<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED March 31, 1999 OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _________ TO __________
Commission File Number 1-13940
EVEREN CAPITAL CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 36-4019175
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
77 West Wacker Drive
Chicago, Illinois 60601
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (312) 574-6000
Indicate by checkmark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [_]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date. Shares outstanding as of
May 6, 1999:
$.01 par value common stock - 35,237,962
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INDEX
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Page
----
PART I. Financial Information
Item 1. Financial Statements (unaudited):
Consolidated Statements of Financial Condition -
March 31, 1999 and December 31, 1998...................... 3
Consolidated Statements of Income -
Three months ended March 31, 1999 and 1998................ 4
Consolidated Statement of Changes in Stockholders' Equity -
Three months ended March 31, 1999......................... 5
Consolidated Statements of Cash Flows - Three months
ended March 31, 1999 and 1998............................. 6
Notes to Consolidated Financial Statements.................. 7
Item 2. Management's Discussion and Analysis -
Results of Operations
Liquidity and Capital Resources............................. 9
Item 3. Quantitative and Qualitative Disclosures About Market Risks... 22
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................. 25
Item 6. Exhibits and Reports on Form 8-K.............................. 25
SIGNATURES............................................................. 27
2
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
EVEREN CAPITAL CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Financial Condition
(unaudited)
(in thousands, except share data)
March 31, December 31,
Assets 1999 1998
----------- ------------
Cash and cash equivalents $ 14,757 $ 19,995
Receivables from:
Customers 1,241,116 1,086,816
Brokers and dealers 86,322 115,720
Others 121,091 112,236
Securities owned, at market 364,202 143,579
Securities purchased under agreements to resell 453,695 478,553
Investment in mortgage-backed certificates
available-for-sale, at fair value 82,715 91,881
Fixed assets, net 53,409 47,423
Other assets 77,294 73,053
---------- ----------
$2,494,601 $2,169,256
========== ==========
Liabilities and Stockholders' Equity
Liabilities:
Bank loans payable $ 581,000 $ 271,000
Payables to customers 279,831 286,300
Securities loaned 292,392 325,531
Collateralized mortgage obligations 75,722 84,312
Securities sold, not yet purchased, at market 133,424 60,069
Securities sold under agreements to repurchase 481,876 453,809
Accounts payable, accrued expenses and other
liabilities 230,382 279,599
---------- ----------
$2,074,627 $1,760,620
========== ==========
Stockholders' Equity:
Common stock, $.01 par value per share;
100,000,000 shares authorized, 36,798,085
and 36,092,936 outstanding at March 31,
1999 and December 31, 1998, respectively 367 361
Additional paid-in capital 305,473 290,778
Unearned cost of restricted stock (25,689) (14,165)
Treasury stock, at cost, 1,354,621 and 1,160,008
shares at March 31, 1999 and December 31, 1998,
respectively (15,003) (11,932)
Retained earnings (since January 1, 1996) 158,630 147,069
Unrealized loss on available-for-sale securities,
net of income taxes (3,804) (3,475)
---------- ----------
419,974 408,636
---------- ----------
$2,494,601 $2,169,256
========== ==========
See accompanying notes to consolidated financial statements.
3
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EVEREN CAPITAL CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Income
Three months ended March 31, 1999 and 1998
(unaudited)
(in thousands)
1999 1998
-------- --------
Revenue:
Commissions $ 99,432 $ 90,843
Principal transactions 39,213 29,632
Investment banking 14,822 21,817
Asset management 29,758 24,546
Other 6,501 14,972
Interest 26,386 26,645
-------- --------
Total revenue 216,112 208,455
Interest expense 13,198 13,819
-------- --------
Net revenue 202,914 194,636
Non-interest expenses:
Compensation and benefits 121,140 114,913
Brokerage and clearance 12,582 5,502
Communications 14,367 13,270
Occupancy and equipment 12,142 12,076
Promotional 6,061 6,440
Other 14,360 16,167
-------- --------
Total non-interest expenses 180,652 168,368
-------- --------
Income before income taxes 22,262 26,268
Income tax provision 8,245 10,127
-------- --------
Net income $ 14,017 $ 16,141
======== ========
Weighted average common shares outstanding:
Basic 32,458,823 32,198,260
========== ==========
Diluted 35,408,125 34,862,300
========== ==========
Net earnings per share of common stock:
Basic $ .42 $ .50
===== =====
Diluted $ .40 $ .46
===== =====
See accompanying notes to consolidated financial statements.
