<PAGE>
Total # of Pages 28
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
----- EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED June 30, 1999 OR
-------
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
----- EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD
FROM TO
---------- ----------
Commission File Number 1-13940
-------------------------------------------------------
EVEREN CAPITAL CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 36-4019175
- ---------------------------------------------------- --------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
77 West Wacker Drive
Chicago, Illinois 60601
- ---------------------------------------------------- --------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (312) 574-6000
---------------------
Indicate by checkmark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date. Shares outstanding
as of August 5, 1999:
$.01 par value common stock - 35,329,786
<PAGE>
INDEX
-----
Page
PART I. Financial Information
Item 1. Financial Statements (unaudited):
Consolidated Statements of Financial Condition -
June 30, 1999 and December 31, 1998 3
Consolidated Statements of Operations and Comprehensive
Income -Three and six months ended June 30, 1999
and 1998 4
Consolidated Statement of Changes in Stockholders' Equity -
Six months ended June 30, 1999 5
Consolidated Statements of Cash Flows -Six months
ended June 30, 1999 and 1998 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 23
PART II. Other Information
Item 1. Legal Proceedings 26
Item 4. Submission of Matters to a Vote of Security Holders 26
Item 6. Exhibits and Reports on Form 8-K 27
SIGNATURES 28
2
<PAGE>
EVEREN CAPITAL CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Financial Condition
(unaudited)
(in thousands, except share data)
<TABLE>
<CAPTION>
June 30, December 31,
Assets 1999 1998
----------- -------------
<S> <C> <C>
Cash and cash equivalents $ 16,444 $ 19,995
Receivables from:
Customers 1,530,264 1,086,816
Brokers and dealers 174,649 115,720
Others 135,080 112,236
Securities owned, at market 219,152 143,579
Securities purchased under agreements to resell 613,393 478,553
Investment in mortgage-backed certificates
available-for-sale, at fair value 74,113 91,881
Fixed assets, net 57,488 47,423
Other assets 82,715 73,053
---------- ----------
$2,903,298 $2,169,256
========== ==========
Liabilities and Stockholders' Equity
Liabilities:
Bank loans payable $ 835,000 $ 271,000
Payables to customers 301,708 286,300
Securities loaned 316,047 325,531
Collateralized mortgage obligations 69,055 84,312
Securities sold, not yet purchased, at market 133,206 60,069
Securities sold under agreements to repurchase 578,283 453,809
Accounts payable, accrued expenses and other liabilities 243,193 279,599
---------- ----------
2,476,492 1,760,620
========== ==========
Stockholders' Equity:
Common stock, $.01 par value per share; 100,000,000
shares authorized, 36,808,842 and 36,092,936 issued at
June 30, 1999 and December 31, 1998, respectively 371 361
Additional paid-in capital 312,690 290,778
Unearned cost of restricted stock (23,217) (14,165)
Treasury stock, at cost, 1,438,821 and 1,160,008 shares
at June 30, 1999 and December 31, 1998, respectively (26,966) (11,932)
Retained earnings (since January 1, 1996) 168,959 147,069
Unrealized loss on available-for-sale securities, net of income taxes (5,031) (3,475)
---------- ----------
426,806 408,636
---------- ----------
$2,903,298 $2,169,256
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
EVEREN CAPITAL CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Operations and Comprehensive Income
Three and six months ended June 30, 1999 and 1998
(unaudited)
(in thousands)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------------------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue:
Commissions $ 104,965 $ 87,942 $ 204,397 $ 178,785
Principal transactions 37,009 27,005 76,223 56,637
Investment banking 15,409 26,668 30,231 48,485
Asset management 32,734 27,521 62,492 52,068
Other 7,100 7,279 13,600 22,251
Interest and dividends 35,715 28,915 62,101 55,560
----------- ----------- ----------- -----------
Total revenue 232,932 205,330 449,044 413,786
Interest expense 19,584 14,984 32,782 28,803
----------- ----------- ----------- -----------
Net revenue 213,348 190,346 416,262 384,983
Non-interest expenses:
Compensation and benefits 128,841 114,091 249,981 229,004
Brokerage and clearance 13,565 5,503 26,147 11,004
Communications 15,637 12,265 30,004 25,536
Occupancy and equipment 12,438 12,357 24,580 24,433
Promotional 7,084 6,498 13,145 12,938
Other 15,233 15,617 29,594 31,786
----------- ----------- ----------- -----------
Total non-interest expenses 192,798 166,331 373,451 334,701
Income before income taxes 20,550 24,015 42,811 50,282
Income tax expense 7,727 9,138 15,972 19,264
----------- ----------- ----------- -----------
Net income $ 12,823 $ 14,877 $ 26,839 $ 31,018
=========== =========== =========== ===========
Weighted average common shares outstanding:
Basic 33,271,398 32,654,295 33,391,930 32,659,414
=========== =========== =========== ===========
Diluted 35,823,883 35,381,103 35,670,253 35,043,666
=========== =========== =========== ===========
Net income per share:
Basic $.39 $.46 $.80 $.95
=========== =========== =========== ===========
Diluted $.36 $.42 $.75 $.89
=========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
EVEREN CAPITAL CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity
Six months ended June 30, 1999
(unaudited)
(in thousands)
<TABLE>
<CAPTION>
Unearned
Additional cost of Retained Unrealized loss Total
Paid-In Restricted Treasury Earnings on available- Stockholders'
Common Stock Capital Stock Stock (since 1/1/96) for-sale securities Equity
------------ ---------- ----------- ---------- -------------- ------------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31,
1998 $361 $290,778 $(14,165) $(11,932) $147,069 $(3,475) $408,636
Issuance of additional
common stock 10 21,912 (9,052) 12,870
Dividends paid (4,949) (4,949)
Purchase of treasury stock (15,034) (15,034)
Comprehensive income:
Net income 26,839
Other comprehensive
income net of tax:
Unrealized loss
on
available-for-sale
securities (1,556)
Comprehensive income 25,283
Balances at June 30, 1999 $371 $312,690 $(23,217) $(26,966) $168,959 $(5,031) $426,806
==== ======== ======== ======== ======== ======== ========
</TABLE>
5
<PAGE>
EVEREN CAPITAL CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Six months ended June 30, 1999 and 1998
(unaudited)
(in thousands)
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 26,839 $ 31,018
Adjustments to reconcile net income to net cash flows
from operating activities:
Depreciation and amortization 23,052 9,841
Deferred income taxes (4,083) (3,249)
Change in assets and liabilities:
Cash and securities segregated under federal
and other regulations - (182)
Receivables from/payables to:
Customers (428,040) (268,494)
