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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, 1997
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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 ________________
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)
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 of 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. [X]
As of March 16, 1998, the aggregate market value of the voting stock held by
non-affiliates of the registrant was approximately $286,937,000 (based on the
closing price on the New York Stock Exchange and on the assumption that the
10,118,155 shares held by the trustee of the registrant's 401(k) and stock
ownership plan are considered held by an "affiliate").
As of March 16, 1998 the following number of shares were outstanding for each
class of the registrant's common stock:
Common Stock, $.01 par value - 17,411,900
Documents Incorporated by Reference - Certain sections of the Registrant's Proxy
Statement dated March 31, 1998 for Annual Meeting of Stockholders to be held May
11, 1998 are incorporated into Part III of this Form 10-K.
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INDEX
PART I PAGE
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Item 1. Business 4
Item 2. Properties 16
Item 3. Legal Proceedings 16
Item 4. Submission of Matters to a Vote of Security Holders 17
PART II
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Item 5. Market for Registrant's Common Equity
and Related Stockholder Matters 17
Item 6. Selected Financial Data 19
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 20
Item 7A. Quantitative and Qualitative Disclosures about Market Risk 37
Item 8. Financial Statements and Supplementary Data 40
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 66
PART III
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Item 10. Directors and Executive Officers of the Registrant 66
Item 11. Executive Compensation 69
Item 12. Security Ownership of Certain Beneficial Owners
and Management 69
Item 13. Certain Relationships and Related Transactions 69
PART IV
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Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K 69
POWER OF ATTORNEY AND SIGNATURES S-1
EXHIBIT INDEX E-3
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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. The statistics in the following discussion do not
include information relating to Principal Securities Holding Corporation and its
wholly-owned subsidiary, Principal Financial Securities, Inc. ("PFSI"), which
was acquired in January 1998.
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 1,330 investment
consultants located in approximately 140 offices in 27 states. As of January 1,
1997, 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 $48.9 billion of
customer assets in approximately 500,000 client accounts.
EVEREN enjoys strong market positions in targeted regional markets with
approximately 72% 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 400 professionals located in approximately 14
offices in major cities in the United States. The Company has increased the
coordination of its investment banking, syndicate and trading activities,
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 expanded its asset management business through a
joint venture with Mentor Investment Group, Inc. ("Mentor"), an asset management
company that had approximately $12 billion of assets under management at year
end 1997. 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 independently owned 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 70% 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 1993, 1994 and 1995 of $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. For the year ended December
31, 1997, the Company generated net income of $46.6 million on net revenue of
$593.1 million, an 11% increase compared to 1996. 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 cost containment. 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
equal or 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 industry
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
transaction-oriented, 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
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clients to maintain an increasing proportion of their financial assets
with the Company and by attracting new clients.
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 has increased 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 that
are likely to further leverage the Company's infrastructure. In that
regard, on January 9, 1998, the Company completed the acquisition of
Principal Securities Holding Corporation and its wholly owned
subsidiary, Principal Financial Securities, Inc., from Principal
Mutual Life Insurance Company for $75 million in cash. PFSI is a
registered securities broker-dealer and will operate as a separate
subsidiary of EVEREN until PFSI's back office and other operating
activities are combined with those of EVEREN Securities.
- 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
containment 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. 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, capital markets and
asset management businesses.
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- 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 a
priority over trading profits, an emphasis on compliance, a focus on
education and the use of 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
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, collateralized bank loans and securities
lending activities. EVEREN Clearing, the Company's clearing subsidiary,
maintains credit lines aggregating approximately $535 million with several
banks, of which $304 million (including $40 million of unsecured credit
arrangements) had been drawn down as of December 31, 1997.
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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.
Markets
EVEREN's investment products and services are marketed to clients by a
network of approximately 1,330 investment consultants operating out of
approximately 140 retail branch offices in 27 states. Although EVEREN
Securities' single largest office in terms of revenue in 1997 was in New York
City, approximately three-quarters of the Company's investment consultants are
located in branch offices in California (310 investment consultants), Ohio
(171), Illinois (159), Texas (126), Wisconsin (119), and Colorado (97). Many of
EVEREN's retail offices are located in smaller cities or suburban areas. The
Company's top fifteen performing branch offices accounted for 33% of retail
sales revenues in 1997.
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 1997 retail revenues:
PERCENTAGE OF
PRODUCT/SERVICE RETAIL REVENUES (1)
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Equities 39%
Asset management 14
Margin interest 13
Mutual funds 14
Other 11
Taxable fixed income 6
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.
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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
AdvantageSM 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 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 210 investment consultants located in 75 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.
<TABLE>
<CAPTION>
PER INVESTMENT CONSULTANT 1997 1996 1995 1994 1993
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<S> <C> <C> <C> <C> <C>
Average production for period (1) $329,000 $306,000 $275,000 $258,000 $295,000
Average client assets at period end
(in millions) (2) $36.8 $32.8 $27.8 $23.2 $26.5
</TABLE>
(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 $294,738 for regional
firms in 1997 and was slightly below the industry average of $354,617 for all
firms. In 1995, 1996 and 1997, the Company had 27, 38, and 41 investment
consultants, respectively, whose production exceeded $1,000,000. On average,
EVEREN's investment consultants (excluding the PFSI investment consultants) have
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more than eight years of tenure with the Company and 16 years of experience in
the securities brokerage industry.
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 113 new investment
consultants in 1997, compared to an increase of net 69 investment consultants
for 1996. 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 has been developed to help experienced investment consultants gather
more client assets and serve clients more effectively. Trainee investment
consultants participate in a program that focuses 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
15.4% of the Company's net revenues. Capital markets activities are conducted
through approximately 400 professionals in 14 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 has coordinated its equity securities research,
investment banking, syndicate and trading activities by industry group and
focused 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. The Company added
coverage of the energy industry with the acquisition of PFSI.
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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 225 publicly
traded companies and uses a team approach that is 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
3 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 1997, the institutional equity
sales force generated $27.4 million of revenues.
Trading. The Company makes a market in approximately 350
over-the-counter stocks, including most of those covered by the Company's
research department. EVEREN employs approximately 20 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 are obtained
in the secondary market. The taxable fixed income department employs
approximately 75 professionals, including fixed income research personnel who
primarily provide investment ideas and credit oversight. To facilitate its
taxable fixed income activities, 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 15
public finance investment bankers and analysts that provide underwriting and
financial advisory services.
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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, 1997, Gateway, as a
pass-through entity, accounted for approximately $11.2 million of interest
income and approximately $10.9 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 at par
and may realize gains on the disposition of the underlying 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 March 31, 1999 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, 1997, Mentor had approximately $12
billion in assets under management compared to $1.0 billion in early 1993.
As of December 31, 1997, the Company had transferred approximately $3.2
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, 1997, 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 continue to be developed for
experienced investment consultants, trainees, branch office managers and other
employees that are 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 are coordinated and funded. The Foundation's focus
is education.
Employees
At December 31, 1997, the Company employed approximately 3,400 persons.
Of that number, approximately 3,000 were employed by EVEREN Securities and
approximately 400 were employed at EVEREN Clearing.
Competition
All aspects of the Company's business are highly competitive. The
Company competes directly with national, regional and local 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 in attracting and retaining
high-producing retail brokers. While many competitors require their
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<PAGE>
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, 1997, EVEREN Securities had net capital, as defined, of $152
million, which exceeded its minimum net capital requirement by $151 million.
EVEREN Clearing had net capital of $73.8 million at December 31, 1997, which
exceeded its minimum net capital requirement by $54.6 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; 136,000 square feet
in two locations in Houston, Texas, a significant portion of which is subleased;
26,000 square feet in Cleveland, Ohio; 118,000 square feet in two locations in
Milwaukee, Wisconsin; 38,000 square feet in two locations in New York City;
30,000 square feet in San Francisco, California; 21,000 square feet in Denver,
Colorado; and approximately 650,000 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.
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. Although there can be no assurances, the
Company does not believe that the ultimate outcome of either of these lawsuits,
individually or in the aggregate, will have a material adverse effect on its
financial condition or results of operations.
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. On December
23, 1997, all but one remaining defendant reached an agreemnt in principle to
settle this lawsuit. In consideration for the dismissal of this action, the
Company paid $135,949 into an escrow account in January 1998 and agreed that on
or before September 30, 1998, it would pay into an escrow account the additional
sum of $4,811,876 or deposit into the escrow account U.S. Treasury securities
which shall mature on or before July 30, 1999, having a value at maturity of
$4,811,876. The settlement is subject to court approval, and a hearing on the
entry of final judgment has been scheduled for September 1998.
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. 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
16
<PAGE>
free credit balances, costs and attorneys' fees. In June 1995, the court
dismissed plaintiffs' complaint for failure to state a claim. Plaintiffs then
filed an amended complaint containing similar claims. Defendants' motion to
dismiss the amended complaint was denied, but on April 22, 1997, the Appellate
Division reversed the lower court and dismissed the action on the grounds of
preemption by federal law. Plaintiffs filed a notice of appeal as of right to
the New York Court of Appeals, and on September 22, 1997, that appeal was
dismissed. On October 16, 1997, plaintiffs filed a motion with the Court of
Appeals for leave to appeal, and on December 17, 1997 the Court of Appeals
denied the motion. On March 10, 1998 plaintiffs petitioned the United States
Supreme Court for certiorari. In addition, in September 1996, the court denied
without prejudice plaintiff's motion for class certification.
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. Although the ultimate
outcome of these matters 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 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.
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 1997 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". The high and low sales prices for the Company's Common
Stock for each quarter of the Company's last two fiscal years during which the
Company's Common Stock was traded on the New York Stock Exchange are as follows:
1997 HIGH LOW
---- ---- ----
4th Quarter $47.688 $35.000
3rd Quarter 40.625 29.375
2nd Quarter 31.250 20.125
1st Quarter 30.250 19.875
1996
----
4th Quarter* 23.375 17.875
*From October 8, 1996 to year-end 1996.
17
<PAGE>
b. Holders
As of March 2, 1998, there were 962 record holders of the Company's
Common Stock according to the records maintained by the Company's transfer
agent.
c. Dividends
Dividends declared during the portion of the last two fiscal years that
the Company's Common Stock was listed on the New York Stock Exchange were as
follows:
CALENDAR QUARTER FIRST SECOND THIRD FOURTH
---------------- ----- ------ ----- ------
1997 $.09 $.09 $.09 $.11
1996 - - - $.09
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.
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.
18
<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.
CONSOLIDATED STATEMENT OF OPERATIONS DATA
(DOLLARS IN MILLIONS):
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenue:
Commissions $267.9 $225.8 $190.4 $180.5 $241.1
Principal transactions 102.9 115.3 122.1 119.1 158.5
Investment banking 69.5 55.9 47.1 61.9 105.3
Asset management 70.9 57.3 53.3 51.5 49.8
Other 33.3 42.2 49.1 43.2 44.9
Interest 85.2 74.1 81.2 73.8 74.1
------ ------ ------ ------ ------
Total revenue 629.7 570.6 543.2 530.0 673.7
Interest expense 36.6 34.0 52.5 44.8 46.9
------ ------ ------ ------ ------
Net revenue 593.1 536.6 490.7 485.2 626.8
------ ------ ------ ------ ------
Non-interest expenses
Compensation and benefits 352.5 331.4 335.5 328.0 387.1
Brokerage and clearance 17.2 14.5 11.4 11.5 15.1
Communications 42.6 38.3 41.8 41.3 49.2
Occupancy and Equipment 40.8 39.2 54.5 46.4 48.7
Promotional 21.5 17.8 13.5 18.9 22.4
Other 43.5 37.8 56.0 51.8 105.8
------ ------ ------ ------ -----
Total non-interest expenses 518.1 479.0 512.7 497.9 628.3
Gain on sale of subsidiary - 50.2 - - -
------ ------ ------ ------ ------
Income (loss) before income taxes and
extraordinary item and cumulative
effect of change in accounting 75.0 107.8 (22.0) (12.7) (1.5)
Income tax provision (benefit) 28.4 42.4 (6.1) (10.5) (3.3)
------ ------ ------ ------ ------
Income (loss) before extraordinary item
and cumulative effect of change in
accounting 46.6 65.4 (15.9) (2.2) 1.8
Extraordinary charge on early retirement
of debt, net of income tax benefit of $1.5 - (2.9) - - -
Cumulative effect of change in accounting
for income taxes-Jan 1, 1993 - - - - (5.5)
------ ------ ------ ------ ------
Net income (loss) $ 46.6 $ 62.5 $(15.9) $(2.2) $(3.7)
====== ====== ====== ====== ======
Earnings per share:
Basic $ 2.89 $ 5.36
====== ======
Diluted $ 2.70 $ 5.14
====== ======
Ratio of earnings to fixed charges (a) 2.6 3.4 - - 1.0
====== ====== ====== ====== ======
</TABLE>
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION DATA (AS OF DECEMBER 31):
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<S> <C> <C> <C> <C> <C>
Total assets $1,906.1 $1,824.3 $2,550.6 $1,554.7 $1,632.4
Long-term obligations 122.0 137.7 160.7 289.4 285.7
Cash dividends per common share .38 .09 - - -
</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, 1995 and 1994, earnings were
insufficient to cover fixed charges by approximately $22.0 million and
$12.7 million, respectively.
19
<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, this report 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 21E 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
relating to the sale of assets 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 contemplated by the
forward looking statements. Statements in this report, including the notes to
the consolidated financial statements, "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business", describe factors
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.
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. The securities market is affected by general economic and market
conditions, including fluctuations in interest rates, the volume of securities
trading, price levels of securities and the flow of investor funds into and out
of mutual funds, and by factors that apply to particular industries, such as
technological advances and changes in the regulatory environment. Substantial
fluctuations can occur and have occurred in the Company's operating results due
to these factors and other factors. In periods of reduced market activity,
profitability has been and is likely to be adversely affected. Accordingly, net
earnings for any period should not be considered representative of any other
period.
The favorable market and economic conditions which characterized 1996
continued throughout much of 1997, contributing to higher industry-wide
securities revenues and net income. Conditions in the U.S. trading markets were
favorable for much of fiscal 1997, as moderate economic growth, low levels of
unemployment, and continued growth in corporate profits generally prevailed.
Despite these conditions, the level of inflation has remained relatively low.
U.S. financial markets also experienced periods of increased volatility during
fiscal 1997. The market for U.S. government securities was particularly strong
during the latter part of the year, as market instability in certain Asian
markets increased investor demand for less risky investments. The performance of
U.S. equity markets also was very positive in fiscal 1997, primarily resulting
from strong corporate earnings, high levels of cash inflows into mutual funds,
and a high volume of equity issuances. U.S. equity markets also experienced
periods of increased volatility, particularly during the second and fourth
fiscal quarters. During both of these periods, equity markets experienced sharp
selloffs that were subsequently followed by strong recoveries.
20
<PAGE>
COMPANY DEVELOPMENTS
On January 9, 1998, EVEREN completed the acquisition of Principal
Securities Holding Corporation and its wholly-owned subsidiary, Principal
Financial Securities, Inc. ("PFSI"), from Principal Mutual Life Insurance
Company for $75 million in cash. PFSI is a registered securities broker-dealer
and will operate as a separate subsidiary of EVEREN until PFSI's back office and
other operating activities are combined with those of EVEREN Securities.
Consistent with the generally strong economic and market conditions
seen throughout the securities industry in 1997, the Company reported strong
growth in both its retail brokerage and investment banking activities. The
favorable industry conditions combined with the Company's strategy to grow its
core business has resulted in considerable growth in both the number of
investment consultants and their productivity, as well as increases in the
number of underwritings and investment banking transactions that the Company has
participated in. The Company's successes in its first full year as a public
company have contributed to continued growth in the Company's recruiting efforts
and generally positive employee morale.
In 1996, the Company undertook several key initiatives to better
position itself as a full service, super-regional securities brokerage firm.
These activities are summarized in the following paragraphs:
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 approximately $30.2 million, is
reflected in the Company's 1996 results of operations.
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 of Mentor since November 1, 1996
(commencement of operations) have been 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.
21
<PAGE>
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 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, 1997 and 1996 represents the accumulated net
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, signaling 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.
YEAR 2000
The "Year 2000" problem is the result of computer programs being
written using two digits (rather than four) to define the applicable year.
Computer programs that have time-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a major
system failure or miscalculations. The Company, utilizing a team of technology
professionals, has conducted a comprehensive review of its computer systems to
identify the systems that could be affected by the "Year 2000" issue and has
developed an implementation plan to address the issue. The Company is assessing
the amount of programming required to upgrade or replace each of the affected
programs with the goal of completing all relevant internal software remediation
and testing by the end of 1998 with continuing Year 2000 compliance efforts
through 1999. In addition, the Company is actively working with all of its major
external counterparties and suppliers to assess their compliance efforts and the
Company's exposure to them. The Company presently believes that, with
modifications to existing software and the conversion to new software, the "Year
2000" problem will not pose significant operational problems for the Company's
computer systems as so modified and converted. However, if such modifications
and conversions are not completed timely, both internally and at the Company's
major external service providers, the "Year 2000" problem may have a material
impact on the operations of the Company. Based upon current information, the
Company believes that its Year 2000 expenditures for 1998 and through the
project's completion are not expected to be significant as the majority of the
Company's systems are outsourced to third party vendors. Costs incurred relating
to this project are being expensed by the Company during the period in which
they are incurred.
22
<PAGE>
EQUITY PARTICIPATION OF EMPLOYEES
As of December 31, 1997, the Company's current employees and directors,
through the KSOP and otherwise, own approximately 70% 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.
In 1996, the Company instituted three 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.
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.
23
<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>
Year Ended December 31,
1997 1996 1995
------ ------- ------
<S> <C> <C> <C>
Revenue:
Commissions 45.2% 42.1% 38.8%
Principal transactions 17.3 21.5 24.9
Investment banking 11.7 10.4 9.6
Asset management 12.0 10.7 10.9
Other 5.6 7.8 10.0
Interest 14.4 13.8 16.5
------ ------ ------
Total revenue 106.2 106.3 110.7
Interest expense 6.2 6.3 10.7
------ ------ ------
Net revenue 100.0 100.0 100.0
------ ------ ------
Non-interest expenses:
Compensation and benefits 59.4 61.8 68.4
Brokerage and clearance 2.9 2.7 2.3
Communications 7.2 7.1 8.5
Occupancy and equipment 6.9 7.3 11.1
Promotional 3.6 3.3 2.8
Other 7.4 7.0 11.4
------ ------ ------
Total non-interest expenses 87.4 89.2 104.5
Gain on sale of subsidiary - 9.4 -
------ ------ ------
Income (loss) before income taxes
and extraordinary charge 12.6 20.2 (4.5)
Income tax provision (benefit) 4.8 8.0 (1.2)
------ ------ ------
Net income (loss) before
extraordinary charge 7.8 12.2 (3.3)
Extraordinary charge on early retirement
of debt, net of income taxes - (0.5) -
------ ------ ------
Net income (loss) 7.8% 11.7%(1) (3.3)%(2)
====== ====== ======
</TABLE>
- -------------
(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 Company's September 13, 1995 separation (the
"Buy-out") from Kemper (4.5% of net revenues)
1997 COMPARED TO 1996
The Company experienced stronger overall operating results for the year
ended December 31, 1997 when compared to 1996. In particular, the strong retail
and equity underwriting markets in the third and fourth quarters of 1997
contributed to the Company's 11% growth in net revenues over the year ended
December 31, 1996. The Company also continues to focus on its core business,
full service securities brokerage. 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
24
<PAGE>
$30.2 million. Net income from the Company's ongoing operations improved in 1997
by $11.4 million or 32% when compared to 1996. Management attributes these
results to several factors. First, favorable conditions continued to prevail in
the industry for most of the year ended December 31, 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, has enhanced employee
morale, focus and productivity, and has 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 $59.1 million or 10% to $629.7 million for the
year ended December 31, 1997 from $570.6 million for the year ended December 31,
1996. Net revenue increased $56.5 million or 11% to $593.1 for the year ended
December 31, 1997 from $536.6 for the year ended December 31, 1996. As
previously noted, the Company sold or exited certain non-strategic businesses in
1996. Excluding revenue from these businesses, total revenue for the year ended
December 31, 1997 increased by $85.6 million or 16% from $544.1 million in 1996,
and net revenue for the year ended December 31, 1997 increased by $81.1 million
or 16% over 1996.
Commission revenue increased $42.1 million or 19% to $267.9 million for
the year ended December 31, 1997 from $225.8 million for the year ended December
31, 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 retail investment consultants from
1,220 in 1996 to 1,333 in 1997.
Principal transactions revenue decreased $12.4 million or 11% to $102.9
million for the year ended December 31, 1997 from $115.3 million for the year
ended December 31, 1996. The decrease for the year ended December 31, 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 the Company's institutional municipal trading
business. The third and fourth quarters of 1997 reflected increases over the
same periods of 1996, due to the strong equity markets.
Investment banking revenue increased $13.6 million or 24% to $69.5
million for the year ended December 31, 1997 from $55.9 million for the year
ended December 31, 1996. Excluding investment banking revenue of $9.5 million
generated from the aforementioned exited businesses in 1996, investment banking
revenues increased $23.1 million or 50% for the year ended December 31, 1997.
This increase is the result of the Company's strategy of 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 for the year ended December 31,
1997.
