<PAGE>
Total # of Pages 25
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED September 30, 1997 OR
__ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _______ TO ______
Commission File Number 1-13940
------------------------------------------------
EVEREN CAPITAL CORPORATION
- --------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 36-4019175
- --------------------------------------- --------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
77 West Wacker Drive
Chicago, Illinois 60601
- --------------------------------------- --------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (312) 574-6000
--------------------
Indicate by checkmark 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 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
--- ---
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date. Shares outstanding
as of November 5, 1997.
$.01 par value common stock - 17,115,880
<PAGE>
INDEX
-----
<TABLE>
<CAPTION>
Page
<S> <C>
PART I. Financial Information
Item 1. Financial Statements (unaudited):
Consolidated Statements of Financial Condition -
September 30, 1997 and December 31, 1996 3
Consolidated Statements of Operations - Three and nine
months ended September 30, 1997 and 1996 4
Consolidated Statement of Changes in Stockholders' Equity -
Nine months ended September 30, 1997 5
Consolidated Statements of Cash Flows - Nine months
ended September 30, 1997 and 1996 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis -
Results of Operations
Liquidity and Capital Resources 9
PART II. Other Information
Item 1. Legal Proceedings 23
Item 6. Exhibits and Reports on Form 8-K 23
SIGNATURES 24
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
EVEREN CAPITAL CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Financial Condition
(unaudited)
(in thousands, except share data)
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
Assets -------------- -------------
<S> <C> <C>
Cash and cash equivalents $ 50,350 $ 46,592
Cash and securities segregated under federal and other regulations 15,552 15,778
Receivables from:
Customers 893,924 764,405
Brokers and dealers 30,285 50,807
Others 47,541 52,804
Securities borrowed 60,078 50,687
Securities owned, at market 229,469 160,940
Securities purchased under agreements to resell 447,620 479,313
Investment in mortgage-backed certificates available-for-sale, at fair value 135,855 144,962
Fixed assets, at cost, net 38,083 36,136
Other assets 24,799 21,921
---------- ----------
$1,973,556 $1,824,345
========== ==========
Liabilities and Stockholders' Equity
Liabilities:
Bank loans payable $ 274,000 $ 140,000
Payables to:
Customers 250,971 259,607
Brokers and dealers 93,108 24,632
Securities loaned 246,318 189,303
Collateralized mortgage obligations 126,904 137,699
Securities sold, not yet purchased, at market 105,283 89,709
Securities sold under agreements to repurchase 348,788 466,266
Deferred income taxes 4,383 13,491
Accounts payable, accrued expenses and other liabilities 201,250 214,603
---------- ----------
1,651,005 1,535,310
---------- ----------
Stockholders' Equity:
Common stock, $.01 par value per share; 40,000,000
shares authorized, 17,107,652 and 16,611,889 outstanding at
September 30, 1997 and December 31, 1996, respectively 175 170
Additional paid-in capital 268,409 255,040
Unrealized loss on available-for-sale securities, net of income taxes (3,341) (4,381)
Unearned cost of restricted stock (9,183) (1,576)
Treasury stock, at cost, 437,994 and 354,473 shares at September 30, 1997
and December 31, 1996, respectively (7,127) (5,230)
Retained earnings (since January 1, 1996) 73,618 45,012
---------- ----------
322,551 289,035
---------- ----------
$1,973,556 $1,824,345
========== ==========
See accompanying notes to consolidated financial statements.
</TABLE>
3
<PAGE>
EVEREN CAPITAL CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Operations
Three and nine months ended September 30, 1997 and 1996
(unaudited)
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ---------------------
1997 1996 1997 1996
----------- -------- ----------- --------
<S> <C> <C> <C> <C>
Revenue:
Commissions $ 73,099 $ 50,741 $ 196,811 $168,450
Principal transactions 28,174 26,389 76,103 91,734
Investment banking 15,272 11,677 40,776 38,660
Asset management 18,493 14,776 50,858 42,488
Other 7,405 7,234 24,633 32,442
Interest 26,201 18,270 62,418 55,739
----------- -------- ----------- --------
Total revenue 168,644 129,087 451,599 429,513
Interest expense 13,113 8,613 26,581 27,070
----------- -------- ----------- --------
Net revenue 155,531 120,474 425,018 402,443
----------- -------- ----------- --------
Non-interest expenses:
Compensation and benefits 93,024 75,601 251,836 251,219
Brokerage and clearance 4,487 3,773 12,736 10,621
Communications 10,996 8,883 30,956 28,771
Occupancy and equipment 10,336 9,676 30,277 29,952
Promotional 5,091 4,326 15,141 12,682
Other 11,613 6,640 30,608 26,571
----------- -------- ----------- --------
Total non-interest expenses 135,547 108,899 371,554 359,816
Gain on sale of subsidiary - - - 50,181
----------- -------- ----------- --------
Income before income taxes 19,984 11,575 53,464 92,808
Income tax expense 7,672 5,165 20,236 37,172
