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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
X SECURITIES EXCHANGE ACT OF 1934
For the quarter ended June 30, 1995
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: 1-8408
THE ADVEST GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware 06-0950444
(State or other jurisdiction of (IRS Employer
incorporation or organization Identification Number)
One Commercial Plaza - 280 Trumbull Street
Hartford, Connecticut 06103
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (203) 525-1421
NONE
Former name, former address and former fiscal year, if changed since last
report.
Indicate 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
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, $.01 par value 8,414,147 shares
Class Outstanding at July 31, 1995
Total of sequentially numbered pages 19.
Exhibit index sequential page number page 18.
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THE ADVEST GROUP, INC.
INDEX
Page No.
PART I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets
June 30, 1995 and September 30, 1994 3
Consolidated Statements of Operations
Three and Nine Months Ended June 30, 1995 and 1994 4
Consolidated Statements of Cash Flows
Nine Months Ended June 30, 1995 and 1994 5
Consolidated Statement of Changes in Shareholders' Equity
Nine Months Ended June 30, 1995 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
PART II. Other Information
Item 1. Legal Proceedings 15
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 17
2
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<TABLE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
The Advest Group, Inc.
Consolidated Balance Sheets
<captions>
(In thousands, except share and per share amounts) June 30, 1995 September 30, 1994
------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets (Unaudited)
Cash and short-term investments
Cash and cash equivalents $ 12,450 $ 7,278
Cash and securities segregated under federal and other regulations 72,158 49,305
Interest-earning deposits and investments - 3,000
------------- ----------
84,608 59,583
------------- ----------
Receivables
Brokerage customers, net 284,184 321,776
Loans and mortgages, net 250,973 279,730
Securities borrowed 123,953 65,751
Brokers and dealers 2,238 3,539
Other 11,251 11,560
------------- ----------
672,599 682,356
------------- ----------
Securities
Inventory, at market value 42,539 34,810
Held to maturity (market values of $40,522 and $53,102) 40,283 53,850
Available for sale, at market value 1,309 4,902
------------- ----------
84,131 93,562
------------- ----------
Other assets
Other real estate owned, net 9,373 13,414
Equipment and leasehold improvements, net 12,240 11,537
Other 22,886 24,403
------------- ----------
44,499 49,354
------------- ----------
$885,837 $884,855
============= ==========
Liabilities & Shareholders' Equity
Liabilities
Deposits $259,129 $291,885
Brokerage customers 305,404 310,537
Securities loaned 137,505 79,459
Compensation and benefits 14,001 14,053
Short-term borrowings 10,951 32,652
Checks payable 10,282 6,800
Brokers and dealers 6,665 6,023
Securities sold, not yet purchased, at market value 2,551 2,187
Other 18,793 15,894
------------- ----------
765,281 759,490
Long-term borrowings 22,608 30,388
Subordinated borrowings 20,552 20,997
------------- ----------
808,441 810,875
------------- ----------
Shareholders' Equity
Common stock, par value $.01, authorized 25,000,000 shares,
issued 10,574,788 and 10,570,222 shares 106 106
Paid-in capital 67,425 67,405
Retained earnings 20,933 16,605
Treasury stock, at cost, 2,131,562 and 1,987,357 shares (11,064) (10,136)
Net unrealized loss on securities available for sale, net of taxes (4) -
------------- ----------
77,396 73,980
------------- ----------
$885,837 $884,855
============= ==========
See Notes to Consolidated Financial Statements.
</TABLE>
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<TABLE>
The Advest Group, Inc.