25
<PAGE>
Asset management revenue increased $13.6 million or 24% to $70.9
million for the year ended December 31, 1997 from $57.3 million for the year
ended December 31, 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 and increased investments in
mutual funds in the current year.
Other income decreased $8.9 million or 21% to $33.3 million for the
year ended December 31, 1997 from $42.2 million for the year ended December 31,
1996. This decrease 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 3% for the year ended December 31, 1997 when compared to 1996. This
increase is due to earnings from the Company's ownership interest in its Mentor
joint venture which approximated $2.6 million for 1997.
Interest and dividend income increased $11.1 million or 15% to $85.2
million for the year ended December 31, 1997 from $74.1 million for the year
ended December 31, 1996. Net interest increased $8.5 million or 21% to $48.6
million for the year ended December 31, 1997 from $40.1 million for the year
ended December 31, 1996. The Company experienced significant growth in its
customer margin accounts in the current year which contributed to its increased
interest revenues.
Total non-interest expenses increased $39.1 million or 8% to $518.1
million for the year ended December 31, 1997 from $479.0 million for the year
ended December 31, 1996.
Compensation and benefits expense increased $21.1 million or 6% to
$352.5 million for the year ended December 31, 1997 from $331.4 million for the
year ended December 31, 1996. The increase is attributed to the 11% increase in
commissions, principal transactions and investment banking revenues in the
current year. Compensation as a percentage of net revenues decreased in the
current year versus 1996 due to the continued focus by management on controlling
overall compensation expense. In addition, 1996 expense includes certain
compensation costs related to the release of unearned KSOP shares.
Brokerage and clearance expense increased $2.7 million or 19% to $17.2
million for the year ended December 31, 1997 from $14.5 million for the year
ended December 31, 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 $4.3 million or 11% to $42.6 million
for the year ended December 31, 1997 from $38.3 million for the year ended
December 31, 1996. This increase is 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 increased $1.6 million or 4% to $40.8
million for the year ended December 31, 1997 from $39.2 million for the year
ended December 31, 1996. The
26
<PAGE>
modest increase in this expense is primarily due to the Company's focus on
utilization of existing office space in its growth efforts.
Promotional expense increased $3.7 million or 21% to $21.5 million for
the year ended December 31, 1997 from $17.8 million for the year ended December
31, 1996. This increase is primarily due to increased advertising 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 and other
promotions.
Other expenses increased $5.7 million or 15% to $43.5 million for the
year ended December 31, 1997 from $37.8 million for the year ended December 31,
1996. This increase is related primarily to an increase in professional fees as
well as additional costs of licensing, insurance and various other office
expenses resulting from the increased number of employees in 1997 when compared
to 1996.
The Company's income tax expense for the year ended December 31, 1997
was $28.4 million, which represented an effective tax rate on income before
taxes of 37.9% compared to $42.4 million or a 39.3% effective tax rate for the
year ended December 31, 1996.
Net income decreased $15.9 million to $46.6 million for the year ended
December 31, 1997 from $62.5 million for the year ended December 31, 1996. Net
income for the year ended December 31, 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 year ended December 31, 1997 improved
$11.4 million or 32% over the year ended December 31, 1996.
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.
27
<PAGE>
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 $6.8 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 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.
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
28
<PAGE>
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
offering to KSOP participants of shares of Common Stock held in the KSOP, but
not allocated to the account of any specific KSOP Participant (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 $3.1 million or 27% to $14.5
million for the year ended December 31, 1996 from $11.4 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.
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
29
<PAGE>
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.
30
<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
12/31/97 9/30/97 6/30/97 3/31/97 12/31/96 9/30/96 6/30/96 3/31/96
-------- ------- ------- ------- -------- ------- ------- -------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Commissions $71,137 $73,099 $61,901 $61,811 $57,349 $50,741 $60,277 $57,431
Principal transactions 26,789 28,174 24,656 23,273 23,558 26,389 34,469 30,875
Investment banking 28,768 15,272 15,514 9,990 17,230 11,677 16,540 10,442
Asset management 20,026 18,493 16,267 16,098 14,806 14,776 13,231 14,480
Other 8,672 7,405 8,371 8,856 9,775 7,234 13,486 11,722
Interest 22,761 26,201 18,195 18,023 18,328 18,270 19,278 18,191
-------- -------- -------- -------- -------- -------- -------- --------
Total revenue 178,153 168,644 144,904 138,051 141,046 129,087 157,281 143,141
Interest expense 10,072 13,113 6,728 6,740 6,850 8,613 9,203 9,254
-------- -------- --------- --------- --------- --------- --------- ---------
Net revenue 168,081 155,531 138,176 131,311 134,196 120,474 148,078 133,887
Non-interest expenses:
Compensation and benefits 100,635 93,024 80,267 78,545 80,170 75,601 88,893 86,725
Brokerage and clearance 4,438 4,487 4,043 4,206 3,938 3,773 3,899 2,949
Communications 11,644 10,996 10,350 9,609 9,495 8,883 9,567 10,321
Occupancy and equipment 10,479 10,336 10,006 9,935 9,200 9,676 10,052 10,224
Promotional 6,384 5,091 5,461 4,589 5,166 4,326 4,375 3,982
Other 12,977 11,613 10,789 8,206 11,195 6,640 10,881 9,049
-------- -------- -------- -------- -------- --------- ------- ---------
Total non-interest expenses 146,557 135,547 120,916 115,090 119,164 108,899 127,667 123,250
Gain on sale of subsidiary - - - - - - 50,181(2) -
-------- -------- -------- -------- -------- --------- -------- ---------
Income before income taxes
and extraordinary charge 21,524 19,984 17,260 16,221 15,032 11,575 70,592 10,637
Income tax provision 8,195 7,672 6,445 6,119 5,269 5,165 28,173 3,831
-------- --------- -------- -------- ------ ------ ------ ------
Income before
extraordinary charge 13,329 12,312 10,815 10,102 9,763 6,410 42,419 6,806
Extraordinary charge, net of
income taxes of $1,561 - - - - - (2,900)(1) - -
-------- --------- -------- -------- ------ ------ ------ ------
Net income $ 13,329 $ 12,312 $ 10,815 $ 10,102 $ 9,763 $ 3,510(1) $42,419(2) $ 6,806
======= ======== ======= ======= ======= ======= ====== ======
</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.
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<PAGE>
The following table sets forth certain financial data as a percentage of net
revenues.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
12/31/97 9/30/97 6/30/97 3/31/97 12/31/96 9/30/96 6/30/96 3/31/96
-------- ------- -------- ------- -------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Commissions 42.3% 47.0% 44.8% 47.1% 42.7% 42.1% 40.7% 42.9%
Principal transactions 15.9 18.1 17.8 17.7 17.6 21.9 23.3 23.1
Investment banking 17.1 9.8 11.2 7.6 12.8 9.7 11.2 7.8
Asset management 11.9 11.9 11.8 12.3 11.0 12.3 8.9 10.8
Other 5.3 4.8 6.1 6.7 7.3 6.0 9.1 8.8
Interest 13.5 16.8 13.2 13.7 13.7 15.2 13.0 13.6
------ ------ ------ ------ ------ ------ ------ ------
Total revenue 106.0 108.4 104.9 105.1 105.1 107.2 106.2 107.0
Interest expense 6.0 8.4 4.9 5.1 5.1 7.2 6.2 7.0
------ ------ ------ ------ ------ ------ ------ ------
Net revenue 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
------ ------ ------ ------ ------ ------ ------ ------
Non-interest expenses:
Compensation and benefits 59.9 59.8 58.1 59.8 59.7 62.8 60.0 64.8
Brokerage and clearance 2.6 2.9 2.9 3.2 2.9 3.1 2.6 2.2
Communications 6.9 7.1 7.5 7.3 7.1 7.4 6.5 7.7
Occupancy and equipment 6.2 6.6 7.2 7.6 6.9 8.0 6.8 7.6
Promotional 3.8 3.3 4.0 3.5 3.9 3.6 3.0 3.0
Other 7.8 7.5 7.8 6.2 8.3 5.5 7.3 6.8
------ ------ ------ ------ ------ ------ ------ ------
Total non-interest expenses 87.2 87.2 87.5 87.6 88.8 90.4 86.2 92.1
Gain on sale of subsidiary - - - - - - 33.9(2) -
------ ------ ------ ------ ------ ------ ------ ------
Income before income taxes
and extraordinary charge 12.8 12.8 12.5 12.4 11.2 9.6 47.7 7.9
Income tax provision 4.9 4.9 4.7 4.7 3.9 4.3 19.0 2.9
------ ------ ------ ------ ------ ------ ------ ------
Income before extraordinary
charge 7.9 7.9 7.8 7.7 7.3 5.3 28.7 5.0
Extraordinary charge, net of
income taxes - - - - - (2.4)(1) - -
------ ------ ------ ------ ------ ------ ------ ------
Net income 7.9% 7.9% 7.8% 7.7% 7.3% 2.9% (1) 28.7%(2) 5.0%
======= ======= ======= ====== ====== ====== ====== ======
</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.
The generally upward trend in the Company's net revenues for the eight
quarterly periods ended December 31, 1997 is consistent with the generally
strong economic and market conditions seen throughout the securities industry.
The Company reported strong growth in both its retail brokerage and investment
banking activities. The favorable industry conditions combined with the
Company's strategy to grow its core business has resulted in considerable growth
in both the number of investment consultants and their productivity, as well as
increases in the number of underwritings and investment banking transactions the
Company has participated in. Revenues in the third quarter of 1996 were
adversely effected by the market volatility and decreased transactional volume
seen throughout the industry.
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 repayment of the KSOP loans. The
Company has also continued to focus on growing its customer margin accounts
which contributes to this positive trend.
32
<PAGE>
While in absolute dollar amounts, non-interest expenses have trended up
during the eight periods, such absolute dollar increases are primarily
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
profitability growth and 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.
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. The Company has also generated funds from
bank loans and the issuance of Common Stock to employees.
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. In November 1997, the Board of
Directors approved an increase in the quarterly dividend rate to $.11 per share
on the Company's Common Stock.
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 equal to a rate per annum of .25% on the
average daily unused balance. On January 9, 1998, the Company borrowed $50
million under this facility in connection with its acquisition of PFSI.
The Company believes that its current level of equity capital, funds
generated from operations, and existing credit facilities will be adequate to
fund its capital needs for the foreseeable future.
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
33
<PAGE>
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, and 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, 1997
and 1996, were approximately $1.9 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, payables to customers, brokers and dealers, and
securities loaned. Short-term funding is generally obtained at rates based on
the federal funds, LIBOR or 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, 1997, the Subsidiaries had
approximately $535 million in uncommitted credit lines with several banks.
On January 23, 1998, the Company, through its wholly-owned subsidiary
EVEREN Clearing Corp., entered into a committed line of credit agreement for an
aggregate $150 million with several banks. The borrowings are secured by either
customer or firm securities, and interest is based on overnight bank lending
rates. The Company pays a commitment fee on the unused portion of the line of
credit. The agreement expires on December 30, 1998 and can be renewed by mutual
agreement of the parties through January 23, 2003.
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).
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.
34
<PAGE>
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, 1997, 1996 and 1995
Cash and cash equivalents at December 31, 1997, 1996, and 1995 totaled
$36.2 million, $46.6 million, and $14.6 million, respectively, reflecting a
decrease of $10.3 million for 1997 and increases of $32.0 million and $4.1
million, for 1996 and 1995, respectively.
In 1997, cash was used in operating activities primarily due to the
growth in customer margin debits which is offset by cash provided by financing
activities primarily through bank loans. For the years ended December 31, 1996
and 1995, cash provided from operating activities was used primarily in
financing activities to reduce bank loans payable.
Net cash used by operating activities totaled $159.5 million in 1997.
Net cash provided by operating activities totaled $74.9 million and $34.3
million in 1996 and 1995, respectively. In 1997, changes in net receivables from
customers and brokers and dealers of $302.9 million used cash. These uses were
partially offset by changes in securities borrowed and loaned of $47.2 million,
and changes in securities purchased under agreements to resell and repurchase of
$26.6 million, and securities owned and securities sold, not yet purchased of
$13.3 million, which generated cash. 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 sold, 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.
In 1997, net cash provided by investing activities of $1.2 million were
the result of cash generated through collections of principal on investments in
mortgage-backed securities of $16.4 million, offset by $15.2 million of fixed
asset expenditures, the majority of which relate to investments in technology.
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 1997, net cash provided by financing activities totaled $147.9
million, primarily due to an increase in bank loans payable of $164.0 million.
Proceeds from the issuance of Common Stock under the Company's stock incentive
programs also generated cash of $9.1 million. These combined to provide cash of
$173.1 million which was used by $16.3 million of repayments of collateralized
mortgage obligations, $6.5 million of dividends paid on the Company's Common
Stock, and $2.4 million of treasury share purchases. 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
35
<PAGE>
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.
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 consolidated 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
Risk is an inherent part of the Company's business and activities. The
extent to which the Company properly and effectively identifies, assesses,
monitors and manages the various types of risks involved in its business is
critical to its profitability. The Company monitors its 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.
Risk management at the Company is an integrated process with
independent oversight which requires constant communication, judgment and
knowledge of specialized products and markets. The Company's senior management
takes an active role in the risk management process and has developed policies
and procedures that require specific administrative and business functions to
assist in the identification, assessment and control of various risks.
36
<PAGE>
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISK
Market risk refers to the risk that a change in the level of one or
more market prices, rates, indices, volatilities, correlations or other market
factors, such as liquidity, will result in losses for a specified position or
portfolio.
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 Company's management believes the
Company's philosophy, risk management and hedging practices result in carefully
managed market exposure and reduced earnings volatility.
At December 31, 1997 and 1996, the Company's securities owned and
securities sold, not yet purchased consisted of the following (in thousands):
OWNED 12/31/97 12/31/96
- ----- -------- --------
Obligations of the U.S. government
or its agencies $ 97,401 $ 83,083
State and municipal obligations 24,753 10,354
Corporate debt obligations 51,668 58,115
Corporate stocks and warrants 13,463 8,459
Other 1,545 929
--------- ---------
$ 188,830 $ 160,940
========= =========
SOLD, NOT YET PURCHASED
- -----------------------
Obligations of the U.S. government
or its agencies $ 114,045 $ 68,713
State and municipal obligations 308 657
Corporate debt obligations 8,926 8,461
Corporate stocks and warrants 6,264 11,372
Other 1,325 506
--------- ---------
$ 130,868 $ 89,709
========= =========
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.
37
<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
The Company's exposure to credit risk arises from the possibility that
a counterparty to a transaction might fail to perform under its contractual
commitment, resulting in the Company incurring losses. 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.
LEGAL RISK
Legal risk includes the risk of non-compliance with applicable legal
and regulatory requirements and the risk that a counterparty's performance
obligations will be unenforceable. The Company is generally subject to extensive
regulation in the different jurisdictions in which it conducts business. The
Company has established legal standards and procedures that are designed to
ensure compliance with all applicable statutory and regulatory requirements. The
Company, principally through the Legal, Compliance and Finance Departments, has
also established procedures that are designed to ensure that senior management's
policies relating to conduct, ethics and business practices are followed. In
connection with its business, the Company has various procedures addressing
issues, such as regulatory capital requirements, new products, credit granting,
collection activities, and record-keeping. The Company has also established
certain procedures to mitigate the risk that a counterparty's performance
obligations will be unenforceable, including consideration of counterparty legal
authority and capacity, adequacy of legal documentation, the permissibility of a
transaction under applicable law and whether applicable bankruptcy or insolvency
laws limit or alter contractual remedies.
38
<PAGE>
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.
RECENT ACCOUNTING PRONOUNCEMENTS
During 1997, the Financial Accounting Standards Board released two
Statements of Financial Accounting Standards ("SFAS"), which are effective for
the year ending December 31, 1998. SFAS No. 130, "Reporting Comprehensive
Income," establishes standards for the reporting and display of comprehensive
income and its components (revenues, expenses, gains and losses) in a full set
of general-purpose financial statements and requires that all items that are
recognized under accounting standards as components of comprehensive income be
reported in one of two statements of financial performance. It does not address
issues of recognition or measurement for comprehensive income and its
components. SFAS No. 131, "Disclosure About Segments of an Enterprise and
Related Information," requires companies to disclose operating segment data
based on how management makes decisions about allocating resources to segments
and measuring their performance. The Company has not yet completed its analysis
of those operating segments, if any, on which it will report. The Company will
adopt both of these standards in 1998. As both are reporting and disclosure
related, neither will impact the Company's financial condition or results of
operations.
39
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following consolidated financial statements of
the Company are included herein:
Independent Auditors' Report
Consolidated Statements of Financial Condition -
December 31, 1997 and 1996
Consolidated Statements of Operations -
For the three years ended December 31, 1997, 1996 and 1995
Consolidated Statements of Changes in Stockholders'
Equity For the three years ended December
31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows -
For the three years ended December 31, 1997, 1996 and 1995
Notes to Consolidated Financial Statements
40
<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, 1997 and 1996,
and the related consolidated statements of operations, changes in stockholders'
equity, and cash flows for each of the three years in the period ended December
31, 1997. 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, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Chicago, Illinois
February 27, 1998
41
<PAGE>
EVEREN CAPITAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1997 AND 1996
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
ASSETS 1997 1996
---------- ----------
<S> <C> <C>
Cash and cash equivalents $ 36,248 $ 46,592
Cash and securities segregated under
federal and other regulations 15,363 15,778
Receivables from:
Customers 935,795 764,405
Brokers and dealers 119,883 50,807
Others 56,187 52,804
Securities borrowed 42,695 50,687
Securities owned, at market 188,830 160,940
Securities purchased under agreements to resell 309,457 479,313
Investment in mortgage-backed certificates
available-for-sale, at fair value 129,904 144,962
Fixed assets, at cost, net 37,769 36,136
Other assets 33,939 21,921
---------- ----------
$1,906,070 $1,824,345
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Bank loans payable $ 304,000 $ 140,000
Payables to:
Customers 192,817 259,607
Brokers and dealers 29,021 24,632
Securities loaned 228,477 189,303
Collateralized mortgage obligations 121,970 137,699
Securities sold, not yet purchased, at market 130,868 89,709
Securities sold under agreements to repurchase 322,972 466,266
Deferred income taxes 5,871 13,491
Accounts payable, accrued expenses and other liabilities 235,133 214,603
---------- ----------
1,571,129 1,535,310
Stockholders' Equity:
Common stock, $.01 par value per share; 40,000,000
shares authorized, 17,120,026 and 16,611,889 outstanding at
December 31, 1997 and 1996, respectively 175 170
Additional paid-in capital 269,608 255,040
Unrealized loss on available-for-sale securities, net of
income taxes (3,989) (4,381)
Unearned cost of restricted stock (8,269) (1,576)
Treasury stock, at cost, 455,775 and 354,473 shares at
December 31, 1997 and 1996, respectively (7,663) (5,230)
Retained earnings (since January 1, 1996) 85,079 45,012
---------- ----------
334,941 289,035
---------- ----------
$1,906,070 $1,824,345
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
42
<PAGE>
EVEREN CAPITAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Revenue:
Commissions $ 267,948 $ 225,798 $190,303
Principal transactions 102,892 115,291 122,127
Investment banking 69,544 55,889 47,093
Asset management 70,884 57,293 53,332
Other 33,304 42,217 49,137
Interest 85,180 74,067 81,177
---------- ---------- ----------
Total revenue 629,752 570,555 543,169
Interest expense 36,653 33,920 52,527
---------- ---------- ----------
Net revenue 593,099 536,635 490,642
---------- ---------- ----------
Non-interest expenses:
Compensation and benefits 352,471 331,389 335,473
Brokerage and clearance 17,174 14,559 11,422
Communications 42,599 38,266 41,759
Occupancy and equipment 40,756 39,152 54,484
Promotional 21,525 17,849 13,507
Other 43,585 37,765 55,976
---------- ---------- ----------
Total non-interest expenses 518,110 478,980 512,621
Gain on sale of subsidiary - 50,181 -
---------- ---------- ----------
Income (loss) before income taxes 74,989 107,836 (21,979)
Income tax provision (benefit) 28,431 42,438 (6,125)
---------- ---------- ----------
Income (loss) before extraordinary item 46,558 65,398 (15,854)
Extraordinary charge on early retirement
of debt, net of income taxes of $1,561 - (2,900) -
---------- ---------- ----------
Net income (loss) $ 46,558 $ 62,498 $(15,854)
========== ========== =========
Dividends on exchangeable preferred stock $ - $ 2,130
========== ==========
Net earnings applicable to common stock $ 46,558 $ 60,368
========== ==========
Weighted average common shares outstanding:
Basic 16,115,489 11,254,680
========== ==========
Diluted 17,223,281 11,749,256
========== ==========
Net earnings per share of common stock:
Basic $ 2.89 $ 5.36
========== ==========
Diluted $ 2.70 $ 5.14
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
43
<PAGE>
EVEREN CAPITAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(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, 1995 $ 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, 1995 $ - $ - $(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)
2,500
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.
