<PAGE>
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 March 31, 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
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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 May 8, 1998:
$.01 par value common stock - 17,423,057
<PAGE>
INDEX
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Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited):
Consolidated Statements of Financial Condition -
March 31, 1998 and December 31, 1997 3
Consolidated Statements of Operations and Comprehensive
Income - Three months ended March 31, 1998 and 1997 4
Consolidated Statement of Changes in Stockholders' Equity -
Three months ended March 31, 1998 5
Consolidated Statements of Cash Flows -Three months
ended March 31, 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 6. Exhibits and Reports on Form 8-K 24
SIGNATURES 25
EXHIBIT INDEX 26
2
2
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PART I. FINACIAL INFORMATION
Item 1. Financial Statements
EVEREN CAPITAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
ASSETS 1998 1997
(unaudited) ------------
------------
<S> <C> <C>
Cash and cash equivalents $ 70,520 $ 36,248
Cash and securities segregated under
federal and other regulations 15,666 15,363
Receivables from:
Customers 905,398 935,795
Brokers and dealers 35,567 119,883
Others 74,994 56,187
Securities borrowed 60,031 42,695
Securities owned, at market 229,788 188,830
Securities purchased under agreements to resell 249,098 309,457
Investment in mortgage-backed certificates
available-for-sale, at fair value 124,172 129,904
Fixed assets, at cost, net 40,717 37,769
Other assets 77,047 33,939
------------ ------------
$1,882,998 $1,906,070
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Bank loans payable $ 255,000 $ 304,000
Payables to:
Customers 204,426 192,817
Brokers and dealers 26,201 29,021
Securities loaned 297,157 228,477
Collateralized mortgage obligations 115,077 121,970
Securities sold, not yet purchased, at market 81,230 130,868
Securities sold under agreements to repurchase 284,587 322,972
Deferred income taxes 6,313 5,871
Accounts payable, accrued expenses and other liabilities 260,577 235,133
------------ ------------
1,530,568 1,571,129
------------ ------------
Stockholders' Equity:
Common stock, $.01 par value per share; 100,000,000
shares authorized, 17,433,602 and 17,120,026 outstanding at
March 31, 1998 and December 31, 1997, respectively 179 175
Additional paid-in capital 283,457 269,608
Unearned cost of restricted stock (19,453) (8,269)
Treasury stock, at cost, 466,855 and 455,775 shares at March 31, 1998
and December 31, 1997, respectively (7,871) (7,663)
Retained earnings (since January 1, 1996) 99,324 85,079
Accumulated other comprehensive loss-
Net unrealized loss on available-for-sale securities (3,206) (3,989)
------------ ------------
352,430 334,941
------------ ------------
$1,882,998 $1,906,070
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
3
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EVEREN CAPITAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
Revenue:
Commissions $ 90,843 $ 61,811
Principal transactions 29,632 23,273
Investment banking 21,817 9,990
Asset management 24,546 16,674
Other 14,972 8,280
Interest 26,645 18,023
------------- -------------
Total revenue 208,455 138,051
Interest expense 13,819 6,740
------------- -------------
Net revenue 194,636 131,311
Non-interest expenses:
Compensation and benefits 114,913 78,545
Brokerage and clearance 5,502 4,206
Communications 13,270 9,609
Occupancy and equipment 12,076 9,935
Promotional 6,440 4,589
Other 16,167 8,206
------------- -------------
Total non-interest expenses 168,368 115,090
------------- -------------
Income before income taxes 26,268 16,221
Income tax expense 10,127 6,119
------------- -------------
Net income $ 16,141 $ 10,102
============= =============
Other comprehensive income - Unrealized gain (loss)
on available-for-sale securities, net of tax 783 (1,929)
------------- -------------
Comprehensive income $ 16,924 $ 8,173
============= =============
Weighted average common shares outstanding
Basic 16,099,130 16,097,507
============= =============
Diluted 17,431,150 16,696,708
============= =============
Net income per share
Basic $ 1.00 $ .63