Consolidated Statement of Operations
(Unaudited)
<captions>
Three Months Ended Nine Months Ended
June 30, June 30,
-------------------------- --------------------------
(In thousands, except per share amounts) 1995 1994 1995 1994
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues
Commissions $22,166 $17,323 $59,317 $62,259
Interest 14,268 11,664 42,025 33,432
Principal transactions 10,369 7,219 30,864 24,098
Asset management and administration 4,290 4,073 12,728 12,155
Investment banking 4,836 6,289 11,776 20,911
Gain on sale of investment advisory business, net 9,249 - 10,092 -
Other 1,741 1,256 4,674 3,304
----------- ----------- ----------- -----------
Total revenues 66,919 47,824 171,476 156,159
----------- ----------- ----------- -----------
Expenses
Compensation and benefits 31,893 26,565 88,013 88,290
Interest 7,788 5,607 22,899 16,311
Communications 4,868 4,574 13,650 14,058
Occupancy and equipment 4,353 3,846 12,741 11,510
Provision for credit losses and asset devaluation 6,294 1,443 9,867 4,519
Professional 1,466 1,575 3,695 4,457
Business development 894 1,003 3,096 3,345
Brokerage, clearing and exchange 1,036 894 2,916 2,849
Other 2,103 1,966 6,584 6,181
----------- ----------- ----------- -----------
Total expenses 60,695 47,473 163,461 151,520
----------- ----------- ----------- -----------
Income before taxes 6,224 351 8,015 4,639
Provision for income taxes 2,917 151 3,687 1,995
----------- ----------- ----------- -----------
Net Income $ 3,307 $ 200 $ 4,328 $ 2,644
=========== =========== =========== ===========
Net income per common share:
Primary $0.38 $0.02 $0.50 $0.29
=========== =========== =========== ===========
Assuming full dilution $0.34 $0.02 $0.49 $0.29
=========== =========== =========== ===========
See Notes to Consolidated Financial Statements.
</TABLE>
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<TABLE>
The Advest Group, Inc.
Consolidated Statements of Cash Flows
<CAPTION> (Unaudited)
Nine Months Ended
June 30,
--------------------------------
(In thousands) 1995 1994
-----------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 4,328 $ 2,644
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization 4,192 3,752
Depreciation 2,217 1,586
Provision for credit losses and asset devaluation 9,867 4,519
Gain on investment advisory business, net (10,092) -
Other 1,298 1,517
(Increase) decrease in operating assets:
Receivables from brokerage customers 37,377 (47,227)
Securities borrowed (58,202) (32,490)
Receivables from brokers and dealers 1,301 (1,308)
Securities inventory (7,729) (11,980)
Cash and securities segregated under federal and other regulations (22,853) 62,811
Other 1,000 1,646
Increase (decrease) in operating liabilities:
Brokerage customers (5,133) (14,696)
Securities loaned 58,046 30,649
Brokers and dealers 642 (1,690)
Checks payable 3,482 (2,066)
Other 871 (5,427)
------------- -------------
Net cash provided by (used for) operating activities 20,612 (7,760)
------------- -------------
FINANCING ACTIVITIES
Net decrease in deposits (32,756) (46,563)
Proceeds from short-term borrowings (529) 10,000
Repayment of short-term borrowings (9,500) (1,488)
Short-term brokerage borrowings, net (16,703) 8,450
Proceeds from long-term borrowings 7,250 2,000
Repayment of long-term borrowings (10,000) -
Other (1,317) (2,984)
------------- -------------
Net cash used for financing activities (63,555) (30,585)
------------- -------------
INVESTING ACTIVITIES
Proceeds from sales of investments 24,136 14,683
Proceeds from maturities of investments 14,293 119,302
Proceeds from investment advisory business, net 9,874 -
Purchase of investment securities and short-term investments (18,282) (85,191)
Principal collections on loans 35,156 43,405
Proceeds from loan sale 32,155 -
Proceeds from other real estate owned, net 2,882 5,692
Loans originated (47,166) (65,429)
Other (4,933) (10,258)
------------- -------------
Net cash provided by investing activities 48,115 22,204
------------- -------------
Increase (Decrease) in cash and cash equivalents 5,172 (16,141)
Cash and cash equivalents at beginning of period 7,278 19,232
------------- -------------
Cash and cash equivalents at period end $ 12,450 $ 3,091
============= =============
Interest paid $ 22,055 $ 16,080
Income taxes paid $ 1,753 $ 1,004
Non-cash transfers from:
Loans to OREO $ 2,870 $ 1,325
Securities held for sale to (from) investment securities $(15,079) $ 27,910
Change in SFAS 115 Valuation Reserve $ (4) $ -
See Notes to Consolidated Financial Statements.
</TABLE>
5
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<TABLE>
The Advest Group, Inc.