Brokers and dealers (58,929) 71,409
Others (34,421) (18,735)
Securities borrowed - (4,778)
Securities owned (75,573) (22,923)
Securities purchased under agreements to resell (134,840) 100,023
Other assets (6,862) (2,107)
Securities loaned (9,484) 174,801
Securities sold, not yet purchased 73,137 (1,652)
Securities sold under agreements to repurchase 124,474 (91,252)
Accounts payable, accrued expenses,
and other liabilities (32,109) (18,550)
--------- ---------
Net cash flows used in operating activities (536,839) (44,830)
--------- ---------
Cash flows from investing activities:
Acquisition of Principal Securities, net of cash acquired - (51,308)
Collections of principal on investments in mortgage-
backed securities 15,719 16,552
Acquisition of fixed assets, net (19,496) (13,274)
--------- ---------
Net cash flows used in investing activities (3,777) (48,030)
--------- ---------
Cash flows from financing activities:
Dividends paid (4,949) (4,318)
Proceeds from common stock issuance 8,553 8,805
Repayment of collateralized mortgage obligations (15,505) (16,333)
Increase in bank loans payable 564,000 92,000
Purchase of treasury stock (15,034) (1,727)
--------- ---------
Net cash flows provided by financing activities 537,065 78,427
--------- ---------
Decrease in cash and cash equivalents (3,551) (14,433)
Cash and cash equivalents at beginning of the period 19,995 36,248
--------- ---------
Cash and cash equivalents at end of the period $ 16,444 $ 21,815
========= =========
Supplemental disclosure of cash flow information:
Interest paid $ 32,782 $ 29,352
========= =========
Income taxes paid $ 14,970 $ 21,366
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
EVEREN CAPITAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Six months ended June 30, 1999
(unaudited)
- --------------------------------------------------------------------------------
(1) General Information
-------------------
The consolidated financial statements, prepared in accordance with
generally accepted accounting principles, include the accounts of EVEREN
Capital Corporation and its subsidiaries (the "Company" or "EVEREN"). 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 1998 Annual Report on Form 10-K.
All material intercompany balances and transactions have been eliminated.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts. Actual results could differ
from those estimates. The results of operations for interim periods are
not necessarily indicative of results for the entire year.
Certain reclassifications have been made in the prior period financial
statements to conform to the current period presentation.
(2) Net Capital Requirements and Dividend Restrictions
--------------------------------------------------
In accordance with the rules and regulations under the Securities Exchange
Act of 1934 for registered brokers and dealers, the net capital rules of
the New York Stock Exchange, and Regulation 1.17 of the Commodity Futures
Trading Commission, EVEREN Securities must maintain minimum net capital.
EVEREN Securities operates under the alternative method which requires
minimum net capital, as defined, equal to the greater of $1 million or 2%
of aggregate debit items arising from customer transactions, as defined.
Such net capital requirements could restrict the ability of a subsidiary to
pay dividends to its parent. At June 30, 1999, EVEREN Securities had net
capital of approximately $168.0 million, which was approximately $137.6
million in excess of its required minimum net capital.
(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
7
<PAGE>
EVEREN CAPITAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Six months ended June 30, 1999
(unaudited)
- --------------------------------------------------------------------------------
at this time, it is the opinion of management, after consultation with
outside counsel, that the resolution of such suits will not have a material
adverse effect on the consolidated financial position of the Company, but
may be material to the Company's operating results for any particular
period, depending upon the level of the Company's income for such period.
In the normal course of business, the Company enters into various
contractual commitments involving future settlement. These include
futures, forwards, options and securities sold, not yet purchased. These
transactions are executed either over-the-counter or are exchange-traded,
and are used primarily to hedge the Company's securities inventory. Many
of these products have maturities that do not extend beyond one year.
Transactions relating to such commitments, which were open at June 30,
1999, and subsequently settled, had no material effect on the consolidated
financial position of the Company.
(4) Pending Merger Transaction
--------------------------
As previously reported, the Company and First Union Corporation ("First
Union") entered into a merger agreement on April 25, 1999. On May 27, 1999,
the Company and First Union agreed to amend the merger agreement.
Specifically, the restated merger agreement amends the exchange ratio from
a fixed ratio of 0.555 shares of First Union common stock per share of
EVEREN common stock, to a ratio that would provide for each share of
EVEREN common stock a number of shares of First Union common stock equal to
the quotient of $31.00, divided by the average closing price of First Union
common stock during the ten trading days ending on the second trading day
prior to the merger. The merger is expected to close in the third quarter
of 1999.
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, 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 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 1998
continued throughout the first half of 1999, contributing to higher industry-
wide securities revenues and net income. Conditions in the U.S. trading markets
continued to be favorable, as moderate economic growth, low levels of
unemployment, and continued growth in corporate profits generally prevailed.
Despite these conditions, the level of inflation has remained relatively low.
The performance of U.S. equity markets continued to be very positive in the
first half of 1999, primarily resulting from strong corporate earnings, high
levels of cash inflows into mutual funds, and a continued strong trading volume.
Company Developments
On March 25, 1999, First Union Corporation ("First Union") and the Company
announced an agreement to form an asset management joint venture that would
combine the Evergreen mutual fund complex with the Mentor Investment Group, of
which the Company held
9
<PAGE>
a 20% interest. Concurrent with entering into this agreement, the Company's
ownership interest in Mentor was reset to 45% effective April 1, 1999. Under
this agreement, the Company and First Union would contribute their respective
current ownership interests in Evergreen and Mentor and receive 5% and 95%
interests in the joint venture, respectively.
