<PAGE>
Total # of Pages 26
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- --- EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED September 30, 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
November 9, 1998:
$.01 par value common stock -- 34,802,437
<PAGE>
INDEX
-----
<TABLE>
<CAPTION>
Page
<S> <C>
PART I. Financial Information
Item 1. Financial Statements (unaudited):
Consolidated Statements of Financial Condition -
September 30, 1998 and December 31, 1997 3
Consolidated Statements of Operations and Comprehensive
Income - Three and nine months ended September 30, 1998
and 1997 4
Consolidated Statement of Changes in Stockholders' Equity -
Nine months ended September 30, 1998 5
Consolidated Statements of Cash Flows - Nine months
ended September 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 1. Legal 24
Item 6. Exhibits and Reports on Form 8-K 25
SIGNATURES 26
</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>
September 30,
1998 December 31,
Assets (unaudited) 1997
------------- -----------
<S> <C> <C>
Cash and cash equivalents $ 30,280 $ 36,248
Cash and securities segregated under federal regulations 16,306 15,363
Receivables from:
Customers 1,145,844 935,795
Brokers and dealers 81,995 119,883
Others 86,778 56,187
Securities borrowed 26,698 42,695
Securities owned, at market 168,631 188,830
Securities purchased under agreements to resell 235,315 309,457
Investment in mortgage-backed certificates
available-for-sale, at fair value 108,132 129,904
Fixed assets, at cost, net 46,606 37,769
Other assets 92,967 33,939
---------- ----------
$2,039,552 $1,906,070
========== ==========
Liabilities and Stockholders' Equity
Liabilities:
Bank loans payable $ 301,000 $ 304,000
Payables to:
Customers 222,301 192,817
Brokers and dealers 137,414 29,021
Securities loaned 357,863 228,477
Collateralized mortgage obligations 98,999 121,970
Securities sold, not yet purchased, at market 95,287 130,868
Securities sold under agreements to repurchase 171,750 322,972
Deferred income taxes 4,042 5,871
Accounts payable, accrued expenses and other liabilities 269,049 235,133
---------- ----------
1,657,705 1,571,129
---------- ----------
Stockholders' Equity:
Common stock, $.01 par value per share; 100,000,000
shares authorized, 34,839,874 and 17,120,026 outstanding at
September 30, 1998 and December 31, 1997, respectively 359 175
Additional paid-in capital 287,924 269,608
Unearned cost of restricted stock (15,722) (8,269)
Treasury stock, at cost, 1,086,810 and 455,775 shares at September 30,
1998 and December 31, 1997, respectively (10,747) (7,663)
Retained earnings (since January 1, 1996) 123,134 85,079
Accumulated other comprehensive loss-
Net unrealized loss on available-for-sale securities (3,101) (3,989)
---------- ----------
381,847 334,941
---------- ----------
$2,039,552 $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 Nine months ended September 30, 1998 and 1997
(unaudited)
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ ------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenue:
Commissions $ 85,352 $ 73,099 $ 264,137 $ 196,811
Principal transactions 28,202 28,174 84,839 76,103
Investment banking 21,676 15,272 70,161 40,776
Asset management 28,266 19,171 80,334 52,762
Other 8,436 6,727 30,686 22,729
Interest and dividends 28,658 26,201 84,218 62,418
----------- ----------- ----------- -----------
Total revenue 200,590 168,644 614,375 451,599
Interest expense 14,808 13,113 43,611 26,581
----------- ----------- ----------- -----------
Net revenue 185,782 155,531 570,764 425,018
Non-interest expenses:
Compensation and benefits 110,279 93,024 339,283 251,836
Brokerage and clearance 5,324 4,487 16,329 12,736
Communications 13,279 10,996 38,815 30,956
Occupancy and equipment 11,946 10,336 36,380 30,277
Promotional 7,729 5,091 20,667 15,141
Other 15,144 11,613 46,930 30,608
----------- ----------- ----------- -----------
Total non-interest expenses 163,701 135,547 498,404 371,554
Income before income taxes 22,081 19,984 72,360 53,464
Income tax expense 8,305 7,672 27,569 20,236
----------- ----------- ----------- -----------
Net income $ 13,776 $ 12,312 $ 44,791 $ 33,228
=========== =========== =========== ===========
Other comprehensive income --
Unrealized gain on
available-for-sale securities,
net of tax 343 1,079 888 1,040
----------- ----------- ----------- -----------
Comprehensive income $ 14,119 $ 13,391 $ 45,679 $ 34,268
=========== =========== =========== ===========