44
<PAGE>
EVEREN CAPITAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY, CONTINUED
YEAR ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL UNAMORTIZED UNREALIZED GAIN
---------------------- PAID-IN RESTRICTED (LOSS) ON AVAILABLE
VOTING NON-VOTING CAPITAL STOCK FOR 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 in cash and stock
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)
---- ---- --------- ------- --------
Issuance of additional common stock 5 14,568 (6,693)
Purchase of treasury stock
Dividends paid
Change in unrealized loss
for the period 392
Net income
---- ---- --------- ------- --------
Balances at December 31, 1997 $175 $ - $ 269,608 $(8,269) $ (3,989)
==== ==== ========= ======= ========
</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, 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 in cash and stock (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 - (5,230) - 45,012 289,035
-------- ------ --------- --------- --------
Issuance of additional common stock 7,880
Purchase of treasury stock (2,433) (2,433)
Dividends paid (6,491) (6,491)
-------- ------ --------- --------- --------
Change in unrealized loss
for the period 392
Net income 46,558 46,558
-------- ------- --------- --------- --------
Balances at December 31, 1997 $ - $(7,663) $ - $ 85,079 $334,941
======== ======= ========= ========= ========
</TABLE>
See accompanying notes to consolidated financial statements.
45
<PAGE>
EVEREN CAPITAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995
---------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 46,558 $ 62,498 $ (15,854)
Adjustments to reconcile net income (loss) to net cash flows
provided by (used in) 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 15,998 12,278 16,771
Deferred income taxes (7,832) (8,724) (20,926)
Change in assets and liabilities:
Cash and securities segregated under federal
and other regulations 415 (222) (490)
Receivables from/payables to:
Customers (238,180) (79,896) 30,253
Brokers and dealers (64,687) 30,567 (25,990)
Affiliates - - 21,798
Others (3,383) (11,589) (13,326)
Securities borrowed 7,992 16,927 (46,845)
Securities owned (27,890) (19,684) 36,860
Securities purchased under agreements to resell 169,856 829,182 (1,079,897)
Other assets (12,079) 1,740 21,605
Securities loaned 39,174 128,200 8,830
Securities sold, not yet purchased 41,159 (1,923) 21,298
Securities sold under agreements to repurchase (143,294) (816,522) 1,057,611
Accounts payable, accrued expenses,
and other liabilities 16,732 (30,291) 22,590
---------- ----------- -----------
Net cash flows provided by (used in) operating activities (159,461) 74,850 34,288
========== =========== ===========
Cash flows from investing activities:
Net proceeds from sale of subsidiary - 59,346 -
Proceeds from sale of investments in mortgage-backed
certificates - - 81,808
Collections of principal on investments in mortgage-
backed certificates 16,393 16,523 15,743
Purchase of investments in mortgage-backed certificates - (9,505) (35,123)
Proceeds from the sale of fixed assets - 2,120 -
Acquisition of fixed assets (15,178) (10,942) (2,508)
---------- ----------- -----------
Net cash flows provided by investing activities 1,215 57,542 59,920
========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
46
<PAGE>
EVEREN CAPITAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from financing activities:
Net proceeds from initial public offering -- 77,833 --
Release of shares related to KSOP loan -- 22,875 --
Dividends paid (6,491) (16,433) --
Retirement of subordinated debt -- (36,012) --
Proceeds from common stock issuance 9,084 8,171 4,738
Amount collected under indemnification agreement -- 12,876 7,124
Proceeds from the issuance of collateralized
mortgage obligations -- 9,422 34,080
Repayment of collateralized mortgage obligations (16,258) (16,109) (95,035)
Debt issuance costs paid -- -- (977)
(Increase) decrease in bank loans payable, net 164,000 (157,800) (40,053)
Purchase of treasury stock (2,433) (5,208) (22)
--------- --------- ---------
Net cash flows provided by (used in) financing activities 147,902 (100,385) (90,145)
--------- --------- ---------
Increase (decrease) in cash and cash equivalents (10,344) 32,007 4,063
Cash and cash equivalents at beginning of year 46,592 14,585 10,522
--------- --------- ---------
Cash and cash equivalents at end of year $ 36,248 $ 46,592 $ 14,585
========= ========= =========
Supplemental disclosure of cash flow information:
Interest paid to unaffiliated entities $ 35,596 $ 37,013 $ 48,780
========= ========= =========
Income taxes paid $ 23,650 $ 50,100 $ --
========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
47
<PAGE>
EVEREN CAPITAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
(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 was
fully collected at December 31, 1996 and is included in additional
paid-in capital.
48
<PAGE>
EVEREN CAPITAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
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.
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
49
<PAGE>
EVEREN CAPITAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
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 statements of financial condition.
Impairment of Long-Lived Assets
The Company periodically reviews long-lived assets for possible
impairment. When circumstances indicate that the carrying amount of
such assets may not be recoverable, the carrying amount is reduced to
the estimated recoverable value.
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 Statement of Financial Accounting
Standards ("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
50
<PAGE>
EVEREN CAPITAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
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.
Recent Accounting Pronouncements
As of January 1, 1997, SFAS No. 125 "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities,"
became effective for transfers of financial assets made after December
31, 1996, except for transfers of certain financial assets for which
the effective date has been delayed for one year. SFAS No. 125 provides
financial reporting standards for the derecognition and recognition of
financial assets, including the distinction between transfers of
financial assets which should be recorded as sales and those which
should be recorded as secured borrowings. The Company does not expect
the impact of the adoption of the deferred provision to be material and
the adoption of the other provisions of SFAS No. 125 was not material
to the Company's financial condition or results of operations.
In 1997, the Company adopted SFAS No. 128, "Earnings Per Share." This
standard requires dual presentation of basic and diluted earnings per
share. Basic earnings per share is computed based on the weighted
average number of common shares outstanding. Diluted earnings per share
is computed based on the weighted average number of common and dilutive
potential common shares outstanding.
During 1997, the Financial Accounting Standards Board released two
SFASs, which are effective for the year ending December 31, 1998. SFAS
No. 130, "Reporting Comprehensive Income," establishes standards for
the reporting and display of comprehensive income and its components
(revenues, expenses, gains and losses) in a full set of general-purpose
financial statements and requires that all items that are recognized
under accounting standards as components of comprehensive income be
reported in one of two statements of financial performance. It does not
address issues of recognition or measurement for comprehensive income
and its components. SFAS No. 131, "Disclosure
51
<PAGE>
EVEREN CAPITAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
About Segments of an Enterprise and Related Information," requires
companies to disclose operating segment data based on how management
makes decisions about allocating resources to segments and measuring
their performance. The Company will adopt both of these standards in
1998. As both are reporting and disclosure related, neither will impact
the Company's financial condition or results of operations.
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, 1997 and 1996 represents the
accumulated net earnings available to common stockholders arising
subsequent to the date of the quasi-reorganization.
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, $55.0
million of bank loans was incurred (the "KSOP loans") and $55.0 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
1997 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, 1997 and 1996, cash of approximately $440,000 and $764,000
and securities (primarily obligations of the U.S. Government) with a
market value of approximately $14.9 million and $15.0 million,
respectively, are segregated pursuant to the Act.
52
<PAGE>
At December 31, 1997 and 1996, 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 $4.1 million
and $6.0 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. The Company also extends credit to customers of
introducing brokers, which are managed on a similar basis as the
Company's own customers.
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 statements of financial
condition. From time to time, the Company deposits customers'
securities as margin with clearing organizations. At December 31, 1997
and 1996, such securities deposited as margin had an aggregate market
value of $8.7 million and $8.1 million, respectively.
(5) SECURITIES-AT MARKET VALUE
Securities owned and securities sold, not yet purchased consisted of
the following (in thousands):
DECEMBER 31,
OWNED 1997 1996
- ----- -------- --------
Obligations of the U.S. Government or its agencies $ 97,401 $ 83,083
State and municipal obligations 24,753 10,354
Corporate obligations 51,668 58,115
Corporate stocks and warrants 13,463 8,459
Other 1,545 929
-------- --------
$188,830 $160,940
======== ========
SOLD, NOT YET PURCHASED
- -----------------------
Obligations of the U.S. Government or its agencies $114,045 $ 68,713
State and municipal obligations 308 657
Corporate obligations 8,926 8,461
Corporate stocks and warrants 6,264 11,372
Other 1,325 506
-------- --------
$130,868 $ 89,709
======== ========
53
<PAGE>
EVEREN CAPITAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
(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, 1997 and 1996 (in thousands):
SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL 1997 1996
----------------------------------------------- --------- --------
U.S. Government and U.S. Government
agency obligations with a market value
of $310.2 million ($482.0 million at 1996) $309,457 $479,313
======== ========
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
U.S. Government and U.S. Government
agency obligations with a market value
of $323.6 million ($469.6 million at 1996) $322,972 $466,266
======== ========
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, 1997, all agreements will mature
within ninety days. Securities purchased under agreements to resell
averaged $372.5 million and $568.7 million during 1997 and 1996,
respectively, and the maximum amounts outstanding at any month-end
during 1997 and 1996 were $545.9 million and $1,400 million,
respectively. Securities sold under agreements to repurchase averaged
$342.9 million and $552.9 million during 1997 and 1996, respectively,
and the maximum amounts outstanding at any month-end during 1997 and
1996 were $530.6 million and $1,387 million, respectively. At December
31, 1997, these agreements to repurchase had a weighted-average annual
interest rate of 6.16 percent (6.02 percent at December 31, 1996).
(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):
DECEMBER 31,
1997 1996
-------- --------
Amortized cost $134,485 $150,147
Gross unrealized gains 338 237
Gross unrealized losses (4,919) (5,422)
-------- --------
Fair value $129,904 $144,962
======== ========
54
<PAGE>
EVEREN CAPITAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
(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 7.05% to 8.15% per year. The stated maturities
range from June 1, 2019 through May 31, 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, 1997 and 1996, fixed assets consist of the following
(in thousands):
DECEMBER 31,
1997 1996
--------- ---------
Building and improvements $ 1,411 $ 1,411
Furniture and equipment 104,792 92,268
Leasehold improvements 23,958 21,304
--------- ---------
Total cost 130,161 114,983
Less accumulated depreciation and amortization (92,392) (78,847)
--------- ---------
Net fixed assets $ 37,769 $ 36,136
========= =========
(10) BANK LOANS PAYABLE
Included in bank loans payable at December 31, 1997 and 1996, are $304
million and $140 million, respectively, in loans drawn from
approximately $535 million and $600 million in uncommitted lines of
credit, respectively, 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 at December 31, 1997 and 1996. The remaining borrowings are
secured by customers' margin securities. The rates on these borrowings
are based on the federal funds rate (5.8% and 6.9% at December 31, 1997
and 1996, respectively).
The Company has a $50 million committed revolving credit facility with
two banks, all of which is unused at December 31, 1997. The agreement
ends on July 10, 1999, 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. Fees paid for the year ended December 31, 1997 were
approximately $60,000. On January 9, 1998 the Company borrowed $50
million under this facility in connection with its acquisition of
Principal Financial Securities, Inc., more fully discussed in Note 21.
55
<PAGE>
EVEREN CAPITAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
(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, 1997 and 1996, EVEREN Securities had net capital of
approximately $152.0 million and $124.0 million, respectively, which
was approximately $151.0 million and $123.0 million, respectively, in
excess of its required minimum net capital. At December 31, 1997 and
1996, EVEREN Clearing had net capital of approximately $73.8 million
and $68.2 million, respectively, which was approximately $54.6 million
and $52.0 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,
which are funded by cash payments and plan forfeitures. Total
contribution expense for the years ended December 31, 1997, 1996 and
1995 was approximately $684,000, $3.0 million and $19.4 million,
respectively.
(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% for 1997, 7.75% for
1996, and 7% for 1995. Actuarial assumptions used to determine the
accumulated postretirement benefit obligation at December 31, 1997 and
1996 include an annual discount rate of 7% and 7.75%, respectively.
Net periodic postretirement benefit cost for the years ended December
31 includes the following components (in thousands):
56
<PAGE>
EVEREN CAPITAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
1997 1996 1995
-------- -------- -------
Service cost of benefits earned $ 970 $ 654 $ 618
Interest cost on accumulated postretirement
benefit obligation 1,453 1,386 1,305
Amortization of unrecognized gain -- -- (149)
------- ------- -------
Net periodic postretirement benefit cost $ 2,423 $ 2,040 $ 1,774
======= ======= =======
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):
1997 1996
-------- -------
Accumulated post-retirement benefit obligation:
Retirees $ 11,052 $ 10,268
Fully eligible active participants 4,825 4,303
Other active participants 4,884 3,316
-------- -------
Accumulated post-retirement benefit obligation 20,761 17,887
Plan assets at fair value - -
-------- -------
Accumulated post-retirement benefit obligation in
excess of plan assets 20,761 17,887
Unrecognized actuarial loss (1,691) (472)
-------- -------
Accrued post-retirement benefit cost $ 19,070 $17,415
======== =======
For measurement purposes, a 7% annual rate of increase in the per
capita health care cost trend rate was assumed for 1998; 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, 1997
by approximately $3.7 million and the aggregate of the service and
interest cost components of net periodic postretirement benefit cost
for the year ended December 31, 1997 by approximately $570,000.
(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 years ended December 31, 1996 and 1995, dividends on the
Exchangeable Preferred Stock were approximately $2.1 million and $1.2
million, respectively.
57
<PAGE>
EVEREN CAPITAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
(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 stock options granted under the equity-based incentive plans have
exercise prices which approximated the market prices on the dates of
grant, and expire within ten years from the date of grant. The options
granted generally vest over a three- or five-year period.
A summary of the Company's stock options for the years ended December
31, 1997, 1996 and 1995 is as follows:
OPTIONS WEIGHTED-AVERAGE
OUTSTANDING EXERCISE PRICE
----------- ----------------
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
--------- -------
Granted 804,255 23.19
Exercised - -
Forfeited (75,662) 10.40
--------- -------
Options Outstanding, December 31, 1997 1,802,218 $ 14.62
========= =======
In 1997, had the Company elected to recognize compensation expense for
its stock option plans pursuant to SFAS No. 123 (based on the fair
value of options at the grant dates) net income would have been reduced
by $1.6 million and basic and diluted earnings per common share would
have been reduced by $0.10 and $0.09, respectively. For options granted
in 1996 and 1995, the compensation cost as determined under SFAS No.
123 was not material to the Company's consolidated net income or
earnings per share calculations.
58
<PAGE>
EVEREN CAPITAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
(16) INCOME TAXES
The income tax provision (benefit) for the years ended December 31 was
as follows (in thousands):
1997 1996 1995
------- ------- --------
U.S. Federal
Current $29,728 $ 43,621 $ 13,193
Deferred (6,532) (8,724) (20,926)
------- ------- --------
Total 23,196 34,897 (7,733)
------- ------- --------
State and Local
Current 6,535 7,541 1,922
Deferred (1,300) - (314)
------- ------- --------
Total 5,235 7,541 1,608
------- ------- --------
$28,431 $42,438 $ (6,125)
======= ======= ========
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>
1997 1996 1995
------- ------- --------
<S> <C> <C> <C>
Statutory federal income tax (benefit) $26,246 $36,180 $(7,694)
Increase (reduction) in income taxes resulting from:
Tax-exempt interest, net (286) (559) (903)
Deductible KSOP dividends (1,414) (337) -
Extraordinary charge on early retirement of debt - 1,561 -
Meals and entertainment 650 483 457
State and local income taxes, net of federal
income tax benefit 3,403 4,459 1,045
Other, net (168) 651 970
------- -------- -------
$28,431 $42,438 $(6,125)
======= ======= =======
</TABLE>
59
<PAGE>
EVEREN CAPITAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
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>
1997 1996
---------- -----------
<S> <C> <C>
Deferred tax assets:
Accrued expenses $ 9,538 $ 6,584
Deferred compensation 3,063 1,412
Deferred rent 3,420 3,727
Fixed assets, principally due
to differences in depreciation - 428
---------- ----------
Total deferred tax assets 16,021 12,151
-------- ----------
Deferred tax liabilities:
Section 338 Election basis difference 19,607 23,083
Exchange memberships 1,393 1,393
Fixed assets principally due to differences in
depreciation 473 -
Other 419 1,166
----------- ----------
Total deferred tax liabilities 21,892 25,642
--------- ---------
Net deferred tax liabilities $ 5,871 $ 13,491
========== =========
</TABLE>
In connection with the Buy-out, 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.
60
<PAGE>
EVEREN CAPITAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
(17) EARNINGS PER SHARE
The following table reconciles the numerators and the denominators of
the Company's basic and diluted per-share calculations for the year
ended December 31, 1997 (in thousands, except share data):
PER SHARE
INCOME SHARES AMOUNT
------- ---------- ---------
Net income $46,558
Basic earnings per share $46,558 16,115,489 $2.89
=====
Effect of Dilutive Securities:
Restricted stock and options - 1,107,792
------- ----------
Diluted earnings per share $46,558 17,223,281 $2.70
======= ========== =====
Earnings per share information is not presented for 1995 due to the
changes in the Company's continuing capital structure as discussed in
Notes 1, 14, and 15. Accordingly, basic and diluted earnings per share
for 1996, calculated on a proforma basis, assuming the Company's
initial public offering and full allocation of KSOP shares to
participant accounts had occurred as of January 1, 1996, would have
been $3.87 and $3.76, respectively. Historical basic earnings per share
for 1996, computed in accordance with SFAS No. 128 was $5.36 based on
11,254,680 weighted average common shares outstanding. Historical
diluted earnings per share for 1996 was $5.14 based on 11,749,256
weighted average common shares outstanding, which includes dilutive
restricted stock and options of 494,576.
On January 20, 1998, the Company granted 548,770 options and 288,998
shares of restricted stock pursuant to its Restricted Stock Incentive
Plans. The effect of these issuances on earnings per share will be
reflected in the Company's first quarter 1998 results.
(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, 1997 were approximately (in thousands):
YEAR ENDING DECEMBER 31,
------------------------
1998 $ 27,600
1999 25,400
2000 21,400
2001 18,900
2002 15,100
Thereafter 42,000
--------
Total minimum lease payments $150,400
========
61
<PAGE>
EVEREN CAPITAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
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 $31.6 million, $33.3 million and $46.8
million for the years ended December 31, 1997, 1996 and 1995,
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, 1997 the Company is obligated
under an unsecured letter of credit totaling $60 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, 1997 and subsequently settled, had no
material effect on the consolidated statement of financial condition.
At December 31, 1997, the Company has investments in limited
partnerships carried at cost with aggregate capital commitments of $10
million over a three-to five-year period.
(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.
62
<PAGE>
EVEREN CAPITAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
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. The Company believes that the settlement of
these transactions will not have a material effect on the Company's
consolidated statement of financial condition or results of operations.
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, and
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
63
<PAGE>
EVEREN CAPITAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
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. Under 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 statements of
financial condition at December 31, 1997 and 1996 at their quoted
market values of $56,000 and $330,000, respectively, in aggregate, and
have aggregate notional values of approximately $7.0 million and $11.6
million, respectively. The average market value of these derivative
instruments during 1997 approximated $215,000.
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) SUBSEQUENT EVENTS
On January 9, 1998, EVEREN completed the acquisition of Principal
Securities Holding Corporation and its wholly-owned subsidiary,
Principal Financial Securities, Inc. ("PFSI"), from Principal Mutual
Life Insurance Company for $75 million in cash. PFSI is a registered
securities broker-dealer and will operate as a separate subsidiary of
EVEREN until PFSI's back office and other operating activities are
combined with those of EVEREN Securities.
On January 23, 1998, the Company, through its wholly-owned subsidiary,
EVEREN Clearing, entered into an additional committed line of credit
agreement for an aggregate $150 million with several banks. The
borrowings are secured by either customer or firm securities, and
interest is based on overnight bank lending rates. The Company pays a
commitment fee on the unused portion of the line of credit. The
agreement expires on
64
<PAGE>
EVEREN CAPITAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
December 30, 1998 and can be renewed by mutual agreement of the parties
for periods up to 364 days per renewal through January 23, 2003.
On February 27, 1998, the Company received notice that on February 10,
1998, an arbitration award of $6 million had been rendered by a New
York Stock Exchange, Inc. arbitration panel in favor of the Company in
connection with the raiding of four of the Company's retail branch
offices in 1994 by a competitor firm.
(22) QUARTERLY INFORMATION (unaudited) (in thousands, except per share data)
<TABLE>
<CAPTION>
QUARTER
- ---------------------------------------------------------------------------------------------------
1997 FIRST SECOND THIRD FOURTH
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total revenues $138,051 $144,904 $168,644 $178,153
Income before income taxes 16,221 17,260 19,984 21,524
Net income 10,102 10,815 12,312 13,329
Earnings per share:
Basic .63 .67 .76 .83
Diluted .60 .63 .71 .76
</TABLE>
<TABLE>
QUARTER
- ---------------------------------------------------------------------------------------------------
1996 FIRST SECOND THIRD FOURTH
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total revenues $143,141 $157,281 $129,087 $141,046
Income before income taxes 10,637 70,592 11,575 15,032
Net income 6,806 42,419 3,510 9,763
Earnings per share:
Basic .70 4.37 .30 .62
Diluted .68 4.26 .29 .59
</TABLE>
****
65
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) Identification of Directors
The information in the Company's Proxy Statement dated March
31, 1998 for the Annual Meeting of Stockholders to be held on
May 11, 1998 ("1998 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:
NAME POSITION AGE
- --------------------- -------- ---
James R. Boris Chairman of the Board and
Chief Executive Officer 53
Stephen G. McConahey President and Chief Operating Officer 54
Stanley R. Fallis Senior Executive Vice President and
Director of Administration and
Operations 57
David M. Greene Senior Executive Vice President
and Director of Client Services 52
Arthur J. McGivern Senior Executive Vice President
and Director of Corporate Development 50
Janet L. Reali Senior Executive Vice President,
General Counsel and Secretary 46
Thomas R. Reedy Senior Executive Vice President and
Director of Capital Markets 38
John G. Sullivan Senior Executive Vice President
and Director of Marketing and
Investment Services 52
Daniel D. Williams Senior Executive Vice President,
Treasurer and Chief Financial Officer 46
Thomas M. Mansheim Executive Vice President, Controller and
Chief Accounting Officer 40
66
<PAGE>
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.