On April 25, 1999, the Company entered into a definitive agreement to be
acquired by First Union. The transaction as originally announced had a fixed
exchange rate of .555 shares of First Union common stock for each EVEREN share
at the closing date. On May 27, 1999, the Company and First Union announced an
amendment to the original terms of the merger agreement. Under the amended
agreement, First Union will issue a number of shares of First Union common stock
valued at $31 in exchange for each EVEREN share. The number of First Union
shares to be exchanged for each EVEREN share will be based on the average
closing price of First Union stock during a 10-day trading period prior to the
closing. The acquisition will be accounted for as a purchase and is expected to
close in the third quarter of 1999, subject to EVEREN shareholder and regulatory
approvals and other conditions of closing.
Consistent with the generally strong economic and market conditions seen
throughout the securities industry in the first half of 1999, the Company
reported strong growth in both its retail brokerage and asset management
activities. The favorable industry conditions have continued to contribute to
considerable growth in both the number of investment consultants and their
productivity.
Year 2000
The Year 2000 problem is the result of computer programs being written
using two digits (rather than four) to define the applicable year. Computer
programs that have time-sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000. This could result in a major system
failure or miscalculations.
The failure of the Company's technology systems relating to a Year 2000
problem would likely have a material adverse effect on the Company's business,
results of operations, or financial condition. This effect could include
disruption of normal business transactions, such as the settlement, execution,
processing, and recording of trades in securities and commodities. The Year
2000 problem could also increase the Company's exposure to risk and its need for
liquidity.
The Company fully recognizes the importance of addressing Year 2000
technology issues and has committed significant funding and resources to the
project. Overall, the firm is comfortable that it is making a reasonable effort
to ensure that all affected areas are identified and, if necessary, remediated.
The Company's Year 2000 project is directed by the Company's Chief Information
Officer, who, utilizing a team of technology professionals, has conducted a
comprehensive review of its computer systems to identify the systems that could
be affected by the Year 2000 issue and has developed an implementation plan to
address the issue. This plan involves the following phases: awareness,
inventory/assessment, renovation, validation, and implementation. The awareness
phase defined and internally publicized the Year 2000 issue. Management support
was obtained and plans were put in place to develop the project. The
inventory/assessment phase consisted of conducting a thorough inventory of
computer applications used in each of the Company's departments. With the
assistance of technology professionals, each department compiled a complete
inventory of all software and hardware
10
<PAGE>
systems currently in use. A departmental liaison was selected who was then
responsible for assigning an impact status to each system based on the negative
impact that would result if a Year 2000 problem were to occur. These reports
were then utilized to determine the level of remediation necessary. The
renovation phase involves (1) altering software and hardware and documenting
such changes; (2) developing replacement systems; and (3) retiring eliminated
systems. The process also considered the complex interdependencies among
applications, hardware platforms, databases, and internal/external interfaces.
The validation phase involved the testing of all converted or replaced systems
to (1) discover errors introduced during the renovation phase; (2) validate Year
2000 compliance; and (3) verify operational readiness. The testing will address
application and database interdependencies as well as interfaces. A Year 2000
test environment was created to ensure adequate validation. Once converted or
replaced and subsequently tested, Year 2000 compliant applications and system
components will be implemented. The implementation phase is on-going as the
reintegration of applications into production is coordinated to account for
certain system interdependencies.
In addition, the Company is actively working with all of its major external
counterparties and suppliers to assess their compliance efforts and the
Company's exposure to them. The Company's major external counterparty is BETA,
the provider of the Company's core brokerage system. The Company's external
interface (i.e., point-to-point) testing is being conducted by BETA on the
Company's behalf. The Company, with BETA, has participated in point-to-point
testing with national securities exchanges and utilities and in industry-wide
testing in March and April 1999. Results of that testing indicate that with
modifications made to existing software and the conversion to new software, the
Year 2000 problem will not pose significant operational problems for the
Company's computer systems as so modified and converted.
Each department within the Company, along with dedicated technology
professionals, continues to develop specific contingency plans, with the
particular choice of contingency action dependent on the severity of the problem
being addressed, the availability of alternative products, and the level of
importance of the business activity supported by the problematic system. As
part of its Year 2000 readiness efforts, the Company has undertaken a project to
develop plans to reduce risks associated with a Year 2000 problem.
A portion of the current year's technology budget has been allocated to the
Year 2000 compliance project. As of June 30, 1999, the total estimated
expenditures associated with the entire Year 2000 project were expected to be
approximately $6.5 million. The majority of the remaining expenditures are
expected to cover some remaining software remediation, testing, and contingency
planning. There can be no assurance that the costs associated with such
remediation efforts will not exceed those currently anticipated, or that the
costs associated with the remediation efforts or the possible failure of such
remediation efforts would not have a material adverse effect on the Company's
business, results of operations, or financial condition.
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.
11
<PAGE>
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 as well as
equity in the earnings of the Company's Mentor asset management joint venture.
Other revenue includes transaction and account fees 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.
12
<PAGE>
Results of Operations
The following table sets forth certain financial data as a percentage of net
revenues:
Consolidated Statement of Operations Data:
Three months ended Six months ended
June 30, June 30,
1999 1998 1999 1998
---- ---- ---- ----
Revenue:
Commissions 49.2% 46.2% 49.1% 46.4%
Principal transactions 17.4 14.2 18.3 14.7
Investment banking 7.2 14.0 7.3 12.6
Asset management 15.3 14.5 15.0 13.5
Other 3.3 3.8 3.3 5.8
Interest 16.7 15.2 14.9 14.4
----- ----- ----- -----
Total revenue 109.1 107.9 107.9 107.4
Interest expense 9.1 7.9 7.9 7.4
----- ----- ----- -----
Net revenue 100.0 100.0 100.0 100.0
----- ----- ----- -----
Non-interest expenses:
Compensation and benefits 60.4 59.9 60.0 59.5
Brokerage and clearance 6.4 2.9 6.3 2.9
Communications 7.3 6.4 7.2 6.6
Occupancy and equipment 5.8 6.5 5.9 6.3
Promotional 3.3 3.4 3.2 3.4
Other 7.1 8.3 7.1 8.2
----- ----- ----- -----
Total non-interest expenses 90.3 87.4 89.7 86.9
Income before income taxes 9.7 12.6 10.3 13.1
Income tax expense 3.6 4.8 3.8 5.0
----- ----- ----- -----
Net income 6.1% 7.8% 6.5% 8.1%
===== ===== ===== =====
13
<PAGE>
Three and six months ended June 30, 1999 compared to the three and six months
ended June 30, 1998
During the first half of 1999, the Company reported increased revenues,
fueled in large part by higher transaction volume and increased assets under
management, in the retail brokerage sector. Revenue generated from commissions,
principal transactions and asset management activities reached record levels.
