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 December 31, 1997
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)
90 State House Square
Hartford, Connecticut 06103
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (860) 509-1000
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 8,856,645 Shares
Class Outstanding at February 2, 1998
Total of sequentially numbered pages 13
<PAGE>
THE ADVEST GROUP, INC.
INDEX
Page No.
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
December 31, 1997 and September 30, 1997 3
Condensed Consolidated Statements of Earnings
Three Months Ended December 31, 1997 and 1996 4
Condensed Consolidated Statements of Cash Flows
Three Months Ended December 31, 1997 and 1996 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk 10
Part II. Other Information
Item 1. Legal Proceedings 10
Item 2. Changes in Securities 10
Item 6. Exhibits and Reports on Form 8-K 10
Signatures 12
2
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
The Advest Group, Inc.
Consolidated Balance Sheets
(Unaudited)
In thousands, except share and per share amounts December 31,1997 September 30, 1997
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash and short-term investments
Cash and cash equivalents $ 22,546 $ 12,459
Cash and securities segregated under federal and other regulations 279 265
-------------------------------
22,825 12,724
-------------------------------
Receivables
Brokerage customers, net 452,422 389,137
Loans, net 201,220 199,166
Securities borrowed 295,936 290,745
Brokers and dealers 8,250 4,096
Other 13,210 12,751
-------------------------------
971,038 895,895
-------------------------------
Securities
Trading, at market value 153,278 94,841
Held to maturity (market values of $20,451 and $20,931) 20,433 21,034
Available for sale, at market value 11,767 13,978
-------------------------------
185,478 129,853
-------------------------------
Other assets
Equipment and leasehold improvements, net 14,416 14,500
Other 23,627 23,834
-------------------------------
38,043 38,334
-------------------------------
$ 1,217,384 $1,076,806
===============================
Liabilities & shareholders' equity
Liabilities
Brokerage customers 345,135 319,101
Securities loaned 272,150 258,295
Deposits 165,785 169,583
Short-term borrowings 126,475 61,496
Securities sold, not yet purchased, at market value 91,524 52,113
Long-term borrowings 41,257 41,321
Checks payable 22,493 18,366
Compensation and benefits 19,496 25,477
Brokers and dealers 3,482 9,389
Other 19,969 17,074
-------------------------------
1,107,766 972,215
-------------------------------
Shareholders' equity
Common stock, par value $.01, authorized 25,000,000 shares,
issued 10,823,571 and 10,812,404 shares 108 108
Paid-in capital 70,886 71,309
Retained earnings 52,465 48,198
Net unrealized loss on securities available for sale, net of taxes (60) (63)
Treasury stock, at cost, 1,982,593 and 2,179,725 shares (13,183) (14,390)
Unamortized restricted stock compensation (598) (571)
-------------------------------
109,618 104,591
-------------------------------
$ 1,217,384 $1,076,806
<FN> ===============================
See Notes to Consolidated Financial Statements
3
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<TABLE>
The Advest Group, Inc.
Consolidated Balance Sheets
(Unaudited)
Three Months Ended
December 31,
------------------------------
(In thousands, except per share amounts) 1997 1996
- -----------------------------------------------------------------------------
<S> <C> <C>
Revenues
Commissions $ 32,423 $ 28,500
Interest 16,642 14,897
Principal transactions 10,762 10,327
Investment banking 10,353 8,703
Asset management and administration 7,974 5,718
Other 1,415 1,733
-------------- --------------
Total revenues 79,569 69,878
-------------- --------------
Expenses
Compensation and benefits 45,642 39,244
Interest 9,357 8,002
Communications 6,022 5,376
Occupancy and equipment 4,552 4,346
Business development 1,669 1,620
Professional 1,526 1,590
Brokerage, clearing and exchange 1,211 1,165
Other 1,890 2,656
-------------- --------------
Total Expenses 71,869 63,999
-------------- --------------
Income before taxes 7,700 5,879
Provision for income taxes 3,080 2,587
-------------- --------------
Net Income $ 4,620 $ 3,292
============== ==============
Net income per common and common equivalent shares:
Basic $ 0.57 $ 0.41
Diluted $ 0.50 $ 0.34
Cash dividend per common share $ 0.04 $ 0.00
Average common and common equivalent shares outstanding:
Basic 8,099 8,039
Diluted 9,213 10,157
<FN>
See Notes to Consolidated Financial Statements
4
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The Advest Group,Inc.