----------- -------- ----------- --------
Income before extraordinary charge 12,312 6,410 33,228 55,636
Extraordinary charge on early
retirement of debt, net of income
taxes of $1,561 - 2,900 - 2,900
----------- -------- ----------- --------
Net income $ 12,312 $ 3,510 $ 33,228 $ 52,736
=========== ======== =========== ========
Weighted average common and
common share equivalents
outstanding 18,263,249 18,174,981
=========== ===========
Net earnings per share $ .67 $ 1.83
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
EVEREN CAPITAL CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity
Nine months ended September 30, 1997
(unaudited)
(in thousands)
<TABLE>
<CAPTION>
Unearned
Additional Unrealized gain cost of Retained Total
Paid-In (loss) on available Restricted Treasury Earnings Stockholders'
Common Stock Capital for sale securities Stock Stock (Since 1/1/96) Equity
------------ ---------- -------------------- ----------- --------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31,
1996 $170 $255,040 $(4,381) $(1,576) $(5,230) $45,012 $289,035
Issuance of additional
common stock under
equity plans 5 13,369 (7,607) 5,767
Dividend on common stock (4,622) (4,622)
Unrealized gain for the
period, net of tax 1,040 1,040
Purchase of treasury
stock, net (1,897) (1,897)
Net income 33,228 33,228
--- -------- ------- ------- ------- ------- --------
Balances at September 30,
1997 $175 $268,409 $(3,341) $(9,183) $(7,127) $73,618 $322,551
==== ======== ======= ======= ======= ======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
EVEREN CAPITAL CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Nine months ended September 30, 1997 and 1996
(unaudited)
(in thousands)
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 33,228 $ 52,736
Adjustments to reconcile net income 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 12,466 9,914
Deferred income taxes (9,662) 4,140
Change in assets and liabilities:
Cash and securities segregated under federal
and other regulations 226 (681)
Receivables from/payables to:
Customers (138,155) (140,865)
Brokers and dealers 88,998 75,808
Others 5,264 (13,859)
Securities borrowed (9,391) 14,627
Securities owned (68,530) (2,360)
Securities purchased under agreements to resell 31,693 699,408
Other assets (2,924) (532)
Securities loaned 57,015 184,926
Securities sold, not yet purchased 15,574 (16,428)
Securities sold under agreements to repurchase (117,478) (719,695)
Accounts payable, accrued expenses,
and other liabilities (17,873) (40,712)
--------- ---------
Net cash flows from operating activities (119,549) 68,736
--------- ---------
Cash flows from investing activities:
Net proceeds from sale of subsidiary - 59,346
Purchase of investments in mortgage-backed securities - (9,505)
Collections of principal on investments in mortgage-
backed securities 11,249 12,990
Proceeds from sale of fixed assets - 2,120
Acquisition of fixed assets, net (12,115) (6,644)
--------- ---------
Net cash flows from investing activities (866) 58,307
--------- ---------
Cash flows from financing activities:
Release of shares related to KSOP loan - 22,875
Proceeds from the issuance of collateralized mortgaged obligations - 9,422
Dividends paid on exchangeable preferred stock - (1,084)
Dividends paid on common stock (4,622) (13,865)
Proceeds from common stock issuance 7,884 7,031
Amount collected under indemnification agreement - 12,876
Repayment of collateralized mortgage obligations (11,192) (12,881)
Increase (decrease) in bank loans payable 134,000 (106,800)
Purchase of treasury stock (1,897) (5,153)
Retirement of subordinated debt - (36,012)
--------- ---------
Net cash flows from financing activities 124,173 (123,591)
--------- ---------
Increase in cash and cash equivalents 3,758 3,452
Cash and cash equivalents at beginning of the period 46,592 14,585
--------- ---------
Cash and cash equivalents at end of the period $ 50,350 $ 18,037
========= =========
Supplemental disclosure of cash flow information:
Interest paid $ 25,745 $ 28,559
========= =========
Income taxes paid $ 20,238 $ 46,945
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
EVEREN CAPITAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Nine months ended September 30, 1997
(unaudited)
- --------------------------------------------------------------------------------
(1) General Information
The consolidated financial statements, prepared in accordance with
generally accepted accounting principles, include the accounts of EVEREN
Capital Corporation and its subsidiaries (the "Company"). The consolidated
financial statements are unaudited. However, in the opinion of management,
such financial statements include all adjustments, consisting of normal
recurring accruals, necessary for the fair presentation of the accompanying
consolidated financial statements.
Certain information and footnotes normally included in financial statements
prepared in accordance with generally accepted accounting principles have
been omitted pursuant to Securities and Exchange Commission ("SEC") rules
and regulations. Accordingly, these financial statements should be read in
conjunction with the financial statements and notes thereto included in the
Company's 1996 Annual Report on Form 10-K.