As a result, both revenues and expenses are higher in the first half of 1999
when compared to the first half of 1998. Net income decreased 13% in the first
half of 1999 when compared to the first half of 1998. This decrease is the
combination of merger related expenses totaling approximately $2.9 million
incurred in the second quarter of 1999, and a one-time arbitration award ($2.9
million (after tax) received in 1998).
Total revenue increased $27.6 million and $35.2 million or 13% and 9% to
$232.9 million and $449.0 million for the three and six months ended June 30,
1999 from $205.3 million and $413.8 million for the three and six months ended
June 30, 1998. Net revenues increased $23.0 million and $31.3 million or 12%
and 8% to $213.3 million and $416.3 million for the three and six months ended
June 30, 1999 from $190.3 million and $385.0 million for the three and six
months ended June 30, 1998.
Commission revenue increased $17.1 million and $25.6 million or 19% and 14%
to $105.0 million and $204.4 million for the three and six months ended June 30,
1999 from $87.9 million and $178.8 million for the three and six months ended
June 30, 1998. The increases in commission revenue are due primarily to the
continued growth in the number of retail investment consultants and their
productivity in the active equity markets in 1999. The increases are also due to
growth in sales of mutual fund and annuity products.
Principal transactions revenue increased $10.0 million and $19.6 million or
37% and 35% to $37.0 million and $76.2 million for the three and six months
ended June 30, 1999 from $27.0 million and $56.6 million for the three and six
months ended June 30, 1998. These increases are due largely to the consistently
strong market conditions in 1999, as well as increased trading volume in the
over-the-counter equity markets.
Investment banking revenue decreased $11.3 million and $18.3 million or 42%
and 38% to $15.4 million and $30.2 million for the three and six months ended
June 30, 1999 from $26.7 million and $48.5 million for the three and six months
ended June 30, 1998. These decreases are due in part to a decline in new issue
activity in the Company's niche market of small to middle-sized capitalization
companies. The decreases are also due in part to the Company's pending merger
with First Union and some of the uncertainties inherent in this type of merger.
Asset management revenue increased $5.2 million and $10.4 million or 19%
and 20% to $32.7 million and $62.5 million for the three and six months ended
June 30, 1999 from $27.5 million and $52.1 million for the three and six months
ended June 30, 1998, due to the significant growth of client assets invested in
managed accounts (approximately 22% 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 45% equity interest compared to 20% in the
1998 periods.
14
<PAGE>
Other income decreased $.2 million and $8.6 million or 2% and 38% to $7.1
million and $13.6 million for the three and six months ended June 30, 1999 from
$7.3 million and $22.2 million for the three and six months ended June 30, 1998.
This decrease is primarily attributable to the $6.0 million arbitration award
received in the first half of 1998; and the sale of 80% of EVEREN Clearing
Corporation, formerly a wholly-owned subsidiary, to the Bank of New York in the
fourth quarter of 1998. Other income in the first half of 1998 included revenues
earned from that subsidiary's clearing and execution business.
Interest and dividend income increased $6.8 million and $6.5 million or 24%
and 12% to $35.7 million and $62.1 million for the three and six months ended
June 30, 1999 from $28.9 million and $55.6 million in the corresponding periods
in 1998. Net interest increased $2.2 million and $2.6 million or 16% and 10% to
$16.1 million and $29.3 million for the three and six months ended June 30, 1999
from $13.9 million and $26.8 million for the three and six months ended June 30,
1998. These increases primarily reflect the 40% growth in average customer
margin account balances in the first half of 1999 when compared to 1998.
Total non-interest expenses increased $26.5 million and $38.8 million or
16% and 12% to $192.8 million and $373.5 million for the three and six months
ended June 30, 1999 from $166.3 million and $334.7 million for the three and six
months ended June 30, 1998.
Compensation and benefits expense increased $14.8 million and $21.0 million
or 13% and 9% to $128.8 million and $250.0 million for the three and six months
ended June 30, 1999 from $114.1 million and $229.0 million for the three and six
months ended June 30, 1998. These increases are directly attributable to the
growth in commission revenue, principal transactions revenue and asset
management revenue in the first half of 1999, resulting in increased production-
based payouts and increased production based incentive accruals.
Brokerage and clearance expense increased $8.1 million and $15.1 million or
147% and 138% to $13.6 million and $26.1 million for the three and six months
ended June 30, 1999 from $5.5 million and $11.0 million for the three and six
months ended June 30, 1998. These increases reflect the variable nature of this
expense, which generally increases in relative proportion to the growth in
transactional revenue. These increases are also due to the adoption of a new
clearing agreement with BNY Clearing in the fourth quarter of 1998 in connection
with the sale of 80% of EVEREN Clearing mentioned earlier. The expenses of
EVEREN Clearing, which were primarily fixed in nature and which were previously
included in the Company's consolidated results of operations across all expense
categories have been eliminated but are offset by increased, primarily variable,
clearing expense.
Communications expense increased $3.4 million and $4.5 million or 27% and
18% to $15.6 million and $30.0 million for the three and six months ended June
30, 1999 from $12.3 million and $25.5 million for the three and six months ended
June 30, 1998, primarily due to an increased number of employees in 1999 when
compared to the corresponding periods in 1998.