============= =============
Diluted $ .93 $ .60
============= =============
Pro forma net income per share (see Note 4)
Basic $ .50 $ .31
============= =============
Diluted $ .46 $ .30
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
4
4
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EVEREN CAPITAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
THREE MONTHS ENDED MARCH 31, 1998
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Accumulated Other
Unearned Comprehensive Income-
Additional cost of Unrealized gain
Paid-In Restricted (loss) on available-
Common Stock Capital Stock for-sale securities
------------ ---------- ---------- ---------------------
<S> <C> <C> <C> <C>
Balances at December 31, 1997 $ 175 $269,608 $ (8,269) $(3,989)
Issuance of additional common stock
under equity plans 4 13,849 (11,184)
Dividend on common stock
Change in unrealized gain (loss) for the period 783
Purchase of treasury stock
Net income
-------- ---------- ---------- ---------
Balances at March 31, 1998 $ 179 $283,457 $(19,453) $(3,206)
======== ========== ========== =========
Retained Total
Treasury Earnings Stockholders'
Stock (since 1/1/96) Equity
-------- -------------- -------------
<S> <C> <C> <C>
Balances at December 31, 1997 $(7,663) $85,079 $ 334,941
Issuance of additional common stock
under equity plans 2,669
Dividend on common stock (1,896) (1,896)
Change in unrealized gain (loss) for the period 783
Purchase of treasury stock (208) (208)
Net income 16,141 16,141
--------- --------- -----------
Balances at March 31, 1998 $(7,871) $99,324 $ 352,430
========= ========= ===========
</TABLE>
See accompanying notes to consolidated financial statements.
5
5
<PAGE>
EVEREN CAPITAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 16,141 $ 10,102
Adjustments to reconcile net income to net cash flows
from operating activities: -
Depreciation and amortization 4,760 3,583
Deferred income taxes 20 (4,215)
Change in assets and liabilities:
Cash and securities segregated under federal
and other regulations (303) 167
Receivables from/payables to:
Customers 42,006 (55,970)
Brokers and dealers 86,839 92,489
Others (11,577) 2,439
Securities borrowed (17,336) 2,972
Securities owned (27,571) (65,041)
Securities purchased under agreements to resell 78,359 100,412
Other assets 6,433 1,112
Securities loaned 68,680 37,349
Securities sold, not yet purchased (51,445) 39,312
Securities sold under agreements to repurchase (38,385) (194,781)
Accounts payable, accrued expenses,
and other liabilities (22,341) 23,196
----------- -----------
Net cash flows from operating activities 134,280 (6,874)
----------- -----------
Cash flows from investing activities:
Acquisition of Principal Securities, net of cash acquired (51,308) -
Collections of principal on investments in mortgage-
backed securities 7,120 3,152
Acquisition of fixed assets, net (4,909) (3,335)
----------- -----------
Net cash flows from investing activities (49,097) (183)
----------- -----------
Cash flows from financing activities:
Dividends paid (1,896) (1,539)
Proceeds from common stock issuance 7,218 5,820
Repayment of collateralized mortgage obligations (7,025) (3,143)
Increase (decrease) in bank loans payable (49,000) 11,000
Purchase of treasury stock (208) (51)
----------- -----------
Net cash flows from financing activities (50,911) 12,087
----------- -----------
Increase in cash and cash equivalents 34,272 5,030
Cash and cash equivalents at beginning of the period 36,248 46,592
----------- -----------
Cash and cash equivalents at end of the period $ 70,520 $ 51,622
=========== ===========
Supplemental disclosure of cash flow information:
Interest paid $ 10,351 $ 7,419
=========== ===========
Income taxes paid $ 4,433 $ 409
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
6
6
<PAGE>
EVEREN CAPITAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 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"). 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.
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.
(2) NET CAPITAL RULE
----------------
EVEREN Securities, Inc. ("EVEREN Securities"), EVEREN Clearing Corp.
("EVEREN Clearing") and Principal Securities, the Company's broker-dealer
subsidiaries, are subject to the Uniform Net Capital Rule of the SEC.
