<PAGE>
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 March 31, 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 8,878,930 Shares
Class Outstanding at May 5, 1999
Exhibit index on page 17.
<PAGE>
THE ADVEST GROUP, INC.
INDEX
Page No.
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
March 31, 1999 and September 30, 1998 3
Condensed Consolidated Statements of Earnings
Three and Six Months Ended March 31, 1999 and 1998 4
Condensed Consolidated Statements of Cash Flows
Six Months Ended March 31, 1999 and 1998 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 12
Part II. Other Information
Item 1. Legal Proceedings 13
Item 2. Changes in Securities 13
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 16
2
<PAGE>
Part I. Financial Information
Item 1. Financial Statements
The Advest Group, Inc.
Condensed Consolidated Balance Sheets
<TABLE>
In thousands, except share and per share amounts March 31, 1999 September 30, 1998
- ------------------------------------------------------------------------------------------------
Unaudited
<S> <C> <C>
Assets
Cash and short-term investments
Cash and cash equivalents $11,087 $13,882
Cash and securities segregated under federal
and other regulations 251 248
------------ ------------
11,338 14,130
------------ ------------
Receivables
Securities borrowed 525,834 270,638
Brokerage customers, net 446,147 433,840
Loans, net 162,379 180,528
Brokers and dealers 6,951 5,310
Other 19,432 18,417
------------ ------------
1,160,743 908,733
------------ ------------
Securities
Trading, at market value 331,304 241,681
Available for sale, at market value 19,869 11,787
Held to maturity (market values of $17,666
and $18,911) 17,622 18,776
------------ ------------
368,795 272,244
------------ ------------
Other assets
Equipment and leasehold improvements, net 12,708 13,377
Other 26,174 24,787
------------ ------------
38,882 38,164
------------ ------------
Total assets $1,579,758 $1,233,271
============ ============
Liabilities & shareholders' equity
Liabilities
Securities loaned $358,914 $216,275
Brokerage customers 325,830 329,975
Short-term borrowings 264,065 134,762 -
Securities sold, not yet purchased, at market value 204,738 149,189
Deposits 169,723 171,074
Long-term borrowings 34,167 41,308
Checks payable 25,257 2,973
Compensation and benefits 23,016 27,247
Repos 16,807 -
Brokers and dealers 6,419 13,984
Other 21,744 22,817
------------ ------------
1,450,680 1,109,604
------------ ------------
Shareholders' equity
Common stock, par value $.01,
authorized 25,000,000 shares, issued
issued 10,902,241 and 10,893,159 shares 109 109
Paid-in capital 75,469 72,966
Retained earnings 72,719 65,785
Accumulated other comprehensive income, net (46) (12)
Unamortized restricted stock compensation (1,893) (1,081)
Treasury stock, at cost, 2,021,215 and 1,943,833 shares (17,280) (14,100)
------------ ------------
129,078 123,667
------------ ------------
Total liabilities and shareholders' equity $1,579,758 $1,233,271
============ ============
See Notes to Consolidated Financial Statements
</TABLE>
3
<PAGE>
The Advest Group, Inc.
Condensed Consolidated Statements of Earnings
Unaudited
<TABLE>
Three months ended Six months ended
March 31, March 31,
---------------------- ---------------------
In thousands, except per share amounts 1999 1998 1999 1998
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues
Commissions $35,302 $33,422 $67,737 $65,844
Interest 15,959 17,448 31,992 34,090
Principal transactions 13,896 11,563 28,856 22,325
Asset management and administration 9,789 8,319 18,406 16,293
Investment banking 5,073 9,741 17,406 18,499
Other 2,619 1,925 4,059 3,342
------ ------ ------- -------
Total revenues 82,638 82,418 168,456 160,393
------ ------ ------- -------
Expenses
Compensation 47,899 46,749 97,983 91,833
Interest 9,307 10,172 18,298 19,529
Communications 8,370 7,143 15,910 13,165
Occupancy & equipment 5,338 4,675 10,482 9,227
Business development 1,835 1,787 3,694 3,456
Professional 1,415 1,163 2,667 2,688
Brokerage, clearing & exchange 1,309 1,040 2,495 2,252
Other expense 2,102 1,757 4,035 3,646
------ ------ ------- -------
Total expenses 77,575 74,486 155,564 145,796
------ ------ ------- -------
Income before taxes 5,063 7,932 12,892 14,597
Provision for income taxes 2,025 3,173 5,157 5,839
------ ------ ------- -------
Net income $3,038 $4,759 $7,735 $8,758
====== ====== ======= =======
Per share data:
Basic earnings $ 0.38 $ 0.58 $ 0.97 $ 1.08
Diluted earnings $ 0.33 $ 0.51 $ 0.84 $ 0.94
Dividend declared $ 0.05 $ 0.04 $ 0.09 $ 0.08
See Notes to Consolidated Financial Statements
</TABLE>
4
<PAGE>
The Advest Group, Inc.