Occupancy and equipment expense totaled $12.4 million and $24.6 million for
the three and six months ended June 30, 1999 as compared to $12.4 million and
$24.4 million for the three and six months ended June 30, 1998. The relatively
stable expenses are primarily the result of the Company's focus on the
utilization of existing facilities in its recruiting efforts and the reduction
in occupancy and equipment expenses arising from the sale of EVEREN Clearing.
15
<PAGE>
Promotional expense increased $.6 million and $.2 million or 9% and 2% to
$7.1 million and $13.1 million for the three and six months ended June 30, 1999
from $6.5 million and $12.9 million for the three and six months ended June 30,
1998. The relatively small increases in promotional expense are due in part to
some merger-related costs incurred in connection with the First Union transition
in the second quarter of 1999.
Other expenses decreased $.4 million and $2.2 million or 2% and 7% to $15.2
million and $29.6 million for the three and six months ended June 30, 1999 from
$15.6 million and $31.8 million for the three and six months ended June 30,
1998. The decrease for the six month period ending June 30, 1999 is related
primarily to $1.1 million of fees related to the aforementioned arbitration
award in 1998 and expense savings in the current year resulting from the
complete integration of Principal Securities into the operations of EVEREN
Securities.
The Company's income tax expense for the three and six months ended June
30, 1999 totaled $7.7 million and $16.0 million, which represented effective tax
rates on income before taxes of 37.6% and 37.3% respectively, compared to $9.1
million and $19.3 million or 38.1% and 38.3% effective tax rates for the three
and six months ended June 30, 1998.
Net income decreased $2.1 million and $4.2 million or 14% and 13% to $12.8
million and $26.8 million for the three and six months ended June 30, 1999 from
$14.9 million and $31.0 million for the three and six months ended June 30,
1998. Excluding the pretax merger-related costs of $2.9 million in 1999 and a
non-recurring after-tax gain of approximately $2.9 million related to an
arbitration award in 1998, net income improved in the first half of 1999 to
$28.6 million, compared to $28.1 million in 1998.
16
<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>
6/30/99 3/31/99 12/31/98 9/30/98 6/30/98 3/31/98 12/31/97 9/30/97
------- ------- -------- ------- ------- ------- -------- -------
(dollars in thousands)
Revenue:
Commissions $104,965 $ 99,432 $ 84,951 $ 85,352 $ 87,942 $ 90,843 $ 71,137 $ 73,099
Principal transactions 37,009 39,213 36,143 28,202 27,005 29,632 26,789 28,174
Investment banking 15,409 14,822 15,833 21,676 26,668 21,817 28,768 15,272
Asset management 32,734 29,758 27,453 28,266 27,521 24,546 20,026 18,493
Other 7,100 6,501 7,187 8,436 7,279 14,972 8,672 7,405
Interest 35,715 26,386 23,688 28,658 28,915 26,645 22,761 26,201
-------- -------- --------- -------- -------- -------- --------- --------
Total revenue 232,932 216,112 195,255 200,590 205,330 208,455 178,153 168,644
Interest expense 19,584 13,198 10,594 14,808 14,984 13,819 10,072 13,113
-------- -------- --------- -------- -------- -------- --------- --------
Net revenue 213,348 202,914 184,661 185,782 190,346 194,636 168,081 155,531
Non-interest expenses:
Compensation and benefits 128,841 121,140 109,562 110,279 114,091 114,913 100,635 93,024
Brokerage and clearance 13,565 12,582 9,119 5,324 5,503 5,502 4,438 4,487
Communications 15,637 14,367 13,654 13,279 12,265 13,270 11,644 10,996
Occupancy and equipment 12,438 12,142 10,742 11,946 12,357 12,076 10,479 10,336
Promotional 7,084 6,061 5,222 7,729 6,498 6,440 6,384 5,091
Other 15,233 14,360 12,813 15,144 15,617 16,167 12,977 11,613
-------- -------- --------- -------- -------- -------- --------- --------
Total non-interest expenses 192,798 180,652 161,112 163,701 166,331 168,368 146,557 135,547
Gain on sale of subsidiary - - 19,780 - - - - -
-------- -------- --------- -------- -------- -------- --------- --------
Income before income taxes 20,550 22,262 43,329 22,081 24,015 26,268 21,524 19,984
Income tax provision 7,727 8,245 16,788 8,305 9,138 10,127 8,195 7,672
-------- -------- --------- -------- -------- -------- --------- --------
Net income $ 12,823 $ 14,017 $ 26,541 (1) $ 13,776 $ 14,877 $ 16,141 $ 13,329 $ 12,312
======== ======== ========= ======== ======== ======== ========= ========
</TABLE>
- ------------------------------------
(1) Includes a $19.8 million pretax ($11.9 million after-tax) gain on the sale
of 80% of EVEREN Clearing.