Consolidated Statements of Cash Flows
(Unaudited)
Three Months Ended December 31,
----------------------------------
In thousands 1997 1996
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income
Adjustments to reconcile net income to net cash $ 4,620 $ 3,292
provided by (used for) operating activities:
Depreciation and amortization 2,121 1,985
Provision for credit losses and asset devaluation 35 173
Loss on retirement of subordinated borrowings 0 608
Deferred income taxes (123) 44
Other 336 137
(Increase) decrease in operating assets:
Receivables from brokerage customers, net (63,305) (88,229)
Securities borrowed (5,191) (15,975)
Receivables from brokers and dealers (4,154) (1,377)
Trading securities (58,437) (1,350)
Cash and securities segregated under federal and other regulations (14) (11,975)
Other (1,008) 532
Increase (decrease) in operating liabilities:
Brokerage customers 26,034 57,701
Securities loaned 13,855 28,365
Securities sold, not yet purchased 39,411 5,303
Checks payable 4,127 15,436
Other (8,460) (1,438)
---------------- ----------------
Net cash used for operating activities (50,153) (6,768)
---------------- ----------------
FINANCING ACTIVITIES
Net (decrease) increase in deposits (3,798) 3,130
Proceeds from short-term borrowings 24,006 0
Repayment of short-term borrowings (19,066) (1,932)
Short-term brokerage borrowings, net 59,975 22,100
Proceeds from long-term borrowings 0 35,000
Repayment of long-term borrowings 0 (3,570)
Other 233 (665)
---------------- ----------------
Net cash provided by financing activities 61,350 54,063
---------------- ----------------
INVESTING ACTIVITIES
Proceeds from (payments for):
Sales of available for sale securities 3,293 2,254
Maturities of available for sale securities 382 473
Maturities of held to maturity securities 10,380 5,715
Purchases of available for sale securities (1) (1)
Purchases of held to maturity securities (10,000) (5,000)
Sale of investment advisory business, net 0 0
Loans sold 12,431 4,523
Sales of OREO, net 31 436
Principal collections on loans 11,132 4,639
Loans originated (26,037) (10,734)
Other (2,721) (4,762)
---------------- ----------------
Net cash used for investing activities (1,110) (2,457)
---------------- ----------------
Increase in cash and cash equivalents 10,087 44,838
Cash and cash equivalents at beginning of period 12,459 11,461
---------------- ----------------
Cash and cash equivalents at end of period $ 22,546 $ 56,299
================ ================
Interest paid $ 7,414 $ 7,449
Income taxes paid $ 1,579 $ 452
Non-cash activities:
Securitization of mortgages $ 3,684 $ 1,052
Restricted stock awards, net of forfeitures $ 26 $ 0
<FN>
See Notes to Consolidated Financial Statements
5
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The Advest Group, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Financial Statements:
The consolidated financial statements include the accounts of The
Advest Group, Inc. and all subsidiaries (collectively the "Company").
Principal operating subsidiaries are Advest, Inc. ("Advest"), a broker-dealer
and Advest Bank and Trust Company (the "Bank"), a federal savings bank. The
Company provides diversified financial services including securities
brokerage, trading, investment banking, consumer lending, trust and asset
management.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Management believes that all adjustments (consisting of normal recurring
accruals) necessary for a fair statement of the results of operations for the
periods presented have been included. All material intercompany accounts and
transactions have been eliminated. Certain fiscal 1997 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, 1997, as filed with the
Securities and Exchange Commission on Form 10-K.
2. Summary of Significant Accounting Policies:
The Financial Accounting Standards Board ("FASB") has issued Statement
of Financial Accounting Standards ("SFAS") 128, "Earnings Per Share" in
February 1997. As of December 31, 1997, the Company adopted SFAS 128, as
required, and its implementation did not have a material impact on the
Company's computation of earnings per share.
Basic earnings per share is calculated by dividing income available to
common stockholders by the weighted-average number of common shares
outstanding during the period. Diluted earnings per share is calculated by
dividing income available to common stockholders by the weighted-average
shares of common stock and common stock equivalents outstanding during the
period. Common stock equivalents are dilutive stock options that are assumed
exercised for calculation purposes. The diluted calculation also assumed full
conversion of the Company's outstanding subordinated debentures into common
stock and elimination of the related interest expense, net of taxes. The
debentures were retired in January 1997.
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
6
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The Advest Group, Inc.
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 December 31, 1997, Advest's regulatory net
capital of $62.2 million was 13% of aggregate debit balances and exceeded
required net capital by $52.2 million.
Under bank regulatory restrictions, the Bank is required to maintain a
minimum level of capital. With its conversion to a federal charter in April
1997, the Bank is required to limit annual dividends to the most recent four
quarters of net income, subject to limitations. No dividends have been
declared or paid by the Bank in fiscal year 1998. At December 31, 1997, the
Bank's leverage capital, risk-based and Tier 1 capital ratios were 6.83%,
10.13% and 8.88%, respectively, which met all regulatory requirements.