Weighted average common shares outstanding:
Basic 32,931,742 32,197,954 32,934,754 32,197,444
=========== =========== =========== ===========
Diluted 35,449,278 34,590,578 35,288,845 34,157,278
=========== =========== =========== ===========
Net income per share:
Basic $ .42 $ .38 $ 1.36 $ 1.03
=========== =========== =========== ===========
Diluted $ .39 $ .36 $ 1.27 $ .97
=========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
EVEREN CAPITAL CORPORATION
AND SUBSIDIARIES
Consolidated Statement of Changes in Stockholders' Equity
Nine months ended September 30, 1998
(unaudited)
(in thousands)
<TABLE>
<CAPTION>
Accumulated
Other
Compre-
hensive
Income--
Unreal-
ized gain
Addi- Unearned (loss) on Retained Total
tional Cost of available- Earnings Stock-
Common Paid-In Restricted for-sale Treasury (since holders'
Stock Capital Stock securities Stock 1/1/96) Equity
------ ------- ---------- ---------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1997 $175 $269,608 $ (8,269) $(3,989) $ (7,663) $ 85,079 $334,941
Issuance of additional common stock
under equity plans 5 16,358 (7,453) 8,910
Dividend on common stock (6,736) (6,736)
Two-for-one stock split 179 (174) (5) --
Change in unrealized gain (loss)
for the period 888 888
Purchase of treasury stock (3,079) (3,079)
Tax benefit from stock option exercise
and vesting of restricted stock 2,132 2,132
Net income 44,791 44,791
---- -------- -------- ------- -------- -------- --------
Balances at September 30, 1998 $359 $287,924 $(15,722) $(3,101) $(10,747) $123,134 $381,847
==== ======== ======== ======= ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
EVEREN CAPITAL CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Nine months ended September 30, 1998 and 1997
(unaudited)
(in thousands)
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 44,791 $ 33,223
Adjustments to reconcile net income to net cash flows
from operating activities:
Depreciation and amortization 13,359 12,466
Deferred income taxes (2,307) (9,662)
Change in assets and liabilities:
Cash and securities segregated under federal
regulations (943) 226
Receivables from/payables to:
Customers (180,565) (138,155)
Brokers and dealers 146,281 88,998
Others (28,459) 5,264
Securities borrowed 15,997 (9,391)
Securities owned 20,199 (68,530)
Securities purchased under agreements to resell 74,142 31,693
Other assets (8,771) (2,924)
Securities loaned 129,386 57,015
Securities sold, not yet purchased (35,581) 15,574
Securities sold under agreements to repurchase (151,222) (117,478)
Accounts payable, accrued expenses,
and other liabilities 38,247 (17,873)
--------- ---------
Net cash flows provided (used) by operating activities 74,554 (119,549)
--------- ---------
Cash flows from investing activities:
Acquisition of Principal Securities, net of cash acquired (51,308) --
Collections of principal on investments in mortgage-
backed securities 23,686 11,249
Acquisition of fixed assets, net (20,622) (12,115)
--------- ---------
Net cash flows used in investing activities (48,244) (866)
--------- ---------
Cash flows from financing activities:
Dividends paid (6,736) (4,622)
Proceeds from common stock issuance 3,904 7,884
Repayment of collateralized mortgage obligations (23,367) (11,192)
Increase (decrease) in bank loans payable (3,000) 134,000
Purchase of treasury stock (3,079) (1,897)
--------- ---------
Net cash flows provided (used) by financing activities (32,278) 124,173
--------- ---------
Increase (decrease) in cash and cash equivalents (5,968) 3,758
Cash and cash equivalents at beginning of the period 36,248 46,592
--------- ---------
Cash and cash equivalents at end of the period $ 30,280 $ 50,350
========= =========
Supplemental disclosure of cash flow information:
Interest paid $ 44,142 $ 25,745
========= =========
Income taxes paid $ 27,883 $ 20,238
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
EVEREN CAPITAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Nine months ended September 30, 1998
(unaudited)
- --------------------------------------------------------------------------------
(1) General Information
The accompanying unaudited condensed consolidated financial statements of
EVEREN Capital Corporation and its wholly-owned subsidiaries (the
"Company") have been prepared in accordance with the instructions for Form
10-Q and, therefore, do not include all information and notes required by
generally accepted accounting principles for complete financial statements.