Condensed Consolidated Statements of Cash Flows
Unaudited
<TABLE>
Six months ended March 31,
-------------------------
In thousands 1999 1998
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 7,735 $ 8,758
Adjustments to reconcile net income to net
cash (used in) provided by operating activities:
Depreciation and amortization 4,107 4,412
Provision for credit losses and asset devaluation (62) 105
Deferred income taxes (343) (241)
Other 778 903
(Increase) decrease in operating assets:
Receivables from brokerage customers, net (12,059) (56,932)
Securities borrowed (255,196) (49,153)
Receivables from brokers and dealers (1,641) (3,104)
Trading securities (89,940) (53,735)
Cash and securities segregated under federal and
other regulations (3) 19
Proceeds from sales of mortgages held for sale 52,302 18,631
Originations and purchases of mortgages held for resale (29,979) (32,649)
Other (8,238) (4,665)
Increase (decrease) in operating liabilities:
Brokerage customers (4,145) 22,370
Securities loaned 142,639 30,882
Securities sold, not yet purchased 55,549 43,345
Checks payable 22,284 (12,247)
Other (7,114) 4,596
--------- --------
Net cash used in operating activities (123,326) (78,705)
--------- --------
FINANCING ACTIVITIES
Net decrease in deposits (1,351) (5,871)
Proceeds from short-term borrowings 68 24,584
Repayment of short-term borrowings (9,940) (28,188)
Short-term brokerage borrowings, net 132,034 72,600
Proceeds from long-term borrowings 7,000
Repurchase agreements 16,807 -
Other (3,847) 748
------- -------
Net cash provided by financing activities 133,771 70,873
------- -------
INVESTING ACTIVITIES
Proceeds from (payments for):
Sales of available for sale securities 5,000 17,447
Maturities of available for sale securities 431 2,260
Maturities of held to maturity securities 11,164 11,681
Purchases of available for sale securities (12,794) (17,709)
Purchases of held to maturity securities (10,000) (10,500)
Loans sold 1,925 5,742
Principal collections on loans 35,306 40,915
Loans originated (42,627) (38,880)
Other (1,645) (4,410)
------- -------
Net cash (used in) provided by investing activities (13,240) 6,546
------- -------
Decrease in cash and cash equivalents (2,795) (1,286)
Cash and cash equivalents at beginning of period 13,882 12,459
------- -------
Cash and cash equivalents at end of period $ 11,087 $ 11,173
======= =======
Interest paid $ 18,316 $ 19,472
Income taxes paid $ 5,767 $ 7,184
Non-cash activities:
Restricted stock awards, net of forfeitures $ 1,024 $ 138
Securization of residential mortgages $ - $ 1,428
- ----------------------------------------------------------------------------------------------
See Noted to Consolidated Financial Statements
</TABLE>
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. 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 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.
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
6
<PAGE>
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 March 31, 1999, Advest's
regulatory net capital of $69.0 million was 13% of aggregate debit balances and
exceeded required net capital by $58.4 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 March 31, 1999, the Bank's leverage
capital, risk-based and Tier 1 capital ratios were 8.24%, 11.6% and 10.34%,
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 six months ended March 31, 1999 and 1998:
For the quarters ended March 31,
-------------------------------------
Basic Diluted
------------------ -----------------
In thousands, except per share amounts 1999 1998 1999 1998
- ------------------------------------------------------------------------------
Net income $3,038 $4,759 $3,038 $4,759
====== ====== ====== ======
Average number of common shares
outstanding during the period 8,854 8,904 8,854 8,904
Adjustments:
Contingently issuable shares (879) (746) -- --
Exercise of stock options -- -- 359 452
------ ------ ------ ------
Average number of common
shares outstanding 7,975 8,158 9,213 9,356
====== ====== ====== ======
Net income per common share $ .38 $ .58 $ .33 $ .51
====== ====== ====== ======
For the six months ended March 31,
-----------------------------------
Basic Diluted
--------------- ---------------
In thousands, except per share amounts 1999 1998 1999 1998
- ------------------------------------------------------------------------------
Net income $7,735 $8,758 $7,735 $8,758
====== ====== ====== ======
Average number of common shares
outstanding during the period 8,868 8,799 8,868 8,799
Adjustments:
Contingently issuable shares (865) (669) -- --
Exercise of stock options -- -- 370 478
------ ------ ------ ------
Average number of common
shares outstanding 8,003 8,130 9,238 9,277
====== ====== ====== ======
Net income per common share $ .97 $ 1.08 $ .84 $ .94
====== ====== ====== ======
7
<PAGE>
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:
March 31,
-------------------------------------
Three months ended Six months ended
------------------ ----------------
In thousands 1999 1998 1999 1998
- ---------------------------------------------------------------------------
Net income $3,038 $4,759 $7,735 $8,758
Other comprehensive income:
Unrealized holding gains/losses arising
during period (34) 136 (30) 175
Less: reclassification adjustment for
gains realized in net income -- 20 -- 56
------ ------ ------ ------
Net unrealized holding gains/losses arising
during the period (34) 116 (30) 119
Deferred income taxes 1 43 4 43
------ ------ ------ ------
Total other comprehensive income (35) 73 (34) 76
------ ------ ------ ------
Comprehensive income $3,003 $4,832 $7,701 $8,834
====== ====== ====== ======
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, consumer lending, trust and asset
management. 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 89
sales offices in 16 states and Washington, DC. Advest Bank and Trust Company
(the "Bank"), an FDIC-insured, federal savings bank, offers residential
mortgage lending and trust services primarily through Advest's branch network.
