion of this expense as well as the decrease in production-based
payout to retail investment consultants that was implemented in the third
quarter of 1995.
Brokerage and clearance expense increased $43.1 million or 27% to $14.5
million for the year ended December 31, 1996 from $11.44 million for the year
ended December 31, 1995. This increase was related to the increased transaction
volume in the current period and was consistent with the increase in
transactional revenue in 1996 over 1995. The increase is also due in part to
the sale of BETA and the new service agreements, whereby BETA operating costs
previously included in the various consolidated operating expense categories are
now limited to amounts due under these agreements and aggregated as trade
processing costs included in brokerage and clearance expense.
26
<PAGE>
Communications expense decreased $3.5 million or 8% to $38.3 million for
the year ended December 31, 1996 from $41.8 million for the year ended
December 31, 1995, primarily due to decreased electronic data processing costs
in 1996 resulting from the sale of BETA.
All other operating expenses excluding the 1995 non-recurring charges of
$16.6 million (pre-tax) identified previously, decreased $12.6 million or 12%
to $94.8 million for the year ended December 31, 1996 from $107.4 million for
the year ended December 31, 1995, primarily due to the continued focus on cost
containment within the Company. All other operating expenses as a percentage
of net revenues declined to 18% for the year ended December 31, 1996 from 22%
for the year ended December 31, 1995 (excluding the non-recurring charges).
Specifically, when comparing the years ended December 31, 1996 and 1995,
occupancy and equipment expense (excluding $10.6 million of non-recurring
charges) decreased $4.7 million or 11%; promotional expense increased $4.3
million or 32%; and other expenses decreased $8.5 million or 18%, after
excluding the $6.0 million of non-recurring charges and a $3.7 million charge
related to the failure of an EVEREN Clearing correspondent firm in 1995. The
increase in promotional expense was due primarily to a more aggressive
advertising campaign initiated in 1996 to promote the new employee-owned
Company.
The Company's income tax expense for the year ended December 31, 1996 was
$42.4 million, which represented an effective tax rate on income before taxes
of 39%, compared to a $6.1 million tax benefit or a 28% effective tax benefit
rate for the year ended December 31, 1995. The lower effective benefit rate in
1995 was due primarily to certain non-deductible compensation expenses related
to appreciation on the shares of Common Stock released to the KSOP (and
subsequently allocated to participants) and higher state and local income
taxes.
Income before extraordinary item increased $81.3 million to $65.4 million
for the year ended December 31, 1996 from a net loss of $15.9 million for
1995. The extraordinary charge of $2.9 million after-tax, recorded in the
third quarter of 1996, related to the early retirement of the Company's junior
subordinated debentures.
Net income increased $78.4 million to $62.5 million for the year ended
December 31, 1996 from a net loss of $15.9 million for the year ended December
31, 1995.
1995 Compared to 1994
Stronger operating results for 1995 were more than offset by $33.3
million pre-tax ($22.0 million after-tax) of non-recurring charges related to
the Buy-out discussed previously. Management believes that the improved
results in 1995, exclusive of non-recurring charges, were due in part to the
turnaround in the equity and fixed income markets that began in the second
quarter and continued through year-end 1995. This factor, coupled with
ownership resolution in the later part of 1995, contributed to improved
commission and principal transaction revenues. For the fourth quarter of 1995,
its first full quarter as an independent entity, the Company reported net
income of $6.2 million on net revenues of $131.3 million, compared to net
income of $0.7 million on net revenues of $114.2 million for the fourth
quarter of 1994.
Total revenue increased $13.2 million or 2% to $543.2 million for the
year ended December 31, 1995 from $530.0 million for the year ended December
31, 1994. Net revenue increased $5.5 million or 1% to $490.7 million for the
year ended December 31, 1995 from
27
<PAGE>
$485.2 million for the year ended December 31, 1994. These increases were
largely due to stronger market conditions in the second half of 1995, which
more than offset the weaker market conditions in the first half of 1995.
Commission revenue increased $9.9 million or 5% to $190.4 million for the
year ended December 31, 1995 from $180.5 million for the year ended December
31, 1994. Specifically, retail investment consultant productivity improved
significantly in the second half of 1995 due to stability in the Company's
workforce.
Principal transactions revenue increased $3.0 million or 3% to $122.1
million for the year ended December 31, 1995 from $119.1 million for the year
ended December 31, 1994, due to stronger equity markets and reduced volatility
in the fixed income markets. Increased stability in the fixed income markets
in 1995 resulted in increased trading profits in the municipal, government and
corporate bond areas, which accounted for the moderate improvement in
principal transactions revenue.
Investment banking revenue decreased $14.8 million or 24% to $47.1
million for the year ended December 31, 1995 from $61.9 million for the year
ended December 31, 1994. Management believes that uncertainties with respect
to the Company's ownership negatively impacted its ability to generate
investment banking fees and participate in the upswing in equity origination
business experienced by other firms in this period.
Asset management revenue increased $1.8 million or 3% to $53.3 million
for the year ended December 31, 1995 from $51.5 million for the year ended
December 31, 1994, primarily due to higher revenues earned on wrap accounts
and other fee earning assets.
Other income improved $5.9 million or 14% to $49.1 million for the year
ended December 31, 1995 from $43.2 million for the year ended December 31,
1994. The most significant element of this increase was the receipt of
approximately $2.8 million in recoveries in 1995 related to the contested
recruitment of Company employees by certain competitors. In addition, the
Company took advantage of favorable market conditions in the fourth quarter of
1995 by exercising its right to call certain of its collateralized mortgage
obligations and selling the related mortgage-backed securities, resulting in a
gain of approximately $2.1 million. Without giving effect to these two items,
other income improved $1.0 million or 2% for the year ended December 31, 1995
compared to the year ended December 31, 1994.
Interest and dividend income improved $7.4 million or 10% to $81.2
million for the year ended December 31, 1995 from $73.8 million for the year
ended December 31, 1994, as increased earnings from higher interest on margin
accounts more than offset reduced customer margin borrowings. The improvement
in interest and dividend income, however, was offset by an increase in
interest expense of $7.7 million or 17% to $52.5 million for the year ended
December 31, 1995 from $44.8 million in 1994, which resulted from higher
average interest rates on the Company's borrowings.
Total non-interest expenses increased $14.8 million or 3% to $512.7
million for the year ended December 31, 1995 from $497.9 million for the year
ended December 31, 1994, the result of the non-recurring charges incurred in
connection with the Buy-out discussed previously. Such non- recurring charges
amounted to $33.3 million pre-tax. Excluding these non-recurring items,
28
<PAGE>
total non-interest expenses decreased $18.5 million or 4% to $479.4 million
for the year ended December 31, 1995 from $497.9 million for the year ended
December 31, 1994, due to the continued focus on cost containment and
profitability.
Compensation and benefits expense increased $7.5 million or 2% to $335.5
million for the year ended December 31, 1995 from $328.0 million for the year
ended December 31, 1994. Compensation and benefits expense as a percentage of
net revenues increased to 68.4% for the year ended December 31, 1995 from 67.6
% for the year ended December 31, 1994. Included in the increase in
compensation and benefits are non-recurring charges of $16.7 million related
to the vesting of restricted stock issued to senior management, and the
initial and matching KSOP contributions related to the Founders' Offering.
Excluding these items, compensation and benefits expense decreased $9.2
million (3%) or to 65% of net revenues as a result of several factors
including decreased production-based compensation related to the weaker market
conditions in the first half of 1995 and a reduction in production-based
payout to retail investment consultants beginning in August 1995 of
approximately 2% of retail revenues.
Brokerage and clearance expense remained relatively constant, decreasing
$0.1 million or 1% to $11.4 million for the year ended December 31, 1995 from
$11.5 million for the year ended December 31, 1994 as a result of the
Company's continued focus on cost containment, despite increased transaction
volumes.
Communications expense increased $0.5 million or 1% to $41.8 million for
the year ended December 31, 1995 from $41.3 million for the year ended
December 31, 1994 mainly due to increased depreciation on broker workstation
equipment.
All other operating expenses, excluding the 1995 non-recurring charges of
$16.6 million pre-tax related to the sublease and relocations and the
Company's name change, decreased $9.7 million or 8% to $107.4 million for the
year ended December 31, 1995 from $117.1 million for the year ended December
31, 1994 as the benefits of cost containment programs were realized.
Specifically, when comparing the years ended December 31, 1995 and 1994,
occupancy and equipment expense (excluding $10.6 million of non-recurring
charges) decreased $2.5 million or 5%; promotional expense decreased $5.4
million or 29%; and other expenses decreased $5.5 million or 11% after
excluding the $6.0 million non- recurring charge and a $3.7 million charge
related to the failure of an EVEREN Clearing correspondent firm, following the
firm's failure to meet a $4.3 million margin call. While the Company believes
that this failure was an isolated event which is not indicative of a trend,
the Company initiated more stringent credit and risk management procedures in
order to reduce the risk of any such future losses. See "--Risk Management"
and "Item 3--Legal Proceedings."
The Company's income tax benefit for the years ended December 31, 1995
and 1994 was $6.1 million and $5.0 million (excluding a $5.5 million 1994
benefit related to the revaluation of certain tax assets), respectively, which
represented a 28% effective benefit rate in 1995 and a 39% effective benefit
rate in 1994. The effective rate decline in 1995 was due to lower tax-exempt
interest income and higher state and local taxes.
The net loss increased $13.7 million to $15.9 million for the year ended
December 31, 1995 from $2.2 million for the year ended December 31, 1994.
29
<PAGE>
QUARTERLY RESULTS
The information set forth below is derived from unaudited quarterly
financial statements of the Company. Such financial statements have been
prepared by the Company on a basis consistent with the consolidated financial
statements included elsewhere in this report and include all adjustments,
consisting principally of normal recurring accruals, that the Company
considers necessary for a fair presentation thereof. These operating results
are not necessarily indicative of the Company's future performance.
<TABLE>
<CAPTION>
Three months ended
------------------
12/31/96 9/30/96 6/30/96 3/31/96 12/31/95 9/30/95 6/30/95 3/31/95
-------- -------- -------- -------- -------- -------- -------- --------
(dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Commissions $ 57,348 $ 50,741 $ 60,277 $ 57,431 $ 49,591 $ 51,188 $ 47,189 $ 42,336
Principal transactions 23,557 26,389 34,469 30,875 30,863 33,670 30,180 27,414
Investment banking 17,229 11,677 16,540 10,442 15,520 8,220 11,807 11,546
Asset management 14,804 14,776 13,231 14,480 13,907 13,636 13,031 12,759
Other 9,775 7,234 13,486 11,722 14,552 11,493 12,112 10,978
Interest 18,328 18,270 19,278 18,191 19,452 20,497 20,460 20,768
-------- -------- -------- -------- -------- -------- -------- --------
Total revenue 141,041 129,087 157,281 143,141 143,885 138,704 134,779 125,801
Interest expense 6,850 8,613 9,203 9,254 12,567 12,942 13,368 13,651
-------- -------- -------- -------- -------- -------- -------- --------
Net revenue 134,191 120,474 148,078 133,887 131,318 125,762 121,411 112,150
Non-interest expenses:
Compensation and benefits 80,170 75,601 88,893 86,725 83,101 98,378(3) 80,193 73,801
Brokerage and clearance 3,937 3,773 3,899 2,949 2,590 3,329 2,729 2,774
Communications 9,495 8,883 9,567 10,321 10,305 10,085 10,703 10,666
Occupancy and equipment 9,200 9,676 10,052 10,224 10,714 21,687(3) 10,929 11,154
Promotional 5,167 4,326 4,375 3,982 3,453 3,568 3,269 3,218
Other 11,194 6,640 10,881 9,049 10,504 17,219(3) 12,568 15,683
-------- -------- -------- -------- -------- -------- -------- --------
Total non-interest expenses 119,163 108,899 127,667 123,250 120,667 154,266 120,391 117,296
Gain on sale of subsidiary - - 50,181(2) - - - - -
-------- -------- -------- -------- -------- -------- -------- --------
Income (loss) before income
taxes and extraordinary
charge 15,028 11,575 70,592 10,637 10,651 (28,504) 1,020 (5,146)
Income tax provision (benefit) 5,266 5,165 28,173 3,831 4,413 (9,125) 517 (1,930)
-------- -------- -------- -------- -------- -------- -------- --------
Income (loss) before
extraordinary charge 9,762 6,410 42,419 6,806 6,238 (19,379) 503 (3,216)
Extraordinary charge, net of
income taxes of $1,561 - (2,900)(1) - - - - - -
-------- -------- -------- -------- -------- -------- -------- --------
Net income (loss) $ 9,762 $ 3,510(1) $ 42,419(2) $ 6,806 $ 6,238 $(19,379)(3) $ 503 $ (3,216)
======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
(1) Includes a $2.9 million after-tax charge related to the early retirement
of the Company's Debentures.
(2) Includes a $50.2 million pre-tax ($30.2 million after-tax) gain on the
sale of BETA.
(3) Includes $33.3 million pre-tax ($22.0 million after-tax) of non-recurring
charges incurred in connection with the Buy-out as discussed under
"Results of Operations." On a pre-tax basis, excluding these charges,
compensation and benefits expense would decrease $16.7 million to $81.7
million from $98.4 million; occupancy and equipment expense would decrease
$10.6 million to $11.1 million from $21.7 million; and other expenses
would decrease $6.0 million to $11.2 million from $17.2 million.