The interim financial statements have been prepared utilizing the interim
basis of reporting and, as such, reflect all adjustments (consisting only
of normal recurring adjustments) which are, in the opinion of management,
necessary for a fair presentation of the results for the periods presented.
The nature of the Company's business is such that the results of any
interim period are not necessarily indicative of results for a full year.
Certain reclassifications have been made in the prior period financial
statements to conform to the current period presentation.
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").
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 reported by the Company is unrealized gains (losses)
on available-for-sale securities.
(2) Net Capital Rule
EVEREN Securities, Inc. ("EVEREN Securities") and EVEREN Clearing LLC
("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 September 30, 1998, EVEREN Securities had
net capital of approximately $141.0 million, which was approximately $140.0
million in excess of its required minimum net capital. At September 30,
1998, EVEREN Clearing had net capital of approximately $94.7 million, which
was approximately $71.1 million in excess of its required minimum net
capital. Such net capital requirements could restrict the ability of these
subsidiaries to make dividend distributions to their parent.
7
<PAGE>
EVEREN CAPITAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Nine months ended September 30, 1998
(unaudited)
- --------------------------------------------------------------------------------
(3) Commitments and Contingencies
The Company has been named as a defendant in various legal actions in
connection with its securities and commodities business. Some of these
lawsuits involve claims for substantial amounts. Although the ultimate
outcome of these suits cannot be ascertained at this time, it is the
opinion of management, after consultation with outside counsel, that the
resolution of such suits will not have a material adverse effect on the
consolidated financial position of the Company, but may be material to the
Company's operating results for any particular period, depending upon the
level of the Company's income for such period.
In the normal course of business, the Company enters into various
contractual commitments involving future settlement. These include futures,
forwards, options and securities sold, not yet purchased. These
transactions are executed either over-the-counter or are exchange-traded,
and are used primarily to hedge the Company's securities inventory. Many of
these products have maturities that do not extend beyond one year.
Transactions relating to such commitments, which were open at September 30,
1998, and subsequently settled, had no material effect on the consolidated
financial position of the Company.
(4) Subsequent Event
On November 2, 1998, EVEREN and The Bank of New York Company, Inc. ("BONY")
announced the completion of a transaction pursuant to which BONY acquired
an 80 percent interest in EVEREN Clearing. On October 23, 1998, in
anticipation of the transaction, EVEREN Securities became a carrying
broker-dealer. EVEREN expects to realize a one-time after-tax gain of
approximately $12 million in the fourth quarter of 1998. 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.
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 resulting in a continuation of lower
returns to fixed-income investors. As a result, retail investors continued to
shift their holdings to the equity markets. 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. The third
quarter of 1998 was characterized by some of the most volatile trading markets
the industry has had in the last twelve months. Uncertainty surrounding Asian
currency valuations and significant declines in the corresponding trading
markets had an adverse effect on the U.S. equity markets. In July 1998, the Dow
Jones Industrial Average experienced record declines. This volatility had a
tremendous impact on the previously active IPO market, as new issue equity
underwritings declined significantly.
9
<PAGE>
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. 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 November 2, 1998, EVEREN and The Bank of New York Company, Inc. ("BONY")
announced the completion of a transaction pursuant to which BONY acquired an 80
percent interest in EVEREN Clearing. On October 23, 1998 in anticipation of the
transaction, EVEREN Securities became a carrying broker-dealer. EVEREN expects
to realize a one-time after-tax gain of approximately $12 million in the fourth
quarter of 1998. 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 1998 and the Company's minimal exposure to
changes in foreign currency valuations, the Company reported strong growth in
both its retail brokerage and investment banking activities. These 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. Increases in the number of underwritings and
investment banking transactions in which the Company has participated in also
contributed to the Company's growth in revenues.
Equity Participation of Employees
As of September 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 60% of the outstanding Common
Stock. Stock owned outside of the Company's equity and retirement plans is not
included in this percentage calculation.
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
10
<PAGE>
12b-1 distribution fees. Other revenue includes transaction and account fees,
correspondent clearing and execution income and miscellaneous income. Interest
income primarily represents interest earned on customer margin accounts and
interest income on securities owned and investments in mortgage-backed
certificates. Net revenues equal total revenues less interest expense. Interest
expense includes interest paid on bank borrowings, collateralized securities
transactions with brokers and dealers and collateralized mortgage obligations.