Consolidated Statements of Changes in Shareholders' Equity
<captions> (Unaudited)
Net unrealized gain
$.01 par value (loss) on securities Total
(In thousands, except Common stock Paid-in Retained Treasury stock available for sale, Shareholders'
share and per share amount Shares Amount capital earnings Shares Amount net of taxes Equity
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance as of
September 30, 1994 10,570,222 $ 106 $67,405 $16,605 (1,987,357) $(10,136) $ - $73,980
Adjustment to beginning
balance for change in
accounting principle (57) (57)
Net Income 4,328 4,328
Exercise of Stock Options 4,566 20 20
Repurchase of common stock (240,301) (1,504) (1,504)
Sale of treasury stock
to 1995 equity plan 96,096 576 576
Change in unrealized gain
(loss), net of taxes 53 53
----------------------------------------------------------------------------------------------------------
Balance as of
June 30, 1995 10,574,788 $ 106 $67,425 $20,933 (2,131,562) $(11,064) $ (4) $77,396
==========================================================================================================
See Notes to Consolidated Financial Statements.
</TABLE>
6
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Financial Statements:
The consolidated financial statements have been prepared in accordance
with the instructions to Form 10-Q and do not include all of the information
and notes required by generally accepted accounting principles for complete
financial statements. The consolidated financial statements include the
accounts of The Advest Group, Inc. ("AGI") and all subsidiaries (the
"Company"). All significant intercompany transactions and accounts have been
eliminated in consolidation. All normal recurring adjustments which, in the
opinion of management, are necessary for a fair presentation of the
consolidated financial condition and results of operations for the interim
periods presented have been made. Certain fiscal 1994 amounts have been
reclassified in the accompanying consolidated financial statements to provide
comparability with the current year presentation. The results of operations
for the interim periods are not necessarily indicative of the results for a
full year.
The statements should be read in conjunction with the Notes to
Consolidated Financial Statements and Management's Discussion and Analysis of
Financial Condition and Results of Operations included in the Company's Annual
Report for the year ended September 30, 1994, as filed with the Securities and
Exchange Commission on Form 10-K.
2. Summary of Significant Accounting Policies:
Effective October 1, 1994, the Company prospectively adopted Statement of
Financial Accounting Standard No. 115, "Accounting for Certain Investments in
Debt and Equity Securities" ("SFAS 115") and revised its securities accounting
policy. SFAS 115 requires the Company to classify its investments in debt and
certain equity securities into three categories: "trading (inventory)",
"available for sale" or "held to maturity". Bonds, notes and mortgage-backed
securities held by the Bank and designated as available for sale are carried
at fair value and unrealized holding gains or losses are credited or charged
directly to shareholders' equity. Other bonds, notes and mortgage-backed
securities, which Bank management intends to hold until maturity, are carried
at amortized cost and classified as held to maturity investments. Available
for sale and held to maturity securities are reduced to fair value, through
charges to income, for declines in value that are considered to be other than
temporary. The accounting treatment for securities classified as "trading"
did not change with the adoption of SFAS 115.
Upon adoption of SFAS 115, management allocated the securities held in the
previous classifications to the classifications specified in SFAS 115.
Consequently, the balances of the category identified as available for sale
prior to the adoption of SFAS 115 increased by $15,079,000 from the prior
year's presentation. The adoption did not have a material effect on the
Company's results of operations or financial condition.
In March 1995, the Financial Accounting Standards Board issued Statement
No. 121 ("SFAS 121"), "Accounting for the Impairment Of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of". SFAS 121 establishes accounting
standards for the impairment of long-lived assets and certain identifiable
intangibles to be held and used by an entity or disposed of. SFAS
7
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121 is effective for fiscal years beginning after December 15, 1995, although
earlier implementation is encouraged. The Company has not determined when it
will adopt SFAS 121 but does not expect its implementation have a material
effect on results of operations or financial condition.
In May 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 122 ("SFAS 122"), "Accounting for Mortgage
Servicing Rights". SFAS 122 amends SFAS 65 "Accounting for Certain Mortgage
Banking Activities" to require that a mortgage banking entity recognize as
separate assets rights to service mortgage loans for others, however those
servicing rights are acquired. SFAS 65 required separate capitalization of
the cost of rights which were acquired through a purchase transaction but
prohibited separate capitalization when the rights were acquired through loan
origination activities. SFAS 122 also requires that a mortgage banking entity
assess capitalized rights for impairment and establish valuation allowances
based on the fair value of those rights, including rights acquired prior to
adoption of SFAS 122. Prospective adoption of SFAS 122 is required for fiscal
years beginning after December 15, 1995, although earlier implementation is
encouraged. The Company has not decided when it will adopt SFAS 122 and has
not yet assessed its impact on operating results or financial condition.