30
<PAGE>
The following table sets forth certain financial data as a percentage of net
revenues.
<TABLE>
<CAPTION>
Three months ended
------------------
12/31/96 9/30/96 6/30/96 3/31/96 12/31/95 9/30/95 6/30/95 3/31/95
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Commissions 42.7% 42.1% 40.7% 42.9% 37.8% 40.7% 38.9% 37.7%
Principal transactions 17.6 21.9 23.3 23.1 23.5 26.8 24.9 24.4
Investment banking 12.8 9.7 11.2 7.8 11.8 6.5 9.7 10.3
Asset management 11.0 12.3 8.9 10.8 10.6 10.8 10.7 11.4
Other 7.3 6.0 9.1 8.8 11.1 9.1 10.0 9.8
Interest 13.7 15.2 13.0 13.6 14.8 16.3 16.9 18.5
-------- -------- -------- -------- -------- -------- -------- --------
Total revenue 105.1 107.2 106.2 107.0 109.6 110.2 111.1 112.1
Interest expense 5.1 7.2 6.2 7.0 9.6 10.2 11.1 12.1
-------- -------- -------- -------- -------- -------- -------- --------
Net revenue 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
-------- -------- -------- -------- -------- -------- -------- --------
Non-interest expenses:
Compensation and benefits 59.7 62.8 60.0 64.8 63.3 78.2(3) 66.1 65.8
Brokerage and clearance 2.9 3.1 2.6 2.2 2.0 2.6 2.2 2.5
Communications 7.1 7.4 6.5 7.7 7.8 8.0 8.8 9.5
Occupancy and equipment 6.9 8.0 6.8 7.6 8.2 17.2(3) 9.0 9.9
Promotional 3.9 3.6 3.0 3.0 2.6 2.8 2.7 2.9
Other 8.3 5.5 7.3 6.8 8.0 13.7(3) 10.4 14.0
-------- -------- -------- -------- -------- -------- -------- --------
Total non-interest expenses 88.8 90.4 86.2 92.1 91.9 122.5 99.2 104.6
Gain on sale of subsidiary . - .- 33.9(2) . - - . - .- .-
-------- -------- -------- -------- -------- -------- -------- --------
Income (loss) before income
taxes and extraordinary
charge 11.2 9.6 47.7 7.9 8.1 (22.5) 0.8 (4.6)
Income tax provision (benefit) 3.9 4.3 19.0 2.9 3.4 (7.3) 0.4 (1.7)
-------- -------- -------- -------- -------- -------- -------- --------
Income (loss) before
extraordinary charge 7.3 5.3 28.7 5.0 4.7 (15.2) 0.4 (2.9)
-------- -------- -------- -------- -------- -------- -------- --------
Extraordinary charge, net of
income taxes - (2.4) - - - - - -
-------- -------- -------- -------- -------- -------- -------- --------
Net income (loss) 7.3% 2.9%(1) 28.7%(2) 5.0% 4.7% (15.2)%(3) 0.4% (2.9)%
======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
(1) Includes a $2.9 million or 2.4% after-tax charge related to the early
retirement of the Company's junior subordinated debentures.
(2) Includes a $50.2 million pre-tax or 33.9% ($30.2 million after-tax or
20.4%) gain on the sale of BETA.
(3) Includes $33.3 million pre-tax or 26.5% ($22.0 million after-tax or 17.4%)
of net revenues for non-recurring charges incurred in connection with the
Buy-out discussed under "Results of Operations." On a pre-tax basis,
excluding these charges, compensation and benefits expense would decrease
13.3% to 64.9% from 78.2%; occupancy and equipment expense would decrease
8.4% to 8.8% from 17.2%; and other expenses would decrease 4.8% to 8.9%
from 13.7%.
The generally upward trend in the Company's net revenues for the eight
quarterly periods ended December 31, 1996 reflects favorable retail brokerage
industry market conditions and general stability in the fixed income markets,
combined with ownership certainty. This ownership stability has contributed
to improved investment consultant retention, recruitment and average
production, as well as increased investment banking activity. Revenues in the
third quarter of 1996 were adversely effected by the market volatility and
decreased transactional volume seen throughout the industry.
31
<PAGE>
Net revenues during this eight-quarter period follow the same positive
trend, with the Company realizing the benefit of declining non-
customer/dealer related interest expense as a result of the elimination of
certain long-term debt owed to Kemper and the accelerated repayment of the
KSOP loans.
While in absolute dollar amounts, non-interest expenses have trended up
during the eight periods (excluding the third quarter 1995 non-recurring
charges of $33.3 million pre-tax discussed previously), such absolute dollar
increases are generally attributable to compensation and benefits expense and
brokerage and clearance expense, which are significantly correlated to revenue
growth. As a percentage of net revenues, non-interest expenses have trended
downward during such periods, which management believes to be a result of the
Company's focus on cost containment.
Net income (both in absolute dollar amounts and as a percentage of net
revenues) also reflects a positive trend during this eight-quarter period,
with the exception of the third quarter of 1995 which includes the $22.0
million (after-tax) of non-recurring charges discussed previously.
LIQUIDITY AND CAPITAL RESOURCES
Holding Company
EVEREN Capital Corporation ("EVEREN Capital") is the parent holding
company for EVEREN Securities Holdings, Inc. ("EVEREN Holdings"), the holding
company for the Company's operating subsidiaries. As the parent, EVEREN
Capital expects to receive dividends, interest on any loans and payments for
federal income tax from its subsidiaries. Dividends and other distributions,
as well as certain interest payments, to EVEREN Capital from its registered
broker-dealer subsidiaries, which are EVEREN Capital's primary sources of
liquidity, are restricted as to amounts which may be paid by applicable laws
or regulations. The "net capital" rules are the primary regulatory
restrictions. EVEREN Capital's rights (and the rights of its stockholders and
creditors) to participate in the assets of any subsidiary are also subject to
prior claims of the subsidiary's creditors, including customers of the broker-
dealer subsidiaries (except to the extent the Company itself may be a creditor
with recognized claims). See Note 11 of Notes to Consolidated Financial
Statements contained in Item 8 of this report. On August 5, 1996, the Company
paid a special purpose cash dividend of $1.18 per common share to holders of
record as of July 23, 1996, enabling the KSOP to repay its remaining loan due
to the Company with the dividend proceeds it received. Since the Buy-out, the
Company has also generated funds from bank loans, the sale of BETA, and the
issuance of Common Stock to employees and to the public.
Since becoming a publicly-traded company, the Company, with approval from
its Board of Directors, began to pay quarterly dividends of $.09 per share on
the outstanding shares of Common Stock.
The Company believes that its current level of equity capital, combined
with funds generated from operations, will be adequate to fund its capital
needs for the foreseeable future.
32
<PAGE>
Operating Subsidiaries
The assets of EVEREN Securities, Inc. and EVEREN Clearing Corp., the
Company's primary operating subsidiaries (the "Subsidiaries"), are highly
liquid. The majority of their assets consist of securities inventories and
collateralized receivables, both of which fluctuate depending on the levels of
customer business. Collateralized receivables consist primarily of securities
purchased under agreements to resell ("resale agreements") and securities
borrowed, both of which are secured by U.S. government and agency securities
and highly marketable corporate debt and equity securities. In addition, the
Subsidiaries have significant receivables from customers, brokers and dealers
which turn over rapidly. The Subsidiaries' total assets and the individual
components of total assets vary significantly from period to period because of
changes relating to customer needs and economic and market conditions. A
relatively small percentage of total assets is fixed or held for a period of
longer than one year. The Company's total assets at December 31, 1996 and
1995, were approximately $1.8 billion and $2.6 billion, respectively.
The majority of the Subsidiaries' assets are financed through daily
operations by securities sold under agreements to repurchase, securities sold
not yet purchased, bank loans, through payables to customers, brokers and
dealers, and through securities loaned. Short-term funding is generally
obtained at rates based on the federal funds, LIBOR and money market rates.
Other borrowing costs are negotiated depending upon prevailing market
conditions. The Company monitors overall liquidity by tracking the extent to
which unencumbered marketable assets exceed short- term unsecured borrowings.
The Company maintains borrowing relationships with a broad range of banks,
financial institutions, counterparties and others. At December 31, 1996, the
Subsidiaries had approximately $600 million in uncommitted credit lines with
several banks.
Repurchase agreements are used primarily for customer accommodation
purposes and to finance the Company's inventory positions in U.S. government
and agency securities. These positions provide products and liquidity for
customers and are not maintained for the Company's investment or market
speculation. The level of activity fluctuates significantly depending on
customer needs; however, these fluctuations have no material effect on cash
flows, liquidity or capital resources. The Company monitors the collateral
position and counterparty risk on these transactions daily. See "Risk
Management."
The Subsidiaries are capital intensive. In addition to normal operating
requirements, capital is required to cover financing and regulatory charges on
securities inventories, investment banking commitments and investments in
fixed assets. The Company's overall capital needs are continually reviewed to
ensure that its capital base can appropriately support the anticipated needs
of the Subsidiaries. Management believes that existing capital, funds from
operations and current credit facilities will be sufficient to finance the
operating subsidiaries' ongoing businesses. The majority of the Subsidiaries'
assets are funded with liabilities that reprice on a matched basis, generally
producing a positive spread. As a result, the Company has modest exposure to
fluctuations in interest rates (other than the effect of interest rate
volatility on market conditions and prices of fixed income securities, and the
impact on the Company's revenues).
33
<PAGE>
CASH FLOWS
The Company's statements of consolidated cash flows classify cash flows
into three broad categories: net cash flows from operating activities,
investing activities and financing activities. The Company's net cash flows
are principally associated with operating and financing activities, which
support the Company's trading, customer and banking activities.
Years Ended December 31, 1996, 1995 and 1994
Cash and cash equivalents at December 31, 1996, 1995 and 1994 totaled
$46.6 million, $14.6 million and $10.5 million, respectively, reflecting
increases of $32.0 million, $4.1 million, and $3.5 million, for 1996, 1995 and
1994, respectively.
For the years ended December 31, 1996, 1995, and 1994, cash provided
from operating activities was used primarily in financing activities to reduce
bank loans payable and to a limited extent in 1994, in investment activities
to fund fixed asset acquisitions.
Net cash provided by operating activities totaled $74.9 million, $34.3
million, and $15.7 million in 1996, 1995 and 1994, respectively. In 1996,
changes in securities borrowed and securities loaned of $145.1 million and
securities purchased under agreements to resell and repurchase of $12.7
million generated cash. These sources were partially offset by a $60.9
million use of funds related to the net change in receivables from and
payables to customers, broker-dealers and others. In 1995, there were changes
in securities owned and securities owned, not yet purchased of $58.2 million
and changes in other assets and other liabilities of $44.2 million which
generated cash. These sources were partially offset by a $22.3 million
increase in securities purchased under agreements to resell in excess of the
increase in securities sold under agreements to repurchase and a $12.7 million
use of funds related to the net change in receivables from and payables to
customers, broker-dealers, affiliates and others. During 1994, decreases in
net securities positions of $81.6 million and other assets of $12.4 million
combined with a $19.2 million increase in securities sold under agreements to
repurchase in excess of the increase in securities purchased under agreements
to resell generated cash. Uses of cash flow offsetting these sources were the
net change in receivables from and payables to customers, broker-dealers,
affiliates and others of $83.0 million and a decrease in accounts payable,
accrued expenses and other liabilities of $35.4 million.
In 1996, net cash provided by investing activities of $57.5 million
resulted primarily from the net proceeds of $59.3 million generated by the
sale of BETA. Collections of principal on investments in mortgage- backed
securities of $16.5 million were offset by a net increase of $8.8 million of
fixed assets and the purchase of investments in mortgage- backed securities of
$9.5 million. In 1995 cash provided from investing activities of $59.9
million resulted primarily from the $62.4 million of net cash flows from the
sale, purchase and principal collections on investments in mortgage-backed
securities which was offset by $2.5 million of fixed asset purchases. In 1994
the Company used $44.8 million for investing activities which was comprised
primarily of $24.0 million used in its mortgage-backed securities investing
activities and for the purchase of $20.8 million of fixed assets.
34
<PAGE>
In 1996, net cash flows used by financing activities amounted to $100.4
million, the net result of the net proceeds of approximately $77.8 million
generated by the Company's initial public offering and the repayment of bank
loans of $157.8 million, retirement of subordinated debt of $36 million and
payment of dividends of $16.4 million. In 1995 the Company's financing
activities included $4.7 million in proceeds from the common stock offering
related to the over-subscribed Founders' Offering, collections of $7.1 million
under the Kemper indemnification, $61.0 million of repayments in excess of
proceeds from the issuance of collateralized mortgage obligations, payment of
debt issuance costs of $1.0 million related to the KSOP loans and the net
repayment of $40.0 million of bank loans. In 1994 financing activities
consisted of a $19.0 million capital contribution from Kemper, $23.6 million
of proceeds from the issuance in excess of repayments of collateralized
mortgage obligations and the net repayment of $10.0 million of bank loans.
DERIVATIVE FINANCIAL INSTRUMENTS
Derivatives are financial instruments, the payments on which are linked
to the prices, or relationships between prices, of securities or commodities,
interest rates, currency exchange rates or other financial measures
(collectively referred to as "cash market instruments"). Derivatives enable
the Company and its clients to manage their exposure to interest rates and
currency exchange rates, and security and other price risks. Derivatives
include structured notes, swaps, futures or forward contracts and options.