All material intercompany balances and transactions have been eliminated.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts. Actual results could differ
from those estimates. The results of operations for interim periods are not
necessarily indicative of results for the entire year.
Certain reclassifications have been made in the prior period financial
statements to conform to the current period presentation.
(2) Net Capital Rule
EVEREN Securities, Inc. ("EVEREN Securities") and EVEREN Clearing Corp.
("EVEREN Clearing"), the Company's broker-dealer subsidiaries, are subject
to the Uniform Net Capital Rule of the SEC. Both EVEREN Securities and
EVEREN Clearing operate under the alternative method, as defined, of
computing minimum net capital. At September 30, 1997, EVEREN Securities had
net capital of approximately $127.2 million which was approximately $126.2
million in excess of its required minimum net capital. At September 30,
1997, EVEREN Clearing had net capital of approximately $63.6 million which
was approximately $45.2 million in excess of its required minimum net
capital. Such net capital requirements could restrict the ability of these
subsidiaries to make dividend distributions to their parent.
7
<PAGE>
EVEREN CAPITAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Nine months ended September 30, 1997
(unaudited)
- --------------------------------------------------------------------------------
(3) Commitments and Contingencies
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 outside counsel, that the
resolution of such suits will not have a material adverse effect on the
consolidated 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.
In the normal course of business, the Company enters into various
contractual commitments involving future settlement. These include futures,
forwards, options and securities sold, not yet purchased. These
transactions are executed either over-the-counter or are exchange-traded,
and are used primarily to hedge the Company's securities inventory. Many of
these products have maturities that do not extend beyond one year.
Transactions relating to such commitments which were open at September 30,
1997, and subsequently settled, had no material effect on the consolidated
financial position of the Company.
On July 11, 1997 the Company entered into a $50 million committed revolving
credit facility with two banks. The term of the agreement is for two years,
subject to a one year extension by mutual agreement of the parties.
Commitment fees under this facility are paid quarterly at a rate per annum
of .25% on the average daily unused balance.
8
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion should be read in conjunction with the Company's
consolidated financial statements and notes thereto contained in Item 1 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. Such forward looking statements are within
the meaning of that term in Section 27A of the Securities Act of 1933, as
amended, and Section 21F of the Securities Exchange Act of 1934, as amended.
Such statements may include, but are not limited to, projections of revenues,
income or loss, capital expenditures, plans for future operations, financing
needs or plans, and plans relating to products or services of the Company, as
well as assumptions relating to the foregoing.
Forward looking statements are inherently subject to risks and
uncertainties, some of which cannot be predicted or quantified. Future events
and actual results could differ materially from those set forth in, contemplated
by, or underlying the forward looking statements. Statements in this quarterly
report, including the notes to the consolidated financial statements and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," describe factors, among others, that could contribute to or cause
such differences. Additional factors that could cause actual results to differ
materially from those expressed in such forward looking statements include those
discussed below in "Business Environment."
Business Environment
The Company's principal business, securities brokerage, 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 volatility in the price levels for
securities and illiquid markets.
Volatile price levels of securities may, among other things, result in (a)
reduced volume of securities, options and futures transactions, with a
consequent reduction in commission and principal transactions 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. Consequently, the results of operations for a
particular period may not be indicative of results to be expected for other
periods.
Industry market conditions have remained generally favorable through the
nine months ended September 30, 1997. The stock market experienced a modest
slowdown in March and April of 1997, due to a rise in short-term interest rates
and some investor uncertainty; however, activity returned to more favorable
levels in the remainder of the second and third quarters.
9
<PAGE>
Equity Participation of Employees
As of September 30, 1997, the Company's employees and directors, through
the Company's 401(k) and Employee Stock Ownership Plan (the "KSOP") and
otherwise, own in excess of 70% of the Company's outstanding $.01 par value
common stock ("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.
In the second quarter of 1996, the Company instituted three employee
benefit plans to provide current and future employees the opportunity to acquire
Common Stock outside of the KSOP. Through September 30, 1997, the Company issued
to employees approximately 882,000 restricted shares and 282,000 unrestricted
shares under these equity plans.
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.
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 for 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.