EVEREN Securities, EVEREN Clearing, and Principal Securities all operate
under the alternative method, as defined, of computing minimum net
capital. At March 31, 1998, EVEREN Securities had net capital of
approximately $147.1 million which was approximately $146.1 million in
excess of its
7
<PAGE>
EVEREN CAPITAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 1998
(UNAUDITED)
required minimum net capital. At March 31, 1998, EVEREN Clearing had net
capital of approximately $77.3 million which was approximately $58.5
million in excess of its required minimum net capital. At March 31,
1998, Principal Securities had net capital of approximately $25.8 million
which was approximately $24.8 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 March 31,
1998, and subsequently settled, had no material effect on the
consolidated financial position of the Company.
(4) SUBSEQUENT EVENT
----------------
On May 11, 1998, the Company's Board of Directors approved a two-for-one
stock split of its common shares. The split will be effected in the form
of a stock dividend, to be distributed on June 16, 1998 to shareholders
of record on June 2, 1998.
8
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 quarter 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 quarter 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 and its wholly-owned subsidiary, Principal
Financial Securities, Inc. ("Principal
9
9
<PAGE>
Securities"), from Principal Mutual Life Insurance Company for $75 million in
cash. Principal Securities is a registered securities broker-dealer and will
operate as a separate subsidiary of EVEREN until Principal Securities' back
office and other operating activities are combined with those of EVEREN
Securities (which is scheduled to occur in the second quarter of 1998).
Consistent with the generally strong economic and market conditions
seen throughout the securities industry in the first quarter 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 March 31, 1998, the Company's current employees and directors,
through the Company's 401(k) and Employee Stock Ownership Plan ("the KSOP")
and otherwise, own approximately 70% of the outstanding Common Stock.
To continue to encourage such ownership and to motivate personnel, in
1996, the Company instituted three new employee benefit plans to provide
current and future employees the opportunity to acquire Common Stock outside
of the KSOP. 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 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
10
<PAGE>
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 March 31,
1998 1997
---- ----
<S> <C> <C>
Revenue:
Commissions 46.7% 47.1%
Principal transactions 15.2 17.7
Investment banking 11.2 7.6
Asset management 12.6 12.7
Other 7.7 6.3
Interest 13.7 13.7
------- -------
Total revenue 107.1 105.1
Interest expense 7.1 5.1
------- -------
Net revenue 100.0 100.0
------- -------
Non-interest expenses:
Compensation and benefits 59.0 59.8
Brokerage and clearance 2.8 3.2
Communications 6.8 7.3
Occupancy and equipment 6.2 7.6
Promotional 3.3 3.5
Other 8.4 6.2
------- -------
Total non-interest expenses 86.5 87.6
------- -------
Income before income taxes 13.5 12.4
Income tax expense 5.2 4.7
------- -------
Net income 8.3% 7.7%
======= =======
</TABLE>
11
11
<PAGE>
Three months ended March 31, 1998 compared to the three months ended March 31,
1997
The Company experienced strong operating results for the quarter ended
March 31, 1998 when compared to the first quarter of 1997. One of the Company's
strategic initiatives is to pursue opportunistic acquisitions that either deepen
penetration in its existing markets or add new, sufficiently penetrated, markets
to its franchise. This focus resulted in the acquisition of Principal
Securities, in the beginning of the first quarter of 1998. Both revenues and
expenses are higher in the first quarter of 1998 than in the comparable period
of 1997 as a result of the Principal Securities acquisition; however, revenues
from the Company's core businesses also increased significantly. Non-interest
expenses have increased in most areas, primarily in direct correlation with the
increased revenues. Net income has improved significantly in the first quarter
of 1998 when compared to the first quarter of 1997. Management attributes these
results to several factors. As noted earlier, favorable conditions prevailed in
the equity markets throughout the first quarter 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, 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 $70.4 million or 51% to $208.5 million for the
three months ended March 31, 1998 from $138.1 million for the three months ended
March 31, 1997. Net revenues increased $63.3 million or 48% to $194.6 million
for the three months ended March 31, 1998 from $131.3 million for the three
months ended March 31, 1997. As previously noted, the Company acquired Principal
Securities in the first quarter of 1998. Excluding the revenues attributable to
Principal Securities and the arbitration award mentioned above, total revenues
for the first quarter of 1998 increased $39.8 million or 29% to $177.8 million
from $138.1 million in the first quarter of 1997, and net revenues for the first
quarter of 1998 increased by approximately $35.2 million or 27% over the same
period of 1997.
