<PAGE>
Total # of Pages 25
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
-----
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED June 30, 1998 OR
-------------
_____ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM __________ TO
___________
Commission File Number 1-13940
------------------------------------------------------
EVEREN CAPITAL CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 36-4019175
------------------------ -----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
77 West Wacker Drive
Chicago, Illinois 60601
-------------------------- --------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (312) 574-6000
------------------
Indicate by checkmark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No ____
-----
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date. Shares outstanding as of
August 10, 1998:
$.01 par value common stock - 34,849,991
<PAGE>
INDEX
-----
<TABLE>
<CAPTION>
Page
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited):
Consolidated Statements of Financial Condition -
June 30, 1998 and December 31, 1997 3
Consolidated Statements of Operations and Comprehensive
Income -Three and six months ended June 30, 1998
and 1997 4
Consolidated Statement of Changes in Stockholders' Equity -
Six months ended June 30, 1998 5
Consolidated Statements of Cash Flows -Six months
ended June 30, 1998 and 1997 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis -
Results of Operations
Liquidity and Capital Resources 9
Item 3. Quantitative and Qualitative Disclosures About Market Risks 21
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 24
Item 6. Exhibits and Reports on Form 8-K 24
SIGNATURES 25
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
EVEREN CAPITAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30,
1998 DECEMBER 31,
ASSETS (UNAUDITED) 1997
----------- ------
<S> <C> <C>
Cash and cash equivalents $ 21,815 $ 36,248
Cash and securities segregated under federal regulations 15,545 15,363
Receivables from:
Customers 1,225,843 935,795
Brokers and dealers 59,867 119,883
Others 83,221 56,187
Securities borrowed 47,473 42,695
Securities owned, at market 225,140 188,830
Securities purchased under agreements to resell 227,434 309,457
Investment in mortgage-backed certificates
available-for-sale, at fair value 114,556 129,904
Fixed assets, at cost, net 45,290 37,769
Other assets 85,571 33,939
---------- ----------
$2,151,755 $1,906,070
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Bank loans payable $ 396,000 $ 304,000
Payables to:
Customers 214,371 192,817
Brokers and dealers 35,071 29,021
Securities loaned 403,277 228,477
Collateralized mortgage obligations 105,901 121,970
Securities sold, not yet purchased, at market 131,024 130,868
Securities sold under agreements to repurchase 231,720 322,972
Deferred income taxes 2,915 5,871
Accounts payable, accrued expenses and other liabilities 263,845 235,133
---------- ----------
1,784,124 1,571,129
---------- ----------
Stockholders' Equity:
Common stock, $.01 par value per share; 100,000,000
shares authorized, 34,864,881 and 17,120,026 outstanding at
June 30, 1998 and December 31, 1997, respectively 359 175
Additional paid-in capital 285,938 269,608
Unearned cost of restricted stock (17,606) (8,269)
Treasury stock, at cost, 1,010,880 and 455,775 shares at June 30, 1998
and December 31, 1997, respectively (9,395) (7,663)
Retained earnings (since January 1, 1996) 111,779 85,079
Accumulated other comprehensive loss-
Net unrealized loss on available-for-sale securities (3,444) (3,989)
---------- ----------
367,631 334,941
---------- ----------
$2,151,755 $1,906,070
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
EVEREN CAPITAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
THREE AND SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue:
Commissions $ 87,942 $ 61,901 $ 178,785 $ 123,712
Principal transactions 27,005 24,656 56,637 47,929
Investment banking 26,668 15,514 48,485 25,504
Asset management 27,521 16,917 52,068 33,591
Other 7,279 7,721 22,251 16,002
Interest and dividends 28,915 18,195 55,560 36,217
----------- ----------- ----------- -----------
Total revenue 205,330 144,904 413,786 282,955
Interest expense 14,984 6,728 28,803 13,468
----------- ----------- ----------- -----------
Net revenue 190,346 138,176 384,983 269,487
Non-interest expenses:
Compensation and benefits 114,091 80,267 229,004 158,812
Brokerage and clearance 5,503 4,043 11,004 8,249
Communications 12,265 10,350 25,536 19,960
Occupancy and equipment 12,357 10,006 24,433 19,941
Promotional 6,498 5,461 12,938 10,050
Other 15,617 10,789 31,786 18,995
----------- ----------- ----------- -----------
Total non-interest expenses 166,331 120,916 334,701 236,007
Income before income taxes 24,015 17,260 50,282 33,480
Income tax expense 9,138 6,445 19,264 12,564
----------- ----------- ----------- -----------
Net income $ 14,877 $ 10,815 $ 31,018 $ 20,916
=========== =========== =========== ===========
Other comprehensive income -
Unrealized gain (loss) on
available-for-sale securities,
net of tax (238) 1,890 545 (39)
----------- ----------- ----------- -----------
Comprehensive income $ 14,639 $ 12,705 $ 31,563 $ 20,877
=========== =========== =========== ===========
Weighted average common shares outstanding:
Basic 32,654,295 32,253,500 32,659,414 32,162,254
=========== =========== =========== ===========
Diluted 35,381,103 34,060,008 35,043,666 33,731,390
=========== =========== =========== ===========
Net income per share:
Basic $ .46 $ .34 $ .95 $ .65
=========== =========== =========== ===========
Diluted $ .42 $ .32 $ .89 $ .62
=========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
EVEREN CAPITAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
SIX MONTHS ENDED JUNE 30, 1998
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Accumulated Other
Unearned Comprehensive Income-
Additional Cost of Unrealized gain
Paid-In Restricted (loss) on available- Treasury