10
<PAGE>
Results of Operations
The following table sets forth certain financial data as a percentage of net
revenues:
Consolidated Statement of Operations Data:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
1997 1996 1997 1996
--------- --------- ------- ------
<S> <C> <C> <C> <C>
Revenue:
Commissions 47.0% 42.1% 46.3% 41.9%
Principal transactions 18.1 21.9 17.9 22.8
Investment banking 9.8 9.7 9.6 9.6
Asset management 11.9 12.3 12.0 10.6
Other 4.8 6.0 5.8 8.1
Interest 16.8 15.2 14.7 13.8
----- ----- ----- -----
Total revenue 108.4 107.2 106.3 106.8
Interest expense 8.4 7.2 6.3 6.8
----- ----- ----- -----
Net revenue 100.0 100.0 100.0 100.0
----- ----- ----- -----
Non-interest expenses:
Compensation and benefits 59.8 62.8 59.2 62.4
Brokerage and clearance 2.9 3.1 3.0 2.6
Communications 7.1 7.4 7.3 7.2
Occupancy and equipment 6.6 8.0 7.1 7.4
Promotional 3.3 3.6 3.6 3.2
Other 7.4 5.5 7.2 6.6
----- ----- ----- -----
Total non-interest expenses 87.1 90.4 87.4 89.4
Gain on sale of subsidiary - - - 12.5
----- ----- ----- -----
Income before taxes 12.9 9.6 12.6 23.1
Income tax provision 5.0 4.3 4.8 9.2
----- ----- ----- -----
Income before extraordinary charge 7.9 5.3 7.8 13.9 (1)
----- ----- ----- -----
Extraordinary charge on early
retirement of debt, net of income taxes - (2.4) - (0.7)
----- ----- ----- -----
Net Income 7.9% 2.9% 7.8% 13.2%
===== ===== ===== =====
</TABLE>
- -------------
(1) Includes a $50.2 million pre-tax or 33.9% ($30.2 million after-tax or
20.4%) gain on the sale of BETA.
11
<PAGE>
Nine months ended September 30, 1997 compared to the nine months ended September
30, 1996
The Company experienced stronger operating results for the three and nine
months ended September 30, 1997 when compared to the comparable periods of 1996.
In particular the strong retail markets in the third quarter of 1997 contributed
to the Company's 29% growth in net revenues over the comparable quarter of 1996.
The Company also continues to focus on its core businesses. This focus resulted
in the sale of the Company's data-processing and quote service subsidiary, Beta
Systems, Inc. ("BETA"), in April 1996, and the departure from both the unit
investment trust origination business and portions of the municipal
institutional sales and trading business in the fourth quarter of 1996. The sale
of BETA resulted in a pre-tax gain of approximately $50.2 million and an after-
tax gain of approximately $30.2 million. Net income from the Company's ongoing
operations improved in 1997 when compared to the corresponding period in 1996.
Management attributes these results to several factors. First, favorable
conditions continued to prevail in the industry for most of the nine months
ended September 30, 1997, reflecting continued investor optimism concerning
inflation, interest rate stability and a strong U. S. economy. Second, the
Company continues to enjoy the benefits of significant employee ownership,
which, in management's opinion, have enhanced employee morale, focus and
productivity, and have allowed management to concentrate on achieving its
strategic initiatives. Finally, a continued focus on cost containment has
contributed to the strong operating results.
Total revenue increased $39.5 million and $22.1 million or 31% and 5% to
$168.6 million and $451.6 million for the three and nine months ended September
30, 1997 from $129.1 million and $429.5 million for the three and nine months
ended September 30, 1996. Net revenue increased $35.0 million and $22.6 million
or 29% and 6% to $155.5 million and $425.0 million for the three and nine months
ended September 30, 1997 from $120.5 million and $402.4 million for the three
and nine months ended September 30, 1996. As previously noted, the Company sold
or exited certain non-strategic businesses in 1996. Excluding revenue from these
businesses, total revenue for the nine months ended September 30, 1997 increased
by $46.2 million from $405.4 million in 1996, and net revenue for the nine
months ended September 30, 1997 increased by approximately $45.9 million or 12%
over the same period of 1996.
Commission revenue increased $22.4 million and $28.4 million or 44% and 17%
to $73.1 million and $196.8 million for the three and nine months ended
September 30, 1997 from $50.7 million and $168.4 million for the three and nine
months ended September 30, 1996. These increases are primarily due to increased
business in both the retail and institutional areas, consistent with the
continued growth in listed share volume on most major domestic equity exchanges
in 1997. The increases are also a result of an increase in the number of
investment consultants in 1997.
Principal transactions revenue increased $1.8 million and decreased $15.6
million or 7% and 17% to $28.2 million and $76.1 million for the three and nine
months ended September 30, 1997 from $26.4 million and $91.7 million for the
three and nine months ended September 30, 1996. The increase in principal
transactions revenue in the third quarter of 1997 when compared to the third
quarter of 1996 is due in large part to the robust trading markets in the 1997
quarter. The decrease for the nine month period of 1997 is attributable, in
part, to a shift in transaction volume away from both fixed income products and
from over-the-counter stocks to listed equities and the departure from a portion
of its institutional municipal trading business.
12
<PAGE>
Investment banking revenue increased $3.6 million and $2.1 million or 31%
and 5% to $15.3 million and $40.8 million for the three and nine months ended
September 30, 1997 from $11.7 million and $38.7 million for the three and nine
months ended September 30, 1996. Excluding investment banking revenue of $7.3
million generated from the aforementioned exited unit investment trust
origination business, in the first nine months of 1996, investment banking
revenues increased $9.4 million or 30% for the first nine months of 1997. This
increase is the result of the Company's continued focus on developing corporate
finance transactions in specific targeted industry sectors aided by the strong
equity markets throughout most of 1997. These factors have contributed to the
Company's greater involvement both in average offering size and number of
offerings made in the equity underwriting market in the nine month period ended
September 30, 1997.
