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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1998
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[ ] TRANSITION REPORT PURSUANT TO SECTION 10 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission file number 1-13940
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EVEREN CAPITAL CORPORATION
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(Exact name of registrant as specified in its charter)
DELAWARE 36-4019175
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
77 West Wacker Drive, Chicago, Illinois 60601
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (312) 574-6000
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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
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Common Stock New York Stock
Exchange, Inc.
Securities registered pursuant to Section 12(g) of the Act: None
Indicated by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ___
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Indicated by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment on this
Form 10-K. [ ]
As of March 15, 1999, the aggregate market value of the voting stock held by
non-affiliates of the registrant was approximately $331,716,000 (based on the
closing price on the New York Stock Exchange and on the assumption that the
17,868,972 shares held by the trustee of the registrant's 401(k) and stock
ownership plan are considered held by an "affiliate").
As of March 15, 1999 the following number of shares were outstanding for each
class of the registrant's common stock:
Common Stock, $.01 par value - 35,394,301
Documents Incorporated by Reference - Certain sections of the Registrant's Proxy
Statement dated March 31, 1999 for Annual Meeting of Stockholders to be held May
6, 1999 are incorporated into Part III of this Form 10-K.
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INDEX
PART I
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<TABLE>
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Page
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Item 1. Business 4
Item 2. Properties 10
Item 3. Legal Proceedings 10
Item 4. Submission of Matters to a Vote of Security Holders 12
Executive Officers of the Registrant
PART II
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Item 5. Market for Registrant's Common Equity
and Related Stockholder Matters 14
Item 6. Selected Financial Data 16
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 17
Item 7A. Quantitative and Qualitative Disclosures about Market Risk 34
Item 8. Financial Statements and Supplementary Data 38
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 63
PART III
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Item 10. Directors and Executive Officers of the Registrant 63
Item 11. Executive Compensation 63
Item 12. Security Ownership of Certain Beneficial Owners
and Management 64
Item 13. Certain Relationships and Related Transactions 64
PART IV
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Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 64
POWER OF ATTORNEY AND SIGNATURES S-1
EXHIBIT INDEX E-3
</TABLE>
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PART I
ITEM 1. BUSINESS
General
EVEREN Capital Corporation and its subsidiaries ("EVEREN" or the "Company")
is a full-service securities brokerage firm that provides a broad range of
investment services and products primarily to individuals and also to
institutions, corporations and municipalities. The Company's core strength is
its retail operations. The Company also engages in capital markets and asset
management that complement and capitalize on the strength of the Company's
retail operations. The Company still participates in brokerage clearing
operations, but on a reduced level as a result of the sale of 80% of EVEREN
Clearing LLC ("EVEREN Clearing") to The Bank of New York in November 1998.
In its retail business, conducted through its wholly-owned subsidiary,
EVEREN Securities, Inc. ("EVEREN Securities"), the Company focuses on
maintaining and developing strong client relationships in local and regional
markets while providing the breadth and quality of services and products offered
by national brokerage firms. Headquartered in Chicago, the Company operates its
retail business through an integrated network of approximately 1,820 investment
consultants located in approximately 170 offices in 27 states. At December 31,
1998, EVEREN held over $63.4 billion of customer assets in approximately 650,000
client accounts.
EVEREN enjoys strong market positions in targeted regional markets with
approximately 70% of branch offices and 71% of its investment consultants
located in the states of Illinois, California, Ohio, Wisconsin, Colorado and
Texas. EVEREN's market penetration is primarily the result of the consolidation
and integration in 1990 of five prominent predecessor firms to form a network of
seasoned investment consultants. In addition, EVEREN acquired the retail
brokerage operations of Principal Financial Securities, Inc. in January 1998,
further strengthening its market positions in these regions.
The Company also provides a full range of equity and fixed income products,
investment banking services and other capital markets products and services
through approximately 23 professionals located in approximately 430 offices in
major cities in the United States. The Company has increased the coordination of
its investment banking, syndicate and trading activities, focusing those
activities on middle market and growth companies in selectively targeted
industries in which management believes the Company has specialized expertise.
In addition, EVEREN expanded its asset management business through a joint
venture with Mentor Investment Group, Inc. ("Mentor"), an asset management
company that had approximately $16 billion of assets under management at year
end 1998.
In September 1995, the Company became independently owned when the EVEREN
Capital Corporation 401(k) and Employee Stock Ownership Plan ("KSOP") purchased
96.6% of the Company's then outstanding Common Stock from Kemper Corporation
("Kemper") for an aggregate cash price of $71.4 million ($55.0 million of which
was funded by bank borrowings) plus $30.0 million of the Company's Exchangeable
Preferred Stock.
In October 1996, the Company completed its initial public offering whereby
4.6 million shares of its Common Stock were sold at a price of $18.50 per share.
Approximately 60% of the
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Company's Common Stock is currently employee-owned, with approximately 90% of
the Company's current employees having an ownership interest. The Company
experienced net losses in 1993, 1994 and 1995 of $3.7 million, $2.2 million and
$15.9 million, respectively. Since becoming independent, EVEREN has experienced
improved growth and profitability relative to prior periods. For the year ended
December 31, 1996, the Company generated net income of $62.5 million, including
a $30.2 million after-tax gain on the sale of a subsidiary, on net revenues of
$536.6 million compared to a net loss of $15.9 million on net revenues of $490.7
million for 1995. For the year ended December 31, 1997, the Company generated
net income of $46.6 million on net revenue of $593.1 million, an 11% increase
compared to 1996. For the year ended December 31, 1998, the Company generated
net income of $71.3 million on net revenue of $755.4 million. Excluding the
$11.9 million after-tax gain on the sale of a subsidiary, net income for 1998
represents a 27% increase over 1997. Management believes that the Company's
independence and employee ownership have resulted in high levels of employee
motivation, confidence and commitment, which have in turn contributed
significantly to the Company's improved performance.
Nature of the Securities Brokerage Business
The securities brokerage business is subject to significant risks,
including the risk of losses resulting from the underwriting or ownership of
securities, trading losses, counterparty failure to meet commitments, customer
fraud, employee fraud, issuer fraud, errors and misconduct, failure in
connection with the processing of securities transactions and litigation. The
securities brokerage business is directly affected by many factors, including
economic and political conditions, broad trends in business and finance,
legislation and regulation affecting the national and international business and
financial communities, currency values, inflation, market conditions, the
availability and cost of short-term or long-term funding and capital, the credit
capacity or perceived creditworthiness of the securities industry in the
marketplace and the level and volatility of interest rates. Such factors can
lead to lower price levels for securities and illiquid markets.
Lower price levels of securities may result in (a) reduced volume of
securities, options and futures transactions, with a consequent reduction in
revenues, (b) losses from declines in the market value of securities held in
trading, investment and underwriting positions and (c) reduced management fees
calculated as a percentage of assets managed. In periods of low volume, levels
of profitability are further adversely affected because certain expenses remain
relatively fixed. Illiquid markets may result in the Company having difficulty
selling securities, hedging its securities positions and investing funds under
its management. The Company believes its trading strategy and risk management
procedures reduce its exposure to losses resulting from such risks, although
there can be no assurance that such losses will not occur or if they do, that
they will not be material.
Dependence on Outside Sources of Financing
The Company, like others in the securities industry, relies on external
sources to finance a significant portion of its day-to-day operations,
principally to finance customer margin account balances and certain other
transactions. The principal sources of the Company's cash and liquidity are
commissions, repurchase agreements, collateralized bank loans and securities
lending activities. See also the discussion of financing in the "Liquidity and
Capital Resources" Section contained in Item 7 of this report.
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Retail Brokerage Activities
EVEREN's retail business offers clients a complete range of investment
products, such as stocks, bonds and mutual funds, and investment services,
including investment advice, financial planning and asset management. Management
believes that the breadth and quality of the Company's products and services,
coupled with the productivity, tenure and experience of its investment
consultants, allow it to provide superior service to its clients and help to
distinguish EVEREN from its competitors.
Markets
EVEREN's investment products and services are marketed to clients by a
network of approximately 1,820 investment consultants operating out of
approximately 170 retail branch offices in 27 states. Although EVEREN
Securities' single largest office in terms of revenue in 1998 was in New York
City, approximately three-quarters of the Company's investment consultants are
located in branch offices in California, Ohio, Illinois, Texas, Wisconsin, and
Colorado. Many of EVEREN's retail offices are located in smaller cities or
suburban areas.
Retail Products and Services
EVEREN offers a full line of investment products to its retail clients.
These include cash management accounts, listed and over-the-counter stocks,
government and corporate bonds, tax-exempt state and local government bonds,
open- and closed-end mutual funds, unit investment trusts, commodities,
individual retirement accounts ("IRAs") and a wide variety of investment
advisory products. Service offerings include investment advisory services,
financial planning services such as retirement planning and planning for college
funding, asset allocation advice, margin loans and prototype 401(k) plans and
services.
In May 1996 as part of its strategy to grow client assets and increase
asset management activity, EVEREN introduced a new form of cash management
account, the EVEREN Advantage(SM) Account ("Advantage"). Advantage is designed
to allow clients to consolidate their financial assets in a full service,
integrated account. Advantage accounts feature numerous services, including a
daily sweep of any cash in the client's account to a money market mutual fund,
unlimited free checking, debit cards, margin account access and automatic bill
payment. Advantage account holders also will receive customized statements
showing gain and loss information, complimentary IRA and EVEREN Online Service,
a service that will provide the client with direct access to his or her account
information via computer modem.
Investment Advisory Services
The Company's investment advisory services include performance monitoring,
selection of third party investment managers and, to a limited extent,
discretionary asset management. The investment advisory services offered by the
Company are tailored for a variety of clients, including individuals, pension
and profit-sharing plans, trusts and estates, charitable organizations,
corporations and other business and governmental entities. Investment advisory
services are typically rendered on a fixed or "wrap" fee basis, such that all
services, including execution services, are provided by EVEREN for a fixed fee,
payable quarterly, usually a percentage of assets under management.
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Capital Markets Activities
In support of and as a complement to its retail operations, the Company
engages in a full range of capital markets activities, including product
origination, trading and research of equity, taxable fixed income and municipal
securities. The Company's capital markets activities are primarily client-
driven, in contrast to those of many other securities firms which emphasize
proprietary trading, and currently account for approximately 15% of the
Company's net revenues. Capital markets activities are conducted through
approximately 430 professionals in 23 offices located in major cities across the
United States.
Equities
The Company seeks to focus its equity capital markets activities
increasingly on institutional clients because of their greater share volumes and
resulting revenues. The Company has coordinated its equity securities research,
investment banking, syndicate and trading activities by industry group and
focused those activities on middle market and growth companies in a group of
core industries. These industries currently include financial services
(primarily thrifts, insurance companies and finance companies), real estate,
technology (primarily computer hardware and software), consumer goods (primarily
retail, catalogues and restaurants), industrials (primarily specialty chemicals,
capital goods and selected manufacturing), telecommunications (primarily
equipment and wireless and landline services), health care and the energy
industry.
Research. The Company provides equity research coverage on a group of
middle-market and growth companies in the Company's core industries. The
Company's research staff prepares periodic reports on approximately 175 publicly
traded companies and uses a team approach that is designed to allow depth of
coverage. In addition, the Company purchases research coverage from two well-
regarded investment banks. This out-sourcing of research provides the broad
services needed by retail investment consultants and clients and allows the
Company's in-house analysts to focus where they can add value. The Company also
maintains a research liaison desk to provide responsive support service to its
investment consultants and retail clients.
Investment Banking. The Company offers a broad range of investment banking
services primarily relating to equity offerings and private placements to middle
market and growth companies, principally in the Company's core industries. The
Company has approximately 70 investment banking professionals in 12 locations.
The Company also offers other investment banking services, including mergers and
acquisitions advisory and debt origination.
Institutional Sales. The Company distributes equity securities through an
institutional equity sales force that primarily serves mid-size and large
institutional clients. The Company has approximately 25 institutional equity
sales professionals located primarily in Chicago and New York. In 1998, the
institutional equity sales force generated approximately $22 million of
revenues.
Trading. The Company makes a market in approximately 400 over-the-counter
stocks, including most of those covered by the Company's research department.
EVEREN employs approximately 30 trading professionals who execute transactions
in both over-the-counter and listed securities primarily for retail and
institutional clients. Traders are paid based on a formula that encourages them
to work with the Company's investment consultants and institutional sales
professionals to generate sales revenues as a priority over trading profits. The
Company seeks to limit its exposure to trading losses by focusing its trading
activity on facilitating its retail and institutional businesses rather than on
trading for its own account. The Company imposes low position limits for its
traders.
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Taxable Fixed Income
The Company provides a broad range of government, government agency and
corporate fixed income securities to its retail and generally smaller
institutional clients. A relatively small amount of the taxable fixed income
securities offered by the Company are originated internally, most are obtained
in the secondary market. The taxable fixed income department employs
approximately 100 professionals, including fixed income research personnel who
primarily provide investment ideas and credit oversight. To facilitate its
taxable fixed income activities, the Company enters into standard repurchase and
reverse repurchase agreements with qualified institutional clients.
Municipals
The Company provides underwriting and financial advisory services to, and
distributes securities of, tax-exempt municipalities principally in the Midwest.
The Company's municipal securities business includes approximately 20 public
finance investment bankers and analysts that provide underwriting and financial
advisory services.
Employees
At December 31, 1998, the Company employed approximately 4,000 persons.
Competition
All aspects of the Company's business are highly competitive. The Company
competes directly with national, regional and local full service broker-dealers
and, to a lesser extent, with discount brokers, dealers, investment banking
firms, investment advisors and certain commercial banks. The Company also
competes indirectly for client assets with insurance companies and others. The
financial services industry has become considerably more concentrated as
numerous securities firms have either ceased operations or have been acquired by
or merged into other firms. Such mergers and acquisitions have increased
competition from these firms, many of whom have significantly greater equity
capital, financial and other resources than the Company. With respect to retail
brokerage activities, many of the regional firms with whom the Company competes
have operated in their regions significantly longer than has the Company and
have established long-standing client relationships. In addition, the Company
expects competition from domestic and international commercial banks to increase
as a result of recent and anticipated legislative and regulatory initiatives in
the United States to remove or relieve certain restrictions on commercial banks
relating to the sale of securities.
In addition, the Company faces competition for investment consultants.
Although the Company takes steps to maintain strong relationships with its
investment consultants, because of the significant emphasis on and importance of
its retail operations, the Company faces competition in attracting and retaining
high-producing retail brokers. While many competitors require their registered
representatives to enter into restrictive non-competition agreements which seek
to prohibit the representatives from being employed by any competitor, the
Company has not implemented such a requirement because it believes that the
general use of such agreements is not conducive to attracting valuable
employees.
Management believes that the principal competitive factors influencing the
Company's business are the quality of its investment consultants and other
professional staff, the Company's
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reputation in and penetration of the local markets in which it operates, its
existing client relationships, its mix of market capabilities and the incentives
associated with employee ownership.
Regulation
The securities industry in the United States is subject to extensive
regulation under both federal and state laws. EVEREN Securities is registered
with the Commission as a broker-dealer and as an investment adviser. It is
subject to regulation by the Commission and by self-regulatory organizations,
principally the NASD and Municipal Securities Rulemaking Board ("MSRB") and
national securities exchanges such as the NYSE. Securities firms are also
subject to regulation by state securities administrators in those states in
which they conduct business. EVEREN Securities is a registered broker-dealer in
all 50 states, the District of Columbia and the Commonwealth of Puerto Rico.
Failure to comply with the laws, rules or regulations of the Commission, such
self-regulatory organizations and state securities commissions may result in
censure, fine, the issuance of cease-and-desist orders or the suspension or
expulsion by such entities of a broker-dealer, an investment adviser, officers
or employees. The Company believes that it is currently in material compliance
with the regulations to which it is subject.
EVEREN Securities is registered with the Commodity Futures Trading
Commission ("CFTC") as a futures commission merchant and is subject to
regulation as such by the CFTC and various domestic boards of trade and other
commodity exchanges. EVEREN Securities' commodity futures and options business
is also regulated by the National Futures Association ("NFA"), a not-for-profit
membership corporation which has been designated as a registered futures
association by the CFTC.
Because financial services businesses are subject to extensive regulation
on the federal and state level, and because of the possibility of changes
resulting from numerous legislative and regulatory proposals that are advanced
each year and from judicial decisions, it is possible that changes will be
necessary to the way in which the Company and its affiliates conduct their
activities. While it is difficult to predict the impact of any new laws,
regulations or judicial decisions, the Company anticipates that regulation of
the securities and commodities industries will increase at all levels and that
compliance therewith will become more difficult. Monetary penalties and
restrictions on business activities by regulators resulting from compliance
deficiencies are also expected to become more severe.
Capital Requirements
As a registered broker-dealer, EVEREN Securities is subject to the
Commission's net capital rule, Rule 15c3-1 (the "Net Capital Rule"), promulgated
under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The
NYSE monitors the application of the Net Capital Rule. EVEREN Securities
computes net capital under the alternative method which requires minimum net
capital equal to the greater of $1 million or 2% of aggregate debit items
arising from customer transactions. A broker-dealer may be required to reduce
its business if its net capital is less than 4% of aggregate debit balances and
may also be prohibited from expanding its business or paying cash dividends if
resulting net capital would be less than 5% of aggregate debit balances. In
addition, the Net Capital Rule does not allow withdrawal of subordinated capital
if net capital would be less than 5% of such debit balances.
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The Net Capital Rule also limits the ability of broker-dealers to transfer
large amounts of capital to parent companies and other affiliates. Under the
Net Capital Rule, equity capital cannot be withdrawn from a broker-dealer
without the prior approval of the Commission when net capital after the
withdrawal would be less than 25% of its securities position haircuts (which are
deductions from capital of certain specified percentages of the market value of
securities to reflect the possibility of a market decline prior to disposition).
In addition, the Net Capital Rule requires a broker-dealer to notify the
Commission and the appropriate self-regulatory organization two business days
before a withdrawal of excess net capital if the withdrawal would exceed 30% of
the broker-dealer's excess net capital, and two business days after a withdrawal
that exceeds 20% of excess net capital, provided that no such notice need be
given if the withdrawal is less than $500,000. Finally, the Net Capital Rule
authorizes the Commission to order a freeze on the transfer of capital if a
broker-dealer plans a withdrawal of more than 30% of its excess net capital and
the Commission believes that such a withdrawal would be detrimental to the
financial integrity of such broker-dealer or would jeopardize the broker-
dealer's ability to pay its customers.
At December 31, 1998, EVEREN Securities had net capital, as defined, of
$187.0 million, which exceeded its minimum net capital requirement by
approximately $165.4 million.
Compliance with the Net Capital Rule could limit those operations of the
Company that require the intensive use of capital, such as underwriting and
trading activities and the financing of customer account balances, and also
could restrict its ability to pay dividends, repay debt and redeem or purchase
shares of its outstanding common stock.
The Commission, the NYSE, the CFTC and various other securities and
commodities exchanges and other regulatory bodies in the United States have
rules with respect to net capital requirements which affect the Company. A
change in such rules, or the imposition of new rules, affecting the scope,
coverage, calculation or amount of such net capital requirements, or a
significant operating loss or any unusually large charge against net capital,
could adversely affect the ability of the Company to expand or maintain present
levels of business or pay dividends or interest.
ITEM 2. PROPERTIES
EVEREN Securities leases 297,000 square feet of office space (and an
additional 36,000 square feet of warehouse space) in two locations in Chicago,
Illinois; 136,000 square feet in two locations in Houston, Texas, a significant
portion of which is subleased; 29,000 square feet in Cleveland, Ohio; 19,000
square feet in Milwaukee, Wisconsin; 38,000 square feet in two locations in New
York City; 30,000 square feet in San Francisco, California; 21,000 square feet
in Denver, Colorado; and approximately 898,000 square feet in other locations
nationwide.
ITEM 3. LEGAL PROCEEDINGS
Many aspects of the Company's business involve substantial risks of
liability. In recent years there has been an increasing incidence of litigation
involving the securities brokerage industry, including class action suits that
generally seek substantial damages and other suits seeking punitive damages.
Like other securities brokerage firms, the Company has been named as a defendant
in class action and other suits and has in the past been subject to substantial
settlements and judgments.
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Following is a description of one of the matters in which the Company is
currently exposed to potential liability. Although there can be no assurances,
the Company does not believe that the ultimate outcome of this matter or any
other litigation, individually or in the aggregate, will have a material adverse
effect on its financial condition or results of operations. Due, however, to the
relatively early stage of this matter, management cannot accurately make
estimates of potential loss, if any, or assure that such matter will have no
material adverse effect on the Company's results of operations in any particular
period.
Internal Revenue Service Notice of Proposed Adjustment Regarding Payments
Made to Robert Kanuth in 1991 and 1992.
The Internal Revenue Service ("IRS") has issued a Notice of Proposed
Adjustment with respect to Kemper Corporation's 1991 and 1992 tax returns.
EVEREN Securities was a subsidiary of Kemper at that time. These proposed
adjustments concern the tax treatment of certain payments made to a former
employee, Robert Kanuth, pursuant to an arbitration award against Prescott Ball
& Turben ("PBT"), a predecessor of EVEREN Securities. Prior to his employment
with PBT, Kanuth was a shareholder and the President of Cranston Securities, a
company purchased by PBT in 1987. In connection with that purchase, PBT entered
into an employment agreement with Kanuth. After Kanuth's employment was
terminated, he brought an arbitration claim against PBT seeking recovery of
incentive compensation payable to him pursuant to his employment agreement, and
the arbitrators awarded him approximately $30 million. The payment of that award
by EVEREN Securities was treated as compensation by Kemper. The IRS Notice
asserts that the incentive compensation paid to Kanuth should have been
considered additional purchase price for the purchase of Cranston rather than
compensation. Kemper has filed a protest with the IRS, and Kemper and the
Company are working together to vigorously defend this matter.
Kemper has asserted that the Company is responsible for any tax liability
associated with this matter pursuant to the terms of a Tax Sharing Agreement
between Kemper and the Company. In September 1998, the Company filed a lawsuit
against Kemper in connection with the Tax Sharing Agreement, which alleges that
Kemper failed to disclose information to the Company concerning this potential
tax liability and should therefore be liable for any taxes imposed. Kemper has
denied those claims. The lawsuit was voluntarily dismissed without prejudice,
pending resolution of the IRS matter, pursuant to a tolling agreement between
the parties.
In addition to the matter described above, the Company is currently a
defendant in various civil actions and arbitrations arising out of its
activities as a broker-dealer in securities. Some of such actions involve
allegations of misconduct by Company employees, and other actions involve claims
against the Company by current or former employees. Although the ultimate
outcome of these matters cannot be ascertained at this time, it is the opinion
of management, after consultation with counsel, that the resolution of such
suits will not have a material adverse effect on the consolidated financial
position of the Company, but may be material to the Company's operating results
for any particular period, depending upon the level of the Company's income for
such period.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the 1998 fiscal year.