4. Net Income Per Common Share:
The following table provides the calculation of net income per common
share for the quarters ended December 31, 1997 and 1996:
For the quarters ended December 31,
--------------------------------------------------------
Basic Diluted
--------------------------------------------------------
In thousands, except per
share amounts 1997 1996 1997 1996
- -----------------------------------------------------------------------------
Net income $4,620 $3,292 $4,620 $3,292
Interest expense
on debentures, net -- -- -- 203
------ ------ ------ ------
Net income applicable to
common stock $4,620 $3,292 $4,620 $3,495
====================================================
Average number of common
shares outstanding during
the period 8,704 8,407 8,704 8,407
Adjustments:
Contingently issuable
shares (605) (368) -- --
Exercise of stock
options -- -- 509 235
Conversion of
debentures -- -- -- 1,515
---------------------------------------------------
Average number of common
shares outstanding 8,099 8,039 9,213 10,157
===================================================
Net income per common
share $ .57 $ .41 $ .50 $ .34
===================================================
7
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The Advest Group, Inc.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Overview
The Advest Group, Inc. ("AGI"), together with its subsidiaries,
provides diversified financial services including securities brokerage,
trading, investment banking, consumer lending, trust and asset management.
All aspects of the Company's business are highly competitive and regulated
and impacted by a variety of factors outside of its control including the
economy, interest rates, the political climate and investor sentiment.
Consequently, revenues and operating results can vary significantly from one
reporting period to the next.
The Company reported net income of $4.6 million for the quarter ended
December 31, 1997 compared with $3.3 million in the prior year, an increase
of 40%. Current quarter basic and diluted earnings per share were $.57 and
$.50, respectively, compared with $.41 and $.34, respectively, a year ago.
Total revenues increased 14% to $79.6 million.
In December 1997, the Company filed a Form S-3 Shelf Registration which
enables it to issue both debt and equity securities up to an aggregate $50
million. Potential proceeds from debt or equity offerings would be used for
general corporate purposes which may include debt refinancing and growth
through acquisition. The registration was declared effective January 5, 1998.
In October 1997, the Company acquired Ironwood Capital Ltd., a private
investment bank. Ironwood personnel joined Advest's Investment Banking Group
as the Corporate Fixed Income Department.
In December 1997, Hannah Consulting Group, an investment management
subsidiary of the Company, was merged into Advest's Investment Management
Department.
Advest, Inc.
Equity markets closed calendar year 1997 on an upward trend for an
unprecedented seventh consecutive year, despite significant volatility in the
last quarter. The markets were favorably impacted by continued economic
growth, a strong dollar, low interest rates and low inflation.
Advest posted pre-tax income of $8.1 million, reflecting a 20% increase
from the year earlier quarter. Revenues increased 15% to $74.4 million, a
record high. Agency commissions increased 14% to $32.4 million, led by mutual
funds and over-the-counter issues which increased 21% and 19%, respectively.
Asset management revenues increased 40% to $7.2 million, a record for the
11th consecutive quarter. Investment banking revenues increased 20% to a
record $10.4 million.
Advest Bank and Trust
The Bank posted pre-tax income of $.1 million compared with $.3 million
last year. The Bank remains well-capitalized and in full regulatory
compliance. At December 31, 1997, the Bank's nonperforming assets totaled
$5.2 million (2.3% of total Bank assets) compared with $2.3 million (1.0% of
total Bank assets) in the prior year.
8
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The Advest Group, Inc.
Results of Operations
Three Months Ended December 31, 1997 Versus
Three Months Ended December 31, 1996
Total revenues increased $9.7 million (14%) to $79.6 million, with
revenue increases posted in all categories except other income. Total
expenses increased $7.9 million (12%) to $71.9 million, primarily as a result
of sales-related compensation and incentives and higher firm payroll. The
effective tax rate was 40% in the current quarter compared with 44% last
year. The lower rate is related to lower state tax obligations, primarily in
Connecticut.
Agency commissions increased $3.9 million (14%) due to the continued
momentum of the equity markets. Mutual fund sales, including 12(b)1 fees,
increased $1.7 million (21%). Year to year gains were also achieved for over-
the-counter commissions, which increased $1.0 million (19%), and listed
commissions, which increased $1.0 million (8%).
Investment banking revenues increased $1.7 million (19%), primarily due
to a $1.4 million gain on the exercise of warrants. Corporate Finance earned
$1.6 million in fees from private placements during the first quarter
compared with $30,000 last year. The Corporate Fixed Income Group, formerly
Ironwood Capital, completed 3 private placements raising $125 million. Merger
and acquisition fee income decreased $1.5 million (81%) in the current
quarter.