Commission revenue increased $29.0 million or 47% to $90.8 million for
the three months ended March 31, 1998 from $61.8 million for the three months
ended March 31, 1997. The strong increase in commission revenues is due in part
to the acquisition of the retail brokerage force of Principal Securities. The
balance is due to growth and increased productivity in both the retail and
institutional areas.
Principal transactions revenue increased $6.3 million or 27% to $29.6
million for the three months ended March 31, 1998 from $23.3 million for the
three months ended March 31, 1997. This increase is due largely to the
consistently strong market in 1998 compared to some of the volatility that
characterized the equity markets in part of the 1997 first quarter, as well as
the Principal Securities acquisition.
Investment banking revenue increased $11.8 million or 118% to $21.8
million for the three months ended March 31, 1998 from $10.0 million for the
three months ended March 31, 1997. This increase is the result of the Company's
strategy of developing corporate finance business in several targeted industry
sectors aided by the continued strong equity markets.
12
<PAGE>
This focus has resulted in the Company's participating in a larger number of
equity underwriting offerings in the first quarter of 1998.
Asset management revenue increased $7.8 million or 47% to $24.5
million for the three months ended March 31, 1998 from $16.7 million for the
three months ended March 31, 1997 due to the growth of client assets invested
in managed accounts 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 holds a
twenty percent equity interest.
Other income increased $6.7 million or 81% to $15.0 million for the
three months ended March 31, 1998 from $8.3 million for the three months ended
March 31, 1997. This increase is primarily attributable to the $6.0 million
arbitration award discussed earlier; excluding this award, other income
increased slightly, $0.7 million or 8%, for the first quarter of 1998 when
compared to the first quarter of 1997.
Interest and dividend income increased $8.6 million or 48% to $26.6
million for the three months ended March 31, 1998 from $18.0 million in the
corresponding period in 1997. Net interest increased $1.5 million or 13% to
$12.8 million for the three months ended March 31, 1998 from $11.3 million for
the three months ended March 31, 1997. These increases are a result of
significant growth in the Company's customer margin accounts in the first
quarter of 1998 compared to 1997.
Total non-interest expenses increased $53.3 million or 46% to $168.4
million for the three months ended March 31, 1998 from $115.1 million for the
three months ended March 31, 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 $36.4 million or 46% to
$114.9 million for the three months ended March 31, 1998 from $78.5 million
for the three months ended March 31, 1997. This increase is directly
attributable to the increases in commission revenue, principal transactions
revenue and investment banking revenues in the first quarter of 1998,
resulting in increased production-based payouts. This increase is also
related to the acquisition of Principal Securities as mentioned above, and the
resultant increased employee base in the first quarter of 1998 when compared
to the first quarter of 1997.
Brokerage and clearance expense increased $1.3 million or 31% to $5.5
million for the three months ended March 31, 1998 from $4.2 million for the
three months ended March 31, 1997. The increase is due to the variable nature
of this expense, which increases in relative proportion to the growth in
transactional revenue in 1998 over 1997.
Communications expense increased $3.7 million or 39% to $13.3 million
for the three months ended March 31, 1998 from $9.6 million for the three
months ended March 31, 1997, primarily due to an increased number of employees
in 1998 when compared to the corresponding period of 1997 and to ongoing
technology enhancements undertaken in late 1997 to improve the Company's
overall productivity and competitiveness.
13
<PAGE>
Occupancy and equipment expense increased $2.2 million or 22% to $12.1
million for the three months ended March 31, 1998 from $9.9 million for the
three months ended March 31, 1997. This increase is 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 $1.8 million or 39% to $6.4 million for
the three months ended March 31, 1998 from $4.6 million for the three months
ended March 31, 1997. This increase is due to both the acquisition of
Principal Securities and the Company's focus on increased name recognition
throughout its retail branch office network.