EXECUTIVE OFFICERS OF THE REGISTRANT
The officers of the Company are elected by and serve at the pleasure of the
Board of Directors. The executive officers of the Company and their respective
positions, ages and backgrounds are as follows:
<TABLE>
<CAPTION>
NAME Position Age
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<S> <C> <C>
James R. Boris Chairman of the Board and Chief Executive Officer 54
Stephen G. McConahey President and Chief Operating Officer 55
David M. Greene Senior Executive Vice President and Director of Client 53
Services
Arthur J. McGivern Senior Executive Vice President, Treasurer and Chief 51
Financial Officer
Janet L. Reali Senior Executive Vice President, General Counsel and 47
Secretary
Thomas R. Reedy Senior Executive Vice President and Director of Capital 39
Markets
John G. Sullivan Senior Executive Vice President and Director of 53
Strategic Planning and Development
Lawrence E. Koehler Executive Vice President and Director of Corporate 42
Administration
Thomas D. Lux Executive Vice President and Chief Accounting Officer 41
</TABLE>
James R. Boris has been Chairman of the Board and Chief Executive Officer
of the Company since its inception in May 1995. Mr. Boris is Chairman of the
Board and Chief Executive Officer of EVEREN Securities, and has held such
positions since January 1990. From January 1994 until September 1995, he was
also an Executive Vice President of Kemper. From January 1990 until September
1995, he served on the board of directors of Kemper Financial Companies, Inc.
and the boards of its major subsidiaries. Mr. Boris is also a director of
Peoples Energy Corporation.
Stephen G. McConahey has been President and Chief Operating Officer of the
Company since its inception in May 1995, and has been a director since July
1995. Mr. McConahey is President and Chief Operating Officer of EVEREN
Securities and has held such positions since January 1994. He was Senior Vice
President for Corporate and International Development of Kemper from 1990
through December 1993. He was also Executive Vice President (Corporate and
International Development) of Kemper Financial Services, Inc. from 1988 through
December 1993
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and Senior Vice President of Kemper Financial Companies, Inc. from 1990 through
1993. Mr. McConahey is also a member of the Board of Trustees of AMLI
Residential Properties Trust, a publicly-traded real estate investment trust
that invests in multi-family properties.
David M. Greene was elected Senior Executive Vice President of the Company
in May 1995 and also acts as the Company's Director of Client Services. Since
January 1994, he has been Senior Executive Vice President and Director of Client
Services of EVEREN Securities. From October 1992 until January 1994, he was
EVEREN Securities' national sales director. From August 1991 to October 1992 he
was Regional Director of EVEREN Securities' branch offices in Wisconsin, Iowa,
Florida and Minnesota. Prior thereto, he was branch manager of the Madison,
Wisconsin branch office of an EVEREN Securities predecessor firm, Blunt Ellis &
Loewi Incorporated ("BEL").
Arthur J. McGivern was elected Senior Executive Vice President, Chief
Financial Officer and Treasurer of the Company in February 1999. From January
1996 through January 1999, he was Senior Executive Vice President and Director
of Corporate Development of the Company and of EVEREN Securities. From January
1994 to January 1996, he was Senior Vice President and Corporate Counsel of
Kemper. Prior to the Company's separation from Kemper in September 1995, Mr.
McGivern was a director and officer of a number of the Company's subsidiaries,
including the following positions at EVEREN Securities: Executive Vice President
from March 1991 to September 1992; Senior Executive Vice President from
September 1992 to September 1995; General Counsel from March 1991 to September
1995; Corporate Secretary from March 1991 to December 1993; and a director from
March 1991 to September 1995.
Janet L. Reali was elected Senior Executive Vice President, General Counsel
and Secretary of the Company in February 1996 after having been Executive Vice
President and Secretary since May 1995. In December 1995 she was elected Senior
Executive Vice President, General Counsel and Secretary of EVEREN Securities
after having been Executive Vice President, Corporate Counsel and Corporate
Secretary since December 1993. She was Senior Vice President and Associate
General Counsel of EVEREN Securities from July 1991 to December 1993. Before
joining EVEREN Securities, she was a partner in the Chicago law firm of Keck,
Mahin & Cate.
Thomas R. Reedy was elected Senior Executive Vice President of the Company
in May 1995 and acts as the Company's Director of Capital Markets. He has been
Senior Executive Vice President of EVEREN Securities since December 1993,
Executive Vice President from September 1993 to December 1993 and Senior Vice
President from January 1991 to September 1993. During these periods, he has held
the additional titles of Director of Capital Markets since January 1995,
Director of Product Origination from June 1994 to January 1995, Director of
Investment Banking from September 1993 to June 1994 and Director of Public
Finance from January 1991 to September 1993. He originally joined EVEREN
Securities in 1988 as a Senior Vice President of BEL.
John G. Sullivan was elected Senior Executive Vice President of the Company
in February 1996 and since February 1999 has acted as the Company's Director of
Strategic Planning and Development. Prior to February 1999, he was the Company's
Director of Marketing and Investment Services. He has been a director and Senior
Executive Vice President and Director of Marketing and Investment Services of
EVEREN Securities since October 1995. Prior to joining the Company, he worked at
Smith Barney Inc. as Executive Vice President for strategic marketing
13
<PAGE>
from July 1995 to October 1995, as Executive Vice President and director of
recruiting and development from June 1994 to June 1995 and as Executive Vice
President and director of that firm's northwest retail division from 1990 to
1994.
Lawrence E. Koehler was elected Executive Vice President and Director of
Corporate Administration of the Company in February 1999. In August 1998, he
assumed responsibility for the Company's human resources, compensation and
benefits, facilities, corporate travel, EVEREN University and the EVEREN
Foundation. He has been a director of EVEREN Securities since September 1998.
Mr. Koehler joined EVEREN Securities in December 1990 as Senior Vice President
and Director of Taxes and Retirement Plans. He became an Executive Vice
President of EVEREN Securities in March 1997.
Thomas D. Lux was elected Executive Vice President of the Company in May
1998 and Chief Accounting Officer in November 1998. He has been an Executive
Vice President and Chief Accounting Officer of EVEREN Securities since March
1998, and was Senior Vice President and Director of Finance from June 1996.
Prior to that time, Mr. Lux was an audit partner with Deloitte & Touche LLP from
June 1992 through June 1996.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
a. Market Information
The Company's Common Stock is traded on the New York Stock Exchange under
the symbol "EVR". The high and low sales prices for the Company's Common Stock
for each quarter of the Company's last two fiscal years during which the
Company's Common Stock was traded on the New York Stock Exchange are as follows
(prices per share prior to June 16, 1998, are restated to reflect the Company's
2-for-1 stock split affected on that date):
<TABLE>
<CAPTION>
1998 High Low
---- ------- -------
<S> <C> <C>
4th Quarter $27.000 $15.250
3rd Quarter 29.625 15.000
2nd Quarter 28.125 21.375
1st Quarter 23.688 19.875
</TABLE>
<TABLE>
<CAPTION>
1997 High Low
---- ------- -------
<S> <C> <C>
4th Quarter $23.844 $17.500
3rd Quarter 20.313 14.688
2nd Quarter 15.625 10.063
1st Quarter 15.125 9.938
</TABLE>
b. Holders
As of March 2, 1999, there were approximately 1,200 record holders of the
Company's Common Stock according to the records maintained by the Company's
transfer agent.
c. Dividends
Dividends declared during the last two fiscal years were as follows
(quarterly dividends prior to the second quarter of 1998 are restated to reflect
the Company's 2-for-1 stock split):
14
<PAGE>
<TABLE>
<CAPTION>
Calendar Quarter First Second Third Fourth
---------------- ----- ------ ----- ------
<S> <C> <C> <C> <C>
1998 $.055 $.07 $.07 $.07
1997 $.045 $.045 $.045 $.055
</TABLE>
The Company's ability to pay dividends is contingent upon the earnings of
its subsidiaries, as well as their ability to declare and pay dividends to the
Company. Certain subsidiaries may be limited in their ability to pay dividends
by capital and other rules of regulatory bodies, as well as certain covenants in
instruments governing certain indebtedness.
Dividend distributions from securities brokerage firms are restricted by
federal and state securities laws, the rules and regulations thereunder and/or
the rules and regulations of exchanges of which the firms are members. As a
result, EVEREN Securities cannot lawfully pay dividends that would either reduce
its net capital amount below the minimum amount required or cause certain net
capital decreases without prior regulatory approval.
15
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth summary historical consolidated
financial data for the Company which was derived from the consolidated financial
statements of the Company. The summary consolidated financial data should be
read together with the consolidated financial statements of the Company and
related notes and "Management's Discussion and Analysis of Financial Condition
and Results of Operations" included elsewhere in this report.
CONSOLIDATED STATEMENT OF OPERATIONS DATA
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA):
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
------- ------- ------ ------- -------
<S> <C> <C> <C> <C> <C>
Revenue:
Commissions $ 349.1 $ 267.9 $ 225.8 $ 190.4 $ 180.5
Principal transactions 121.0 102.9 115.3 122.1 119.1
Investment banking 86.0 69.5 55.9 47.1 61.9
Asset management 107.8 73.6 57.3 53.3 51.5
Other 37.8 30.6 42.2 49.1 43.2
Interest 107.9 85.2 74.1 81.2 73.8
------- ------- ------- ------- -------
Total revenue 809.6 629.7 570.6 543.2 530.0
Interest expense 54.2 36.6 34.0 52.5 44.8
------- ------- ------- ------- -------
Net revenue 755.4 593.1 536.6 490.7 485.2
------- ------- ------- ------- -------
Non-interest expenses
Compensation and benefits 448.8 352.5 331.4 335.5 328.0
Brokerage and clearance 25.4 17.2 14.5 11.4 11.5
Communications 52.5 42.6 38.3 41.8 41.3
Occupancy and equipment 47.1 40.8 39.2 54.5 46.4
Promotional 25.9 21.5 17.8 13.5 18.9
Other 59.8 43.5 37.8 56.0 51.8
------- ------- ------- ------- -------
Total non-interest expenses 659.5 518.1 479.0 512.7 497.9
Gain on sale of subsidiary 19.8 - 50.2 - -
------- ------- ------- ------- -------
Income (loss) before income taxes and
extraordinary item 115.7 75.0 107.8 (22.0) (12.7)
Income tax provision (benefit) 44.4 28.4 42.4 (6.1) (10.5)
------- ------- ------- ------- -------
Income (loss) before extraordinary item 71.3 46.6 65.4 (15.9) (2.2)
Extraordinary charge on early retirement
of debt, net of income tax benefit of $1.5 - - (2.9) - -
------- ------- ------- ------- -------
Net income (loss) $ 71.3 $ 46.6 $ 62.5 $ (15.9) $ (2.2)
======= ======= ======= ======= =======
Earnings per share (A):
Basic $ 2.16 $ 1.44 $ 2.68
======= ======= =======
Diluted $ 2.01 $ 1.35 $ 2.57
======= ======= =======
Ratio of earnings to fixed charges (B) 2.8 2.6 3.4 - -
======= ======= ======= ======= =======
</TABLE>
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION DATA (AS OF DECEMBER 31):
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<S> <C> <C> <C> <C> <C>
Total assets $2,169.3 $1,906.1 $1,824.3 $2,550.6 $1,554.7
Long-term obligations 84.3 122.0 137.7 160.7 289.4
Cash dividends per common share (A) .27 .19 .05 - -
</TABLE>
(a) Earnings per share and cash dividends per common share for 1997 and 1996
have been restated for the 2-for-1 stock split effected in the second
quarter of 1998.
(b) For purposes of computing the ratio of earnings to fixed charges, earnings
consist of income before income taxes plus fixed charges. Fixed charges
consist of interest expense and the approximate portion of rental expense
representative of the approximate interest factor. For the years ended
December 31, 1995 and 1994, earnings were insufficient to cover fixed
charges by approximately $22.0 million and $12.7 million, respectively.
16
<PAGE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the "Selected
Financial Data" in Item 6 and the Company's consolidated financial statements
and notes thereto contained in Item 8 of this report. In addition to historical
information, this report contains forward-looking statements. Such forward-
looking statements are within the meaning of that term in Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended. Such statements may include, but are not limited to,
projections of revenues, income or loss, and capital expenditures, as well as
assumptions relating to the foregoing.
Forward-looking statements are inherently subject to risks and
uncertainties, some of which cannot be predicted or quantified. Future events
and actual results could differ materially from those contemplated by the
forward-looking statements. Statements in this report, including the notes to
the consolidated financial statements, "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business", describe factors
that could contribute to or cause such differences. Additional factors that
could cause actual results to differ materially from those expressed in such
forward-looking statements include those discussed below.
BUSINESS ENVIRONMENT
The Company's principal business activity, retail broker-dealer operations,
as well as its investment banking, institutional sales, investment advisory, 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 throughout
most of 1998, 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 recent years. Uncertainty
surrounding emerging market 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.
The favorable market and economic conditions which had characterized 1996
continued throughout much of 1997, contributing to higher industry-wide
securities revenues and net income.
17
<PAGE>
Conditions in the U.S. trading markets were favorable for much of 1997, as
moderate economic growth, low levels of unemployment, and continued growth in
corporate profits generally prevailed. Despite these conditions, the level of
inflation remained relatively low in 1997. U.S. financial markets also
experienced periods of increased volatility during 1997. The market for U.S.
government securities was particularly strong during the latter part of the
year, as market instability in certain Asian markets increased investor demand
for less risky investments. The performance of U.S. equity markets also was very
positive in 1997, primarily resulting from strong corporate earnings, high
levels of cash inflows into mutual funds, and a high volume of equity issuances.
U.S. equity markets also experienced periods of increased volatility,
particularly during the second and fourth quarters of 1997. During both of these
periods, equity markets experienced sharp selloffs that were subsequently
followed by strong recoveries.
COMPANY DEVELOPMENTS
On January 9, 1998, EVEREN completed the acquisition of Principal
Securities Holding Corporation and its wholly-owned subsidiary, Principal
Financial Securities, Inc. ("Principal Securities"), from Principal Life
Insurance Company for $75 million in cash. Principal Securities was a registered
securities broker-dealer and operated as a separate subsidiary of EVEREN until
Principal Securities' back office and other operating activities were combined
with those of EVEREN Securities in 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 ("BONY") announced the
completion of a transaction pursuant to which BONY acquired an 80% interest in
EVEREN Clearing. On October 23, 1998 in anticipation of the transaction, EVEREN
Securities became a carrying broker-dealer. In conjunction with the transaction,
EVEREN realized a one-time after-tax gain of approximately $11.9 million in the
fourth quarter of 1998. The transaction is not expected to have a significant
impact on the Company's financial position or ongoing earnings from operations.
Consistent with the generally strong economic and market conditions seen
throughout the securities industry in 1997, the Company reported strong growth
in both its retail brokerage and investment banking activities in 1998. The
favorable industry conditions combined with the Company's strategy to grow its
core business has resulted in considerable growth in both the number of
investment consultants and their productivity, as well as increases in the
number of underwritings and investment banking transactions in which the Company
has participated. The Company's continued success as a public company and the
continued majority employee ownership have contributed to the strong growth in
the Company's recruiting efforts and generally positive employee morale.
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. The Company continues to
sponsor three employee benefit plans that provide employees the opportunity to
acquire the Company's Common Stock outside of the EVEREN Capital Corporation
401(k) and Employee Stock Ownership Plan (the "KSOP"). In connection with these
plans, the Company recognizes additional compensation
18
<PAGE>
expense equal to the difference between the fair value of the Common Stock
issued and the amount of cash compensation otherwise payable or cash paid under
each respective plan.
In 1996, the Company undertook several key initiatives to better position
itself as a full service, super-regional securities brokerage firm. These
activities are summarized in the following paragraphs:
Consistent with its strategy to focus on core businesses, the Company
completed the sale of BETA Systems, Inc. ("BETA"), a wholly-owned data
processing and quote service subsidiary, on April 30, 1996, for $63.5 million.
The sale, which resulted in an after-tax gain of approximately $30.2 million, is
reflected in the Company's 1996 results of operations.
On June 17, 1996 the Company exchanged all of its outstanding Exchangeable
Preferred Stock for an aggregate $32.2 million principal amount of 13.5% Junior
Subordinated Debentures due 2007 ("Debentures"). On July 30, 1996 the Company
issued a notice calling all of the outstanding Debentures for redemption on
September 16, 1996 at a price of 112% of principal or $36.0 million, plus
accrued interest. This early redemption was funded principally through $36.0
million of bank borrowings and resulted in an extraordinary charge of
approximately $2.9 million after-tax for the year ended December 31, 1996 due to
the early extinguishment of debt.
On July 25, 1996 the Company entered into a joint venture agreement (the
"JVA"), pursuant to which it acquired an initial 20% ownership interest in
Mentor Investment Group, Inc. ("Mentor"), the asset management subsidiary of
Wheat First Butcher Singer, Inc., for no direct cash consideration. Under the
terms of the JVA, the Company's ownership interest may increase to as much as
50%. This joint venture is being accounted for as an equity investment and the
Company's proportionate share of the earnings or losses of Mentor since November
1, 1996 (commencement of operations) have been included in the Company's
operating results.
On August 5, 1996 the Company paid a special purpose cash dividend of $1.18
per share on its common shares outstanding as of July 23, 1996. This dividend
allowed the KSOP to repay the balance of its loan to the Company, incurred in
connection with its separation from Kemper Corporation, and allowed the release
of substantially all of the remaining unallocated KSOP shares to employee
participant accounts.
On October 8, 1996 the Company completed its initial public offering,
whereby 4.6 million shares of its $.01 par value Common Stock were sold at a
price of $18.50 per share (or 9.2 million shares of $.01 par value common stock
at a price of $9.25, after adjustment for the Company's 2-for-1 stock split
discussed previously). The initial public offering resulted in net proceeds of
approximately $78 million to the Company. Such proceeds were used to reduce
bank loans payable. The Common Stock is listed on the New York Stock Exchange
under the symbol "EVR".
In keeping with its strategic initiative to concentrate on its core
businesses, the Company exited certain portions of its municipal institutional
sales and trading and the unit investment trust origination businesses in the
fourth quarter of 1996.
Effective January 1, 1996, the Company implemented a quasi-reorganization
and revalued its assets and liabilities to fair value as of that date. This
revaluation resulted in a reduction in net assets of $3.7 million. The quasi-
reorganization also resulted in the transfer of the accumulated deficit as of
January 1, 1996 of $306.5 million to additional paid-in capital. Such
revaluation has
19
<PAGE>
not had and in the future will not have any significant impact on the operating
results of the Company. The balance in retained earnings at December 31, 1998
and 1997 represents the accumulated net earnings available to common
stockholders arising subsequent to the date of the quasi-reorganization. The
quasi-reorganization was effected in order to reflect the emergence of the
Company as a new organization, signaling the end of its transition from a
wholly-owned subsidiary to a fully independent company and enable the Company to
present more accurately the new organization's cumulative performance.
YEAR 2000
The Year 2000 problem is the result of computer programs being written
using two digits (rather than four) to define the applicable year. Computer
programs that have time-sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000. This could result in a major system
failure or miscalculations.
The 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 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 are coordinated to account for certain system interdependencies.
20
<PAGE>
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 (ie, 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 will participate in
industry-wide testing currently scheduled for March and April 1999. The Company
presently believes that, with modifications to existing software and the
conversion to new software, the Year 2000 problem will not pose significant
operational problems for the Company's computer systems as so modified and
converted. However, if such modifications and conversions are not completed
timely, both internally and at the Company's major external service providers,
the Year 2000 problem may have a material impact on the operations of the
Company.
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 significant portion of the current year's technology budget has been
allocated to the Year 2000 compliance project. As of the end of 1998, the total
estimated expenditures associated with the entire Year 2000 project were
expected to be approximately $6 million, of which approximately $3 million is
remaining. The majority of these remaining expenditures are expected to cover
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.
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, 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.
21
<PAGE>
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
revenue:
Consolidated Statement of Operations Data:
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Revenue:
Commissions 46.2% 45.2% 42.1%
Principal transactions 16.0 17.3 21.5
Investment banking 11.4 11.7 10.4
Asset management 14.3 12.4 10.7
Other 5.0 5.2 7.8
Interest 14.3 14.4 13.8
----- ----- -----
Total revenue 107.2 106.2 106.3
Interest expense 7.2 6.2 6.3
----- ----- -----
Net revenue 100.0 100.0 100.0
----- ----- -----
Non-interest expenses:
Compensation and benefits 59.4 59.4 61.8
Brokerage and clearance 3.4 2.9 2.7
Communications 6.9 7.2 7.1
Occupancy and equipment 6.2 6.9 7.3
Promotional 3.5 3.6 3.3
Other 7.9 7.4 7.0
----- ----- -----
Total non-interest expenses 87.3 87.4 89.2
Gain on sale of subsidiary 2.6 - 9.4
----- ----- -----
Income before income taxes
and extraordinary charge 15.3 12.6 20.2
Income tax provision 5.9 4.8 8.0
----- ----- -----
Net income before
extraordinary charge 9.4 7.8 12.2
Extraordinary charge on early retirement
of debt, net of income taxes - - (0.5)
----- ----- -----
Net income 9.4%(1) 7.8% 11.7%(2)
===== ===== ====
</TABLE>
_________________
(1) Includes a $11.9 million (1.6%) after-tax gain on the sale of EVEREN
Clearing.
(2) Includes a $30.2 million (5.6%) after-tax gain on the sale of BETA.
22
<PAGE>
1998 Compared to 1997
The Company experienced strong operating results for 1998 when compared to
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 improved
significantly in 1998 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
initial public offering ("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 $179.9 million or 29% to $809.6 million for the
year ended December 31, 1998 from $629.7 million for the year ended December 31,
1997. Net revenues increased $162.3 million or 27% to $755.4 million for the
year ended December 31, 1998 from $593.1 million for the year ended December 31,
1997. As previously noted, the Company acquired Principal Securities in the
first quarter of 1998. This transaction, strong market conditions, and internal
growth, were generally responsible for the significant growth in revenue.
Commission revenue increased $81.2 million or 30% to $349.1 million for the
year ended December 31, 1998 from $267.9 million for the year ended December 31,
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, a movement by investors from over-the-counter
equities to investments in listed securities.
Principal transactions revenue increased $18.1 million or 18% to $121.0
million for the year ended December 31, 1998 from $102.9 million for the year
ended December 31, 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 1998.
Investment banking revenue increased $16.5 million or 24% to $86.0 million
for the year ended December 31, 1998 from $69.5 million for the year ended
December 31, 1997. These increases are the result of the Company's strategy of
developing its corporate finance business in several targeted industry sectors,
which was aided by favorable IPO market conditions during the
23
<PAGE>
first half of 1998. This focus enabled the Company to participate in a larger
number of underwritings, including equity, taxable and tax-exempt issues, in
1998 than in 1997. Market volatility in the third quarter of 1998 significantly
impacted the number of equity underwritings that took place in the third and
fourth quarters and had the effect of depressing revenues in this area when
compared to the first two quarters of 1998.