3. Capital and Regulatory Requirements:
Advest is subject to the net capital rule adopted and administered by the
New York Stock Exchange, Inc. ("NYSE") and the Securities and Exchange
Commission. Advest has elected to compute its net capital under the
alternative method of the rule which requires the maintenance of minimum net
capital equal to 2% of aggregate debit balances arising from customer
transactions, as defined. The NYSE also may require a member firm to reduce
its business if net capital is less than 4% of aggregate debit balances and
may prohibit a member firm from expanding its business and declaring cash
dividends if net capital is less than 5% of aggregate debit balances.
At June 30, 1995, Advest's regulatory net capital of $40.0 million was 13%
of aggregate debit balances and exceeded required net capital by $33.9
million.
The Federal Deposit Insurance Corporation ("FDIC") requires most banks to
establish and maintain leverage capital of 4% to 5%. Pursuant to a Memorandum
of Understanding (the "MOU") with the Regional Director of the FDIC and the
Banking Commissioner of the State of Connecticut, the Bank is required to
exercise all reasonable good faith efforts to achieve (generally within
unspecified time periods) certain goals, including among others: to achieve
and maintain a leverage capital ratio of at least 6% and comply with existing
risk-based capital requirements, to ensure that there are adequate loan loss
reserves and quarterly evaluations of such reserves, to reduce the level of
adversely classified assets to not more than 40% of total capital and reserves
and to provide periodic progress reports to regulatory agencies.
At June 30, 1995, the Bank's leverage capital ratio was 4.60% which met
the statutory regulatory requirements, but did not meet the 6% Tier 1 leverage
capital requirement stated in the MOU. Management does not anticipate any
adverse action by its banking regulators as a result of its non-compliance
with the MOU. See further discussion in the Business Environment section of
the Management's Discussion and Analysis. In addition, the Bank must maintain
risk-based
8
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capital of 8.0%, including at least 4.0% Tier 1 capital. At June 30, 1995,
the Bank's total risk-based capital ratio was 8.00% and the Tier 1 ratio was
6.76%, which met the regulatory requirements.
4. Income per share calculations:
Primary income per common share is computed by dividing net income by the
weighted average number of common stock and common stock equivalents
outstanding during the period. Fully diluted income per common share assumes
conversion of outstanding convertible debentures as well.
The weighted average number of shares of common stock and common stock
equivalents included in the primary and fully diluted per share calculations
are as follows (in thousands):
For the quarters For the six months
ended June 30, ended June 30,
1995 1994 1995 1994
Primary 8,757 8,878 8,731 9,068
Assuming full dilution 10,351 8,878 10,293 9,068
5. Employee Benefit Plans:
Equity Plans
In January 1995, the Company implemented two 1995 equity plans which cover
executive officers (the "Executive Plan"), eligible top performing account
executives and designated key employees of the Company (the "Equity Plan").
Under the Equity Plan, participants may elect to invest part of their 1995
compensation, within established minimum and maximum amounts, on a pre-tax
basis in units consisting of one share of the AGI's common stock and one
option to purchase a single share of AGI common stock. The stock will be
purchased from AGI's treasury stock each month-end using the closing price of
the stock and will be restricted until the January 1, 1999 vesting date.
Options will be granted on January 1, 1996 and will become exercisable on the
January 1, 2001 vesting date. Employees may forfeit both unvested stock and
options under circumstances outlined in the Equity Plan's prospectus. The
terms of the Executive Plan are similar in most respects to the Equity Plan.
The principal differences are that shares of AGI stock will be purchased on
the open market on a quarterly basis and the options will be granted under the
1993 Stock Option Plan. Both plans are effective for calendar year 1995 and
may not be offered in future years.
9
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Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Business Environment
The Advest Group, Inc. is a financial services holding company engaged
with its operating subsidiaries (the "Company") in securities brokerage,
trading, investment banking, consumer lending, asset management and related
financial services. All aspects of the business of the Company are highly
competitive and impacted by a variety of factors outside of its control
including economic and market conditions, the political climate and investor
sentiment. Consequently, revenues and operating results can vary
significantly from one reporting period to the next. Principal operating
subsidiaries are Advest, Inc. ("Advest"), a broker-dealer; Advest Bank (the
"Bank"), a state-chartered savings bank, Boston Security Counsellors ("BSC"),
an investment advisor and Billings & Co., Inc. ("Billings"), a company
specializing in private placement offerings primarily in real estate.