Asset management revenues increased $2.3 million (39%) to $8.0 million,
primarily as a result of increased fee-based accounts at Advest. The Bank's
revenue increased 24% to $250,000 primarily due to increased trust revenues.
Other income decreased $.3 million (18%) due primarily to lower
execution fee income at Advest related to regulatory changes which impact
over-the-counter trading revenue.
Net interest income was $7.3 million, an increase of $.4 million (6%)
from 1996. Advest's net interest rose $.4 million (7%) primarily due to
higher average margin debits which were partly offset by increased borrowing
costs.
Compensation costs increased $6.4 million (16%) primarily due to higher
sales-related compensation and incentives and higher firm payroll primarily
related to general payroll increases and increased staff levels especially in
research, investment banking, sales and trading departments. Communication
costs increased $.6 million (12%) primarily related to volume-driven costs of
Advest's third party data processor and increased computer software expenses.
Other expenses decreased $.6 million (25%) primarily as a result of a $.6
million charge related to the early retirement of the Company's outstanding
convertible debentures in the prior year.
Liquidity and Capital Resources
Three Months Ended December 31, 1997
There have been no material changes to the Company's liquidity or
capital resources since September 30, 1997.
9
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The Advest Group, Inc.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes to the Company's risk management
analysis since September 30, 1997. Potential future losses associated with
the Company's non-hedged financial instruments are within pre-determined
levels of loss tolerance which are not material to results of operations,
financial condition or cash flows.
Part II. Other Information
Item 1. Legal Proceedings
The Company has been named as defendant in a number of legal
proceedings arising principally from its securities and investment banking
business. Some of these actions involve claims by plaintiffs for substantial
amounts. While results of litigation cannot be predicted with certainty, 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, future operating results or cash flows of the Company.
Item 2. Changes in Securities
During the current quarter the Company assigned 8,648 shares of its
common stock as compensation to employees under separate Employment
Agreements.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27 -- Financial Data Schedule (Selected financial data - for
EDGAR electronic filing only to SEC)
The interim financial information contained herein has been subjected
to a review by Coopers & Lybrand L.L.P., the registrant's Independent
Accountants, whose report is included on page 11 of this filing.
(b) Reports on Form 8-K
Form 8-K of the Registrant filed October 2, 1997, concerning
acquisition of Ironwood Capital Ltd.
10
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The Advest Group, Inc.
Report of Independent Accountants
To the Shareholders and Board of Directors of
The Advest Group, Inc.:
We have reviewed the accompanying condensed consolidated balance sheet of The
Advest Group, Inc. and subsidiaries as of December 31, 1997, and the related
condensed consolidated statements of earnings and cash flows for the three-
month period ended December 31, 1997 and 1996. These financial statements are
the responsibility of the Company's management.
We conducted our review in accordance with Statements on Standards for
Accounting and Review Services issued 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 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, 1997, and the
related statements of earnings, changes in shareholders' equity and cash
flows for the year then ended (not presented herein), and in our report,
dated October 22, 1997, we expressed an unqualified opinion on those
consolidated financial statements. In our opinion, the information set forth
in the accompanying condensed consolidated balance sheet as of September 30,
1997, is fairly stated, in all material respects, in relation to the balance
sheet from which it has been derived.
COOPERS & LYBRAND L.L.P.
Hartford, Connecticut
January 14, 1998
11
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The Advest Group, Inc.
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 February 6, 1998 /s/ Allen Weintraub
Allen Weintraub,
Chairman of the Board and
Chief Executive Officer
Date February 6, 1998 /s/ Martin M. Lilienthal
Martin M. Lilienthal,
Senior Vice President and
Chief Financial Officer
12
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<ARTICLE> BD
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> DEC-31-1997
<CASH> 22825
<RECEIVABLES> 675102
<SECURITIES-RESALE> 0
<SECURITIES-BORROWED> 295936
<INSTRUMENTS-OWNED> 185478
<PP&E> 14416
<TOTAL-ASSETS> 1217384
<SHORT-TERM> 126475
<PAYABLES> 211729
<REPOS-SOLD> 272150
<SECURITIES-LOANED> 0
<INSTRUMENTS-SOLD> 91524
<LONG-TERM> 41257
<COMMON> 108
0
0
<OTHER-SE> 109510
<TOTAL-LIABILITY-AND-EQUITY> 1217384
<TRADING-REVENUE> 10762
<INTEREST-DIVIDENDS> 16642
<COMMISSIONS> 32423
<INVESTMENT-BANKING-REVENUES> 10353
<FEE-REVENUE> 7974
<INTEREST-EXPENSE> 9357
<COMPENSATION> 45642
<INCOME-PRETAX> 7700
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4620
<EPS-PRIMARY> .57
<EPS-DILUTED> .50
</TABLE>