Other expenses increased $8.0 million or 98% to $16.2 million for the
three months ended March 31, 1998 from $8.2 million for the three months ended
March 31, 1997. This increase is 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 base in the first quarter 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 months ended March 31,
1998 was $10.1 million, which represented an effective tax rate on income
before taxes of 38.4%, compared to a $6.1 million or a 37.7% effective tax
rate for the three months ended March 31, 1997.
Net income increased $6.0 million or 59% to $16.1 million for the
three months ended March 31, 1998 from $10.1 million for the three months
ended March 31, 1997.
Comprehensive income, which includes net income plus the change in
unrealized gains (losses) on available-for-sale securities, increased $8,751
or 107% to $16,924 for the three months ended March 31, 1998 from $8,173 for
the three months ended March 31, 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
3/31/98 12/31/97 9/30/97 6/30/97 3/31/97 12/31/96 9/30/96 6/30/96
------- -------- ------- ------- ------- -------- ------- -------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Commissions $ 90,843 $ 71,137 $ 73,099 $ 61,901 $ 61,811 $ 57,349 $ 50,741 $ 60,277
Principal transactions 29,632 26,789 28,174 24,656 23,273 23,558 26,389 34,469
Investment banking 21,817 28,768 15,272 15,514 9,990 17,230 11,677 16,540
Asset management 24,546 20,026 18,493 16,267 16,098 14,806 14,776 13,231
Other 14,972 8,672 7,405 8,371 8,856 9,775 7,234 13,486
Interest 26,645 22,761 26,201 18,195 18,023 18,328 18,270 19,278
--------- --------- --------- --------- --------- --------- --------- ---------
Total revenue 208,455 178,153 168,644 144,904 138,051 141,046 129,087 157,281
Interest expense 13,819 10,072 13,113 6,728 6,740 6,850 8,613 9,203
--------- --------- --------- --------- --------- --------- --------- ---------
Net revenue 194,636 168,081 155,531 138,176 131,311 134,196 120,474 148,078
Non-interest expenses:
Compensation and benefits 114,913 100,635 93,024 80,267 78,545 80,170 75,601 88,893
Brokerage and clearance 5,502 4,438 4,487 4,043 4,206 3,938 3,773 3,899
Communications 13,270 11,644 10,996 10,350 9,609 9,495 8,883 9,567
Occupancy and equipment 12,076 10,479 10,336 10,006 9,935 9,200 9,676 10,052
Promotional 6,440 6,384 5,091 5,461 4,589 5,166 4,326 4,375
Other 16,167 12,977 11,613 10,789 8,206 11,195 6,640 10,881
--------- --------- --------- --------- --------- --------- --------- ---------
Total non-interest expenses 168,368 146,557 135,547 120,916 115,090 119,164 108,899 127,667
Gain on sale of subsidiary - - - - - - - 50,181 (2)
--------- --------- --------- --------- --------- --------- --------- ---------
Income before income taxes
and extraordinary charge 26,268 21,524 19,984 17,260 16,221 15,032 11,575 70,592
Income tax expense 10,127 8,195 7,672 6,445 6,119 5,269 5,165 28,173
--------- --------- --------- --------- --------- --------- --------- ---------
Income before
extraordinary charge 16,141 13,329 12,312 10,815 10,102 9,763 6,410 42,419
Extraordinary charge, net of
income taxes of $1,561 - - - - - - (2,900)(1) -
--------- --------- --------- --------- --------- --------- --------- ---------
Net income $ 16,141 $ 13,329 $ 12,312 $ 10,815 $ 10,102 $ 9,763 $ 3,510 (1) $ 42,419 (2)
========= ========= ========= ========= ========= ========= ========= =========
</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.
15
15
<PAGE>
The following table sets forth certain financial data as a percentage of net
revenues.