Certain types of derivatives, including forwards and certain options, are
traded in the OTC markets. Other types of derivatives, including futures
contracts and listed options, are traded on regulated exchanges.
Based on relative notional amounts, management believes that the
Company's derivative activities are not as extensive as those of many of its
competitors. The Company does not engage in the speculative trading of
derivatives. Instead, the Company has focused its derivative activities on
trading in forward and futures contracts in U.S. government and agency issued
or guaranteed securities as hedges against the Company's securities inventory
positions. The Company also executes transactions in exchange-traded futures
contracts and listed options on behalf of its customers.
The Company enters into certain futures and options contracts on a
limited basis in the ordinary course of its business to hedge or modify
exposures to interest rate fluctuations related to interest-sensitive
securities in its inventory. Given the limited use of such derivatives, the
Company has not incurred and does not expect to incur any material losses
relating to its derivative investments that would not be substantially offset
with corresponding gains on the securities positions hedged. Both the
securities hedged and the derivative instruments are carried on the statement
of financial condition at their market values. Gains and losses, both
realized and unrealized, from both the hedged securities and the derivative
instruments are included in current operating results.
35
<PAGE>
RISK MANAGEMENT
The Company monitors its market and counterparty risk on a daily basis
through a number of control procedures designed to identify and evaluate the
various risks to which the Company is exposed.
The Company often acts as a principal in customer-related transactions in
financial instruments which expose the Company to market risks. The Company
makes dealer markets in certain equity securities, investment-grade corporate
debt, high-yield securities, U.S. government and agency securities, mortgages
and mortgage-backed securities, and municipal fixed-income securities. As
such, the Company maintains securities inventories to facilitate customer
transactions. The Company covers its exposure to market risk by limiting its
net long or short positions, both overall and by individual product area, by
limiting the number of days inventory is held, by selling or buying similar
instruments and by utilizing various derivative financial instruments such as
futures and forward and option contracts. The management believes the
Company's philosophy, risk management and hedging practices result in
carefully managed market exposure and reduced earnings volatility.
At December 31, 1996 and 1995, the Company's securities owned and
securities sold, not yet purchased consisted of the following (in thousands):
<TABLE>
<CAPTION>
12/31/96 12/31/95
OWNED -------- --------
- -----
<S> <C> <C>
Obligations of the U.S. Government
or its agencies $ 83,083 $ 62,808
State and municipal obligations 10,354 22,333
Corporate debt obligations 58,115 44,954
Corporate stocks and warrants 8,459 9,205
Other 929 1,956
-------- --------
$160,940 $141,256
======== ========
SOLD, NOT YET PURCHASED
- -----------------------
Obligations of the U.S. Government
or its agencies $ 68,713 $ 70,130
State and municipal obligations 657 601
Corporate debt obligations 8,461 13,809
Corporate stocks and warrants 11,372 7,085
Other 506 7
-------- --------
$ 89,709 $ 91,632
======== ========
</TABLE>
The Company manages risk exposure utilizing mechanisms involving various
levels of management. The Company's risk management committee assists senior
management in managing risk associated with trading and inventory accounts.
The primary function of this committee is to establish and monitor position
limits for these accounts on an ongoing basis. Current and proposed
underwriting and other commitments are subject to due diligence reviews by
senior management as well as professionals in the appropriate business and
support units involved.
36
<PAGE>
The Company's trading activities result in the creation of inventory
positions. Position and exposure reports are prepared daily by operations
staff. Such reports are distributed to and reviewed independently on a daily
basis by the Company's risk management committee as well as members of senior
management. In addition, the corporate accounting group prepares a daily
consolidated summarized position report indicating both long and short
exposure. These reports, which are distributed to various levels of
management throughout the Company, enable senior management to better control
inventory levels and monitor results of the trading areas. The Company also
reviews and monitors, at various levels of management, inventory aging,
pricing, concentration and securities ratings.
In addition to position and exposure reports, the Company produces a
daily revenue report which summarizes the trading, interest, commissions,
fees, underwriting and other revenue items for each of the trading
departments. Daily revenue is reviewed for various risk factors and is
independently verified by members of the risk management committee. The daily
revenue report is summarized by the corporate accounting group and distributed
to various levels of management throughout the Company, together with position
and exposure reports. These reports enable senior management to monitor and
better control the overall activity of the trading areas.
Credit risk related to various financing activities is reduced by the
industry practice of obtaining and maintaining possession and control of
collateral. The Company monitors its exposure to counterparty risk on a daily
basis through the use of credit exposure information and the monitoring of
collateral values. The Company's credit department is responsible for
reviewing counterparties to establish appropriate exposure limits for a
variety of transactions. In addition, the Company actively manages the credit
exposure relating to its trading activities by monitoring the creditworthiness
of counterparties and their related trading limits on an ongoing basis,
requesting additional collateral when deemed necessary and limiting the amount
and duration of exposure to individual counterparties.
The Company seeks to control the risks associated with its investment
banking activities through a process that results in a thorough review by
various committees of the risks associated with all significant transactions
prior to acceptance of any engagement. The Company currently has various
commitment and other review committees. Each such committee is chaired by a
member of senior management and has at least one additional senior management
member. Other committee members include employees who provide expertise in
the evaluation and analysis of proposed transactions brought before the
particular committee.
The Company's risk management effort also includes an emphasis on
compliance. Retail branch managers and other supervisors are required to
engage in specific review and other tasks, and complete various reports, as
part of their supervisory responsibilities. The Company's compliance
department professionals monitor the Company's retail and capital markets
activities, conduct periodic and other examinations, respond to any customer
complaints that arise and interface with the various regulatory agencies that
have jurisdiction over the Company and its business.
37
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following consolidated financial statements of the
Company are included herein:
Independent Auditors' Reports
Consolidated Statements of Financial Condition -
December 31, 1996 and 1995
Consolidated Statements of Operations -
For the three years ended December 31, 1996, 1995
and 1994
Consolidated Statements of Changes in Stockholders'
Equity - For the three years ended December 31, 1996,
1995 and 1994
Consolidated Statements of Cash Flows -
For the three years ended December 31, 1996, 1995
and 1994
Notes to Consolidated Financial Statements
38
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
EVEREN Capital Corporation
We have audited the accompanying consolidated statements of financial
condition of EVEREN Capital Corporation and subsidiaries as of December 31,
1996 and 1995, and the related consolidated statements of operations, changes
in stockholders' equity, and cash flows for each of the two years in the
period ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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, such consolidated financial statements present fairly, in all
material respects, the financial position of EVEREN Capital Corporation and
subsidiaries as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the two years in the period ended
December 31, 1996, in conformity with generally accepted accounting
principles.
Deloitte & Touche LLP
Chicago, Illinois
February 28, 1997
39
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
EVEREN Capital Corporation
We have audited the accompanying consolidated statements of operations, changes
in stockholder's equity, and cash flows of Kemper Securities Holdings, Inc. and
subsidiaries (predecessor of EVEREN Capital Corporation andSubsidiaries) for the
year ended December 31, 1994. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audit 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 audit provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the results of operations and cash
flows of Kemper Securities Holdings, Inc. and subsidiaries (predecessor of
EVEREN Capital Corporation and Subsidiaries) for the year ended December 31,
1994 in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Chicago, Illinois
May 5, 1995
40
<PAGE>
EVEREN CAPITAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1996 AND 1995
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
ASSETS 1996 1995
---------- ----------
<S> <C> <C>
Cash and cash equivalents $ 46,592 $ 14,585
Cash and securities segregated under
federal and other regulations 15,778 15,556
Receivables from:
Customers 764,405 648,659
Brokers and dealers 50,807 75,961
Others 52,804 51,496
Securities borrowed 50,687 67,614
Securities owned, at market 160,940 141,256
Securities purchased under agreements
to resell 479,313 1,308,495
Investment in mortgage-backed certificates
available-for-sale, at fair value 144,962 156,457
Fixed assets, at cost, net 36,136 49,403
Other assets 21,921 21,145
---------- ----------
$1,824,345 $2,550,627
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Bank loans payable $ 140,000 $ 297,800
Payables to:
Customers 259,607 223,757
Brokers and dealers 24,632 17,307
Securities loaned 189,303 61,103
Collateralized mortgage obligations 137,699 143,878
Securities sold, not yet purchased,
at market 89,709 91,632
Securities sold under agreements to
repurchase 466,266 1,282,788
Deferred income taxes 13,491 26,118
Accounts payable, accrued expenses and
other liabilities 214,603 246,328
---------- ----------
1,535,310 2,390,711
Exchangeable preferred stock, $.01 par
value per share; 10,000,000 shares
authorized; 1,244,168 shares
issued and outstanding at
December 31, 1995 - 28,343
Stockholders' Equity:
Common stock, $.01 par value per share;
40,000,000 shares authorized,
16,611,889 and 11,493,731 outstanding
at December 31, 1996 and 1995,
respectively 170 115
Nonvoting common stock, $.01 par
value per share; 400,000 shares
authorized, 107,400 shares outstanding
at December 31, 1995 - 1
Additional paid-in capital 255,040 449,396
Unrealized gain (loss) on
available-for-sale securities, net of
income taxes (4,381) 11,497
Unearned cost of restricted stock (1,576) -
Unearned KSOP shares - (22,875)
Treasury stock, at cost, 354,473 and
3,239 shares at December 31, 1996
and 1995, respectively (5,230) (22)
Accumulated deficit - (306,539)
Retained earnings (since January 1, 1996) 45,012 -
---------- ----------
289,035 131,573
---------- ----------
$1,824,345 $2,550,627
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
41
<PAGE>
EVEREN CAPITAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
1996 1995 1994
----------- -------- --------
<S> <C> <C> <C>
Revenue:
Commissions $ 225,798 $190,303 $180,535
Principal transactions 115,291 122,127 119,066
Investment banking 55,889 47,093 61,851
Asset management 57,293 53,332 51,468
Other 42,217 49,137 43,235
Interest 74,067 81,177 73,815
----------- -------- --------
Total revenue 570,555 543,169 529,970
Interest expense 33,920 52,527 44,830
----------- -------- --------
Net revenue 536,635 490,642 485,140
----------- -------- --------
Non-interest expenses:
Compensation and benefits 331,389 335,473 328,005
Brokerage and clearance 14,559 11,422 11,533
Communications 38,266 41,759 41,291
Occupancy and equipment 39,152 54,484 46,361
Promotional 17,849 13,507 18,882
Other 37,765 55,976 51,843
----------- -------- --------
Total non-interest expenses 478,980 512,621 497,915
Gain on sale of subsidiary 50,181 - -
----------- -------- --------
Income (loss) before income taxes 107,836 (21,979) (12,775)
Income tax provision (benefit) 42,438 (6,125) (10,537)
----------- -------- --------
Income (loss) before extraordinary
item 65,398 (15,854) (2,238)
Extraordinary charge on early
retirement of debt, net of
income taxes of $1,561 (2,900) - -
----------- -------- --------
Net income (loss) $ 62,498 $(15,854) $ (2,238)
=========== ======== ========
Dividends on exchangeable
preferred stock $ 2,130
===========
Net earnings applicable to common
stock before extraordinary
charge $ 63,268
===========
Net earnings applicable to
common stock after
extraordinary charge $ 60,368
===========
Weighted average common shares
outstanding 12,208,532
===========
Net earnings per share of common
stock before
extraordinary charge $ 5.18
===========
Net earnings per share of common
stock after
extraordinary charge $ 4.94
===========
</TABLE>
See accompanying notes to consolidated financial statements.
42
<PAGE>
EVEREN CAPITAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
Common Stock Additional Unamortized Unrealized gain
--------------------------- Paid-In Restricted on available for
Voting Non-voting Capital Stock sale securities
------ ---------- ---------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
Balances at January 1, 1994 $ 10 $ - $438,903 $ - $ -
Capital contribution 19,000
Net loss
---- -------- -------- ------- --------
Balances at December 31, 1994 10 - 457,903 - -
---- -------- -------- ------- --------
Change in equity related to
spinoff adjustments, net 98 1 6,587 (2,500)
Deferred tax liability related
to Section 338 election (31,919)
Common stock offering 7 4,731
Amount received from former
parent under
indemnification agreement 13,374
Release of KSOP shares
Dividends on exchangeable
preferred stock (1,207)
Accretion of preferred stock to
redemption value (73)
Change in unrealized gain for
the period 11,497
Vesting of restricted stock 2,500
Purchase of treasury stock
Net loss
---- -------- -------- ------- --------
Balances at December 31, 1995 115 1 449,396 - 11,497
---- -------- -------- ------- --------
</TABLE>
<TABLE>
<CAPTION>
Unearned Retained Total
KSOP Treasury Accumulated Earnings Stockholders'
Shares Stock Deficit (since 1/1/96) Equity
-------- --------- ------------ -------------- -------------
<S> <C> <C> <C> <C> <C>
Balances at January 1, 1994 $ - $ - $(288,447) $ - $150,466
Capital contribution 19,000
Net loss (2,238) (2,238)
-------- ------- --------- ------------ --------
Balances at December 31, 1994 - - (290,685) - 167,228
-------- ------- --------- ------------ --------
Change in equity related to
spinoff adjustments, net (55,000) (50,814)
Deferred tax liability related
to Section 338 election (31,919)
Common stock offering 4,738
Amount received from former
parent under
indemnification agreement 13,374
Release of KSOP shares 32,125 32,125
Dividends on exchangeable
preferred stock (1,207)
Accretion of preferred stock to
redemption value (73)
Change in unrealized gain for
the period 11,497
Vesting of restricted stock 2,500
Purchase of treasury stock (22) (22)
Net loss (15,854) (15,854)
-------- ------- --------- ------------ --------
Balances at December 31, 1995 (22,875) (22) (306,539) - 131,573
-------- ------- --------- ------------ --------
</TABLE>
See accompanying notes to consolidated financial statements.