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-based
business and developing new revenue sources. Nonetheless, operating results
of any individual period should not be considered representative of future
performance.
8
<PAGE>
The Company reported net income of $3.0 million for the quarter ended
March 31, 1999 compared with $4.8 million in the prior year, a decrease of 36%.
Current quarter basic and diluted earnings per share were $.38 and $.33,
respectively, compared with $.58 and $.51, respectively, a year ago. Total
revenues increased less than 1% to $82.6 million while total expenses increased
4% to $77.6 million. Through the first half of fiscal 1999, net income was
$7.7 million, a decline of 12% from $8.8 million in the prior year. Basic and
diluted earnings per share were $.97 and $.84, respectively, compared with
$1.08 and $.94, respectively, a year ago. Total revenues increased 5% to a
record $168.5 million while total expenses increased 7% to $155.6 million.
Included in revenues are $3.7 million in realized and unrealized first quarter
gains related to an equity position acquired in a prior year investment banking
transaction. At March 31, 1999, book value per share was $14.53, up 13% from
the prior year.
Advest, Inc.
The Dow Jones Industrial Average (DJIA) gained 6.6% during the current
quarter, 11.2% for the twelve month period, briefly surpassing the 10000
threshold, before closing at 9786. While the overall returns were impressive,
a performance gap was evident - with large capitalization stocks significantly
outperforming the broad index. The S&P 500 gained 4.6% during the quarter but
all of that gain was from 21 of the 500 stocks represented. Although the
narrowness of the gains should not encourage confidence in the broad market,
if the current pace continues, the DJIA will achieve a 9th straight year of
gains and its fifth consecutive year of double digit gains. In the
underwriting markets, near record amounts of new stocks and bonds were sold
during the current quarter. However, significant year-to-year declines in
equity offerings, which generate higher fees, contributed to substantially
lower investment banking revenues. In the market segment Advest participates
in - $50 million and less - equity underwriting volume declined 52% from the
prior year.
For the quarter ending March 31, 1999, Advest posted pre-tax earnings of
$5.6 million, a 32% decrease from the prior year. Total revenues increased
2% to $78.8 million, the second highest results in its history with record
levels attained for agency commissions, up 6%, and asset management revenues,
up 19%. Investment banking revenues declined 48%, primarily reflecting the
industry scarcity of equity underwritings. Total expenses increased
$3.9 million (6%) to $73.2 million with compensation and benefits up
$1.1 million (3%) and communications expenses up $1.2 million (18%). The
increase in compensation includes a $1.4 million (13%) increase in general
payroll most of which relates to increased staffing in Advest's equity capital
markets departments. During the past few years, Advest has committed
substantial financial resources to building it equity capital markets
business. During times of low underwriting activity as occurred in the
current quarter, Advest's operating results are more vulnerable because its
capital markets team is still establishing itself.
Advest Bank and Trust
The Bank posted pre-tax income of $50,000 compared with $.2 million in
the prior year, a 77% decline. The Bank remains well-capitalized and in full
regulatory compliance. At March 31, 1999, the Bank's nonperforming assets
totaled $2.9 million (1.5% of total Bank assets) compared with $5.0 million
(2.3% of total Bank assets) in the prior year. The Bank's declining asset
base and its concentration on residential lending versus higher yielding
commercial lending have contributed to a declining earnings trend. After
careful review of the Bank's activities and prospects as they relate to the
firm's strategic goals, management has been evaluating potential courses of
action that would enable the Company to maintain a high level of service to
clients while earning a better return on its capital. See Subsequent Event
below.