4
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EVEREN CAPITAL CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity
Three months ended March 31, 1999
(unaudited)
(in thousands)
<TABLE>
<CAPTION>
Unearned
Additional cost of Retained Unrealized loss Total
Paid-In Restricted Treasury Earnings on available- Stockholders'
Common Stock Capital Stock Stock (since 1/1/96) for-sale securities Equity
------------ ---------- ---------- -------- -------------- ------------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1998 $ 361 $290,778 $(14,165) $(11,932) $147,069 $(3,475) $408,636
Issuance of additional common stock 6 14,695 (11,524) 3,177
Dividends paid (2,456) (2,456)
Purchase of treasury stock (3,071) (3,071)
Comprehensive income:
Net income 14,017
Other comprehensive income
net of tax:
Unrealized loss on available-
for-sale securities (329)
Comprehensive income 13,688
------- -------- -------- -------- -------- ------- --------
Balances at March 31, 1999 $ 367 $305,473 $(25,689) $(15,003) $158,630 $(3,804) $419,974
======= ======== ======== ======== ======== ======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
5
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EVEREN CAPITAL CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Three months ended March 31, 1999 and 1998
(unaudited)
(in thousands)
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 14,017 $ 16,141
Adjustments to reconcile net income to net cash flows
from operating activities: -
Depreciation and amortization 6,547 4,760
Deferred income taxes (1,151) 20
Change in assets and liabilities:
Cash and securities segregated under federal
and other regulations - (303)
Receivables from/payables to:
Customers (160,769) 42,006
Brokers and dealers 29,398 86,839
Others 8,263 (11,577)
Securities borrowed - (17,336)
Securities owned (220,623) (27,571)
Securities purchased under agreements to resell 24,858 78,359
Other assets (4,886) 6,433
Securities loaned (33,139) 68,680
Securities sold, not yet purchased 73,355 (51,445)
Securities sold under agreements to repurchase 28,067 (38,385)
Accounts payable, accrued expenses,
and other liabilities (30,647) (22,341)
--------- ---------
Net cash flows from (used in) operating activities (300,644) 134,280
--------- ---------
Cash flows from investing activities:
Acquisition of Principal Securities, net of cash acquired - (51,308)
Collections of principal on investments in mortgage-
backed securities 8,832 7,120
Acquisition of fixed assets, net (10,517) (4,909)
--------- ---------
Net cash flows used in investing activities (1,685) (49,097)
--------- ---------
Cash flows from financing activities:
Dividends paid (2,456) (1,896)
Proceeds from common stock issuance 1,332 7,218
Repayment of collateralized mortgage obligations (8,714) (7,025)
Increase (decrease) in bank loans payable, net 310,000 (49,000)
Purchase of treasury stock (3,071) (208)
--------- ---------
Net cash flows from (used in) financing activities 297,091 (50,911)
--------- ---------
Increase (decrease) in cash and cash equivalents (5,238) 34,272
Cash and cash equivalents at beginning of the period 19,995 36,248
--------- ---------
Cash and cash equivalents at end of the period $ 14,757 $ 70,520
========= =========
Supplemental disclosure of cash flow information:
Interest paid $ 13,211 $ 10,351
========= =========
Income taxes paid $ 10,826 $ 4,433
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
6
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EVEREN CAPITAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Three months ended March 31, 1999
(unaudited)
- --------------------------------------------------------------------------------
(1) General Information
-------------------
The consolidated financial statements, prepared in accordance with
generally accepted accounting principles, include the accounts of EVEREN
Capital Corporation and its subsidiaries (the "Company"). The consolidated
financial statements are unaudited. However, in the opinion of management,
such financial statements include all adjustments, consisting of normal
recurring accruals, necessary for the fair presentation of the accompanying
consolidated financial statements.
Certain information and footnotes normally included in financial statements
prepared in accordance with generally accepted accounting principles have
been omitted pursuant to Securities and Exchange Commission ("SEC") rules
and regulations. Accordingly, these financial statements should be read in
conjunction with the financial statements and notes thereto included in the
Company's 1998 Annual Report on Form 10-K.
All material intercompany balances and transactions have been eliminated.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts. Actual results could differ
from those estimates. The results of operations for interim periods are not
necessarily indicative of results for the entire year.
Certain reclassifications have been made in the prior period financial
statements to conform to the current period presentation.
(2) Net Capital Requirements and Dividend Restrictions
--------------------------------------------------
In accordance with the rules and regulations under the Securities Exchange
Act of 1934 for registered brokers and dealers, the net capital rules of
the New York Stock Exchange, and Regulation 1.17 of the Commodity Futures
Trading Commission, EVEREN Securities must maintain minimum net capital.
EVEREN Securities operates under the alternative method which requires
minimum net capital, as defined, equal to the greater of $1 million or 2%
of aggregate debit items arising from customer transactions, as defined.
Such net capital requirements could restrict the ability of a subsidiary to
pay dividends to its parent. At March 31, 1999, EVEREN Securities had net
capital of approximately $173.2 million, which was approximately $148.4
million in excess of its required minimum net capital.
(3) Commitments and Contingencies
-----------------------------
The Company has been named as a defendant in various legal actions in
connection with its securities and commodities business. Some of these
lawsuits involve claims for substantial amounts. Although the ultimate
outcome of these suits cannot be ascertained at this time, it is the
opinion of management, after consultation with outside counsel, that the
resolution of such suits will not have a material adverse effect on the
consolidated financial position of the Company, but may be material to the
Company's operating
7
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EVEREN CAPITAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Three months ended March 31, 1999
(unaudited)
- --------------------------------------------------------------------------------
results for any particular period, depending upon the level of the
Company's income for such period.
In the normal course of business, the Company enters into various
contractual commitments involving future settlement. These include futures,
forwards, options and securities sold, not yet purchased. These
transactions are executed either over-the-counter or are exchange-traded,
and are used primarily to hedge the Company's securities inventory. Many of
these products have maturities that do not extend beyond one year.
Transactions relating to such commitments which were open at March 31,
1999, and subsequently settled, had no material effect on the consolidated
financial statements.
(4) Subsequent Event
----------------
On April 26, 1999, the Company entered into a definitive agreement to be
acquired by First Union Corporation ("First Union"). The transaction has a
fixed exchange rate of .555 shares of First Union common stock for each
EVEREN share at the closing date.
The acquisition will be accounted for as a purchase and is expected to
close in the third quarter of 1999, subject to EVEREN shareholder and
regulatory approvals and other conditions of closing.
8
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion should be read in conjunction with the
Company's consolidated financial statements and notes thereto contained in Item
1 of this report. In addition to historical information, the following
Management's Discussion and Analysis of Financial Condition and Results of
Operations contains forward-looking statements. Such forward-looking statements
are within the meaning of that term in Section 27A of the Securities Act of
1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended. Such statements may include, but are not limited to, projections of
revenues, income or loss, capital expenditures, plans for future operations,
financing needs or plans, and plans relating to products or services of the
Company, as well as assumptions relating to the foregoing.
Forward-looking statements are inherently subject to risks and
uncertainties, some of which cannot be predicted or quantified. Future events
and actual results could differ materially from those contemplated by the
forward-looking statements. Statements in this quarterly report, including the
notes to the consolidated financial statements and "Management's Discussion and
Analysis of Financial Condition and Results of Operations," describe factors,
that could contribute to or cause such differences. Additional factors that
could cause actual results to differ materially from those expressed in such
forward-looking statements include those discussed below.