Asset management revenue increased $3.7 million and $8.4 million or 25% and
20% to $18.5 million and $50.9 million for the three and nine months ended
September 30, 1997 from $14.8 million and $42.5 million for the three and nine
months ended September 30, 1996 due primarily to increased managed account fees
and increased 12b-1 distribution fees. These increases are reflective of
increases in the number and asset values of managed accounts in the current
periods.
Other income remained relatively constant at $7.4 million and decreased
$7.8 million or 24% to $24.6 million for the three and nine months ended
September 30, 1997 from $7.2 million and $32.4 million for the three and nine
months ended September 30, 1996. The decrease in the nine month results is due
primarily to the sale of BETA in the second quarter of 1996. Excluding revenues
attributable to BETA, other income increased $1.1 million or 5% for the nine
months ended September 30, 1997 when compared to the corresponding period of
1996. This increase is due in part to earnings from the Company's joint venture
with Mentor Investment Group, Inc. ("Mentor").
Interest and dividend income increased $7.9 million and $6.7 million or 43%
and 12% to $26.2 million and $62.4 million for the three and nine months ended
September 30, 1997 from $18.3 million and $55.7 million for the corresponding
periods in 1996. Net interest increased $3.4 million and $7.2 million or 36% and
25% to $13.1 million and $35.8 million for the three and nine months ended
September 30, 1997 from $9.7 million and $28.6 million for the three and nine
months ended September 30, 1996. The Company has experienced significant growth
in its customer margin accounts in the current year period which has contributed
to its increased interest revenues.
Total non-interest expenses increased $26.6 million and $11.7 million or
24% and 3% to $135.5 million and $371.5 million for the three and nine months
ended September 30, 1997 from $108.9 million and $359.8 million for the three
and nine months ended September 30, 1996.
Compensation and benefits expense increased $17.4 million and $.6 million
or 23% and .3% to $93.0 million and $251.8 million for the three and nine months
ended September 30, 1997 from $75.6 million and $251.2 million for the three and
nine months ended September 30, 1996. The increase in the current quarter is
directly correlated to the 31% increase in commission, principal transactions
and investment banking revenues. The nine month period ended September 30, 1997
did not increase in relative proportion to the nine month period increase in
commission, principal transactions and investment banking revenues, due to the
continued focus by
13
<PAGE>
management on controlling overall compensation expense as a percentage of net
revenues. In addition, certain compensation costs related to the release of
unearned KSOP shares are included in the nine month period ended September 30,
1996.
Brokerage and clearance expense increased $.7 million and $2.1 million or
19% and 20% to $4.5 million and $12.7 million for the three and nine months
ended September 30, 1997 from $3.8 million and $10.6 million for the three and
nine months ended September 30, 1996. The increase is due primarily to certain
variable cost components of this expense category which have increased as
transactional revenues have increased.
Communications expense increased $2.1 million and $2.2 million or 24% and
8% to $11.0 million and $31.0 million for the three and nine months ended
September 30, 1997 from $8.9 million and $28.8 million for the three and nine
months ended September 30, 1996. These increases are due primarily to an
increased number of employees along with technology initiatives and enhancements
undertaken in 1997 to improve the Company's overall productivity and
competitiveness.
Occupancy and equipment expense remained relatively constant for the three
and nine months ended September 30, 1997 when compared to the corresponding
periods of 1996, primarily due to the Company's focus on utilization of existing
office space in its growth efforts.
Promotional expense increased $.8 million and $2.5 million or 18% and 19%
to $5.1 million and $15.1 million for the three and nine months ended September
30, 1997 from $4.3 million and $12.6 million for the three and nine months ended
September 30, 1996. These increases are primarily due to increased advertising
in 1997 related to name recognition and the Company's expansion in breadth of
products and services, as well as internal marketing of Mentor mutual fund
products.
Other expenses increased $5.0 million and $4.0 million or 75% and 15% to
$11.6 million and $30.6 million for the three and nine months ended September
30, 1997 from $6.6 million and $26.6 million for the three and nine months ended
September 30, 1996. These increases are related to an increase in professional
fees as well as the increased number of employees in 1997 when compared to the
corresponding periods in 1996, resulting in additional costs of licensing,
insurance and various other expenses.
The Company's income tax expense for the three and nine months ended
September 30, 1997 was $7.7 million and $20.2 million, which represented an
effective tax rate on income before taxes of 38.5% and 37.8%, compared to a $5.2
million and $37.2 million or a 44.8% and 40.1% effective tax rate for the three
and nine months ended September 30, 1996.