Expenses. Compensation and benefits expense includes sales, trading and
incentive compensation, which are primarily variable based on revenue
production, and salaries, payroll taxes and employee benefits, which are
relatively fixed in nature. Brokerage and clearance expense includes the cost of
securities clearance, floor brokerage and exchange fees. Communications expense
includes charges for telecommunications, news and market data services, customer
statements and depreciation on data processing and telecommunications equipment.
Occupancy and equipment expense includes rent and operating expenses for the
Company's facilities, expenditures for repairs and maintenance, and depreciation
of furniture, fixtures and leasehold improvements. Promotional expense includes
travel, entertainment and advertising. Other expense includes professional
services, litigation expenses, office expenses, dues and assessments, and other
miscellaneous expenses.
Results of Operations
The following table sets forth certain financial data as a percentage of net
revenues:
Consolidated Statement of Operations Data:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
1998 1997 1998 1997
--------- --------- --------- --------
<S> <C> <C> <C> <C>
Revenue:
Commissions 45.9% 47.0% 46.3% 46.3%
Principal transactions 15.2 18.1 14.9 17.9
Investment banking 11.7 9.8 12.3 9.6
Asset management 15.2 12.3 14.1 12.4
Other 4.5 4.3 5.4 5.3
Interest 15.4 16.8 14.8 14.7
----- ----- ----- -----
Total revenue 107.9 108.3 107.8 106.2
Interest expense 7.9 8.3 7.8 6.2
----- ----- ----- -----
Net revenue 100.0 100.0 100.0 100.0
----- ----- ----- -----
Non-interest expenses:
Compensation and benefits 59.4 59.8 59.4 59.3
Brokerage and clearance 2.9 2.9 2.9 3.0
Communications 7.1 7.1 6.8 7.3
Occupancy and equipment 6.4 6.6 6.4 7.1
Promotional 4.2 3.3 3.6 3.6
Other 8.1 7.5 8.2 7.2
----- ----- ----- -----
Total non-interest
expenses 88.1 87.2 87.3 87.4
----- ----- ----- -----
Income before income taxes 11.9 12.8 12.7 12.6
Income tax expense 4.5 4.9 4.9 4.8
----- ----- ----- -----
Net income 7.4% 7.9% 7.8% 7.8%
===== ===== ===== =====
</TABLE>
11
<PAGE>
Three and nine months ended September 30, 1998 compared to the three and nine
months ended September 30, 1997
The Company experienced strong operating results for the three and nine
month periods of 1998 when compared to the comparable periods in 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 1998 periods than in the comparable periods of 1997
as a result of the Principal Securities acquisition; additionally, revenues from
the Company's core businesses 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 1998 periods when
compared to 1997. Management attributes these results to several factors
including the generally 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. Market
volatility in the 1998 third quarter did not have a significant impact on the
Company's operating results, but did impact investment banking activity, as IPO
activity dissipated. 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 $31.9 million and $162.8 million or 19% and 36% to
$200.6 million and $614.4 million for the three and nine months ended September
30, 1998 from $168.7 million and $451.6 million for the three and nine months
ended September 30, 1997. Net revenues increased $30.3 million and $145.8
million or 19% and 34% to $185.8 million and $570.8 million for the three and
nine months ended September 30, 1998 from $155.5 million and $425.0 million for
the three and nine months ended September 30, 1997. As previously noted, the
Company acquired Principal Securities in the first quarter of 1998, which, when
combined with the generally strong market conditions and internal growth, have
contributed to the significant growth in revenue.
Commission revenue increased $12.3 million and $67.3 million or 17% and 34%
to $85.4 million and $264.1 million for the three and nine months ended
September 30, 1998 from $73.1 million and $196.8 million for the three and nine
months ended September 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 and growth of the Company's
retail brokerage force. The Company experienced strong growth in sales of mutual
fund and annuity products, and to a lesser degree, the movement by investors
from over-the-counter equities to investments in listed securities.
Principal transactions revenue remained relatively constant at $28.2
million for the third quarters of 1998 and 1997 and increased $8.7 million or
11% to $84.8 million for the three and nine months ended September 30, 1998 from
$76.1 million for the nine months ended September 30, 1997. This increase is due
largely to the consistently strong market throughout most of 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. Third quarter 1998
market volatility did impact the Company's
12
<PAGE>
ability to grow its revenues for the three month period 1998 over the
corresponding period in 1997.