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.
67
<PAGE>
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 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.
68
<PAGE>
Compliance with Section 16(a) of the Exchange Act
The information in the 1998 Proxy under the caption "SECTION 16(a)
BENEFICIAL OWNERSHIP REPORTING COMPLIANCE" is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information in the 1998 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 1998 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 - The information in the 1998 Proxy
under the caption "INTEREST OF MANAGEMENT IN CERTAIN
TRANSACTIONS" is incorporated herein by reference.
(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.
-------- --------
Report of Independent Auditors E-1
Schedule II Valuation and Qualifying Accounts E-2
(a)(3) Exhibits
The exhibits listed on the accompanying Index to Exhibits at pages
E-3 through E-6 below are filed as part of this Annual Report on
Form 10-K.
69
<PAGE>
(b) Reports on Form 8-K
The Company filed a report on Form 8-K dated November 18, 1997.
Under Item 5 (Other Events) the Company reported the settlement of
a lawsuit against EVEREN Securities (and other defendants) titled
Cuyahoga County, Ohio Litigation (Jones, et al v. McDonald & Co.,
et al.).
70
<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 31, 1998 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 31st day of March
1998.
By: /S/ JAMES R. BORIS
---------------------------------
James R. Boris
Chairman of the Board, Chief
Executive Officer and Director
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)
S-1
<PAGE>
By: /S/ THOMAS M. MANSHEIM
-------------------------------------
Thomas M. Mansheim
Executive Vice President,
Controller and Chief Accounting Officer
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, 1997 and 1996, and for each of
the three years in the period ended December 31, 1997, and have issued our
report thereon dated February 27, 1998; such consolidated financial statements
and report are included in the Annual Report on Form 10-K for the year ended
December 31, 1997. Our audits also included the consolidated financial statement
schedule, Valuation and Qualifying Accounts, for each of the three years in the
period ended December 31, 1997 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 consolidated 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 27, 1998
E-1
<PAGE>
Schedule II
EVEREN CAPITAL CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
DESCRIPTION 1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Asset valuation reserves:
Balance at beginning of period $ 9,182 $10,028 $11,797
Additions-provisions for losses 2,495 913 1,411
Deductions (1) 4,481 1,759 3,180
------- ------- -------
Balance at end of period $ 7,196 $ 9,182 $10,028
======== ======= ========
</TABLE>
- -------------
(1) These deductions represent the net effect on the valuation reserves of
write-downs and recoveries.
E-2
<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).
10.5(a) First Amendment of EVEREN Capital Corporation 401(k) and
Employee Stock Ownership Plan (As Amended and Restated
Effective as of September 1, 1995).
10.5(b) Second Amendment of EVEREN Capital Corporation 401(k) and
Employee Stock Ownership Plan (As Amended and Restated
Effective as of September 1, 1995).
10.5(c) Third Amendment of EVEREN Capital Corporation 401(k) and
Employee Stock Ownership Plan (As Amended and Restated
Effective as of September 1, 1995).
10.5(d) Fourth Amendment of EVEREN Capital Corporation 401(k) and
Employee Stock Ownership Plan (As Amended and Restated
Effective as of September 1, 1995).
E-3
<PAGE>
10.5(e) Fifth Amendment of EVEREN Capital Corporation 401(k) and
Employee Stock Ownership Plan (As Amended and Restated
Effective as of September 1, 1995).
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).
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).
E-4
<PAGE>
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).
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 June 30, 1996
and filed with the Commission on July 31, 1996).
10.23(a) Amendment to Joint Venture Agreement dated July 15, 1997
10.23(b) Clarification Agreement Re: Joint Venture Agreement dated as
of October 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 (Incorporated by reference to Exhibit 10.25 to
EVEREN's Annual Report on Form 10-K for the fiscal year ended
December 31, 1996 ("1996 10-K"))
10.26 Second Amendment dated February 7, 1997 to Employment
Agreement dated September 13, 1995 between Stephen G.
McConahey and EVEREN (Incorporated by reference to Exhibit
10.26 to the 1996 10-K)
10.27 Credit Agreement by and among EVEREN, the Lenders Party
thereto, LaSalle National Bank, as documentation agent, and
The Bank of New York, as administrative agent, dated July 11,
1997. (Incorporated by reference to Exhibit 10.27 to Form
10-Q dated June 30, 1997 and filed with the Commission on
August 14, 1997).
E-5
<PAGE>
10.28 Not Used.
10.29 Not Used.
10.30 EVEREN Capital Corporation Senior Management Incentive
Compensation Plan. (Incorporated by reference to Exhibit A to
EVEREN's Proxy Statement dated April 4, 1997 relating to
EVEREN's Annual Meeting of Stockholder's held on May 6,
1997).
10.31 Non-qualified Stock Option Agreement dated as of February 7,
1997 between EVEREN and James R. Boris.
10.32 Non-qualified Stock Option Agreement dated as of February 7,
1997 between EVEREN and Stephen G. McConahey.
10.33 1996 Restricted Stock Incentive Plan (as Amended and Restated
effective as of May 6, 1997).
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 10.5(a)
FIRST AMENDMENT
OF
EVEREN CAPITAL CORPORATION 401(K)
AND EMPLOYEE STOCK OWNERSHIP PLAN
(As Amended and Restated Effective as of September 1, 1995)
WHEREAS, EVEREN Capital Corporation (the "Company") maintains the
EVEREN Capital Corporation 401(k) and Employee Stock Ownership Plan (As Amended
and Restated Effective as of September 1, 1995) (the "Plan"); and
WHEREAS, the Plan has been amended and restated in its entirety,
effective as of September 1, 1995, and further amendment of the Plan, as amended
and restated, now is considered desirable;
NOW, THEREFORE, pursuant to the power reserved to the Company under
Section 18.1 of the Plan, the Plan, as amended and restated, is hereby further
amended, effective April 30, 1996, by adding the following Supplement B to the
Plan immediately after Supplement A thereof:
<PAGE>
"SUPPLEMENT B
SPECIAL PROVISIONS RELATING TO
SALE OF BETA SYSTEMS INC.
B-1. INTRODUCTION; USE OF TERMS. On or about April 30, 1996 (the 'sale
date'), EVEREN Securities Holdings, Inc. sold all of the issued and
outstanding stock of BETA Systems Inc. ('BETA') to Thomson Holdings
Inc. This Supplement B sets forth special provisions applicable to
participants who are employed by BETA on the sale date ('BETA
participants'). Terms used in this Supplement B shall, unless otherwise
defined in this Supplement B, have the meanings given to such terms in
the plan.
B-2. FULL VESTING. Effective as of the sale date, each BETA
participant, regardless of the BETA participant's years of credited
service, shall have a fully vested and non-forfeitable right to the
entire amount of such BETA participant's account balance under the plan
(including the shares of company stock allocated to the participant's
KSOP stock account as of the sale date).
B-3. DISTRIBUTIONS. Pursuant to Section 401(k)(10) of the Code, any
BETA participant who continues employment with BETA following the sale
of BETA shall be entitled to request an immediate lump sum distribution
of such participant's account balance in accordance with the plan and
the distribution procedures established by the committee; provided,
however, (a) if a BETA participant's vested account balance does not
exceed $3,500 as of the sale date, the BETA participant shall receive
an automatic lump sum distribution of his vested account balance, and
(b) any distribution of company stock (or of amounts attributable to
company stock) shall be based on the value of the company stock
determined as of the accounting date as of which company stock was
valued that is coincident with or immediately preceding the date on
which the distribution is made to a BETA participant. Any election made
pursuant to this paragraph B-3 must be made by such date as the
committee shall designate in order to allow a lump sum distribution to
be made by December 31, 1996."
IN WITNESS WHEREOF, the undersigned duly authorized officer of EVEREN
Capital Corporation has caused the foregoing amendment to be executed this
<PAGE>
_______ day of ________________, 1996.
EVEREN CAPITAL CORPORATION
By
Its
<PAGE>
Exhibit 10.5(b)
SECOND AMENDMENT
OF
EVEREN CAPITAL CORPORATION 401(K)
AND EMPLOYEE STOCK OWNERSHIP PLAN
(As Amended and Restated Effective as of September 1, 1995)
WHEREAS, EVEREN Capital Corporation (the "company") maintains the
EVEREN Capital Corporation 401(k) and Employee Stock Ownership Plan (As Amended
and Restated Effective as of September 1, 1995) (the "plan"); and
WHEREAS, the plan has been amended, and further amendment of the plan,
as amended, now is considered desirable;
NOW, THEREFORE, pursuant to the power reserved to the company under
subsection 18.1 of the plan, and in exercise of the authority delegated to the
undersigned officer of the company by resolution of the company's Board of
Directors, the plan, as amended, is hereby further amended, effective as of June
30, 1996, by substituting the following for subparagraphs 7.8(c)(i) and (ii) of
the plan:
"(i) FIRST, financed shares with a fair market value at least equal
to the dividends paid with respect to the company stock
allocated to participants' KSOP stock accounts shall be
allocated among and credited to the KSOP stock accounts of
such participants, pro rata, according to the number of shares
of company stock held in such accounts on the regular
accounting date immediately preceding the dividend declaration
date; and
<PAGE>
(ii) NEXT, any remaining financed shares released from the
unreleased share account by reason of dividends paid with
respect to company stock held in the unreleased share account
shall be allocated among and credited to the KSOP stock
accounts of all participants employed by the employers on the
record date of such dividend, pro rata, according to the
number of shares of company stock held in such accounts on the
regular accounting date immediately preceding the dividend
declaration date."
IN WITNESS WHEREOF, the undersigned duly authorized officer of EVEREN
Capital Corporation has caused the foregoing amendment to be executed this
________ day of __________, 1996.
EVEREN CAPITAL CORPORATION
By
Its
<PAGE>
Exhibit 10.5(c)
THIRD AMENDMENT OF
EVEREN CAPITAL CORPORATION
401(K) AND EMPLOYEE STOCK OWNERSHIP PLAN (As
Amended and Restated Effective as of September 1, 1995)
WHEREAS, EVEREN Capital Corporation (the "company") maintains the
EVEREN Capital Corporation 401(k) and Employee Stock Ownership Plan (As Amended
and Restated Effective as of September 1, 1995) (the "plan"); and
WHEREAS, the plan has been amended, and further amendment of the plan
now is considered desirable;
NOW, THEREFORE, pursuant to the power reserved to the committee under
the plan (the "committee") by subsection 18.1 of the plan, the plan, as amended,
is hereby further amended in the following particulars:
<PAGE>
1. Effective as of January 1, 1995, by adding the following new
subsection 4.9 to the plan immediately after subsection 4.8 thereof:
"4.9. 1995 CORRECTIVE CONTRIBUTION. Subject to the conditions and
limitations of the plan, each employer shall make a contribution to the
plan of $950.00 (the '1995 corrective contribution') on behalf of each
participant who was employed by that employer on December 31, 1995, and
whose compensation (as defined below) for 1995 was less than
$15,000.00. For purposes of this subsection, a participant's
compensation shall equal the participant's income for 1995 from the
employers as shown on the participant's Federal wage and tax statement
for 1995 (Form W-2, Box 1), but including for such plan year all of a
participant's income deferral contributions under this plan and all
salary reductions made by the participant pursuant to an arrangement
maintained by an employer under Section 125 of the Code during the plan
year. The 1995 corrective contribution shall be paid in cash (without
interest) to the trustee as soon as practicable following the end of
the 1995 plan year, but not later than the time prescribed by law for
filing the company's Federal income tax return for such plan year,
including extensions thereof. The 1995 corrective contribution shall be
applied in accordance with subsections 4.6 and 6.2 and shall be subject
to the requirements of subsection 4.7."
2. Effective as of March 31, 1996, by substituting "Investments in
Company Stock and Preferred Stock" for the title of subsection 6.2 of the plan.
3. Effective as of March 31, 1996, by adding the following paragraph at
the end of subsection 6.2 of the plan:
"On and after March 31, 1996, the committee shall direct the trustee to
invest participants' account balances in shares of preferred stock
issued by the company which are convertible into debentures issued by
the company ('preferred stock'), as elected by participants pursuant to
paragraph 6.3(b). Any purchases of preferred stock, and any conversion
thereof or redemption of debentures, shall comply with the applicable
requirements of ERISA. The committee shall establish procedures for
accounting for participants' interests in preferred stock (including
interests following the conversion of the preferred stock) and for
dealing with the conversion of the preferred stock and the redemption
of the debentures. Any voting rights appurtenant to the preferred stock
shall be exercised by participants in accordance with the procedures
set forth in Section 15 with respect to company stock."
<PAGE>
4. Effective as of March 31, 1996, by substituting the following for
paragraph 6.3(b) of the plan:
"(b) EXISTING ACCOUNT BALANCES - INVESTMENT FUNDS AND PREFERRED
STOCK. Each participant may elect to have all or a portion of
the amount invested on the participant's behalf in any
investment fund transferred to any one or more of the other
investment funds or, effective March 31, 1996, to preferred
stock. Each participant may elect to have all or a portion of
the amount invested on the participant's behalf in preferred
stock transferred to one or more of the investment funds.
Participants may transfer amounts from the investment funds to
company stock only pursuant to paragraph (c) below. Except as
provided in subsection 6.4, participants shall not be entitled
to transfer their account balances from company stock to the
investment funds."
5. Effective as of September 1, 1995, by adding the following paragraph
to paragraph 6.3(c) of the plan immediately after the last sentence thereof:
"In the event that a participant's election to invest in company stock
is reduced because participants' elections exceed $25 million (as
described above), such participant may make a one-time irrevocable
election to invest in company stock that portion of such participant's
account balances equal to the amount by which such participant's
election under the initial offering was reduced. Any amounts invested
in company stock in such secondary offering shall be treated as amounts
invested under the initial offering, except that amounts invested in
company stock pursuant to this secondary offering shall not be taken
into account in determining the employer founders' stock contribution
under subsection 4.4."
6. Effective as of January 1, 1995, by adding the following sentence at
the end of subsection 8.1 of the plan:
"Furthermore, if the 1995 corrective contribution would cause a
participant's annual addition for the 1995 plan year to exceed the
limitations of this subsection 8.1, the applicable portion of such
contribution shall be forfeited prior to applying the provisions of
paragraphs (a), (b), and (c) above, and any such forfeited amount shall
be applied in accordance with paragraph (c) above."
7. Effective as of January 1, 1995, by deleting the first sentence that
immediately follows subparagraph 10.4(b)(ii).
<PAGE>
8. Effective as of September 1, 1995, by adding the following
subparagraph (iv) to the plan immediately after subparagraph 12.4(b)(iii)
thereof:
"(iv) In accordance with procedures established by the committee,
distributions of company stock (or the proceeds from the sale
thereof) shall be made as soon as practicable following the
end of each plan year."
9. Effective as of September 1, 1995, by adding the following new
subsection 20.8 to the plan immediately after subsection 20.7 thereof:
"20.8. MINIMUM VESTING. For any plan year in which the plan is
a top-heavy plan, a participant's vested percentage in the
participant's employer contribution accounts shall not be less than the
percentage determined under the following table:
YEARS OF VESTED
CREDITED SERVICE PERCENTAGE
---------------- ----------
Less than 2 0%
2 20%
3 40%
4 60%
5 or more 100%
If the foregoing provisions of this subsection 20.8 become effective,
and the plan subsequently ceases to be a top-heavy plan, each
participant who then has completed three or more years of credited
service may elect to continue to have the vested percentage of the
participant's employer contribution accounts under the plan determined
under the provisions of this subsection 20.8. Such election shall be
made no later than 60 days after the later of (i) the first day of the
plan year in which the plan ceases to be a top-heavy plan or (ii) the
date participants are notified in writing of the change in the plan's
status and of their right to make such
<PAGE>
election. Any portion of a participant's accounts that was
nonforfeitable before the plan ceased to be a top-heavy plan shall
remain nonforfeitable."
10. Effective as of September 1, 1995, by adding the following at the
end of subparagraph A-3(b) of Supplement A to the plan:
"A Loewi participant may elect to waive the pre-retirement survivor
annuity provided under this subparagraph A-3(b) before attaining age
35; however, the pre-retirement survivor annuity will be reinstated as
of the first day of the plan year in which the Loewi participant
attains age 35. If at that time, the Loewi participant still wishes to
waive the pre-retirement survivor annuity, the Loewi participant must
make another written election to waive the pre-retirement survivor
annuity. An election to waive the pre-retirement survivor annuity may
be revoked by a Loewi participant at any time prior to his death."
11. Effective as of September 1, 1995, by adding the following at the
end of subparagraph A-4(b) of Supplement A to the plan:
"A KCC participant may elect to waive the pre-retirement survivor
annuity provided under this subparagraph A-4(b) before attaining age
35; however, the pre-retirement survivor annuity will be reinstated as
of the first day of the plan year in which the KCC participant attains
age 35. If at that time, the KCC participant still wishes to waive the
pre-retirement survivor annuity, the KCC participant must make another
written election to waive the pre-retirement survivor annuity. An
election to waive the pre-retirement survivor annuity may be revoked by
a KCC participant at any time prior to his death."
IN WITNESS WHEREOF, the undersigned duly authorized member of the
committee has caused the foregoing amendment to be executed this day of
September, 1996.
---------------------------------------
On behalf of the committee as aforesaid
<PAGE>
Exhibit 10.5(d)
FOURTH AMENDMENT
OF
EVEREN CAPITAL CORPORATION
401(K) AND EMPLOYEE STOCK OWNERSHIP PLAN
(As Amended and Restated Effective as of September 1, 1995)
WHEREAS, EVEREN Capital Corporation (the "company") maintains the
EVEREN Capital Corporation 401(k) and Employee Stock Ownership Plan (As Amended
and Restated Effective as of September 1, 1995) (the "plan"); and
WHEREAS, the plan has been amended, and further amendment of the plan
now is considered desirable;
NOW, THEREFORE, pursuant to the power reserved to the committee under
the plan (the "committee") by subsection 18.1 of the plan, the plan, as amended,
is hereby further amended, effective as of September 1, 1995, in the following
particulars:
1. By substituting the following sentence for the second
sentence immediately following paragraph 3.5(g) of the plan:
"In no event shall the amount of a participant's earnings taken into
account for purposes of the plan for any plan year exceed $150,000 (or
such other amount as may be determined by the Secretary of the Treasury
pursuant to Code Section 401(a)(17))."
2. By adding the following sentence at the end of subsection
8.4 of the plan:
"The amount of any excess deferrals to be distributed to a participant
under this subsection for a plan year shall be reduced by any excess
income deferral contributions previously distributed to the participant
for such plan year under paragraph 8.5(d)."
3. By adding the following two sentences at the end of
paragraph 8.5(c) of the plan:
<PAGE>
"Corrective deferral contributions made under this paragraph (c) may be
taken into account for purposes of satisfying the requirements of this
subsection 8.5 only if such contributions satisfy the requirements of
Treasury Regulation Section 1.401(k)-1(b)(5). Any amounts attributable
to corrective deferral contributions shall be fully vested and
nonforfeitable at all times and may be distributed only upon the
occurrence of an event described in Code Section 401(k)(2)(B)(i)(I),
(II), (III), or (IV)."
4. By adding the following sentence immediately before the
last sentence of paragraph 8.5(d) of the plan:
"The amount of any excess income deferral contributions to be
distributed to a highly compensated participant under this paragraph
(d) for a plan year shall be reduced by any excess deferrals previously
distributed to such participant for such plan year under subsection
8.4."
5. By adding the following sentence at the end of paragraph
8.6(c) of the plan:
"Any amounts attributable to corrective matching contributions may be
distributed only upon the occurrence of an event described in Code
Section 401(k)(2)(B)(i)(I), (II), or (III)."
6. By adding the following sentence immediately after the
first sentence of subsection 20.5 of the plan:
"Each participant who is not a key employee shall share in the employer
contribution described in the immediately preceding sentence for any
plan year only if the participant is employed by the employers on the
last day of the plan year, regardless of (i) the number of hours of
service completed by the participant during the plan year, (ii) the
participant's compensation for the plan year, (iii) whether the
participant has made income deferral contributions for the plan year,
or (iv) whether the participant has, during the plan year, withdrawn
any of the participant's income deferral contributions."