43
<PAGE>
EVEREN CAPITAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY, CONTINUED
YEAR ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
Common Stock Additional Unamortized Unrealized gain
--------------------------- Paid-In Restricted on available for
Voting Non-voting Capital Stock sale securities
------ ---------- ---------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
Balances at January 1, 1996 $115 $ 1 $449,396 $ - $ 11,497
Quasi-reorganization adjustments
as of January 1, 1996:
Restatement of assets and
liabilities to estimated fair value (3,675)
Transfer of accumulated deficit
and unrealized gain at January 1,
1996 to additional paid-in capital (295,042) (11,497)
Amount received from former parent
under indemnification agreement 6,626
Release of KSOP shares 8,029
Issuance of additional non-voting
common stock 1 1,515 (1,073)
Issuance of additional common stock 7 8,164 (503)
Conversion of non-voting common
stock to common stock 2 (2)
Proceeds from initial public offering 46 77,787
Dividends paid
Dividend reinvestment 7
Change in unrealized loss for the period (4,381)
Accretion of preferred stock (14)
Tax benefit from Kemper stock options 2,247
Purchase of treasury stock
Net income
---- ------ --------- --------- --------
Balances at December 31, 1996 $170 $ - $ 255,040 $ (1,576) $ (4,381)
---- ------ --------- --------- --------
Unearned Retained Total
KSOP Treasury Accumulated Earnings Stockholders'
Shares Stock Deficit (since 1/1/96) Equity
-------- --------- ------------ -------------- -------------
<C> <C> <C> <C> <C>
Balances at January 1, 1996 $(22,875) $ (22) $(306,539) - $ 131,573
Quasi-reorganization adjustments
as of January 1, 1996:
Restatement of assets and
liabilities to estimated fair value (3,675)
Transfer of accumulated deficit
and unrealized gain at January 1,
1996 to additional paid-in capital 306,539 -
Amount received from former parent
under indemnification agreement 6,626
Release of KSOP shares 22,875 30,904
Issuance of additional non-voting
common stock 443
Issuance of additional common stock 7,668
Conversion of non-voting common
stock to common stock -
Proceeds from initial public offering 77,833
Dividends paid (17,486) (17,486)
Dividend reinvestment 7
Change in unrealized loss for the period (4,381)
Accretion of preferred stock (14)
Tax benefit from Kemper stock options 2,247
Purchase of treasury stock (5,208) (5,208)
Net income 62,498 62,498
-------- ------- -------- -------- --------
Balances at December 31, 1996 $ - $(5,208) $ - $ 45,012 $289,035
======== ======= ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
44
<PAGE>
EVEREN CAPITAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 62,498 $ (15,854) $ (2,238)
Adjustments to reconcile net income
(loss) to net cash flows
from operating activities:
Extraordinary charge on early
retirement of debt 4,461 - -
Gain on sale of subsidiary (50,181) - -
Release of KSOP shares 8,029 - -
Depreciation and amortization 12,278 16,771 16,200
Deferred income taxes (8,724) (20,926) 5,783
Change in assets and liabilities:
Cash and securities segregated under
federal and other regulations (222) (490) 1,093
Receivables from/payables to:
Customers (79,896) 30,253 (68,892)
Brokers and dealers 30,567 (25,990) 8,326
Affiliates - 21,798 (36,569)
Others (11,589) (13,326) 1,892
Securities borrowed 16,927 (46,845) 18,656
Securities owned (19,684) 36,860 88,316
Securities purchased under
agreements to resell 829,182 (1,079,897) (24,131)
Other assets 1,740 21,605 12,414
Securities loaned 128,200 8,830 (6,412)
Securities sold, not yet purchased (1,923) 21,298 (6,689)
Securities sold under agreements
to repurchase (816,522) 1,057,611 43,298
Accounts payable, accrued expenses,
and other liabilities (30,291) 22,590 (35,361)
--------- ----------- --------
Net cash flows from operating activities 74,850 34,288 15,686
--------- ----------- --------
Cash flows from investing activities:
Net proceeds from sale of subsidiary 59,346 - -
Proceeds from sale of investments
in mortgage-backed securities - 81,808 6,793
Collections of principal on
investments in mortgage-
backed securities 16,523 15,743 44,598
Purchase of investments in
mortgage-backed securities (9,505) (35,123) (75,389)
Proceeds from the sale of
fixed assets 2,120 - -
Acquisition of fixed assets, net (10,942) (2,508) (20,780)
--------- ----------- --------
Net cash flows from investing activities 57,542 59,920 (44,778)
--------- ----------- --------
</TABLE>
See accompanying notes to consolidated financial statements.
45
<PAGE>
EVEREN CAPITAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S>
Cash flows from financing activities: <C> <C> <C>
Net proceeds from initial public offering 77,833 - -
Release of shares related to KSOP loan 22,875 - -
Dividends paid (16,433) - -
Retirement of subordinated debt (36,012) - -
Proceeds from common stock issuance 8,171 4,738 -
Amount collected under indemnification agreement 12,876 7,124 -
Capital contribution - - 19,000
Proceeds from the issuance of collateralized
mortgage obligations 9,422 34,080 72,569
Repayment of collateralized mortgage obligations (16,109) (95,035) (48,954)
Debt issuance costs paid - (977) -
Decrease in bank loans payable, net (157,800) (40,053) (10,011)
Purchase of treasury stock (5,208) (22) -
---------- --------- ---------
Net cash flows from financing activities (100,385) (90,145) 32,604
---------- --------- ---------
Increase in cash and cash equivalents 32,007 4,063 3,512
Cash and cash equivalents at beginning of year 14,585 10,522 7,010
---------- --------- ---------
Cash and cash equivalents at end of year $ 46,592 $ 14,585 $ 10,522
========== ========= =========
Supplemental disclosure of cash flow information:
Interest paid to unaffiliated entities $ 37,013 $ 48,780 $ 37,410
========== ========= =========
Income taxes paid $ 50,100 $ - $ -
========== ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
46
<PAGE>
EVEREN CAPITAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(1) GENERAL INFORMATION
EVEREN Capital Corporation ("EVEREN") was incorporated in Delaware in May
1995, for the purpose of acquiring all of the outstanding common stock of
Kemper Securities Holdings, Inc. ("KSHI") and its subsidiaries including
its primary subsidiary, Kemper Securities, Inc. ("KSI"); a clearing
subsidiary, Kemper Clearing Corp. ("KCC"); and a data processing
subsidiary, BETA Systems, Inc. On September 13, 1995, KSHI, KSI and KCC
changed their names to EVEREN Securities Holdings, Inc. ("EVEREN
Holdings"), EVEREN Securities, Inc. ("EVEREN Securities") and EVEREN
Clearing Corp. ("EVEREN Clearing"), respectively. Collectively, EVEREN
and its subsidiaries are referred to in these Notes as the "Company".
The Company is a financial services holding company, and is engaged
primarily in the retail and institutional brokerage business, including
investment banking and underwriting services. EVEREN Securities and
EVEREN Clearing are both registered as brokers and dealers in securities
under the Securities Exchange Act of 1934 and as futures commission
merchants under the Commodities Exchange Act. EVEREN Securities clears
all transactions with and for customers on a fully disclosed basis
through EVEREN Clearing. Another subsidiary, Gateway Mortgage Acceptance
Corporation ("Gateway"), was formed to issue and sell one or more series
of collateralized mortgage obligations ("CMOs") directly or through one
or more beneficially owned trusts (each, a "Trust").
On September 13, 1995, the Company completed its separation (the
"Buy-out") from its former parent, Kemper Corporation ("Kemper"), and
became an independent, employee-owned company with publicly traded
preferred stock. The preferred stock was issued to Kemper, which in turn
distributed the shares to holders of Kemper common stock and to holders
of certain Kemper common stock options and phantom stock units as a
taxable distribution (the "Kemper Distribution"). Simultaneously,
10,437,781 shares of common stock, par value $.01 per share, of EVEREN,
representing approximately 96% of such shares outstanding, were sold by
Kemper to the EVEREN Capital Corporation 401(k) and Employee Stock
Ownership Trust which is part of the EVEREN Capital Corporation 401(k)
and Employee Stock Ownership Plan (collectively, the "KSOP") for an
aggregate price of $71.4 million or $6.8405 per common share (the "KSOP
Purchase").
Following the Buy-out, the KSOP offered to KSOP participants up to $25
million of common stock of the Company (3,654,685 shares at $6.8405 per
share) as an investment option for a portion of their current account
balances in the KSOP (the "Founders' Offering"). The offering price per
share in the Founders' Offering was equal to the per share price paid by
the KSOP in the KSOP Purchase. As part of the separation from Kemper,
Kemper indemnified the Company for the first $20 million of employer
contributions to the KSOP. The $20 million indemnification has been
fully collected at December 31, 1996 and is recorded as additional
paid-in capital.
47
<PAGE>
EVEREN CAPITAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
During 1996, the Company completed the sale of BETA Systems, Inc., a
wholly-owned data processing and quote services subsidiary, for $63.5
million, resulting in an after-tax gain of approximately $30.2 million.
On October 8, 1996 the Company completed its initial public offering,
whereby 4.6 million shares of common stock were sold at a price of $18.50
per share, resulting in net proceeds of approximately $78 million to the
Company.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of EVEREN and
its subsidiaries. All significant intercompany balances and transactions
have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Securities and Commodities Transactions
Customer receivables and payables are recorded on a settlement date
basis. The related commission revenue and expenses from securities and
commodities transactions are recorded on trade date. Principal
securities and commodities transactions are also recorded on trade date.
Securities owned and securities sold, not yet purchased are recorded at
market value, with unrealized gains and losses included in income.
Securities Purchased Under Agreements to Resell and Securities Sold
Under Agreements to Repurchase
Securities purchased under agreements to resell and securities sold under
agreements to repurchase are collateralized transactions and are carried
at the contract amounts at which the securities will be resold or
reacquired, including accrued interest. It is the policy of the Company
to take possession of the securities purchased under agreements to resell
at the time such agreements are entered into. In the event that the
market value of such securities falls below the contract amount of the
related agreement to resell, the Company requests additional collateral.
48
<PAGE>
EVEREN CAPITAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
Securities Borrowed and Securities Loaned
Securities borrowed and securities loaned are recorded at the amount of
cash collateral advanced or received. Securities borrowed transactions
require the Company to deposit cash, letters of credit, or other
collateral with the lender. With respect to securities loaned, the
Company receives collateral in the form of cash or other collateral in an
amount generally in excess of the market value of securities loaned. The
Company monitors the market value of securities borrowed and loaned on a
daily basis, with additional collateral obtained or refunded as
necessary.
Fixed Assets
Fixed assets are recorded at historical cost, net of accumulated
depreciation and amortization. Depreciation on fixed assets is generally
recorded on a straight-line basis over the estimated useful lives of the
assets, which range from four to seven years for furniture and equipment
and up to thirty years for building and improvements. Leasehold
improvements are amortized on a straight- line basis over the lesser of
the lease term or the economic life of the asset.
Investments in Mortgage-backed Certificates/Collateralized Mortgage
Obligations
The CMOs issued by Gateway are collateralized by certain mortgage-
related instruments ("Certificates") and the investment of the proceeds
relating to principal payments and interest on such Certificates. The
CMOs are accounted for as borrowings. The Certificates are classified as
"available-for-sale" and are accounted for at market value with
unrealized gains or losses included in the equity section of the
consolidated statements of financial condition. Market value is
determined using current market valuations from an independent pricing
service.
Investments
The Company accounts for investments over which it exerts significant
influence but does not control under the equity method, whereby the
Company's proportionate share of earnings or losses are included in its
results of operations. The investments are included in other assets on
the consolidated statement of financial condition.
Impairment of Long-Lived Assets
In 1996, the Company adopted Statement of Financial Accounting Standards
("SFAS") No. 121, "Accounting for the Impairment of Long- Lived Assets
and for Long-Lived Assets to be Disposed Of." Such adoption had no
material impact on these consolidated financial statements.
49
<PAGE>
EVEREN CAPITAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
Stock Based Compensation
The Company accounts for stock-based compensation issued to employees in
accordance with Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees," ("APB Opinion No. 25") which recognizes
compensation cost based upon the intrinsic value at the date of grant of
the equity instrument awarded.
The Financial Accounting Standards Board issued SFAS No. 123, "Accounting
for Stock-Based Compensation," which encourages, but does not require,
companies to recognize compensation expense for grants of stock, stock
options and other equity instruments based on the fair value of those
instruments. The Company has elected, as permitted by SFAS No. 123, to
adopt the disclosure requirement of SFAS No. 123 and continue to account
for stock-based compensation under APB Opinion No. 25.
Income Taxes
Income taxes are provided for using the liability method, under which
deferred tax assets and liabilities are recorded based on differences
between the financial accounting and tax bases of assets and liabilities.
Deferred tax assets and liabilities are measured based on the currently
enacted tax rate expected to apply to taxable income in the period in
which the deferred tax asset or liability is expected to be settled or
realized.