Investment banking revenue increased $6.4 million and $29.4 million or 42%
and 72% to $21.7 million and $70.2 million for the three and nine months ended
September 30, 1998 from $15.3 million and $40.8 million for the three and nine
months ended September 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 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. Market volatility in the third quarter of 1998 significantly
impacted the number of equity underwritings that took place and had the effect
of depressing revenues in this area.
Asset management revenue increased $9.1 million and $27.6 million or 47%
and 52% to $28.3 million and $80.3 million for the three and nine months ended
September 30, 1998 from $19.2 million and $52.7 million for the three and nine
months ended September 30, 1997, due to the significant growth of client assets
invested in managed accounts (approximately 36% 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 increased $1.7 million and $8.0 million or 25% and 35% to $8.4
million and $30.7 million for the three and nine months ended September 30, 1998
from $6.7 million and $22.7 million for the three and nine months ended
September 30, 1997. The increase for the nine month period in 1998 is
attributable to the $6.0 million arbitration award discussed earlier.
Interest and dividend income increased $2.5 million and $21.8 million or 9%
and 35% to $28.7 million and $84.2 million for the three and nine months ended
September 30, 1998 from $26.2 million and $62.4 million in the corresponding
periods in 1997. Net interest increased $0.8 million and $4.8 million or 6% and
13% to $13.9 million and $40.6 million for the three and nine months ended
September 30, 1998 from $13.1 million and $35.8 million for the three and nine
months ended September 30, 1997. These increases are a result of significant
growth in the Company's customer margin accounts, specifically a 35% growth in
average margin debits for the nine months ended September 30, 1998 when compared
to the corresponding period in 1997.
Total non-interest expenses increased $28.2 million and $126.8 million or
21% and 34% to $163.7 million and $498.4 million for the three and nine months
ended September 30, 1998 from $135.5 million and $371.6 million for the three
and nine months ended September 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 $17.3 million and $87.5 million
or 19% and 35% to $110.3 million and $339.3 million for the three and nine
months ended September 30, 1998 from $93.0 million and $251.8 million for the
three and nine months ended September 30, 1997. These increases are directly
attributable to the growth in commission revenue, principal transactions revenue
and investment banking revenues in the nine months ended September 30, 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 1998 when compared to 1997.
13
<PAGE>
Brokerage and clearance expense increased $0.8 million and $3.6 million or
19% and 28% to $5.3 million and $16.3 million for the three and nine months
ended September 30, 1998 from $4.5 million and $12.7 million for the three and
nine months ended September 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.
Communications expense increased $2.3 million and $7.8 million or 21% and
25% to $13.3 million and $38.8 million for the three and nine months ended
September 30, 1998 from $11.0 million and $31.0 million for the three and nine
months ended September 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 $1.6 million and $6.1 million or
16% and 20% to $11.9 million and $36.4 million for the three and nine months
ended September 30, 1998 from $10.3 million and $30.3 million for the three and
nine months ended September 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 $2.6 million and $5.6 million or 52% and 37%
to $7.7 million and $20.7 million for the three and nine months ended September
30, 1998 from $5.1 million and $15.1 million for the three and nine months ended
September 30, 1997. These increases are due primarily to increased participation
in sales incentive programs which have resulted from both the acquisition of
Principal Securities and the Company's own internal growth.
Other expenses increased $3.5 million and $16.3 million or 30% and 53% to
$15.1 million and $46.9 million for the three and nine months ended September
30, 1998 from $11.6 million and $30.6 million for the three and nine months
ended September 30, 1997. These increases are related primarily to an increase
in professional fees which includes 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 1998 when compared to 1997, and the cost of integrating Principal
Securities into the operations of EVEREN Securities.
The Company's income tax expense for the three and nine months ended
September 30, 1998 totaled $8.3 million and $27.6 million, which represented
effective tax rates on income before taxes of 37.6% and 38.1% respectively,
compared to $7.7 million and $20.2 million or 38.4% and 37.8% effective tax
rates for the three and nine months ended September 30, 1997.
Net income increased $1.5 million and $11.6 million or 12% and 35% to $13.8
million and $44.8 million for the three and nine months ended September 30, 1998
from $12.3 million and $33.2 million for the three and nine months ended
September 30, 1997.