Business Environment
The Company's principal business activity, retail broker-dealer
operations, as well as its investment banking, institutional sales, investment
advisory, and other services, are highly competitive and subject to various
risks. The securities market is affected by general economic and market
conditions, including fluctuations in interest rates, the volume of securities
trading, price levels of securities and the flow of investor funds into and out
of mutual funds, and by factors that apply to particular industries, such as
technological advances and changes in the regulatory environment. Substantial
fluctuations can occur and have occurred in the Company's operating results due
to these factors and other factors. In periods of reduced market activity,
profitability has been and is likely to be adversely affected. Accordingly, net
earnings for any period should not be considered representative of any other
period.
The favorable market and economic conditions which characterized 1998
continued throughout the first quarter of 1999, contributing to higher industry-
wide securities revenues and net income. Conditions in the U.S. trading markets
continued to be favorable, as moderate economic growth, low levels of
unemployment, and continued growth in corporate profits generally prevailed.
Despite these conditions, the level of inflation has remained relatively low.
The performance of U.S. equity markets continued to be very positive in the
first quarter of 1999, primarily resulting from strong corporate earnings, high
levels of cash inflows into mutual funds, and a continued strong trading volume.
Company Developments
On March 25, 1999, First Union Corporation ("First Union") and the
Company announced an agreement to form an asset management joint venture that
would combine the Evergreen mutual fund complex with the Mentor Investment
Group, of which the Company held a 20% interest. Concurrent with entering into
this agreement, the Company's ownership interest in Mentor was reset to 45%
effective April 1, 1999. Under this agreement, the Company and
9
<PAGE>
First Union will contribute their respective current ownership interests in
Evergreen and Mentor and will receive 5% and 95% interests in the joint venture,
respectively. The transaction is subject to regulatory and other approvals and
is expected to be completed in the third quarter of 1999.
On April 26, 1999, the Company entered into a definitive agreement to be
acquired by First Union. The transaction has a fixed exchange rate of .555
shares of First Union common stock for each EVEREN share at the closing date.
The acquisition will be accounted for as a purchase and is expected to close in
the third quarter of 1999, subject to EVEREN shareholder and regulatory
approvals and other conditions of closing.
Consistent with the generally strong economic and market conditions seen
throughout the securities industry in the first quarter of 1999, the Company
reported strong growth in both its retail brokerage and asset management
activities. The favorable industry conditions has resulted in considerable
growth in both the number of investment consultants and their productivity.
Year 2000
The Year 2000 problem is the result of computer programs being written
using two digits (rather than four) to define the applicable year. Computer
programs that have time-sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000. This could result in a major system
failure or miscalculations.
The failure of the Company's technology systems relating to a Year 2000
problem would likely have a material adverse effect on the Company's business,
results of operations, or financial condition. This effect could include
disruption of normal business transactions, such as the settlement, execution,
processing, and recording of trades in securities and commodities. The Year 2000
problem could also increase the Company's exposure to risk and its need for
liquidity.
The Company fully recognizes the importance of addressing Year 2000
technology issues and has committed significant funding and resources to the
project. Overall, the firm is comfortable that it is making a reasonable effort
to ensure that all affected areas are identified and, if necessary, remediated.
The Company's Year 2000 project is directed by the Company's Chief Information
Officer, who, utilizing a team of technology professionals, has conducted a
comprehensive review of its computer systems to identify the systems that could
be affected by the Year 2000 issue and has developed an implementation plan to
address the issue. This plan involves the following phases: awareness,
inventory/assessment, renovation, validation, and implementation. The awareness
phase defined and internally publicized the Year 2000 issue. Management support
was obtained and plans were put in place to develop the project. The
inventory/assessment phase consisted of conducting a thorough inventory of
computer applications used in each of the Company's departments. With the
assistance of technology professionals, each department compiled a complete
inventory of all software and hardware 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
10
<PAGE>
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.
In addition, the Company is actively working with all of its major
external counterparties and suppliers to assess their compliance efforts and the
Company's exposure to them. The Company's major external counterparty is BETA,
the provider of the Company's core brokerage system. The Company's external
interface (i.e., point-to-point) testing is being conducted by BETA on the
Company's behalf. The Company, with BETA, has participated in point-to-point
testing with national securities exchanges and utilities and in industry-wide
testing in March and April 1999. 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 portion of the current year's technology budget has been allocated to
the Year 2000 compliance project. As of the end of the first quarter 1999, the
total estimated expenditures associated with the entire Year 2000 project were
expected to be approximately $6.5 million, of which approximately $2.5 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, and miscellaneous income.
Interest income primarily represents interest earned on customer margin
11
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accounts and interest income on securities owned and investments in mortgage-
backed certificates. Net revenues equal total revenues less interest expense.
Interest expense includes interest paid on bank borrowings, collateralized
securities transactions with brokers and dealers, and collateralized mortgage
obligations.
Expenses. Compensation and benefits expense includes sales, trading and
--------
incentive compensation, which are primarily variable based on revenue
production, and salaries, payroll taxes and employee benefits, which are
relatively fixed in nature. Brokerage and clearance expense includes the cost of
securities clearance, floor brokerage and exchange fees. Communications expense
includes charges for telecommunications, news and market data services, customer
statements, and depreciation on data processing and telecommunications
equipment. Occupancy and equipment expense includes rent and operating expenses
for the Company's facilities, expenditures for repairs and maintenance, and
depreciation of furniture, fixtures and leasehold improvements. Promotional
expense includes travel, entertainment and advertising. Other expense includes
professional services, litigation expenses, office expenses, dues and
assessments, and other miscellaneous expenses.