Common Stock Capital Stock for-sale securities Stock
------------ ------- ---------- --------------------- --------
<S> <C> <C> <C> <C> <C>
Balances at December 31, 1997 $ 175 $269,608 $ (8,269) $(3,989) $(7,663)
Issuance of additional common stock
under equity plans 5 15,435 (9,337)
Dividend on common stock
Two-for-one stock split 179 (174) (5)
Change in unrealized gain (loss) for the period
Purchase of treasury stock 545
Tax benefit from stock option exercise (1,727)
Net income 1,069
------- -------- -------- ------- -------
Balances at June 30, 1998 $ 359 $285,938 $(17,606) $(3,444) $(9,395)
======= ======== ======== ======= =======
<CAPTION>
Retained Total
Earnings Stockholders'
(since 1/1/96) Equity
-------------- ------
<S> <C> <C>
Balances at December 31, 1997 $ 85,079 $334,941
Issuance of additional common stock
under equity plans 6,103
Dividend on common stock (4,318) (4,318)
Two-for-one stock split -
Change in unrealized gain (loss) for the period 545
Purchase of treasury stock (1,727)
Tax benefit from stock option exercise 1,069
Net income 31,018 31,018
-------- ---------
Balances at June 30, 1998 $111,779 $ 367,631
======== =========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
EVEREN CAPITAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 31,018 $ 20,916
Adjustments to reconcile net income to net cash flows
from operating activities:
Depreciation and amortization 9,841 7,560
Deferred income taxes (3,249) (6,187)
Change in assets and liabilities:
Cash and securities segregated under federal
and other regulations (182) 130
Receivables from/payables to:
Customers (268,494) (73,241)
Brokers and dealers 71,409 45,101
Others (18,735) 6,071
Securities borrowed (4,778) (4,835)
Securities owned (22,923) (32,743)
Securities purchased under agreements to resell 100,023 (3,762)
Other assets (2,107) (4,180)
Securities loaned 174,801 41,153
Securities sold, not yet purchased (1,652) 26,113
Securities sold under agreements to repurchase (91,252) (45,994)
Accounts payable, accrued expenses,
and other liabilities (18,550) 5,616
--------- --------
Net cash flows used in operating activities (44,830) (18,282)
--------- --------
Cash flows from investing activities:
Acquisition of Principal Securities, net of cash acquired (51,308) -
Collections of principal on investments in mortgage-
backed securities 16,552 7,208
Acquisition of fixed assets, net (13,274) (8,506)
--------- --------
Net cash flows used in investing activities (48,030) (1,298)
--------- --------
Cash flows from financing activities:
Dividends paid (4,318) (3,097)
Proceeds from common stock issuance 8,805 6,751
Repayment of collateralized mortgage obligations (16,333) (7,212)
Increase in bank loans payable 92,000 23,000
Purchase of treasury stock (1,727) (2,013)
--------- --------
Net cash flows provided by financing activities 78,427 17,429
--------- --------
Decrease in cash and cash equivalents (14,433) (2,151)
Cash and cash equivalents at beginning of the period 36,248 46,592
--------- --------
Cash and cash equivalents at end of the period $ 21,815 $ 44,441
========= ========
Supplemental disclosure of cash flow information:
Interest paid $ 29,352 $ 16,579
========= ========
Income taxes paid $ 21,366 $ 14,317
========= ========
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
EVEREN CAPTIAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 1998
(UNAUDITED)
- --------------------------------------------------------------------------------
(1) GENERAL INFORMATION
-------------------
The consolidated financial statements, prepared in accordance with
generally accepted accounting principles, include the accounts of EVEREN
Capital Corporation and its subsidiaries (the "Company" or "EVEREN"). On
January 9, 1998 the Company completed its previously announced acquisition
of Principal Securities Holding Corporation and its wholly-owned
subsidiary, Principal Financial Securities, Inc. ("Principal Securities").
The consolidated financial statements are unaudited. However, in the
opinion of management, such financial statements include all adjustments,
consisting of normal recurring accruals, necessary for the fair
presentation of the accompanying consolidated financial statements.
Certain information and footnotes normally included in financial statements
prepared in accordance with generally accepted accounting principles have
been omitted pursuant to Securities and Exchange Commission ("SEC") rules
and regulations. Accordingly, these financial statements should be read in
conjunction with the financial statements and notes thereto included in the
Company's 1997 Annual Report on Form 10-K.
All material intercompany balances and transactions have been eliminated.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts. Actual results could differ
from those estimates. The results of operations for interim periods are
not necessarily indicative of results for the entire year.
Certain reclassifications have been made in the prior period financial
statements to conform to the current period presentation.
On May 11, 1998, the Company's Board of Directors approved a two-for-one
stock split of its common shares. The split was effected in the form of a
stock dividend, distributed on June 16, 1998 to shareholders of record on
June 2, 1998. Prior period earnings per share and per share data on the
Company's Consolidated Statements of Operations and Comprehensive Income
have been restated to reflect the split.
The Financial Accounting Standards Board issued Statement No. 130,
"Reporting Comprehensive Income," in June 1997. The Company adopted the
provisions of the new standard in the first quarter of 1998. In accordance
with the statement, prior year financial statements have been reclassified
to be consistent with the current year presentation. The only item of
comprehensive income that the Company has is unrealized gains (losses) on
available-for-sale securities.