Comprehensive income, which includes net income plus the change in
unrealized gains (losses) on available-for-sale securities, increased $0.7
million and $11.4 million or 5% and 33% to $14.1 million and $45.7 million for
the three and nine months ended September 30, 1998 from $13.4 million and $34.3
million for the three and nine months ended September 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
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
9/30/98 6/30/98 3/31/98 12/31/97 9/30/97 6/30/97 3/31/97 12/31/96
-------- -------- -------- --------- -------- -------- -------- ---------
(dollars in thousands)
Revenue:
Commissions $ 85,352 $ 87,942 $ 90,843 $ 71,137 $ 73,099 $ 61,901 $ 61,811 $ 57,349
Principal transactions 28,202 27,005 29,632 26,789 28,174 24,656 23,273 23,558
Investment banking 21,676 26,668 21,817 28,768 15,272 15,514 9,990 17,230
Asset management 28,266 27,521 24,546 20,026 18,493 16,267 16,098 14,806
Other 8,436 7,279 14,972 8,672 7,405 8,371 8,856 9,775
Interest 28,658 28,915 26,645 22,761 26,201 18,195 18,023 18,328
-------- -------- -------- --------- -------- -------- -------- ---------
Total revenue 200,590 205,330 208,455 178,153 168,644 144,904 138,051 141,046
Interest expense 14,808 14,984 13,819 10,072 13,113 6,728 6,740 6,850
-------- -------- -------- --------- -------- -------- -------- ---------
Net revenue 185,782 190,346 194,636 168,081 155,531 138,176 131,311 134,196
Non-interest expenses:
Compensation and benefits 110,279 114,091 114,913 100,635 93,024 80,267 78,545 80,170
Brokerage and clearance 5,324 5,503 5,502 4,438 4,487 4,043 4,206 3,938
Communications 13,279 12,265 13,270 11,644 10,996 10,350 9,609 9,495
Occupancy and equipment 11,946 12,357 12,076 10,479 10,336 10,006 9,935 9,200
Promotional 7,729 6,498 6,440 6,384 5,091 5,461 4,589 5,166
Other 15,144 15,617 16,167 12,977 11,613 10,789 8,206 11,195
-------- -------- -------- --------- -------- -------- -------- ---------
Total non-interest expenses 163,701 166,331 168,368 146,557 135,547 120,916 115,090 119,164
Income before income taxes 22,081 24,015 26,268 21,524 19,984 17,260 16,221 15,032
Income tax expense 8,305 9,138 10,127 8,195 7,672 6,445 6,119 5,269
-------- -------- -------- --------- -------- -------- -------- ---------
Net income $ 13,776 $ 14,877 $ 16,141 $ 13,329 $ 12,312 $ 10,815 $ 10,102 $ 9,763
======== ======== ======== ========= ======== ======== ======== =========
</TABLE>
15
<PAGE>
The following table sets forth certain financial data as a percentage of net
revenues.
<TABLE>
<CAPTION>
Three months ended
------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
9/30/98 6/30/98 3/31/98 12/31/97 9/30/97 6/30/97 3/31/97 12/31/96
------- ------- ------- -------- ------- ------- ------- --------
Revenue:
Commissions 45.9% 46.2% 46.7% 42.3% 47.0% 44.8% 47.1% 42.7%
Principal transactions 15.2 14.2 15.2 15.9 18.1 17.8 17.7 17.6
Investment banking 11.7 14.0 11.2 17.1 9.8 11.2 7.6 12.8
Asset management 15.2 14.5 12.6 11.9 12.3 11.8 12.3 11.0
Other 4.5 3.8 7.7 5.3 4.3 6.1 6.7 7.3
Interest 15.4 15.2 13.7 13.5 16.8 13.2 13.7 13.7
----- ----- ----- ----- ----- ----- ----- -----
Total revenue 107.9 107.9 107.1 106.0 108.3 104.9 105.1 105.1
Interest expense 7.9 7.9 7.1 6.0 8.3 4.9 5.1 5.1
----- ----- ----- ----- ----- ----- ----- -----
Net revenue 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
----- ----- ----- ----- ----- ----- ----- -----
Non-interest expenses:
Compensation and benefits 59.4 59.9 59.0 59.9 59.8 58.1 59.8 59.7
Brokerage and clearance 2.9 2.9 2.8 2.6 2.9 2.9 3.2 2.9
Communications 7.1 6.4 6.8 6.9 7.1 7.5 7.3 7.1
Occupancy and equipment 6.4 6.5 6.2 6.2 6.6 7.2 7.6 6.9
Promotional 4.2 3.4 3.3 3.8 3.3 4.0 3.5 3.9
Other 8.1 8.3 8.4 7.8 7.5 7.8 6.2 8.3
----- ----- ----- ----- ----- ----- ----- -----
Total non-interest expenses 88.1 87.4 86.5 87.2 87.2 87.5 87.6 88.8
Income before income taxes 11.9 12.6 13.5 12.8 12.8 12.5 12.4 11.2
Income tax expense 4.5 4.8 5.2 4.9 4.9 4.7 4.7 3.9
----- ----- ----- ----- ----- ----- ----- -----
Net income 7.4% 7.8% 8.3% 7.9% 7.9% 7.8% 7.7% 7.3%
===== ===== ===== ===== ===== ===== ===== =====
</TABLE>
- -----------------------------------
The generally positive trend in the Company's net revenues for the eight
quarterly periods ended September 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 in the first half of 1998 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. Market volatility in
the third quarter of 1998 had a slight impact on the Company's commission
revenues, principal transaction revenue and investment banking revenue as
investor activity in the equity markets slowed significantly and equity
