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, 1999
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 8,922,556 Shares
Class Outstanding at August 5, 1999
<PAGE>
THE ADVEST GROUP, INC.
INDEX
Page No.
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
June 30, 1999 and September 30, 1998 3
Condensed Consolidated Statements of Earnings
Three and Nine Months Ended June 30, 1999 and 1998 4
Condensed Consolidated Statements of Cash Flows
Nine Months Ended June 30, 1999 and 1998 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk 13
Part II. Other Information
Item 1. Legal Proceedings 14
Item 2. Changes in Securities 14
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 16
2
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<TABLE>
Part I. Financial Information
Item 1. Financial Statements
The Advest Group, Inc.
Condensed Consolidated Balance Sheets
In thousands, except share and per share amounts June 30, 1999 September 30, 1998
- ------------------------------------------------------------------------------------------------
Unaudited
<S> <C> <C>
Assets
Cash and short-term investments
Cash and cash equivalents $ 25,974 $ 13,882
Cash and securities segregated under federal and
other regulations 252 248
----------- -----------
26,226 14,130
----------- -----------
Receivables
Securities borrowed 583,068 270,638
Brokerage customers, net 489,946 433,840
Brokers and dealers 14,037 5,310
Other 28,267 20,605
----------- -----------
1,115,318 730,393
----------- -----------
Securities
Trading, at market value 342,010 241,681
Available for sale, at market value 11,050 11,787
Held to maturity (market values of $17,088 and $18,911) 17,088 18,776
----------- -----------
370,148 272,244
----------- -----------
Other assets
Equipment and leasehold improvements, net 12,954 13,377
Net assets of discontinued operations -- 6,166
Other 26,207 24,787
----------- -----------
39,161 44,330
----------- -----------
Total assets $1,550,853 $1,061,097
=========== ===========
Liabilities & shareholders' equity
Liabilities
Securities loaned $ 519,337 $ 216,275
Brokerage customers 332,489 329,975
Securities sold, not yet purchased, at market value 233,834 149,189
Short-term borrowings 206,696 134,762
Long-term borrowings 30,598 41,308
Compensation and benefits 25,239 27,247
Checks payable 20,034 2,973
Brokers and dealers 16,236 13,984
Securities sold under agreements to repurchase 1,146 --
Net liabilities of discontinued operations 580 --
Other 33,089 21,717
----------- -----------
1,419,278 937,430
----------- -----------
Shareholders' equity
Common stock, par value $.01, authorized 25,000,000 shares,
issued 10,905,239 and 10,893,159 shares 109 109
Paid-in capital 75,979 72,966
Retained earnings 74,789 65,785
Accumulated other comprehensive income, net (6) (12)
Unamortized restricted stock compensation (1,939) (1,081)
Treasury stock, at cost, 2,002,274 and 1,943,833 shares (17,357) (14,100)
----------- -----------
131,575 123,667
----------- -----------
Total liabilities and shareholders' equity $1,550,853 $1,061,097
=========== ===========
- ----------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements
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The Advest Group, Inc.
Condensed Consolidated Statements of Earnings
(unaudited)
Three months ended Year to date
June 30, June 30,
In thousands, except --------------------- --------------------
per share amounts 1999 1998 1999 1998
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues
Commissions $37,820 $33,039 $105,558 $ 98,883
Interest 15,454 14,241 41,116 40,219
Principal transactions 12,685 11,191 41,547 33,558
Investment banking 8,887 10,776 26,293 29,276
Asset management and administratio 10,159 8,432 28,596 24,716
Other 1,725 1,462 5,862 4,715
------- ------- -------- --------
Total revenues 86,730 79,141 248,972 231,367
------- ------- -------- --------
Expenses
Compensation 51,956 45,378 149,113 136,148
Interest 9,753 8,416 24,342 23,165
Communications 8,150 7,563 23,719 20,322
Occupancy & equipment 4,877 4,732 15,195 13,770
Business development 2,056 1,970 5,686 5,360
Professional 1,601 1,394 4,010 3,569
Brokerage, clearing & exchange 1,286 1,163 3,781 3,415
Other 2,177 1,994 5,874 5,171
------- ------- -------- --------
Total expenses 81,856 72,610 231,720 210,920
------- ------- -------- --------
Income before taxes 4,874 6,531 17,252 20,447
Provision for income taxes 1,950 2,612 6,901 8,179
------- ------- -------- --------
Income from continuing operations 2,924 3,919 10,351 12,268
Income from discontinued
operations, net of taxes 295 229 603 638
Loss on sale of discontinued
operations, net of taxes 705 -- 705 --
------- ------- -------- --------
Net income $ 2,514 $ 4,148 $ 10,249 $ 12,906
======= ======= ======== ========
- --------------------------------------------------------------------------------------
Per share data:
Basic earnings:
Continuing operations $ 0.36 $ 0.48 $ 1.29 $ 1.50
Discontinued operations 0.04 0.03 0.08 0.08
Loss on sale of discontinued
operations 0.09 -- 0.09 --
------- ------- -------- --------
Net income $ 0.31 $ 0.51 $ 1.28 $ 1.58
======= ======= ======== ========
Diluted earnings:
Continuing operations $ 0.32 $ 0.42 $ 1.12 $ 1.31
Discontinued operations 0.03 0.02 0.07 0.07
Loss on sale of discontinued
operations 0.08 0.00 0.08 0.00
------- ------- -------- --------
Net income $ 0.27 $ 0.44 $ 1.11 $ 1.38
======= ======= ======== ========
Dividends declared $ 0.05 $ 0.04 $ 0.14 $ 0.12
======= ======= ======== ========
See Notes to Consolidated Financial Statements
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</TABLE>
<TABLE>
The Advest Group, Inc.