Results of Operations
The following table sets forth certain financial data as a percentage of net
revenues:
Consolidated Statement of Operations Data:
Three months ended March 31,
1999 1998
Revenue: ----- -----
Commissions 49.0% 46.7%
Principal transactions 19.3 15.2
Investment banking 7.3 11.2
Asset management 14.7 12.6
Other 3.2 7.7
Interest 13.0 13.7
----- -----
Total revenue 106.5 107.1
Interest expense 6.5 7.1
----- -----
Net revenue 100.0 100.0
----- -----
Non-interest expenses:
Compensation and benefits 59.7 59.0
Brokerage and clearance 6.2 2.8
Communications 7.1 6.8
Occupancy and equipment 6.0 6.2
Promotional 3.0 3.3
Other 7.0 8.4
----- -----
Total non-interest expenses 89.0 86.5
----- -----
Income before income taxes 11.0 13.5
Income tax provision 4.1 5.2
----- -----
Net income 6.9% 8.3%
===== =====
12
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Three months ended March 31, 1999 compared to the three months ended
March 31, 1998
During the first quarter of 1999, the Company reported increased
revenues, fueled in large part by higher transaction volume and increased assets
under management, in volatile market conditions. Revenue generated from
commissions, principal transactions and asset management activities reached
record levels. As a result, both revenues and expenses are higher in the first
quarter of 1999 when compared to the first quarter of 1998. Net income increased
6% in the first quarter of 1999 when compared to the first quarter of 1998,
after adjusting for a one-time arbitration award of $2.9 million (after tax)
received in 1998. This increase is due primarily to the strong growth in
commission and principal transactions revenue noted earlier.
Total revenue increased $7.6 million or 4% to $216.1 million for the
three months ended March 31, 1999 from $208.5 million for the three months ended
March 31, 1998. Net revenues increased $8.3 million or 4% to $202.9 million for
the three months ended March 31, 1999 from $194.6 million for the three months
ended March 31, 1998. Excluding the revenue attributable to the arbitration
award mentioned above, total revenues for the first quarter of 1999 increased
$13.7 million or 7% from $202.5 million in the first quarter of 1998, and net
revenues for the first quarter of 1999 increased by approximately $14.3 million
or 8% over the same period of 1998.
Commission revenue increased $8.6 million or 9% to $99.4 million for the
three months ended March 31, 1999 from $90.8 million for the three months ended
March 31, 1998. The increase in commission revenues is due to growth in number
of investment consultants (6% increase) and increased productivity in both the
retail and institutional areas. The increase is also attributable to favorable
market conditions for listed equity securities in the first quarter of 1999.
Principal transactions revenue increased $9.6 million or 32% to $39.2
million for the three months ended March 31, 1999 from $29.6 million for the
three months ended March 31, 1998. This increase is primarily due to increased
trading volume in the over-the-counter equity markets.
Investment banking revenue decreased $7.0 million or 32% to $14.8
million for the three months ended March 31, 1999 from $21.8 million for the
three months ended March 31, 1998. This decrease is consistent with the decline
in new issue activity in the Company's market of small and mid-cap companies as
seen throughout the industry. In the first quarter of 1999, the Company managed
or co-managed new issues of $388.5 million compared to $1.1 billion in the first
quarter of 1998.
Asset management revenue increased $5.3 million or 22% to $29.8 million
for the three months ended March 31, 1999 from $24.5 million for the three
months ended March 31, 1998 due to the growth of client assets invested in
managed accounts and mutual funds and the resulting increase in managed account
fees and 12b-1 distribution fees. The increase also reflects the growth in
earnings in Mentor Investment Group, in which the Company held a 20% equity
interest as of March 31, 1999.
Other income decreased $8.5 million or 57% to $6.5 million for the three
months ended March 31, 1999 from $15.0 million for the three months ended March
31, 1998. This decrease is
13
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primarily attributable to the $6.0 million arbitration award discussed earlier.
Excluding this award, other income decreased $2.5 million or 28%, for the first
quarter of 1999 when compared to the first quarter of 1998 due to the sale of
80% of EVEREN Clearing in the fourth quarter of 1998 and its related
correspondent revenue.
Interest and dividend income decreased $0.2 million or 1% to $26.4
million for the three months ended March 31, 1999 from $26.6 million in the
corresponding period in 1998, largely as a result of a decrease in broker call
rates that was partially offset by an increase in customer margin receivables.
Net interest income increased $0.4 million or 3% to $13.2 million for the three
months ended March 31, 1999 from $12.8 million for the three months ended March
31, 1998.
Total non-interest expenses increased $12.3 million or 7% to $180.7
million for the three months ended March 31, 1999 from $168.4 million for the
three months ended March 31, 1998, primarily in the variable expense categories
due to increased trading volumes.
Compensation and benefits expense increased $6.2 million or 5% to $121.1
million for the three months ended March 31, 1999 from $114.9 million for the
three months ended March 31, 1998. This increase is directly attributable to the
increases in commission revenue, principal transactions revenue and asset
management revenues in the first quarter of 1999, resulting in increased
production-based payouts.
Brokerage and clearance expense increased $7.1 million or 129% to $12.6
million for the three months ended March 31, 1999 from $5.5 million for the
three months ended March 31, 1998. The increase reflects the variable nature of
this expense, which increased in part because of the growth in transactional
volume. This increase is also due to the change to a new clearing agreement with
BNY Clearing in the fourth quarter of 1998 adopted in connection with the sale
of 80% of EVEREN Clearing. The expenses of EVEREN Clearing, which were primarily
fixed in nature and which were previously included in the Company's consolidated
results of operations across all expense categories have been eliminated but are
offset by increased, primarily variable, clearing expense.
Communications expense increased $1.1 million or 8% to $14.4 million for
the three months ended March 31, 1999 from $13.3 million for the three months
ended March 31, 1998, primarily due to an increased number of employees in 1999
when compared to the corresponding period of 1998.
Occupancy and equipment expense remained constant at approximately $12.1
million for the three months ended March 31, 1999 and 1998.
Promotional expense decreased $0.3 million or 5% to $6.1 million for the
three months ended March 31, 1999 from $6.4 million for the three months ended
March 31, 1998. This decrease is due to the integration of Principal Securities,
thereby reducing the need for additional promotional expense in the 1999 first
quarter.
Other expenses decreased $1.8 million or 11% to $14.4 million for the
three months ended March 31, 1999 from $16.2 million for the three months ended
March 31, 1998. This decrease is related primarily to $1.1 million of additional
professional fees incurred in 1998
14
<PAGE>
related to the aforementioned NYSE arbitration award; as well as reduced
expenses resulting from the complete integration of Principal Securities into
the operations of EVEREN Securities in the current quarter's results.