Net income for the third quarter ended June 30, 1995 was $3.3 million
($.38 per share) compared with $.2 million ($.02 per share) in 1994. During
the quarter the Company recognized $9.3 million in pre-tax gains on the sale
of its mutual fund advisory business to two unrelated third parties. Current
quarter results also include combined pre-tax charges of $6.0 million from
both sales and write-downs of Bank non-performing assets and certain
performing loans.
Advest, Inc.
In the stock market, the DOW closed the June quarter at 4556, continuing
the rally begun last quarter. Lower interest rates have bolstered earnings of
corporate issuers resulting in higher stock prices and gains on all the major
indices. Despite concerns of an anticipated correction, the DOW, led by
technology and financial services issues, has risen steadily, gaining 10% in
the current quarter for an overall 19% advance calendar year-to-date. Falling
interest rates also resulted in an increased number of underwritings as
issuers sought to refinance debt at lower rates. New stock and bond issues
totaled $190 billion in the June quarter up 30% and 16%, respectively, from
the preceding and year earlier quarters, although underwriting fees were lower
in 1995. Driven by industry consolidations, merger and acquisition activities
achieved record levels for the six months ended June 30.
Advest's quarterly pre-tax earnings were $3.4 million compared with $2.0
million a year ago, reflecting the strong market conditions. Significant
revenue gains were posted for principal transactions, commissions, net
interest income and asset management activities.
Advest Bank
The Bank posted a pre-tax loss of $5.7 million compared with a loss of
$71,000 in the prior year. During the current quarter, the Bank completed a
previously announced evaluation of alternatives for the disposition of its non-
performing assets. As a result, the Bank's board of directors approved a plan
for the accelerated disposition of NPAs and certain commercial loans primarily
through bulk and other institutional sales. Current quarter results include
pre-tax charges of $2.5 million on the sales of $22.4 million of loans and
NPAs. It is intended that
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substantially all of the remaining NPAs will be sold or under contract in the
next two quarters. Consequently, in accordance with the asset disposition
plan, an additional pre-tax charge of $3.5 million was taken to mark the
balance of the NPAs down to their expected sales proceeds. It is anticipated
that the completion of the plan will enable the Bank to concentrate on it's
core residential mortgage lending and trust services.
Pursuant to a Memorandum of Understanding ("MOU") entered into with its
regulators, the Bank is required to maintain minimum Tier 1 leverage capital
of 6% and risk-based capital of 8%. As a result of the current quarter's
operating loss, the Bank's Tier 1 leverage and risk-based capital ratios were
4.6% and 8.00%, respectively, compared with 6.47% and 10.69%, respectively, a
year ago. The asset disposition plan, including it's impact on the Bank's
ability to comply with the MOU, was discussed with the Bank's regulators
prior to its implementation. No objections to the plan were expressed.
Consequently, management believes that the Bank's non-compliance with the
required Tier 1 capital ratio is unlikely to result in adverse action by its
regulators.
At June 30, 1995, non-performing assets were $11.8 million (4% of total
bank assets) compared with $27.9 million (8% of total bank assets) a year ago.
The delinquency rate was 2.09%, down from 4.68% in 1994. Interest-earning
assets were 94.2% of total bank assets compared with 91.5% last year.
Other
On May 1, the Company completed the sale of its advisory business related
to The Advantage Municipal Funds to an unrelated third party. The Company
received consideration of approximately $1.2 million. Net of expenses, which
include unamortized organization costs of the funds and Advest's deferred
sales charges, the Company realized a pre-tax gain of $.2 million.
Under a separate agreement, on June 2, 1995, the Company sold the business
related to its six taxable funds included in the Advantage Family to an
unrelated third party for consideration of $10 million and additional payments
contingent on net assets and future fund sales. In addition, Advest will
continue to receive 12(b)1 distributions and deferred sales charges on fund
shares outstanding at the date of the transaction. Net of expenses, the
Company realized a pre-tax gain of $9.1 million.
BSC posted a quarterly pre-tax profit of $.2 million compared with $.3
million in 1994. Prior to the current quarter sale of the business related to
the Advantage Family of Mutual Funds, advisory fees related to the funds
accounted for more than 70% of BSC's revenue. Although there will be a
related decrease in expenses, primarily due to staff reductions, BSC's
operating results will be significantly impacted by the sale of the advisory
business. It is expected that Advest's operating results will benefit from
its no longer paying up front commissions to its brokers on the Advantage
Funds sales. The anticipated benefit to Advest should substantially negate
the decline in BSC's operating results, consequently, the impact on
consolidated results should not be material.