Net income increased $8.8 million and decreased $19.5 million to $12.3
million and $33.2 million for the three and nine months ended September 30, 1997
from $3.5 million and $52.7 million for the three and nine months ended
September 30, 1996. Net income for the three and nine month periods ending
September 30, 1996 includes an after-tax extraordinary charge of $2.9 million
related to the early retirement of debt. Excluding the after-tax gain on sale of
BETA of $30.2 million and the $2.9 million after-tax charge noted above, net
income for the nine months ended September 30, 1997 improved $7.8 million over
the nine months ended September 30, 1996.
14
<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
------------------
9/30/97 6/30/97 3/31/97 12/31/96 9/30/96 6/30/96 3/31/96 12/31/95
------ ------- ------- -------- ------- ------- ------- --------
(dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Commissions $ 73,099 $ 61,901 $ 61,811 $ 57,348 $ 50,741 $ 60,277 $ 57,431 $ 49,591
Principal transactions 28,174 24,656 23,273 23,557 26,389 34,469 30,875 30,863
Investment banking 15,272 15,514 9,990 17,229 11,677 16,540 10,442 15,520
Asset management 18,493 16,267 16,098 14,804 14,776 13,231 14,480 13,907
Other 7,405 8,371 8,856 9,775 7,234 13,486 11,722 14,552
Interest 26,201 18,195 18,023 18,328 18,270 19,278 18,191 19,452
-------- -------- -------- -------- -------- -------- -------- --------
Total revenue 168,644 144,904 138,051 141,041 129,087 157,281 143,141 143,885
Interest expense 13,113 6,728 6,740 6,850 8,613 9,203 9,254 12,567
-------- -------- -------- -------- -------- -------- -------- --------
Net revenue 155,531 138,176 131,311 134,191 120,474 148,078 133,887 131,318
-------- -------- -------- -------- -------- -------- -------- --------
Non-interest expenses:
Compensation and benefits 93,024 80,267 78,545 80,170 75,601 88,893 86,725 83,101
Brokerage and clearance 4,487 4,043 4,206 3,937 3,773 3,899 2,949 2,590
Communications 10,996 10,350 9,609 9,495 8,883 9,567 10,321 10,305
Occupancy and equipment 10,336 10,006 9,935 9,200 9,676 10,052 10,224 10,714
Promotional 5,091 5,461 4,589 5,167 4,326 4,375 3,982 3,453
Other 11,613 10,789 8,206 11,194 6,640 10,881 9,049 10,504
-------- -------- -------- -------- -------- -------- -------- --------
Total non-interest
expenses 135,547 120,916 115,090 119,163 108,899 127,667 123,250 120,667
Gain on sale of subsidiary - - - - - 50,181/(2)/ - -
-------- -------- -------- -------- -------- -------- -------- --------
Income before income taxes
and extraordinary charge 19,984 17,260 16,221 15,028 11,575 70,592 10,637 10,651
Income tax provision 7,672 6,445 6,119 5,266 5,165 28,173 3,831 4,413
-------- -------- -------- -------- -------- -------- -------- --------
Income before
extraordinary charge 12,312 10,815 10,102 9,762 6,410 42,419 6,806 6,238
Extraordinary charge, net of
income taxes of $1,561 - - - - (2,900)/(1)/ - - -
-------- -------- -------- -------- -------- -------- -------- --------
Net income $ 12,312 $ 10,815 $ 10,102 $ 9,762 $ 3,510/(1)/ $42,419/(2)/ $ 6,806 $ 6,238
======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
- ------------------------
(1) Includes a $2.9 million after-tax charge related to the early retirement of
the Company's junior subordinated debentures.
(2) Includes a $50.2 million pre-tax ($30.2 million after-tax) gain on the sale
of BETA.
15
<PAGE>
The following table sets forth certain financial data as a percentage of net
revenues.