IN WITNESS WHEREOF, the undersigned duly authorized member of the
committee has caused the foregoing amendment to be executed this _____ day of
<PAGE>
___________________________, 1997.
---------------------------------------
On behalf of the committee as aforesaid
<PAGE>
Exhibit 10.5(e)
FIFTH AMENDMENT
OF
EVEREN CAPITAL CORPORATION
401(K) AND EMPLOYEE STOCK OWNERSHIP PLAN
(As Amended and Restated Effective as of September 1, 1995)
WHEREAS, EVEREN Capital Corporation (the "company") maintains the
EVEREN Capital Corporation 401(k) and Employee Stock Ownership Plan (As Amended
and Restated Effective as of September 1, 1995) (the "plan"); and
WHEREAS, the plan has been amended, and further amendment of the plan
now is considered desirable;
NOW, THEREFORE, pursuant to the power reserved to the committee under
the plan (the "committee") by subsection 18.1 of the plan, the plan, as amended,
is hereby further amended, effective as of January 1, 1996, in the following
particulars:
1. By adding the following new subsection 4.10 to the plan immediately
after subsection 4.9 thereof:
"4.10. 1996 CORRECTIVE CONTRIBUTION. Subject to the conditions and
limitations of the plan, each employer shall make a contribution to the
plan of $985.00 (the '1996 corrective contribution') on behalf of each
participant who is employed by that employer on December 31, 1996, and
whose compensation (as defined below) for 1996 is less than $15,000.00.
For purposes of this subsection, a participant's compensation shall
equal the participant's income for 1996 from the employers as shown on
the participant's Federal wage and tax statement for 1996 (Form W-2,
Box 1), but including for such plan year all of a participant's income
deferral contributions under this plan and all salary reductions made
by the participant pursuant to an arrangement maintained by an employer
under Section 125 of the Code during the plan year. The 1996 corrective
contribution shall be paid in cash (without interest) to the trustee as
soon as practicable following the end of the
<PAGE>
1996 plan year, but not later than the time prescribed by law for
filing the company's Federal income tax return for such plan year,
including extensions thereof. The 1996 corrective contribution shall be
applied in accordance with subsections 4.6 and 6.2 and shall be subject
to the requirements of subsection 4.7."
2. By adding the following sentence at the end of subsection
8.1 of the plan:
"Finally, if the 1996 corrective contribution would cause a
participant's annual addition for the 1996 plan year to exceed the
limitations of this subsection 8.1, the applicable portion of such
contribution shall be forfeited prior to applying the provisions of
paragraphs (a), (b), and (c) above, and any such forfeited amount shall
be applied in accordance with paragraph (c) above."
IN WITNESS WHEREOF, the undersigned duly authorized member of the
committee has caused the foregoing amendment to be executed this day of July,
1997.
---------------------------------------
On behalf of the committee as aforesaid
<PAGE>
Exhibit 10.23(a)
AMENDMENT TO
JOINT VENTURE AGREEMENT
THIS AMENDMENT TO JOINT VENTURE AGREEMENT is made as of this 15th day
of July, 1997, by and between WHEAT FIRST BUTCHER SINGER, INC. ("WFBS"), WHEAT
FIRST SECURITIES, INC. ("Wheat"), MENTOR INVESTMENT GROUP, L.L.C. ("Mentor"),
EVEREN CAPITAL CORPORATION ("EVEREN"), EVEREN SECURITIES HOLDINGS, INC. ("EVEREN
Holdings"), EVEREN SECURITIES, INC. ("EVEREN Securities") and EVEREN CLEARING
CORP. ("EVEREN Clearing"), (hereinafter collectively called the "parties").
WHEREAS, the parties have entered into that certain Joint Venture
Agreement dated as of the 25th day of July, 1996 as supplemented by the
Clarification Agreement dated as of October 30, 1996 (together, the
"Agreement"); and
WHEREAS, the Agreement provides that on the Second Closing Date, EVEREN
is to be issued Interests in Mentor relative to the Venture Revenues
attributable to EVEREN (as more fully described in, and calculated in accordance
with the provisions of, the Agreement); and
WHEREAS, EVEREN offers, through its Consulting Services division, a
managed money program commonly known as the "Paragon Program" whereby, among
other things, clients may engage EVEREN to perform third-party investment
manager search services; and
WHEREAS, from time to time in the course of providing investment
manager search services to a client which is (i) an employee benefit plan
("Employee Benefit Plan") within the meaning of Section 3(3) of ERISA, (ii) an
individual retirement account ("IRA") as defined in Section 408 of the Internal
Revenue Code of 1986, as amended (the "Code") or (iii) a retirement plan for
self-employed individuals subject to the provisions of Section 401(c) of the
Code ("HR-10 Plan"), and which has entered into a Paragon Program Client
Agreement, EVEREN may present Mentor to such clients as a potential investment
manager;
NOW THEREFORE, for good and valuable consideration, the receipt of
which is hereby acknowledged, the parties hereby agree as follows:
1. (a) All capitalized terms used herein, unless otherwise defined
herein, shall have the meanings set forth in the Agreement.
(b) "Excluded Paragon Clients" shall mean those Paragon clients of
EVEREN who are Employee Benefit Plans, IRAs and HR-10 Plans who engage EVEREN to
perform investment manager search services and who thereafter select Mentor as
their investment manager.
<PAGE>
2. Solely for the purpose of determining the Venture Revenues
attributable to EVEREN on the Second Closing Date pursuant to Section 2.4 of the
Agreement, there shall be excluded from such determination all revenues
attributable to Excluded Paragon Clients.
3. EVEREN's obligations pursuant to Section 3.3(a) to include the
Mentor Funds and the Venture Entities' private account management services in
its "preferred" or "focus group" list of mutual funds and private account
managers offered to customers is subject to Department of Labor and other
regulatory guidelines.
4. Except as set forth in this Amendment, the Agreement shall remain in
full force and effect.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed as of the date and year first above written.
WHEAT FIRST BUTCHER SINGER, INC.
By:
-------------------------------------
Name:
Title:
WHEAT FIRST SECURITIES, INC.
By:
-------------------------------------
Name:
Title:
MENTOR INVESTMENT GROUP, INC.
By:
-------------------------------------
Name:
Title:
EVEREN CAPITAL CORPORATION
By:
-------------------------------------
Name: Arthur J. McGivern
Title: Senior Executive Vice President
EVEREN SECURITIES HOLDINGS, INC.
<PAGE>
By:
-------------------------------------
Name: Arthur J. McGivern
Title: Authorized Signer
EVEREN SECURITIES, INC.
By:
-------------------------------------
Name: Arthur J. McGivern
Title: Senior Executive Vice President
EVEREN CLEARING CORP.
By:
Name: Arthur J. McGivern
Title: Authorized Signer
<PAGE>
Exhibit 10.23(b)
CLARIFICATION AGREEMENT RE
JOINT VENTURE AGREEMENT
This Clarification Agreement dated as of October 30, 1995 between the
parties hereto relates to that certain Joint Venture Agreement (the "JVA") dated
as of July 25, 1996 by and between the parties hereto and certain others. Unless
otherwise stated, defined terms used in this Agreement shall have the meanings
assigned such terms in the JVA.
WHEREAS, the JVA expresses the parties' desires that Mentor become a
preferred provider of asset management services to EVEREN Clients and that
EVEREN acquire and maintain an equity investment in the Venture,
WHEREAS, the parties desire to clarify in certain respects EVEREN's
obligations under the JVA that form the consideration for EVEREN Holdings'
receipt of Interests at the Initial Closing.
NOW, THEREFORE, the parties agree as follows:
1. Included within EVEREN's obligations under Section 3.3(a)(ii) of the
JVA to "include the Mentor Funds... in its `preferred' or `focus group' list of
mutual funds... with a status that reflects ... EVEREN's proprietary interest in
the Venture" is the obligation to develop and sponsor as initial marketing
program relative to the Mentor Funds that includes at least the following:
(a) a series of complimentary due diligence/information
meetings to be held in late 1996 in at least six
separate locations at which EVEREN Securities
registered representatives will have the opportunity
to attend presentations describing Mentor, its asset
management services and related matters;
(b) an incentive program regarding purchases by EVEREN
Clients of Mentor Fund Class A shares at net asset
value and without any sales charge with the
redemption proceeds received within the proceeding 90
days from the sale of any non-Mentor open-end mutual
fund (an "NAV Transaction") pursuant to which, during
at least the period November 1, 1996 through October
31, 1997, EVEREN will cause to be credited to the
gross production of the selling registered
representative an aggregate 2% of the value of each
NAV Transaction, the first 1% creditable at
approximately the date of sale and the second 1% not
later than February 1998; and
(c) a second complimentary the diligence/information
meeting to be held at a quality United States
resort/conference center not later than Summer, 1997
to which any EVEREN Securities retail
<PAGE>
registered representative whose EVEREN Clients invest
an aggregate $500,000 or more in Mentor Funds during
the period November 1, 1996 through March 31, 1997
will be invited with a guest ($350,000 or more
without a guest).
2. Mentor shall (a) cooperate with respect to the due
diligence/information meetings referred to in Sections 1(a) and (c) above and
(b) reimburse EVEREN for any qualifying registered representatives greater than
300 who actually attend the due diligence/information meeting referred to in
Section 1(c) above at the rate of $2,500 per excess qualifier.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the date and year first above written.
MENTOR INVESTMENT GROUP, INC.
By: ________________________________
EVEREN CAPITAL CORPORATION
EVEREN SECURITIES HOLDINGS, INC.
EVEREN SECURITIES, INC.
EVEREN CLEARING CORP.
By: ________________________________
<PAGE>
Exhibit 10.31
NONQUALIFIED STOCK OPTION AGREEMENT
This AGREEMENT is made effective as of February 7, 1997 (the "Award Date")
by and between EVEREN Capital Corporation, a Delaware corporation (the
"Corporation"), and JAMES R. BORIS (the "Participant").
WHEREAS, EVEREN Capital Corporation's Board of Directors (the "Board of
Directors") believes it is in the best interest of the Corporation and its
shareholders for key executives to increase their stock interest in the
Corporation in order to create a long term incentive to work for and manage the
Corporation in such a way that its shares become more valuable; and
WHEREAS, the Participant is employed by the Corporation as such a key
executive; and
WHEREAS, the Corporation and Participant desire to enter into this
Nonqualified Stock Option Agreement for such purpose; and
WHEREAS, the Board of Directors has authorized the Corporation to make an
"Award" to the Participant of an "Option" to purchase a total of Three Hundred
Thousand (300,000) shares of the $.01 par value common stock ("Common Stock") of
the Corporation at an "Option Price" of $23.8125 per share as a long term
incentive;
NOW, THEREFORE, the Corporation and Participant agree as follows:
1. INCORPORATION OF PLAN BY REFERENCE. The Award of the Option memorialized
by this Agreement is made pursuant to the terms determined by the Board of
Directors. When establishing these terms, the Board of Directors considered
provisions of the 1996 Restricted Stock Incentive Plan (the "Plan"), certain
terms of which are incorporated herein by reference. Except to the extent
expressly provided herein, capitalized terms used in this Agreement shall have
the same meaning ascribed thereto in the Plan. A copy of the Plan is on file in
the offices of the Corporation and may be reviewed during normal business hours.
2. OPTION GRANT. This Option is a nonstatutory option and is not intended
to qualify for any special tax benefits in the hands of the Participant.
3. TIME OF EXERCISE; VESTING. This Option shall be exercisable at the
Option Price on the earlier of:
(a) February 7, 2002; or
<PAGE>
(b) the trading day which immediately follows the completion of any
thirty (30) day period where the average of the average daily high and low
trading of one share of EVEREN Capital Corporation Common Stock is $40.00 or
more; or
(c) the date of a "Change in Control" (as defined in Section 7 of the
Plan) of the Corporation; or
(d) the date the Participant's employment is terminated by the
Corporation for reasons other than "Cause" or is terminated by the Participant
for "Good Reason" or is terminated due to the Participant's death or Disability.
As used in this Agreement, "Cause" means (i) Participant's
willful malfeasance having material adverse effect on the Corporation or EVEREN
Securities, Inc. ("EVEREN"); or (ii) the Participant's conviction of a felony;
PROVIDED that any action or refusal by the Participant shall not constitute
"Cause" if , in good faith, the Participant believed such action or refusal to
be in, or not opposed to, the best interests of the Corporation, or if the
Participant shall be entitled, under applicable law or under the Corporation's
or EVEREN's Certificate of Incorporation or By-laws, as the same may be amended
or restated from time to time, to be indemnified with respect to such action or
refusal.
As used in this Agreement, "Good Reason" means (i) any demotion
of the Participant from his positions as Chairman of the Board and Chief
Executive Officer of the Corporation and of EVEREN; (ii) any reduction in the
Participant's base salary or annual bonus opportunity; or (iii) any material
breach of this Agreement by the Corporation.
If the Participant terminates employment from the Corporation due
to Normal Retirement, the Option will continue to vest following such Normal
Retirement, according to the vesting schedule described above. As used in this
Agreement, "Normal Retirement" shall mean termination of the Participant's
employment from the Corporation for any reason after (i) attaining age 65 or
(ii) attaining age 55 and having been employed by the Corporation, a Corporation
predecessor, a qualified subsidiary and/or Kemper Corporation for ten (10) or
more years.
4. Continuation of Option After Change in Control Events. If the Option is
not yet vested and exercisable and becomes fully (100%) vested and exercisable
as a result of a "Change in Control" of the Corporation, the Option will remain
exercisable until its expiration (as described in Section 5 below) unless the
Compensation Committee of the Board of Directors (the "Committee") provides the
Participant with written notification, on or before such effective date, that
the Option will remain exercisable only during a defined period commencing on
such date (with the final day of such defined period being the last exercise
date for the Option as to which vesting and exercisability has so accelerated in
the event such notification is made).
5. Exercise Period; Effect of Termination of Employment. Once vested, the
Option shall be exercisable until the Option terminates (i.e., expires) as of
the earliest of:
(a) one (1) year after the Participant's termination of employment
with the Corporation and/or its parent or subsidiaries for any reason other than
termination by the Corporation for
<PAGE>
reasons other than Cause, resignation by the Participant for Good Reason, or the
Participant's Normal Retirement, death or disability; or
(b) ten (10) years from the Award Date (i.e., February 7, 2007).
The Option granted hereunder will also terminate (i.e., expire), even
if vested, if either before or after the Participant's Normal Retirement or
termination (whether voluntary or involuntary), the Participant directly or
indirectly (1) engages in any activity or conducts himself in a manner which has
a material adverse effect on the business interests of the Corporation or an
affiliate of the Corporation or (2) discloses to any unauthorized person any
information or knowledge as to the business affairs of the Corporation or an
affiliate of the Corporation that the Corporation or the affiliate considers to
be confidential, which the Participant received during the time of the
Participant's employment by the Corporation or an affiliate of the Corporation;
in either case as determined solely by the Committee.
6. Method and Time of Exercise.
(a) In order to exercise the Option granted hereunder, the Participant
must give written notice thereof to the Compensation & Benefits Department (as
defined in the Plan) at the Corporation's corporate headquarters at 77 West
Wacker, Chicago, Illinois 60601-1693, specifying the number of shares of Common
Stock being purchased, and accompanied by payment of the Option Price for the
share(s) and the amount of any applicable withholding taxes. Such payment shall
be made in cash or by check, or in previously owned shares of Common Stock
(having a Fair Market Value equal to the Option Price of the share(s) purchased
and any applicable withholding taxes), or in any combination of cash and such
shares. The payment in full of the Option Price need not accompany the written
notice of exercise if the notice of exercise directs that the certificate for
the shares being purchased be delivered to a licensed broker acceptable to the
Corporation as agent for the Participant and, at the time the certificate for
the shares is delivered, the broker tenders to the Corporation cash (or cash
equivalents acceptable to the Corporation) equal to the Option Price for the
share(s) plus the amount of any withholding taxes required. The Participant may,
for the purpose of paying any withholding taxes required, direct the Corporation
to withhold shares of Common Stock having a Fair Market Value equal to the
amount of any taxes to be withheld from the shares of Common Stock which
Participant would have otherwise received upon the exercise of the Option.
(b) The Option may not be exercised if the issuance of shares of
Common Stock upon such exercise or the method of payment of consideration for
such shares would constitute a violation of any applicable federal or state
securities laws or other laws or regulations, including, without limitation, the
Securities Act of 1933, as amended, the rules and regulations promulgated
thereunder, and any rule under Part 207 of Title 12 of the Code of Federal
Regulations ("Regulation G") as promulgated by the Federal Reserve Board. The
Participant acknowledges that the shares of Common Stock covered by this Option
have not been registered under the applicable securities laws and that as a
result, as a condition to the exercise of the Option the Corporation may require
the Participant to represent and warrant that he is acquiring the shares of
Common Stock for investment without present intention to sell or distribute such
shares, and that the shares may not be transferable by the Participant unless
and until they are registered under the applicable securities laws or an
exemption from such registration is available. As soon as reasonably practical
following a request from the Participant, the Corporation agrees that it will
register the shares of Common Stock under applicable securities laws by means of
an appropriate registration
<PAGE>
statement, which shall include, to the extent necessary, a reoffer prospectus,
in order to facilitate the transfer or disposition of the shares.
7. Restrictions on Transfer. This Option is not transferable by the
Participant except:
(a) by will or the laws of descent and distribution; or
(b) all or a portion of the Option may be transferred by the
Participant to one or more Immediate Family Members, a trust maintained for the
exclusive benefit of one or more Immediate Family Members, a partnership in
which Immediate Family Members are the only partners, or a private family
foundation established by the Participant, provided that there may be no
consideration for such transfer and no subsequent transfer of the transferred
Option shall be made other than by laws of descent and distribution; or
(c) the Option may be exercisable during the lifetime of the
Participant only by such Participant or the Participant's guardian or legal
representative unless it has been transferred pursuant to Section 7(b), in which
case it shall be exercisable only by such transferee. If the Participant dies
during the option period, this Option may be exercised by the Participant's
estate, the person to whom the Option passes by will or the laws of descent and
distribution or the transferee for up to twelve (12) months after the
Participant's date of death, but only to the extent that the Participant could
have exercised the Option on the date of death in accordance with Section 5
above.
(d) for purposes of this Agreement, the Participant's "Immediate
Family Members" shall include the Participant, his spouse, his children and his
grandchildren.
8. Withholding Tax and/or Requiring Payment of Taxes. The Corporation shall
have the right to withhold with respect to any payments made to the Participant
any taxes required by law to be withheld with regard to such payments and/or to
require, prior to the exercise of the Option, payment by the Participant of any
taxes required by law with respect to the issuance or delivery of such shares
(or any portion thereof) for which such taxes have not been withheld.
9. Changes in Capitalization and Similar Changes. If the Corporation shall
at any time change the number of outstanding shares of Common Stock by reason of
any stock dividend or split, recapitalization, merger, consolidation,
combination or exchange of shares or other similar corporate change, the total
number of shares then remaining subject to purchase hereunder shall be changed
in proportion to such change in outstanding shares and the Option Price per
share shall be adjusted so that the total consideration payable to the
Corporation upon the purchase of all shares not theretofore purchased shall not
be changed. If, during the term of this Option, the Common Stock of the
Corporation shall be exchanged for shares of another corporation, whether as a
result of reorganization, sale, merger, consolidation, or other similar
transaction, the Corporation shall cause adequate provision to be made whereby
the Participant shall thereafter be entitled to receive, upon the due exercise
of this Option, the securities the Participant would have been entitled to
receive immediately prior to the effective date of any such transaction for
shares of Common Stock not theretofore purchased which could have been acquired
through the exercise of this Option.
<PAGE>
10. Participant's Rights. The granting of this Option does not limit the
right of the Corporation or any subsidiary to terminate a Participant's
employment at any time or give to a Participant any right to remain employed by
the Corporation or any subsidiary in any particular position or at any rate of
compensation.
11. Binding Effect. This Agreement shall inure to the benefit of and be
binding upon the parties hereto and their respective heirs, executors,
administrators, successors, and assigns.
12. Interpretations and Arbitration of Disputes. All determinations and
interpretations with respect to the Award, the Option or this Agreement shall be
made by the Committee. Any dispute between the Corporation or any of its
affiliates and the Participant relating to this Agreement shall be submitted to
arbitration before the National Association of Securities Dealers, Inc. or the
New York Stock Exchange, Inc. in accordance with its rules and regulations.
13. Applicable Laws. The securities transferred under this Option may be
subject to such conditions, limitations or restrictions as may be necessary to
comply with any law or regulation or with the requirements of any securities
exchange. The delivery or issuance of any shares of Common Stock may be
postponed by the Corporation for such period as may be required to comply with
the applicable requirements under the Federal and state securities laws, and any
applicable listing requirements of any national securities exchange and with all
requirements under any other law or regulation applicable to the issuance or
delivery of such shares. Further, the Corporation shall not be obligated to
deliver or issue any shares of Common Stock if the delivery or issuance
therefore shall constitute a violation of any provision of any national
securities exchange to which the Corporation is subject, or any law or
regulation of any governmental authority.
<PAGE>
IN WITNESS WHEREOF, the Corporation has caused this Agreement to be
effective as of the day and year first above written.
PARTICIPANT EVEREN Capital Corporation
By:
- -------------------------- ----------------------------------
James R. Boris Janet L. Reali
Its: General Counsel and Secretary
<PAGE>
Exhibit 10.32
NONQUALIFIED STOCK OPTION AGREEMENT
This AGREEMENT is made effective as of February 7, 1997 (the "Award Date")
by and between EVEREN Capital Corporation, a Delaware corporation (the
"Corporation"), and STEPHEN G. MCCONAHEY (the "Participant").