Condensed Consolidated Statements of Cash Flows
Unaudited
Nine months ended June 30,
---------------------------
In thousands 1999 1998
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 10,249 $ 12,906
Income from discontinued operations (603) (638)
Loss on sale of discontinued operations 705 --
---------- ----------
Income from continuing operations 10,351 12,268
Adjustments to reconcile net income to net cash (used in)
provided by operating activities of continuing operations:
Depreciation and amortization 8,135 6,765
Provision for credit losses and asset devaluation 80 268
Deferred income taxes 5 667
Other (993) 6
(Increase) decrease in operating assets:
Receivables from brokerage customers, net (55,882) (86,409)
Securities borrowed (312,430) (106,532)
Receivables from brokers and dealers (8,727) (4,317)
Trading securities (99,837) (112,907)
Cash and securities segregated under federal and other r (4) 18
Other (12,976) (7,198)
Increase (decrease) in operating liabilities:
Brokerage customers 2,514 1,840
Securities loaned 303,062 108,983
Securities sold, not yet purchased 84,645 92,665
Checks payable 17,061 1,172
Other 14,821 (355)
---------- ---------
Net cash used in operating activities of continuing operations (50,175) (93,066)
---------- ---------
FINANCING ACTIVITIES
Repayment of short-term borrowings (195) (1,575)
Short-term brokerage borrowings, net 70,437 108,180
Repurchase agreements 1,146 --
Other (4,082) 117
---------- ---------
Net cash provided by financing activities of continuing operatio 67,306 106,722
---------- ---------
INVESTING ACTIVITIES
Proceeds from (payments for):
Sales of available for sale securities 13,414 35,853
Maturities of available for sale securities 810 2,260
Maturities of held to maturity securities 18,603 17,222
Purchases of available for sale securities (12,913) (37,383)
Purchases of held to maturity securities (16,599) (15,500)
Principal collections on loans 1,589 125
Loans originated (513) (716)
Other (7,292) (9,028)
---------- ---------
Net cash used in investing activities of continuing operations (2,901) (7,167)
Net cash used in discontinued operations (2,138) (10,070)
---------- ---------
Increase (decrease) in cash and cash equivalents 12,092 (3,581)
Cash and cash equivalents at beginning of period 13,882 12,459
---------- ---------
Cash and cash equivalents at end of period $ 25,974 $ 8,878
========== =========
- ------------------------------------------------------------------------------------------------
Interest paid $ 23,471 $ 22,386
Income taxes paid $ 8,402 $ 11,175
Non-cash activities:
Restricted stock awards, net of forfeitures $ 1,261 $ 385
See Notes to Consolidated Financial Statements
5
<PAGE>
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. During
the current quarter, the Company announced that it was entering into two
agreements with a third party financial institution, which include the sale
of the Bank's lending and deposit businesses. The Company provides
diversified financial services including securities brokerage, trading,
investment banking, 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 1998 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, 1998, as filed with the
Securities and Exchange Commission on Form 10-K.
2. Summary of Significant Accounting Policies:
Repurchase agreements
The Company utilizes short-term repurchase agreements as supplementary
short-term financing transactions and receives cash as collateral for U.S.