<TABLE>
<CAPTION>
Three months ended
------------------
9/30/97 6/30/97 3/31/97 12/31/96 9/30/96 6/30/96 3/31/96 12/31/95
------- ------- ------- -------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Commissions 47.0% 44.8% 47.1% 42.7% 42.1% 40.7% 42.9% 37.8%
Principal transactions 18.1 17.8 17.7 17.6 21.9 23.3 23.1 23.5
Investment banking 9.8 11.2 7.6 12.8 9.7 11.2 7.8 11.8
Asset management 11.9 11.8 12.3 11.0 12.3 8.9 10.8 10.6
Other 4.8 6.1 6.7 7.3 6.0 9.1 8.8 11.1
Interest 16.8 13.2 13.7 13.7 15.2 13.0 13.6 14.8
----- ----- ----- ----- ----- ----- ----- -----
Total revenue 108.4 104.9 105.1 105.1 107.2 106.2 107.0 109.6
Interest expense 8.4 4.9 5.1 5.1 7.2 6.2 7.0 9.6
----- ----- ----- ----- ----- ----- ----- -----
Net revenue 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
----- ----- ----- ----- ----- ----- ----- -----
Non-interest expenses:
Compensation and benefits 59.8 58.1 59.8 59.7 62.8 60.0 64.8 63.3
Brokerage and clearance 2.9 2.9 3.2 2.9 3.1 2.6 2.2 2.0
Communications 7.1 7.5 7.3 7.1 7.4 6.5 7.7 7.8
Occupancy and equipment 6.6 7.2 7.6 6.9 8.0 6.8 7.6 8.2
Promotional 3.3 4.0 3.5 3.9 3.6 3.0 3.0 2.6
Other 7.4 7.8 6.2 8.3 5.5 7.3 6.8 8.0
----- ----- ----- ----- ----- ----- ----- -----
Total non-interest expenses 87.1 87.5 87.6 88.8 90.4 86.2 92.1 91.9
Gain on sale of subsidiary - - - - - 33.9 (2) - -
----- ----- ----- ----- ----- ----- ----- -----
Income before income taxes
and extraordinary charge 12.9 12.5 12.4 11.2 9.6 47.7 7.9 8.1
Income tax provision 5.0 4.7 4.7 3.9 4.3 19.0 2.9 3.4
----- ----- ----- ----- ----- ----- ----- -----
Income before
extraordinary charge 7.9 7.8 7.7 7.3 5.3 28.7 5.0 4.7
----- ----- ----- ----- ----- ----- ----- -----
Extraordinary charge, net of
income taxes - - - - (2.4) (1) - - -
----- ----- ----- ----- ----- ----- ----- -----
Net income 7.9% 7.8% 7.7% 7.3% 2.9% (1) 28.7% (2) 5.0% 4.7%
===== ===== ===== ===== ===== ===== ===== =====
</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.
16
<PAGE>
The generally favorable trend in the Company's revenues for the eight
quarterly periods ended September 30, 1997 reflects the favorable retail
brokerage industry market conditions and relative stability in the fixed income
markets. Revenues in the first quarter of 1997 and the third quarter of 1996
were adversely effected by market volatility and decreased transactional volume
seen throughout the industry at that time. Net revenues during this eight-
quarter period followed the same trend.
As a percentage of net revenues, non-interest expenses have generally
trended downward during such periods, which management believes to be a result
of the Company's focus on cost containment. The absolute dollar variations in
non-interest expenses are generally attributable to compensation and benefits
expense and brokerage and clearance expense which are significantly correlated
to revenues.
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 1996 when weaker market conditions
occurred; and the second quarter of 1996 which includes the one time gain on the
sale of BETA.
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, as needed, 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 2 of Notes to Consolidated Financial Statements
contained in Item 1 of this report.
Since becoming a publicly-traded company in the fourth quarter of 1996, the
Company, with approval from its Board of Directors, has paid a quarterly
dividend of $.09 per share on the outstanding shares of Common Stock.
On July 11, 1997 EVEREN Capital entered into a $50 million committed
revolving credit facility with two banks. The term of the agreement is for two
years, subject to a one year extension by mutual agreement of the parties.
Commitment fees under this facility are equal to a rate per annum of .25% on the
average daily unused balance.
The Company believes that its current level of equity capital and available
credit resources, combined with funds generated from operations, will be
adequate to fund its capital needs for the foreseeable future.
17
<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 and/or are collateralized by marketable securities. The
Subsidiaries' total assets and the individual components of total assets vary
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
September 30, 1997 and December 31, 1996 were approximately $2.0 billion and
$1.8 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, securities loaned and, through payables to
customers, brokers and dealers. Short-term funding is generally obtained at
rates based on the federal funds, LIBOR and other 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 September 30, 1997, 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 inventory positions provide products and liquidity for
customers and are generally 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).
18
<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.
Nine months ended September 30, 1997 and 1996
Cash and cash equivalents at September 30, 1997 and 1996 totaled $50.4
million and $18.0 million, respectively, reflecting increases of $3.8 million
and $3.5 million, respectively.
For the nine months ended September 30, 1997 cash used by operating
activities was funded through financing activities, primarily by an increase in
bank loans payable, while in 1996 cash provided by operating activities and
investing activities, primarily the proceeds from the sale of BETA, were used to
reduce bank financings.
Net cash used by operating activities totaled $119.5 million in 1997 and
net cash provided from operating activities totaled $68.7 million in 1996. In
1997, changes in securities owned and securities sold not yet purchased of $53.0
million and securities purchased under agreements to resell and repurchase of
$85.8 million used cash. These uses were partially offset by changes in
securities borrowed and loaned of $47.6 million. In 1996, there were changes in
securities borrowed and loaned of $199.6 million and changes in other assets and
other liabilities of $130.8 million which generated cash. These sources were
partially offset by a $18.8 million increase in securities owned and securities
sold not yet purchased and a $78.9 million use of funds related to the net
change in receivables from and payables to customers, broker-dealers and others.