Billings Management Company ("BMC"), a subsidiary of Billings, has served
as a managing general partner of a real estate limited partnership since 1990
when the original general partner
11
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filed for bankruptcy protection. As a result Billings has made advances
through charges to income to the partnership to cover cash flow deficiencies.
Over the past two years, the deficiencies have declined substantially
resulting in a favorable impact on Billings' pre-tax results. The partnership
property is currently fully occupied with a waiting list and generates
sufficient cash flow from operations to meet its needs. In January 1993, a
class action lawsuit on behalf of the limited partners was certified. On
December 24, 1994, the US District Court for the district of Connecticut
signed an order approving a stipulation of settlement whereby the Plaintiffs
retained their equity interests in the partnership in exchange for annual cash
distributions through 2004 and a substantial reduction in partnership debt.
On January 27, 1995, the settlement was finalized. Management expects that
the partnership will produce sufficient cash flow to meet the annual cash
distribution payments through 2004. However, should funds from operations be
insufficient, the company will be required to make supplementary cash payments
to the partnership via capital contributions. The settlement did not have a
material impact on the Company's results of operations or financial condition.
Billings pre-tax operating results improved $.1 million and $.6 million,
respectively, for the quarter and nine months ended June 30, 1995 compared
with the prior year.
Results of Operations
Three Months Ended June 30, 1995 Versus
Three Months ended June 30, 1994
Net revenues, total revenues less interest expense, were $59.1 million, an
increase of 40% from $42.2 million in 1994. Excluding the $9.3 million gain
on the sale of the mutual fund advisory business, net revenues rose 18%.
Revenues increased in all categories with the exception of investment banking
revenues which declined versus 1994. Net expenses, total expenses excluding
interest, increased 26% to $52.9 million. Excluding the loss from the Bank's
asset sales and write-downs, net expenses increased 12%. The effective tax
rate was 47% compared with 43% in 1994 primarily due to higher state taxes.
Commission revenue increased $4.8 million (28%) to $22.2 million.
Reflecting both the current market rally and 1994's rising interest rates,
current quarter listed commissions increased $2.8 million (33%), mutual fund
commissions, including fees and contingent deferred sales charges, rose $1.3
million (25%) and over-the-counter commissions gained $1.2 million (57%).
Insurance commissions declined $.2 million (22%) as lower interest rates
weakened the demand for variable annuities.
Revenue from principal transactions increased $3.2 million (44%) to $10.4
million. Advest's revenue increased $2.7 million (37%) led by equity
commissions up $1.2 million. Trading profits increased in all areas with
municipal and corporate bond profits improving $.6 million and $.2 million,
respectively, from 1994 trading losses. Bond commissions increased $.4
million (8%). The Bank posted a $.4 million improvement in principal
transactions from a $.3 million loss in the 1994 quarter related to portfolio
market value declines to a $.1 million current quarter gain on the sale of
securities obtained in exchange for loans held for sale by the Bank.
Investment banking revenues declined $1.5 million (23%) to $4.8 million,
primarily due to a $1.3 million gain in the 1994 quarter on the exercise of
stock warrants from a past underwriting.
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Merger and acquisition revenue advanced $1.1 million but this gain was more
than offset by declines in underwriting and syndicate fees and related
commission revenues.
Asset management revenue increased $.2 million (5%) to $4.3 million.
Advest's revenue increased $.4 million (14%) due to increased assets under
management. BSC's income declined $.3 million (27%). The current quarter sale
of the mutual fund business discussed previously contributed to a 31% decrease
in advisory fees from the Advantage Funds. Management fees from private
accounts declined 18% from the 1994 quarter.
Net interest income was $6.5 million, an increase of 7% from the prior
year. Advest's net interest rose $.7 million (17%) primarily due to higher
interest rates on margin accounts, although average margin debits declined
approximately 6% from the 1994 quarter. Although asset utilization and the
level of earning assets increased in the current quarter, a lower total asset
base resulted in a $.2 million (6%) decline in the Bank's net interest income.
Other income increased $.5 million (39%) primarily due to higher
transaction and fee-based income at Advest.
Compensation costs increased $5.3 million (20%) primarily due higher sales
compensation and incentives as well as higher employee insurance costs and
payroll taxes. The provision for credit losses and asset devaluation
increased $4.9 million (336%) due to $6.0 million in charges from the combined
sale and write-down of certain assets of the Bank, as previously discussed,
partly offset by a $1.0 million decline in provisions at the holding company.