The Company and Kemper agreed to make an election under Section
338(h)(10) of the Internal Revenue Code (the "Section 338 Election") with
respect to the sale by Kemper and purchase by EVEREN of the common stock
of EVEREN Holdings on September 13, 1995 (the "EVEREN Holdings
Purchase"). The impact of the Section 338 Election on the Company is
that the assets of EVEREN Holdings and subsidiaries received a new, and
overall lower, basis for federal income tax purposes.
Supplemental Disclosure of Non-Cash Investing and Financing
Activities
The Company, with approval from its Board of Directors, implemented a
quasi-reorganization to reflect the emergence of EVEREN as an ongoing,
independent organization and to enable the Company to present more
accurately the new organization's cumulative performance. The
quasi-reorganization was effective January 1, 1996, and all assets and
liabilities were adjusted to fair value as of that date. This resulted
in a reduction of net assets of $3.7 million. The quasi-reorganization
also resulted in the transfer of the accumulated deficit as of January 1,
1996 of $306.5 million to additional paid-in capital. The balance in
retained earnings at December 31, 1996 represents the accumulated net
earnings available to common stockholders arising subsequent to the date
of the quasi-reorganization.
50
<PAGE>
EVEREN CAPITAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
In 1995, in connection with the Buy-out, $44.3 million of subordinated
debt and $37.6 million in affiliated payables were converted to equity;
$48.2 million in receivables from affiliates was forgiven as a result of
termination of a tax sharing arrangement theretofore in place; and
preferred shares valued at $27.1 million were issued to Kemper. In
connection with the purchase of the common stock of the Company, $55
million of bank loans was incurred (the "KSOP loans") and $55 million in
unearned KSOP shares were recorded. In connection with the agreement of
Kemper and the Company to make the Section 338 Election, a deferred tax
liability of $31.9 million was established and reduced additional paid-in
capital.
Reclassifications
Certain prior year amounts have been reclassified to conform with the
1996 financial statement presentation.
(3) CASH AND SECURITIES SEGREGATED UNDER FEDERAL AND OTHER REGULATIONS
The Company is required under the Commodity Exchange Act (the "Act") to
account for and segregate all customer assets, as defined by the Act, in
connection with transactions in regulated commodities. As of December
31, 1996 and 1995, cash of approximately $764,000 and $406,000 and
securities (primarily obligations of the U.S. Government) with a market
value of approximately $15.0 million and $15.2 million, respectively, are
segregated pursuant to the Act.
At December 31, 1996 and 1995, the Company was in compliance with the
segregation requirements of the Act and had total segregated funds in
excess of the aggregate required amount by approximately $6.0 million and
$4.1 million, respectively.
(4) RECEIVABLES FROM AND PAYABLES TO CUSTOMERS
The Company extends credit to its customers to finance their purchases of
securities on margin. The Company receives income from interest charged
on such extensions of credit. Customer receivables include amounts due
on margin balances. Customer payables include customers' free credit
balances.
Securities owned by customers and held by the Company as collateral or as
margin and the market value of commodity option positions owned by
customers are not included in the consolidated statement of financial
condition. From time to time, the Company deposits customers' securities
as margin with clearing organizations. At December 31, 1996 and 1995,
such securities deposited as margin had an aggregate market value of $8.1
million and $8.6 million, respectively.
51
<PAGE>
EVEREN CAPITAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(5) SECURITIES-AT MARKET VALUE
Securities owned and securities sold, not yet purchased consisted of the
following (in thousands):
<TABLE>
<CAPTION>
December 31,
---------------------
Owned 1996 1995
----- -------- --------
<S> <C> <C>
Obligations of the U.S. Government or
its agencies $ 83,083 $ 62,808
State and municipal obligations 10,354 22,333
Corporate obligations 58,115 44,954
Corporate stocks and warrants 8,459 9,205
Other 929 1,956
-------- --------
$160,940 $141,256
======== ========
Sold, not yet purchased
Obligations of the U.S. Government or
its agencies $68,713 $70,130
State and municipal obligations 657 601
Corporate obligations 8,461 13,809
Corporate stocks and warrants 11,372 7,085
Other 506 7
-------- --------
$89,709 $91,632
======== ========
</TABLE>
(6) SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL AND SECURITIES SOLD UNDER
AGREEMENTS TO REPURCHASE
Securities purchased under agreements to resell and securities sold under
agreements to repurchase consisted of the following at December 31, 1996
and 1995 (in thousands):
<TABLE>
<CAPTION>
Securities Purchased Under Agreements to Resell 1996 1995
----------------------------------------------- ---- ----
<S> <C> <C>
U.S. Government and U.S. Government
agency obligations with a market value
of $482 million ($1,339 million at 1995) $479,313 $1,308,495
======== ==========
Securities Sold Under Agreements to Repurchase
----------------------------------------------
U.S. Government and U.S. Government
agency obligations with a market value
of $469.6 million ($1,313 million at 1995) $466,266 $1,282,788
======== ==========
</TABLE>
The Company enters into collateralized transactions to resell and
repurchase securities. These transactions are carried at the contract
amounts at which the securities will be resold or reacquired plus accrued
interest. At December 31, 1996, these agreements matured within ninety
days. Securities purchased under agreements to resell averaged $568.7
million and $550.1 million during 1996 and 1995, respectively, and the
maximum amounts outstanding at any month-end during 1996 and 1995 were
$1,400 million and $1,308.5 million, respectively. Securities sold under
agreements to repurchase averaged
52
<PAGE>
EVEREN CAPITAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
$552.9 and $538.8 million during 1996 and 1995, respectively, and the
maximum amounts outstanding at any month-end during 1996 and 1995 were
$1,387 million and $1,282.8 million, respectively. At December 31, 1996,
these agreements to repurchase had a weighted-average interest rate of
6.02 percent (5.96 percent at December 31, 1995).
(7) Investments in Mortgage-Backed Certificates
As required by the related indenture provisions of the CMOs, the
Certificates are held as collateral by a trustee of the Trust. The
trustee collects principal and interest payments from the
Certificates, reinvests the payments in eligible investments, and
makes principal and interest payments on the CMOs. A summary of
the Certificates, available-for-sale is as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
--------------
1996 1995
---- ----
<S> <C> <C>
Amortized cost $150,147 $143,949
Gross unrealized gains 237 12,508
Gross unrealized losses (5,422) -
-------- --------
Fair value $144,962 $156,457
======== ========
</TABLE>
(8) COLLATERALIZED MORTGAGE OBLIGATIONS
Receipt of principal and interest from the Certificates, including
prepayments, and income earned on the reinvestment of such amounts is
applied to the extent required by the indenture to make monthly payments
of principal on the CMOs. All payments of principal on the CMOs are
allocated to the classes of CMOs in accordance with the terms of the
standard indenture provisions. Interest rates on the CMOs are fixed and
range from 7.25% to 9.60% per year. The stated maturities range from June
1, 2019 through June 20, 2026 and represent the dates on which the CMOs
of each class are expected to be fully paid. The actual maturities of the
CMOs will depend on the rate of principal payments, including
prepayments, on the Certificates. The CMOs may be subject to redemption
at the option of Gateway, in the circumstances and at the redemption
price set forth in the related prospectus.
(9) FIXED ASSETS
At December 31, 1996 and 1995, fixed assets consist of the following (in
thousands):
<TABLE>
<CAPTION>
December 31,
----------------
1996 1995
---- ----
<S> <C> <C>
Building and improvements $ 1,411 $ 3,811
Furniture and equipment 92,268 116,784
Leasehold improvements 21,304 24,834
-------- ---------
Total cost 114,983 145,429
Less accumulated depreciation
and amortization (78,847) (96,026)
-------- ---------
Net fixed assets $ 36,136 $ 49,403
======== =========
</TABLE>
53
<PAGE>
EVEREN CAPITAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(10) BANK LOANS PAYABLE
Included in bank loans payable at December 31, 1996 and 1995, are $140
million and $275 million, respectively, in loans drawn from approximately
$600 million in lines of credit extended by several banks to the Company.
The level of these borrowings fluctuates daily, and at times
significantly, depending on market activity and customer margin activity
levels. Under such lines of credit, the Company has unsecured borrowings
totaling $40 million and $30 million at December 31, 1996 and 1995,
respectively. The remaining borrowings are secured by customers' margin
securities and the Company's securities inventory. The rates on these
borrowings are based on the federal funds rate (6.9% and 6% at December
31, 1996 and 1995, respectively).
At December 31, 1995, $22.8 million of the original KSOP loan discussed
in Note 2, was outstanding and included in bank loans payable bearing an
annualized interest rate of 7.1%. The loan balance was repaid in full
during 1996.
(11) NET CAPITAL REQUIREMENTS AND DIVIDEND RESTRICTIONS
In accordance with the rules and regulations of the Securities and
Exchange Commission for registered brokers and dealers, the capital rules
of the New York Stock Exchange and Regulation 1.17 of the Commodity
Futures Trading Commission, EVEREN Securities and EVEREN Clearing must
maintain minimum net capital. Both EVEREN Securities and EVEREN Clearing
operate under the alternative method of computing minimum net capital, as
defined. Such net capital requirements could restrict the ability of
each subsidiary to pay dividends to its parent. At December 31, 1996 and
1995, EVEREN Securities had net capital of approximately $124 million and
$94.2 million, respectively, which was approximately $123 million and
$93.2 million, respectively, in excess of its required minimum net
capital. At December 31, 1996 and 1995, EVEREN Clearing had net capital
of approximately $68.2 million and $58.6 million, respectively, which was
approximately $52 million and $45 million, respectively, in excess of its
required minimum net capital.
(12) DEFINED CONTRIBUTION PLAN
EVEREN maintains the KSOP to provide employees with an opportunity to
accumulate funds for retirement and acquire ownership interests in the
voting common stock of EVEREN. Participants are eligible to make pre-tax
contributions to the KSOP and share in employer contributions. Total
contribution expense for the years ended December 31, 1996, 1995 and 1994
was approximately $3.0 million, $19.4 million and $9.4 million,
respectively.
54
<PAGE>
EVEREN CAPITAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(13) POSTRETIREMENT BENEFITS
The Company currently sponsors a plan that provides postretirement
medical and dental benefits for substantially all employees. Employees
generally become eligible for postretirement benefits when they meet
minimum retirement age and service requirements. The cost of providing
these benefits is shared with retirees. The Company has reserved the
right to change or eliminate the benefit plan. The Company accrues the
expected cost of providing these postretirement benefits during the years
that the employee renders the necessary service.
Actuarial assumptions used to determine net periodic postretirement
benefit cost include an annual discount rate of 7.75% for 1996 and 7% for
1995 and 1994. Actuarial assumptions used to determine the accumulated
postretirement benefit obligation at December 31, 1996 and 1995 include
an annual discount rate of 7.75% and 7%, respectively.
Net periodic postretirement benefit cost for the years ended December 31
includes the following components (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Service cost of benefits earned $ 654 $ 618 $ 918
Interest cost on accumulated
postretirement benefit obligation 1,386 1,305 1,433
Amortization of unrecognized loss (gain) - (149) 14
------ ------ ------
Net periodic postretirement benefit cost $2,040 $1,774 $2,365
====== ====== ======
</TABLE>
The following table presents the plan's funded status reconciled with
amounts recognized in the Company's consolidated statement of financial
condition at December 31 (in thousands):
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Accumulated post-retirement benefit obligation:
Retirees $10,268 $ 3,637
Fully eligible active participants 4,303 4,255
Other active participants 3,316 7,773
------- -------
Accumulated post-retirement benefit obligation 17,887 15,665
Plan assets at fair value - -
------- -------
Accumulated post-retirement benefit obligation in
excess of plan assets 17,887 15,665
Unrecognized actuarial gain (loss) (472) 4,902
------- -------
Accrued post-retirement benefit cost $17,415 $20,567
======= =======
</TABLE>
55
<PAGE>
EVEREN CAPITAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
For measurement purposes, an 8% annual rate of increase in the per capita
health care cost trend rate was assumed for 1997; the rate was assumed to
decrease gradually to 6% by the year 1999 and remain at that level
thereafter. The health care cost trend rate assumption has a significant
effect on the amounts reported. Increasing the assumed health care cost
trend rates by one percentage point would increase the accumulated
post-retirement benefit obligation as of December 31, 1996 by
approximately $3.2 million and the aggregate of the service and interest
cost components of net periodic postretirement benefit cost for the year
ended December 31, 1996 by approximately $447,000.
(14) EXCHANGEABLE PREFERRED STOCK AND JUNIOR SUBORDINATED DEBENTURES
As discussed in Note 1, on September 13, 1995, EVEREN issued 1,202,805
shares of Series A Exchangeable Preferred Stock ("Exchangeable Preferred
Stock") with a liquidation preference of $25 per share and a dividend
rate of 13.5% per year. During 1996, the Company exchanged 13.5% Junior
Subordinated Debentures due 2007 for all outstanding shares of the
Exchangeable Preferred Stock. Such Debentures were subsequently redeemed
in 1996 resulting in an after-tax extraordinary charge of $2.9 million.
For the year ended December 31, 1996 and 1995, dividends on the
Exchangeable Preferred Stock were approximately $2.1 million and $1.2
million, respectively.
(15) STOCK OPTIONS
The Company maintains equity-based incentive plans under which various
types of stock options are granted to officers, directors, and key
employees of the Company.
The exercise prices of stock options granted under the equity-based
incentive plans approximated the market prices on the dates of grant, and
each such option has a maximum duration of ten years. Each option
generally becomes exercisable five years from the date of grant.