7
<PAGE>
EVEREN CAPTIAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 1998
(UNAUDITED)
- --------------------------------------------------------------------------------
(2) NET CAPITAL RULE
----------------
EVEREN Securities, Inc. ("EVEREN Securities") and EVEREN Clearing Corp.
("EVEREN Clearing") the Company's broker-dealer subsidiaries, are subject
to the Uniform Net Capital Rule of the SEC. EVEREN Securities and EVEREN
Clearing, each operate under the alternative method, as defined, of
computing minimum net capital. At June 30, 1998, EVEREN Securities had net
capital of approximately $130.0 million which was approximately $129.0
million in excess of its required minimum net capital. At June 30, 1998,
EVEREN Clearing had net capital of approximately $88.5 million which was
approximately $64.0 million in excess of its required minimum net capital.
Such net capital requirements could restrict the ability of these
subsidiaries to make dividend distributions to their parent.
(3) COMMITMENTS AND CONTINGENCIES
-----------------------------
The Company has been named as a defendant in various legal actions in
connection with its securities and commodities business. Some of these
lawsuits involve claims for substantial amounts. Although the ultimate
outcome of these suits cannot be ascertained at this time, it is the
opinion of management, after consultation with outside counsel, that the
resolution of such suits will not have a material adverse effect on the
consolidated financial position of the Company, but may be material to the
Company's operating results for any particular period, depending upon the
level of the Company's income for such period.
In the normal course of business, the Company enters into various
contractual commitments involving future settlement. These include
futures, forwards, options and securities sold, not yet purchased. These
transactions are executed either over-the-counter or are exchange-traded,
and are used primarily to hedge the Company's securities inventory. Many
of these products have maturities that do not extend beyond one year.
Transactions relating to such commitments which were open at June 30, 1998,
and subsequently settled, had no material effect on the consolidated
financial position of the Company.
(4) SUBSEQUENT EVENT
----------------
On August 5, 1998, EVEREN and The Bank of New York Company Inc. ("BONY")
entered into a definitive agreement pursuant to which BONY will acquire an
80 percent interest in EVEREN Clearing. EVEREN will realize a one-time
after-tax gain of approximately $13 million. The transaction is expected
to be completed in the fourth quarter of 1998 and is subject to regulatory
and other approvals. As a result of the transaction, EVEREN Securities
will become a carrying broker-dealer. The transaction is not expected to
have a significant impact on the Company's earnings from operations.
8
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion should be read in conjunction with the Company's
consolidated financial statements and notes thereto contained in Item 1 of this
report. In addition to historical information, the following Management's
Discussion and Analysis of Financial Condition and Results of Operations
contains forward-looking statements. Such forward looking statements are within
the meaning of that term in Section 27A of the Securities Act of 1933, as
amended, and Section 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 for future operations, financing
needs or plans, and plans relating to products or services of the Company, as
well as assumptions relating to the foregoing.
Forward looking statements are inherently subject to risks and
uncertainties, some of which cannot be predicted or quantified. Future events
and actual results could differ materially from those contemplated by the
forward looking statements. Statements in this quarterly report, including the
notes to the consolidated financial statements and "Management's Discussion and
Analysis of Financial Condition and Results of Operations," describe factors,
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 1997
continued throughout the first half of 1998, contributing to higher industry-
wide securities revenues and net income. Conditions in the U.S. trading markets
continued to be favorable, 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.
The performance of U.S. equity markets continued to be very positive in the
first half of 1998, primarily resulting from strong corporate earnings, high
levels of cash inflows into mutual funds, and a continued strong volume of
equity issuances.
COMPANY DEVELOPMENTS
On January 9, 1998, EVEREN completed the acquisition of Principal
Securities Holding Corporation ("PSHC") and its wholly-owned subsidiary,
Principal Financial Securities, Inc. ("Principal Securities"), from Principal
Mutual Life Insurance Company for $75 million in cash.
9
<PAGE>
Principal Securities was combined with the operations of EVEREN Securities
during the second quarter of 1998.
On May 11, 1998, the Company's Board of Directors approved a two-for-one
split of its common shares ("Common Stock"). The split was effected in the form
of a stock dividend and distributed on June 16, 1998 to shareholders of record
on June 2, 1998.
On August 5, 1998, EVEREN and The Bank of New York Company Inc. ("BONY")
entered into a definitive agreement pursuant to which BONY will acquire an 80
percent interest in EVEREN Clearing. EVEREN will realize a one-time after-tax
gain of approximately $13 million. The transaction is expected to be completed
in the fourth quarter of 1998 and is subject to regulatory and other approvals.
As a result of the transaction, EVEREN Securities will become a carrying broker-
dealer. The transaction is not expected to have a significant impact on the
Company's earnings from operations.
Consistent with the generally strong economic and market conditions seen
throughout the securities industry in the first half of 1998, 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 in
which the Company has participated.
EQUITY PARTICIPATION OF EMPLOYEES
As of June 30, 1998, the Company's current employees and directors, through
the Company's 401(k) and Employee Stock Ownership Plan ("the KSOP") and through
other employee plans, own approximately 63% of the outstanding Common Stock.
To continue to encourage such ownership and to motivate personnel, the
Company sponsors three employee benefit plans to provide current and future
employees the opportunity to acquire Common Stock outside of the KSOP.
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.
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
10
<PAGE>
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.