Treasury securities transferred. These repurchase agreements are accounted
for as collateralized financings. The fee paid by the Company is recorded as
interest expense. The Company monitors the market value of securities
transferred on a daily basis, and obtains or refunds collateral as necessary.
Other accounting pronouncements
In October 1998, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") 134, "Accounting
for Mortgage-Backed Securities Retained after the Securitization of Mortgage
Loans Held for Sale by a Mortgage Banking Enterprise". The Company adopted
SFAS 134 as of January 1, 1999, as required, and its adoption did not have a
material impact on the Company's financial condition, results of operations
or cash flows.
SFAS 134 amends SFAS 65 to require that, after the securitization of
mortgage loans held for sale, an entity engaged in mortgage banking
activities classify the resulting mortgage-backed securities or other
retained interests based on its ability and positive intent to sell or hold
those investments.
In June 1999, the FASB issued SFAS 137, "Deferral of the Effective Date
of SFAS 133." SFAS 133, "Accounting for Derivative Instruments and Hedging
Activities" was issued in June 1998. SFAS 137 defers the effective date for
6
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SFAS 133 to all fiscal quarters of all fiscal years beginning after June 15,
2000. The Company will adopt SFAS 133 as amended by SFAS 137 during fiscal
2001, as required, and has not determined whether its implementation will
have a material impact on the Company's financial condition, results of
operations or cash flows.
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, 1999, Advest's regulatory net capital of $65.5 million was 12% of
aggregate debit balances and exceeded required net capital by $54.4 million.
Under bank regulatory restrictions, the Bank is required to maintain a
minimum level of capital. As a federal chartered savings bank, 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 during the current fiscal year. At June 30, 1999, the Bank's
leverage capital, risk-based and Tier 1 capital ratios were 8.80%, 10.48% and
10.45%, respectively, which met all regulatory requirements.
4. Common Stock:
The following table provides the calculation of net income per common
share for the three and nine months ended June 30, 1999 and 1998:
For the quarters ended June 30,
Basic Diluted
------------------ -----------------
In thousands, except
per share amounts 1999 1998 1999 1998
- ------------------------------------------------------------------------------
Income from continuing operations $2,924 $3,919 $2,924 $3,919
Income from discontinued
operations, net of taxes 295 229 295 229
Loss on sale of discontinued
operations, net of taxes 705 -- 705 --
------ ------ ------ ------
Net income $2,514 $4,148 $2,514 $4,148
====== ====== ====== ======
Average number of common shares
outstanding during the period 8,889 8,954 8,889 8,954
Adjustments:
Contingently issuable shares (892) (772) -- --
Exercise of stock options -- -- 366 473
------ ------ ------ ------
Average number of common
shares outstanding 7,997 8,182 9,255 9,427
====== ====== ====== ======
Income from continuing operations $ 0.36 $ 0.48 $ 0.32 $ 0.42
Income from discontinued
operations, net of taxes 0.04 0.03 0.03 0.02
Loss on sale of discontinued
operations, net of taxes 0.09 -- 0.08 --
------- ------- ------- -------
Net income $ 0.31 $ 0.51 $ 0.27 $ 0.44
======= ======= ======= =======
7
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For the nine months ended June 30,
Basic Diluted
------------------- -------------------
In thousands, except
per share amounts 1999 1998 1999 1998
- ------------------------------------------------------------------------------
Income from continuing operations $10,351 $12,268 $10,351 $12,268
Income from discontinued
operations, net of taxes 603 638 603 638
Loss on sale of discontinued
operations, net of taxes 705 -- 705 --
------- ------- ------- -------
Net income $10,249 $12,906 $10,249 $12,906
======= ======= ======= =======
Average number of common shares
outstanding during the period 8,875 8,847 8,875 8,847
Adjustments:
Contingently issuable shares (875) (701) -- --
Exercise of stock options -- -- 370 480
------- ------- ------- -------
Average number of common
shares outstanding 8,000 8,146 9,245 9,327
======= ======= ======= =======
Income from continuing operations $ 1.29 $ 1.50 $ 1.12 $ 1.31
Income from discontinued
operations, net of taxes 0.08 0.08 0.07 0.07
Loss on sale of discontinued
operations, net of taxes 0.09 -- 0.08 --
------- ------- ------- -------
Net income $ 1.28 $ 1.58 $ 1.11 $ 1.38
======= ======= ======= =======
5. Comprehensive Income:
In October 1998, the Company adopted the provisions of FASB Statement
No. 130, "Reporting Comprehensive Income". Statement No. 130 requires
reporting of comprehensive income for all gains and losses that result from
transactions not included in net earnings. The components of comprehensive
income are as follows:
June 30,
-----------------------------------------
Three months ended Nine months ended
------------------- -------------------
In thousands 1999 1998 1999 1998