The Company's income tax expense for the three months ended March 31,
1999 was $8.2 million, which represented an effective tax rate on income before
taxes of 37.0%, compared to a $10.1 million or a 38.4% effective tax rate for
the three months ended March 31, 1998.
Net income decreased $2.1 million or 13% to $14.0 million for the three
months ended March 31, 1999 from $16.1 million for the three months ended March
31, 1998. Excluding the non-recurring $2.9 million after-tax gain related to the
aforementioned NYSE arbitration award included in the first quarter 1998 net
income, net income increased $0.8 million or 6% for the first quarter of 1999.
15
<PAGE>
Quarterly Results
The information set forth below is derived from unaudited quarterly
financial statements of the Company. Such financial statements have been
prepared by the Company on a basis consistent with the consolidated financial
statements included elsewhere in this report and include all adjustments,
consisting principally of normal recurring accruals, that the Company considers
necessary for a fair presentation thereof. These operating results are not
necessarily indicative of the Company's future performance.
<TABLE>
<CAPTION>
Three months ended
-------------------------------------------------------------------------------------------------
3/31/99 12/31/98 9/30/98 6/30/98 3/31/98 12/31/97 9/30/97 6/30/97
--------- ---------- --------- --------- --------- ---------- ---------- ---------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Commissions $ 99,432 $ 84,951 $ 85,352 $ 87,942 $ 90,843 $ 71,137 $ 73,099 $ 61,901
Principal transactions 39,213 36,143 28,202 27,005 29,632 26,789 28,174 24,656
Investment banking 14,822 15,833 21,676 26,668 21,817 28,768 15,272 15,514
Asset management 29,758 27,453 28,266 27,521 24,546 20,026 18,493 16,267
Other 6,501 7,187 8,436 7,279 14,972 8,672 7,405 8,371
Interest 26,386 23,688 28,658 28,915 26,645 22,761 26,201 18,195
--------- -------- -------- -------- -------- -------- -------- --------
Total revenue 216,112 195,255 200,590 205,330 208,455 178,153 168,644 144,904
Interest expense 13,198 10,594 14,808 14,984 13,819 10,072 13,113 6,728
--------- -------- -------- -------- -------- -------- -------- --------
Net revenue 202,914 184,661 185,782 190,346 194,636 168,081 155,531 138,176
Non-interest expenses:
Compensation and benefits 121,140 109,562 110,279 114,091 114,913 100,635 93,024 80,267
Brokerage and clearance 12,582 9,119 5,324 5,503 5,502 4,438 4,487 4,043
Communications 14,367 13,654 13,279 12,265 13,270 11,644 10,996 10,350
Occupancy and equipment 12,142 10,742 11,946 12,357 12,076 10,479 10,336 10,006
Promotional 6,061 5,222 7,729 6,498 6,440 6,384 5,091 5,461
Other 14,360 12,813 15,144 15,617 16,167 12,977 11,613 10,789
--------- -------- -------- -------- -------- -------- -------- --------
Total non-interest expenses 180,052 161,112 163,701 166,331 168,368 146,557 135,547 120,916
Gain on sale of subsidiary - 19,780 - - - - - -
--------- -------- -------- -------- -------- -------- -------- --------
Income before income taxes 22,262 43,329 22,081 24,015 26,268 21,524 19,984 17,260
Income tax provision 8,245 16,788 8,305 9,138 10,127 8,195 7,672 6,445
--------- -------- -------- -------- -------- -------- -------- --------
Net income $ 14,017 $ 26,541(1) $ 13,776 $ 14,877 $ 16,141 $ 13,329 $ 12,312 $ 10,815
========= ======== ======== ======== ======== ======== ======== ========
</TABLE>
- -----------------
(1) Includes a $19.8 million pretax ($11.9 million after-tax) gain on the sale
of 80% of EVEREN Clearing.
16
<PAGE>
The following table sets forth certain financial data as a percentage of net
revenues.
<TABLE>
<CAPTION>
Three months ended
-----------------------------------------------------------------------------------
3/31/99 12/31/98 9/30/98 6/30/98 3/31/98 12/31/97 9/30/97 6/30/97
-------- -------- --------- -------- ------- -------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Commissions 49.0% 46.0% 45.9% 46.2% 46.7% 42.3% 47.0% 44.8%
Principal transactions 19.3 19.6 15.2 14.2 15.2 15.9 18.1 17.8
Investment banking 7.3 8.6 11.7 14.0 11.2 17.1 9.8 11.2
Asset management 14.7 14.9 15.2 14.5 12.6 11.9 11.9 11.8
Other 3.2 3.8 4.5 3.8 7.7 5.3 4.8 6.1
Interest 13.0 12.8 15.4 15.2 13.7 13.5 16.8 13.2
----- ----- ----- ----- ----- ----- ----- -----
Total revenue 106.5 105.7 107.9 107.9 107.1 106.0 108.4 104.9
Interest expense 6.5 5.7 7.9 7.9 7.1 6.0 8.4 4.9
----- ----- ----- ----- ----- ----- ----- -----
Net revenue 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
----- ----- ----- ----- ----- ----- ----- -----
Non-interest expenses:
Compensation and benefits 59.7 59.3 59.4 59.9 59.0 59.9 59.8 58.1
Brokerage and clearance 6.2 4.9 2.9 2.9 2.8 2.6 2.9 2.9
Communications 7.1 7.4 7.1 6.4 6.8 6.9 7.1 7.5
Occupancy and equipment 6.0 5.8 6.4 6.5 6.2 6.2 6.6 7.2
Promotional 3.0 2.8 4.2 3.4 3.3 3.8 3.3 4.0
Other 7.0 6.9 8.1 8.3 8.4 7.8 7.5 7.8
----- ----- ----- ----- ----- ----- ----- -----
Total non-interest expenses 89.0 87.2 88.1 87.4 86.5 87.2 87.2 87.5
Gain on sale of subsidiary - 10.7 - - - - - -
----- ----- ----- ----- ----- ----- ----- -----
Income before income taxes 11.0 23.5 11.9 12.6 13.5 12.8 12.8 12.5
Income tax provision 4.1 9.1 4.5 4.8 5.2 4.9 4.9 4.7
----- ----- ----- ----- ----- ----- ----- -----
Net income 6.9% 14.4%(1) 7.4% 7.8% 8.3% 7.9% 7.9% 7.8%
===== ===== ===== ===== ===== ===== ===== =====
</TABLE>
- ---------------
(1) Includes a $19.8 million pretax or 10.7% ($11.9 million after-tax or 6.4%)
gain on sale of 80% of EVEREN Clearing.