Asset management revenue increased $34.2 million or 46% to $107.8 million
for the year ended December 31, 1998 from $73.6 million for the year ended
December 31, 1997, due to the significant growth of client assets invested in
managed accounts (approximately 37% 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 20% equity interest.
Other income increased $7.2 million or 24% to $37.8 million for the year
ended December 31, 1998 from $30.6 million for the year ended December 31, 1997.
The increase in 1998 is primarily attributable to the $6.0 million arbitration
award discussed earlier.
Interest and dividend income increased $22.7 million or 27% to $107.9
million for the year ended December 31, 1998 from $85.2 million for the year
ended December 31, 1997. Net interest increased $5.1 million or 10% to $53.7
million for the year ended December 31, 1998 from $48.6 million for the year
ended December 31, 1997. These increases are a result of significant growth in
the Company's customer margin accounts, specifically a 20% increase in average
margin debits for the year ended December 31, 1998 when compared to 1997.
Total non-interest expenses increased $141.4 million or 27% to $659.5
million for the year ended December 31, 1998 from $518.1 million for the year
ended December 31, 1997. The acquisition of Principal Securities as well as the
Company's internal growth created significant increases in most expense
categories.
Compensation and benefits expense increased $96.3 million or 27% to $448.8
million for the year ended December 31, 1998 from $352.5 million for the year
ended December 31, 1997. This increase is primarily attributable to the growth
in commission revenue, principal transactions revenue and investment banking
revenues in 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 (approximately 16%) in 1998 when compared to
1997.
Brokerage and clearance expense increased $8.2 million or 48% to $25.4
million for the year ended December 31, 1998 from $17.2 million for the year
ended December 31, 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, as well as the change to a new clearing agreement
with BNY Clearing in the fourth quarter of 1998. As a result of the sale of 80%
of EVEREN Clearing to BONY, certain primarily fixed expenses previously included
in the Company's consolidated results of operations in all expense categories
have been eliminated but are offset by increased, primarily variable, clearing
expense.
24
<PAGE>
Communications expense increased $9.9 million or 23% to $52.5 million for
the year ended December 31, 1998 from $42.6 million for the year ended December
31, 1997, primarily due to an increased number of employees in 1998 when
compared to 1997 and to ongoing technology enhancements initiated beginning in
late 1997 to improve the Company's overall productivity and competitiveness.
Occupancy and equipment expense increased $6.3 million or 15% to $47.1
million for the year ended December 31, 1998 from $40.8 million for the year
ended December 31, 1997. This increase is largely the result of the Principal
Securities acquisition, which added approximately 35 new branch office locations
to the Company's existing retail system.
Promotional expense increased $4.4 million or 20% to $25.9 million for the
year ended December 31, 1998 from $21.5 million for the year ended December 31,
1997. This increase is 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 $16.3 million or 37% to $59.8 million for the year
ended December 31, 1998 from $43.5 million for the year ended December 31, 1997.
This increase is 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 before taxes for the year ended December 31, 1998
includes the $19.8 million gain on the sale of 80% of EVEREN Clearing to BONY.
The Company's income tax expense for the year ended December 31, 1998 totaled
$44.4 million, which represents an effective tax rate on income before taxes of
38.4% compared to $28.4 million or a 37.9% effective tax rate for the year ended
December 31, 1997.
Net income increased $24.7 million or 53% to $71.3 million for the year
ended December 31, 1998 from $46.6 million for the year ended December 31, 1997.
Excluding the $11.9 million after-tax gain on the sale of 80% of EVEREN
Clearing, net income increased $12.8 million or 27% over 1997.
1997 Compared to 1996
The Company experienced stronger overall operating results for the year
ended December 31, 1997 when compared to 1996. In particular, the strong retail
and equity underwriting markets in the third and fourth quarters of 1997
contributed to the Company's 11% growth in net revenues over the year ended
December 31, 1996. The Company also continued to focus on its core business,
full service securities brokerage. This focus resulted in the sale of the
Company's data-processing and quote service subsidiary, BETA, in April 1996, and
the departure from both the unit investment trust origination business and
portions of the municipal institutional sales and trading business in the fourth
quarter of 1996. The sale of BETA resulted in a pre-tax gain of approximately
$50.2 million and an after-tax gain of
25
<PAGE>
approximately $30.2 million. Net income from the Company's ongoing operations
improved in 1997 by $11.4 million or 32% when compared to 1996. Management
attributes these results to several factors. First, favorable conditions
continued to prevail in the industry for most of the year ended December 31,
1997, reflecting continued investor optimism concerning inflation, interest rate
stability and a strong U.S. economy. Second, the Company continued to enjoy the
benefits of significant employee ownership, which, in management's opinion, has
enhanced employee morale, focus and productivity, and has allowed management to
concentrate on achieving its strategic initiatives. Finally, a continued focus
on cost containment has contributed to the strong operating results.
Total revenue increased $59.1 million or 10% to $629.7 million for the year
ended December 31, 1997 from $570.6 million for the year ended December 31,
1996. Net revenue increased $56.5 million or 11% to $593.1 for the year ended
December 31, 1997 from $536.6 for the year ended December 31, 1996. As
previously noted, the Company sold or exited certain non-strategic businesses in
1996. Excluding revenue from these businesses, total revenue for the year ended
December 31, 1997 increased by $85.6 million or 16% from $544.1 million in 1996,
and net revenue for the year ended December 31, 1997 increased by $81.1 million
or 16% over 1996.
Commission revenue increased $42.1 million or 19% to $267.9 million for the
year ended December 31, 1997 from $225.8 million for the year ended December 31,
1996. These increases are primarily due to increased business in both the
retail and institutional areas, consistent with the continued growth in listed
share volume on most major domestic equity exchanges in 1997. The increases are
also a result of an increase in the number of retail investment consultants from
1,220 in 1996 to 1,333 in 1997.
Principal transactions revenue decreased $12.4 million or 11% to $102.9
million for the year ended December 31, 1997 from $115.3 million for the year
ended December 31, 1996. The decrease for the year ended December 31, 1997 is
attributable, in part, to a shift in transaction volume away from both fixed
income products and from over-the-counter stocks to listed equities, and the
departure from a portion of the Company's institutional municipal trading
business. The third and fourth quarters of 1997 reflected increases over the
same periods of 1996, due to the strong equity markets.
Investment banking revenue increased $13.6 million or 24% to $69.5 million
for the year ended December 31, 1997 from $55.9 million for the year ended
December 31, 1996. Excluding investment banking revenue of $9.5 million
generated from the aforementioned exited businesses in 1996, investment banking
revenues increased $23.1 million or 50% for the year ended December 31, 1997.
This increase is the result of the Company's strategy of developing corporate
finance transactions in specific targeted industry sectors aided by the strong
equity markets throughout most of 1997. These factors have contributed to the
Company's greater involvement both in average offering size and number of
offerings made in the equity underwriting market for the year ended December 31,
1997.
Asset management revenue increased $16.3 million or 28% to $73.6 million
for the year ended December 31, 1997 from $57.3 million for the year ended
December 31, 1996, due primarily
26
<PAGE>
to increased managed account fees and increased 12b-1 distribution fees. These
increases are reflective of increases in the number and asset values of managed
accounts and increased investments in mutual funds in 1997.
Other income decreased $11.6 million or 27% to $30.6 million for the year
ended December 31, 1997 from $42.2 million for the year ended December 31, 1996.
This decrease is due primarily to the sale of BETA in the second quarter of
1996.
Interest and dividend income increased $11.1 million or 15% to $85.2
million for the year ended December 31, 1997 from $74.1 million for the year
ended December 31, 1996. Net interest increased $8.5 million or 21% to $48.6
million for the year ended December 31, 1997 from $40.1 million for the year
ended December 31, 1996. The Company experienced significant growth in its
customer margin accounts in 1997 which contributed to its increased interest
revenues.
Total non-interest expenses increased $39.1 million or 8% to $518.1 million
for the year ended December 31, 1997 from $479.0 million for the year ended
December 31, 1996.
Compensation and benefits expense increased $21.1 million or 6% to $352.5
million for the year ended December 31, 1997 from $331.4 million for the year
ended December 31, 1996. The increase is attributed to the 11% increase in
commissions, principal transactions and investment banking revenues in 1997.
Compensation as a percentage of net revenues decreased in 1997 versus 1996 due
to the continued focus by management on controlling overall compensation
expense. In addition, 1996 expense includes certain compensation costs related
to the release of unearned KSOP shares.
Brokerage and clearance expense increased $2.7 million or 19% to $17.2
million for the year ended December 31, 1997 from $14.5 million for the year
ended December 31, 1996. The increase is due primarily to certain variable cost
components of this expense category which have increased as transactional
revenues increased.
Communications expense increased $4.3 million or 11% to $42.6 million for
the year ended December 31, 1997 from $38.3 million for the year ended December
31, 1996. This increase was due primarily to an increased number of employees
along with technology initiatives and enhancements undertaken in 1997 to improve
the Company's overall productivity and competitiveness.
Occupancy and equipment expense increased $1.6 million or 4% to $40.8
million for the year ended December 31, 1997 from $39.2 million for the year
ended December 31, 1996. The modest increase in this expense was primarily due
to the Company's focus on utilization of existing office space in its growth
efforts.
Promotional expense increased $3.7 million or 21% to $21.5 million for the
year ended December 31, 1997 from $17.8 million for the year ended December 31,
1996. This increase was primarily due to increased advertising related to name
recognition and the Company's expansion in
27
<PAGE>
breadth of products and services, as well as internal marketing of Mentor mutual
fund products and other promotions.
Other expenses increased $5.7 million or 15% to $43.5 million for the year
ended December 31, 1997 from $37.8 million for the year ended December 31, 1996.
This increase was related primarily to an increase in professional fees as well
as additional costs of licensing, insurance and various other office expenses
resulting from the increased number of employees in 1997 when compared to 1996.
The Company's income tax expense for the year ended December 31, 1997 was
$28.4 million, which represented an effective tax rate on income before taxes of
37.9% compared to $42.4 million or a 39.3% effective tax rate for the year ended
December 31, 1996.
Net income decreased $15.9 million to $46.6 million for the year ended
December 31, 1997 from $62.5 million for the year ended December 31, 1996. Net
income for the year ended December 31, 1996 included an after-tax extraordinary
charge of $2.9 million related to the early retirement of debt. Excluding the
after-tax gain on sale of BETA of $30.2 million and the $2.9 million after-tax
charge noted above, net income for the year ended December 31, 1997 improved
$11.4 million or 32% over the year ended December 31, 1996.
28
<PAGE>
QUARTERLY RESULTS
The information set forth below is derived from unaudited quarterly
financial statements of the Company. Such financial statements have been
prepared by the Company on a basis consistent with the consolidated financial
statements included elsewhere in this report and include all adjustments,
consisting principally of normal recurring accruals, that the Company considers
necessary for a fair presentation thereof. These operating results are not
necessarily indicative of the Company's future performance.
<TABLE>
<CAPTION>
Three months ended
------------------
12/31/98 9/30/98 6/30/98 3/31/98 12/31/97 9/30/97 6/30/97 3/31/97
-------- -------- -------- -------- --------- -------- -------- --------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Commissions $ 84,951 $ 85,352 $ 87,942 $ 90,843 $ 71,137 $ 73,099 $ 61,901 $ 61,811
Principal transactions 36,143 28,202 27,005 29,632 26,789 28,174 24,656 23,273
Investment banking 15,833 21,676 26,668 21,817 28,768 15,272 15,514 9,990
Asset management 27,453 28,266 27,521 24,546 20,793 19,171 16,917 16,674
Other 7,187 8,436 7,279 14,972 7,905 6,727 7,721 8,280
Interest 23,688 28,658 28,915 26,645 22,761 26,201 18,195 18,023
-------- -------- -------- -------- --------- -------- -------- --------
Total revenue 195,255 200,590 205,330 208,455 178,153 168,644 144,904 138,051
Interest expense 10,594 14,808 14,984 13,819 10,072 13,113 6,728 6,740
-------- -------- -------- -------- --------- -------- -------- --------
Net revenue 184,661 185,782 190,346 194,636 168,081 155,531 138,176 131,311
Non-interest expenses:
Compensation and benefits 109,562 110,279 114,091 114,913 100,635 93,024 80,267 78,545
Brokerage and clearance 9,119 5,324 5,503 5,502 4,438 4,487 4,043 4,206
Communications 13,654 13,279 12,265 13,270 11,644 10,996 10,350 9,609
Occupancy and equipment 10,742 11,946 12,357 12,076 10,479 10,336 10,006 9,935
Promotional 5,222 7,729 6,498 6,440 6,384 5,091 5,461 4,589
Other 12,813 15,144 15,617 16,167 12,977 11,613 10,789 8,206
-------- -------- -------- -------- --------- -------- -------- --------
Total non-interest expenses 161,112 163,701 166,331 168,368 146,557 135,547 120,916 115,090
Gain on sale of subsidiary 19,780 - - - - - - -
-------- -------- -------- -------- --------- -------- -------- --------
Income before income taxes 43,329 22,081 24,015 26,268 21,524 19,984 17,260 16,221
Income tax provision 16,788 8,305 9,138 10,127 8,195 7,672 6,445 6,119
-------- -------- -------- -------- --------- -------- -------- --------
Net income $ 26,541 $ 13,776 $ 14,877 $ 16,141 $ 13,329 $ 12,312 $ 10,815 $ 10,102
======== ======== ======== ======== ========= ======== ======== ========
</TABLE>
29
<PAGE>
The following table sets forth certain financial data as a percentage of net
revenue.
<TABLE>
<CAPTION>
Three months ended
------------------
12/31/98 9/30/98 6/30/98 3/31/98 12/31/97 9/30/97 6/30/97 3/31/97
-------- ------- ------- ------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Commissions 46.0% 45.9% 46.2% 46.7% 42.3% 47.0% 44.8% 47.1%
Principal transactions 19.6 15.2 14.2 15.2 15.9 18.1 17.8 17.7
Investment banking 8.6 11.7 14.0 11.2 17.1 9.8 11.2 7.6
Asset management 14.9 15.2 14.5 12.6 12.4 12.3 12.2 12.7
Other 3.8 4.5 3.8 7.7 4.8 4.4 5.7 6.3
Interest 12.8 15.4 15.2 13.7 13.5 16.8 13.2 13.7
-------- ------- ------- ------- -------- ------- ------- -------
Total revenue 105.7 107.9 107.9 107.1 106.0 108.4 104.9 105.1
Interest expense 5.7 7.9 7.9 7.1 6.0 8.4 4.9 5.10
-------- ------- ------- ------- -------- ------- ------- -------
Net revenue 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
-------- ------- ------- ------- -------- ------- ------- -------
Non-interest expenses:
Compensation and benefits 59.3 59.4 59.9 59.0 59.9 59.8 58.1 59.8
Brokerage and clearance 4.9 2.9 2.9 2.8 2.6 2.9 2.9 3.2
Communications 7.4 7.1 6.4 6.8 6.9 7.1 7.5 7.3
Occupancy and equipment 5.8 6.4 6.5 6.2 6.2 6.6 7.2 7.6
Promotional 2.8 4.2 3.4 3.3 3.8 3.3 4.0 3.5
Other 6.9 8.1 8.3 8.4 7.8 7.5 7.8 6.2
-------- ------- ------- ------- -------- ------- ------- -------
Total non-interest expenses 87.2 88.1 87.4 86.5 87.2 87.2 87.5 87.6
Gain on sale of subsidiary 10.7 - - - - - - -
-------- ------- ------- ------- -------- ------- ------- -------
Income before income taxes 23.5 11.9 12.6 13.5 12.8 12.8 12.5 12.4
Income tax provision 9.1 4.5 4.8 5.2 4.9 4.9 4.7 4.7
-------- ------- ------- ------- -------- ------- ------- -------
Net income 14.4% (1) 7.4% 7.8% 8.3% 7.9% 7.9% 7.8% 7.7%
======== ======= ======= ======= ======== ======= ======= =======
</TABLE>
____________________________
(1) Includes a $19.8 million pretax or 10.7% ($11.9 million after-tax or 6.4%)
gain on the sale of 80% of EVEREN Clearing.
The generally upward trend in the Company's total revenue for the eight
quarterly periods ended December 31, 1998 is consistent with the generally
strong economic and market conditions seen throughout the securities industry.
The third and fourth quarter of 1998 results, however, reflect investor caution
and the slow-down in the IPO markets due to volatility related to overseas
market uncertainty. The Company reported strong growth in both its retail
brokerage and investment banking activities. The favorable industry conditions
combined with the Company's strategy to grow its core business has resulted in
considerable growth in both the number of investment consultants and their
productivity, as well as increases in the number of underwritings and investment
banking transactions in which the Company has participated. Net revenues during
this eight-quarter period follow the same positive trend, with the Company
realizing the benefits of continued growth in its customer margin accounts.
While in absolute dollar amounts, non-interest expenses have trended up
during the eight periods, such absolute dollar increases are primarily
attributable to compensation and benefits expense and brokerage and clearance
expense, which are significantly correlated to revenue growth. As a percentage
of net revenues, non-interest expenses have remained relatively constant or
grown incrementally in relation to the Company's increased employee base during
such periods.
Net income (both in absolute dollar amounts and as a percentage of net
revenue) also reflects a positive trend during this eight-quarter period.
30
<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
subsidiary, which is EVEREN Capital's primary source of liquidity, are
restricted by applicable laws or regulations as to amounts which may be paid.
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 subsidiary
(except to the extent the Company itself may be a creditor with recognized
claims). See Note 10 of Notes to Consolidated Financial Statements contained in
Item 8 of this report. The Company has also generated funds from bank loans and
the issuance of Common Stock.
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, beginning in
the second quarter of 1998.
The Company maintains a $50 million committed revolving credit facility
with two banks all of which is unused at December 31, 1998. 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.
In the fourth quarter of 1998, the Company announced a stock repurchase
program whereby it will repurchase up to one million shares of its common stock
in open market or private transactions subject to market conditions. Shares
repurchased will be used to fund option grants and other equity opportunity
programs.
In February 1999, the Company created the EVEREN 1999 Capital Fund, LLC
(the "Fund") to enable its key employees or directors to pool their investment
resources and make investments on a more advantageous basis. The Fund expects
to invest exclusively in other investment funds. The Company acts as managing
member and is committed to invest up to $20 million in the Fund.
The Company believes that its current level of equity capital, funds
generated from operations, and existing credit facilities will be adequate to
fund its capital needs for the foreseeable future.
31
<PAGE>
Operating Subsidiaries
The assets of EVEREN Securities, Inc., the Company's primary operating
subsidiary (the "Subsidiary" or "EVEREN Securities"), are highly liquid. The
majority of its assets consist of 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"), all of which is secured by highly marketable equity and corporate
debt securities or U.S. government and agency securities. In addition, EVEREN
Securities has significant receivables from customers, and 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 December 31, 1998 and 1997,
were approximately $2.2 billion and $1.9 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 December 31, 1998, EVEREN Securities had
approximately $495 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 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 December 31, 1998, $171 million of the $271 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 December 31, 1998. 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
32
<PAGE>
of the Subsidiary. 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 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 of any such fluctuations 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.
Years Ended December 31, 1998, 1997 and 1996
Cash and cash equivalents at December 31, 1998, 1997, and 1996 totaled
$20.0 million, $36.2 million, and $46.6 million, respectively, reflecting
decreases of $16.3 million and $10.3 million for 1998 and 1997, respectively,
and an increase of $32.0 million in 1996.
In 1998, cash provided by operating activities, was used primarily to
reduce bank loans payable and in the acquisition of Principal Securities. In
1997, cash was used in operating activities primarily due to the growth in
customer margin debits which was offset by cash provided by financing activities
primarily through bank loans. For the year ended December 31, 1996, cash
provided from operating activities was used primarily to reduce bank loans
payable.
Net cash provided by operating activities totaled $61.9 million in 1998.
Net cash used by operating activities totaled $159.5 million in 1997. Net cash
provided by operating activities totaled $74.9 million in 1996. In 1998,
changes in securities borrowed and loaned of $139.7 million combined with a
decrease in securities owned of $45.3 million generated cash. Net increases in
receivables from customers and broker dealers of $82.4 million and a decrease in
securities sold, not yet purchased of $70.8 million partially used this cash.
In 1997, net increases in net receivables from customers and brokers and dealers
of $302.9 million used cash. These uses were partially offset by changes in
securities borrowed and loaned of $47.2 million, and changes in securities
purchased/sold under agreements to resell/repurchase of $26.6 million, and
securities owned and securities sold, not yet purchased of $13.3 million, which
generated cash. In 1996, changes in securities borrowed and securities loaned
of $145.1 million and securities purchased/sold under agreements to
resell/repurchase of $12.7 million generated cash. These sources were partially
offset by a $60.9 million use of funds related to the decrease in net
receivables from and payables to customers, broker-dealers and others.
In 1998, net cash provided by investing activities of $72,000 is the net
result of the acquisition of Principal Securities which used $51.3 million of
cash and the sale of 80% of the Company's interest in its EVEREN Clearing
subsidiary, which generated $37.8 million of net proceeds. Collections of
principal on investments in mortgage-backed certificates also generated $34.4
million of cash, which is offset by $25.9 million of fixed asset expenditures
related primarily to the Company's rollout of upgraded broker workstations. In
1997, net cash provided by investing activities of $1.2 million were the result
of cash generated through collections of principal on investments in mortgage-
backed securities of $16.4 million, offset by $15.2 million of fixed asset
33
<PAGE>
expenditures, the majority of which relate to investments in technology. In
1996, net cash provided by investing activities of $57.5 million resulted
primarily from the net proceeds of $59.3 million generated by the sale of BETA.
Collections of principal on investments in mortgage-backed securities of $16.5
million were offset by a net increase of $8.8 million of fixed assets and the
purchase of investments in mortgage-backed securities of $9.5 million.
In 1998, net cash used in financing activities of $78.3 million is made up
of a decrease in bank loans payable of $33.0 million and the repayment of
collateralized mortgage obligations of $38.4 million. In 1997, net cash
provided by financing activities totaled $147.9 million, primarily due to an
increase in bank loans payable of $164.0 million. Proceeds from the issuance of
Common Stock under the Company's stock incentive programs also generated cash of
$9.1 million. These combined to provide cash of $173.1 million which was used
to fund $16.3 million of repayments of collateralized mortgage obligations, $6.5
million of dividends paid on the Company's Common Stock, and $2.4 million of
treasury share purchases. In 1996, net cash flows used by financing activities
amounted to $100.4 million, the net result of the net proceeds of approximately
$77.8 million generated by the Company's initial public offering and the
repayment of bank loans of $157.8 million, retirement of subordinated debt of
$36 million and payment of dividends of $16.4 million.