RESULTS OF OPERATIONS
The following table sets forth certain financial data as a percentage of net
revenues:
Consolidated Statement of Operations Data:
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
1998 1997 1998 1997
------- ------- ------ ------
<S> <C> <C> <C> <C>
Revenue:
Commissions 46.2% 44.8% 46.4% 45.9%
Principal transactions 14.2 17.8 14.7 17.8
Investment banking 14.0 11.2 12.6 9.5
Asset management 14.5 12.2 13.5 12.5
Other 3.8 5.7 5.8 5.9
Interest 15.2 13.2 14.4 13.4
----- ----- ----- -----
Total revenue 107.9 104.9 107.5 105.0
Interest expense 7.9 4.9 7.5 5.0
----- ----- ----- -----
Net revenue 100.0 100.0 100.0 100.0
----- ----- ----- -----
Non-interest expenses:
Compensation and benefits 59.9 58.1 59.5 58.9
Brokerage and clearance 2.9 2.9 2.9 3.1
Communications 6.4 7.5 6.6 7.4
Occupancy and equipment 6.5 7.2 6.3 7.4
Promotional 3.4 4.0 3.4 3.7
Other 8.3 7.8 8.3 7.1
----- ----- ----- -----
Total non-interest expenses 87.4 87.5 86.9 87.6
Income before income taxes 12.6 12.5 13.1 12.4
Income tax expense 4.8 4.7 5.0 4.6
----- ----- ----- -----
Net income 7.8% 7.8% 8.1% 7.8%
===== ===== ===== =====
</TABLE>
11
<PAGE>
Three and six months ended June 30, 1998 compared to the three and six months
ended June 30, 1997
The Company experienced strong operating results for the first half of 1998
when compared to the first half of 1997. Contributing significantly to these
results was the acquisition of Principal Securities in the beginning of the
first quarter of 1998. Both revenues and expenses are higher in the first half
of 1998 than in the comparable period of 1997 as a result of the Principal
Securities acquisition; additionally, revenues from the Company's core
businesses also increased significantly. Non-interest expenses have increased in
most areas, generally in direct correlation with the increased revenues. Net
income has improved significantly in the first half of 1998 when compared to the
first half of 1997. Management attributes these results to several factors
including the favorable conditions which prevailed in the equity markets
throughout the first half of 1998, reflecting continued investor optimism
concerning inflation and relative interest rate stability. Additionally, the
Company experienced strong growth in its retail and institutional brokerage
operations and asset management activities. Finally, in the first quarter of
1998, the Company received an arbitration award of $6.0 million in connection
with the raiding of four of its retail branch offices in 1994 by a competitor
firm which resulted in a $2.9 million increase in net income after related
expenses and taxes.
Total revenue increased $60.4 million and $130.8 million or 42% and 46% to
$205.3 million and $413.8 million for the three and six months ended June 30,
1998 from $144.9 million and $282.9 million for the three and six months ended
June 30, 1997. Net revenues increased $52.1 million and $115.5 million or 38%
and 43% to $190.3 million and $385.0 million for the three and six months ended
June 30, 1998 from $138.2 million and $269.5 million for the three and six
months ended June 30, 1997. As previously noted, the Company acquired Principal
Securities in the first quarter of 1998, which contributed in part to the
significant revenue growth.
Commission revenue increased $26.0 million and $55.1 million or 42% and 45%
to $87.9 million and $178.8 million for the three and six months ended June 30,
1998 from $61.9 million and $123.7 million for the three and six months ended
June 30, 1997. The strong increase in commission revenues is due in part to the
acquisition of the retail brokerage force of Principal Securities and the
continued strong productivity of the Company's retail brokerage force. The
balance is due to growth in sales of mutual fund and annuity products, and to a
lesser degree, the movement by investors from the small to mid-cap over-the-
counter equities to investments in listed securities.
Principal transactions revenue increased $2.3 million and $8.7 million or
10% and 18% to $27.0 million and $56.6 million for the three and six months
ended June 30, 1998 from $24.7 million and $47.9 million for the three and six
months ended June 30, 1997. This increase is due largely to the consistently
strong market in 1998 compared to some volatility that characterized the equity
markets in part of the 1997 first quarter, as well as the increase in
transactional volume that resulted from the larger investment consultant
population in the current year.
Investment banking revenue increased $11.2 million and $23.0 million or 72%
and 90% to $26.7 million and $48.5 million for the three and six months ended
June 30, 1998 from $15.5 million and $25.5 million for the three and six months
ended June 30, 1997. These increases are the result of the Company's strategy
of developing its corporate finance business in several targeted industry
sectors, which has been aided by favorable IPO market conditions. This focus
12
<PAGE>
enabled the Company to participate in a larger number of underwritings,
including equity, taxable and tax-exempt issues, in the first half of 1998 when
compared to 1997.
Asset management revenue increased $10.6 million and $18.5 million or 63%
and 55% to $27.5 million and $52.1 million for the three and six months ended
June 30, 1998 from $16.9 million and $33.6 million for the three and six months
ended June 30, 1997, due to the significant growth of client assets invested in
managed accounts (approximately 64% over the prior year) and mutual funds and
the resulting increase in managed account fees and 12b-1 distribution fees. The
increase also reflects the growth in earnings in Mentor Investment Group, in
which the Company currently holds a twenty percent equity interest.