- ------------------------------------------------------------------------------
Net income $2,514 $4,148 $10,249 $12,906
Other comprehensive income:
Unrealized holding gains/losses
arising during period 238 6 194 72
Less: reclassification
adjustment for gains
realized in net income (183) -- (183) 56
------- ------- ------- -------
Net unrealized holding
gains/losses arising
during the period 55 6 11 128
Deferred income taxes 15 2 5 48
------- ------- ------- -------
8
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Total other comprehensive income 40 4 6 80
------- ------- ------- -------
Comprehensive income $2,554 $4,152 $10,255 $12,986
======= ======= ======== ========
6. Discontinued Operations:
On May 11, 1999, the Company announced the sale of its deposit and
lending businesses to a third party financial institution. Pursuant to
Accounting Principles Board Opinion No. 30 "Reporting the Results of
Operations - Reporting the Effects of Disposal of a Segment of a Business,
and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions," the consolidated financial statements of the Company reflect
the disposition of certain assets and liabilities of the Bank. Accordingly,
the consolidated Company's revenues, costs and expenses, assets and
liabilities, and cash flows have been restated to exclude the lending and
deposit businesses of the Bank from the respective captions in the Condensed
Consolidated Statement of Earnings, Condensed Consolidated Balance Sheets and
Condensed Consolidated Statements of Cash Flows, and have been reported
through their respective dates of disposition as "Income from discontinued
operations," net of applicable income taxes; as "Net liabilities or assets of
discontinued operations"; and as "Net cash used in discontinued operations".
Summarized financial information for discontinued operations is as
follows:
June 30,
-----------------------------------------
Three months ended Nine months ended
------------------ ------------------
In thousands 1999 1998 1999 1998
Revenue $3,002 $3,728 $9,216 $11,896
Income before taxes 492 382 1,005 1,063
Net income 295 229 603 638
At June At September
In thousands 30, 1999 30, 1998
- ------------------------------------------------------------------
Total assets 160,435 178,340
Total liabilities 161,015 172,174
Net assets of discontinued operations -- 6,166
Net liabilities of discontinued operations 580 --
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Overview
The Advest Group, Inc. ("AGI"), together with its subsidiaries (the
"Company"), provides diversified financial services including securities
brokerage, trading, investment banking, trust and asset management. All
aspects of the Company's business are highly competitive and impacted by
regulatory and other factors outside of its control, including domestic and
global economic and financial conditions, the volume and price levels of
securities markets, the demand for investment banking services and interest
rate volatility. The Company closely monitors its operating environment to
enable it to respond promptly to market cycles. In addition, the Company
seeks to lessen earnings volatility by controlling expenses, increasing fee-
9
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based business and developing new revenue sources. Nonetheless, operating
results of any individual period should not be considered representative of
future performance.
Advest, Inc. ("Advest"), a regional broker/dealer and the Company's
principal subsidiary, provides brokerage, investment banking and asset
management services to retail and institutional investors through 90 sales
offices in 16 states and Washington, DC. Advest Bank and Trust Company (the
"Bank"), a FDIC-insured, federal savings bank, offers residential mortgage
lending and trust services primarily through Advest's branch network. During
the current quarter, the Company announced that it was entering into two
agreements with a third party financial institution, which include the sale
of the Bank's lending and deposit businesses. As required, the Company has
disclosed the net loss from the sale of the discontinued operations as a
separate component of earnings and restated all prior periods to separately
disclose income from discontinued operations. Refer to discussion below and
under the caption "Advest Bank and Trust." The purchase and sale transaction
resulted in a pre-tax profit of $.3 million, after anticipated severance
costs. However, the after tax impact was a charge of $.7 million due to tax
implications related to the reversal of the Bank's loan loss reserves.
The Company reported income from continuing operations of $2.9 million
($.32 per share) compared with $3.9 million ($.42 per share), last year, a
decline of 25%. Income from discontinued operations was $.3 million ($.03
per share) compared with $.2 million ($.02 per share) last year. The loss on
sale of discontinued operations was $.7 million or $.08 per diluted share.
Net income, was $2.5 million ($.27 per share) compared with $4.1 million
($.44 per share) in the prior year, a 39% decline. Total revenues increased
10% to $86.7 million and total expenses increased 13% to $81.9 million.