17
<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>
6/30/99 3/31/99 12/31/98 9/30/98 6/30/98 3/31/98 12/31/97 9/30/97
------- ------- -------- ------- ------- ------- -------- -------
Revenue:
Commissions 49.2% 49.0% 46.0% 45.9% 46.2% 46.7% 42.3% 47.0%
Principal transactions 17.4 19.3 19.6 15.2 14.2 15.2 15.9 18.1
Investment banking 7.2 7.3 8.6 11.7 14.0 11.2 17.1 9.8
Asset management 15.3 14.7 14.9 15.2 14.5 12.6 11.9 11.9
Other 3.3 3.2 3.8 4.5 3.8 7.7 5.3 4.8
Interest 16.7 13.0 12.8 15.4 15.2 13.7 13.5 16.8
------- ------- -------- ------- ------- ------- -------- -------
Total revenue 109.1 106.5 105.7 107.9 107.9 107.1 106.0 108.4
Interest expense 9.1 6.5 5.7 7.9 7.9 7.1 6.0 8.4
------- ------- -------- ------- ------- ------- -------- -------
Net revenue 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
------- ------- -------- ------- ------- ------- -------- -------
Non-interest expenses:
Compensation and benefits 60.4 59.7 59.3 59.4 59.9 59.0 59.9 59.8
Brokerage and clearance 6.4 6.2 4.9 2.9 2.9 2.8 2.6 2.9
Communications 7.3 7.1 7.4 7.1 6.4 6.8 6.9 7.1
Occupancy and equipment 5.8 6.0 5.8 6.4 6.5 6.2 6.2 6.6
Promotional 3.3 3.0 2.8 4.2 3.4 3.3 3.8 3.3
Other 7.1 7.0 7.0 8.1 8.3 8.4 7.8 7.5
------- ------- -------- ------- ------- ------- -------- -------
Total non-interest expenses 90.3 89.0 87.2 88.1 87.4 86.5 87.2 87.2
Gain on sale of subsidiary - - 10.7 - - - - -
------- ------- -------- ------- ------- ------- -------- -------
Income before income taxes 9.7 11.0 23.5 11.9 12.6 13.5 12.8 12.8
Income tax provision 3.6 4.1 9.1 4.5 4.8 5.2 4.9 4.9
------- ------- -------- ------- ------- ------- -------- -------
Net income 6.1% 6.9% 14.4% (1) 7.4% 7.8% 8.3% 7.9% 7.9%
======= ======= ======== ======= ======= ======= ======== =======
</TABLE>
- ------------------------------------------
(1) Includes a $19.8 million pretax or 10.7% ($11.9 million after-tax or 6.4%)
gain on sale of 80% of EVEREN Clearing.
The generally upward trend in the Company's net revenues for the eight
quarterly periods ended June 30, 1999 reflects generally strong economic and
market conditions seen throughout the securities industry. The Company reported
strong growth in its retail brokerage 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.
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
remained generally stable during such periods, which management believes to be a
result of the Company's focus on profitability, growth and cost containment.
The second quarter of 1999 includes merger-related costs of $2.9 million, which
have negatively impacted total non-interest expenses as a percentage of net
revenues.
18
<PAGE>
Net income after adjustment for merger-related costs and non-recurring
items, both in absolute dollar amounts and as a percentage of net revenues, also
generally reflect a positive trend during this eight-quarter period.
Liquidity and Capital Resources
Holding Company
EVEREN Capital Corporation ("EVEREN Capital") is the parent holding company
for EVEREN Securities Holdings, Inc. ("EVEREN Holdings"), the holding company
for the Company's operating subsidiaries. As the parent, EVEREN Capital expects
to receive dividends, interest on any loans and payments for federal income tax
from its subsidiaries. Dividends and other distributions, as well as certain
interest payments, to EVEREN Capital from its registered broker-dealer
subsidiaries, which are EVEREN Capital's primary sources of liquidity, are
restricted as to amounts which may be paid by applicable laws or regulations.
The "net capital" rules are the primary regulatory restrictions. EVEREN
Capital's rights (and the rights of its stockholders and creditors) to
participate in the assets of any subsidiary are also subject to prior claims of
the subsidiary's creditors, including customers of the broker-dealer
subsidiaries (except to the extent the Company itself may be a creditor with
recognized claims). See Note 2 of Notes to Consolidated Financial Statements
contained in Item 1 of this report. The Company has also generated funds from
bank loans and the issuance of Common Stock to employees.
Upon becoming a publicly-traded company, the Company, with approval from
its Board of Directors, began to pay quarterly dividends of $.09 per share on
the outstanding shares of Common Stock. In November 1997, the Board of
Directors approved an increase in the quarterly dividend rate to $.11 per share
on the Company's Common Stock, which was paid in December 1997 and March 1998.
On May 11, 1998, the Company's Board of Directors approved a two-for-one stock
split of its common shares. The split was effected by means of a stock dividend
to shareholders of record on June 2, 1998, and distributed on June 16, 1998. The
Board of Directors also approved an additional increase in the Company's
dividend to $.14 per pre-split share, or $.07 per post-split share, also payable
to shareholders of record on June 2, 1998.
The Company maintains a $50 million committed revolving credit facility
with two banks, all of which is unused at June 30, 1999. The initial term of
the agreement was for two years, subject to a one-year extension by mutual
agreement of the parties. On March 1, 1999, the Company extended the term of
the agreement to June 30, 2000. 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.
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, the Company's primary operating subsidiary
(the "Subsidiary" or "EVEREN Securities") are highly liquid. The majority of
its assets consist of
19
<PAGE>
securities inventories and collateralized receivables, both of which fluctuate
depending on the levels of customer business. Collateralized receivables consist
primarily of customer margin debits and securities purchased under agreements to
resell ("resale agreements"), both of which are secured by U.S. government and
agency securities or highly marketable corporate debt and equity securities. In
addition, EVEREN Securities has significant receivables from customers, brokers
and dealers, which turn over rapidly. The Subsidiary's total assets and the
individual components of total assets vary significantly from period to period
because of changes relating to customer needs and economic and market
conditions. A relatively small percentage of total assets is fixed or held for a
period of longer than one year. The Company's total assets at June 30, 1999 and
December 31, 1998 were approximately $2.9 billion and $2.2 billion,
respectively.
The majority of EVEREN Securities' assets are financed through daily
operations by securities sold under agreements to repurchase, securities sold
not yet purchased, bank loans, payables to customers, brokers and dealers, and
securities loaned. Short-term funding is generally obtained at rates based on
the federal funds, LIBOR or money market rates. Other borrowing costs are
negotiated depending upon prevailing market conditions. The Company monitors
overall liquidity by tracking the extent to which unencumbered marketable assets
exceed short-term unsecured borrowings. The Company maintains borrowing
relationships with a broad range of banks, financial institutions,
counterparties and others. At June 30, 1999, EVEREN Securities had
approximately $995 million in uncommitted credit lines with several banks.
EVEREN Securities maintains two committed secured lines of credit. The
first committed line is provided through a $500 million facility from The Bank
of New York, ("BONY"). This facility expires on November 1, 1999, but may be
extended for 364-day periods by mutual agreement of the parties. Extensions of
the facility cannot be made more than twice per year. At June 30, 1999, $500
million of the $835 million in bank loans payable was drawn against this
facility. The second line is provided under a $200 million facility from
various banks, for which the Company pays a commitment fee on the unused
portion. This facility expires on October 29, 1999, but may be extended by
mutual agreement of the parties for successive 364-day periods through October
29, 2003. No borrowings were outstanding on this facility at June 30, 1999.