A summary of the Company's stock options for the years ended December 31,
1996 and 1995 is presented below:
<TABLE>
<CAPTION>
Weighted Average
Options Exercise Price
------- ----------------
<S> <C> <C>
Options Outstanding, January 1, 1995 - $ -
Granted 994,075 6.84
Exercised - -
Forfeited - -
--------- ------
Options Outstanding, December 31, 1995 994,075 6.84
Granted 189,750 10.77
Exercised - -
Forfeited (110,200) 6.84
--------- ------
Options Outstanding, December 31, 1996 1,073,625 $7.53
========= ======
</TABLE>
56
<PAGE>
EVEREN CAPITAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
For options granted in 1996 and 1995, the compensation cost as determined
under SFAS No. 123 (based on the fair value of options at the grant date)
was not material to the Company's consolidated net income.
(16) INCOME TAXES
The income tax expense (benefit) for the years ended December 31 was as
follows (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
U.S. Federal
Current $ 43,621 $ 13,193 $(16,801)
Deferred (8,724) (20,926) 5,783
-------- -------- --------
Total 34,897 (7,733) (11,018)
State and Local
Current 7,541 1,922 671
Deferred - (314) (190)
-------- -------- --------
Total 7,541 1,608 481
-------- -------- --------
$42,438 $ (6,125) $(10,537)
======== ======== ========
</TABLE>
As a result of the Section 338 Election, EVEREN Holdings incurred a tax
basis reduction of approximately $97.3 million in its various assets.
This reduction in tax basis represents future taxable income to EVEREN
Holdings as the individual assets are converted to cash. Consequently,
EVEREN Holdings and its subsidiaries established a $31.9 million deferred
tax liability as of September 13, 1995.
A reconciliation of the statutory federal income tax to the effective tax
rate is as follows (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Statutory federal income tax (benefit) $36,180 $(7,694) $ (4,471)
Increase (reduction) in income taxes
resulting from:
Tax-exempt interest, net (559) (903) (1,604)
Prior year deferred compensation
adjustment - - (5,491)
Extraordinary charge on early
retirement of debt 1,561 - -
Travel and entertainment 483 457 696
State and local income taxes,
net of federal
income tax benefit 4,459 1,045 313
Other, net 314 970 20
------- ------- --------
$42,438 $(6,125) $(10,537)
======= ======= ========
</TABLE>
57
<PAGE>
EVEREN CAPITAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
The tax effect of temporary differences that give rise to significant portions
of the deferred tax assets and liabilities at December 31, is presented below
(in thousands):
<TABLE>
<CAPTION>
Deferred tax assets: 1996 1995
---- ----
<S> <C> <C>
Accrued expenses $ 6,584 $ 3,312
Deferred compensation 1,412 2,035
Deferred rent 3,727 98
Fixed assets, principally due
to differences in depreciation 428 -
-------- --------
Total deferred tax assets 12,151 5,445
-------- --------
Deferred tax liabilities:
Unrealized gain on available-for-sale
securities 207 1,011
Section 338 Election basis difference 23,083 29,763
Exchange memberships 1,393 -
Other 959 789
-------- --------
Total deferred tax liabilities 25,642 31,563
-------- --------
Net deferred tax liabilities $(13,491) $(26,118)
======== ========
</TABLE>
As a result of the Buy-out, EVEREN Holdings is no longer a member of
Kemper's consolidated tax group for federal income tax purposes. EVEREN
and Kemper have entered into an agreement (the "Tax Sharing Agreement"),
which provides that Kemper will be responsible for and receive the
benefits of (i) all settlements with the Internal Revenue Service (the
"IRS") for the 1990 and prior year tax periods, (ii) the impact of all
tax items for the 1990 and prior year tax periods theretofore identified
by the IRS that reverse during the period January 1, 1991 through
September 13, 1995 and (iii) all tax issues for the period from January
1, 1991 to September 13, 1995 identified by Kemper and EVEREN in the Tax
Sharing Agreement. The Tax Sharing Agreement provides that EVEREN will
be responsible for and receive the benefits of all tax liabilities and
refunds attributable to the business of the Company after September 13,
1995. Tax returns for the years 1991 through 1993 are currently under
examination by the IRS.
Though valid as between EVEREN and Kemper, the Tax Sharing Agreement is
not binding on the IRS and does not affect the several liability of
EVEREN, Kemper and their respective subsidiaries to the IRS for all
federal taxes of the consolidated group relating to periods prior to
September 13, 1995.
(17) RELATED-PARTY TRANSACTIONS
Prior to the Buy-out, the Company provided certain services to a
wholly-owned subsidiary of Kemper. As a result, included in asset
management income for the year ended December 31, 1994 is
approximately $14.1 million the Company received for acting as an
underwriter and distributor of money market funds managed by a
wholly-owned subsidiary
58
<PAGE>
EVEREN CAPITAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
of Kemper. Included in commission revenue for the year ended December
31, 1994 is approximately $17 million representing commission earned from
affiliates of a Kemper subsidiary for the sale of mutual funds and other
products. The asset management income and commission revenues represent
standard broker fees and commission loads earned in the normal course of
business.
Additional interest expense incurred on payables to affiliates other than
that incurred on subordinated debt payable to affiliates amounted to $2.3
million for the year ended December 31, 1994.
(18) COMMITMENTS AND CONTINGENCIES
The Company leases certain office space under various noncancelable
operating leases with remaining terms greater than one year. Future
minimum payments under noncancelable operating leases as of December 31,
1996 were approximately (in thousands):
<TABLE>
<CAPTION>
Year Ending December 31,
------------------------
<S> <C>
1997 $ 25,240
1998 24,436
1999 21,973
2000 18,291
2001 15,802
Thereafter 51,095
--------
Total minimum lease payments $156,837
========
</TABLE>
Certain of the leases are subject to changes in the operating costs of
the particular facilities. Total rental expense for all operating
leases, including expenses related to the abandonment of leased property,
was approximately $33.3 million, $46.8 million and $40.9 million for the
years ended December 31, 1996, 1995 and 1994, respectively.
The Company uses unsecured letter of credit agreements issued by banks to
provide the required margin for customers' and introducing brokers'
transactions with the Options Clearing Corporation. Such letters of
credit are generally for periods of six months. The Company pays
commitment fees on these letters of credit at an annual rate of
approximately .375%. At December 31, 1996 the Company is obligated under
an unsecured letter of credit totaling $40 million.
In the normal course of business, the Company enters into underwriting
commitments. Transactions relating to such underwriting commitments,
which were open at December 31, 1996 and subsequently settled, had no
material effect on the consolidated statement of financial condition.
59
<PAGE>
EVEREN CAPITAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(19) LITIGATION
The Company has been named as a defendant in various legal actions in
connection with its securities and commodities business. Some of these
lawsuits involve claims for substantial amounts. Although the ultimate
outcome of these suits cannot be ascertained at this time, it is the
opinion of management, after consultation with counsel, that the
resolution of such suits will not have a material adverse effect on the
financial position of the Company but may be material to the Company's
operating results for any particular period, depending upon the level of
the Company's income for such period.
(20) FINANCIAL INSTRUMENTS
Off-Balance Sheet Credit Risk and Concentration of Credit Risk Certain
market and credit risks are inherent in the Company's business, primarily
in facilitating customers' trading and financing transactions in
financial instruments, which include derivatives. In the normal course of
business, the Company's customer activities include execution,
settlement, and financing of various customer securities and commodities
transactions, which may expose the Company to off-balance sheet risk in
the event the customer is unable to fulfill its contractual obligations.
The Company's customer securities activities are transacted on either a
cash or margin basis. In margin transactions, the Company extends credit
to the customer which is collateralized by cash and/or securities in the
customer's account. In connection with these activities, the Company
executes and clears customer transactions involving securities sold but
not yet purchased ("short sales") and the writing of option contracts.
The Company also executes customer transactions in the purchase and sale
of commodity futures contracts (including options on futures),
substantially all of which are transacted on a margin basis subject to
various exchange regulations. The Company seeks to control the risks
associated with its customer activities by requiring customers to
maintain margin collateral in compliance with various regulatory,
exchange, and internal guidelines. The Company monitors required margin
levels daily and, pursuant to such guidelines, requires the customers to
deposit additional collateral or reduce positions when necessary. Such
transactions may expose the Company to significant off-balance sheet risk
in the event the margin is not sufficient to fully cover losses which
customers may incur. In the event the customer fails to satisfy its
obligations, the Company may be required to purchase or sell the
collateral at prevailing market prices in order to fulfill the customer's
obligations.
In accordance with industry practice, the Company records customer
securities transactions on a settlement date basis, which is generally
three business days after trade date. The Company is therefore exposed
to risk of loss on these transactions in the event of the customer's or
broker's inability to meet the terms of their contracts in which case the
Company may have to purchase or sell financial instruments at prevailing
market prices.
60
<PAGE>
EVEREN CAPITAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
The Company believes that the settlement of these transactions will not
have a material effect on the Company's consolidated statement of
financial condition.
The Company's customer financing and securities settlement activities
require the Company to pledge customer securities as collateral in
support of various secured financing sources such as bank loans,
securities loaned and agreements to repurchase. Additionally, the Company
pledges customer securities as collateral to satisfy margin deposits of
various exchanges. In the event the counterparty is unable to meet its
contractual obligation to return customer securities pledged as
collateral, the Company may be exposed to the risk of acquiring the
securities at prevailing market prices in order to satisfy its customer
obligations. The Company controls this risk by monitoring the market
value of securities pledged on a daily basis and by requiring adjustments
of collateral levels in the event of excess market exposures.
Additionally, the Company establishes credit limits for such activities
and monitors compliance on a daily basis. The Company also enters into
collateralized financing agreements in which it extends short-term
credit, primarily to major financial institutions. The Company generally
controls access to the collateral pledged by the counterparties, which
consists largely of securities issued by the U.S. government or its
agencies.
The Company is engaged in various securities trading and brokerage
activities servicing a diverse group of corporations, governments,
institutional and individual investors primarily located in the United
States. A substantial portion of the Company's transactions are
collateralized and are executed with and on behalf of other major brokers
and dealers. The Company's exposure to credit risk associated with the
nonperformance of these counterparties in fulfilling their contractual
obligation pursuant to securities and commodities transactions can be
directly impacted by volatile trading markets which may impair the
counterparties' ability to satisfy their obligations to the Company. The
Company monitors credit risk on both an individual and group counterparty
basis.
Derivatives
The Company also uses derivative financial instruments to hedge market
risk, primarily arising from fluctuations in interest rates, in its
securities inventory. To accomplish this, the Company uses
exchange-traded futures and option contracts that contain varying degrees
of off-balance-sheet risk, whereby changes in the market values of the
underlying securities or other financial instruments may be in excess of
the amounts reflected in the consolidated statement of financial
condition. In light of this strategy, the Company does not expect any
material losses relating to such derivative instruments that would not be
offset with corresponding gains on the securities hedged. These
derivative instruments, which consist solely of exchange-traded futures
and option contracts, are carried in the consolidated statement of
financial condition at December 31, 1996 and 1995 at their quoted market
values of $330,000 and $77,000, respectively, in aggregate, and have
aggregate notional values of approximately $11.6 million and $10.2
million, respectively.
61
<PAGE>
EVEREN CAPITAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
The average market value of these derivative instruments during 1996
approximated $228,000.
Fair Value
The Company's financial instruments are carried at fair value or at
amounts which approximate fair value. Customer receivables, primarily
consisting of floating-rate loans collateralized by margin securities,
are charged interest at rates similar to other such loans made within the
industry. Reverse repurchase/repurchase agreements, securities
borrowed/loaned, and notes payable to banks are carried at contract
amount plus accrued interest or at the amount of cash collateral advanced
or received, which approximates fair value due to their highly liquid
nature and short maturity. The Company's remaining financial instruments
are generally short- term in nature and are typically liquidated at their
carrying values.
(21) QUARTERLY INFORMATION (UNAUDITED) (IN THOUSANDS)
<TABLE>
<CAPTION>
QUARTER
-------------------------------------------------------------------
1996 FIRST SECOND THIRD FOURTH
-------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total revenues $143,141 $157,281 $129,087 $141,041
Income before income taxes 10,637 70,592 11,575 15,028
Net income 6,806 42,419 3,510 9,762
QUARTER
-------------------------------------------------------------------
1995 FIRST SECOND THIRD FOURTH
-------------------------------------------------------------------
Total revenues $125,801 $134,779 $138,704 $143,885
Income (loss) before income
taxes (5,146) 1,020 (28,504) 10,651
Net income (loss) (3,216) 503 (19,379) 6,238
</TABLE>
* * * * * *
62
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
On October 3, 1995, upon recommendation by the Board of Directors, the
Company appointed Deloitte & Touche LLP as its new independent
accountants to replace KPMG Peat Marwick LLP as the Company's
certifying independent accountant. During the 24 months preceding such
replacement of KPMG Peat Marwick LLP as the auditors, there existed no
problems relating to any matter of accounting principles or practices,
financial statement disclosures, auditing scope or procedures, or
compliance with applicable rules of the Commission, which problems, if
not resolved to the satisfaction of KPMG Peat Marwick LLP, would have
caused them to make reference to such problems in their reports. In
addition, for each of the past two fiscal years, the reports of KPMG
Peat Marwick LLP on such financial statements did not include an
adverse opinion or a disclaimer of opinion, nor was it qualified as to
uncertainties, audit scope, or accounting principles. The opinion for
the fiscal year ended December 31, 1993 was modified to reflect the
change in accounting for adoption of the Financial Accounting Standards
Board's Statement of Financial Accounting Standards No. 109 "Accounting
for Income Taxes."