WHEREAS, EVEREN Capital Corporation's Board of Directors (the "Board of
Directors") believes it is in the best interest of the Corporation and its
shareholders for key executives to increase their stock interest in the
Corporation in order to create a long term incentive to work for and manage the
Corporation in such a way that its shares become more valuable; and
WHEREAS, the Participant is employed by the Corporation as such a key
executive; and
WHEREAS, the Corporation and Participant desire to enter into this
Nonqualified Stock Option Agreement for such purpose; and
WHEREAS, the Board of Directors has authorized the Corporation to make an
"Award" to the Participant of an "Option" to purchase a total of Two Hundred
Thousand (200,000) shares of the $.01 par value common stock ("Common Stock") of
the Corporation at an "Option Price" of $23.8125 per share as a long term
incentive;
NOW, THEREFORE, the Corporation and Participant agree as follows:
1. Incorporation of Plan by Reference. The Award of the Option memorialized
by this Agreement is made pursuant to the terms determined by the Board of
Directors. When establishing these terms, the Board of Directors considered
provisions of the 1996 Restricted Stock Incentive Plan (the "Plan"), certain
terms of which are incorporated herein by reference. Except to the extent
expressly provided herein, capitalized terms used in this Agreement shall have
the same meaning ascribed thereto in the Plan. A copy of the Plan is on file in
the offices of the Corporation and may be reviewed during normal business hours.
2. Option Grant. This Option is a nonstatutory option and is not intended
to qualify for any special tax benefits in the hands of the Participant.
3. Time of Exercise; Vesting. This Option shall be exercisable at the
Option Price on the earlier of:
(a) February 7, 2002; or
(b) the trading day which immediately follows the completion of any
thirty (30) day period where the average of the average daily high and low
trading of one share of EVEREN Capital Corporation Common Stock is $40.00
or more; or
<PAGE>
(c) the date of a "Change in Control" (as defined in Section 7 of the
Plan) of the Corporation; or
(d) the date the Participant's employment is terminated by the
Corporation for reasons other than "Cause" or is terminated by the Participant
for "Good Reason" or is terminated due to the Participant's death or Disability.
As used in this Agreement, "Cause" means (i) Participant's willful
malfeasance having material adverse effect on the Corporation or EVEREN
Securities, Inc. ("EVEREN"); or (ii) the Participant's conviction of a felony;
provided that any action or refusal by the Participant shall not constitute
"Cause" if , in good faith, the Participant believed such action or refusal to
be in, or not opposed to, the best interests of the Corporation, or if the
Participant shall be entitled, under applicable law or under the Corporation's
or EVEREN's Certificate of Incorporation or By-laws, as the same may be amended
or restated from time to time, to be indemnified with respect to such action or
refusal.
As used in this Agreement, "Good Reason" means (i) any demotion of the
Participant from his positions as President and Chief Operating Officer of the
Corporation and of EVEREN; (ii) any reduction in the Participant's base salary
or annual bonus opportunity; or (iii) any material breach of this Agreement by
the Corporation.
If the Participant terminates employment from the Corporation due to
Normal Retirement, the Option will continue to vest following such Normal
Retirement, according to the vesting schedule described above. As used in this
Agreement, "Normal Retirement" shall mean termination of the Participant's
employment from the Corporation for any reason after (i) attaining age 65 or
(ii) attaining age 55 and having been employed by the Corporation, a Corporation
predecessor, a qualified subsidiary and/or Kemper Corporation for ten (10) or
more years.
4. Continuation of Option After Change in Control Events. If the Option
is not yet vested and exercisable and becomes fully (100%) vested and
exercisable as a result of a "Change in Control" of the Corporation, the Option
will remain exercisable until its expiration (as described in Section 5 below)
unless the Compensation Committee of the Board of Directors (the "Committee")
provides the Participant with written notification, on or before such effective
date, that the Option will remain exercisable only during a defined period
commencing on such date (with the final day of such defined period being the
last exercise date for the Option as to which vesting and exercisability has so
accelerated in the event such notification is made).
5. Exercise Period; Effect of Termination of Employment. Once vested,
the Option shall be exercisable until the Option terminates (i.e., expires) as
of the earliest of:
(a) one (1) year after the Participant's termination of employment
with the Corporation and/or its parent or subsidiaries for any reason other than
termination by the Corporation for reasons other than Cause, resignation by the
Participant for Good Reason, or the Participant's Normal Retirement, death or
disability; or
(b) ten (10) years from the Award Date (i.e., February 7, 2007).
<PAGE>
The Option granted hereunder will also terminate (i.e., expire), even if
vested, if either before or after the Participant's Normal Retirement or
termination (whether voluntary or involuntary), the Participant directly or
indirectly (1) engages in any activity or conducts himself in a manner which has
a material adverse effect on the business interests of the Corporation or an
affiliate of the Corporation or (2) discloses to any unauthorized person any
information or knowledge as to the business affairs of the Corporation or an
affiliate of the Corporation that the Corporation or the affiliate considers to
be confidential, which the Participant received during the time of the
Participant's employment by the Corporation or an affiliate of the Corporation;
in either case as determined solely by the Committee.
6. Method and Time of Exercise.
(a) In order to exercise the Option granted hereunder, the
Participant must give written notice thereof to the Compensation & Benefits
Department (as defined in the Plan) at the Corporation's corporate headquarters
at 77 West Wacker, Chicago, Illinois 60601-1693, specifying the number of shares
of Common Stock being purchased, and accompanied by payment of the Option Price
for the share(s) and the amount of any applicable withholding taxes. Such
payment shall be made in cash or by check, or in previously owned shares of
Common Stock (having a Fair Market Value equal to the Option Price of the
share(s) purchased and any applicable withholding taxes), or in any combination
of cash and such shares. The payment in full of the Option Price need not
accompany the written notice of exercise if the notice of exercise directs that
the certificate for the shares being purchased be delivered to a licensed broker
acceptable to the Corporation as agent for the Participant and, at the time the
certificate for the shares is delivered, the broker tenders to the Corporation
cash (or cash equivalents acceptable to the Corporation) equal to the Option
Price for the share(s) plus the amount of any withholding taxes required. The
Participant may, for the purpose of paying any withholding taxes required,
direct the Corporation to withhold shares of Common Stock having a Fair Market
Value equal to the amount of any taxes to be withheld from the shares of Common
Stock which Participant would have otherwise received upon the exercise of the
Option.
(b) The Option may not be exercised if the issuance of shares of
Common Stock upon such exercise or the method of payment of consideration for
such shares would constitute a violation of any applicable federal or state
securities laws or other laws or regulations, including, without limitation, the
Securities Act of 1933, as amended, the rules and regulations promulgated
thereunder, and any rule under Part 207 of Title 12 of the Code of Federal
Regulations ("Regulation G") as promulgated by the Federal Reserve Board. The
Participant acknowledges that the shares of Common Stock covered by this Option
have not been registered under the applicable securities laws and that as a
result, as a condition to the exercise of the Option the Corporation may require
the Participant to represent and warrant that he is acquiring the shares of
Common Stock for investment without present intention to sell or distribute such
shares, and that the shares may not be transferable by the Participant unless
and until they are registered under the applicable securities laws or an
exemption from such registration is available. As soon as reasonably practical
following a request from the Participant, the Corporation agrees that it will
register the shares of Common Stock under applicable securities laws by means of
an appropriate registration statement, which shall include, to the extent
necessary, a reoffer prospectus, in order to facilitate the transfer or
disposition of the shares.
7. Restrictions on Transfer. This Option is not transferable by the
Participant except:
<PAGE>
(a) by will or the laws of descent and distribution; or
(b) all or a portion of the Option may be transferred by the
Participant to one or more Immediate Family Members, a trust maintained for the
exclusive benefit of one or more Immediate Family Members, a partnership in
which Immediate Family Members are the only partners, or a private family
foundation established by the Participant, provided that there may be no
consideration for such transfer and no subsequent transfer of the transferred
Option shall be made other than by laws of descent and distribution; or
(c) the Option may be exercisable during the lifetime of the
Participant only by such Participant or the Participant's guardian or legal
representative unless it has been transferred pursuant to Section 7(b), in which
case it shall be exercisable only by such transferee. If the Participant dies
during the option period, this Option may be exercised by the Participant's
estate, the person to whom the Option passes by will or the laws of descent and
distribution or the transferee for up to twelve (12) months after the
Participant's date of death, but only to the extent that the Participant could
have exercised the Option on the date of death in accordance with Section 5
above.
(d) for purposes of this Agreement, the Participant's "Immediate
Family Members" shall include the Participant, his spouse, his children and his
grandchildren.
8. Withholding Tax and/or Requiring Payment of Taxes. The Corporation
shall have the right to withhold with respect to any payments made to the
Participant any taxes required by law to be withheld with regard to such
payments and/or to require, prior to the exercise of the Option, payment by the
Participant of any taxes required by law with respect to the issuance or
delivery of such shares (or any portion thereof) for which such taxes have not
been withheld.
9. Changes in Capitalization and Similar Changes. If the Corporation
shall at any time change the number of outstanding shares of Common Stock by
reason of any stock dividend or split, recapitalization, merger, consolidation,
combination or exchange of shares or other similar corporate change, the total
number of shares then remaining subject to purchase hereunder shall be changed
in proportion to such change in outstanding shares and the Option Price per
share shall be adjusted so that the total consideration payable to the
Corporation upon the purchase of all shares not theretofore purchased shall not
be changed. If, during the term of this Option, the Common Stock of the
Corporation shall be exchanged for shares of another corporation, whether as a
result of reorganization, sale, merger, consolidation, or other similar
transaction, the Corporation shall cause adequate provision to be made whereby
the Participant shall thereafter be entitled to receive, upon the due exercise
of this Option, the securities the Participant would have been entitled to
receive immediately prior to the effective date of any such transaction for
shares of Common Stock not theretofore purchased which could have been acquired
through the exercise of this Option.
10. Participant's Rights. The granting of this Option does not limit the
right of the Corporation or any subsidiary to terminate a Participant's
employment at any time or give to a Participant any right to remain employed by
the Corporation or any subsidiary in any particular position or at any rate of
compensation.
<PAGE>
11. Binding Effect. This Agreement shall inure to the benefit of and be
binding upon the parties hereto and their respective heirs, executors,
administrators, successors, and assigns.
12. Interpretations and Arbitration of Disputes. All determinations and
interpretations with respect to the Award, the Option or this Agreement shall be
made by the Committee. Any dispute between the Corporation or any of its
affiliates and the Participant relating to this Agreement shall be submitted to
arbitration before the National Association of Securities Dealers, Inc. or the
New York Stock Exchange, Inc. in accordance with its rules and regulations.
13. Applicable Laws. The securities transferred under this Option may be
subject to such conditions, limitations or restrictions as may be necessary to
comply with any law or regulation or with the requirements of any securities
exchange. The delivery or issuance of any shares of Common Stock may be
postponed by the Corporation for such period as may be required to comply with
the applicable requirements under the Federal and state securities laws, and any
applicable listing requirements of any national securities exchange and with all
requirements under any other law or regulation applicable to the issuance or
delivery of such shares. Further, the Corporation shall not be obligated to
deliver or issue any shares of Common Stock if the delivery or issuance
therefore shall constitute a violation of any provision of any national
securities exchange to which the Corporation is subject, or any law or
regulation of any governmental authority.
<PAGE>
IN WITNESS WHEREOF, the Corporation has caused this Agreement to be
effective as of the day and year first above written.
PARTICIPANT EVEREN Capital Corporation
By:
- ------------------------------- -------------------------------
Stephen G. McConahey Janet L. Reali
Its: General Counsel and Secretary
-----------------------------
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Exhibit 10.33
EVEREN CAPITAL CORPORATION
1996 RESTRICTED STOCK INCENTIVE PLAN
(AS AMENDED AND RESTATED EFFECTIVE AS OF MAY 6, 1997)
1. Purpose. EVEREN Capital Corporation, a Delaware corporation (the
"Company"), hereby adopts the EVEREN Capital Corporation 1996 Restricted Stock
Incentive Plan (the "Plan"). The purpose of the Plan is to provide opportunities
for the transfer of common stock, par value $.01 per share ("Common Stock"), of
the Company and non-qualified options to acquire Common Stock, to certain
employees of the Company and its qualified subsidiaries, thereby attracting,
retaining and rewarding such persons and strengthening the mutuality of interest
between such persons and the Company's stockholders. All of the Common Stock to
be transferred and Options to be granted to such persons under the Plan will
initially be subject to vesting and transfer restrictions, as more fully
described in Section 7 below, so as to constitute shares of restricted stock
("Restricted Stock") and restricted non-qualified stock options (each an
"Option").
2. Shares Subject to Plan. There is hereby reserved for issuance under the
Plan a maximum of (i) 4,000,000 shares of Common Stock of the Company (the
"Shares") and (ii) any shares of Common Stock which may be reserved for issuance
under the Company's 1996 New Employee Restricted Stock Purchase Plan (the "New
Employee Plan"), but which are not actually issued pursuant thereto if the
Committee (as defined below) decides to designate such shares as being reserved
for issuance instead under this Plan. Any shares of Common Stock reserved for
issuance hereunder but not actually issued pursuant to the terms of this Plan
may at any time be designated by the Committee as being reserved for issuance
under the New Employee Plan.
The Shares may be authorized but unissued Common Stock, treasury shares or
Common Stock reacquired by the Company or purchased in the open market. If any
shares of Restricted Stock are, or any Option is, forfeited in accordance with
the provisions of Section 7 below, such shares of Common Stock or shares covered
by such Options shall again be made available under the Plan.
3. Administration. The committee appointed to administer the Plan (the
"Committee") shall be the Compensation Committee of the board of directors of
the Company (the "Board of Directors" or "Board") or another committee
consisting of not less than two directors of the Company appointed by the Board
of Directors, and, if the Board of Directors has determined that the Plan shall
comply with Securities and Exchange Commission Regulation 17 C.F.R. ss.240.16b-3
or any successor regulation, none of such persons shall participate in the Plan
and each such person shall qualify as a disinterested person within the meaning
of 17 C.F.R. ss.240.16b-3 or any successor regulation. The Committee is
authorized, subject to the provisions of the Plan, to establish such rules and
regulations as it deems necessary for the proper administration of the Plan and
to make such determinations and interpretations and to take such action in
connection with the Plan and any Shares made available hereunder as it deems
necessary or advisable. The Committee shall have the right to determine prior to
any calendar year the maximum number of shares of Restricted Stock, and the
maximum number of shares of Common Stock subject to any Option, which may be
awarded to each eligible employee for such calendar year and, if necessary, the
manner of allocating the Shares and Options among eligible employees.
All determinations and interpretations made by the Committee shall be
binding and conclusive on all participating employees (each a "Participant") and
their legal representatives. No member of the Board, no member of the Committee
and no employee of the Company or any subsidiary shall be liable for any act or
failure to act hereunder, by any other member or employee or by any agent to
whom duties in connection with the administration of this Plan have been
delegated or, except in circumstances involving his or her bad faith, gross
negligence or fraud, for any act or failure to act by the member or employee.
<PAGE>
4. Eligibility. All regular full-time and part-time salaried employees
regularly scheduled to work 25 hours or more per week of the Company and its
qualified subsidiaries who receive or are entitled to receive incentive pay will
participate on a non-voluntary basis, or be eligible to participate on a
voluntary basis, in the Plan as described in Sections 5 and 6 below and Appendix
A attached hereto and incorporated by reference herein ("Appendix A") with
respect to portions of such incentive pay. Employees who desire to participate
voluntarily in the Plan with respect to a portion of the incentive compensation
to which they may become entitled with respect to any entire calendar period
(or, in certain cases, the remainder of a calendar year) must complete and
deliver to the Company's Compensation and Benefits Department (the "Department")
the appropriate participation election form (each, an "Election Form") not later
than the date set forth in Section 6 below. All salaries, draws, base grid
investment consultant payouts and non-recurring special purpose bonuses, if any,
will be paid solely in cash and will not be eligible for awards of Restricted
Stock or Options under the Plan. For purposes of the Plan, the term "qualified
subsidiary" means any subsidiary, 50% or more of the total combined voting power
of all classes of stock in which is now owned or hereafter acquired by the
Company or any such qualified subsidiary.
5. Restricted Stock and Option Awards. Not later than the last day of
February of each year (each such date, an "Award Date"), each Participant will
receive one or more awards of Restricted Stock and/or of Options (each, an
"Award") in place of certain portion(s) of such Participant's incentive
compensation attributable to the prior calendar year or portion thereof, as
described in Section 6 below and Appendix A. In the case of an Award of
Restricted Stock the number of shares of Restricted Stock, to be received will
be determined by (a) dividing (i) the cash amount of the incentive compensation
being replaced by (ii) the "Fair Value" (as defined below) of one share of
Common Stock as of 11:59 P.M., Chicago time, on the fifteenth (15th) day of the
calendar quarter in which the Award Date occurs (December 31, 1996 for the Award
Date occurring in February 1997) (the "Determination Date"), (b) further
dividing the resultant quotient by (iii) one minus the discount rate, if any,
applicable to such form of incentive compensation under Section 6 below and (c)
rounding to the nearest whole number of Shares. In the case of an Award of an
Option, the number of shares of Common Stock purchasable upon the exercise
thereof and the exercise or purchase price thereof will be determined as set
forth in Section 6(f) or 6(g), as appropriate.
For purposes of the Plan, the "Fair Value" of one share of Common Stock on
the Determination Date means:
(i) if shares of Common Stock are publicly traded, the average closing
price of a share of Common Stock during the ten trading days immediately
preceding the Determination Date; and
(ii) if shares of Common Stock are not publicly traded, the value of a
share of Common Stock as of the Determination Date as determined by the
Committee.
6. Participation and Discount and Leverage Rates. The incentive
compensation receivable by various categories of employees qualifying for
participation in the Plan, and the discount and leverage rates, if any, that
will be used in calculating the number of shares of Restricted Stock, or the
number of shares of Common Stock underlying any Option, awarded under the Plan
(unless the Committee determines a different percentage or rate, which it may
from time to time do), are as follows:
(a) Investment Consultant Employees.
(i) The first two percent (2%) of eligible gross commissions
otherwise to be credited to an investment consultant
employee as incentive deferred compensation for 1996 and
each subsequent calendar year shall be paid, on a non-
voluntary basis, in Restricted Stock priced at no discount
to (i.e.,
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100% of) Fair Value. Notwithstanding the provisions of
Section 7, vesting of such shares of Restricted Stock shall
be the same as if such incentive deferred compensation had
continued to be credited in cash. Any incentive deferred
compensation in excess of two percent (2%) of eligible gross
commissions otherwise creditable to an investment consultant
shall continue to be credited in cash as provided for in the
applicable schedule to the EVEREN Securities, Inc. Incentive
Deferred Compensation Plan (the "Deferred Compensation
Plan").
(ii) Each investment consultant may voluntarily elect, on a
timely basis, for any entire calendar year (or, where
applicable, the remaining portion of a calendar year) to
have twenty-five percent (25%) of his/her monthly bonus grid
compensation, if any, withheld, accumulated throughout the
year and paid in Restricted Stock priced at a twenty percent
(20%) discount to (i.e., 80% of) Fair Value (with respect to
Award Dates prior to July 1997, a fifteen percent (15%)
discount to (i.e., 85% of) Fair Value). To be timely, an
investment consultant employee's completed Election Form
under this section 6(a)(ii) must be delivered to the
Department not later than December 15 of the year preceding
the entire year to which such election relates (or not later
than the date set by the Committee with respect to an
election applicable to a remaining portion of a year).
(b) Bonus Eligible Salaried Employees.
(i) Each bonus eligible salaried employee whose salary and
regular annual bonus attributable to a calendar year exceeds
$200,000 ($100,000 for the 1996 calendar year) will receive,
on a non-voluntary basis, twenty-five percent (25%) of such
employee's bonus beyond such threshold in Restricted Stock
priced at a twenty percent (20%) discount to (i.e., 80% of)
Fair Value.
(ii) (A) Each bonus eligible salaried employee whose bonus is
determined on an annual basis may voluntarily elect, on a
timely basis, to have up to twenty-five percent (25%) of
such employee's bonus, if any, for the current year (up to
ten percent (10%) for the 1996 calendar year for employees
with base salaries of $50,000 or more) that has not
previously been paid or advanced in cash be paid in
Restricted Stock priced at a twenty percent (20%) discount
to (i.e., 80% of) Fair Value. To be timely, a salaried
employee's completed Election Form under this Section
6(b)(ii)(A) must be delivered to the Department not later
than the fifteenth (15th) day of the last month of the
calendar year to which such bonus is attributable.
(B) Each bonus eligible salaried employee whose bonus is
determined on a semi-annual, quarterly or other basis which
is more frequent than annually, may voluntarily elect, on a
timely basis, for any calendar year (or where applicable the
remaining portion of any calendar year) to have up to
twenty-five percent (25%) of such employee's bonus for each
such calendar period, if any, withheld, accumulated
throughout the year and
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paid in Restricted Stock priced at a twenty percent (20%)
discount to (i.e., 80% of) Fair Value. To be timely, such
salaried employee's completed Election Form under this
Section 6(b)(ii)(B) must be delivered to the Department not
later than December 15 of the year preceding the entire
year to which such election relates (or not later than the
date set by the Committee with respect to an election
applicable to a remaining portion of a year).