Occupancy and equipment costs increased $.5 million (13%) primarily due to
increased depreciation, maintenance and other costs related to the Advantage
2000, a firm-wide technology upgrade.
Nine Months Ended June 30, 1995 Versus
Nine Months Ended June 30, 1994
Net revenues increased $8.7 million (6%) to $148.6 million as current
quarter revenue gains more than offset declines through the first six months.
A $9.3 million current quarter pre-tax gain related to the sale of the
Company's mutual fund advisory business accounted for the current year
increase. Net income was $4.3 million compared with $2.6 million in the prior
year, a 64% increase. The effective income tax rates were 46% and 43% for the
1995 and 1994 periods, respectively.
Revenue from principal transactions increased $6.8 million (28%) to $30.9
million. Trading profits on municipal, government and corporate debt
securities rose $1.9 million, $.5 million and $.3 million, respectively.
Related sales credits increased $1.7 million as gains in municipal bonds and
government zero coupons were partly offset by a substantial decline in sales
of CMOs. Sales credits and trading profits on over-the-counter issues
increased $1.3 million and $.5 million, respectively.
Commissions declined $2.9 million (5%) as current quarter revenue
increases substantially offset a 17% decrease through the first six months.
Declines in insurance and mutual funds commissions accounted for most of the
year-to-date decline.
13
<PAGE>
Investment banking revenues decreased $9.1 million (44%) to $11.8 million.
Reflecting a significant decline in the number of new offerings and lower fees
on underwritten issues, sales credits declined $4.3 million and syndicate
revenue and corporate finance underwriting fees were off $2.3 and $1.4
million, respectively. Merger and acquisition revenue increased $1.8 million
in 1995 while consulting fees declined $.6 million. Additionally, the 1994
period included a $1.3 million gain on the exercise of stock warrants from a
previous underwriting.
Other income increased $1.4 million (41%) to $4.7 million due primarily to
the sale of an exchange seat in the first quarter and higher fee income at
Advest.
Net interest income was $19.1 million, a 12% increase from fiscal 1994.
Advest's net interest increased $2.5 million (24%) primarily due to higher
interest rates on margin debits, despite a year to year decline in average
debit balances. The Bank's net interest declined $.4 million (5%) reflecting
a smaller asset base.
Expenses, excluding interest, increased $5.4 million (4%) to $140.6
million primarily due to $6.0 million in current quarter charges at the Bank,
as previously discussed.
Liquidity and Capital Resources
Nine Months Ended June 30, 1995
The current quarter disposition of the Company's mutual fund advisory
business generated $12.2 million in cash before expenses.
During the current quarter, the Bank's total assets declined $21.9 million
to $293.7 million in accordance with a plan to accelerate disposition of its
NPAs. Implementation of the plan resulted in cash proceeds of $19.8 million
and a pre-tax loss of $5.7 million for the quarter. The asset decline
reflects the combined effect of the operating loss which decreased equity and
a reduction in deposit balances, which fell by $16.9 million during the
quarter. Year-to-date, the Bank's assets have declined $61.0 million (17%)
primarily from asset sales. Additional asset sales are expected in the fourth
quarter.
In the second quarter, Advest borrowed $6.25 million under a non-recourse
note, collateralized exclusively by Advest's furniture and computer equipment.
Under the terms of the note, the principal is due October 1, 1998, unless
extended at Advest's option, with interest payments due monthly beginning
April 1, 1995. The purpose of the loan was to increase the broker-dealer's
net capital. As required by the non-recourse note, AGI signed a letter of
credit with a third party bank guaranteeing 20% of Advest's debt. The letter
of credit is fully collateralized by government securities.
Certain securities of the Bank have been reclassified as required by the
adoption of SFAS 115, as discussed in Note 2.
There have been no other material changes to the Company's liquidity or
capital resources since September 30, 1994.