Through the first nine months of fiscal 1999, income from continuing
operations was $10.4 million ($1.12 per share), down 16% from $12.3 million
($1.31 per share) last year. Income from discontinued operations was $.6
million ($.07 per share) for both the 1999 and 1998 periods. Net income was
$10.2 million ($1.11 per share) compared with $12.9 million ($1.38 per share)
in the prior year, a decline of 21%. Total revenues increased 8% to $249.0
million while total expenses increased 10% to $231.7 million.
Advest, Inc.
The Federal Reserve, as expected, raised the fed funds rate 25 basis
points the last day of the current quarter. Rate increases generally cause
stock and bond prices to decline, however, indications that a second rate
hike was not imminent caused both stock and bond markets to rally at quarter
end, with two of the major equity indices achieving new highs. The Dow Jones
Industrial Average (DJIA) gained 12% during the quarter, 23% for the twelve
month period, surpassing the 11000 threshold before closing at 10971, off 1%
from its high. The S&P 500 and Nasdaq Composite achieved record highs,
closing up 7% each for the quarter, and 21% and 42%, respectively, for the
twelve months ended June 30, 1999. The interest rate hike, forewarned by the
Fed in May, had a negative impact on underwriting activities during the
current quarter. Total stock and bond underwritings declined 8% from the
June 1998 quarter. Merger and acquisition activity, although at near record
peaks, has declined considerably in all but a handful of industry sectors.
Advest, Inc. posted record revenues of $85.8 million, reflecting a 10%
increase from the prior year. Record levels were attained for agency
commissions, up 14%, interest income, up 8%, and asset management revenues,
up 22%. Revenue from principal transactions increased 13% while investment
banking revenues declined 18%. Expenses increased 12% to $80.1 million.
Pre-tax profits decreased 20% to $5.7 million from the prior year, but
reflected a modest increase from the immediately preceding quarter.
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Advest Bank and Trust
During the current quarter, the Company announced that it will enter
into two agreements with Hudson United Bank ("Hudson"), a subsidiary of
Hudson United Bancorp, a Mahwah, New Jersey-based bank holding company.
Under the terms of a purchase and sale agreement, Hudson will acquire the
loan and other financial assets and assume the deposit liabilities of the
Bank. In a separate agreement, Advest and Hudson will enter into a strategic
alliance whereby Hudson will become the exclusive provider of banking
products and services to Advest and its clients. Concurrent with the
agreements, the Bank will end its mortgage origination and deposit services
but will retain its bank charter and continue to provide trust and custody
services. The purchase and sale transaction, which is subject to approval by
federal and state regulatory authorities, is expected to close in the first
quarter of fiscal 2000.
Income from discontinued operations reflects the after tax operating
results of the Bank's lending and deposit operations and, along with the loss
on the sale of discontinued operations, is discussed in the Overview above.
Total revenues and expenses for the Bank's retained trust and custody
operations are not material to consolidated results.
Results of Operations
Three Months Ended June 30, 1999 Versus
Three Months Ended June 30, 1998
Net revenues, total revenues less interest expense, increased $6.3
million (9%) to $77.0 million. Net expenses increased $7.9 million (12%) to
$72.1 million, primarily as a result of higher sales-related compensation and
general payroll. The effective tax rate was 40% for both the current and
prior year.
Agency commissions increased $4.8 million (14%) led by a $2.3 million
(19%) increase in listed commissions, a $1.4 million (24%) increase in over-
the-counter commissions and a $.8 million (35%) increase in insurance
commissions. Mutual fund commissions, including distribution fees, were
substantially unchanged from the 1998 quarter. Commissions on listed and
over-the-counter securities increased primarily due to high share volume and
prices as previously discussed in the Overview.
Revenue from principal transactions increased $1.5 million (13%).
Commissions on fixed income securities increased $2.8 million (52%), led by
investment grade corporate bonds, up $.9 million (75%), government agency
obligations, up $.8 million (272%), and collateralized mortgage obligations
(CMOs), up $.3 million (56%). The increases in government agency and CMOs
sales were due primarily to two new sales units established by Advest in the
latter part of fiscal 1998: a fixed income sales unit in Boca Raton, Florida
and a Community Reinvestment Act Sales (CRA) unit which sells securitized
loans to banks and other financial institutions. Fixed income trading
profits declined across the board primarily as a result of higher interest
rates and investor concerns that interest rates would be increasing. Trading
profits for corporate, municipal and government bonds declined $.2 million
(25%), $.4 million (67%) and $.1 million (60%), respectively. On the equity
side, trading profits were $172,000 in the June 1999 quarter compared with a
trading loss of $159,000 in the prior year and equity sales credits declined
$.7 million (17%).