During the fiscal year ended December 31, 1994 and through October 3,
1995, the Company had not consulted with Deloitte and Touche LLP
regarding either (1) the application of accounting principles to a
specified transaction, either completed or proposed, or the type of
audit opinion that might be rendered on the Company's financial
statements or (2) concerning the subject matter of a disagreement with
the former auditor, or a reportable event as described in Regulation S-
K Item 304 (a)(2).
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) Identification of Directors
The information in the Company's Proxy Statement dated April 4, 1997
for the Annual Meeting of Stockholders to be held on May 6, 1997
("1997 Proxy") under the headings "ELECTION OF DIRECTORS" and "BOARD
OF DIRECTORS COMMITTEES" is incorporated herein by reference.
(b) Identification of Executive Officers
The officers of the Company are elected by and serve at the pleasure
of the Board of Directors. The executive officers of the Company
and their respective positions, ages and backgrounds are as follows:
63
<PAGE>
Name Position Age
- ---- -------- ---
James R. Boris Chairman of the Board and Chief 52
Executive Officer
Stephen G. McConahey President and Chief Operating Officer 53
Stanley R. Fallis Senior Executive Vice President and 56
Director of Administration and
Operations
David M. Greene Senior Executive Vice President and 51
Director of Client Services
Arthur J. McGivern Senior Executive Vice President and 49
Director of Corporate Development
Janet L. Reali Senior Executive Vice President, 45
General Counsel and Secretary
Thomas R. Reedy Senior Executive Vice President and 37
Director of Capital Markets
John G. Sullivan Senior Executive Vice President and 51
Director of Marketing and Investment
Services
Daniel D. Williams Senior Executive Vice President, 45
Treasurer and
Chief Financial Officer
Thomas M. Mansheim Senior Vice President, Controller and 39
Chief Accounting Officer
James R. Boris has been Chairman of the Board and Chief Executive Officer
of the Company since its inception in May 1995. Mr. Boris is Chairman of the
Board and Chief Executive Officer of EVEREN Securities, and has held such
positions since January 1990. From January 1994 until September 1995, he was
also an Executive Vice President of Kemper. From January 1990 until September
1995, he served on the board of directors of Kemper Financial Companies, Inc.
and the boards of its major subsidiaries.
Stephen G. McConahey has been President and Chief Operating Officer of
the Company since its inception in May 1995, and has been a director since
July 1995. Mr. McConahey is President and Chief Operating Officer of EVEREN
Securities and has held such positions since January 1994. He was Senior Vice
President for Corporate and International Development of Kemper from 1990
through December 1993. He was also Executive Vice President (Corporate and
International Development) of Kemper Financial Services, Inc. from 1988
through December 1993 and Senior Vice President of Kemper Financial Companies,
Inc. from 1990 through 1993. Mr. McConahey is also a member of the Board of
Trustees of AMLI Residential Properties Trust, a publicly-traded real estate
investment trust that invests in multi-family properties, and is an
independent general partner of Boettcher Venture Capital Partners, L.P.
64
<PAGE>
Stanley R. Fallis was elected Senior Executive Vice President of the
Company in May 1995 and also acts as the Company's Director of Administration
and Operations. In April 1995, he was elected Senior Executive Vice President
and Chief Administrative Officer of EVEREN Securities. From March 1994 until
April 1995, he was Senior Vice President and Director of Strategic Planning of
Kemper. He was Senior Executive Vice President, Treasurer and Chief Financial
Officer of EVEREN Securities from September 1991 until March 1994, after
having been Executive Vice President, Treasurer and Chief Financial Officer
from April 1990 until September 1991.
David M. Greene was elected Senior Executive Vice President of the
Company in May 1995 and also acts as the Company's Director of Client
Services. Since January 1994 he has been Senior Executive Vice President and
Director of Client Services of EVEREN Securities. From October 1992 until
January 1994, he was EVEREN Securities' national sales director. From August
1991 to October 1992 he was Regional Director of EVEREN Securities' branch
offices in Wisconsin, Iowa, Florida and Minnesota. Prior thereto, he was
branch manager of the Madison, Wisconsin branch office of an EVEREN Securities
predecessor firm, Blunt Ellis & Loewi Incorporated ("BEL").
Arthur J. McGivern was elected Senior Executive Vice President and
Director of Corporate Development of the Company in February 1996, at which
time he was also elected as a director and as Senior Executive Vice President
and Director of Corporate Development of EVEREN Securities. From January 1994
to January 1996, he was Senior Vice President and Corporate Counsel of Kemper.
Prior to the Company's separation from Kemper in September 1995, Mr. McGivern
was a director and officer of a number of the Company's subsidiaries,
including the following positions at EVEREN Securities: Executive Vice
President from March 1991 to September 1992; Senior Executive Vice President
from September 1992 to September 1995; General Counsel from March 1991 to
September 1995; Corporate Secretary from March 1991 to December 1993; and a
director from March 1991 to September 1995.
Janet L. Reali was elected Senior Executive Vice President, General
Counsel and Secretary of the Company in February 1996 after having been
Executive Vice President and Secretary since May 1995. In December 1995 she
was elected Senior Executive Vice President, General Counsel and Secretary of
EVEREN Securities after having been Executive Vice President, Corporate
Counsel and Corporate Secretary since December 1993. She was Senior Vice
President and Associate General Counsel of EVEREN Securities from July 1991 to
December 1993. Before joining EVEREN Securities, she was a partner in the
Chicago law firm of Keck, Mahin & Cate.
Thomas R. Reedy was elected Senior Executive Vice President of the
Company in May 1995 and acts as the Company's Director of Capital Markets. He
has been Senior Executive Vice President of EVEREN Securities since December
1993, Executive Vice President from September 1993 to December 1993 and Senior
Vice President from January 1991 to September 1993. During these periods, he
has held the additional titles of Director of Capital Markets since January
1995, Director of Product Origination from June 1994 to January 1995, Director
of Investment Banking from September 1993 to June 1994 and Director of Public
Finance from January 1991 to September 1993. He originally joined EVEREN
Securities in 1988 as a Senior Vice President of BEL.
John G. Sullivan was elected Senior Executive Vice President of the
Company in February 1996 and also acts as the Company's Director of Marketing
and Investment Services. He has been a director and Senior Executive Vice
President and Director of Marketing and Investment Services of EVEREN
Securities since October 1995. Prior to joining the Company, he worked at
Smith Barney Inc. as
65
<PAGE>
Executive Vice President for strategic marketing from July 1995 to October
1995, as Executive Vice President and director of recruiting and development
from June 1994 to June 1995 and as Executive Vice President and director of
that firm's northwest retail division from 1990 to 1994.
Daniel D. Williams was elected Senior Executive Vice President, Treasurer
and Chief Financial Officer of the Company in May 1995. Since April 1995 he
has been Senior Executive Vice President and Chief Financial Officer of EVEREN
Securities. From January 1994 to April 1995 he was Executive Vice President
and Director of Finance and Administration and from January 1991 to January
1994 he was Senior Vice President and Director of Accounting of EVEREN
Securities.
Thomas M. Mansheim was elected Vice President, Controller and Chief
Accounting Officer of the Company in May 1995 and Senior Vice President,
Controller and Chief Accounting Officer as of July 1995. He is Executive
Vice President of EVEREN Securities after having been Senior Vice President
from January 1991 until March 1997. Since January 1994 he has been Director
of Accounting of EVEREN Securities.
(c) Identification of certain significant employees - none.
(d) Family relationships - none.
(e) Business experience - See Items 10(a) and 10(b) above.
(f) Involvement in certain legal proceedings - none.
(g) Promoters and control persons - none.
Compliance with Section 16(a) of the Exchange Act
The information in the 1997 Proxy under the caption "SECTION 16(a)
BENEFICIAL OWNERSHIP REPORTING COMPLIANCE" is incorporated herein by
reference.
66
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
The information in the 1997 Proxy under the following captions (including
any subcaptions) is incorporated herein by reference:
COMPENSATION OF DIRECTORS
COMPENSATION OF EXECUTIVE OFFICERS
EMPLOYMENT AGREEMENTS
BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
PERFORMANCE GRAPH
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information in the 1997 Proxy under the caption "PRINCIPAL
STOCKHOLDERS" is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
(a) Transactions with management and others - none.
(b) Certain business relationships - none.
(c) Indebtedness of management - none
(d) Transactions with promoters - not applicable.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) Financial Statements
A listing of all financial statements filed as part of this Annual
Report on Form 10-K is included in Item 8.
(a) (2) Financial Statement Schedules
The following financial statement schedules are filed as part of this
annual report on Form
10-K:
Schedule Page No.
-------- --------
Reports of Independent Auditors E-1
Schedule II Valuation and Qualifying Accounts E-3
(a) (3) Exhibits
The exhibits listed on the accompanying Index to Exhibits at pages E-4
through E-6 below are filed as part of this Annual Report on Form 10-K.
(b) Reports on Form 8-K
None
67
<PAGE>
POWER OF ATTORNEY
Each person whose signature appears below hereby appoints Stanley R.
Fallis, Senior Executive Vice President, and Janet L. Reali, Senior Executive
Vice President, General Counsel and Secretary, his true and lawful
attorney-in-fact with authority together or individually to execute in the
name of each such signatory, and with authority to file with the Securities
and Exchange Commission, any and all amendments to this Annual Report on Form
10-K, together with any exhibits thereto and other documents therewith,
necessary or advisable to enable EVEREN Capital Corporation to comply with the
Securities Exchange Act of 1934, as amended, and any rules, regulations and
requirements of the Securities and Exchange Commission in respect thereof,
which amendments may make such other changes in the Annual Report on Form 10-K
as the aforesaid attorney-in-fact executing the same deems appropriate.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, EVEREN Capital Corporation has duly caused this report
to be signed on its behalf by the undersigned thereunto duly authorized.
EVEREN CAPITAL CORPORATION
Date: March 28, 1997 By: /s/James R. Boris
------------------------------------
James R. Boris
Chairman of the Board, Chief
Executive Officer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of EVEREN
Capital Corporation and in the capacities indicated on the 28th day of March
1997.
By: /s/Stephen G. McConahey
------------------------------------
Stephen G. McConahey
President, Chief Operating
Officer and Director
By: /s/Daniel D. Williams
------------------------------------
Daniel D. Williams
Senior Executive Vice President
Treasurer and Chief Financial Officer
(Principal financial officer)
By: /s/Thomas M. Mansheim
------------------------------------
Thomas M. Mansheim
Senior Vice President,
Controller and Chief Accounting Officer
S-1
<PAGE>
Signatures (Continued)
By: /s/William T. Esrey
------------------------------------
William T. Esrey
Director
By: /s/Jack Kemp
------------------------------------
Jack Kemp
Director
By: /s/Homer J. Livingston Jr.
------------------------------------
Homer J. Livingston, Jr.
Director
By: /s/William C. Springer
------------------------------------
William C. Springer
Director
S-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
EVEREN Capital Corporation
We have audited the consolidated financial statements of EVEREN Capital
Corporation and subsidiaries as of December 31, 1996 and 1995, and for each of
the two years in the period ended December 31, 1996, and have issued our
report thereon dated February 28, 1997; such consolidated financial statements
and report are included in the Annual Report on Form 10-K for the year ended
December 31, 1996. Our audits also included the consolidated financial
statement schedule, Valuation and Qualifying Accounts, for each of the two
years in the period ended December 31, 1996 of EVEREN Capital Corporation and
subsidiaries, listed in Item 14 of this report. This consolidated financial
statement schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion on such financial statement schedule
based on our audits. In our opinion, such consolidated financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
Deloitte & Touche LLP
Chicago, Illinois
February 28, 1997
E-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders of
EVEREN Capital Corporation
Under the date of May 5, 1995, we reported on the consolidated
statements of operations, changes in stockholder's equity, and cash
flows of Kemper Securities Holdings, Inc. and subsidiaries (predecessor
of EVEREN Capital Corporation and Subsidiaries) for the year ended
December 31, 1994, as contained in the Annual Report on Form 10-K
for the year ended December 31, 1996. In connection with our audit of
the aforementioned consolidated financial statements, we also audited
the related financial statement schedule for the year ended December 31,
1994. This financial statement schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion on
this financial statement schedule based on our audit.
In our opinion, such financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information set
forth therein.
KPMG Peat Marwick LLP
Chicago, Illinois
May 5, 1995
E-2
<PAGE>
SCHEDULE II
EVEREN CAPITAL CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
DESCRIPTION 1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Asset valuation reserves:
Balance at beginning of period $10,028 $11,797 $12,407
Additions-provisions for losses 913 1,411 702
Deductions (1) 1,759 3,180 1,312
------- ------- -------
Balance at end of period $ 9,182 $10,028 $11,797
======= ======= =======
</TABLE>
- -------------------
(1) These deductions represent the net effect on the valuation reserves of
write-downs and recoveries.
E-3
<PAGE>
EXHIBIT INDEX
Exhibit No. Description Page No.