underwritings in both the initial and secondary markets came to a halt. 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 remained constant during such periods, which management believes to be
a result of the Company's focus on profitability growth and cost containment.
Net income, in absolute dollar amounts, also generally reflects a positive
trend during this eight-quarter period.
16
<PAGE>
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 was 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
September 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 September 30, 1998, $10 million was
outstanding pursuant to this credit facility. On October 13, 1998, this amount
was repaid in full.
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, 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 September 30, 1998 and December 31, 1997 were
approximately $2.0 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 September 30, 1998, the Subsidiaries had
approximately $745 million in uncommitted credit lines with several banks.
In connection with the conversion of EVEREN Securities to a carrying broker
and the sale of an 80% interest in EVEREN Clearing to The Bank of New York,
these uncommitted facilities were cancelled or transferred to EVEREN Securities.
As of November 2, 1998, EVEREN Securities had approximately $295 million in
uncommitted credit lines with several banks, in addition to the $700 million in
committed lines discussed below.
On January 23, 1998, the Company, through its wholly-owned subsidiary
EVEREN Clearing, entered into a committed line of credit agreement (the
"Clearing Facility") 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. On October 30, 1998, the Clearing Facility
was terminated, and EVEREN Securities entered into a committed line of credit
agreement totaling $200 million (the "Securities Facility") with a syndicate of
banks. The terms of the Securities Facility are similar to those of the Clearing
Facility. The Securities Facility expires on October 29, 1999, and may be
renewed by mutual agreement of the parties through October 29, 2003. No
borrowings have been made under either the Clearing Facility or the Securities
Facility.
18
<PAGE>
On November 2, 1998, EVEREN Securities established a $500 million committed
line of credit through an agreement with The Bank of New York. Borrowings are
secured by either customer or firm securities, with interest based on overnight
bank lending rates. This agreement also expires on November 1, 1999, and is
subject to periodic extensions at the request of EVEREN Securities, subject to
the approval of The Bank of New York.
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.
Nine months ended September 30, 1998 and 1997
Cash and cash equivalents at September 30, 1998 and 1997 totaled $30.3
million and $50.4 million, respectively, reflecting a decrease of $6.0 million
and an increase of 3.8 million, respectively, from year-end balances.
For the nine months ended September 30, 1998, cash generated by operating
activities was used by investing activities, primarily in the acquisition of
Principal Securities; and in financing activities primarily for the repayment of
bank loans and payment of dividends. For the nine months ended September 30,
1997, cash used by operating activities was generated primarily through
financing activities through an increase in bank loans payable.
Net cash provided by operating activities in 1998 totaled $74.5 million.
This is the combination of increases in receivables from customers and others of
$209.0 million and
19
<PAGE>
decreases in securities sold under agreements to repurchase of $151.2 million
which used cash. These uses were more than offset by an increase in securities
loaned of $129.4 million and decreases in receivables from broker-dealers of
$146.2 million and securities purchased under agreements to resell of $74.1
million. In 1997, net cash used in operating activities totaled $119.5 million
and is the result of increases in receivables from customers of $138.2 million
and securities owned of $68.5 million, and a decrease in securities sold under
agreements to repurchase of $117.5 million which used cash. These uses were
partially offset by a decrease in receivables from/payables to broker dealers of
$89.0 million and an increase in securities loaned of $57.0 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 $0.9 million is the
result of collections of principal on investments in mortgage-backed securities
of $11.2 million offset by a net increase of $12.1 million of fixed assets.