Investment banking revenues decreased $1.9 million (18%). Merger and
acquisition fee income declined $2.5 million (69%) reflecting a dearth of
activity in most industry sectors as discussed previously. Private placement
fees in the Corporate Fixed Income Group declined $.7 million (67%) and unit
trust commissions declined $.4 million (21%) primarily due to interest rate
concerns. These declines were partly offset by a $.5 million (108%) year-to-
year increase in underwriting fees and a $1.1 million (51%) increase in
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related sales credits. Current quarter revenues increased $1.1 million due
primarily to unrealized gains on equity warrants received in connection with
investment banking activities.
Asset management revenues increased $1.7 million (20%) primarily as a
result of increased fee-based managed account business and higher service
fees related to money market accounts at Advest. The Bank's revenue increased
26% to $341,000 primarily due to increased trust revenues.
Compensation costs increased $6.6 million (15%) primarily due to higher
sales-related compensation and increased staff levels especially in retail
sales management, data processing and fixed income personnel. Communications
costs increased $.6 million (8%) primarily related to higher volume-driven
costs of Advest's third party data processor and higher service bureaus costs
related to enhanced desktop technology.
Nine Months Ended June 30, 1999 Versus
Nine Months Ended June 30, 1998
Net revenues increased $16.4 million (8%) and net expenses increased
$19.6 million (10%). Year-to-year variances in agency commissions and asset
management are consistent with the June quarter analysis. On the expense
side, variances for compensation and benefits and communications are
consistent with the June quarter discussion.
Revenue from principal transactions increased $8.0 million (24%)
primarily related to a $9.6 million (66%) increase in fixed income sales
credits and a $2.0 million (77%) increase in corporate bond trading profits.
These increases were partly offset by a $2.7 million (19%) decline in equity
sales credits. Current year results reflect an over-the-counter trading loss
of $.6 million compared with a profit of $142,000 a year ago, reflective of
the current market environment which has resulted in part from rule changes
implemented by the SEC which have reduced the profit spreads of market makers
over the past few years. Primarily in response to the SEC changes, there is
an ongoing transition in the mix of over-the-counter business from principal
to agency transactions as is evidenced by the sharp decline in principal
business and a corresponding increase in agency business. See discussion of
agency commissions as well.
Investment banking revenues declined $3.0 million (10%) with declines
posted in virtually all business activities. Merger and acquisition fees
declined $2.2 million (45%) and private placement fees declined $1.2 million
(40%). Total sales credits, which include equities, fixed income securities
and mutual funds, declined $2.1 million (21%). Equity underwriting fees
declined $.4 million (16%) and related trading profits declined $.9 million
(83%). Corporate syndicate trading profits declined $.4 million (53%).
These declines were partly offset by a $4.0 million increase in the firm
trading account primarily related to a first quarter $3.7 million realized
gain on an equity investment acquired in connection with Advest's investment
banking activities.
Other income increased $1.1 million (24%) primarily due to higher fee
income and proceeds from a legal settlement.
Occupancy and equipment costs increased $1.4 million (10%) primarily due
to rent increases, including the opening of new sales offices, and computer
and equipment rental and lease expenses related to firm-wide desktop
technology upgrades. Professional fees increased $.4 million (12%) primarily
related to consulting costs associated with the Company's risk management
activities.
Liquidity and Capital Resources
Nine Months Ended June 30, 1999
Total assets increased $489.8 million (46%). Securities borrowed
increased $312.4 million (115%) of which approximately $229.2 million
represents an increase in firm securities borrowed with a corresponding
12
<PAGE>
increase in firm securities loaned. The balance of the increase was used
primarily to cover a $84.6 million (57%) increase in short trading positions,
mostly fixed income. Trading securities increased $100.3 million (42%)
primarily related to new principal trading activities initiated by the
broker/dealer in late fiscal 1998. This increase was financed primarily by
short-term borrowings, which increased $71.9 million (53%).
During the nine months ended June 30, 1999, the Company re-purchased
264,700 shares of its common stock at a cost of $4.8 million under a buyback
program begun in August 1990. Cash dividends totaling $1.2 million were
declared and/or paid. At June 30, 1999, 8,902,965 shares were outstanding.