17
<PAGE>
The generally upward trend in the Company's net revenues for the eight
quarterly periods ended March 31, 1999 reflects generally strong economic and
market conditions seen throughout the securities industry. The Company reported
strong growth in its retail brokerage activities. The favorable industry
conditions combined with the Company's strategy to grow its core business has
resulted in considerable growth in both the number of investment consultants and
their productivity.
Net revenues during this eight-quarter period follow the same positive
trend. The Company has also grown its customer margin accounts which
contributes to this positive trend.
While in absolute dollar amounts, non-interest expenses have trended up
during the eight periods, such increases are generally attributable to the
variable nature of compensation and benefits expense and brokerage and clearance
expense as well as certain other expenses, which are significantly correlated to
revenue growth. As a percentage of net revenues, non-interest expenses have
remained relatively stable during such periods, which management believes to be
a result of the Company's focus on profitability, growth and cost containment.
Net income, both in absolute dollar amounts and as a percentage of net
revenues, also reflects a positive trend during this eight-quarter period.
Liquidity and Capital Resources
Holding Company
EVEREN Capital Corporation ("EVEREN Capital") is the parent holding company
for EVEREN Securities Holdings, Inc. ("EVEREN Holdings"), 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 as to amounts which may be paid by applicable laws or regulations.
The "net capital" rules are the primary regulatory restrictions. EVEREN
Capital's rights (and the rights of its stockholders and creditors) to
participate in the assets of any subsidiary are also subject to prior claims of
the subsidiary's creditors, including customers of the broker-dealer
subsidiaries (except to the extent the Company itself may be a creditor with
recognized claims). See Note 2 of Notes to Consolidated Financial Statements
contained in Item 1 of this report. The Company has also generated funds from
bank loans and the issuance of Common Stock to employees.
Since becoming a publicly-traded company, the Company, with approval from
its Board of Directors, began to pay quarterly dividends of $.09 per share on
the outstanding shares of Common Stock. In November 1997, the Board of
Directors approved an increase in the quarterly dividend rate to $.11 per share
on the Company's Common Stock, which was paid in 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 affected 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.
18
<PAGE>
The Company maintains a $50 million committed revolving credit facility
with two banks, all of which is unused at March 31, 1999. The initial term of
the agreement was for two years, subject to a one-year extension by mutual
agreement of the parties. On March 1, 1999, the Company extended the term of
the agreement to June 30, 2000. Commitment fees under this facility are equal
to a rate per annum of .25% on the average daily unused balance. Interest on
the outstanding borrowing is based upon the Company's election of a "reference
rate" equal to LIBOR or the banks' prime rate.
In the fourth quarter of 1998, the Company announced a stock repurchase
program whereby it may 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, combined
with funds generated from operations, will be adequate to fund its capital needs
for the foreseeable future.
Operating Subsidiaries
The assets of EVEREN Securities, Inc., 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 March 31, 1999 and December
31, 1998 were approximately $2.5 billion and $2.2 billion, respectively.
The majority of EVEREN Securities' assets are financed through daily
operations by securities sold under agreements to repurchase, securities sold
not yet purchased, bank loans, payables to customers, brokers and dealers, and
securities loaned. Short-term funding is generally obtained at rates based on
the federal funds, LIBOR or money market rates. Other borrowing costs are
negotiated depending upon prevailing market conditions. The Company monitors
overall liquidity by tracking the extent to which unencumbered marketable assets
exceed short-term unsecured borrowings. The Company maintains borrowing
relationships with a broad range of banks, financial institutions,
counterparties and others. At March 31, 1999, EVEREN Securities had
approximately $495 million in uncommitted credit lines with several banks.
19
<PAGE>
EVEREN Securities maintains two committed secured lines of credit. The
first committed line is provided through a $500 million facility from The Bank
of New York, ("BONY"). This facility expires on November 1, 1999, but may be
extended for 364-day periods by mutual agreement of the parties. Extensions of
the facility cannot be made more than twice per year. At March 31, 1999, $361
million of the $581 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 March 31, 1999.
Borrowings under each of the committed lines of credit may be secured by either
customer margin or firm securities, with interest based upon overnight bank
lending rates.
Repurchase agreements are used primarily for customer accommodation
purposes and to finance the Company's inventory positions in U.S. government and
agency securities. These positions provide products and liquidity for customers
and are not maintained for the Company's investment or market speculation. The
level of activity fluctuates significantly depending on customer needs; however,
these fluctuations have no material effect on cash flows, liquidity or capital
resources. The Company monitors the collateral position and counterparty risk
on these transactions daily. See "Risk Management."
EVEREN Securities is capital intensive. In addition to normal operating
requirements, capital is required to cover financing and regulatory charges on
securities inventories, investment banking commitments and investments in fixed
assets. The Company's overall capital needs are continually reviewed to ensure
that its capital base can appropriately support the anticipated needs of the
Subsidiary. Management believes that existing capital, funds from operations
and 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.
Three months ended March 31, 1999 and 1998
Cash and cash equivalents at March 31, 1999 and 1998 totaled $14.8 million
and $70.5 million, respectively. The cash balance at March 31, 1998 included
$50 million in cash deposited by Principal Securities in a brokerage account at
its former clearing broker. These funds were subsequently redeployed within the
Company in connection with the integration of Principal Securities into the
Company's operations.
20
<PAGE>
For the three months ended March 31, 1999, cash used by operating
activities was generated primarily in financing activities through an increase
in bank loans payable and for the three months ended March 31, 1998, cash
generated by operating activities was used in financing the acquisition of
Principal Securities and a decrease in bank loans payable.