In 1998, net cash used in financing activities totaled $32.3 million and is
made up primarily of $23.7 million of repayments of collateralized mortgage
obligations and $6.7 million of dividends paid on the Company's common stock. In
1997, net cash flows from financing activities amounted to $124.2 million, the
net result of a $134.0 million increase in bank loans, $7.9 million of proceeds
from the issuance of common stock, payment of dividends of $4.6 million and the
repayment of collateralized mortgage obligations of $11.2 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 over-
the-counter 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
20
<PAGE>
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.
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
<PAGE>
At September 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>
Owned 9/30/98 12/31/97
- ----- -------- ---------
<S> <C> <C>
Obligations of the U.S. Government
or its agencies $ 76,055 $ 97,401
State and municipal obligations 37,171 24,753
Corporate debt obligations 28,979 51,668
Corporate stocks and warrants 24,924 13,463
Other 1,502 1,545
-------- ---------
$168,631 $ 188,830
======== =========
Sold, not yet purchased
- -----------------------
Obligations of the U.S. Government
or its agencies $ 76,579 $ 114,045
State and municipal obligations 235 308
Corporate debt obligations 4,573 8,926
Corporate stocks and warrants 12,787 6,264
Other 1,113 1,325
-------- ---------
$ 95,287 $ 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
<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, extending credit,
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>
Year 2000
The Year 2000 issue affects the ability of computer systems to correctly
process dates after December 31, 1999. The Company has evaluated its internal
and third party software, as well as its service providers' computer systems,
for their ability to accurately process in the next millennium. The Company has
identified and assessed those computer systems and processes that require
modification and is utilizing both internal and external resources to make the
necessary modifications. In addition to internal testing, the Company will
actively participate in systems testing among securities brokerage firms,
securities exchanges, clearing organizations, and other vendors.
The Company's primary third party vendor, responsible for its securities
brokerage processing system, has substantially completed the necessary coding
modifications with user testing scheduled for the fourth quarter of 1998 and
industry-wide testing scheduled for the first and second quarters of 1999.
Confirmation has been received from the vendor that its modification and testing
plan is on schedule for Year 2000 compliance. The Company is pursuing similar
confirmation from its other vendors and service providers. The Company is
currently developing its contingency plan.
The Company believes that the costs associated with modifications for
internal systems will not be material to the Company's financial statements.
However, the Company could be adversely affected if other organizations,
including those mentioned above, are unsuccessful in completing the required
Year 2000 systems modifications.
PART II - OTHER INFORMATION
Item 1. Legal
Many aspects of the Company's business involve substantial risks of
liability. In recent years there has been an increasing incidence of litigation
involving the securities brokerage industry, including class action suits that
generally seek substantial damages and other suits seeking punitive damages.
Like other securities brokerage firms, the Company has been named as a defendant
in class action and other suits has in the past been subject to substantial
settlements and judgments.
Following is a description of one of the lawsuits in which the Company was
named as a defendant, which has now been resolved.
In Re NASDAQ Market-Maker Antitrust Litigation. In December 1994 a
consolidated amended class action complaint was filed in the United States
District Court for the Southern District of New York against thirty-three
broker-dealer market makers in The NASDAQ National Market System ("NASDAQ")
traded securities including EVEREN Securities, alleging the defendants had
conspired to fix the "spread" between bid and asked prices for NASDAQ traded
securities in violation of Section 1 of the Sherman Act. In November 1996, the
Court certified a class of investors including customers of the defendants who
purchased or sold securities on NASDAQ during a period from May 1989 through May
1994. In December 1997, the parties reached an agreement to settle this lawsuit.
In consideration for the dismissal of this action, the Company paid $135,949
into an escrow account in January 1998 and on September 30, 1998, paid the
additional sum of $4,811,876.
24
<PAGE>
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.
25
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, EVEREN
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
EVEREN CAPITAL CORPORATION
Date: November 13, 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/ Thomas D. Lux
--------------------------------------
Thomas D. Lux
Executive Vice President
Chief Accounting Officer
26
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