Borrowings under each of the committed lines of credit may be secured by either
customer margin or firm securities, with interest based upon overnight bank
lending rates.
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."
EVEREN Securities is 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
Subsidiary. Management believes that existing capital funds from operations and
20
<PAGE>
current credit facilities will be sufficient to finance the operating
subsidiary's ongoing businesses. The majority of the assets of EVEREN
Securities are funded with liabilities that reprice on a matched basis,
generally producing a positive spread. As a result, the Company has modest
exposure to fluctuations in interest rates (other than the effect of interest
rate volatility on market conditions and prices of fixed income securities, and
the impact on the Company's revenues).
Cash Flows
The Company's statements of consolidated cash flows classify cash flows
into three broad categories: net cash flows from operating activities, investing
activities and financing activities. The Company's net cash flows are
principally associated with operating and financing activities, which support
the Company's trading, customer and banking activities.
Six months ended June 30, 1999 and 1998
Cash and cash equivalents at June 30, 1999 and 1998 totaled $16.4 million
and $21.8 million, respectively. The cash balance at June 30, 1998 included $50
million in cash deposited by Principal Securities in a brokerage account at its
former clearing broker. These funds were subsequently redeployed within the
Company in connection with the integration of Principal Securities into the
Company's operations.
For the six months ended June 30, 1999, cash used by operating activities
specifically, through an increase in customer margin debits, was generated
primarily in financing activities through increased bank loans. For the six
months ended June 30, 1998, cash generated by operating activities was used in
financing the acquisition of Principal Securities and a decrease in bank loans
payable.
Operating activities used cash totaling $536.8 million in 1999 and $44.8
million in 1998. In 1999, changes in receivables from brokers and dealers and
others of $93.4 million, securities loaned of $9.5 million, net change in
receivables from and payables to customer of $428.0 million, and accounts
payable and other liabilities of $32.1 million used cash. In 1998, increases in
receivables from customers and others of $287.2 million and decreases in
securities purchased under agreements to resell of $100.0 million used cash.
This was partially offset by an increase in securities loaned $174.8 million and
a decrease in receivables from broker-dealers of $71.4 million.
In 1999, net cash used by investing activities is comprised primarily of
the $19.5 million cash used in the acquisition of fixed assets. In 1998, net
cash used in investing activities is the result of the $51.3 million cash used
to acquire Principal Securities, net of cash acquired.
In 1999, net cash flows from financing activities amounted to $537.1
million, the net result of a $564.0 million increase in bank loans and $8.6
million of proceeds from the issuance of common stock offset by the payment of
dividends of $4.9 million and the repayment of collateralized mortgage
obligations of $15.5 million. In 1998, net cash used by financing activities is
primarily the result of a $92.0 million increase in bank loans payable.
21
<PAGE>
Derivative Financial Instruments
Derivatives are financial instruments, the payments on which are linked to
the prices, or relationships between prices, of securities or commodities,
interest rates, currency exchange rates or other financial measures
(collectively referred to as "cash market instruments"). Derivatives enable the
Company and its clients to manage their exposure to interest rates and currency
exchange rates, and security and other price risks. Derivatives include
structured notes, swaps, futures or forward contracts and options. Certain
types of derivatives, including forwards and certain options, are traded in the
OTC markets. Other types of derivatives, including futures contracts and listed
options, are traded on regulated exchanges.
Based on relative notional amounts, management believes that the Company's
derivative activities are not as extensive as those of many of its competitors.
The Company does not engage in the speculative trading of derivatives. Instead,
the Company has focused its derivative activities on trading in forward and
futures contracts in U.S. government and agency issued or guaranteed securities
as hedges against the Company's securities inventory positions. The Company
also executes transactions in exchange-traded futures contracts and listed
options on behalf of its customers.
The Company enters into certain futures and options contracts on a limited
basis in the ordinary course of its business to hedge or modify exposures to
interest rate fluctuations related to interest-sensitive securities in its
inventory. Given the limited use of such derivatives, the Company has not
incurred and does not expect to incur any material losses relating to its
derivative investments that would not be substantially offset with corresponding
gains on the securities positions hedged. Both the securities hedged and the
derivative instruments are carried on the statement of financial condition at
their market values. Gains and losses, both realized and unrealized, from both
the hedged securities and the derivative instruments are included in current
operating results.
Risk Management
Risk is an inherent part of the Company's business and activities. The
extent to which the Company properly and effectively identifies, assesses,
monitors and manages the various types of risks involved in its business is
critical to its profitability. The Company monitors its risk on a daily basis
through a number of control procedures designed to identify and evaluate the
various risks to which the Company is exposed.
Risk management at the Company is an integrated process with independent
oversight, which requires constant communication, judgment and knowledge of
specialized products and markets. The Company's senior management takes an
active role in the risk management process and has developed policies and
procedures that require specific administrative and business functions to assist
in the identification, assessment and control of various risks.
22
<PAGE>
Item 3: Quantitative and Qualitative Disclosures About Market Risk
Market Risk
Market risk refers to the risk that a change in the level of one or more
market prices, rates, indices, volatilities, correlations or other market
factors, such as liquidity, will result in losses for a specified position or
portfolio.
The Company often acts as a principal in customer-related transactions
in financial instruments, which expose the Company to market risks. The Company
makes dealer markets in certain equity securities, investment-grade corporate
debt, high-yield securities, U.S. government and agency securities, mortgages
and mortgage-backed securities, and municipal fixed-income securities. As such,
the Company maintains securities inventories to facilitate customer
transactions. The Company covers its exposure to market risk by limiting its
net long or short positions, both overall and by individual product area, by
limiting the number of days inventory is held, by selling or buying similar
instruments and by utilizing various derivative financial instruments such as
futures and forward and option contracts. The Company's management believes the
Company's philosophy, risk management and hedging practices result in carefully
managed market exposure and reduced earnings volatility.