Other income decreased $.4 million or 6% and increased $6.2 million or 39%
to $7.3 million and $22.2 million for the three and six months ended June 30,
1998 from $7.7 million and $16.0 million for the three and six months ended June
30, 1997. The increase for the six month period in 1998 is attributable to the
$6.0 million arbitration award discussed earlier; excluding this award, other
income increased slightly, $0.2 million or 1%, for the first half of 1998 when
compared to the first half of 1997.
Interest and dividend income increased $10.7 million and $19.3 million or
59% and 53% to $28.9 million and $55.6 million for the three and six months
ended June 30, 1998 from $18.2 million and $36.2 million in the corresponding
periods in 1997. Net interest increased $2.4 million and $4.0 million or 21%
and 18% to $13.9 million and $26.8 million for the three and six months ended
June 30, 1998 from $11.5 million and $22.7 million for the three and six months
ended June 30, 1997. These increases are a result of significant growth in the
Company's customer margin accounts, specifically a 29% growth in average margin
debits in the first half of 1998 when compared to 1997.
Total non-interest expenses increased $45.4 million and $98.7 million or
38% and 42% to $166.3 million and $334.7 million for the three and six months
ended June 30, 1998 from $120.9 million and $236.0 million for the three and six
months ended June 30, 1997. The acquisition of Principal Securities as well as
the Company's internal growth created significant increases in most expense
categories.
Compensation and benefits expense increased $33.8 million and $70.2 million
or 42% and 44% to $114.1 million and $229.0 million for the three and six months
ended June 30, 1998 from $80.3 million and $158.8 million for the three and six
months ended June 30, 1997. These increases are directly attributable to the
growth in commission revenue, principal transactions revenue and investment
banking revenues in the first half of 1998, resulting in increased production-
based payouts. This increase is also related to the acquisition of Principal
Securities as mentioned above, which generally had higher percentages of
compensation expense to net revenues, and the increased employee base in the
first half of 1998 when compared to the first half of 1997.
Brokerage and clearance expense increased $1.5 million and $2.8 million or
36% and 33% to $5.5 million and $11.0 million for the three and six months ended
June 30, 1998 from $4.0 million and $8.2 million for the three and six months
ended June 30, 1997. The increase reflects the variable nature of this expense,
which increased in relative proportion to the growth in transactional revenue in
1998 over 1997.
13
<PAGE>
Communications expense increased $1.9 million and $5.6 million or 19% and
28% to $12.3 million and $25.5 million for the three and six months ended June
30, 1998 from $10.4 million and $19.9 million for the three and six months ended
June 30, 1997, primarily due to an increased number of employees in 1998 when
compared to the corresponding periods in 1997 and to ongoing technology
enhancements initiated in late 1997 to improve the Company's overall
productivity and competitiveness.
Occupancy and equipment expense increased $2.4 million and $4.5 million or
24% and 23% to $12.4 million and $24.4 million for the three and six months
ended June 30, 1998 from $10.0 million and $19.9 million for the three and six
months ended June 30, 1997. These increases are largely the result of the
Principal Securities acquisition, which added approximately 35 new branch office
locations to the Company's existing retail system.
Promotional expense increased $1.0 million and $2.9 million or 19% and 29%
to $6.5 million and $12.9 million for the three and six months ended June 30,
1998 from $5.5 million and $10.0 million for the three and six months ended June
30, 1997. These increases are due to both the acquisition of Principal
Securities and the Company's own internal growth.
Other expenses increased $4.8 million and $12.8 million or 45% and 67% to
$15.6 million and $31.8 million for the three and six months ended June 30, 1998
from $10.8 million and $19.0 million for the three and six months ended June 30,
1997. These increases are related primarily to an increase in professional fees
which includes $1.1 million of fees related to the aforementioned NYSE
arbitration award; as well as additional costs of licensing, insurance and
various other office expenses resulting from the increased employee and customer
base in the first half of 1998 when compared to 1997, and the integration of
Principal Securities into the operations of EVEREN Securities.
The Company's income tax expense for the three and six months ended June
30, 1998 totaled $9.1 million and $19.3 million, which represented effective tax
rates on income before taxes of 38.1% and 38.3% respectively, compared to $6.4
million and $12.6 million or 37.3% and 37.5% effective tax rates for the three
and six months ended June 30, 1997.
Net income increased $4.1 million and $10.1 million or 38% and 48% to $14.9
million and $31.0 million for the three and six months ended June 30, 1998 from
$10.8 million and $20.9 million for the three and six months ended June 30,
1997.
Comprehensive income, which includes net income plus the change in
unrealized gains (losses) on available-for-sale securities, increased $1.9
million and $10.7 million or 15% and 51% to $14.6 million and $31.6 million for
the three and six months ended June 30, 1998 from $12.7 million and $20.9
million for the three and six months ended June 30, 1997.
14
<PAGE>
QUARTERLY RESULTS
The information set forth below is derived from unaudited quarterly
financial statements of the Company. Such financial statements have been
prepared by the Company on a basis consistent with the consolidated financial
statements included elsewhere in this report and include all adjustments,
consisting principally of normal recurring accruals, that the Company considers
necessary for a fair presentation thereof. These operating results are not
necessarily indicative of the Company's future performance.