RECENT ACCOUNTING PRONOUNCEMENTS
Effective January 1, 1998, the Company adopted certain provisions of
Statement of Financial Accounting Standards No. 125, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities" ("SFAS
125"), which are applicable to its business. SFAS 125 introduces the financial
components approach, which focuses on the recognition of financial assets and
liabilities an entity controls and the derecognition of financial assets and
liabilities for which control has been transferred. As a result, the Company
continues to report assets it has pledged as collateral in secured borrowings
and other arrangements when the secured party cannot sell or repledge the assets
or the Company can substitute collateral or otherwise redeem it on short notice.
The Company generally does not report assets received as collateral in secured
lending and other arrangements because the debtor typically has the right to
redeem the collateral on short notice. Accordingly, the adoption of SFAS 125 did
not have a material effect on the Company's financial position or results of
operations.
In 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position ("SOP")
98-1, "Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." SOP 98-1, which is effective January 1, 1999, provides guidance
on accounting for the costs of computer software developed or obtained for
internal use which was previously accounted for as an expense. The impact on the
financial statements of implementing SOP 98-1 cannot be determined at this time.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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
34
<PAGE>
contracts and options. Certain types of derivatives, including forwards and
certain options, are traded in the OTC markets. Other types of derivatives,
including futures contracts and listed options, are traded on regulated
exchanges.
Based on relative notional amounts, management believes that the Company's
derivative activities are not as extensive as those of many of its competitors.
The Company does not engage in the speculative trading of derivatives. Instead,
the Company has focused its derivative activities on trading in forward and
futures contracts in U.S. government and agency issued or guaranteed securities
as hedges against the Company's securities inventory positions. The Company
also executes transactions in exchange-traded futures contracts and listed
options on behalf of its customers.
The Company enters into certain futures and options contracts on a limited
basis in the ordinary course of its business to hedge or modify exposures to
interest rate fluctuations related to interest-sensitive securities in its
inventory. Given the limited use of such derivatives, the Company has not
incurred and does not expect to incur any material losses relating to its
derivative investments that would not be substantially offset with corresponding
gains on the securities positions hedged. Both the securities hedged and the
derivative instruments are carried on the consolidated statement of financial
condition at their market values. Gains and losses, both realized and
unrealized, from both the hedged securities and the derivative instruments are
included in current operating results.
RISK MANAGEMENT
Risk is an inherent part of the Company's business and activities. The
extent to which the Company properly and effectively identifies, assesses,
monitors and manages the various types of risks involved in its business is
critical to its profitability. The Company monitors its risk on a daily basis
through a number of control procedures designed to identify and evaluate the
various risks to which the Company is exposed.
Risk management at the Company is an integrated process with independent
oversight which requires constant communication, judgment and knowledge of
specialized products and markets. The Company's senior management takes an
active role in the risk management process and has developed policies and
procedures that require specific administrative and business functions to assist
in the identification, assessment and control of various risks.
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
35
<PAGE>
instruments such as futures and forward and option contracts. The Company's
management believes the Company's philosophy, risk management and hedging
practices result in carefully managed market exposure and reduced earnings
volatility.
At December 31, 1998 and 1997, the Company's securities owned and
securities sold, not yet purchased consisted of the following (in thousands):
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
OWNED
- -----
Obligations of the U.S. government
or its agencies $ 45,551 $ 97,401
State and municipal obligations 45,962 24,753
Corporate debt obligations 23,328 51,668
Corporate stocks and warrants 27,394 13,463
Other 1,344 1,545
-------- --------
$143,579 $188,830
======== ========
SOLD, NOT YET PURCHASED
- -----------------------
Obligations of the U.S. government
or its agencies $ 40,717 $114,045
State and municipal obligations 198 308
Corporate debt obligations 12,797 8,926
Corporate stocks and warrants 6,074 6,264
Other 283 1,325
-------- --------
$ 60,069 $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
36
<PAGE>
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 that address
issues such as regulatory capital requirements, new products, credit granting,
collection activities, and record-keeping. The Company has also established
certain procedures to mitigate the risk that a counterparty's performance
obligations will be unenforceable, including consideration of counterparty legal
authority and capacity, adequacy of legal documentation, the permissibility of a
transaction under applicable law and whether applicable bankruptcy or insolvency
laws limit or alter contractual remedies.
The Company seeks to control the risks associated with its investment
banking activities through a process that results in a thorough review by
various committees of the risks associated with all significant transactions
prior to acceptance of any engagement. The Company currently has various
commitment and other review committees. Each such committee is chaired by a
member of senior management and has at least one additional senior management
member. Other committee members include employees who provide expertise in the
evaluation and analysis of proposed transactions brought before the particular
committee.
The Company's risk management effort also includes an emphasis on
compliance. Retail branch managers and other supervisors are required to engage
in specific review and other tasks, and complete various reports, as part of
their supervisory responsibilities. The Company's compliance department
professionals monitor the Company's retail and capital markets activities,
conduct periodic and other examinations, respond to any customer complaints that
arise and interface with the various regulatory agencies that have jurisdiction
over the Company and its business.
37
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following consolidated financial statements of the Company are
included herein:
Independent Auditors' Report
Consolidated Statements of Financial Condition -
December 31, 1998 and 1997
Consolidated Statements of Income -
For the three years ended December 31, 1998, 1997 and 1996
Consolidated Statements of Changes in Stockholders' Equity -
For the three years ended December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows -
For the three years ended December 31, 1998, 1997 and 1996
Notes to Consolidated Financial Statements
38
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
EVEREN Capital Corporation:
We have audited the accompanying consolidated statements of financial condition
of EVEREN Capital Corporation and subsidiaries (the "Company") as of December
31, 1998 and 1997, and the related consolidated statements of income, changes in
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 1998. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of EVEREN Capital Corporation and
subsidiaries as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Chicago, Illinois
March 18, 1999
39
<PAGE>
EVEREN CAPITAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1998 AND 1997
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
Assets 1998 1997
----------- -----------
<S> <C> <C>
Cash and cash equivalents $ 19,995 $ 36,248
Cash and securities segregated under
federal and other regulations - 15,363
Receivables from:
Customers 1,086,816 935,795
Brokers and dealers 115,720 119,883
Others 112,236 56,187
Securities borrowed - 42,695
Securities owned, at market 143,579 188,830
Securities purchased under agreements to resell 478,553 309,457
Investments in mortgage-backed certificates
available-for-sale, at fair value 91,881 129,904
Fixed assets, net 47,423 37,769
Other assets 73,053 33,939
---------- ----------
$2,169,256 $1,906,070
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Bank loans payable $ 271,000 $ 304,000
Payables to:
Customers 286,300 192,817
Brokers and dealers - 29,021
Securities loaned 325,531 228,477
Collateralized mortgage obligations 84,312 121,970
Securities sold, not yet purchased, at market 60,069 130,868
Securities sold under agreements to repurchase 453,809 322,972
Accounts payable, accrued expenses and other liabilities 279,599 241,004
---------- ----------
1,760,620 1,571,129
---------- ----------
Stockholders' Equity:
Common stock, $.01 par value per share; 100,000,000
shares authorized, 36,092,936 and 17,575,801 outstanding at
December 31, 1998 and 1997, respectively 361 175
Additional paid-in capital 290,778 269,608
Unearned cost of restricted stock (14,165) (8,269)
Treasury stock, at cost, 1,160,008 and 455,775 shares at
December 31, 1998 and 1997, respectively (11,932) (7,663)
Retained earnings (since January 1, 1996) 147,069 85,079
Unrealized loss on available-for-sale securities, net of
income taxes (3,475) (3,989)
---------- ----------
408,636 334,941
---------- ----------
$2,169,256 $1,906,070
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
40
<PAGE>
EVEREN CAPITAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 1998, 1997 and 1996
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- ------------
<S> <C> <C> <C>
Revenue:
Commissions $ 349,088 $ 267,948 $ 225,798
Principal transactions 120,982 102,892 115,291
Investment banking 85,994 69,544 55,889
Asset management 107,786 73,555 57,293
Other 37,874 30,633 42,217
Interest 107,906 85,180 74,067
----------- ----------- -----------
Total revenue 809,630 629,752 570,555
Interest expense 54,205 36,653 33,920
----------- ----------- -----------
Net revenue 755,425 593,099 536,635
----------- ----------- -----------
Non-interest expenses:
Compensation and benefits 448,845 352,471 331,389
Brokerage and clearance 25,448 17,174 14,559
Communications 52,468 42,599 38,266
Occupancy and equipment 47,121 40,756 39,152
Promotional 25,889 21,525 17,849
Other 59,741 43,585 37,765
----------- ----------- -----------
Total non-interest expenses 659,512 518,110 478,980
Gain on sale of subsidiary 19,780 - 50,181
----------- ----------- -----------
Income before income taxes 115,693 74,989 107,836
Income tax provision 44,358 28,431 42,438
----------- ----------- -----------
Income before extraordinary item 71,335 46,558 65,398
Extraordinary charge on early retirement
of debt, net of income taxes of $1,561 - - (2,900)
----------- ----------- -----------
Net income $ 71,335 $ 46,558 $ 62,498
=========== =========== ===========
Dividends on exchangeable preferred stock $ - $ - $ 2,130
=========== =========== ===========
Net earnings applicable to common stock $ 71,335 $ 46,558 $ 60,368
=========== =========== ===========
Weighted average common shares outstanding:
Basic 33,039,893 32,230,978 22,509,360
=========== =========== ===========
Diluted 35,425,565 34,446,562 23,498,512
=========== =========== ===========
Net earnings per share of common stock:
Basic $ 2.16 $ 1.44 $ 2.68
=========== =========== ===========
Diluted $ 2.01 $ 1.35 $ 2.57
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
41
<PAGE>
EVEREN CAPITAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
Common Stock Additional Unearned Cost Unearned
------------------------------
Paid-In of Restricted KSOP
Voting Non-voting Capital Stock shares
------------ ---------------- ------------- ------------- ---------
<S> <C> <C> <C> <C> <C>
Balances at January 1, 1996 $ 115 $ 1 $ 449,396 $ - $(22,875)
Quasi-reorganization adjustments
as of January 1, 1996:
Restatement of assets and
liabilities to estimated fair value (3,675)
Transfer of accumulated deficit
and unrealized gain at January 1,
1996 to additional paid-in capital (295,042)
Amount received from former parent
under indemnification agreement 6,626
Release of KSOP shares 8,029 22,875
Issuance of additional non-voting
common stock 1 1,515 (1,073)
Issuance of additional common stock 7 8,164 (503)
Conversion of non-voting common
stock to common stock 2 (2)
Proceeds from initial public offering 46 77,787
Dividends paid in cash and stock
Dividend reinvestment 7
Accretion of preferred stock (14)
Tax benefit from Kemper stock options 2,247
Purchase of treasury stock
Comprehensive income:
Net income
Other comprehensive income, net of tax:
Unrealized loss on available-for-sale
securities
Comprehensive income
--------- -------- --------- ----------- --------
Balances at December 31, 1996 170 - 255,040 (1,576) -
--------- -------- --------- ----------- --------
Issuance of additional common stock 5 14,568 (6,693)
Purchase of treasury stock
Dividends paid
Comprehensive income:
Net income
Other comprehensive income, net of tax:
Unrealized gain on available for sale securities
Comprehensive income
--------- -------- --------- ----------- --------
Balances at December 31, 1997 $ 175 $ - $ 269,608 $(8,269) $ -
========= ======== ========= =========== ========
<CAPTION>
Retained Unrealized gain (loss) Total
Treasury Accumulated Earnings on available-for- Stockholders'
Stock Deficit (since 1/1/96) sale securities Equity
------------ ------------------ -------------- --------------- --------------
<S> <C> <C> <C> <C> <C>
Balances at January 1, 1996 $ (22) $ (306,539) $ - $ 11,497 $131,573
Quasi-reorganization adjustments
as of January 1, 1996:
Restatement of assets and
liabilities to estimated fair value (3,675)
Transfer of accumulated deficit
and unrealized gain at January 1,
1996 to additional paid-in capital 306,539 (11,497) -
Amount received from former parent
under indemnification agreement 6,626
Release of KSOP shares 30,904
Issuance of additional non-voting
common stock 443
Issuance of additional common 7,668
Conversion of non-voting common
stock to common stock -
Proceeds from initial public offering 77,833
Dividends paid in cash and stock (17,486) (17,486)
Dividend reinvestment 7
Accretion of preferred stock (14)
Tax benefit from Kemper stock options 2,247
Purchase of treasury stock (5,208) (5,208)
Comprehensive income:
Net income 62,498
Other comprehensive income, net of tax:
Unrealized loss on available-for-sale securities (4,381)
Comprehensive income 58,117
----------- -------------- ------------- -------------- -------------
Balances at December 31, 1996 (5,230) - 45,012 (4,381) 289,035
----------- -------------- ------------- -------------- -------------
Issuance of additional common stock 7,880
Purchase of treasury stock (2,433) (2,433)
Dividends paid (6,491) (6,491)
Comprehensive income:
Net income 46,558
Other comprehensive income, net of tax:
Unrealized gain on available for sale securities 392
Comprehensive income 46,950
----------- -------------- ------------- -------------- -------------
Balances at December 31, 1997 $ (7,663) $ - $ 85,079 $ (3,989) $334,941
=========== ============== ============= ============== =============
</TABLE>
42
<PAGE>
EVEREN CAPITAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY, CONTINUED
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
Additional Unearned cost Retained Unrealized gain Total
Earnings (loss)
Paid-In of Restricted Treasury (since on available-for- Stockholders'
Common Stock Capital Stock Stock 1/1/96) sale securities Equity
------------ ----------- ------------- --------- ---------- ----------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1997 $ 175 $269,608 $ (8,269) $ (7,663) $ 85,079 $(3,989) $334,941
Issuance of additional
common stock 7 19,212 (5,896) 13,323
Dividends paid (9,345) (9,345)
Two-for-one stock split 179 (174) (5) -
Purchase of treasury stock (4,264) (4,264)
Tax benefit from stock
option exercise and
vesting of restricted stock 2,132 2,132
Comprehensive income:
Net income 71,335
Other comprehensive
income net of tax:
Unrealized gain on available
for sale securities 514
Comprehensive income 71,849
------ -------- ----------- --------- -------- -------------- -----------
Balances at December 31, 1998 $ 361 $290,778 $(14,165) $(11,932) $147,069 $(3,475) $408,636
====== ======== =========== ========= ======== ============== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
43
<PAGE>
EVEREN CAPITAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 71,335 $ 46,558 $ 62,498
Adjustments to reconcile net income to net cash flows
provided by (used in) operating activities:
Extraordinary charge on early retirement of debt - - 4,461
Gain on sale of subsidiary (19,780) - (50,181)
Release of KSOP shares - - 8,029
Depreciation and amortization 38,247 15,998 12,278
Deferred income taxes (16,367) (7,832) (8,724)
Change in assets and liabilities:
Cash and securities segregated under federal
and other regulations 15,363 415 (222)
Receivables from/payables to:
Customers (57,538) (238,180) (79,896)
Brokers and dealers (24,858) (64,687) 30,567
Others (75,065) (3,383) (11,589)
Securities borrowed 42,695 7,992 16,927
Securities owned 45,251 (27,890) (19,684)
Securities purchased under agreements to resell (169,096) 169,856 829,182
Other assets (8,322) (12,079) 1,740
Securities loaned 97,054 39,174 128,200
Securities sold, not yet purchased (70,799) 41,159 (1,923)
Securities sold under agreements to repurchase 130,837 (143,294) (816,522)
Accounts payable, accrued expenses,
and other liabilities 62,987 16,732 (30,291)
--------- --------- ---------
Net cash flows provided by (used in) operating activities 61,944 (159,461) 74,850
--------- --------- ---------
Cash flows from investing activities:
Acquisition of Principal Securities, net of cash acquired (51,308) - -
Net proceeds from sale of subsidiary 37,780 - 59,346
Proceeds from sale of investments in mortgage-backed
certificates 5,062 - -
Collections of principal on investments in mortgage-
backed certificates 34,394 16,393 16,523
Purchase of investments in mortgage-backed certificates - - (9,505)
Proceeds from the sale of fixed assets - - 2,120
Acquisition of fixed assets (25,856) (15,178) (10,942)
--------- --------- ---------
Net cash flows provided by (used in) investing activities 72 1,215 57,542
--------- --------- ---------
</TABLE>
44
<PAGE>
EVEREN CAPITAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ----------
<S> <C> <C> <C>
Cash flows from financing activities:
Net proceeds from initial public offering - - 77,833
Release of shares related to KSOP loan - - 22,875
Dividends paid (9,345) (6,491) (16,433)
Retirement of subordinated debt - - (36,012)
Proceeds from common stock issuance 6,697 9,084 8,171
Amount collected under indemnification agreement - - 12,876
Proceeds from the issuance of collateralized
mortgage obligations - - 9,422
Repayment of collateralized mortgage obligations (38,357) (16,258) (16,109)
Increase (decrease) in bank loans payable, net (33,000) 164,000 (157,800)
Purchase of treasury stock (4,264) (2,433) (5,208)
-------- -------- ---------
Net cash flows provided by (used in) financing activities (78,269) 147,902 (100,385)
-------- -------- ---------
Increase (decrease) in cash and cash equivalents (16,253) (10,344) 32,007
Cash and cash equivalents at beginning of year 36,248 46,592 14,585
-------- -------- ---------
Cash and cash equivalents at end of year $ 19,995 $ 36,248 $ 46,592
======== ======== =========
Supplemental disclosure of cash flow information:
Interest paid to unaffiliated entities $ 64,392 $ 35,596 $ 37,013
======== ======== =========
Income taxes paid $ 42,085 $ 23,650 $ 50,100
======== ======== =========
</TABLE>
See accompanying notes to consolidated financial statements.
45
<PAGE>
EVEREN CAPITAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
(1) GENERAL INFORMATION
EVEREN Capital Corporation ("EVEREN") is a financial services holding
company, and is engaged primarily in the retail and institutional brokerage
business, including investment banking and underwriting services. EVEREN's
primary subsidiary, EVEREN Securities, Inc. ("EVEREN Securities") is
registered as a broker and dealer in securities under the Securities
Exchange Act of 1934 and as a futures commission merchant under the
Commodity Exchange Act. Another subsidiary, Gateway Mortgage Acceptance
Corporation ("Gateway"), was formed to issue and sell one or more series of
collateralized mortgage obligations ("CMOs") directly or through one or
more beneficially owned trusts (each, a "Trust"). Collectively, EVEREN and
its subsidiaries are referred to in these notes as the "Company."
On January 9, 1998, EVEREN completed the acquisition of Principal
Securities Holding Corporation and its wholly-owned subsidiary, Principal
Financial Securities, Inc. ("Principal Securities") from Principal Life
Insurance Company for $75 million. Principal Securities was a registered
securities broker-dealer and operated as a separate subsidiary of EVEREN
until the second quarter of 1998 when Principal Securities' operating
activities were combined with those of EVEREN Securities.
On May 11, 1998, the Company's Board of Directors declared 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. All share and per share data have been restated to reflect
the split.
On November 2, 1998, EVEREN and The Bank of New York ("BONY") completed a
transaction pursuant to which BONY acquired an 80% interest in EVEREN
Clearing Corp. ("EVEREN Clearing"). Prior to the transaction, EVEREN
Clearing was a wholly-owned subsidiary of the Company and its results of
operations are included in the accompanying consolidated statements of
income through such date. On October 23, 1998, in anticipation of the
transaction, EVEREN Securities became a carrying broker-dealer. In
conjunction with the transaction, the Company realized an after-tax gain of
approximately $11.9 million in the fourth quarter of 1998. The Company
accounts for its remaining 20% interest in BNY Clearing Services, LLC ("BNY
Clearing"), successor to EVEREN Clearing, on the equity method. EVEREN
Securities now carries the customer securities accounts, which had
previously been carried by EVEREN Clearing. The transaction is not
anticipated to have a significant impact on the Company's financial
position or ongoing operations.
Since October 23, 1998, EVEREN Securities has cleared all securities
transactions with and for customers on an omnibus basis through BNY
Clearing. EVEREN Securities clears all commodities transactions with and
for customers on a fully disclosed basis through BNY Clearing (see Note
13).
46
<PAGE>
EVEREN CAPITAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
During 1996, the Company completed the sale of BETA Systems, Inc.,
previously a wholly-owned data processing and quote services subsidiary,
for $63.5 million, resulting in an after-tax gain of approximately $30.2
million.
On October 8, 1996 the Company completed its initial public offering,
whereby 4.6 million shares of common stock were sold at a price of $18.50
per share (before the 2-for-1 stock split), resulting in net proceeds of
approximately $78 million to the Company.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of EVEREN and
its subsidiaries. All significant intercompany balances and transactions
have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions regarding certain securities inventory valuations, the
potential outcome of litigation, postretirement benefits, and other matters
that affect the reported amount of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Securities and Commodities Transactions
Customer receivables and payables are recorded on a settlement date basis.
The related commission revenue and expenses from securities and commodities
transactions are recorded on trade date. Principal securities and
commodities transactions are also recorded on trade date. Securities owned
and securities sold, not yet purchased are recorded at market value, with
unrealized gains and losses included in principal transaction revenue.
Market value is based primarily on listed or quoted market prices, or at
values determined by management based on other relevant factors.
Securities Purchased Under Agreements to Resell and Securities Sold Under
Agreements to Repurchase
Securities purchased under agreements to resell and securities sold under
agreements to repurchase are collateralized transactions and are carried at
the contract amounts at which the securities will be resold or reacquired,
including accrued interest. It is the policy of the Company to take
possession of the securities purchased under agreements to resell at the
time such agreements are entered into. In the event that the market value
of such securities falls below the contract amount of the related agreement
to resell, the Company requests additional collateral.
47
<PAGE>
EVEREN CAPITAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
Investment Banking
Underwriting revenues and fees for mergers and acquisition and advisory
assignments are recorded when services for the transaction are
substantially completed. Transaction-related expenses are deferred and
later expensed to match revenue recognition.
Securities Borrowed and Securities Loaned
Securities borrowed and securities loaned are recorded at the amount of
cash collateral advanced or received. Securities borrowed transactions
require the Company to deposit cash, letters of credit, or other collateral
with the lender. With respect to securities loaned, the Company receives
collateral in the form of cash or other collateral in an amount generally
in excess of the market value of securities loaned. The Company monitors
the market value of securities loaned on a daily basis, with additional
collateral obtained or refunded as necessary.
Fixed Assets
Fixed assets are recorded at historical cost, net of accumulated
depreciation and amortization. Depreciation on fixed assets is generally
recorded on a straight-line basis over the estimated useful lives of the
assets, which range from four to seven years for furniture and equipment
and up to thirty years for building and improvements. Leasehold
improvements are amortized on a straight-line basis over the lesser of the
lease term or the economic life of the asset.
Goodwill
Goodwill, which arose from the Principal Securities acquisition and is
included in other assets, was approximately $35.3 million (net of
amortization) at December 31, 1998. Goodwill is being amortized on a
straight-line basis over fifteen years.