Operating activities used cash totaling $300.6 million in 1999 and provided
cash of $134.3 million in 1998. In 1999, changes in securities owned and
securities sold not yet purchased of $147.3 million, securities loaned of $33.1
million, net change in receivables from and payables to customer of $160.8
million, and accounts payable and other liabilities of $30.6 million used cash.
These uses were partially offset by a $37.7 million source of funds related to
the net change in receivables from and payables to broker-dealers and others and
changes in securities purchased under agreements to resell and repurchase of
$52.9 million. In 1998, decreases in receivables from customers and broker-
dealers of $128.8 million, decreases in securities purchased under agreements to
resell of $78.4 million, and an increase in securities loaned of $68.7 million
generated cash. This was partially used by increases in securities borrowed and
securities owned of $44.9 million and a decrease in securities sold under
agreements to repurchase of $38.4 million.
In 1999, net cash used by investing activities is comprised primarily of
the $10.5 million cash used in the acquisition of fixed assets. In 1998, net
cash used in investing activities is the result of the $51.3 million cash used
to acquire Principal Securities, net of cash acquired.
In 1999, net cash flows from financing activities amounted to $297.1
million, the net result of an $310 million increase in bank loans and $1.3
million of proceeds from the issuance of common stock offset by the payment of
dividends of $2.5 million and the repayment of collateralized mortgage
obligations of $8.7 million. In 1998, net cash used by financing activities is
primarily the result of a $49.0 million decrease in bank loans payable.
Derivative Financial Instruments
Derivatives are financial instruments, the payments on which are linked to
the prices, or relationships between prices, of securities or commodities,
interest rates, currency exchange rates or other financial measures
(collectively referred to as "cash market instruments"). Derivatives enable the
Company and its clients to manage their exposure to interest rates and currency
exchange rates, and security and other price risks. Derivatives include
structured notes, swaps, futures or forward contracts and options. Certain
types of derivatives, including forwards and certain options, are traded in the
OTC markets. Other types of derivatives, including futures contracts and listed
options, are traded on regulated exchanges.
Based on relative notional amounts, management believes that the Company's
derivative activities are not as extensive as those of many of its competitors.
The Company does not engage in the speculative trading of derivatives. Instead,
the Company has focused its derivative activities on trading in forward and
futures contracts in U.S. government and agency issued or guaranteed securities
as hedges against the Company's securities inventory positions. The Company
also executes transactions in exchange-traded futures contracts and listed
options on behalf of its customers.
21
<PAGE>
The Company enters into certain futures and options contracts on a limited
basis in the ordinary course of its business to hedge or modify exposures to
interest rate fluctuations related to interest-sensitive securities in its
inventory. Given the limited use of such derivatives, the Company has not
incurred and does not expect to incur any material losses relating to its
derivative investments that would not be substantially offset with corresponding
gains on the securities positions hedged. Both the securities hedged and the
derivative instruments are carried on the statement of financial condition at
their market values. Gains and losses, both realized and unrealized, from both
the hedged securities and the derivative instruments are included in current
operating results.
Risk Management
Risk is an inherent part of the Company's business and activities. The
extent to which the Company properly and effectively identifies, assesses,
monitors and manages the various types of risks involved in its business is
critical to its profitability. The Company monitors its risk on a daily basis
through a number of control procedures designed to identify and evaluate the
various risks to which the Company is exposed.
Risk management at the Company is an integrated process with independent
oversight which requires constant communication, judgment and knowledge of
specialized products and markets. The Company's senior management takes an
active role in the risk management process and has developed policies and
procedures that require specific administrative and business functions to assist
in the identification, assessment and control of various risks.
Item 3: Quantitative and Qualitative Disclosures About Market Risk
Market Risk
Market risk refers to the risk that a change in the level of one or more
market prices, rates, indices, volatilities, correlations or other market
factors, such as liquidity, will result in losses for a specified position or
portfolio.
The Company often acts as a principal in customer-related transactions in
financial instruments which expose the Company to market risks. The Company
makes dealer markets in certain equity securities, investment-grade corporate
debt, high-yield securities, U.S. government and agency securities, mortgages
and mortgage-backed securities, and municipal fixed-income securities. As such,
the Company maintains securities inventories to facilitate customer
transactions. The Company covers its exposure to market risk by limiting its net
long or short positions, both overall and by individual product area, by
limiting the number of days inventory is held, by selling or buying similar
instruments and by utilizing various derivative financial instruments such as
futures and forward and option contracts. The Company's management believes the
Company's philosophy, risk management and hedging practices result in carefully
managed market exposure and reduced earnings volatility.
22
<PAGE>
At March 31, 1999 and December 31, 1998, the Company's securities owned and
securities sold, not yet purchased consisted of the following (in thousands):
3/31/99 12/31/98
-------- --------
Owned
- -----
Obligations of the U.S. Government
or its agencies $196,847 $ 45,551
State and municipal obligations 54,896 45,962
Corporate debt obligations 83,847 23,328
Corporate stocks and warrants 27,179 27,394
Other 1,433 1,344
-------- --------
$364,202 $143,579
======== ========
Sold, not yet purchased
- -----------------------
Obligations of the U.S. Government
or its agencies $106,833 $ 40,717
State and municipal obligations 564 198
Corporate debt obligations 14,298 12,797
Corporate stocks and warrants 8,581 6,074
Other 3,148 283
-------- --------
$133,424 $ 60,069
======== ========
The Company manages risk exposure utilizing mechanisms involving various
levels of management. The Company's risk management committee assists senior
management in managing risk associated with trading and inventory accounts. The
primary function of this committee is to establish and monitor position limits
for these accounts on an ongoing basis. Current and proposed underwriting and
other commitments are subject to due diligence reviews by senior management as
well as professionals in the appropriate business and support units involved.
The Company's trading activities result in the creation of inventory
positions. Position and exposure reports are prepared daily by operations
staff. Such reports are distributed to and reviewed independently on a daily
basis by the Company's risk management committee as well as members of senior
management. In addition, the corporate accounting group prepares a daily
consolidated summarized position report indicating both long and short exposure.