At June 30, 1999 and December 31, 1998, the Company's securities owned
and securities sold, not yet purchased consisted of the following (in
thousands):
6/30/99 12/31/98
-------- ---------
Owned
- -----
Obligations of the U.S. Government
or its agencies $ 99,256 $ 45,551
State and municipal obligations 28,518 45,962
Corporate debt obligations 66,261 23,328
Corporate stocks and warrants 22,627 27,394
Other 2,490 1,344
-------- ---------
$219,152 $ 143,579
======== =========
Sold, not yet purchased
- -----------------------
Obligations of the U.S. Government
or its agencies $119,417 $ 40,717
State and municipal obligations 123 198
Corporate debt obligations 4,325 12,797
Corporate stocks and warrants 6,276 6,074
Other 3,065 283
-------- ---------
$133,206 $ 60,069
======== =========
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
23
<PAGE>
by senior management as well as professionals in the appropriate business and
support units involved.
The Company's trading activities result in the creation of inventory
positions. Position and exposure reports are prepared daily by operations
staff. Such reports are distributed to and reviewed independently on a daily
basis by the Company's risk management committee as well as members of senior
management. In addition, the corporate accounting group prepares a daily
consolidated summarized position report indicating both long and short exposure.
These reports, which are distributed to various levels of management throughout
the Company, enable senior management to better control inventory levels and
monitor results of the trading areas. The Company also reviews and monitors, at
various levels of management, inventory aging, pricing, concentration and
securities ratings.
In addition to position and exposure reports, the Company produces a
daily revenue report, which summarizes the trading, interest, commissions, fees,
underwriting and other revenue items for each of the trading departments. Daily
revenue is reviewed for various risk factors and is independently verified by
members of the risk management committee. The daily revenue report is
summarized by the corporate accounting group and distributed to various levels
of management throughout the Company, together with position and exposure
reports. These reports enable senior management to monitor and better control
the overall activity of the trading areas.
Credit Risk
The Company's exposure to credit risk arises from the possibility that
a counterparty to a transaction might fail to perform under its contractual
commitment, resulting in the Company incurring losses. Credit risk related to
various financing activities is reduced by the industry practice of obtaining
and maintaining possession and control of collateral. The Company monitors its
exposure to counterparty risk on a daily basis through the use of credit
exposure information and the monitoring of collateral values. The Company's
credit department is responsible for reviewing counterparties to establish
appropriate exposure limits for a variety of transactions. In addition, the
Company actively manages the credit exposure relating to its trading activities
by monitoring the creditworthiness of counterparties and their related trading
limits on an ongoing basis, requesting additional collateral when deemed
necessary and limiting the amount and duration of exposure to individual
counterparties.
Legal Risk
Legal risk includes the risk of non-compliance with applicable legal
and regulatory requirements and the risk that a counterparty's performance
obligations will be unenforceable. The Company is generally subject to extensive
regulation in the different jurisdictions in which it conducts business. The
Company has established legal standards and procedures that are designed to
ensure compliance with all applicable statutory and regulatory requirements.
The Company, principally through the Legal, Compliance and Finance Departments,
has also established procedures that are designed to ensure that senior
management's policies relating to conduct, ethics and business practices are
followed. In connection with its business, the Company has various procedures
addressing issues, such as regulatory capital requirements, new products, credit
granting, collection activities, and record-keeping. The Company has also
24
<PAGE>
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.
25
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company's quarterly report on Form 10-Q for the quarter ended March 31,
1999 described another arbitration proceeding, the status of which has not
changed. The Company intends to vigorously defend itself against the allegations
in such actions. Although there can be no assurances, the Company does not
believe that the ultimate outcome of these matters will have a material adverse
effect on its financial condition. Due, however, to the relatively early stage
of these matters and the lack of information currently available, management
cannot accurately make estimates of potential loss, if any, or assure that these
matters will have no material adverse effect on the Company's results of
operations in any particular period.
Item 4. Submission of Matters to a Vote of Security Holders
(a) The annual meeting of stockholders of the Company was held on May 6, 1999.
(b) At the annual meeting, the following directors, constituting the entire
board of directors, were elected until the 2000 annual meeting of
stockholders of the Company, or until their respective successors have been
elected and qualified: James R. Boris, William T. Esrey, Donald P. Jacobs,
Jack Kemp, Homer J. Livingston, Jr., Stephen G. McConahey, James J.
O'Connor, Samuel K. Skinner, William C. Springer and Donna F. Tuttle.
26
<PAGE>
(c) The number of votes cast for and withheld for each of the nominees for
director were as follows:
Broker
Board Member For Withheld Non-Voters
------------ ---------- -------- ----------
James R. Boris 31,261,240 91,003 0
William T. Esrey 31,280,813 71,431 0
Donald P. Jacobs 31,274,494 77,750 0
Jack Kemp 31,273,964 78,280 0
Homer J. Livingston, Jr. 31,283,113 69,131 0
Stephen G. McConahey 31,265,328 89,916 0
James J. O'Connor 31,282,750 69,494 0
Samuel K. Skinner 31,275,694 76,550 0
William C. Springer 31,282,313 69,931 0
Donna F. Tuttle 31,278,939 73,305 0
In addition to the election of directors, the following matter was voted
upon by the holders of the Company's Common Stock:
Broker
For Against Abstain Non-Voters
---- ------- ------- ----------
Ratification of Deloitte &
Touche LLP as the Company's
independent accountants for
1999 31,278,466 54,802 18,975 0
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
The Registrant filed a report on Form 8-K dated June 11, 1999 with
regard to its amended merger agreement with First Union Corporation.
27
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, EVEREN
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
EVEREN CAPITAL CORPORATION
Date: August 12, 1999 By: /s/Arthur J. McGivern
---------------------
Arthur J. McGivern
Senior Executive Vice President
Treasurer and Chief Financial Officer
By: /s/Thomas Lux
-------------
Thomas Lux
Executive Vice President
Controller and Chief Accounting Officer
28
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