Investments in Mortgage-backed Certificates/Collateralized Mortgage
Obligations
The CMOs issued by Gateway are collateralized by certain mortgage-related
instruments ("Certificates") and the investment of the proceeds relating to
principal payments and interest on such Certificates. The CMOs are
accounted for as borrowings. The Certificates are classified as "available-
for-sale" and are accounted for at market value with unrealized gains or
losses included in equity. Market value is determined using current market
valuations from an independent pricing service.
Investments
Investments in equity securities and other interests purchased in
connection with private equity and other principal investment activities
are initially carried in the consolidated financial statements at their
original costs. Downward adjustments to the carrying value of such
securities are made in the event that the Company determines that the
eventual realizable value is less than the carrying value.
Impairment of Long-Lived Assets
The Company periodically reviews long-lived assets, including goodwill, for
possible impairment based primarily on expected cash flows. When
circumstances indicate that the
48
<PAGE>
EVEREN CAPITAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
carrying amount of such assets may not be recoverable, the carrying amount
is reduced to the estimated recoverable value. No such impairments existed
at December 31, 1998 or 1997.
Stock-Based Compensation
The Company accounts for stock-based compensation issued to employees in
accordance with Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," ("APB Opinion No. 25") which recognizes
compensation cost based upon the intrinsic value at the date of grant of
the equity instrument awarded. The Financial Accounting Standards Board
issued Statement of Financial Accounting Standards ("SFAS") No. 123,
"Accounting for Stock-Based Compensation," which encourages, but does not
require, companies to recognize compensation expense for grants of stock,
stock options and other equity instruments based on the fair value of those
instruments. The Company has elected, as permitted by SFAS No. 123, to
adopt the disclosure requirement of SFAS No. 123 and continue to account
for stock-based compensation under APB Opinion No. 25.
Income Taxes
Income taxes are provided for using the asset and liability method, under
which deferred tax assets and liabilities are recorded based on differences
between the financial accounting and tax bases of assets and liabilities
using currently enacted tax rates.
Earnings Per Share of Common Stock
The Company computes earnings per share of common stock in accordance with
SFAS No. 128, "Earnings Per Share." Basic earnings per share is computed by
dividing income available to common stockholders by the weighted-average
number of common shares outstanding for the period. Diluted earnings per
share assumes the conversion of all dilutive securities.
Consolidated Statements of Cash Flows
Cash and cash equivalents consist of cash and highly liquid investments not
held for resale with maturities, when purchased, of three months or less.
Recent Accounting Pronouncements
Effective January 1, 1998, the Company adopted certain provisions of SFAS
No. 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities." Under SFAS No. 125, the Company continues
to report assets it has pledged as collateral in secured borrowings and
other arrangements when the secured party cannot sell or repledge the
assets or the Company can substitute collateral or otherwise redeem it on
short notice. The Company generally does not report assets received as
collateral in secured lending and other arrangements because the debtor
typically has the right to redeem the collateral on short notice.
Accordingly, the adoption of SFAS No. 125 did not have a material effect on
the Company's financial position or results of operations.
Effective January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income." SFAS No. 130 establishes standards for the reporting
and display of comprehensive
49
<PAGE>
EVEREN CAPITAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
income and its components in the consolidated financial statements but has
no impact on the measurement of such items. The Company's only component of
other comprehensive income is unrealized gains (losses) on available-for-
sale securities (net of tax).
In 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position
("SOP") 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use." SOP 98-1, which is effective January 1, 1999,
provides guidance on the capitalization of costs of computer software
developed or obtained for internal use which was previously accounted for
as an expense. The impact on the consolidated financial statements of
implementing SOP 98-1 cannot be determined at this time.
Reclassifications
Certain prior year amounts have been reclassified to conform with the 1998
financial statement presentation.
(3) RECEIVABLES FROM AND PAYABLES TO CUSTOMERS
The Company extends credit to its customers to finance their purchases of
securities on margin. The Company receives income from interest charged on
such extensions of credit. Customer receivables include amounts due on
margin balances. Securities owned by customers are held as collateral for
receivables; such collateral is not recorded in the consolidated financial
statements. Customer payables include customers' free credit balances.
(4) SECURITIES-AT MARKET VALUE
Securities owned and securities sold, not yet purchased consisted of the
following (in thousands):
<TABLE>
<CAPTION>
December 31,
-------------------
Owned 1998 1997
----- -------- --------
<S> <C> <C>
Obligations of the U.S. Government or its agencies $ 45,551 $ 97,401
State and municipal obligations 45,962 24,753
Corporate obligations 23,328 51,668
Corporate stocks and warrants 27,394 13,463
Other 1,344 1,545
-------- --------
$143,579 $188,830
======== ========
Sold, not yet purchased
-----------------------
Obligations of the U.S. Government or its agencies $ 40,717 $114,045
State and municipal obligations 198 308
Corporate obligations 12,797 8,926
Corporate stocks and warrants 6,074 6,264
Other 283 1,325
-------- --------
$ 60,069 $130,868
======== ========
</TABLE>
50
<PAGE>
EVEREN CAPITAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
(5) SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL AND SECURITIES SOLD UNDER
AGREEMENTS TO REPURCHASE
Securities purchased under agreements to resell and securities sold under
agreements to repurchase consisted of the following at December 31, 1998
and 1997 (in thousands):
<TABLE>
<CAPTION>
Securities Purchased Under Agreements to Resell 1998 1997
----------------------------------------------- -------- --------
<S> <C> <C>
U.S. Government and U.S. Government
agency obligations with a market value
of $485.7 million ($310.2 million at 1997) $478,553 $309,457
======== ========
Securities Sold Under Agreements to Repurchase
----------------------------------------------
U.S. Government and U.S. Government
agency obligations with a market value
of $461.2 million ($323.6 million at 1997) $453,809 $322,972
======== ========
</TABLE>
At December 31, 1998, all agreements will mature within ninety days.
Securities purchased under agreements to resell averaged $295.4 million and
$372.5 million during 1998 and 1997, respectively, and the maximum amounts
outstanding at any month-end during 1998 and 1997 were $487.7 million and
$545.9 million, respectively. Securities sold under agreements to
repurchase averaged $284.0 million and $342.9 million during 1998 and 1997,
respectively, and the maximum amounts outstanding at any month-end during
1998 and 1997 were $453.8 million and $530.6 million, respectively. At
December 31, 1998, these agreements to repurchase had a weighted-average
annual interest rate of 4.96% (6.16% at December 31, 1997).
(6) INVESTMENTS IN MORTGAGE-BACKED CERTIFICATES
As required by the related indenture provisions of the CMOs, the
Certificates are held as collateral by a trustee of the Trust. The trustee
collects principal and interest payments from the Certificates, reinvests
the payments in eligible investments, and makes principal and interest
payments on the CMOs. A summary of the Certificates is as follows (in
thousands):
<TABLE>
<CAPTION>
December 31,
---------------------
1998 1997
---------- ---------
<S> <C> <C>
Amortized cost $95,995 $134,485
Gross unrealized gains 458 338
Gross unrealized losses (4,572) (4,919)
------- --------
Fair value $91,881 $129,904
======= ========
</TABLE>
51
<PAGE>
EVEREN CAPITAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
(7) COLLATERALIZED MORTGAGE OBLIGATIONS
Receipt of principal and interest from the Certificates, including
prepayments, and income earned on the reinvestment of such amounts is
applied to the extent required by the indenture to make monthly payments of
principal on the CMOs. Interest rates on the CMOs are fixed and range from
7.05% to 9.60% per year. The stated maturities range from June 1, 2019
through May 31, 2026 and represent the dates on which the CMOs of each
class are expected to be fully paid. The actual maturities of the CMOs will
depend on the rate of principal payments, including prepayments, on the
Certificates. The CMOs may be subject to redemption at the option of
Gateway, in the circumstances and at the redemption price set forth in the
related prospectus.
(8) FIXED ASSETS
At December 31, 1998 and 1997, fixed assets consisted of the following (in
thousands):
<TABLE>
<CAPTION>
December 31,
--------------------
1998 1997
--------- ---------
<S> <C> <C>
Building and improvements $ 385 $ 1,411
Furniture and equipment 113,283 104,792
Leasehold improvements 23,498 23,958
-------- --------
Total fixed assets, at cost 137,166 130,161
Less accumulated depreciation and amortization (89,743) (92,392)
-------- --------
Fixed assets, net $ 47,423 $ 37,769
======== ========
</TABLE>
(9) BANK LOANS PAYABLE
At December 31, 1998, bank loans payable consisted of $271 million in loans
drawn against various lines of credit extended to the Company by various
banks. These loans are short-term borrowings made primarily to finance
purchases of securities by customers on margin and purchases of securities
owned. Interest on such borrowings is based on the federal funds rate
(4.07% at December 31, 1998).
The Company maintains various committed and uncommitted lines of credit
with various banks. The Company maintained uncommitted, unsecured lines of
credit totaling $40 million, which were utilized fully at December 31,
1998. At December 31, 1998, uncommitted, secured lines of credit totaling
$455 million had been extended to the Company, of which $60 million was
utilized.
EVEREN Securities maintains two committed, secured lines of credit. The
first committed line is provided through a $500 million facility from 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 December 31, 1998, $171 million
of the $271 million in bank loans payable was drawn against this facility.
52
<PAGE>
EVEREN CAPITAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
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 December 31, 1998.
Borrowings under either of the committed lines of credit may be secured by
either customer margin or firm securities, with interest based upon
overnight bank lending rates.
EVEREN has a $50 million committed revolving credit facility with two
banks, all of which is unused at December 31, 1998. The facility expires on
July 10, 1999, subject to a one-year extension by mutual agreement of the
parties. Commitment fees under this facility are paid quarterly at a rate
per annum of .25% on the average daily unused balance. Fees paid for the
year ended December 31, 1998 were approximately $70,000.
Of the bank loans payable outstanding on December 31, 1998, $231 million
was collateralized by customers' margin account securities with an
aggregate market value of approximately $296.9 million.
(10) 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 December 31, 1998 and 1997, EVEREN
Securities had net capital of approximately $187.0 million and $152.0
million, respectively, which was approximately $165.4 million and $151.0
million, respectively, in excess of its required minimum net capital.
(11) DEFINED CONTRIBUTION PLAN
EVEREN maintains the EVEREN Capital Corporation 401(k) and Employee Stock
Ownership Plan ("KSOP") to provide employees with an opportunity to
accumulate funds for retirement and acquire ownership interests in the
voting common stock of EVEREN. Participants are eligible to make pretax
contributions to the KSOP and share in employer contributions, which are
funded by cash payments and plan forfeitures. Employer contributions are
generally made at the discretion of the Board of Directors of the Company.
Total contribution expense under the KSOP for the years ended December 31,
1998, 1997 and 1996 was approximately $850,000, $684,000 and $3.0 million,
respectively.
53
<PAGE>
EVEREN CAPITAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
(12) POSTRETIREMENT BENEFITS
The Company sponsors a plan that provides postretirement medical and dental
benefits for substantially all employees. Employees generally become
eligible for postretirement benefits when they meet minimum retirement age
and service requirements. The cost of providing these benefits is shared
with retirees. The Company reserves the right to change or eliminate the
benefit plan. The Company accrues the expected cost of providing these
postretirement benefits during the years that the employee renders the
necessary service.
In 1998, the Company adopted SFAS No. 132, "Employers' Disclosures About
Pensions and Other Postretirement Benefits." The provisions of SFAS No. 132
revise employers' disclosure about pensions and other postretirement
benefit plans. This pronouncement does not change the measurement or
recognition of related costs under these plans. The following tables,
prepared in accordance with the new standard, set forth the changes in
postretirement benefit obligations and plan assets as of December 31 (in
thousands):
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Change in benefit obligation:
Benefit obligation as of January 1 $ 19,070 $ 17,415
Acquisition of Principal Securities 1,750 -
Service cost 1,275 970
Interest cost 1,712 1,453
Actuarial loss 3,243 1,691
Benefits paid (1,682) (2,459)
-------- --------
Benefit obligation as of December 31 $ 25,368 $ 19,070
======== ========
Change in plan assets:
Fair value as of January 1 - $ -
Actual return on plan assets - -
Company contributions 1,682 2,459
Benefits paid (1,682) (2,459)
-------- --------
Fair value as of December 31 $ - $ -
======== ========
Funded status:
As of December 31 $(25,368) $(19,070)
Unrecognized cost:
Actuarial losses, net 3,243 1,691
-------- --------
Accrued benefit cost $(22,125) $(17,379)
======== ========
</TABLE>
The components of net periodic postretirement benefit cost follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Service cost $1,275 $ 970 $ 654
Interest cost 1,712 1,453 1,386
------ -------- --------
Net periodic postretirement benefit cost $2,987 $ 2,423 $ 2,040
====== ======== ========
</TABLE>
54
<PAGE>
EVEREN CAPITAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
Actuarial assumptions used to determine net periodic benefit cost include
an annual discount rate of 6.75% for 1998, 7% for 1997, and 7.75% for 1996.
The assumed health care cost trend rate was 6% for 1999 and is assumed to
remain at that level thereafter. A one percentage point change in the
assumed health care cost trend rate would increase and decrease the total
service and interest cost components and postretirement benefit obligation
by $32,000 and $262,000, respectively.
(13) TRANSACTIONS WITH AFFILIATES
As a part of the sale of an 80% interest in EVEREN Clearing to BONY, EVEREN
Securities entered into an Omnibus Clearing Agreement (the "Omnibus
Agreement") and a Facilities Management Agreement (the "Facilities
Agreement," collectively with the Omnibus Agreement, the "Agreements") with
BNY Clearing.
The Omnibus Agreement describes the terms and conditions under which BNY
Clearing will provide securities execution and clearing services for the
customer and firm accounts of EVEREN Securities. The Facilities Agreement
sets forth the terms and conditions under which BNY Clearing will provide
certain ministerial services relating to activities, including account
administration, dividend processing, and treasury administration for EVEREN
Securities. The Agreements provide for an initial term of five years.
Thereafter, the Agreements remain in effect unless terminated by either
party upon 180 days' written notice. Under the Agreements, EVEREN
Securities pays BNY Clearing fees on a per trade basis for clearance,
settlement, execution and processing. The per trade fees for clearance,
settlement and processing are subject to discount upon EVEREN Securities'
attainment of various trade volumes. Fees for clearance and settlement are
subject to an annual minimum of $24 million in 1999 and $20 million for
each year thereafter. The Company may terminate the Agreements in the event
of a change in control upon the payment of a termination fee.
At December 31, 1998, receivables from brokers and dealers consist entirely
of amounts due from BNY Clearing in connection with the omnibus clearing
account.
(14) STOCK OPTIONS
The Company maintains equity-based incentive plans under which various
types of stock options are granted to officers, directors, and key
employees of the Company. The stock options granted under the equity-based
incentive plans have exercise prices which approximated the market prices
on the dates of grant, and expire within ten years from the date of grant.
The options granted generally vest over a three- or five-year period.
A summary of the Company's stock options for the years ended December 31,
1998, 1997 and 1996 is as follows (prior periods have been restated to
reflect the Company's 2-for-1 stock split effected in the second quarter of
1998):
55
<PAGE>
EVEREN CAPITAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Options Weighted-Average
Outstanding Exercise Price
------------ ----------------
<S> <C> <C>
Options Outstanding, January 1, 1996 1,988,150 $ 3.42
Granted 379,500 5.39
Exercised - -
Forfeited (220,400) 3.42
--------- ------
Options Outstanding, December 31, 1996 2,147,250 3.77
--------- ------
Granted 1,608,510 11.60
Exercised - -
Forfeited (151,324) 5.20
--------- ------
Options Outstanding, December 31, 1997 3,604,436 7.31
--------- ------
Granted 1,121,940 22.12
Exercised (57,576) 6.13
Forfeited (52,746) 11.41
--------- ------
Options Outstanding, December 31, 1998 4,616,054 $ 10.79
========= ======
</TABLE>
In 1998 and 1997, had the Company elected to recognize compensation expense
for its stock option plans pursuant to SFAS No. 123 (based on the fair
value of options at the grant dates) net income would have been reduced by
$2.6 million and $1.6 million, respectively, and basic and diluted earnings
per common share would have been reduced by $ 0.08 and $0.10 and $0.07 and
$0.09, respectively. For options granted in 1996, the compensation cost as
determined under SFAS No. 123 was not material to the Company's
consolidated net income or earnings per share calculations.
(15) INCOME TAXES
The income tax provision for the years ended December 31 was as follows (in
thousands):
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
U.S. Federal
Current $ 51,753 $29,728 $43,621
Deferred (15,047) (6,532) (8,724)
-------- ------- -------
Total 36,706 23,196 34,897
-------- ------- -------
State and Local
Current 8,972 6,535 7,541
Deferred (1,320) (1,300) -
-------- ------- -------
Total 7,652 5,235 7,541
-------- ------- -------
$ 44,358 $28,431 $42,438
======== ======= =======
</TABLE>
56
<PAGE>
EVEREN CAPITAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
A reconciliation of the statutory federal income tax to the effective tax
rate is as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Statutory federal income tax $40,493 $26,246 $36,180
Increase (reduction) in income taxes resulting from:
Tax-exempt interest, net (393) (286) (559)
Deductible KSOP dividends (1,786) (1,414) (337)
Extraordinary charge on early retirement of debt - - 1,561
Meals and entertainment 764 650 483
State and local income taxes, net of federal
income tax benefit 4,974 3,403 4,459
Other, net 306 (168) 651
------- ------- -------
$44,358 $28,431 $42,438
======= ======= =======
</TABLE>
The significant components of the deferred tax assets and liabilities at
December 31, is presented below (in thousands):
<TABLE>
<CAPTION>
Deferred tax assets: 1998 1997
-------- --------
<S> <C> <C>
Accrued expenses $ 15,165 $ 9,538
Deferred compensation 4,544 3,063
Deferred rent 3,927 3,420
-------- -------
Total deferred tax assets 23,636 16,021
-------- -------
Deferred tax liabilities:
Section 338 Election basis difference 3,282 19,607
Exchange memberships 1,400 1,393
Fixed assets principally due to differences in
depreciation 1,615 473
Other 372 419
-------- -------
Total deferred tax liabilities 6,669 21,892
-------- -------
Net deferred tax (assets) liabilities $(16,967) $ 5,871
======== =======
</TABLE>
As a result of certain tax policies adopted by the Company in 1995 as a
result of its separation from Kemper Corporation (the "Section 338
election"), the Company recorded its prorata share of a basis reduction in
its various assets for tax purposes. This reduction in tax basis represents
future taxable income to the Company as the individual assets are converted
to cash. Accordingly, a portion of the Company's total deferred tax
liabilities at December 31, 1998 and 1997 relates to this future income
recognition.
57
<PAGE>
EVEREN CAPITAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
(16) EARNINGS PER SHARE
The following table reconciles the numerators and the denominators of the
Company's basic and diluted per-share calculations for the year ended
December 31, 1998 and 1997 (in thousands, except share data):
<TABLE>
<CAPTION>
1998 1997/(a)/
---- ---------
<S> <C> <C>
Net income $ 71,335 $ 46,558
--------------------------------------------------------------------------
Basic earnings per common share $ 2.16 $ 1.44
Average number of basic common shares
outstanding 33,039,893 32,230,978
--------------------------------------------------------------------------
Diluted earnings per common share $ 2.01 $ 1.35
Average number of diluted common shares
outstanding 35,425,565 34,446,562
--------------------------------------------------------------------------
</TABLE>
/(a)/ 1997 earnings per share and shares outstanding have been adjusted to
reflect the Company's 2-for-1 stock split effected in the second
quarter of 1998.
Basic and diluted earnings per share for 1996, calculated on a proforma
basis due to changes in the Company's continuing capital structure,
assuming the Company's initial public offering and full allocation of KSOP
shares to participant accounts had occurred as of January 1, 1996, would
have been $1.94 and $1.88, respectively. Historical basic earnings per
share for 1996, computed in accordance with SFAS No. 128 was $2.68 based on
22,509,360 weighted average common shares outstanding. Historical diluted
earnings per share for 1996 was $2.57 based on 23,498,512 weighted average
common shares outstanding. Dilutive securities include restricted stock and
options.
On January 20, 1999, the Company granted options for approximately 965,500
shares and approximately 561,000 shares of restricted stock pursuant to its
Restricted Stock Incentive Plans. The effect of these issuances on earnings
per share will be reflected in the Company's first quarter 1999 results.
(17) COMMITMENTS AND CONTINGENCIES
The Company leases certain office space under various noncancelable
operating leases. Future minimum payments under noncancelable operating
leases with remaining terms greater than one year as of December 31, 1998
were approximately (in thousands):
<TABLE>
Year Ending December 31,
------------------------
<S> <C>
1999 $ 32,600
2000 33,400
2001 30,500
2002 26,200
2003 21,000
Thereafter 51,500
--------
Total future minimum lease payments $195,200
========
</TABLE>
58
<PAGE>
EVEREN CAPITAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
Certain of the leases are subject to changes in the operating costs of the
particular facilities. Total rental expense for all operating leases,
including expenses related to the abandonment of leased property, was
approximately $35.0 million, $31.6 million and $33.3 million for the years
ended December 31, 1998, 1997 and 1996, respectively.
In the normal course of business, the Company enters into underwriting
commitments. Transactions relating to such underwriting commitments, which
were open at December 31, 1998 and subsequently settled, had no material
effect on the consolidated financial statements.
At December 31, 1998, the Company has investments in limited partnerships
carried at cost with aggregate capital commitments of $10 million over a
three to five-year period.
In February 1999, the Company created the EVEREN 1999 Capital Fund, LLC
(the "Fund") to enable its key employees or directors to pool their
investment resources and make investments on a more advantageous basis. The
Fund expects to invest exclusively in other investment funds. The Company
acts as managing member and is committed to invest up to $20 million in the
Fund.
(18) LITIGATION
In the normal course of business, the Company has been named as a defendant
in various legal actions in connection with its securities and commodities
business. Some of these lawsuits involve claims for substantial amounts.
Although the ultimate outcome of these suits cannot be ascertained at this
time, it is the opinion of management, after consultation with counsel,
that the resolution of such suits will not have a material adverse effect
on the financial position of the Company but may be material to the
Company's operating results for any particular period, depending upon the
level of the Company's income for such period.
(19) FINANCIAL INSTRUMENTS
Off-Balance Sheet Credit Risk and Concentration of Credit Risk
Certain market and credit risks are inherent in the Company's business,
primarily in facilitating customers' trading and financing transactions in
financial instruments, which include derivatives. In the normal course of
business, the Company's customer activities include execution, settlement,
and financing of various customer securities and commodities transactions,
which may expose the Company to off-balance sheet risk in the event the
customer is unable to fulfill its contractual obligations.
The Company's customer securities activities are transacted on either a
cash or margin basis. In margin transactions, the Company extends credit to
the customer which is collateralized by cash and/or securities in the
customer's account. In connection with these activities, the
59
<PAGE>
EVEREN CAPITAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
Company executes and clears customer transactions involving securities sold
but not yet purchased ("short sales") and the writing of option contracts.