These reports, which are distributed to various levels of management throughout
the Company, enable senior management to better control inventory levels and
monitor results of the trading areas. The Company also reviews and monitors, at
various levels of management, inventory aging, pricing, concentration and
securities ratings.
In addition to position and exposure reports, the Company produces a daily
revenue report which summarizes the trading, interest, commissions, fees,
underwriting and other revenue items for each of the trading departments. Daily
revenue is reviewed for various risk factors and is independently verified by
members of the risk management committee. The daily revenue report is
summarized by the corporate accounting group and distributed to various levels
of management throughout the Company, together with position and exposure
reports. These reports enable senior management to monitor and better control
the overall activity of the trading areas.
23
<PAGE>
Credit Risk
The Company's exposure to credit risk arises from the possibility that a
counterparty to a transaction might fail to perform under its contractual
commitment, resulting in the Company incurring losses. Credit risk related to
various financing activities is reduced by the industry practice of obtaining
and maintaining possession and control of collateral. The Company monitors its
exposure to counterparty risk on a daily basis through the use of credit
exposure information and the monitoring of collateral values. The Company's
credit department is responsible for reviewing counterparties to establish
appropriate exposure limits for a variety of transactions. In addition, the
Company actively manages the credit exposure relating to its trading activities
by monitoring the creditworthiness of counterparties and their related trading
limits on an ongoing basis, requesting additional collateral when deemed
necessary and limiting the amount and duration of exposure to individual
counterparties.
Legal Risk
Legal risk includes the risk of non-compliance with applicable legal and
regulatory requirements and the risk that a counterparty's performance
obligations will be unenforceable. The Company is generally subject to
extensive regulation in the different jurisdictions in which it conducts
business. The Company has established legal standards and procedures that are
designed to ensure compliance with all applicable statutory and regulatory
requirements. The Company, principally through the Legal, Compliance and
Finance Departments, has also established procedures that are designed to ensure
that senior management's policies relating to conduct, ethics and business
practices are followed. In connection with its business, the Company has
various procedures addressing issues, such as regulatory capital requirements,
new products, credit granting, collection activities, and record-keeping. The
Company has also established certain procedures to mitigate the risk that a
counterparty's performance obligations will be unenforceable, including
consideration of counterparty legal authority and capacity, adequacy of legal
documentation, the permissibility of a transaction under applicable law and
whether applicable bankruptcy or insolvency laws limit or alter contractual
remedies.
The Company seeks to control the risks associated with its investment
banking activities through a process that results in a thorough review by
various committees of the risks associated with all significant transactions
prior to acceptance of any engagement. The Company currently has various
commitment and other review committees. Each such committee is chaired by a
member of senior management and has at least one additional senior management
member. Other committee members include employees who provide expertise in the
evaluation and analysis of proposed transactions brought before the particular
committee.
The Company's risk management effort also includes an emphasis on
compliance. Retail branch managers and other supervisors are required to engage
in specific review and other tasks, and complete various reports, as part of
their supervisory responsibilities. The Company's compliance department
professionals monitor the Company's retail and capital markets activities,
conduct periodic and other examinations, respond to any customer complaints that
arise and interface with the various regulatory agencies that have jurisdiction
over the Company and its business.
24
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Following is a description of one of the arbitration proceedings in which
EVEREN Securities is currently a named respondent. The Company intends to
vigorously defend itself against the allegations in such action. Although there
can be no assurances, the Company does not believe that the ultimate outcome of
this matter will have a material adverse effect on its financial condition.
Due, however, to the relatively early stage of this matter and the lack of
information currently available, management cannot accurately make estimates of
potential loss, if any, or assure that this matter will have no material adverse
effect on the Company's results of operations in any particular period.
Ronald S. Rosenblatt, Trustee of the INA Charitable Grantor Trust, U/A
Dated 12/18/96 v. EVEREN Securities, et al.
In March 1999, EVEREN Securities was served with a customer arbitration
claim filed before the National Association of Securities Dealers Regulation,
Inc. The claim alleges that after the Claimant utilized margin to accumulate
large concentrated positions in two stocks, the EVEREN Securities' investment
consultant responsible for servicing the account failed to follow the Claimant's
instructions to begin selling shares of one of the stocks to reduce a
substantial margin debit balance. The claim further alleges that the investment
consultant improperly recommended that the Claimant utilize the proceeds from
the stock liquidation to acquire additional shares of the other concentrated
position and to engage in speculative option trading. These transactions were
allegedly excessive, unsuitable and recommended solely for the purpose of
generating commissions. The arbitration claim seeks compensatory damages in
excess of $40 million plus exemplary damages in an amount of at least three
times the losses sustained as a result of the alleged wrongful conduct. The
claim alleges violations of Sections 10(b) and 20 of the Securities Exchange Act
of 1934 and Rule 10b-5 promulgated thereunder and also alleges negligence,
breach of fiduciary duty, breach of contract and fraud. EVEREN Securities and
its investment consultant intend to file an answer denying the material
allegations of the claim.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
2 Agreement and Plan of Merger, dated as of April 25, 1999, among
EVEREN Capital Corporation and First Union Corporation
(Incorporated by reference to Exhibit 2.1 to EVEREN's current
report on Form 8-K dated April 25, 1999 and filed with the
Commission on May 3, 1999 (the "May 3, 1999 8-K")
4 First Amendment to Rights Agreement (Incorporated by reference
to Exhibit 4.1 to the May 3, 1999 8-K).
27 Financial Data Schedule
(b) Reports on Form 8-K
25
<PAGE>
The Registrant filed a report on Form 8-K dated April 25, 1999 with regard to
its merger with First Union Corporation.
26
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, EVEREN
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
EVEREN CAPITAL CORPORATION
Date: May 10, 1999 By: /s/ Arthur J. McGivern
----------------------------------------
Arthur J. McGivern
Senior Executive Vice President
Treasurer and Chief Financial Officer
By: /s/ Thomas Lux
----------------------------------------
Thomas Lux
Executive Vice President
Controller and Chief Accounting Officer
27
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
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0
0
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</TABLE>