During the current quarter, the Company announced that it will sell the
financial assets and deposit liabilities of the Bank and enter into a
strategic agreement with Hudson United Bank. Refer to discussion under
Advest Bank and Trust above. As a result of the proposed agreements, the
ongoing capital requirements of the Bank are expected to be significantly
lower enabling the Company to redeploy approximately $12.0 million of capital
currently invested in the Bank. Most of the redeployed capital is expected
to be invested in Advest for the purpose of reducing its short-term
borrowings.
There have been no other material changes to the Company's liquidity or
capital resources since September 30, 1998.
Forward Looking Statements
The Company and its subsidiaries conduct their businesses in financial
markets that are influenced by many unpredictable factors, including economic
conditions, monetary policies, interest and inflation rates, market
liquidity, national and international political events, regulatory
developments, changing tax law, the competitive environment and investor
sentiment. These factors can significantly affect the transaction volume,
price levels and volatility of financial markets, as well as the
competitiveness of the Company's products and services within its industry.
The Company's revenues and net earnings may vary significantly from period to
period as a result. In addition to presenting historical information, the
Company may make or publish forward-looking statements about management
expectations, strategic objectives, business prospects, anticipated financial
performance, and similar matters. Numerous factors, many beyond the
Company's control, could cause actual results to differ materially from the
expectations expressed. Those factors include, among others, those listed
above and the other risks and uncertainties noted elsewhere in this Form
10-Q. The Company does not undertake any obligation to publicly update or
revise any forward-looking statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There were no material changes to the Company's market risk analysis
during the quarter ending June 30, 1999.
13
<PAGE>
Part II. Other Information
Item 1. Legal Proceedings
The Company has been named as defendant, or has been threatened with
being named defendant in various actions, suits and proceedings before a
court or arbitrator arising principally from its securities and investment
banking business. Such matters involve alleged violations of federal and
state securities laws and other laws. Certain of these actions claim
substantial damages and, if determined adversely to the Company, could have a
material adverse effect on the consolidated financial condition, results of
operations or cash flows of the Company. The Estate of Gabriel Levine and his
wife and various related entities have threatened a proceeding before the
American Arbitration Association against Advest. They originally commenced
related arbitration and court proceedings in 1993, which were stayed pending
consideration of statute of limitations defenses. In 1998 the Connecticut
Supreme Court ruled that arbitrators and not a court should decide whether
those defenses apply. The claimants allege that the option trading in their
accounts was unsuitable, and that there was a failure to disclose risks and
to supervise their accounts. In court papers filed in 1993 the claimants
asserted claims for principal losses of nearly $30,000,000, plus interest
since October 1987. Management believes that Advest, Inc. has strong defenses
to these claims and intends to defend them vigorously. While the outcome of
any litigation is uncertain, management, based in part upon consultation with
legal counsel, believes that the resolution of all matters pending or
threatened against the Company will not have a material adverse effect on the
financial condition or future results of operations or cash flows of the
Company.
Item 2. Changes in Securities
During the current quarter the Company assigned 12,061 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 10(a) -- Amendment to Employment Agreement with
President/Chief Executive Officer
Exhibit 10(b) -- Second Amendment to The Advest Group, Inc.
Nonqualified Executive Post-Employment Income Plan
effective as of June 3, 1999
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 PricewaterhouseCoopers LLP, the
registrant's Independent Accountants, whose report is
included on page 15 of this filing.
(b) Reports on Form 8-K
Form 8-K filed May 11, 1999 concerning Strategic Alliance Agreement and
Purchase and Sale Agreement between the Company and Hudson United Bancorp.
14
<PAGE>
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 (the "Company") as of June 30, 1999, and
the related condensed consolidated statements of earnings and cash flows for
the three-month and nine-month periods ended June 30, 1999 and 1998. 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, 1998, 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 21, 1998, 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,
1998, is fairly stated, in all material respects, in relation to the balance
sheet from which it has been derived.
PricewaterhouseCoopers LLP
/s/ PricewaterhouseCoopers LLP
Hartford, Connecticut
July 14, 1999
15
<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 August 12, 1999 /s/ Grant Kurtz
Grant Kurtz,
Chief Executive Officer
and President
Date August 12, 1999 /s/ Martin M. Lilienthal
Martin M. Lilienthal,
Executive Vice President and
Chief Financial Officer
16
<PAGE>
Exhibit Index
Exhibit Description Page
10(a) Amendment to Employment Agreement with President/Chief
Executive Officer 18
10(b) Second Amendment to The Advest Group, Inc. Nonqualified
Executive Post-Employment Income Plan effective as of
June 3, 1999 20
27 Financial Data Schedule (Selected financial data - for
EDGAR electronic transmission only for SEC.) 22
17
</TABLE>
<PAGE>
Exhibit 10(a)
THE ADVEST GROUP, INC.