The Company also executes customer transactions in the purchase and sale of
commodity futures contracts (including options on futures), substantially
all of which are transacted on a margin basis subject to various exchange
regulations. The Company seeks to control the risks associated with its
customer activities by requiring customers to maintain margin collateral in
compliance with various regulatory, exchange, and internal guidelines. The
Company monitors required margin levels daily and, pursuant to such
guidelines, requires the customers to deposit additional collateral or
reduce positions when necessary. Such transactions may expose the Company
to significant off-balance sheet risk in the event the margin is not
sufficient to fully cover losses which customers may incur. In the event
the customer fails to satisfy its obligations, the Company may be required
to purchase or sell the collateral at prevailing market prices in order to
fulfill the customer's obligations.
In accordance with industry practice, the Company records customer
securities transactions on a settlement date basis, which is generally
three business days after trade date. The Company is therefore exposed to
risk of loss on these transactions in the event of the customer's or
broker's inability to meet the terms of their contracts in which case the
Company may have to purchase or sell financial instruments at prevailing
market prices. The Company believes that the settlement of these
transactions will not have a material effect on the Company's consolidated
statement of financial condition or results of operations.
The Company's customer financing and securities settlement activities
require the Company to pledge customer securities as collateral in support
of various secured financing sources such as bank loans, securities loaned
and agreements to repurchase. Additionally, the Company pledges customer
securities as collateral to satisfy margin deposits of various exchanges.
In the event the counterparty is unable to meet its contractual obligation
to return customer securities pledged as collateral, the Company may be
exposed to the risk of acquiring the securities at prevailing market prices
in order to satisfy its customer obligations. The Company controls this
risk by monitoring the market value of securities pledged on a daily basis
and by requiring adjustments of collateral levels in the event of excess
market exposures. Additionally, the Company establishes credit limits for
such activities and monitors compliance on a daily basis. The Company also
enters into collateralized financing agreements in which it extends short-
term credit, primarily to major financial institutions. The Company
generally controls access to the collateral pledged by the counterparties,
which consists largely of securities issued by the U.S Government or its
agencies.
The Company is engaged in various securities trading and brokerage
activities servicing a diverse group of corporations, governments, and
institutional and individual investors primarily located in the United
States. A substantial portion of the Company's transactions are
collateralized and are executed with and on behalf of other major brokers
and dealers. The Company's exposure to credit risk associated with the
nonperformance of these
60
<PAGE>
EVEREN CAPITAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
counterparties in fulfilling their contractual obligation pursuant to
securities and commodities transactions can be directly impacted by
volatile trading markets which may impair the counterparties' ability to
satisfy their obligations to the Company. The Company monitors credit risk
on both an individual and group counterparty basis.
Derivatives
The Company also uses derivative financial instruments to hedge market
risk, primarily arising from fluctuations in interest rates, in its
securities inventory. To accomplish this, the Company uses exchange-traded
futures and option contracts that contain varying degrees of off-balance-
sheet risk, whereby changes in the market values of the underlying
securities or other financial instruments may be in excess of the amounts
reflected in the consolidated statement of financial condition. Under this
strategy, the Company does not expect any material losses relating to such
derivative instruments that would not be offset with corresponding gains on
the securities hedged. These derivative instruments, which consist solely
of exchange-traded futures and option contracts, are carried in the
consolidated statements of financial condition at December 31, 1998 and
1997 at their quoted market values of $0 and $56,000, respectively, in
aggregate, and have aggregate notional values of approximately $0 and $7.0
million, respectively. The average market value of these derivative
instruments during 1998 and 1997 approximated $38,000 and $215,000,
respectively.
Fair Value
The Company's financial instruments are carried at fair value or at amounts
which approximate fair value. Customer receivables, primarily consisting of
floating-rate loans collateralized by margin securities, are charged
interest at rates similar to other such loans made within the industry.
Reverse repurchase/repurchase agreements, securities borrowed/loaned, and
notes payable to banks are carried at contract amount plus accrued interest
or at the amount of cash collateral advanced or received, which
approximates fair value due to their highly liquid nature and short
maturity. The Company's remaining financial instruments are generally
short-term in nature and are typically liquidated at their carrying values.
(20) SEGMENT INFORMATION
During 1998, the Company adopted SFAS No. 131, "Disclosures About Segments
of An Enterprise and Related Information." SFAS No. 131 requires the
Company to use the "management approach" in disclosing segment information.
The Company conducts its business predominantly within one industry
segment, retail and institutional brokerage, which includes the Company's
asset management, investment banking and underwriting services, for all
periods presented. Management assesses the Company's performance and
measures the Company's income and assets on a single segment basis. The
single segment generated revenue predominantly from the United States for
all periods presented.
61
<PAGE>
EVEREN CAPITAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
(21) QUARTERLY INFORMATION (unaudited) (in thousands, except per share data)
<TABLE>
<CAPTION>
QUARTER
--------------------------------------------------------------------
1998 FIRST SECOND THIRD FOURTH
--------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total revenue $208,455 $205,330 $200,590 $195,255
Income before income taxes 26,268 24,015 22,081 43,329
Net income 16,141 14,877 13,776 26,541
Earnings per share:
Basic .50 .46 .42 .80
Diluted .46 .42 .39 .76
</TABLE>
<TABLE>
<CAPTION>
QUARTER
--------------------------------------------------------------------
1997 FIRST SECOND THIRD FOURTH
--------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total revenue $138,051 $144,904 $168,644 $178,153
Income before income taxes 16,221 17,260 19,984 21,524
Net income 10,102 10,815 12,312 13,329
Earnings per share:
Basic .31 .34 .38 .41
Diluted .30 .32 .36 .38
</TABLE>
* * * * *
62
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) Identification of Directors
The information in the Company's Proxy Statement dated March 31,
1999 for the Annual Meeting of Stockholders to be held on May 6,
1999 ("1999 Proxy") under the headings "ELECTION OF DIRECTORS"
and "BOARD OF DIRECTORS COMMITTEES" is incorporated herein by
reference.
(b) Identification of Executive Officers
See section titled "Executive Officers of the Registrant" at the
end of Part I of this Form 10-K.
(c) Identification of certain significant employees - none.
(d) Family relationships - none.
(e) Business experience - See Items 10(a) and 10(b) above.
(f) Involvement in certain legal proceedings.
On September 25, 1996, in The Matter of Deloitte & Touche LLP and Thomas D.
-------------------------------------------------
Lux, the Commodity Futures Trading Commission ("Commission") entered an
---
Order Instituting Proceedings Pursuant to Section 6(c) of the Commodity
Exchange Act and Part 14 of the Commission's Regulations and Findings and
Order Imposing Remedial Sanctions. Pursuant to an offer of settlement and
without admitting or denying any findings and without any adjudication on
the merits, the Commission found that Thomas D. Lux violated certain
Commission regulations regarding the adequacy of certain procedures he used
in conducting an audit of another client of Deloitte & Touche LLP while he
was a partner at that accounting firm. The Commission ordered him to cease
and desist from further violations of said regulations and censured him.
EVEREN does not believe this matter will affect his ability or integrity to
act as an executive officer of EVEREN.
(g) Promoters and control persons - none.
Compliance with Section 16(a) of the Exchange Act
The information in the 1999 Proxy under the caption "SECTION 16(a)
BENEFICIAL OWNERSHIP REPORTING COMPLIANCE" is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information in the 1999 Proxy under the following captions (including
any subcaptions) is incorporated herein by reference:
63
<PAGE>
COMPENSATION OF DIRECTORS
COMPENSATION OF EXECUTIVE OFFICERS
EMPLOYMENT AGREEMENTS
BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
PERFORMANCE GRAPH
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information in the 1999 Proxy under the caption "STOCK OWNERSHIP" is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
(a) Transactions with management and others - none.
(b) Certain business relationships - none.
(c) Indebtedness of management - The information in the 1999 Proxy under
the caption "INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS" is
incorporated herein by reference.
(d) Transactions with promoters - not applicable.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) Financial Statements
A listing of all financial statements filed as part of this Annual
Report on Form 10-K is included in Item 8.
(a) (2) Financial Statement Schedules
The following financial statement schedules are filed as part of this
annual report on Form 10-K:
Schedule Page No.
-------- --------
Independent Auditors' Report E-1
Schedule II Valuation and Qualifying Accounts E-2
(a) (3) Exhibits
The exhibits listed on the accompanying Index to Exhibits at pages E-3
through E-6 below are filed as part of this Annual Report on Form 10-K.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Registrant in the period
covered by this report.
64
<PAGE>
POWER OF ATTORNEY
Each person whose signature appears below hereby appoints Arthur J.
McGivern, Senior Executive Vice President and Treasurer and Chief Financial
Officer, Janet L. Reali, Senior Executive Vice President, General Counsel and
Secretary, his true and lawful attorney-in-fact with authority together or
individually to execute in the name of each such signatory, and with authority
to file with the Securities and Exchange Commission, any and all amendments to
this Annual Report on Form 10-K, together with any exhibits thereto and other
documents therewith, necessary or advisable to enable EVEREN Capital Corporation
to comply with the Securities Exchange Act of 1934, as amended, and any rules,
regulations and requirements of the Securities and Exchange Commission in
respect thereof, which amendments may make such other changes in the Annual
Report on Form 10-K as the aforesaid attorney-in-fact executing the same deems
appropriate.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, EVEREN Capital Corporation has duly caused this report to
be signed on its behalf by the undersigned thereunto duly authorized.
EVEREN CAPITAL CORPORATION
Date: March 22, 1999 By: /s/James R. Boris
---------------------------------------
James R. Boris
Chairman of the Board, Chief
Executive Officer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of EVEREN
Capital Corporation and in the capacities indicated on the 22nd day of March
1999.
By: /s/James R. Boris
---------------------------------------
James R. Boris
Chairman of the Board, Chief
Executive Officer and Director
By: /s/Stephen G. McConahey
---------------------------------------
Stephen G. McConahey
President, Chief Operating
Officer and Director
By: /s/Arthur J. McGivern
---------------------------------------
Arthur J. McGivern
Senior Executive Vice President
Treasurer and Chief Financial Officer
(Principal Financial Officer)
S-1
<PAGE>
By: /s/ Thomas D. Lux
-------------------------------
Thomas D. Lux
Executive Vice President
Chief Accounting Officer
By: /s/ William T. Esrey
-------------------------------
William T. Esrey
Director
By: /s/ Donald P. Jacobs
-------------------------------
Donald P. Jacobs
Director
By: /s/ Jack Kemp
-------------------------------
Jack Kemp
Director
By: /s/ Homer J. Livingston Jr.
-------------------------------
Homer J. Livingston, Jr.
Director
By /s/ James J. O'Connor
-------------------------------
James J. O'Connor
Director
By: /s/ Samuel K. Skinner
-------------------------------
Samuel K. Skinner
Director
By: /s/ William C. Springer
-------------------------------
William C. Springer
Director
By: /s/ Donna F. Tuttle
-------------------------------
Donna F. Tuttle
Director
S-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
EVEREN Capital Corporation
We have audited the consolidated financial statements of EVEREN Capital
Corporation and subsidiaries as of December 31, 1998 and 1997, and for each of
the three years in the period ended December 31, 1998, and have issued our
report thereon dated March 18, 1999; such consolidated financial statements and
report are included in the Annual Report on Form 10-K for the year ended
December 31, 1998. Our audits also included the consolidated financial
statement schedule, Valuation and Qualifying Accounts, for each of the three
years in the period ended December 31, 1998 of EVEREN Capital Corporation and
subsidiaries, listed in Item 14 of this report. This consolidated financial
statement schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion on such consolidated financial statement
schedule based on our audits. In our opinion, such consolidated financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
Deloitte & Touche LLP
Chicago, Illinois
March 18, 1999
E-1
<PAGE>
SCHEDULE II
EVEREN CAPITAL CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
DESCRIPTION 1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Asset valuation reserves:
Balance at beginning of period............ $7,196 $9,182 $10,028
Additions-provisions for losses........... 4,451 2,495 913
Deductions (1)............................ 4,442 4,481 1,759
------ ------ -------
Balance at end of period $7,205 $7,196 $ 9,182
====== ====== =======
</TABLE>
_____________
(1) These deductions represent the net effect on the valuation reserves of
write-downs and recoveries.
E-2
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description Page No.
- ----------- ----------- --------
<S> <C> <C>
3.1 Amended and Restated Certificate of Incorporation of EVEREN
Capital Corporation ("EVEREN"). (Incorporated by reference to
Exhibit 3.1 to Amendment No. 1 to EVEREN's Registration Statement
on Form S-1 (File No. 333-09163) filed with the Securities and
Exchange Commission ("Commission") on September 6, 1996 (the
"EVEREN S-1")).
3.2 Restated By-laws of EVEREN. (Incorporated by reference to Exhibit
3.2 of the EVEREN S-1.)
10.1 Assumption Agreement, dated as of September 13, 1995, between
Kemper Corporation and EVEREN Securities, Inc. (Incorporated by
reference to Exhibit 10.6 to EVEREN's Current Report on Form 8-K
dated September 13, 1995 and filed with the Commission on
September 27, 1995 ("Form 8-K")).
10.2 + Employment Agreement, dated as of September 13, 1995, between
EVEREN and James R. Boris, as amended effective March 28, 1996.
(Incorporated by reference to Exhibit 10.7 to EVEREN's Annual
Report on Form 10-K for the fiscal year ended December 31, 1995
("1995 10-K")).
10.3 + Employment Agreement, dated as of September 13, 1995, between
EVEREN and Stephen G. McConahey, as amended effective March 28,
1996. (Incorporated by reference to Exhibit 10.8 to the 1995 10-
K).
10.4 + The EVEREN Capital Corporation 401(k) and Employee Stock
Ownership Trust. (Incorporated by reference to Exhibit 10.9 to
the Form 8-K).
10.5 + The EVEREN Capital Corporation 401(k) and Employee Stock
Ownership Plan. (Incorporated by reference to Exhibit 10.10 to
the Form 8-K).
10.5(a) + First Amendment of EVEREN Capital Corporation 401(k) and Employee
Stock Ownership Plan (As Amended and Restated Effective as of
September 1, 1995). (Incorporated by reference to Exhibit 10.5(a)
to EVEREN's Annual Report on Form 10-K for the fiscal year ended
December 31, 1997 ("1997 10-K")).
10.5(b) + Second Amendment of EVEREN Capital Corporation 401(k) and
Employee Stock Ownership Plan (As Amended and Restated Effective
as of September 1, 1995). (Incorporated by reference to Exhibit
10.5(b) to the 1997 10-K.)
10.5(c) + Third Amendment of EVEREN Capital Corporation 401(k) and Employee
Stock Ownership Plan (As Amended and Restated Effective as of
September 1, 1995). (Incorporated by reference to Exhibit 10.5(c)
to the 1997 10-K.)
</TABLE>
E-3
<PAGE>
10.5(d) + Fourth Amendment of EVEREN Capital Corporation 401(k) and
Employee Stock Ownership Plan (As Amended and Restated Effective
as of September 1, 1995). (Incorporated by reference to Exhibit
10.5(d) to the 1997 10-K.)
10.5(e) + Fifth Amendment of EVEREN Capital Corporation 401(k) and Employee
Stock Ownership Plan (As Amended and Restated Effective as of
September 1, 1995). (Incorporated by reference to Exhibit 10.5(e)
to the 1997 10-K.)
10.5(f) +* Sixth Amendment of EVEREN Capital Corporation 401(k) and
Employees Stock Ownership Plan (As Amended and Restated Effective
as of September 1, 1995).
10.6 + EVEREN Capital Corporation 1995 Stock Plan, dated as of September
13, 1995, as amended. (Incorporated by reference to Exhibits 10.6
and 10.27 to the EVEREN S-1).
10.7 + Form of Indemnification Agreement, between EVEREN and the
directors of EVEREN. (Incorporated by reference to Exhibit 10.7
to the EVEREN S-1).
10.8 + Tax Sharing Agreement, dated as of September 13, 1995, between
EVEREN and Kemper. (Incorporated by reference to Exhibit 10.13 to
the Form 8-K).
10.9 + EVEREN Capital Corporation 1995 Non-employee Directors Plan, as
amended. (Incorporated by reference to Exhibit 10.9 to the EVEREN
S-1).
10.10 + Employment Agreement, dated as of February 16, 1996, between
EVEREN and Stanley R. Fallis. (Incorporated by reference to
Exhibit 10.31 to the 1995 10-K).
10.11 + Employment Agreement, dated as of February 22, 1996, between
EVEREN and David M. Greene. (Incorporated by reference to Exhibit
10.33 to the 1995 10-K).
10.12 + Employment Agreement, dated as of February 15, 1996, between
EVEREN and Arthur J. McGivern. (Incorporated by reference to
Exhibit 10.34 to the 1995 10-K).
10.13 + Employment Agreement, dated as of February 15, 1996, between
EVEREN and Janet L. Reali. (Incorporated by reference to Exhibit
10.35 to the 1995 10-K).
10.14 + Employment Agreement, dated as of February 16, 1996, between
EVEREN and Thomas R. Reedy. (Incorporated by reference to Exhibit
10.36 to the 1995 10-K).
E-4
<PAGE>
10.15 + Employment Agreement, dated as of February 20, 1996, between
EVEREN and John G. Sullivan. (Incorporated by reference to
Exhibit 10.37 to the 1995 10-K).
10.16 Joint Venture Agreement dated as of July 25, 1996 among EVEREN,
Mentor and certain of their affiliates. (Incorporated by
reference to Exhibit 10.1 to Form 10-Q dated June 30, 1996 and
filed with the Commission on July 31, 1996).
10.16(a) Amendment to Joint Venture Agreement dated July 15, 1997.
(Incorporated by reference to Exhibit 10.23(a) to the 1997 10-K.)
10.16(b) Clarification Agreement Re: Joint Venture Agreement dated as of
October 30, 1996. (Incorporated by reference to Exhibit 10.23(b)
to the 1997 10-K.)
10.16(c)* Clarification Agreement Re: Joint Venture Agreement dated as of
December 14, 1998.
10.17 Form of Rights Agreement, dated as of _________, 1996, between
EVEREN and _______________. (Incorporated by reference to Exhibit
10.26 to the EVEREN S-1).
10.18 + Second Amendment dated February 7, 1997 to Employment Agreement
dated September 13, 1995 between James R. Boris and EVEREN
(Incorporated by reference to Exhibit 10.25 to EVEREN's Annual
Report on Form 10-K for the fiscal year ended December 31, 1996
("1996 10-K")).
10.19 + Second Amendment dated February 7, 1997 to Employment Agreement
dated September 13, 1995 between Stephen G. McConahey and EVEREN
(Incorporated by reference to Exhibit 10.26 to the 1996 10-K).
10.20 Credit Agreement by and among EVEREN, the Lenders Party thereto,
LaSalle National Bank, as documentation agent, and The Bank of
New York, as administrative agent, dated July 11, 1997 (the
"Credit Agreement"). (Incorporated by reference to Exhibit 10.27
to Form 10-Q dated June 30, 1997 and filed with the Commission on
August 14, 1997).
10.20(a)* Amendment No. 1 to the Credit Agreement dates as of February 26,
1999.
10.20(b)* Amendment No. 2 to the Credit Agreement dated as of March 17,
1999.
10.21 + EVEREN Capital Corporation Senior Management Incentive
Compensation Plan. (Incorporated by reference to Exhibit A to
EVEREN's Proxy Statement dated April 4, 1997 relating to EVEREN's
Annual Meeting of Stockholder's held on May 6, 1997).
10.22 + Non-qualified Stock Option Agreement dated as of February 7, 1997
between EVEREN and James R. Boris. (Incorporated by reference to
Exhibit 10.31 to the 1997 10-K.)
E-5
<PAGE>
10.23 + Non-qualified Stock Option Agreement dated as of February 7, 1997
between EVEREN and Stephen G. McConahey. (Incorporated by
reference to Exhibit 10.32 to the 1997 10-K.)
10.24 + 1996 Restricted Stock Incentive Plan (as Amended and Restated
effective as of May 6, 1997). (Incorporated by reference to
Exhibit 10.33 to the 1997 10-K.)
10.25 +* EVEREN Capital Corporation 1996 Employee Periodic Payroll Stock
Purchase Plan (as Amended and Restated Effective as of January
1, 1999).
12.0 * Statement regarding computation of ratios.
21.0 * Subsidiaries of EVEREN.
24.0 * Power of Attorney - a power of attorney is included above at the
signatures page of this Annual Report on Form 10-K.
27.0 * Financial Data Schedule
_________________
* Filed with this report
+ Management contract or compensatory plan or arrangement required to be filed
as an exhibit to this Form 10-K pursuant to Item 14(c).
E-6
<PAGE>
Exhibit 10.5(f)
SIXTH AMENDMENT
---------------
OF
--
EVEREN CAPITAL CORPORATION
--------------------------
401(k) AND EMPLOYEE STOCK OWNERSHIP PLAN
----------------------------------------
(As Amended and Restated Effective as of September 1, 1995)
WHEREAS, EVEREN Capital Corporation (the "company") maintains the EVEREN
Capital Corporation 401(k) and Employee Stock Ownership Plan (As Amended and
Restated Effective as of September 1, 1995) (the "plan"); and
WHEREAS, the plan has been amended, and further amendment of the plan, as
amended, now is considered desirable;
NOW, THEREFORE, pursuant to the power reserved to the company under
subsection 18.1 of the plan, and in exercise of the authority delegated to the
undersigned officer of the company by resolution of the board of directors of
the company, the plan, as amended, is hereby further amended, effective October
1, 1998, by adding the following new Supplement C to the plan immediately after
Supplement B thereof:
"SUPPLEMENT C
------------
SPECIAL PROVISIONS FOR CERTAIN
------------------------------
EMPLOYEES OF EVEREN CLEARING LLC
--------------------------------
C-1. Introduction; Use of Terms. Pursuant to a Purchase Agreement dated
--------------------------
as of August 4, 1998 (the `Purchase Agreement'), by and among The Bank of
New York (`BNY'), EVEREN Securities, Inc. (`ESI'), EVEREN Clearing Corp.,
and EVEREN Clearing LLC (`ECL'), ESI will sell 80% of the member interests
in ECL to BNY. The provisions of this Supplement C shall become effective
only upon the closing of the above-described sale (the `closing date').
This Supplement C sets forth special provisions applicable to participants
who are employed by ECL on the closing date (`ECL participants'). Terms
used in this
<PAGE>
Supplement C shall, unless otherwise defined in this Supplement C, have the
meanings given to such terms in the plan.
C-2. Cessation of Contributions. No employee or employer contributions
--------------------------
shall be made to the plan by or on behalf of an ECL participant (or any
other employee of ECL) for any period beginning after the closing date.