<TABLE>
<CAPTION>
Three months ended
3/31/98 12/31/97 9/30/97 6/30/97 3/31/97 12/31/96 9/30/96 6/30/96
------- -------- ------- ------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Commissions 46.7% 42.3% 47.0% 44.8% 47.1% 42.7% 42.1% 40.7%
Principal transactions 15.2 15.9 18.1 17.8 17.7 17.6 21.9 23.3
Investment banking 11.2 17.1 9.8 11.2 7.6 12.8 9.7 11.2
Asset management 12.6 11.9 11.9 11.8 12.3 11.0 12.3 8.9
Other 7.7 5.3 4.8 6.1 6.7 7.3 6.0 9.1
Interest 13.7 13.5 16.8 13.2 13.7 13.7 15.2 13.0
------ ------ ------ ------ ------ ------ ------ ------
Total revenue 107.1 106.0 108.4 104.9 105.1 105.1 107.2 106.2
Interest expense 7.1 6.0 8.4 4.9 5.1 5.1 7.2 6.2
------ ------ ------ ------ ------ ------ ------ ------
Net revenue 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
------ ------ ------ ------ ------ ------ ------ ------
Non-interest expenses:
Compensation and benefits 59.0 59.9 59.8 58.1 59.8 59.7 62.8 60.0
Brokerage and clearance 2.8 2.6 2.9 2.9 3.2 2.9 3.1 2.6
Communications 6.8 6.9 7.1 7.5 7.3 7.1 7.4 6.5
Occupancy and equipment 6.2 6.2 6.6 7.2 7.6 6.9 8.0 6.8
Promotional 3.3 3.8 3.3 4.0 3.5 3.9 3.6 3.0
Other 8.4 7.8 7.5 7.8 6.2 8.3 5.5 7.3
------ ------ ------ ------ ------ ------ ------ ------
Total non-interest expenses 86.5 87.2 87.2 87.5 87.6 88.8 90.4 86.2
Gain on sale of subsidiary - - - - - - - 33.9 (2)
------ ------ ------ ------ ------ ------ ------ ------
Income before income taxes
and extraordinary charge 13.5 12.8 12.8 12.5 12.4 11.2 9.6 47.7
Income tax expense 5.2 4.9 4.9 4.7 4.7 3.9 4.3 19.0
------ ------ ------ ------ ------ ------ ------ ------
Income before extraordinary
charge 8.3 7.9 7.9 7.8 7.7 7.3 5.3 28.7
Extraordinary charge, net of
income taxes - - - - - - (2.4) (1) -
------ ------ ------ ------ ------ ------ ------ ------
Net income 8.3% 7.9% 7.9% 7.8% 7.7% 7.3% 2.9% (1) 28.7%(2)
====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
(1) Includes a $2.9 million or 2.4% after-tax charge related to the early
retirement of the Company's junior subordinated debentures.
(2) Includes a $50.2 million pre-tax or 33.9% ($30.2 million after-tax or
20.4%) gain on the sale of BETA.
16
16
<PAGE>
The generally upward trend in the Company's net revenues for the eight
quarterly periods ended March 31, 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
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. The Company has also grown its customer margin accounts which
contributes to this 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 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") and Principal
Securities Holding Corporation ("PSHC"), the holding companies 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.
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 which was paid in
17
<PAGE>
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
will be 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. 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 March 31, 1998, $45 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.
Operating Subsidiaries
The assets of EVEREN Securities, Inc., EVEREN Clearing Corp. and
Principal Securities, 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 both March 31, 1998 and December 31, 1997 were
approximately $1.9 billion.
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 March 31, 1998, the
Subsidiaries had approximately $645 million in uncommitted credit lines with
several banks.
18
18
<PAGE>
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. The Company's net cash flows
are principally associated with operating and financing activities, which
support the Company's trading, customer and banking activities.
Three months ended March 31, 1998 and 1997
Cash and cash equivalents at March 31, 1998 and 1997 totaled $70.5
million and $51.6 million, respectively, reflecting increases of $34.3 million
and $5.0 million, respectively.