(C) Any employee electing under this Section 6(b)(ii) who
also qualifies for an Award of Restricted Stock under
Section(6)(b)(i) will receive only one Award under the
Section that produces the greater Award in terms of the
number of shares of Restricted Stock subject to such Award.
(c) BRANCH OFFICE MANAGER EMPLOYEES.
(i) Each branch office manager employee ("BOM"), retail or
institutional, whose combined BOM salary and BOM bonus(es)
(e.g., profit bonuses, recruiting bonuses, trainee bonuses
and other BOM bonuses) exceeds $200,000 for any calendar
year ($100,000 for the 1996 calendar year) (exclusive of
any base or bonus grid commissions or incentive deferred
compensation payable or creditable to such employee as an
investment consultant or other institutional sales employee
based on such employee's personal production), will have,
on a non-voluntary basis, twenty-five percent (25%) of any
BOM bonuses beyond such threshold withheld, accumulated
throughout the year, and paid in Restricted Stock priced at
a twenty percent (20%) discount to (i.e., 80% of) Fair
Value.
(ii) Each BOM may voluntarily elect, on a timely basis, to have
up to twenty-five percent (25%) of any such BOM bonuses for
the current year that have not previously been paid or
advanced in cash paid in Restricted Stock priced at a
twenty percent (20%) discount to (i.e., 80% of) Fair Value.
To be timely, a BOM's completed Election Form under this
Section 6(c)(ii) must be delivered to the Department not
later than December 15 of the year to which such BOM
bonus(es) is(are) attributable.
(iii) Each BOM eligible to receive one or more Awards of
Restricted Stock as an investment consultant or an
institutional sales employee, on a non-voluntary or
voluntary basis under Section 6(a) or 6(d), respectively,
with respect to such BOM's personal production, would
continue to be eligible for and to receive such Awards,
regardless of any Awards of Restricted Stock received under
this Section 6(c).
(d) INSTITUTIONAL SALES EMPLOYEES.
(i) The first two percent (2%) of eligible gross commissions
otherwise to be credited to an institutional sales employee
as incentive deferred compensation for 1996 and each
subsequent calendar year shall be paid, on a non-voluntary
basis, in Restricted Stock priced at no discount to (i.e.,
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<PAGE>
100% of) Fair Value. Notwithstanding the provisions of
Section 7, vesting of such shares of Restricted Stock shall
be the same as if such incentive deferred compensation had
continued to be credited in cash. Any incentive deferred
compensation in excess of two percent (2%) of eligible gross
commissions otherwise creditable to an institutional sales
employee shall continue to be credited in cash as provided
for in the applicable schedule to the Deferred Compensation
Plan.
(ii) Each institutional sales employee may voluntarily elect, on
a timely basis, for any entire calendar year ( or, in
certain cases, the remainder of a calendar year), to have
twenty-five percent (25%) of any commission compensation to
which such employee becomes entitled that exceeds $100,000
for the calendar year withheld, accumulated throughout the
year and paid in Restricted Stock priced at a twenty percent
(20%) discount to (i.e., 80% of) Fair Value, (fifteen
percent (15%) discount to (i.e., 85% of) Fair Value for
Award Dates prior to July 1997). To be timely, an
institutional sales employee's completed Election Form under
this Section 6(d)(ii) must be delivered to the Department
not later than December 15 of the year preceding the year to
which such election relates (or, not later than the date set
by the Committee with respect to an election applicable to a
remaining portion of a year).
(e) Other Incentive Arrangement Employees. Employees not covered by
Sections 6(a) through (d) above with periodic incentive
arrangements (each, an "Other Incentive Arrangement Employee")
may voluntarily elect, on a timely basis, for any entire calendar
year (or in certain cases, the remainder of a calendar year) to
have twenty-five percent (25%) of any incentive compensation to
which such employee becomes entitled that, when combined with
salary or draw, exceeds $100,000 for the calendar year, withheld,
accumulated throughout the year and paid in Restricted Stock
priced at a twenty percent (20%) discount to (i.e., 80% of) Fair
Value, (fifteen percent (15%) discount to (i.e., 85% of) Fair
Value for Award Dates prior to July 1997). To be timely, an Other
Incentive Arrangement Employee's completed Election Form under
this Section 6(e) must be delivered to the Department not later
than December 15 of the year preceding the year to which such
election relates (or not later than the date set by the Committee
with respect to an election applicable to a remaining portion of
a year).
(f) Option Alternative. For Award Dates after June 1997, on or prior
to the Determination Date any Participant may elect, on an
appropriate election form, to apply up to 100% of the incentive
compensation that would otherwise be received in the form of an
Award of Restricted Stock pursuant to Sections 6(a)(ii), (b),
(c), (d)(ii) or (e) to an Award of an Option with the number of
shares of Common Stock subject to such Option being determined by
(i) dividing the amount of incentive compensation being applied
by the Fair Value of one share as of the Determination Date, (ii)
multiplying the resulting quotient by five (5) and (iii) rounding
to the nearest whole number of Shares. For any Award Date prior
to July 1997, prior to the Award Date any Participant may elect,
on an appropriate election form, to receive up to one-third of
the shares he/she would otherwise
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receive as Restricted Stock in the form of an Option (with an
Option for three shares being given for each share of Restricted
Stock which would otherwise be received). Regardless of the Award
Date, each Option shall be exercisable at the Fair Value of a
share of Common Stock as of the Determination Date relating to
such Award Date (the "Option Price").
(g) Excess Bonus Participation. Any Participant who is required under
Section 6(b)(i) or 6(c)(i) to receive a portion of his or her
bonus in the form of an Award (who also, involuntarily or
voluntarily in part, is to receive an Award of Restricted Stock
and/or an Award of an Option for a full twenty-five percent (25%)
of the bonus to which he or she would otherwise be entitled for
any calendar year after 1996) may, on a timely basis, further
elect, on an appropriate election form, to apply up to a second
twenty-five percent (25%) of such bonus to an Award of an Option
with the number of shares and the exercise price of such Option
being determined in the manner set forth in Section 6(f). To be
timely, a Participant's completed election form under this
Section 6(g) must be delivered to the Department not later than
the date that is (or if the Participant's salary and previously
paid bonus had been less than $200,000 would have been)
applicable to any voluntary election made by such Participant
under Section 6(b)(ii) or 6(c)(ii).
7. Terms And Conditions Of Restricted Stock And Options. All shares of
Restricted Stock and Options awarded to Participants under the Plan shall be
subject to the following terms and conditions and to such other terms and
conditions, not inconsistent with the Plan, as shall be prescribed by the
Committee in its sole discretion:
(a) Restricted Stock Vesting. Except as provided in Sections 6(a)(i)
and 6(d)(i) above, the restrictions set forth in this Section 7 shall apply
to the shares of Restricted Stock subject to each Award for the period (the
"Restricted Period") commencing on the Award Date and ending on the
earliest to occur of the following:
(1) (A) with respect to Award Dates after June 1997, each of the
first, second and third anniversaries of the Award Date, as to
one-third, respectively, of the shares of Restricted Stock, and (B)
with respect to Award Dates prior to July 1997, the second anniversary
of the Award Date if, as of the Award Date, the Participant has at
least five "Years of Service" with the Company, a Company subsidiary,
a predecessor of either and/or Kemper Corporation (or a Kemper
affiliate) (or the third anniversary of such date if the Participant
does not have five Years of Service with one or more of the entities
as of such date);
(2) the date of a "Change in Control" (as defined below) of the
Company or the qualified subsidiary that is employing the Participant;
(3) the date the Participant's employment terminates because of
the Participant's death or disability; or
(4) such date as the Committee may designate at the Award Date.
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For purposes of the Plan, a "Year of Service" shall be determined in the
same manner a "Year of Service" would be determined for vesting purposes under
the Company's 401(k) and Employee Stock Ownership Plan (taking into account all
rules set forth in such document which are applicable to the determination
(e.g., applicable break-in-service rules)). Unless the Restricted Period has
already ended, not later than December 15th of the calendar year preceding the
year in which the Restricted Period is scheduled to expire pursuant to Section
7(a)(1) above, each Participant will have the right to deliver to the Department
an appropriate form of written direction to extend such scheduled expiration
date for one year (the "Extended Restricted Period"). If a Participant elects
one or more Extended Restricted Periods, all of the vesting and transfer
restrictions outlined in this Section 7 will apply to the Participant's
Restricted Stock during each Extended Restricted Period. The Committee may, at
any time hereafter, reduce or terminate any Restricted Period or Extended
Restricted Period.
For purposes of this Plan, a "Change in Control" shall be deemed to have
occurred upon the first to occur of any of the following events (or any other
event recognized in writing by the Committee as constituting a "Change in
Control"):
(A) any consolidation or merger of the Company (or a qualified
subsidiary employer) in which the Company (or the qualified
subsidiary) is not the continuing or surviving corporation or pursuant
to which shares of the Company's Common Stock (or the qualified
subsidiary employer's common stock) would be converted into cash,
securities or other property, other than any consolidation or merger
of the Company (or a qualified subsidiary employer) in which the
holders of the Company's Common Stock (or the qualified subsidiary
employer's common stock) immediately prior to the consolidation or
merger have the same proportionate ownership of common stock of the
surviving corporation immediately after the consolidation or merger;
or
(B) any sale, lease, exchange or other transfer (in one
transaction or a series of related transactions) of all, or
substantially all, of the assets of the Company (or a qualified
subsidiary employer) other than any sale, lease, exchange or other
transfer to an entity where the Company (or the qualified subsidiary
employer) owns, directly or indirectly, at least eighty percent (80%)
of the outstanding voting securities of such entity after any such
transfer; or
(C) any liquidation or dissolution of the Company; or
(D) the date any person (as such term is used in Section 13(d) of
the Securities Exchange Act of 1934, hereinafter the "1934 Act"),
other than one or more trusts established by the Company or any
subsidiary of the Company for the benefit of employees of the Company
or its subsidiaries, shall become the beneficial owner (within the
meaning of Rule 13d-3 under the 1934 Act) of twenty percent (20%) or
more of the Company's outstanding Common Stock; or
(E) the failure, during any period of twenty-four (24)
consecutive months, of those individuals who at the beginning of such
period constitute the entire Board for any reason to constitute a
majority thereof unless the election, or the nomination for election
by the stockholders of the Company, of each new director comprising
the majority was approved by a vote of at least a majority of the
Continuing Directors as hereinafter defined, in office on the date of
such election or nomination for election of the new director. For
purposes hereof, a "Continuing Director" shall mean:
(i) any member of the Board immediately following the
consummation of the "KSOP Purchase" (as defined in the prospectus
included in the Registration Statement on Form S-1 filed by the
Company with the Securities and Exchange Commission (File No. 33-
92686)) or
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(ii) any director elected, or nominated for election by the
stockholders of the Company to fill any vacancy or newly created
directorship on the Board, by a majority of the Continuing
Directors then still in office.
(b) Option Vesting. Vesting of an Award of an Option will be the same
as vesting of an Award of Restricted Stock in all respects, except that
instead of the schedule set forth in Section 7(a)(1), Awards of Options
with Award Dates prior to July 1997 will vest (i) thirty-three and a third
percent (33-1/3%) on each of the first three anniversaries of the Award
Date if the Participant has at least five Years of Service (as defined
above) with the Company, a Company subsidiary, a predecessor of either
and/or Kemper Corporation (or a Kemper affiliate) as of the Award Date, or
(ii) if the Participant does not have at least five Years of Service with
the Company, a Company subsidiary, a predecessor of either and/or Kemper
Corporation (or a Kemper affiliate) as of the Award Date, the Option will
vest twenty percent (20%) per year for each of the first five anniversaries
of the Award Date. Each Option shall accelerate and shall become
exercisable in full immediately prior to the occurrence of any event
described in Section 7(a)(2), (3) or (4).
(c) Option Term. Subject to earlier termination as provided below, a
vested Option shall be exercisable for a period of ten years commencing on
the Award Date. If a Participant terminates his/her employment with the
Company or a qualified subsidiary, he/she will have six months from the
effective date of termination to exercise any vested Option(s). If his/her
employment is terminated pursuant to a Normal Retirement (as defined
below), or by death or disability, the Participant (or his/her estate) will
have three years from the date at such Normal Retirement, death or
disability to exercise any vested Option.
(d) Forfeiture of Rights. Subject to Section 7(f) below, if a
Participant terminates employment with the Company or a qualified
subsidiary prior to the end of the Restricted Period or any Extended
Restricted Period for any reason, the Participant will forfeit any shares
of Restricted Stock and any Options that are not yet vested. A transfer
from the Company to a qualified subsidiary of the Company or an affiliate,
or vice versa, is not a termination of employment for purposes of this
Plan. Except as provided in Sections 6(a)(i) and 6(d)(i) above, if a
Participant's position is eliminated or his/her employment is terminated
for a reason other than "Cause" (as defined below), the Participant will
receive, without interest, the cash compensation that was replaced with an
Award of any unvested shares of Restricted Stock and/or any unvested
Option. If a participant resigns voluntarily (other than pursuant to a
"sunset arrangement" (as more fully described in Section 7(f)(iii) below))
or a Participant is terminated for "Cause" (as defined below) such
Participant will forfeit any unvested shares of Restricted Stock and any
unvested Options theretofore awarded to such Participant as well as any
right to claim the cash compensation that was replaced with any such Award
of unvested shares of Restricted Stock and/or any unvested Option. For
purposes of this Plan, a termination for "Cause" shall be defined as (i)
Participant's willful malfeasance which is demonstrably and materially
injurious, monetarily or otherwise, to the Company or any of its
subsidiaries, provided, however, that any action or refusal to act by
Participant shall not constitute "Cause" if, in good faith, Participant
believed such action or refusal to act to be in, or not opposed to, the
best interests of the Company or any of its subsidiaries, or if Participant
shall be entitled, under applicable law or under the Certificate of
Incorporation or By-Laws of the Company or any subsidiary, as the same may
be amended or restated from time to time, to be indemnified with respect to
such action or refusal to act; (ii) Participant's bar or suspension from
the securities industry for a period in excess of ninety (90) days; (iii)
Participant's conviction of, or plea of nolo contendere to, a felony; or
(iv) Participant's gross and willful misconduct or act of dishonesty
involving the Company or any of its subsidiaries which reflects adversely
on the Company or any of its subsidiaries.
(e) Restrictions. A stock certificate representing, or other evidence
of, the number of shares of Restricted Stock, or the number of shares of
Common Stock subject to any Option, awarded to a Participant
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shall be held by the Company in Participant's name (or if the Participant
so requests in writing, in the Participant's name jointly with a member of
the Participant's family, with right of survivorship). Except as provided
in the following sentence, the Participant shall have all rights and
privileges of a stockholder as to any such shares of Restricted Stock (but
not as to any shares of Common Stock subject to any unexercised Option,
even if fully vested), including (1) the right to receive dividends and (2)
the right to vote such shares of Restricted Stock. Subject to the
provisions of Section 7(f) below, the following restrictions shall apply:
(i) the Participant shall not be entitled to delivery of any
stock certificate representing, or other evidence of, the shares of
Restricted Stock, or the number of shares of Common Stock subject to
any Option, awarded to the Participant hereunder until the expiration
of the Restricted Period and all Extended Restricted Periods;
(ii) none of the shares of Restricted Stock and no portion of any
Option may be sold, transferred, assigned, pledged or otherwise
encumbered or disposed of during the Restricted Period or any Extended
Restricted Period; and
(iii) except as provided in Section 7(f) below, all of the shares
of Restricted Stock and all Options awarded to the Participant shall
be forfeited and all rights of the Participant to such shares of
Restricted Stock or under such Option(s) shall terminate without
further obligation on the part of the Company or any subsidiary unless
the Participant has remained an employee of the Company or a qualified
subsidiary for the entire Restricted Period and any Extended
Restricted Periods applicable to such shares of Restricted Stock and
Options, as appropriate.
If the Participant has remained an employee of the Company or a qualified
subsidiary for the entire Restricted Period and all Extended Restricted Periods,
such restrictions shall lapse at the end of the Restricted Period (or Extended
Restricted Period as the case may be) applicable to any Award. The Participant
shall forfeit all shares of Restricted Stock and all Options with respect to
which such restrictions do not lapse. Upon the forfeiture (in whole or in part)
of shares of Restricted Stock or Option(s), such forfeited shares or Option(s)
shall be transferred to the Company without further action by the Participant.
The Participant shall have the same rights and privileges, and be subject to the
same restrictions, with respect to any shares or other securities on non-cash
property received pursuant to Section 16 below.
(f) TERMINATION OF EMPLOYMENT.
(i) DISABILITY. If a Participant ceases to be an employee of the
Company or a qualified subsidiary prior to the end of the Restricted
Period, or all Extended Restricted Periods, by reason of disability
(as defined below), all unvested shares of Restricted Stock and all
Option(s) awarded to such Participant shall immediately vest, all
restrictions applicable to such shares and Option(s) shall lapse, and
the Restricted Period (or Extended Restricted Period) shall end. A
certificate for such shares and written evidence of such Option(s)
shall be delivered to the Participant in accordance with Section 8.
For purposes of this Section 7(f), the term "disability" shall mean
total disability which continues for twelve (12) months and is of a
character which, in the sole judgment of the Department (or for
executive officers who are subject to Section 16 of the 1934 Act, the
Committee) after receiving competent medical advice, will permanently
prevent the Participant from performing on a full-time basis such
duties as the Company or a qualified subsidiary may reasonably assign
to him/her consistent with the duties which he/she was performing
immediately prior to the disability. For purposes of this Plan, the
Participant
C-9
<PAGE>
shall be deemed to have become disabled on the date on which the
Department (or the Committee) makes its determination.
(ii) DEATH. If a Participant ceases to be an employee of the
Company or a qualified subsidiary prior to the end of the Restricted
Period or all Extended Restricted Periods by reason of the
Participant's death, any unvested shares of Restricted Stock and any
Option(s) awarded to such Participant shall vest, all restrictions
applicable to such shares and Option(s) shall lapse and the Restricted
Period or Extended Restricted Period shall end. A certificate for such
shares and written evidence of such Option(s) shall be delivered to
the Participant's estate in accordance with Section 8 below.
(iii) ALL OTHER TERMINATIONS. Subject to the next succeeding
sentence, if a Participant ceases to be an employee of the Company or
a qualified subsidiary prior to the end of the Restricted Period or
any Extended Restricted Period for any reason other than disability or
death, the Participant shall immediately forfeit all of his/her
unvested shares of Restricted Stock and all of his/her unvested
Options. If the Participant terminates employment on or after
attaining age 65 or attaining age 55 and having been employed by the
Company, a Company predecessor, a qualified subsidiary and/or Kemper
Corporation (or a Kemper affiliate) for ten or more years ("Normal
Retirement") and the Participant thereafter remains retired from the
industry (a "sunset arrangement"), each share of Restricted Stock and
each Option awarded to the Participant will, following such
retirement, continue to vest during the Restricted Period or Extended
Restricted Period.
(g) LEGEND ON CERTIFICATES DEPOSITED WITH COMPANY. Each certificate
issued in respect of shares of Restricted Stock awarded under the Plan
which is registered in the name of the Participant and deposited with the
Company shall bear the following (or similar) legend:
"The transferability of this certificate and the shares of stock
represented hereby are subject to the terms and conditions (including
forfeiture) contained in the EVEREN Capital Corporation 1996
Restricted Stock Incentive Plan (as Amended and Restated Effective as
of May 6, 1997) and an agreement entered into between the registered
owner and EVEREN Capital Corporation."
(h) RESTRICTED STOCK AND OPTION AGREEMENTS. The Participant shall
enter into an agreement with the Company in a form specified by the Committee
which memorializes each Award of Restricted Stock or an Option and describes the
terms and conditions of the Award and such other matters as the Committee shall,
in its sole discretion, determine.
8. CERTIFICATES. At the end of the Restricted Period or the Extended
Restricted Period, the restrictions applicable to a Participant's shares of
Restricted Stock or Option shall lapse as provided in Section 7(e) above or
Section 7(f) above, but a stock certificate for the number of shares of
Restricted Stock with respect to which the restrictions have lapsed shall not
automatically be delivered, free of all such restrictions, to the Participant or
the Participant's estate (as the case may be). Rather, certificates for whole
shares of Common Stock (being former shares of Restricted Stock) as to which the
restrictions have lapsed shall thereafter be issued as soon as practicable
following a Participant's written request. The Company may assess or impose a
reasonable charge for the issuance of such certificates. The Company shall not
be required to deliver any fractional share of Common Stock but will pay, in
lieu thereof, the Fair Value (determined as of the date on which the
restrictions lapse or, if no determination
C-10
<PAGE>
is made for that day, the most recently determined Fair Value) of such
fractional share to the Participant or the Participant's estate.
9. DIVIDENDS OR DISTRIBUTIONS. On each Common Stock dividend or
distribution payment date, each Participant shall be credited with an amount
equal to the dividend or distribution which is payable on that date with respect
to a share of Common Stock multiplied by the number of shares of Restricted
Stock held by the Participant. Such amounts shall be paid to the Participant.
10. RIGHTS NOT TRANSFERABLE. Rights granted under this Plan are not
transferable by a Participant other than by will or the laws of descent and
distribution, and are exercisable during an employee's lifetime only by the
Participant.