- ----------- ----------- --------
3.1 Amended and Restated Certificate of Incorporation of
EVEREN Capital Corporation ("EVEREN"). (Incorporated
by reference to Exhibit 3.1 to Amendment No. 1 to
EVEREN's Registration Statement on Form S-1 (File
No. 333-09163) filed with the Securities and
Exchange Commission ("Commission") on September 6,
1996 (the "EVEREN S-1")).
3.2 Restated By-laws of EVEREN. (Incorporated by
reference to Exhibit 3.2 of the EVEREN S-1.)
10.1 Assumption Agreement, dated as of September 13,
1995, between Kemper Corporation and EVEREN
Securities, Inc. (Incorporated by reference to
Exhibit 10.6 to EVEREN's Current Report on Form 8-K
dated September 13, 1995 and filed with the
Commission on September 27, 1995 ("Form 8-K")).
10.2 Employment Agreement, dated as of September 13,
1995, between EVEREN and James R. Boris, as amended
effective March 28, 1996. (Incorporated by
reference to Exhibit 10.7 to EVEREN's Annual Report
on Form 10-K for the fiscal year ended December 31,
1995 ("1995 10-K")).
10.3 Employment Agreement, dated as of September 13,
1995, between EVEREN and Stephen G. McConahey, as
amended effective March 28, 1996. (Incorporated by
reference to Exhibit 10.8 to the 1995 10-K).
10.4 The EVEREN Capital Corporation 401(k) and Employee
Stock Ownership Trust. (Incorporated by reference
to Exhibit 10.9 to the Form 8-K).
10.5 The EVEREN Capital Corporation 401(k) and Employee
Stock Ownership Plan. (Incorporated by reference to
Exhibit 10.10 to the Form 8-K).
10.6 EVEREN Capital Corporation 1995 Stock Plan, dated as
of September 13, 1995, as amended. (Incorporated by
reference to Exhibits 10.6 and 10.27 to the EVEREN
S-1).
10.7 Form of Indemnification Agreement, between EVEREN
and the directors of EVEREN. (Incorporated by
reference to Exhibit 10.7 to the EVEREN S-1).
10.8 Tax Sharing Agreement, dated as of September 13,
1995, between EVEREN and Kemper. (Incorporated by
reference to Exhibit 10.13 to the Form 8-K).
10.9 EVEREN Capital Corporation 1995 Non-employee
Directors Plan, as amended. (Incorporated by
reference to Exhibit 10.9 to the EVEREN S-1).
E-4
<PAGE>
Exhibit No. Description Page No.
- ----------- ----------- --------
10.10 Stock Award Agreement, dated as of January 8,
1996, by and between EVEREN and William T. Esrey.
(Incorporated by reference to Exhibit 10.24 to the
1995 10-K).
10.11 Stock Award Agreement, dated as of January 8, 1996,
by and between EVEREN and Homer J. Livingston, Jr.
(Incorporated by reference to Exhibit 10.25 to the
1995 10-K).
10.12 Stock Award Agreement, dated as of January 8, 1996,
by and between EVEREN and William C. Springer.
(Incorporated by reference to Exhibit 10.26 to the
1995 10-K).
10.13 Stock Transfer Restriction Agreement, dated as of
January 8, 1996, by and between EVEREN and William
T. Esrey. (Incorporated by reference to Exhibit
10.28 to the 1995 10-K).
10.14 Stock Transfer Restriction Agreement, dated as of
January 8, 1996, by and between EVEREN and Homer J.
Livingston, Jr. (Incorporated by reference to
Exhibit 10.29 to the 1995 10-K).
10.15 Stock Transfer Restriction Agreement, dated as of
January 8, 1996, by and between EVEREN and William
C. Springer. (Incorporated by reference to Exhibit
10.30 to the 1995 10-K).
10.16 Employment Agreement, dated as of February 16,
1996, between EVEREN and Stanley R. Fallis.
(Incorporated by reference to Exhibit 10.31 to the
1995 10-K).
10.17 Employment Agreement, dated as of February 22,
1996, between EVEREN and David M. Greene.
(Incorporated by reference to Exhibit 10.33 to the
1995 10-K).
10.18 Employment Agreement, dated as of February 15,
1996, between EVEREN and Arthur J. McGivern.
(Incorporated by reference to Exhibit 10.34 to the
1995 10-K).
10.19 Employment Agreement, dated as of February 15,
1996, between EVEREN and Janet L. Reali.
(Incorporated by reference to Exhibit 10.35 to the
1995 10-K).
10.20 Employment Agreement, dated as of February 16,
1996, between EVEREN and Thomas R. Reedy.
(Incorporated by reference to Exhibit 10.36 to the
1995 10-K).
10.21 Employment Agreement, dated as of February 20,
1996, between EVEREN and John G. Sullivan.
(Incorporated by reference to Exhibit 10.37 to the
1995 10-K).
E-5
<PAGE>
Exhibit No. Description Page No.
- ----------- ----------- --------
10.22 Employment Agreement, dated as of February 15,
1996, between EVEREN and Daniel D. Williams.
(Incorporated by reference to Exhibit 10.38 to the
1995 10-K).
10.23 Joint Venture Agreement dated as of July 25, 1996
among EVEREN, Mentor and certain of their
affiliates. (Incorporated by reference to Exhibit
10.1 to Form 10-Q dated July 30, 1996 and filed
with the Commission on July 30, 1996).
10.24 Form of Rights Agreement, dated as of _________,
1996, between EVEREN and _______________.
(Incorporated by reference to Exhibit 10.26 to the
EVEREN S-1).
10.25 Second Amendment dated February 7, 1997 to
Employment Agreement dated September 13, 1995
between James R. Boris and EVEREN.
10.26 Second Amendment dated February 7, 1997 to
Employment Agreement dated September 13, 1995
between Stephen G. McConahey and EVEREN.
11.0 Statement regarding computation of per share earnings.
12.0 Statement regarding computation of ratios.
21.0 Subsidiaries of EVEREN.
24.0 Power of Attorney - a power of attorney is included
above at the signatures page of this Annual Report
on Form 10-K.
27.0 Financial Data Schedule
E-6
<PAGE>
EXHIBIT 10.25
SECOND AMENDMENT TO EMPLOYMENT AGREEMENT
DATED SEPTEMBER 13, 1995 BETWEEN
JAMES R. BORIS AND EVEREN CAPITAL CORPORATION
WHEREAS, on September 13, 1995, EVEREN Capital Corporation (the
"Company") and JAMES R. BORIS ("Executive") entered into an Employment
Agreement ("the Employment Agreement"); and
WHEREAS, on March 28, 1996, the Company and Executive executed an
amendment to that Employment Agreement; and
WHEREAS, the Company and Executive desire to further amend the
Employment Agreement in accordance with paragraph 12 thereof.
NOW THEREFORE, the parties, intending to be legally bound hereby,
amend the Employment Agreement as follows:
1. Paragraph 7(a) of the Employment Agreement, as amended, is
hereby further amended as follows:
In the last sentence of paragraph 7(a), "150%" is amended to
read "200%".
2. Paragraph 7(b) of the Employment Agreement, as amended, is
hereby further amended as follows:
In the last sentence of the first paragraph of paragraph
7(b), "300%" is amended to read "400%".
IN WITNESS WHEREOF, the parties hereto have executed this
Amendment, personally and as corporate officers duly authorized, on the
date set forth below.
EVEREN Capital Corporation
2/7/97 By: /s/ Stanley R. Fallis
- ---------------------- ---------------------------------
Date
Its: Senior Executive Vice President
--------------------------------
Executive:
2/7/97 /s/ James R. Boris
- ---------------------- -------------------------------------
Date James R. Boris
<PAGE>
EXHIBIT 10.26
SECOND AMENDMENT TO EMPLOYMENT AGREEMENT
DATED SEPTEMBER 13, 1995 BETWEEN
STEPHEN G. McCONAHEY AND EVEREN CAPITAL CORPORATION
WHEREAS, on September 13, 1995, EVEREN Capital Corporation (the
"Company") and STEPHEN G. McCONAHEY ("Executive") entered into an
Employment Agreement ("the Employment Agreement"); and
WHEREAS, on March 28, 1996, the Company and Executive executed an
amendment to that Employment Agreement; and
WHEREAS, the Company and Executive desire to further amend the
Employment Agreement in accordance with paragraph 12 thereof.
NOW THEREFORE, the parties, intending to be legally bound hereby,
amend the Employment Agreement as follows:
1. Paragraph 7(a) of the Employment Agreement, as amended, is
hereby further amended as follows:
In the last sentence of paragraph 7(a), "125%" is amended to
read "150%".
2. Paragraph 7(b) of the Employment Agreement, as amended, is
hereby further amended as follows:
In the last sentence of the first paragraph of paragraph
7(b), "275%" is amended to read "300%".
IN WITNESS WHEREOF, the parties hereto have executed this
Amendment, personally and as corporate officers duly authorized, on the
date set forth below.
EVEREN Capital Corporation
2/7/97 By: /s/ Stanley R. Fallis
- ---------------------- ---------------------------------
Date
Its: Senior Executive Vice President
--------------------------------
Executive:
2/7/97 /s/ Stephen G. McConahey
- ---------------------- -------------------------------------
Date Stephen G. McConahey
<PAGE>
EXHIBIT 11
EVEREN CAPITAL CORPORATION
PRO FORMA COMPUTATION OF EARNINGS PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Year ended December 31,
1995 1994
---- ----
<S> <C> <C>
Net loss reported $ (15,854) $ (2,238)
Less: Pro forma dividends on exchangeable
preferred stock (13.5% of liquidation
value) (2,130) (2,130)
------------ ------------
Pro forma net loss applicable to
common shares $ (17,984) $ (4,368)
============ ============
Pro forma net loss per common share $ (1.47) $ (.36)
------------ ------------
Pro forma weighted average common shares
outstanding: 12,208,532 12,208,532
============ ============
</TABLE>
<PAGE>
EXHIBIT 12
EVEREN CAPITAL CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(IN MILLIONS)
(UNAUDITED)
<TABLE>
<CAPTION>
Year ended December 31,
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
EARNINGS:
Pretax Income (loss) $107.8 $(22.0) $(12.7) $(1.5) $(27.5)
Fixed Charges 45.1 68.1 58.0 61.4 64.1
----------------------------------------
Earnings $152.9 $ 46.1 $ 45.3 $59.9 $ 36.6
========================================
FIXED CHARGES:
Interest expense $ 34.0 $ 52.5 $ 44.8 $46.9 $ 53.0
Approximate portion of
rental expense
representative of an
interest factor 11.1 15.6 13.2 14.5 11.1
----------------------------------------
Fixed Charges $ 45.1 $ 68.1 $ 58.0 $61.4 $ 64.1
========================================
Ratio of earnings to fixed
charges 3.4 0.68 0.78 1.00 0.57
========================================
Deficiency of earnings
available to cover
fixed charges $ - $(22.0) $(12.7) $ - (27.5)
========================================
</TABLE>
<PAGE>
EXHIBIT 21
EVEREN CAPITAL CORPORATION
SUBSIDIARIES
NAME STATE OF
- ---- INCORPORATION
-------------
EVEREN Securities Holdings, Inc. Delaware
Bateman Eichler, Hill Richards Realty Services, Inc. California
Bateman Eichler, Hill Richards Housing
Investors, Inc. California
Bateman Eichler, Hill Richards Realty Co.,
Incorporated California
BPL Holdings, Inc. Delaware
Boettcher FTZ Building, Inc. Colorado
Seven Sisters Corp. Delaware
Carnegie Administration Corp. New York
BJVC Real Estate Corporation Illinois
EVEREN Mortgage Group, Inc. Delaware
Gateway Mortgage Acceptance Corporation Delaware
EVEREN Securities, Inc. Delaware
EVEREN Clearing Corp (99.1% owned). Delaware
ESI Fund Management, Inc. Delaware
ESI Insurance Agency, Inc. of Colorado Colorado
ESI Insurance Agency, Inc. of Hawaii Hawaii
ESI Insurance Agency, Inc. of Nevada Nevada
ESI Insurance Agency, Inc. of Utah Utah
ESI Insurance Agency, Inc. of Wyoming Wyoming
ESI (MA) Insurance Agency. Inc. Massachusetts
Prescott Realty Services, Inc. Ohio
Prescott Polaris, Inc. Delaware
Bateman Eichler, Hill Richards, Inc. (dormant) Delaware
Boettcher & Company, Inc. (dormant) Delaware
Blunt, Ellis & Loewi, Inc. (dormant) Delaware
Lovett Underwood Neuhaus & Webb, Inc. (dormant) Delaware
Prescott, Ball & Turben, Inc. (dormant) Delaware
ORG4.SEC
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<CIK> 0000945770
<NAME> EVEREN CAPITAL CORPORATION
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 46,592,000
<SECURITIES> 160,940,000
<RECEIVABLES> 868,016,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 36,136,000
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,824,345,000
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 170,000
<OTHER-SE> 288,865,000
<TOTAL-LIABILITY-AND-EQUITY> 1,824,345,000
<SALES> 225,798,000
<TOTAL-REVENUES> 570,555,000
<CGS> 0
<TOTAL-COSTS> 478,980,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 33,920,000
<INCOME-PRETAX> 107,836,000
<INCOME-TAX> 42,438,000
<INCOME-CONTINUING> 65,398,000
<DISCONTINUED> 0
<EXTRAORDINARY> (2,900,000)
<CHANGES> 0
<NET-INCOME> 62,498,000
<EPS-PRIMARY> 4.94
<EPS-DILUTED> 0
</TABLE>