<TABLE>
<CAPTION>
Three months ended
------------------
6/30/98 3/31/98 12/31/97 9/30/97 6/30/97 3/31/97 12/31/96 9/30/96
-------- -------- -------- -------- -------- --------- -------- -------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Commissions $ 87,942 $ 90,843 $ 71,137 $ 73,099 $ 61,901 $ 61,811 $ 57,349 $ 50,741
Principal transactions 27,005 29,632 26,789 28,174 24,656 23,273 23,558 26,389
Investment banking 26,668 21,817 28,768 15,272 15,514 9,990 17,230 11,677
Asset management 27,521 24,546 20,026 18,493 16,267 16,098 14,806 14,776
Other 7,279 14,972 8,672 7,405 8,371 8,856 9,775 7,234
Interest 28,915 26,645 22,761 26,201 18,195 18,023 18,328 18,270
-------- -------- -------- -------- -------- -------- --------- --------
Total revenue 205,330 208,455 178,153 168,644 144,904 138,051 141,046 129,087
Interest expense 14,984 13,819 10,072 13,113 6,728 6,740 6,850 8,613
-------- -------- -------- -------- -------- -------- --------- --------
Net revenue 190,346 194,636 168,081 155,531 138,176 131,311 134,196 120,474
Non-interest expenses:
Compensation and benefits 114,091 114,913 100,635 93,024 80,267 78,545 80,170 75,601
Brokerage and clearance 5,503 5,502 4,438 4,487 4,043 4,206 3,938 3,773
Communications 12,265 13,270 11,644 10,996 10,350 9,609 9,495 8,883
Occupancy and equipment 12,357 12,076 10,479 10,336 10,006 9,935 9,200 9,676
Promotional 6,498 6,440 6,384 5,091 5,461 4,589 5,166 4,326
Other 15,617 16,167 12,977 11,613 10,789 8,206 11,195 6,640
-------- -------- -------- -------- -------- -------- --------- --------
Total non-interest expenses 166,331 168,368 146,557 135,547 120,916 115,090 119,164 108,899
Income before income taxes
and extraordinary charge 24,015 26,268 21,524 19,984 17,260 16,221 15,032 11,575
Income tax expense 9,138 10,127 8,195 7,672 6,445 6,119 5,269 5,165
-------- -------- -------- -------- -------- -------- --------- --------
Income before
extraordinary charge 14,877 16,141 13,329 12,312 10,815 10,102 9,763 6,410
Extraordinary charge, net of
income taxes of $1,561 - - - - - - - (2,900) (1)
-------- -------- -------- -------- -------- -------- --------- --------
Net income $ 14,877 $ 16,141 $ 13,329 $ 12,312 $ 10,815 $ 10,102 $ 9,763 $ 3,510 (1)
======== ======== ======== ======== ======== ======== ========= ========
</TABLE>
____________________________________
(1) Includes a $2.9 million after-tax charge related to the early retirement
of the Company's Debentures.
15
<PAGE>
The following table sets forth certain financial data as a percentage of net
revenues.
<TABLE>
<CAPTION>
Three months ended
-------------------
6/30/98 3/31/98 12/31/97 9/30/97 6/30/97 3/31/97 12/31/96 9/30/96
------- ------- -------- -------- -------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Commissions 46.2% 46.7% 42.3% 47.0% 44.8% 47.1% 42.7% 42.1%
Principal transactions 14.2 15.2 15.9 18.1 17.8 17.7 17.6 21.9
Investment banking 14.0 11.2 17.1 9.8 11.2 7.6 12.8 9.7
Asset management 14.5 12.6 11.9 11.9 11.8 12.3 11.0 12.3
Other 3.8 7.7 5.3 4.8 6.1 6.7 7.3 6.0
Interest 15.2 13.7 13.5 16.8 13.2 13.7 13.7 15.2
------- ------- ------- ------- -------- ------- ----- -----
Total revenue 107.9 107.1 106.0 108.4 104.9 105.1 105.1 107.2
Interest expense 7.9 7.1 6.0 8.4 4.9 5.1 5.1 7.2
------- ------- ------- ------- -------- ------- ----- -----
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 59.0 59.9 59.8 58.1 59.8 59.7 62.8
Brokerage and clearance 2.9 2.8 2.6 2.9 2.9 3.2 2.9 3.1
Communications 6.4 6.8 6.9 7.1 7.5 7.3 7.1 7.4
Occupancy and equipment 6.5 6.2 6.2 6.6 7.2 7.6 6.9 8.0
Promotional 3.4 3.3 3.8 3.3 4.0 3.5 3.9 3.6
Other 8.3 8.4 7.8 7.5 7.8 6.2 8.3 5.5
------- ------- ------- ------- -------- ------- ----- -----
Total non-interest expenses 87.4 86.5 87.2 87.2 87.5 87.6 88.8 90.4
Income before income taxes
and extraordinary charge 12.6 13.5 12.8 12.8 12.5 12.4 11.2 9.6
Income tax expense 4.8 5.2 4.9 4.9 4.7 4.7 3.9 4.3
------- ------- ------- ------- -------- ------- ----- -----
Net income 7.8% 8.3% 7.9% 7.9% 7.8% 7.7% 7.3% 5.3%
======= ======= ======= ======= ======== ======= ===== =====
</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.
The generally upward trend in the Company's net revenues for the eight
quarterly periods ended June 30, 1998 reflects 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 that 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.
While in absolute dollar amounts, non-interest expenses have trended up
during the eight periods, such increases are generally attributable to the
variable nature of compensation and benefits expense and brokerage and clearance
expense as well as certain other expenses, which are significantly correlated to
revenue growth. As a percentage of net revenues, non-interest expenses have
generally trended downward during such periods, which management believes to be
a result of the Company's focus on profitability growth and cost containment.