14
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company has been named as defendant in various legal actions. These
actions have arisen principally from the securities and investment banking
business. In the opinion of management, based on discussion with counsel, the
outcome of these matters will not result in a material adverse effect on the
financial condition or future operating results of the Company.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 11 -- Computation of Net Earnings Per Share
Exhibit 27 -- Financial Data Schedule (Selected financial data -
for EDGAR electronic filing only to SEC)
Coopers & Lybrand report on limited review performed on financial
information contained herein (see page 16)
(b) Reports on Form 8-K
None
15
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors of
The Advest Group, Inc.:
We have reviewed the accompanying consolidated balance sheet of The Advest
Group, Inc. and subsidiaries as of June 30, 1995, and the related consolidated
statements of operations for the three and nine-month periods ended June 30,
1995 and 1994, cash flows for the nine-month periods ended June 30, 1995 and
1994, and changes in shareholders' equity for the nine-month period ended June
30, 1995. These financial statements are the responsibility of the Company's
management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures
to financial data and making inquires of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted
in accordance with generally accepted auditing standards, the objective of
which is the expression of an opinion regarding the financial statements taken
as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the aforementioned consolidated financial statements for
them to be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet as of September 30, 1994, and the
related consolidated statements of operations, changes in shareholders' equity
and cash flows for the year then ended (not presented herein), and in our
report dated October 27, 1994, we expressed an unqualified opinion on those
consolidated financial statements. In our opinion, the information set forth
in the accompanying consolidated balance sheet as of September 30, 1994, is
fairly stated, in all material respects, in relation to the consolidated
balance sheet from which it has been derived.
/s/ Coopers & Lybrand L.L.P.
Hartford, Connecticut
July 19, 1995
16
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant duly caused this report to be signed on its behalf by the
thereunto duly authorized.
The Advest Group, Inc.
Registrant
Date July 31, 1995 /s/Allen Weintraub
Allen Weintraub,
Chairman of the Board and
Chief Executive Officer
Date July 31, 1995 /s/Martin M. Lilienthal
Martin M. Lilienthal,
Senior Vice President and
Chief Financial Officer
17
<PAGE>
EXHIBIT INDEX
Exhibit Description
11 Computation of Net Income Per Share
27 Financial Data Schedule (Selected financial data - for EDGAR
electronic transmission only to SEC.)
18
<PAGE>
<TABLE> Exhibit 11
The Advest Group, Inc. and Subsidiaries
Computation of Net Income Per Common Share
<captions>
For the quarters For the nine months
ended June 30, ended June 30,
Assuming Assuming
(In thousands, except Primary full dilution Primary full dilution
per share amounts) 1995 1994* 1995 1995 1994* 1995
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net income $3,307 $200 $3,307 $4,328 $2,644 $4,328
Interest on convertible debentures
outstanding during the period, net of
tax and other related expenses - - 222 - - 752
------------------------------- --------------------------------
Net income applicable to common stock
and other dilutive securities $3,307 $200 $3,529 $4,328 $2,644 $5,080
=============================== ================================
Average number of common shares
outstanding during the period 8,521 8,681 8,521 8,533 8,829 8,533
Additional shares assuming:
Exercise of stock options 236 197 312 198 239 229
Conversion of debentures - - 1,518 - - 1,531
------------------------------- --------------------------------
Average number of common and common
equivalent shares used to calculate net
income per common share 8,757 8,878 10,351 8,731 9,068 10,293
=============================== ================================
Net income per common and common
equivalent share $0.38 $0.02 $0.34 $0.50 $0.29 $0.49
=============================== ================================
Note: For the three and nine months ended June 30, 1994,
net income per common share assuming full dilution is the
same as primary net income per common share.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> BD
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1995
<PERIOD-END> JUN-30-1995
<CASH> 12682
<RECEIVABLES> 548646
<SECURITIES-RESALE> 71926
<SECURITIES-BORROWED> 123953
<INSTRUMENTS-OWNED> 84131
<PP&E> 12240
<TOTAL-ASSETS> 885837
<SHORT-TERM> 10951
<PAYABLES> 294869
<REPOS-SOLD> 0
<SECURITIES-LOANED> 137505
<INSTRUMENTS-SOLD> 2551
<LONG-TERM> 43160
<COMMON> 106
0
0
<OTHER-SE> 77290
<TOTAL-LIABILITY-AND-EQUITY> 885837
<TRADING-REVENUE> 10369
<INTEREST-DIVIDENDS> 14268
<COMMISSIONS> 22166
<INVESTMENT-BANKING-REVENUES> 4836
<FEE-REVENUE> 4290
<INTEREST-EXPENSE> 7788
<COMPENSATION> 31893
<INCOME-PRETAX> 6224
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3307
<EPS-PRIMARY> .38
<EPS-DILUTED> .34
</TABLE>