C-3. Crediting of Service with ECL and BNY. An ECL participant's period
-------------------------------------
of employment with ECL or BNY after the closing date shall be taken into
account in determining the ECL participant's credited service and years of
credited service under the plan.
C-4. In-Service Withdrawals. Subject to the terms of Section 10 of the
----------------------
plan and the rules and procedures established by the committee, an ECL
participant may request an in-service withdrawal during the time the ECL
participant is employed by ECL or BNY.
C-5. Loans. An ECL participant may not request a new loan from the plan
-----
after the closing date. After the closing date, each ECL participant shall
continue to repay the balance of any outstanding loan in accordance with
the terms of the plan and the applicable loan documents. Such repayments
shall be made in accordance with the rules and procedures established by
the committee.
C-6. Distributions. Except as otherwise permitted under applicable law,
-------------
and subject to the rules and procedures established by the committee, an
ECL participant may not request a distribution under Section 12 of the Plan
during the period the ECL participant is employed by ECL or BNY."
IN WITNESS WHEREOF, the undersigned duly authorized officer of the company
has caused the foregoing amendment to be executed this 28th day of September,
1998.
EVEREN CAPITAL CORPORATION
By ________________________________
Its _______________________________
2
<PAGE>
Exhibit 10.16(c)
CLARIFICATION AGREEMENT
RE JOINT VENTURE AGREEMENT
CLARIFICATION AGREEMENT dated as of December 14, 1998, relating to that
certain Joint Venture Agreement (the "JVA") dated as of July 25, 1996, by and
between the parties hereto, each of which is a party to, or a successor to a
party to, the JVA. Unless otherwise stated, terms used in this Agreement shall
have the meanings assigned such terms in the JVA.
WHEREAS, the parties desire to clarify the meaning of Section 3.3(a)(i) of
the JVA, which sets forth the obligation of EVEREN Securities and Wheat that the
Mentor Money Market Funds be exclusively utilized for its client sweep accounts,
with certain exceptions set forth therein.
WHEREAS, the parties' intent in Section 3.3(a)(i) of the JVA is to permit
enhancements of sweep account product offerings, while maintaining the
obligation to utilize the Mentor Money Market Funds.
NOW THEREFORE, the parties agree as follows:
1. The recitals set forth above are hereby incorporated by reference as
if set forth in this paragraph.
2. Section 3.3(a)(iv) shall not prohibit EVEREN Securities or Wheat from
offering both an FDIC-insured account product and the Mentor Money Market Funds
for sweep account assets as long as the interest rates offered by such FDIC-
insured account are not established to compete with the interest rates offered
by the Mentor Money Market Funds, except that interest rates may be established
on a competitive basis for short periods of time in connection with promotional
activities. The parties believe that a customer should be interested in
choosing the FDIC-insured account instead of the Mentor Money Market Funds
primarily due to the FDIC-insured nature of the account, not the interest rate
on the account. The parties further believe that offering an FDIC-insured
account as a product enhancement will have the ultimate effect of increasing
client assets in the Mentor Funds.
3. Section 3.3(a)(i) of the JVA permits sweep account assets to be
invested in money market open-end investment companies of the type offered in
EVEREN Securities sweep accounts as of the date of the JVA for which there is
not a comparable Mentor Money Market Fund. This exception to the obligation to
utilize the Mentor Money Market Funds was intended where a sweep account product
could be enhanced with money market funds of a type Mentor determines it is not
economically efficient to offer due to the projected size of the fund. The
parties desire to permit such types of money market funds to be offered as
product enhancements; provided that Mentor first has been given the opportunity
to provide such a fund.
3
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the date and year first above written.
MENTOR INVESTMENT GROUP, LLC
By: _______________________________
WHEAT FIRST BUTCHER SINGER, INC.
WHEAT FIRST SECURITIES, INC.
By: ________________________________
EVEREN CAPITAL CORPORATION
EVEREN SECURITIES HOLDINGS, INC.
EVEREN SECURITIES, INC.
By: ________________________________
4
<PAGE>
EXHIBIT 10.20(A)
AMENDMENT NO. 1
AMENDMENT NO. 1 (this "Amendment"), dated as of February 26, 1999, under
---------
the Credit Agreement, dated as of July 11, 1997, by and among EVEREN Capital
Corporation, the Lenders party thereto, LaSalle National Bank, as Documentation
Agent, and The Bank of New York, as Administrative Agent (the "Agreement").
---------
RECITALS
--------
I. Capitalized terms used herein which are not otherwise defined herein shall
have the respective meanings ascribed thereto in the Agreement.
II. The Borrower has requested that the Agreement be amended upon the terms and
conditions contained herein.
Accordingly, in consideration of the Recitals and the terms and conditions
hereinafter set forth, and for other good and valuable consideration, the
receipt and adequacy of which are hereby acknowledged, the parties hereto hereby
agree as follows:
THE FACILITY HAS BEEN EXTENDED FROM THE INITIAL MATURITY DATE AND SHALL
-----------------------------------------------------------------------
MATURE INSTEAD ON THE EXTENDED MATURITY DATE.
- ---------------------------------------------
SECTION 1.1 OF THE AGREEMENT IS AMENDED BY ADDING THE FOLLOWING DEFINITION
--------------------------------------------------------------------------
IN ITS APPROPRIATE ALPHABETICAL ORDER:
- --------------------------------------
"BNYCS": BNY Clearing Services LLC.
-----
SECTION 1.1 OF THE AGREEMENT IS AMENDED TO DELETE THE DEFINED TERM "EVEREN
--------------------------------------------------------------------------
CLEARING CORP.".
- ----------------
SECTION 1.1 OF THE AGREEMENT IS AMENDED BY AMENDING AND RESTATING CLAUSE
------------------------------------------------------------------------
(G)(II) OF THE DEFINITION OF "INDEBTEDNESS" IN ITS ENTIRETY TO READ AS FOLLOWS:
- -------------------------------------------------------------------------------
(ii) Indebtedness incurred by EVEREN Securities to finance
the acquisition or carrying of securities for its own
account or for the account of its customers in the ordinary
course of business.
SECTION 1.1 OF THE AGREEMENT IS AMENDED BY AMENDING CLAUSE (A) OF THE
---------------------------------------------------------------------
DEFINITION OF "INTEREST EXPENSE" BY DELETING THE WORDS "AND EVEREN CLEARING
- ---------------------------------------------------------------------------
CORP.".
- -------
SECTION 1.1 OF THE AGREEMENT IS AMENDED BY AMENDING THE DEFINITION OF
---------------------------------------------------------------------
"LIQUIDITY RATIO" BY DELETING EACH REFERENCE TO "EVEREN CLEARING CORP." AND
- ---------------------------------------------------------------------------
SUBSTITUTING IN ITS PLACE THE WORDS "EVEREN SECURITIES".
- --------------------------------------------------------
SECTION 6.10 OF THE AGREEMENT IS AMENDED BY DELETING EACH REFERENCE TO THE
--------------------------------------------------------------------------
WORDS "(AT LEAST 99% IN THE CASE OF EVEREN CLEARING CORP.)".
- ------------------------------------------------------------
SECTION 6.14 OF THE AGREEMENT IS AMENDED AND RESTATED IN ITS ENTIRETY TO
------------------------------------------------------------------------
READ AS FOLLOWS:
- ----------------
EVEREN Securities Liquidity Ratio
---------------------------------
<PAGE>
At all times cause EVEREN Securities to maintain a Liquidity Ratio
greater than 1.00:1.00.
SECTION 6.15 OF THE AGREEMENT IS AMENDED AND RESTATED IN ITS ENTIRETY TO
------------------------------------------------------------------------
READ AS FOLLOWS:
- ----------------
EVEREN Securities Net Capital to Debits Ratio
---------------------------------------------
At all times cause EVEREN Securities to maintain a ratio of net
capital to aggregate debit items (as each such term is defined in Rule 15c3-3 of
the General Rules and Regulations as promulgated by the SEC (17 CFR 240.15c3-3)
as such Rule may be amended from time to time, or any rule or regulation of the
SEC which replaces such Rule) equal to or greater than 0.060:1.00.
SECTION 6.16 OF THE AGREEMENT IS AMENDED AND RESTATED IN ITS ENTIRETY TO
------------------------------------------------------------------------
READ AS FOLLOWS:
- ----------------
EVEREN Securities Net Capital Requirement
-----------------------------------------
At all times cause EVEREN Securities to be in full compliance with the
minimum net capital requirements of Rule 15c3-1.
SECTION 6.17 OF THE AGREEMENT IS AMENDED AND RESTATED IN ITS ENTIRETY TO
------------------------------------------------------------------------
READ AS FOLLOWS:
- ----------------
EVEREN Securities Minimum Net Capital
-------------------------------------
At the end of each month cause EVEREN Securities to maintain net
capital (as defined in Rule 15c3-1) equal to or greater than
$125,000,000.
SECTION 7.1 OF THE AGREEMENT IS AMENDED BY (I) DELETING EACH REFERENCE TO
--------------------------------------------------------------------------
"EVEREN CLEARING CORP." AND SUBSTITUTING IN ITS PLACE THE WORDS "EVEREN
- -----------------------------------------------------------------------
SECURITIES" AND (II) REPLACING THE REFERENCE TO "$500,000" CONTAINED IN
- -----------------------------------------------------------------------
SUBSECTION (F) OF THIS SECTION 7.1 WITH "$1,000,000".
- -----------------------------------------------------
SECTION 7.2 OF THE AGREEMENT IS AMENDED BY DELETING THE WORDS "(X) LIENS ON
---------------------------------------------------------------------------
PROPERTY OF EVEREN CLEARING CORP. SECURING INDEBTEDNESS PERMITTED BY
- --------------------------------------------------------------------
SECTION7.1(E), AND (XI)" AND SUBSTITUTING IN ITS PLACE THE FOLLOWING: "AND (X)".
- --------------------------------------------------------------------------------
SECTION 7.4 OF THE AGREEMENT IS AMENDED BY AMENDING SUBSECTION (IV) BY
----------------------------------------------------------------------
DELETING THE REFERENCE TO "$100,000,000" AND SUBSTITUTING IN ITS PLACE
- ----------------------------------------------------------------------
"$300,000,000 (LESS THE AGGREGATE AMOUNT OF INVESTMENTS MADE PURSUANT TO SECTION
- --------------------------------------------------------------------------------
7.5(L))".
- ---------
SECTION 7.5 OF THE AGREEMENT IS AMENDED BY AMENDING CLAUSE (H) BY DELETING
--------------------------------------------------------------------------
THE WORDS "AND EVEREN CLEARING CORP." AND BY DELETING THE WORDS "OR EVEREN
- --------------------------------------------------------------------------
CLEARING CORP.".
- ----------------
SECTION 7.5 OF THE AGREEMENT IS AMENDED BY DELETING THE WORD "AND"
------------------------------------------------------------------
IMMEDIATELY PRECEDING CLAUSE (K) AND SUBSTITUTING IN ITS PLACE A COMMA, AND BY
- ------------------------------------------------------------------------------
ADDING THE FOLLOWING IMMEDIATELY BEFORE THE PERIOD AT THE END OF CLAUSE (K):
- ----------------------------------------------------------------------------
and (l) Investments of the Borrower in BNYCS, when and to the extent
required by the Purchase Agreement dated August 4, 1998 by and among
The Bank of New York, EVEREN Clearing Corp., EVEREN Clearing LLC,
EVEREN Securities Inc., and EVEREN Capital Corporation, in an
aggregate amount not exceeding the lesser of (x) $50,000,000 and (y)
$300,000,000 less the sum of the aggregate consideration paid for all
Acquisitions pursuant to Section 7.4(iv) and the aggregate Investments
made pursuant to this Section 7.5(l).
2
<PAGE>
SECTION 7.7 OF THE AGREEMENT IS AMENDED BY DELETING THE WORD "AND"
------------------------------------------------------------------
IMMEDIATELY PRECEDING "(C)" AND, IMMEDIATELY BEFORE THE PERIOD AT THE END
- -------------------------------------------------------------------------
THEREOF, ADDING THE FOLLOWING:
- -------------------------------
(d) the Borrower may repurchase up to 1,000,000 shares of its common
stock for an aggregate purchase price not exceeding $25,000,000
provided that, with respect to each such repurchase, (A) no Default or
Event of Default shall or would exist, and (B) all of the
representations and warranties contained in Section 4 shall be true
and correct as if then made
Section 7.11 of the Agreement is amended by deleting the words "which are
-------------------------------------------------------------------------
at least 99% owned, directly or indirectly, by the Borrower".
- -------------------------------------------------------------
SCHEDULE 4.1 OF THE AGREEMENT IS REPLACED AND AMENDED TO READ IN ITS
--------------------------------------------------------------------
ENTIRETY AS SCHEDULE 4.1 TO THIS AMENDMENT.
- -------------------------------------------
SCHEDULE 4.5 OF THE AGREEMENT IS REPLACED AND AMENDED TO READ IN ITS
--------------------------------------------------------------------
ENTIRETY AS SCHEDULE 4.5 TO THIS AMENDMENT.
- -------------------------------------------
EXHIBIT A OF THE AGREEMENT IS AMENDED BY DELETING THE NAME "MARY JOSEPHS"
-------------------------------------------------------------------------
AND SUBSTITUTING IN ITS PLACE THE NAME "RICHARD G. MAIER" AND BY DELETING THE
- -----------------------------------------------------------------------------
PHONE NUMBER "(312) 904-8696" AND SUBSTITUTING IN ITS PLACE THE TELEPHONE NUMBER
- --------------------------------------------------------------------------------
"(312) 904-7624".
- -----------------
EXHIBIT D OF THE SECRETARY'S CERTIFICATE IS AMENDED BY DELETING THE
-------------------------------------------------------------------
REFERENCE TO "STANLEY R. FALLIS SENIOR EXECUTIVE VICE PRESIDENT" AND
- --------------------------------------------------------------------
SUBSTITUTING IN ITS PLACE "THOMAS D. LUX EXECUTIVE VICE PRESIDENT" AND BY
- -------------------------------------------------------------------------
DELETING THE REFERENCE TO "DANIEL D. WILLIAMS SENIOR EXECUTIVE VICE PRESIDENT,
- ------------------------------------------------------------------------------
TREASURER AND CHIEF FINANCIAL OFFICER" AND SUBSTITUTING IN ITS PLACE "ARTHUR J.
- -------------------------------------------------------------------------------
MCGIVERN SENIOR EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER".
- ----------------------------------------------------------------------
ON THE DATE HEREOF, EACH LOAN PARTY HEREBY (A) REAFFIRMS AND ADMITS THE
-----------------------------------------------------------------------
VALIDITY AND ENFORCEABILITY OF THE LOAN DOCUMENTS (AS AMENDED BY THIS AMENDMENT)
- --------------------------------------------------------------------------------
AND ALL OF ITS OBLIGATIONS THEREUNDER, (B) AGREES AND ADMITS THAT IT HAS NO
- ---------------------------------------------------------------------------
DEFENSES TO OR OFFSETS AGAINST ANY SUCH OBLIGATIONS, (C) REPRESENTS AND WARRANTS
- --------------------------------------------------------------------------------
THAT, BOTH IMMEDIATELY BEFORE AND AFTER GIVING EFFECT TO THIS AMENDMENT, EACH
- -----------------------------------------------------------------------------
REPRESENTATION AND WARRANTY MADE IN ANY LOAN DOCUMENT IS TRUE AND CORRECT, AND
- ------------------------------------------------------------------------------
(D) REPRESENTS AND WARRANTS THAT, BOTH IMMEDIATELY BEFORE AND AFTER GIVING
- --------------------------------------------------------------------------
EFFECT TO THIS AMENDMENT, NO DEFAULT OR EVENT OF DEFAULT HAS OCCURRED AND IS
- ----------------------------------------------------------------------------
CONTINUING.
- -----------
THIS AMENDMENT SHALL BE EFFECTIVE AS OF THE DATE FIRST WRITTEN ABOVE FOR
------------------------------------------------------------------------
THE PERIOD FROM AND AFTER SUCH DATE UPON RECEIPT BY THE AGENT OF THIS AMENDMENT
- -------------------------------------------------------------------------------
DULY EXECUTED BY THE BORROWER, THE REQUIRED LENDERS AND THE AGENT.
- ------------------------------------------------------------------
EXCEPT AS EXPRESSLY AMENDED HEREBY, THE LOAN DOCUMENTS ARE AND SHALL REMAIN
---------------------------------------------------------------------------
IN FULL FORCE AND EFFECT, AND NO AMENDMENT IN RESPECT OF ANY TERM OR CONDITION
- ------------------------------------------------------------------------------
OF ANY LOAN DOCUMENT SHALL BE DEEMED TO BE AN AMENDMENT IN RESPECT OF ANY OTHER
- -------------------------------------------------------------------------------
TERM OR CONDITION CONTAINED IN ANY LOAN DOCUMENT.
- -------------------------------------------------
THE BORROWER HEREBY AGREES TO PAY PROMPTLY ALL EXPENSES OF THE AGENT IN
-----------------------------------------------------------------------
CONNECTION WITH THIS AMENDMENT, INCLUDING THE FEES AND DISBURSEMENTS OF SPECIAL
- -------------------------------------------------------------------------------
COUNSEL TO THE AGENT.
- ---------------------
THIS AMENDMENT MAY BE EXECUTED IN ANY NUMBER OF COUNTERPARTS, ALL OF WHICH,
---------------------------------------------------------------------------
TAKEN TOGETHER, SHALL CONSTITUTE ONE AGREEMENT.
- -----------------------------------------------
THIS AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN
---------------------------------------------------------------------
ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO PRINCIPLES
- --------------------------------------------------------------------------------
OF CONFLICT OF LAWS.
- --------------------
3
<PAGE>
AS EVIDENCE of the agreement by the parties hereto to the terms and
conditions herein contained, each such party has caused this Amendment to be
executed on its behalf.
EVEREN CAPITAL CORPORATION
By: ________________________________
THE BANK OF NEW YORK, in its capacity as
a Lender and the Administrative Agent
By: ________________________________
LASALLE NATIONAL BANK, in its capacity as a Lender
and the Documentation Agent
By: ________________________________
4
<PAGE>
EXHIBIT 10.20(B)
AMENDMENT NO. 2
AMENDMENT NO.2 (this "Amendment"), dated as of March 17, 1999, under the
---------
Credit Agreement, dated as of July 11, 1997, by and among EVEREN Capital
Corporation, the Lenders party thereto, LaSalle National Bank, as Documentation
Agent, and The Bank of New York, as Administrative Agent (the "Agreement").
---------
RECITALS
--------
I. Capitalized terms used herein which are not otherwise defined herein shall
have the respective meanings ascribed thereto in the Agreement.
II. The Borrower has requested that the Agreement be amended upon the terms and
conditions contained herein.
Accordingly, in consideration of the Recitals and the terms and conditions
hereinafter set forth, and for other good and valuable consideration, the
receipt and adequacy of which are hereby acknowledged, the parties hereto hereby
agree as follows:
ARTICLE I. SECTION 7.6 OF THE AGREEMENT IS AMENDED AND RESTATED IN ITS
- --------------------------------------------------------------------------
ENTIRETY TO READ AS FOLLOWS:
- -----------------------------
7.6 Capital Expenditures
--------------------
Make any Capital Expenditure, or permit any Subsidiary so to do,
except (a) Acquisitions permitted under Sections 7.4, and (b) other Capital
Expenditures, provided that such other Capital Expenditures shall not
exceed $30,000,000 on a Consolidated basis in any fiscal year.
ARTICLE II. SECTION 7.16 OF THE AGREEMENT IS AMENDED AND RESTATED IN ITS
- ---------------------------------------------------------------------------
ENTIRETY TO READ AS FOLLOWS:
- ---------------------------
7.16 Forgivable Loans
----------------
MAKE OR ASSUME ANY FORGIVABLE LOAN, OR PERMIT ANY SUBSIDIARY SO
---------------------------------------------------------------
TO DO, IF IMMEDIATELY BEFORE OR AFTER GIVING EFFECT THERETO, THE AGGREGATE
--------------------------------------------------------------------------
PRINCIPAL AMOUNT OF FORGIVABLE LOANS OF THE BORROWER AND THE SUBSIDIARIES
-------------------------------------------------------------------------
ON A CONSOLIDATED BASIS SHALL EXCEED $100,000,000 (EXCLUDING FORGIVABLE
-----------------------------------------------------------------------
LOANS ACQUIRED PURSUANT TO AN ACQUISITION PERMITTED PURSUANT TO SECTION
-----------------------------------------------------------------------
7.4).
-----
ARTICLE III. ON THE DATE HEREOF, EACH LOAN PARTY HEREBY (A) REAFFIRMS AND
- ---------------------------------------------------------------------------
ADMITS THE VALIDITY AND ENFORCEABILITY OF THE LOAN DOCUMENTS (AS AMENDED BY
- ---------------------------------------------------------------------------
THIS AMENDMENT) AND ALL
- -----------------------
<PAGE>
OF ITS OBLIGATIONS THEREUNDER, (B) AGREES AND ADMITS THAT IT HAS NO DEFENSES TO
- -------------------------------------------------------------------------------
OR OFFSETS AGAINST ANY SUCH OBLIGATIONS, (C) REPRESENTS AND WARRANTS THAT, BOTH
- -------------------------------------------------------------------------------
IMMEDIATELY BEFORE AND AFTER GIVING EFFECT TO THIS AMENDMENT, EACH
- ------------------------------------------------------------------
REPRESENTATION AND WARRANTY MADE IN ANY LOAN DOCUMENT IS TRUE AND CORRECT, AND
- ------------------------------------------------------------------------------
(D) REPRESENTS AND WARRANTS THAT, BOTH IMMEDIATELY BEFORE AND AFTER GIVING
- --------------------------------------------------------------------------
EFFECT TO THIS AMENDMENT, NO DEFAULT OR EVENT OF DEFAULT HAS OCCURRED AND IS
- ----------------------------------------------------------------------------
CONTINUING.
- -----------
ARTICLE IV. THIS AMENDMENT IS BEING DATED FOR CONVENIENCE; PROVIDED,
- ------------------------------------------------------------------------
HOWEVER, THAT NOTWITHSTANDING SUCH DATE, SUBJECT TO THE RECEIPT BY THE
- ----------------------------------------------------------------------
ADMINISTRATIVE AGENT OF THIS AMENDMENT DULY EXECUTED BY THE BORROWER, THE
- -------------------------------------------------------------------------
REQUIRED LENDERS AND THE ADMINISTRATIVE AGENT, THE AMENDMENTS SET FORTH IN
- --------------------------------------------------------------------------
PARAGRAPH 1 AND PARAGRAPH 2 ABOVE SHALL BE EFFECTIVE AS OF DECEMBER 31, 1998.