16
<PAGE>
Net income, both in absolute dollar amounts and as a percentage of net
revenues, also generally reflect 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 2 of Notes to Consolidated Financial Statements
contained in Item 1 of this report. The Company has also generated funds from
bank loans and the issuance of Common Stock to employees.
Upon 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, which was paid in December 1997 and March 1998.
On May 11, 1998, the Company's Board of Directors approved a two-for-one stock
split of its common shares. The split was effected by means of a stock dividend
to shareholders of record on June 2, 1998, and distributed on June 16, 1998. The
Board of Directors also approved an additional increase in the Company's
dividend to $.14 per pre-split share, or $.07 per post-split share, also payable
to shareholders of record on June 2, 1998.
In 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. Interest on the outstanding borrowing is based upon the Company's
election of a "reference rate" equal to LIBOR or the banks' prime rate (6.9% at
June 30, 1998). On January 9, 1998, the Company borrowed $50 million under this
facility in connection with its acquisition of PSHC and its wholly-owned
subsidiary, Principal Securities. At June 30, 1998, $15 million is outstanding
pursuant to this credit facility.
The Company believes that its current level of equity capital, combined
with funds generated from operations, will be adequate to fund its capital needs
for the foreseeable future.
17
<PAGE>
Operating Subsidiaries
The assets of EVEREN Securities and EVEREN Clearing Corp, the Company's
primary operating subsidiaries (the "Subsidiaries"), are highly liquid. The
majority of their assets consist of securities inventories and collateralized
receivables, both of which fluctuate depending on the levels of customer
business. Collateralized receivables consist primarily of securities purchased
under agreements to resell ("resale agreements") and securities borrowed, both
of which are secured by U.S. government and agency securities and highly
marketable corporate debt and equity securities. In addition, the Subsidiaries
have significant receivables from customers, brokers and dealers which turn over
rapidly. The Subsidiaries' total assets and the individual components of total
assets vary significantly from period to period because of changes relating to
customer needs and economic and market conditions. A relatively small
percentage of total assets is fixed or held for a period of longer than one
year. The Company's total assets at June 30, 1998 and December 31, 1997 were
approximately $2.2 billion and $1.9 billion, respectively.
The majority of the Subsidiaries' assets are financed through daily
operations by securities sold under agreements to repurchase, securities sold
not yet purchased, bank loans, through payables to customers, brokers and
dealers, and through securities loaned. Short-term funding is generally
obtained at rates based on the federal funds, LIBOR and money market rates.
Other borrowing costs are negotiated depending upon prevailing market
conditions. The Company monitors overall liquidity by tracking the extent to
which unencumbered marketable assets exceed short-term unsecured borrowings.
The Company maintains borrowing relationships with a broad range of banks,
financial institutions, counterparties and others. At June 30, 1998, the
Subsidiaries had approximately $695 million in uncommitted credit lines with
several banks.
On January 23, 1998, the Company, through its wholly-owned subsidiary
EVEREN Clearing, 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. No borrowings have been made
under this facility.
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
18
<PAGE>
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. The Company's net cash flows are
principally associated with operating and financing activities, which support
the Company's trading, customer and banking activities.
Six months ended June 30, 1998 and 1997
Cash and cash equivalents at June 30, 1998 and 1997 totaled $21.8 million
and $44.4 million, respectively, reflecting decreases of $14.4 million and $2.2
million, respectively from its year end balances.
For the six months ended June 30, 1998 cash generated by financing
activities was used in the acquisition of Principal Securities and in operating
activities, and for the six months ended June 30, 1997, cash used by operating
activities was generated primarily through financing activities by an increase
in bank loans payable.
Net cash used in operating activities totaled $44.8 million and $18.3
million in 1998 and 1997, respectively. In 1998, increases in receivables from
customers and others of $287.2 million and decreases in securities purchased
under agreements to resell of $100.0 million used cash. This was partially
offset by an increase in securities loaned $174.8 million and a decrease in
receivables from broker-dealers of $71.4 million. In 1997, changes in
securities owned and securities sold not yet purchased of $6.6 million and
securities purchased under agreements to resell and repurchase of $49.8 million
used cash. These uses were partially offset by changes in securities borrowed
and loaned of $36.3 million.
In 1998, net cash used in investing activities is comprised primarily of
the $51.3 million cash used to acquire Principal Securities, net of cash
acquired. In 1997, net cash used in investing activities of $1.3 million is the
result of collections of principal on investments in mortgage-backed securities
of $7.2 million offset by a net increase of $8.5 million of fixed assets.
In 1998, net cash from financing activities is primarily the result of a
$92.0 million increase in bank loans payable. In 1997, net cash flows from
financing activities amounted to $17.4 million, the net result of a $23 million
increase in bank loans, $6.8 million of proceeds from the issuance of common
stock, payment of dividends of $3.1 million and the repayment of collateralized
mortgage obligations of $7.2 million.
19
<PAGE>
DERIVATIVE FINANCIAL INSTRUMENTS
Derivatives are financial instruments, the payments on which are linked to
the prices, or relationships between prices, of securities or commodities,
interest rates, currency exchange rates or other financial measures
(collectively referred to as "cash market instruments"). Derivatives enable the
Company and its clients to manage their exposure to interest rates and currency
exchange rates, and security and other price risks. Derivatives include
structured notes, swaps, futures or forward contracts and options. Certain
types of derivatives, including forwards and certain options, are traded in the
OTC markets. Other types of derivatives, including futures contracts and listed
options, are traded on regulated exchanges.