90 State House Square
Hartford, CT 06103
April 1, 1999
Mr. Grant W. Kurtz
President and Chief Executive Officer
The Advest Group, Inc.
90 State House Square
Hartford, CT 06103
Re: Amendment to Employment Agreement
Dear Grant:
The Human Resources Committee of the Board of Directors of The Advest
Group, Inc. ("Advest") has adopted a resolution authorizing me to send you
this letter amending the terms of the Employment Agreement between Advest and
you dated October 1, 1997 (the "Employment Agreement"). Except to the extent
modified below, the Employment Agreement shall remain in full force and
effect.
The Employment Agreement is amended as follows:
1. Paragraph 1 is amended by deleting the word "President" where it
appears and replacing it with "Chief Executive Officer," and by deleting in
its entirety the phrase "reporting to and under the direction of the Chief
Executive Officer."
2. Paragraph 2 is amended by deleting the date "September 30, 2002"
where it appears and replacing it with the date "September 30, 2004."
3. Paragraph 3 is amended by deleting the phrase "other than the
Chief Executive Officer" where it appears in the final sentence.
<PAGE>
Mr. Grant W. Kurtz
April 1, 1999
Page 2
4. Clauses (i) and (ii) of paragraph 5(a) are amended by deleting the
word "President" where it appears in each clause and replacing it with "Chief
Executive Officer."
Please sign the enclosed acknowledgement copy of this letter confirming
your agreement with the terms of this letter.
Very truly yours,
/s/ Richard G. Dooley
Richard G. Dooley
Chairman, Human Resources Committee
for the Board of Directors
By signing below I confirm my agreement
with the terms of this letter.
/s/ Grant W. Kurtz
________________________________
Grant W. Kurtz
<PAGE>
Exhibit 10(b)
Second Amendment to
The Advest Group, Inc.
Nonqualified Executive Post-Employment
Income Plan
THIS SECOND AMENDMENT to The Advest Group, Inc. Nonqualified Executive
Post-Employment Income Plan (the "Plan") is made effective as of June 3,
1999.
W I T N E S S E T H
WHEREAS, the Plan was adopted effective October 1, 1993 for a select
group of highly compensated senior executives to ensure that the overall
effectiveness of the Company's compensation program will attract, retain and
motivate qualified senior executives;
WHEREAS, the Plan was amended by action of the Board of Directors
effective October 1, 1995; and
WHEREAS, the Company believes that it is now appropriate to amend the
Plan to provide for enhanced benefits for such executives contingent upon
performance-related compensation they earn in the future, and to make other
changes as specified below;
NOW, THEREFORE, the Plan is hereby amended as follows:
1. Effective as of October 1, 1999, Section 1.10 of the Plan is
modified in its entirety to read as follows:
1.10 "Compensation" for any Participant for
any year means the sum of all base pay and bonus
(but disregarding any bonus exceeding 50% of base
salary) paid to the Participant during the year,
including in that calculation any salary deferrals
under a plan intended to meet the requirements of
either Section 401(k) or Section 125 of the Internal
Revenue Code.
2. Section 2.1 of the Plan is modified in its entirety to read as
follows:
2.1 Eligibility. A senior executive employee of
the Company or any affiliated corporation is eligible
to become a Participant in the Plan; provided such
employee is designated as a Participant by the Board of
Directors or the Human Resources Committee or equivalent
committee of the Board of Directors. Once an employee
becomes a Participant, such employee shall remain a
Participant until termination of employment with the
Company and thereafter until all benefits, if any, to
which such employee or such employee's Beneficiary is
entitled under the plan have been paid. Notwithstanding
<PAGE>
the foregoing, the Board of Directors or Human Resources
Committee or equivalent committee may at any time limit a
Participant's Annual Benefit to the Annual Benefit accrued
as a specified date no earlier than the date action is
taken. In such event, the Annual Benefit will be calculated
as though the Commencement Date occurred on the specified
date. Payment of Annual Benefits will commence on the
Commencement Date determined in accordance with Section 3.1.
3. In all other respects the Plan remains in full force and effect.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
effective as of the date first written above.
THE ADVEST GROUP, INC.
By: ____________________
Grant W. Kurtz
Chief Executive Officer
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