- -----------------------------------------------------------------------------
ARTICLE V. EXCEPT AS EXPRESSLY AMENDED HEREBY, THE LOAN DOCUMENTS ARE AND
- ------------------------------------------------------------------------------
SHALL REMAIN IN FULL FORCE AND EFFECT, AND NO AMENDMENT IN RESPECT OF ANY TERM
- ------------------------------------------------------------------------------
OR CONDITION OF ANY LOAN DOCUMENT SHALL BE DEEMED TO BE AN AMENDMENT IN RESPECT
- -------------------------------------------------------------------------------
OF ANY OTHER TERM OR CONDITION CONTAINED IN ANY LOAN DOCUMENT.
- --------------------------------------------------------------
ARTICLE VI. THE BORROWER HEREBY AGREES TO PAY PROMPTLY ALL EXPENSES OF THE
- ------------------------------------------------------------------------------
ADMINISTRATIVE AGENT IN CONNECTION WITH THIS AMENDMENT, INCLUDING THE FEES AND
- ------------------------------------------------------------------------------
DISBURSEMENTS OF SPECIAL COUNSEL TO THE ADMINISTRATIVE AGENT.
- -------------------------------------------------------------
ARTICLE VII. THIS AMENDMENT MAY BE EXECUTED IN ANY NUMBER OF COUNTERPARTS,
- -----------------------------------------------------------------------------
ALL OF WHICH, TAKEN TOGETHER, SHALL CONSTITUTE ONE AGREEMENT.
- -------------------------------------------------------------
ARTICLE VIII. THIS AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED AND
- ----------------------------------------------------------------------
INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK, WITHOUT
- --------------------------------------------------------------------------
REGARD TO PRINCIPLES OF CONFLICT OF LAWS.
- -----------------------------------------
2
<PAGE>
AS EVIDENCE of the agreement by the parties hereto to the terms and
conditions herein contained, each such party has caused this Amendment to be
executed on its behalf.
EVEREN CAPITAL CORPORATION
By: _________________________________
Name:________________________________
Title:_______________________________
THE BANK OF NEW YORK, in its capacity as
a Lender and the Administrative Agent
By:__________________________________
Name:________________________________
Title:_______________________________
LASALLE NATIONAL BANK, in its capacity as a Lender
and the Documentation Agent
By:__________________________________
Name:________________________________
Title:_______________________________
3
<PAGE>
EXHIBIT 10.25
EVEREN CAPITAL CORPORATION
1996 EMPLOYEE PERIODIC PAYROLL STOCK PURCHASE PLAN
(AS AMENDED AND RESTATED EFFECTIVE AS OF JANUARY 1, 1999)
1. PURPOSE. EVEREN Capital Corporation, a Delaware corporation
(the "Company"), hereby adopts the EVEREN Capital Corporation 1996
Employee Periodic Payroll Stock Purchase Plan (the "Plan"). The
purpose of the Plan is to provide an opportunity for the employees of
the Company and any qualified subsidiaries to purchase shares of the
common stock, par value $.01 per share ("Common Stock"), of the
Company through voluntary automatic payroll deductions and cash
contributions, thereby attracting, retaining and rewarding such
persons and strengthening the mutuality of interest between such
persons and the Company's stockholders.
2. SHARES SUBJECT TO PLAN. An aggregate of 500,000 shares (the
"Shares") of Common Stock of the Company may be sold pursuant to the
Plan. Such Shares may be authorized but unissued Common Stock,
treasury shares or Common Stock reacquired by the Company or purchased
in the open market.
3. ADMINISTRATION. The Plan shall be administered by a
committee (the "Committee") which shall be the Compensation Committee
of the board of directors (the "Board of Directors" or "Board") or
another committee consisting of not less than two directors of the
Company appointed by the Board of Directors, and, if the Board of
Directors has determined that the Plan shall comply with Securities
and Exchange Regulation 17 C.F.R. (S)240.16b-3 or any successor
regulation, none of such persons shall participate in the Plan and
each such person shall qualify as a disinterested person within the
meaning of 17 C.F.R. (S)240.16b-3 or any successor regulation. The
Committee is authorized, subject to the provisions of the Plan, to
establish such rules and regulations as it deems necessary for the
proper administration of the Plan and to make such determinations and
interpretations and to take such action in connection with the Plan
and any Shares made available hereunder as it deems necessary or
advisable. The Committee shall have the right to determine prior to
any Offering Period (as defined in Section 9 below) the maximum number
of Shares which may be offered during the Offering Period and the
manner of allocating the Shares among eligible employees.
All determinations and interpretations made by the Committee shall be binding
and conclusive on all participating employees (each a "Participant") and their
legal representatives. No member of the Board, no member of the Committee and
no employee of the Company or any subsidiary shall be liable for any act or
failure to act hereunder, by any other member or employee or by any agent to
whom duties in connection with the administration of this Plan have been
delegated or, except in circumstances involving his or her bad faith, gross
negligence or fraud, for any act or failure to act by the member or employee.
<PAGE>
4. ELIGIBILITY. All regular full and part-time employees of
the Company, and of each qualified subsidiary of the Company, other
than:
(a) employees whose customary employment is 20 hours or less per
week; and
(b) any employee who, immediately after any purchase of shares would
own stock possessing 5% or more of the total combined voting power or value
of all classes of stock of the Company
shall be eligible to participate in the Plan as of the first "Enrollment Date"
(as defined in Section 5 below) immediately following the later of (a) the
eligible employee's initial date of hire or (b) the effective date of the Plan's
adoption. For the purposes of this Plan, the term "qualified subsidiary" means
any subsidiary, 50% or more of the total combined voting power of all classes of
stock of which is now owned or hereafter acquired by the Company or any such
qualified subsidiary. For purposes of this Section 4, the provisions of Section
424(d) of the Internal Revenue Code of 1986, as amended (the "Code"), shall
apply in determining the stock ownership of an employee, and the shares which an
employee may purchase under outstanding rights or options shall be treated as
shares owned by the employee.
5. PARTICIPATION. Prior to any "Enrollment Date" an eligible
employee may elect to participate in the Plan as of such date.
Enrollment Dates shall occur on the first day of each Offering Period
(as defined in Section 9). Any such election shall be made by
completing and delivering to the Company's Compensation and Benefits
Department (the "Department") an enrollment and payroll deduction
authorization form prior to such Enrollment Date, authorizing payroll
deductions in such amounts as the employee may request but in no event
less than any minimum nor more than any maximum amounts specified from
time to time by the Committee. During an Offering Period, a
Participant may at any time, but effective as of the next available
payroll period, increase or decrease his/her payroll deductions with
respect to the Offering Period by completing and delivering to the
Department a revised payroll deduction authorization form; provided,
that (a) changes in payroll deductions shall not be permitted to the
extent that they would result in total payroll deductions below any
minimum or above any maximum amounts specified by the Committee; and
(b) an eligible employee who elects not to participate in the Plan
through payroll deductions as of any Enrollment Date may not
participate through payroll deductions in the Plan until the next
Enrollment Date (at which time the filing of a new election form in
accordance with this Section 5 will be required).
Regardless of an eligible employee's election to participate in the Plan
through payroll deductions, any eligible employee may also participate in the
Plan at any time during an Offering Period by making periodic cash contributions
to the Plan during such period through the delivery to the Department of a
personal check for the amount of each contribution. Subject to the right-to-
purchase limitation described in Section 9(b) below, the monthly cash
contribution made by any Participant or eligible employee through a payroll
deduction shall be no less than $50 and no more than $2,000.
2
<PAGE>
6. PAYROLL DEDUCTION AND CASH CONTRIBUTION ACCOUNTS. The Company shall
establish on its books and records a "Payroll Deduction Account" for each
Participant and shall credit to such account all payroll deductions made on
behalf of each Participant (as described in Sections 12 and 13 below). No
interest shall be credited to any Payroll Deduction Account.
The Company shall also establish on its books and records a separate "Cash
Contribution Account" for each Participant and credit to such account all
voluntary cash contributions made by the Participant during an Offering Period.
No interest shall be credited to any Cash Contribution Account. All cash
dividends paid on shares of Company Stock held in a participant's brokerage or
Plan Share Account will be reinvested (as described in Section 11 below).
7. WITHDRAWAL. A non-terminated Participant may withdraw from an Offering
Period at any time by completing and delivering a written notice to the Company.
Upon receipt of such notice, payroll deductions on behalf of the Participant
shall be discontinued commencing with the next available payroll period. Amounts
credited to the Payroll Deduction or Cash Contribution Account of any
Participant who withdraws or ceases to participate in the Plan (including any
employee who ceases to participate in the Plan for a non-termination of
employment reason (e.g., a prolonged leave of absence) shall be used to purchase
Shares as described in Section 10 below. An employee may resume participation in
the Plan at the next Enrollment Date, by filing a new election form in
accordance with Section 5.
8. TERMINATION OF EMPLOYMENT. The termination of a Participant's
employment with the Company or any designated subsidiary will constitute a
withdrawal from the Plan. Voluntary cash contributions to the Plan will not be
accepted following any such termination of employment. Payroll deductions and/or
voluntary cash contributions credited to such Participant's account during the
Offering Period but not yet used to purchase shares shall be used automatically
on the "Share Purchase Date" (see Section 9 below), and the maximum number of
full and fractional shares shall be purchased for such participant at the
applicable Purchase Price. All Plan accounts originally established by the
Company on behalf of the terminated Participant will be automatically terminated
and certificates for whole Shares purchased under the Plan will be issued as
soon as practicable after such Participant's termination. Fractional interests
in shares will be paid to the Participant in cash at the same time certificates
are issued. If a share certificate is issued to a Participant, the Participant
will be required to notify the Company of his/her disposition of such shares, if
his/her disposition occurs within time periods established by the Company.
9. OFFERING PERIODS. The Plan shall be implemented by consecutive three-
month Offering Periods with a new Offering Period commencing on the first day of
each January, April, July and October during the term of the Plan, or on such
other date as the Committee shall determine, and continuing thereafter to the
end of such period, subject to termination in accordance with Section 19 hereof.
"Trading day" shall mean a day on which the New York Stock Exchange is open for
trading. The Committee shall have the power to change the duration of Offering
Periods (including the commencement dates thereof) with respect to future
offerings. The last day of each Offering Period prior to the termination of the
Plan (or such other trading date as the Committee shall determine) shall
constitute the purchase date (the "Share Purchase Date") on which each
Participant for whom a Payroll Deduction Account or Cash Contribution Account
has been
3
<PAGE>
maintained shall purchase the number of Shares determined under Section
10(a). Notwithstanding the foregoing, the Company shall not permit the exercise
of any right to purchase Shares:
(a) by an employee who, immediately after such purchase would
own shares possessing 5% or more of the total combined voting power or
value of all classes of stock of the Company; or
(b) which would permit an employee's rights to purchase shares
under this Plan, or under any other qualified employee stock purchase
plan maintained by the Company or any parent or subsidiary of the
Company, to accrue at a rate in excess of $25,000 of the fair market
value of such shares determined at the time such rights are granted
for each calendar year in which the right is outstanding at any time.
For the purposes of paragraph (a), the provisions of Code Section 424(d) shall
apply in determining the stock ownership of an employee, and the shares which an
employee may purchase under outstanding rights or options shall be treated as
shares owned by the employee.
10. PURCHASE OF SHARES.
(a) Subject to the limitations set forth in Sections 5,7, 8 and 9,
each Participant who is participating in the Plan as of any Enrollment Date
shall purchase from the Company as many whole Shares (plus any fractional
interest in a Share) as may be purchased with the combined amounts credited
to his or her Payroll Deduction and Cash Contribution Accounts as of the
day immediately preceding the applicable Share Purchase Date (or such other
date as the Committee shall determine) (the "Cutoff Date"). Participants
may purchase Shares only through payroll deductions and cash contributions
to such accounts.
(b) The "Purchase Price" for Shares purchased under the Plan from the
Participant's Payroll Deduction Account shall be 92.5% of the lesser of the
fair market value of shares of Common Stock on the first trading day of
each calendar quarter or the last trading day of each calendar quarter.
The Purchase Price for Shares purchased from a Participant's Cash
Contribution Account will be 100% of the fair market value of such shares
as of the Share Purchase Date (or such different purchase price established
by the Committee that complies with the provisions of Code Section 423).
For this purpose, the fair market value shall be the closing price for such
date as reported in The Wall Street Journal, Midwest Edition. The
-----------------------
Committee shall have the authority to establish a different Purchase Price
as long as any such Purchase Price complies with (i) the provisions of
Section 423 of the Code.
(c) On each Share Purchase Date, the amount credited to each
Participant's Payroll Deduction and Cash Contribution Accounts as of the
immediately preceding Cutoff Date shall be applied to purchase as many
whole Shares (plus any fractional interest in a Share) as may be purchased
with such amount at the applicable Purchase Price. Any amounts remaining in
a Participant's Payroll Deduction Account and/or Cash Contribution Account
as of the relevant Cutoff Date in excess of the amount that may properly be
applied to the purchase of Shares shall be refunded to the Participant as
soon as practicable.
4
<PAGE>
11. DIVIDEND REINVESTMENT. All cash dividends paid on shares of Common
Stock held in a Participant's brokerage or Plan Share Account (as described in
Section 12 below) will be reinvested. The Purchase Price for Shares purchased
with dividends will be 100% of the fair market value of such Shares as of the
Dividend Payment Date (or such different purchase price established by the
Committee that complies with the provisions of Code Section 423). For this
purpose, the fair market value shall be the closing price for such date as
reported in The Wall Street Journal, Midwest Edition. The Committee shall have
-----------------------
the authority to establish a different Purchase Price as long as any such
Purchase Price complies with (i) the provisions of Section 423 of the Code and
(ii) 17 C.F.R. (S)240.16b-3 if the Board of Directors has determined that the
Plan shall comply with such rule.
12. BROKERAGE ACCOUNTS OR PLAN SHARE ACCOUNTS. By enrolling in the Plan,
each Participant shall be deemed to have authorized the establishment of a
brokerage account on his or her behalf at any securities brokerage firm
(including, without limitation, any Company affiliate) selected by the
Department. Alternatively, the Department may provide for Plan share accounts
("Plan Share Accounts") for Participants to be established by the Company or by
an outside entity selected by the Department which is not a brokerage firm.
Shares purchased by a Participant pursuant to the Plan shall be held in the
Participant's brokerage or Plan Share Account in street name, or if the employee
so indicates on his or her payroll deduction authorization form, in the
Participant's name or the Participant's name jointly with a member of the
Participant's family, with right of survivorship.
13. RIGHTS AS STOCKHOLDER. A Participant shall have no rights as a
stockholder with respect to Shares which may be issued under this Plan until
payment for such Shares has been completed at the close of business on the
relevant Share Purchase Date. Cash dividends paid on Shares held in a
Participant's Plan Share Account will be reinvested and used to purchase Shares
as described in Section 11.
14. CERTIFICATES. Certificates for Shares purchased under the Plan will
not be issued automatically to active participants. However, certificates for
whole Shares purchased shall be issued as soon as practicable following a
Participant's written request. The Company may assess or impose a reasonable
charge for the issuance of such certificates. Fractional interests in Shares
shall be carried forward in a Participant's Plan Share Account until they equal
one whole Share or until the termination of the Participant's participation in
the Plan, in which event an amount in cash equal to the value of such fractional
interest shall be paid to the Participant in cash. If a share certificate is
issued to a Participant, the Participant will be required to notify the Company
of his/her disposition of such shares, if his/her disposition occurs within time
periods established by the Company.
15. RIGHTS NOT TRANSFERABLE. Rights granted under this Plan are not
transferable by a Participant other than by will or the laws of descent and
distribution, and are exercisable during an employee's lifetime only by the
Participant.
16. EMPLOYMENT RIGHTS. Neither participation in the Plan, nor the exercise
of any right granted under the Plan, shall be made a condition of employment, or
of continued employment with
5
<PAGE>
the Company or any subsidiary. Participation in the Plan does not limit the
right of the Company or any subsidiary to terminate a Participant's employment
at any time or give any right to a Participant to remain employed by the Company
or any subsidiary in any particular position or at any particular rate of
remuneration.
17. APPLICATION OF FUNDS. All funds received by the Company for Shares
sold by the Company on any Share Purchase Date pursuant to this Plan may be used
for any corporate purpose.
18. WITHHOLDING TAX AND/OR REQUIRING PAYMENT OF TAXES. The Company shall
have the right to withhold with respect to any payments made to Participants
under the Plan any taxes required by law to be withheld with regard to such
payments and/or to require, prior to the delivery of any shares of Common Stock,
payment by Participants of any taxes required by law with respect to the
issuance of delivery of such shares (or any portion thereof) for which such
taxes have not been withheld.
19. AMENDMENTS AND TERMINATION. The Board of Directors may amend the Plan
at any time, provided that no such amendment shall be effective unless approved
within 12 months after the date of adoption of such amendment by the affirmative
vote of stockholders holding the majority of the outstanding shares of Common
Stock entitled to vote if such stockholder approval is required for the Plan to
continue to comply with Code Section 423. The Board of Directors may suspend the
Plan or discontinue the Plan at any time. Upon termination of the Plan, all
payroll deductions shall cease and all amounts then credited to the
Participants' Payroll Deduction Accounts shall be equitably applied to the
purchase of whole Shares then available for sale, and any remaining amounts
shall be promptly refunded to the Participants.
20. APPLICABLE LAWS. This Plan, and all rights granted hereunder, are
intended to meet the requirements of an "employee stock purchase plan" under
Code Section 423, as from time to time amended, and the Plan shall be construed
and interpreted to accomplish this intent. The delivery or issuance of any
shares of Common Stock may be postponed by the Company for such period as may be
required to comply with the applicable requirements under the Federal and state
securities laws, and any applicable listing requirements of any national
securities exchange (in the event the Company is or becomes subject to such laws
or requirements prior to the termination of this Plan) and with all requirements
under any other law or regulation applicable to the issuance or delivery of such
shares. Further, the Company shall not be obligated to deliver or issue any
shares of Common Stock if the delivery or issuance of such shares shall
constitute a violation of any provision of any national securities exchange (in
the event the Company becomes subject to the provisions of such an exchange
prior to the termination of this Plan) or any law or regulation of any
governmental authority. Sales of Shares under the Plan are subject to, and
shall be accomplished only in accordance with, the requirements of all
applicable securities and other laws.
21. CHANGES IN CAPITALIZATION AND SIMILAR CHANGES. In the event of any
change in the outstanding shares of Common Stock by reason of any stock dividend
or split, recapitalization, merger, consolidation, combination or exchange of
shares or other similar corporate change, the maximum aggregate number and class
of shares available for sale under the Plan shall be equitably adjusted by the
Committee. Such determination of the Committee shall be conclusive.
6
<PAGE>
22. EXPENSES. Except to the extent otherwise provided herein, all expenses
of administering the Plan, including expenses incurred in connection with any
purchase of Shares in the open market for sale to Participants, shall be borne
by the Company and its subsidiaries.
23. ARBITRATION OF DISPUTES. Any dispute between the Company or any of its
affiliates and any Participant relating to this Plan shall be submitted to
arbitration before the National Association of Securities Dealers, Inc. or the
New York Stock Exchange, Inc. in accordance with its rules and regulations.
24. EFFECTIVE DATE AND STOCKHOLDER APPROVAL. The Plan initially became
effective on April 15, 1996. The amended and restated Plan became effective on
January 1, 1999.
7
<PAGE>
Exhibit 12
EVEREN CAPITAL CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(in millions)
(unaudited)
<TABLE>
<CAPTION>
Year ended December 31,
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
EARNINGS:
Pretax Income (loss) $115.7 $ 75.0 $107.8 $(22.0) $(12.7)
Fixed Charges 65.8 47.1 45.1 68.1 58.0
------------------------------------------------------
Earnings $181.5 $122.1 $152.9 $ 46.1 $ 45.3
======================================================
FIXED CHARGES:
Interest expense $ 54.2 $ 36.6 $ 34.0 $ 52.5 $ 44.8
Approximate portion of rental expense
representative of an interest factor 11.6 10.5 11.1 15.6 13.2
------------------------------------------------------
Fixed Charges $ 65.8 $ 47.1 $ 45.1 $ 68.1 $ 58.0
======================================================
Ratio of earnings to fixed charges 2.8 2.6 3.4 0.68 0.78
======================================================
Deficiency of earnings available to cover
fixed charges $ - $ - $(22.0) $(12.7) $ -
======================================================
</TABLE>
<PAGE>
Exhibit 21.0
EVEREN CAPITAL CORPORATION
SUBSIDIARIES
<TABLE>
<CAPTION>
STATE OF
--------
NAME INCORPORATION
- ---- -------------
<S> <C>
EVEREN Thrift Holdings, Inc. ..................................................Delaware
EVEREN Securities Holdings, Inc. ..............................................Delaware
Bateman Eichler, Hill Richards Realty Services, Inc. ...................California
Bateman Eichler, Hill Richards Housing Investors, Inc. ............California
Bateman Eichler, Hill Richards Realty Co., Incorporated ................California
BPL Holdings, Inc. .......................................................Delaware
Boettcher FTZ Building, Inc. ........................................Colorado
BPL Corporation. ....................................................Delaware
Seven Sisters Corp. .................................................Delaware
EVEREN Mortgage Group, Inc. ..............................................Delaware
Gateway Mortgage Acceptance Corporation..............................Delaware
EVEREN Securities, Inc. ..................................................Delaware
ESI Fund Management, Inc. ................................................Delaware
ESI Insurance Agency, Inc. of Colorado....................................Colorado
ESI Insurance Agency, Inc. of Hawaii........................................Hawaii
ESI Insurance Agency, Inc. of Nevada........................................Nevada
ESI Insurance Agency, Inc. of Utah............................................Utah
ESI Insurance Agency, Inc. of Wyoming......................................Wyoming
ESI (MA) Insurance Agency. Inc. .....................................Massachusetts
Prescott Realty Services, Inc. ...............................................Ohio
Bateman Eichler, Hill Richards, Inc. (dormant)............................Delaware
Boettcher & Company, Inc. (dormant).......................................Delaware
Blunt, Ellis & Loewi, Inc. (dormant)......................................Delaware
Lovett Underwood Neuhaus & Webb, Inc. (dormant)...........................Delaware
Prescott, Ball & Turben, Inc. (dormant)...................................Delaware
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<CIK> 0000945770
<NAME> EVEREN CAPITAL CORPORATION
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 19,995,000
<SECURITIES> 143,579,000
<RECEIVABLES> 112,236,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 47,423,000
<DEPRECIATION> 0
<TOTAL-ASSETS> 2,169,256,000
<CURRENT-LIABILITIES> 271,000,000
<BONDS> 0
0
0
<COMMON> 361,000
<OTHER-SE> 408,275,000
<TOTAL-LIABILITY-AND-EQUITY> 2,169,256,000
<SALES> 0
<TOTAL-REVENUES> 809,630,000
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 659,512,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 54,205,000
<INCOME-PRETAX> 115,693,000
<INCOME-TAX> 44,358,000
<INCOME-CONTINUING> 71,335,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 71,335,000
<EPS-PRIMARY> 2.16
<EPS-DILUTED> 2.01
</TABLE>