Based on relative notional amounts, management believes that the Company's
derivative activities are not as extensive as those of many of its competitors.
The Company does not engage in the speculative trading of derivatives. Instead,
the Company has focused its derivative activities on trading in forward and
futures contracts in U.S. government and agency issued or guaranteed securities
as hedges against the Company's securities inventory positions. The Company
also executes transactions in exchange-traded futures contracts and listed
options on behalf of its customers.
The Company enters into certain futures and options contracts on a limited
basis in the ordinary course of its business to hedge or modify exposures to
interest rate fluctuations related to interest-sensitive securities in its
inventory. Given the limited use of such derivatives, the Company has not
incurred and does not expect to incur any material losses relating to its
derivative investments that would not be substantially offset with corresponding
gains on the securities positions hedged. Both the securities hedged and the
derivative instruments are carried on the statement of financial condition at
their market values. Gains and losses, both realized and unrealized, from both
the hedged securities and the derivative instruments are included in current
operating results.
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.
20
<PAGE>
Item 3: 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 June 30, 1998 and December 31, 1997, the Company's securities owned and
securities sold, not yet purchased consisted of the following (in thousands):
<TABLE>
<CAPTION>
6/30/98 12/31/97
-------- ---------
<S> <C> <C>
OWNED
- -----
Obligations of the U.S. Government
or its agencies $ 92,438 $ 97,401
State and municipal obligations 32,274 24,753
Corporate debt obligations 74,237 51,668
Corporate stocks and warrants 23,486 13,463
Other 2,705 1,545
-------- ---------
$225,140 $ 188,830
======== =========
SOLD, NOT YET PURCHASED
- -----------------------
Obligations of the U.S. Government
or its agencies $105,051 $ 114,045
State and municipal obligations 262 308
Corporate debt obligations 6,942 8,926
Corporate stocks and warrants 16,600 6,264
Other 2,169 1,325
-------- ---------
$131,024 $ 130,868
======== =========
</TABLE>
The Company manages risk exposure utilizing mechanisms involving various
levels of management. The Company's risk management committee assists senior
management in managing risk associated with trading and inventory accounts. The
primary function of this committee is to establish and monitor position limits
for these accounts on an ongoing basis. Current and proposed underwriting and
other commitments are subject to due diligence reviews
21
<PAGE>
by senior management as well as professionals in the appropriate business and
support units involved.
The Company's trading activities result in the creation of inventory
positions. Position and exposure reports are prepared daily by operations
staff. Such reports are distributed to and reviewed independently on a daily
basis by the Company's risk management committee as well as members of senior
management. In addition, the corporate accounting group prepares 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
22
<PAGE>
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.
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.
23
<PAGE>
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
(a) The annual meeting of stockholders of the Company was held on May 11, 1998.
(b) At the annual meeting, the following directors, constituting the entire
board of directors, were elected until the 1999 annual meeting of stockholders
of the Company, or until their respective successors have been elected and
qualified: James R. Boris, William T. Esrey, Donald P. Jacobs, Jack Kemp, Homer
J. Livingston, Jr., Stephen G. McConahey, Samuel K. Skinner, William C. Springer
and Donna F. Tuttle.
(c) The number of votes cast for and withheld for each of the nominees for
director were as follows:
<TABLE>
<CAPTION>
Board Member For Withheld
------------ ---------- --------
<S> <C> <C>
James R. Boris 15,541,780 245,768
William T. Esrey 15,576,445 211,104
Donald P. Jacobs 15,648,504 139,045
Jack Kemp 15,631,930 155,619
Homer J. Livingston, Jr. 15,524,198 263,351
Stephen G. McConahey 15,399,075 388,474
Samuel K. Skinner 15,546,991 240,557
William C. Springer 15,636,238 151,311
Donna F. Tuttle 15,646,014 141,535
</TABLE>
In addition to the election of directors, the following matter was voted
upon by the holders of the Company's Common Stock:
For Against Abstain
---- ------- -------
Ratification of Deloitte &
Touche LLP as the Company's
independent accountants for
1998 15,710,184 42,175 35,190
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K have been filed by the Registrant during
the period covered by this report.
24
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, EVEREN
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
EVEREN CAPITAL CORPORATION
Date: August 14, 1998 By: /s/ Daniel D. Williams
--------------------------------
Daniel D. Williams
Senior Executive Vice President
Treasurer and Chief Financial
Officer (Principal Financial and
Accounting Officer)
By: /s/ Janet L. Reali
--------------------------------
Janet L. Reali
Senior Executive Vice President
General Counsel
25
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 21,815,000
<SECURITIES> 225,140,000
<RECEIVABLES> 1,368,931,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 45,290,000
<DEPRECIATION> 0
<TOTAL-ASSETS> 2,151,755,000
<CURRENT-LIABILITIES> 396,000,000
<BONDS> 0
0
0
<COMMON> 359,000
<OTHER-SE> 367,272,000
<TOTAL-LIABILITY-AND-EQUITY> 2,151,755,000
<SALES> 0
<TOTAL-REVENUES> 413,786,000
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 334,701,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 28,803,000
<INCOME-PRETAX> 50,282,000
<INCOME-TAX> 19,264,000
<INCOME-CONTINUING> 31,018,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 31,018,000
<EPS-PRIMARY> .95
<EPS-DILUTED> .89
</TABLE>