For the three months ended March 31, 1998 cash generated by operating
activities was used by financing the acquisition of Principal Securities and a
decrease in bank loans payable and for the three months ended March 31, 1997,
cash used by operating activities was generated primarily in financing
activities through an increase in bank loans payable.
Net cash provided by (used by) operating activities totaled $134.3
million and $6.9 million in 1998 and 1997, respectively. In 1998, decreases
in receivables from customers and broker-dealers of $128.8 million, decreases
in securities purchased under agreements to resell of
19
19
<PAGE>
$78.4 million, and an increase in securities loaned of $68.7 million generated
cash. This was partially used by increases in securities borrowed and
securities owned of $44.9 million and a decrease in securities sold under
agreements to repurchase of $38.4 million. In 1997, changes in securities
owned and securities sold not yet purchased of $25.7 million and securities
purchased under agreements to resell and repurchase of $94.4 million used
cash. These uses were partially offset by a $38.9 million use of funds
related to the net change in receivables from and payables to customers,
broker-dealers and others and changes in securities borrowed and loaned of
$40.3 million.
In 1998, net cash used by 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 $.2 million is
the result of collections of principal on investments in mortgage-backed
securities of $3.1 million offset by a net increase of $3.3 million of fixed
assets.
In 1998, net cash used by financing activities is primarily the result
of a $49.0 million decrease in bank loans payable. In 1997, net cash flows
from financing activities amounted to $12.1 million, the net result of an $11
million increase in bank loans, $5.8 million of proceeds from the issuance of
common stock, payment of dividends of $1.5 million and the repayment of
collateralized mortgage obligations of $3.1 million.
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
20
20
<PAGE>
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.
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.
21
21
<PAGE>
At March 31, 1998 and December 31, 1997, the Company's securities
owned and securities sold, not yet purchased consisted of the following (in
thousands):
<TABLE>
<CAPTION>
3/31/98 12/31/97
------- --------
<S> <C> <C>
OWNED
- -----
Obligations of the U.S. Government
or its agencies $ 105,349 $ 97,401
State and municipal obligations 36,779 24,753
Corporate debt obligations 52,141 51,668
Corporate stocks and warrants 28,278 13,463
Other 7,241 1,545
--------- ---------
$ 229,788 $ 188,830
========= =========
SOLD, NOT YET PURCHASED
- -----------------------
Obligations of the U.S. Government
or its agencies $ 62,504 $ 114,045
State and municipal obligations 270 308
Corporate debt obligations 9,486 8,926
Corporate stocks and warrants 6,045 6,264
Other 2,925 1,325
--------- ---------
$ 81,230 $ 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 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.
22
22
<PAGE>
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.
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
23
<PAGE>
PART II - OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
A report on Form 8-K dated January 9, 1998 was filed by the
Registrant disclosing the completion of the acquisition of Principal
Securities Holding Corporation and its wholly-owned subsidiary Principal
Financial Securities, Inc.
24
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: May 15, 1998 By: /s/ Daniel D. Williams
-----------------------------------
Daniel D. Williams
Senior Executive Vice President
Treasurer and Chief Financial
Officer (Principal Securities
Financial Officer)
By: /s/ Thomas M. Mansheim
-----------------------------------
Thomas M. Mansheim
Executive Vice President
Controller and Chief Accounting
Officer
25
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<CIK> 0000945770
<NAME> EVEREN CAPITAL CORPORATION
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 70,520,000
<SECURITIES> 229,788,000
<RECEIVABLES> 74,994,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 40,717,000
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,882,998,000
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 179,000
<OTHER-SE> 352,251,000
<TOTAL-LIABILITY-AND-EQUITY> 1,882,998,000
<SALES> 0
<TOTAL-REVENUES> 208,455,000
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 168,368,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 13,819,000
<INCOME-PRETAX> 26,268,000
<INCOME-TAX> 10,127,000
<INCOME-CONTINUING> 16,141,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 16,141,000
<EPS-PRIMARY> 1.00
<EPS-DILUTED> 0.93
</TABLE>