11. EMPLOYEES' AND PARTICIPANTS' RIGHTS. No employee or other person shall
have any claim or right to be awarded Restricted Stock or an Option under the
Plan except as provided in the Plan. Participation in the Plan does not limit
the right of the Company or any subsidiary to terminate a Participant's
employment at any time or give any right to a Participant to remain employed by
the Company or any subsidiary in any particular position or at any particular
rate of remuneration.
12. WITHHOLDING TAX AND/OR REQUIRING PAYMENT OF TAXES. The Company shall
have the right to withhold with respect to any payments made to Participants
under the Plan any taxes required by law to be withheld with regard to such
payments and/or to require, prior to the delivery of any shares of unrestricted
Common Stock or pursuant to the exercise of any Option, payment by Participants
of any taxes required by law with respect to the issuance or delivery of such
shares (or any portion thereof) for which such taxes have not been withheld.
13. SECTION 83(B) ELECTION. Each Participant under the Plan may, but shall
not be required to, make an election under Section 83(b) of the Internal Revenue
Code of 1986, as amended ("Code"), with respect to any Award of Restricted
Stock.
14. AMENDMENTS AND TERMINATION. The Board of Directors may amend the Plan
at any time, provided that no such amendment that materially increases benefits
under the Plan shall be effective unless approved within 12 months after the
date of adoption of any such amendment by the affirmative vote of stockholders
holding the majority of the outstanding shares of Common Stock entitled to vote
if such stockholder approval is required for the Plan to comply with the
requirements of 17 C.F.R. SS.240.16b-3 (for periods during which the Board of
Directors has determined that the Plan will comply with 17 C.F.R. SS.240.16b-3).
The Board of Directors may suspend the Plan or discontinue the Plan at any time.
15. APPLICABLE LAWS. Notwithstanding any other provision of the Plan, the
Committee may subject shares of either Common Stock or Restricted Stock or
Options transferred and/or awarded under the Plan to such conditions,
limitations or restrictions as the Committee determines to be necessary or
desirable to comply with any law or regulation or with the requirements of any
securities exchange. The delivery or issuance of any shares of Common Stock or
Restricted Stock or Options may be postponed by the Company for such period as
may be required to comply with the applicable requirements under the Federal and
state securities laws, and any applicable listing requirements of any national
securities exchange (in the event the Company is or becomes subject to such laws
or requirements prior to the termination of this Plan) and with all requirements
under any other law or regulation applicable to the issuance or delivery of such
shares or Options. Further, the Company shall not be obligated to deliver or
issue any shares of Common Stock or Restricted Stock or Options if the delivery
or issuance thereof shall constitute a violation of any provision of any
national securities exchange to which the Company is subject, or any law or
regulation of any governmental authority. Awards of Restricted Stock and/or
Options under
C-11
<PAGE>
the Plan are subject to, and shall be accomplished only in accordance with the
requirements of all applicable securities and other laws.
16. CHANGES IN CAPITALIZATION AND SIMILAR CHANGES. In the event of any
change in the outstanding shares of Common Stock by reason of any stock dividend
or split, recapitalization, merger, consolidation, combination or exchange of
shares or other similar corporate change, the maximum aggregate number and class
of shares which may be delivered under the Plan shall be equitably adjusted by
the Committee. Such determination of the Committee shall be conclusive.
Furthermore, if there is an adjustment in the number of shares, no fraction of a
share shall be delivered with respect to any Award of Restricted Stock, although
the Company will pay, in lieu thereof, the Fair Value (measured as of the date
the restrictions lapse or, if no determination is made for that day, the Fair
Value most recently determined) of such fractional share to the Participant or
the Participant's estate. Any shares of stock or other securities or non-cash
property credited to a Participant with respect to the Participant's shares of
Restricted Stock or Option(s) will be subject to the same restrictions as such
Restricted Stock or Option(s), shall be deposited with the Company and shall
bear an appropriate legend similar in form to the legend set forth in Section 7.
17. EXPENSES. Except to the extent provided in Sections 7 and 12 above, all
expenses of administering the Plan, including expenses incurred in
connection with any purchase of Shares in the open market for Award to
Participants, shall be borne by the Company and its subsidiaries.
18. ARBITRATION OF DISPUTES. Any dispute between the Company or any of its
affiliates and any Participant relating to this Plan shall be submitted to
arbitration before the National Association of Securities Dealers, Inc. or the
New York Stock Exchange, Inc. in accordance with its rules and regulations.
19. EFFECTIVE DATE. This Plan became effective on April 15, 1996, upon
receipt of stockholder approval of the Plan on May 8, 1996. The Plan was
subsequently amended, and this amendment and restatement of the Plan was
approved, by action of the Board of Directors on May 6, 1997.
C-12
<PAGE>
Appendix A
<TABLE>
<CAPTION>
INVESTMENT BONUS ELIGIBLE BRANCH OFFICE INSTITUTIONAL
OPPORTUNITY/ CONSULTANT SALARIED MANAGER SALES
SITUATION ("I/C") EMPLOYEES EMPLOYEES ("BOM") EMPLOYEES EMPLOYEES
<S> <C> <C> <C> <C>
Incentive/bonus
compensation for
years after 1996
payable in Restricted
Stock and/or an
Option.
A. Nonvoluntary All incentive deferred 25% of that portion 25% of that portion All incentive deferred
participation (i.e., compensation credits of annual incentive of all branch compensation credits
incentive equal to the first bonuses that when manager bonuses equal to the first
compensation which two percent (2%) of combined with base (e.g., profit bonus, two percent (2%) of
will automatically be eligible gross salary results in recruiting bonus and eligible gross
awarded in the form of commissions for any year total compensation other bonuses) that commissions for any year
Restricted Stock would be in Restricted in excess of when combined with would be in Restricted
and/or an Option). Stock only. $200,000 for year the branch manager's Stock only.
NOTE: The examples ($100,000 for 1996). base salary results
shown reflect the in total branch
percentage of-Fair- Example: Assume for manager compensation
Value award 1997 Employee A has (non-production) in
"discounts" detailed a base salary of excess of $200,000
in Section 6 of the $140,000 and is to ($100,000 in 1996)
Plan. be awarded a for year will be
$190,000 annual withheld,
bonus. That bonus accumulated
would be paid throughout the year
$157,500 in cash and then awarded the
($60,000 to bring following year in
A's salary and cash Restricted Stock
bonus to $200,000 and/or an Option.
plus 75% of the
remaining $130,000) Example: Branch
and $32,500 in manager C has total
Restricted Stock non-production
having a Fair Value compensation in
of $40,625. A may excess of $200,000.
elect to have up to During the year C
a full 25% ($47,500) becomes entitled to
of the bonus paid in a $10,000 profit
Restricted Stock. bonus for one
quarter, and a
A may further elect $6,000 bonus for a
to have up to 100% second quarter. He
of the amount that also becomes
would otherwise be entitled to a $5,000
paid in Restricted recruiting bonus.
Stock (i.e., up to For the first
$32,500 or up to quarter $7,500 would
$47,500) paid in an be paid currently in
Option instead of in cash ($10,000 x 75%
Restricted Stock. = $7,500) and $2,500
Assuming a Fair would be withheld.
Value of $25 per For the second
share, if A were to quarter $4,500 would
elect to have be paid currently in
$20,000 paid in an cash ($6,000 x 75%)
and $1,500 would be
</TABLE>
<TABLE>
<CAPTION>
OTHERS WITH
INCENTIVE
ARRANGEMENTS
<S> <C>
None
</TABLE>
<PAGE>
Appendix A
<TABLE>
<CAPTION>
INVESTMENT BONUS ELIGIBLE BRANCH OFFICE INSTITUTIONAL
OPPORTUNITY/ CONSULTANT SALARIED MANAGER SALES
SITUATION ("I/C") EMPLOYEES EMPLOYEES ("BOM") EMPLOYEES EMPLOYEES
<S> <C> <C> <C> <C>
Option the Option withheld. The
would be for 4,000 recruiting bonus would
shares ($20,000/$25 be paid $3,750 in cash
per share = 800 ($5,000 x 75%) and
shares x 5 = 4,000 $1,250 withheld. Such
shares) exercisable aggregate $5,250
at $25 per share. A withheld and
would also receive accumulated through the
$12,500 ($32,500 - year would be awarded
$20,000) in the following year to C
Restricted Stock in Restricted Stock
having a Fair Value having a Fair Value of
of $15,625. $6,563.
C may elect to have up
to 100% of such $5,250
paid in an Option
instead of in
Restricted Stock.
Assuming a Fair Value
of $25 per share, if C
were to elect to have
$2,500 paid in an
Option the Option would
be for 500 shares
($2,500/$25 per share =
100 shares x 5 = 500
shares) exercisable at
$25 per share. C would
also receive $2,750
($5,250 - $2,500) in
Restricted Stock having
a Fair Value of $3,438.
All deferred I/C
compensation equal to
the first two percent
(2%) of eligible gross
commissions to which a
BOM becomes entitled
would be awarded in
Restricted Stock only.
</TABLE>
<TABLE>
<CAPTION>
OTHERS WITH
INCENTIVE
ARRANGEMENTS
<S> <C>
</TABLE>
<PAGE>
Appendix A
<TABLE>
<CAPTION>
INVESTMENT BONUS ELIGIBLE BRANCH OFFICE INSTITUTIONAL
OPPORTUNITY/ CONSULTANT SALARIED MANAGER SALES
SITUATION ("I/C") EMPLOYEES EMPLOYEES ("BOM") EMPLOYEES EMPLOYEES
<S> <C> <C> <C> <C>
B. Voluntary Can elect annually to For 1997, any bonus Can elect Restricted Stock Can elect annually to
participation have 25% of monthly eligible employee can and/or an Option for 25% of have 25% of any
bonus grid compensation elect to have up to I/C bonus grid compensation. annual compensation
(i.e., monthly payout 25% of any bonus that exceeds $100,000
determined by the awarded for that year To the extent a branch withheld, accumulated
"bonus grid" (ranging paid in Restricted Stock. manager's aggregate cash throughout the year
from .5% to 1.75% of For 1996, if base salary compensation from all and paid the following
production under the exceeds $50,000 (but sources other than personal year in Restricted
current bonus grid for combined base salary and production as an I/C (e.g., Stock and/or an Option.
qualifying I/Cs)) bonus is less than salary, recruiting bonuses,
withheld, accumulated $100,000), the employee profit bonuses) is less Example: Institutional
throughout the year and may elect to have up to that $200,000 for a year sales employee G has
awarded in Restricted 10% of any bonus awarded ($100,000 for 1996), any production that results
Stock and/or an Option for that year paid in deferred profit or other in payouts of precisely
the following year. Restricted Stock. bonus to which he or she $30,000 per month for
is entitled will be paid all 12 months of the
Example: I/C E has Example: Employee F has a in cash rather than year or $360,000 for
production of $20,000 salary of $90,000 and a awarded in Restricted the year. Assuming G
for month one and bonus opportunity of Stock or an Option, had made the voluntary
$25,000 for month two, $60,000 to $120,000. If F absent a voluntary election to
entitling E under the made the maximum 25% election by the branch participate, for the
current bonus grid to a election and then became manager. first three months of
2% bonus payout for entitled to a $100,000 the year nothing would
month one ($400) and a bonus, $75,000 would be Example: For the year be withheld ($30,000 x
3% bonus payout for paid in cash and $25,000 branch manager D 3 = $90,000) since the
month two ($750). would be paid in Restricted receives a salary of $100,000 threshold had
Assuming E had made the Stock having a Fair Value $15,000, has $150,000 not been reached.
voluntary election to of $31,250. gross production that
participate, for month generates a $60,000 For the fourth month,
one $100 would be F may further elect to have payout, receives a the first $10,000 would
withheld and for month up to 100% of such $25,000 $5,000 recruiting bonus be paid in cash
two $188 would be paid in an Option instead of and is entitled to ($90,000 + $10,000 =
withheld. Such in Restricted Stock. $18,000 in profit $100,000). From the
aggregate $288 withheld Assuming a Fair Value of bonuses. Because D's remaining $20,000,
and accumulated through $25 per share, if F were to aggregate cash $5,000 would be
the year would be elect to have $15,000 paid compensation as a withheld (25% x
awarded to E the in an Option the Option manager for the year $20,000). For each of
following year in would be for 3,000 shares is only $38,000 the remaining eight
Restricted Stock having ($15,000 / 25 per share = ($15,000 + $5,000 + months $7,500 would be
a Fair Value of $360. 600 shares x 5 = 3,000 $18,000 = $38,000), withheld (25% x
shares) exercisable at all of D's deferred $30,000). The aggregate
E may elect to have up to $25 per share. F would also profit and recruiting $65,000 would be
a 100% of such $288 paid receive $10,000 ($25,000 - bonus would be paid in accumulated through the
in an Option instead of in $15,000) in cash (subject to any year and awarded the
Restricted Stock. Assuming applicable holdback following year in
a Fair Value of $25 per or deferral) and Restricted
share, if E were to elect
</TABLE>
<TABLE>
<CAPTION>
OTHERS WITH
INCENTIVE
ARRANGEMENTS
<S> <C>
Can elect annually to have 25%
of that portion of incentive
compensation that when combined
with salary or draw) results in
total compensation in excess of
$100,000 accumulated throughout
the remainder of the year and
awarded the following year in
Restricted Stock and/or an
Option.
Example: Trader H has a draw of
$72,000 per year ($6,000 per
month) and a quarterly incentive
based on trading volume that
results in incentive payments of
$14,000 for the first quarter,
$16,000 for the second, $12,000
for the third and $25,000 for
the fourth quarter or $138,000
total for the year. Assuming
Trader H had made the voluntary
election to participate, none of
the first three quarters'
incentive would be withheld
($6,000 x 9 = $54,000 + $14,000
+ $16,000 + $12,000 = $96,000)
since the $100,000 threshold had
not been reached. Because such
threshold would be reached with
the fourth quarter salary, $6,000
of the fourth quarter incentive
(25% x $24,000) would be withheld
and awarded the following year in
</TABLE>
<PAGE>
Appendix A
<TABLE>
<CAPTION>
INVESTMENT BONUS ELIGIBLE BRANCH OFFICE INSTITUTIONAL
OPPORTUNITY/ CONSULTANT SALARIED MANAGER SALES
SITUATION ("I/C") EMPLOYEES EMPLOYEES ("BOM") EMPLOYEES EMPLOYEES
<S> <C> <C> <C> <C>
to have $200 paid in an Restricted Stock none would be awarded Stock having a Fair Value
Option the Option would be having a Fair Value in Restricted Stock or of $81,250.
for 40 shares ($200 / $25 of $12,500. an Option unless prior
per share = 8 shares x 5 = to December 15th of G may further elect to
40 shares) exercisable at If F's bonus of the year in question have up to 100% of such
$25 per share. E would $100,000 was the branch manager $65,000 paid in an
also receive $88 ($288 - actually paid in voluntarily elected Option instead of in
$200) in Restricted Stock multiple period to participate in the Restricted Stock.
having a Fair Value of $110. installments, then Plan with respect to Assuming a Fair Value of
25% of each such such bonus. In such $25 per share, if G were
installment would be case, up to $5,750 to elect to have $30,000
paid in Restricted of D's $23,000 paid in an Option the
Stock and/or an aggregate bonuses Option would be for 6,000
Option if F made the would be awarded in shares ($30,000 / $25 per
maximum election. combination of share = 1,200 shares x
Restricted Stock 5 = 6,000 shares)
and/or an Option, exercisable at $25 per
with the Restricted share. G would also
Stock having a Fair receive $35,000 ($65,000 -
Value of up to $7,188 $30,000) in Restricted
if the Award were Stock having a Fair
taken solely in Value of $43,750.
Restricted Stock and,
assuming a Fair Value
of $25 per share, with
up to 1,150 shares
($5,750 / $25 per share
= 230 shares x 5 =
1,150 shares) being
subject to an Option
exercisable at $25 per
share if the Award
were taken solely in
an Option.
</TABLE>
<TABLE>
<CAPTION>
OTHERS WITH
INCENTIVE
ARRANGEMENTS
<S> <C>
Restricted Stock having a Fair
Value of $7,500.
H may elect to have up to 100%
of such $6,000 paid in an Option
instead of in Restricted Stock.
Assuming a Fair Value of $25 per
share, if H were to elect to have
$2,000 paid in an Option the
Option would be for 400 shares
($2,000 / $25 per share = 80
shares x 5 = 400 shares)
exercisable at $25 per share.
H would also receive $4,000
($6,000 - $2,000) in
Restricted Stock having a Fair
Value of $5,000.
</TABLE>
<PAGE>
Appendix A
<TABLE>
<CAPTION>
INVESTMENT BONUS ELIGIBLE BRANCH OFFICE INSTITUTIONAL
OPPORTUNITY/ CONSULTANT SALARIED MANAGER SALES
SITUATION ("I/C") EMPLOYEES EMPLOYEES ("BOM") EMPLOYEES EMPLOYEES
<S> <C> <C> <C> <C>
A. Excess voluntary None If an employee is subject If a branch manager is None
participation to the nonvoluntary subject to the
provisions and is to nonvoluntary provisions
receive (or elects to with respect to any
receive) a full 25% of portion of his or her
annual bonus in Restricted branch manager bonus
Stock and/or an Option, he and is to receive
or she may elect to (or elects to receive)
receive up to a second 25% a full 25% of his or
in an Option only, the her branch manager
number of shares subject bonuses in Restricted
to such Option and the Stock and/or an
exercise price to be Option, he/she can
determined as set forth elect to receive up
above. to a second 25% in an
Option only, the
Example: Assume Employee number of shares
A above makes no voluntary subject to such Option
election or makes an and the exercise price
election that results in to be determined as
less than a full 25% set forth above.
($47,500) of A's bonus
being paid in Restricted Example: Assume the
Stock and/or an Option. A participation of
is not eligible to make Branch manager C
any election under the above was involuntary
voluntary excess to at least some
provisions. extent and that C was
participating with
If A had elected to have a respect to the full
full 25% ($47,500) of A's $5,250 referred to
bonus paid in Restricted above. C could elect
Stock and/or an Option, A to have up to a
could further elect to second $5,250 paid in
have up to a second 25% an Option only. If C
(i.e., up to a second were to elect to have
$47,500) of A's bonus paid $1,000 of such second
in an Option only. If A $5,250 paid in an
were to elect to have Option the Option
$30,000 of the second would be for 200
$47,500 paid in an Option, shares ($1,000 / $25
the Option would be for per share = 40 shares
6,000 shares ($30,000 / x 5 = 200 shares)
$25/share = 1,200 shares x exercisable at $25 per
5 = 6,000 share. C would also
receive total cash in
the amount of $14,750
($10,000 + $6,000 +
$5,000 = $21,000 -
$5,250 - $1,000).
</TABLE>
<TABLE>
<CAPTION>
OTHERS WITH
INCENTIVE
ARRANGEMENTS
<S> <C>
None
</TABLE>
<PAGE>
Appendix A
<TABLE>
<CAPTION>
INVESTMENT BONUS ELIGIBLE BRANCH OFFICE INSTITUTIONAL
OPPORTUNITY/ CONSULTANT SALARIED MANAGER SALES
SITUATION ("I/C") EMPLOYEES EMPLOYEES ("BOM") EMPLOYEES EMPLOYEES
<S> <C> <C> <C> <C>
shares) exercisable at $25 Example: Assume Branch
per share. A would also manager D did or did not
receive total cash in the make the voluntary
amount of $112,500 election referred to
($190,000 - $47,500 - above. Because D is not
30,000). participating on an
involuntary basis D is
Example: The participation not eligible to make any
of Employee F above is election under the
purely voluntary since the voluntary excess
$200,000 combined salary provisions.
and bonus threshold has
not been reached
($90,000 + $100,000 =
$190,000). Therefore,
even though Employee F
above had made the
maximum 25% election, F
is not eligible to make an
election under the
voluntary excess
provisions.
</TABLE>
<TABLE>
<CAPTION>
OTHERS WITH
INCENTIVE
ARRANGEMENTS
<S> <C>
</TABLE>
<PAGE>
EXHIBIT 12
EVEREN CAPITAL CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(IN MILLIONS)
(UNAUDITED)
<TABLE>
<CAPTION>
Year ended December 31,
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
EARNINGS:
Pretax Income (loss) $ 75.0 $107.8 $(22.0) $(12.7) $(1.5)
Fixed Charges 47.1 45.1 68.1 58.0 61.4
-----------------------------------------------------------
Earnings $122.1 $152.9 $ 46.1 $ 45.3 $59.9
===========================================================
FIXED CHARGES:
Interest expense $ 36.6 $ 34.0 $ 52.5 $ 44.8 $46.9
Approximate portion of rental expense
representative of an interest factor 10.5 11.1 15.6 13.2 14.5
-----------------------------------------------------------
Fixed Charges $ 47.1 $ 45.1 $ 68.1 $ 58.0 $61.4
===========================================================
Ratio of earnings to fixed charges 2.6 3.4 0.68 0.78 1.00
===========================================================
Deficiency of earnings available to cover
fixed charges $ - $ - $(22.0) $(12.7) $ -
===========================================================
</TABLE>
<PAGE>
Exhibit 21.0
EVEREN CAPITAL CORPORATION
SUBSIDIARIES
<TABLE>
CAPTION>
NAME STATE OF
INCORPORATION
-------------
<S> <C>
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. ........................................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
Principal Securities Holding Corporation .................................Delaware
Principal Financial Securities, Inc....................................Delaware
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