In 1997, net cash used in investing activities of $.9 million is the result
of collections of principal on investments in mortgage-backed securities of
$11.2 million offset by a net increase of $12.1 million due to the purchases of
fixed assets, primarily technology related. In 1996 cash provided from investing
activities of $58.3 million resulted primarily from the $59.3 million net
proceeds from sale of BETA and the $2.1 million of net cash flows from the sale
of fixed assets and principal collections on investments in mortgage-backed
securities of $13.0 million, which were offset by $6.6 million of fixed asset
purchases and $9.5 million of purchases of investments in mortgage-backed
securities.
In 1997, net cash flows from financing activities amounted to $124.2
million, the net result of a $134.0 million increase in bank loans, $7.9 million
of proceeds from the issuance of common stock under its equity participation
programs, payment of dividends of $4.6 million, purchase of treasury stock of
$1.9 million and the repayment of collateralized mortgage obligations of $11.2
million. In 1996 the Company's financing activities used $123.6 million of net
cash flows, the net result of a $106.8 million decrease in bank loans, $12.9
million of repayments of collateralized mortgage obligations, money collected
under an indemnification agreement of $12.9 million, proceeds from common stock
issuance of $7.0 million, $22.9 million release of shares related to
19
<PAGE>
KSOP loan, payment of a special purpose cash dividend on its common stock of
$13.9 million, and $9.4 million proceeds from the issuance of collateralized
mortgage obligations.
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 focuses 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.
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
20
<PAGE>
held, by selling or buying similar instruments and by utilizing various
derivative financial instruments such as futures and forward and option
contracts. Management believes the Company's philosophy, risk management and
hedging practices result in carefully managed market exposure and reduced
earnings volatility.
At September 30, 1997 and December 31, 1996, the Company's securities owned
and securities sold, not yet purchased consisted of the following (in
thousands):
<TABLE>
<CAPTION>
<S> <C> <C>
9/30/97 12/31/96
-------- ---------
Owned
- -----
Obligations of the U.S. Government
or its agencies $106,478 $ 83,083
State and municipal obligations 29,864 10,354
Corporate debt obligations 78,326 58,115
Corporate stocks and warrants 13,364 8,459
Other 1,437 929
-------- ---------
$229,469 $ 160,940
======== =========
Sold, not yet purchased
- -----------------------
Obligations of the U.S. Government
or its agencies $ 77,280 $ 68,713
State and municipal obligations 361 657
Corporate debt obligations 18,890 8,461
Corporate stocks and warrants 7,766 11,372
Other 986 506
-------- ---------
$105,283 $ 89,709
======== =========
</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.
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 daily consolidated
summarized position reports indicating both long and short exposure. These
reports, which are distributed to various levels of management throughout the
Company, enable senior management to better monitor inventory levels and results
of the trading areas. The Company also reviews and monitors, at various levels
of management, inventory aging, pricing, concentration and securities ratings.
21
<PAGE>
In addition to position and exposure reports, the Company produces daily
revenue reports which summarize 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.
22
<PAGE>
PART II - Other Information
Item 1. 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 changes in the status of the
lawsuits previously disclosed in the Company's annual report on Form 10-K.
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. The County
Prosecutor's Office has asked the County Commissioners at a regularly scheduled
meeting to consider a proposed settlement of the litigation negotiated between
counsel for the County, EVEREN and several other defendants.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
11 Pro Forma Computation of earnings per share
27 Financial Data Schedule
(b) Reports on Form 8-K have been filed by the Registrant during the period
covered by this report
23
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, EVEREN
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
EVEREN CAPITAL CORPORATION
Date: November 12, 1997 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
Executive Vice President
Controller and Chief Accounting Officer
24
<PAGE>
EXHIBIT 11
<TABLE>
<CAPTION>
EVEREN CAPITAL CORPORATION
PRO FORMA COMPUTATION OF EARNINGS PER SHARE
(in thousands, except per share data)
(unaudited)
Three months Nine months
ended ended
September 30, 1996 September 30, 1996
------------------- ------------------
<S> <C> <C>
Net income reported $ 3,510 $ 52,736
=========== ===========
Net income applicable to common shares $ 3,510 $ 50,606
=========== ===========
Pro forma weighted average common and
common share equivalents outstanding (1) 17,156,396 15,153,274
=========== ===========
Pro forma per share of common stock:
Net income before extraordinary charge $ .37 $ $3.53
Extraordinary charge on early retirement
of debt (.17) (.19)
----------- -----------
Net income $ .20 $ 3.34
=========== ===========
</TABLE>
(1) Pro forma earnings per share was calculated as if the Company's initial
public offering and the full allocation of employee stock ownership plan
shares to participant accounts had occurred at the beginning of 1996.
25
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<NAME> EVEREN CAPITAL CORPORATION
<S> <C>
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0
0
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