9
<PAGE>
Subsequent Event
On May 10, the Company announced that it had 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 operations 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 within 90 to 120 days.
Results of Operations
Three Months Ended March 31, 1999 Versus
Three Months Ended March 31, 1998
Net revenues, total revenues less interest expense, increased $1.1 million
(2%) to $73.3 million, as a $4.7 million (48%) decline in investment banking
revenues substantially offset gains in commissions, principal transactions and
asset management revenues. Net expenses increased $4.0 million (6%) to
$68.3 million, primarily as a result of higher general payroll and sales-
related compensation which were partly offset by lower investment banking
incentives, as well as technology upgrades and higher service bureau costs.
The effective tax rate was 40% for both the current and prior year.
Revenue from principal transactions increased $2.3 million (20%).
Corporate Bond trading profits, primarily from the Institutional Bond Group,
were $1.8 million, up 84% from the prior year, and municipal bond trading
profits increased 77% to $.6 million. Commissions on fixed income securities
increased $3.3 million (67%) to $8.3 million, led by government agency
obligations, up $.9 million (255%), investment grade corporate bonds, up
$.8 million (76%), municipal obligations, up $.8 million (51%), and
collateralized mortgage obligations (CMOs), up $.7 million (292%). The
increases in government agency and CMO sales were due 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. On
the equity side, over-the-counter trading losses were $.4 million in the
March 1999 quarter compared with trading profits of $.4 million in the prior
year and equity sales credits declined $1.3 million (27%). The swing in
trading profits relates in part to rule changes implemented by the SEC which
have consistently reduced the profit spreads of market makers over the past
few years. In addition, trading profits in the 1998 quarter represented the
highest in two 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 below.
Investment banking revenues declined $4.7 million (48%), primarily
related to lower equity underwriting-related revenue. As discussed in the
Overview, the volume of equity underwritings declined significantly from the
1998 quarter. $1.2 million of the decline relates to a change in accounting
for stock warrants retroactively adopted in June 1998. The new accounting
treatment resulted in a $1.1 million increase to revenues for the March 1998
quarter; conversely the impact to the current quarter was a reduction in
revenues of $144,000 for a net year-to-year decline of $1.2 million. Merger
and acquisition fee income decreased $.5 million (45%) and private placement
fees declined $.4 million (85%) in the current year. Unit trust commissions
increased $.4 million (40%).
10
<PAGE>
Agency commissions increased $1.9 million (6%) led by a $1.2 million
(20%) increase in over-the-counter commissions. See related discussion above
in principal transactions. Commissions on listed securities and options
increased $.9 million (7%) and $.3 million (33%), respectively, while mutual
fund commissions, including distribution fees, decreased $.4 million (4%).
Commission revenue increases relate primarily to higher market volume and
prices as previously discussed in the Overview.
Asset management revenues increased $1.5 million (18%) primarily as a
result of higher service fees related to money market accounts and increased
fee-based managed account business at Advest. The Bank's revenue increased
25% to $.3 million primarily due to increased trust revenues. Other income
increased $.7 million (36%) primarily due to higher fee income and proceeds
from a legal settlement.
Net interest income declined $.6 million (9%). The Bank's net interest
income declined $.4 million (23%) primarily due to a declining asset base and
reduced interest spreads related to a lower yields associated with its
predominantly residential mortgage portfolio. Advest's net interest income
declined $.2 million (4%) primarily due to higher costs of carrying inventory.
Compensation costs increased $1.1 million (2%) primarily due to higher
sales-related compensation, increased staff levels especially in research,
investment banking, sales and trading departments higher investment banking
which were partly offset by lower investment banking incentives and insurance
costs. Communications costs increased $1.2 million (17%) primarily related to
technology and software upgrades, telephone equipment and usage, service
bureaus and volume-driven costs of Advest's third party data processor.
Occupancy and equipment costs increased $.7 million (14%) primarily due to
rent increases including the opening of new sales offices and computer and
equipment rental and lease expenses.
Six Months Ended March 31, 1999 Versus
Six Months Ended March 31, 1998
Net revenues increased $9.3 million (7%) and net expenses increased
$11.0 million (9%). Year-to-year variances in principal transactions, net
interest income, asset management and other revenues are consistent with the
March quarter analysis. On the expense side, variances for compensation and
benefits, communications and occupancy and equipment costs are consistent
with the March quarter discussion.
Agency commissions increased $1.9 million (3%) with substantially all
of the increase in the March quarter. Commissions on listed and over-the-
counter securities increased $1.3 million (5%) and $.9 million (7%),
respectively, while mutual fund commissions decreased $.9 million (5%).
Investment banking revenues declined $1.1 million (6%) as the
$3.7 million first quarter gains on an equity investment discussed in the
Overview partly offset second quarter revenue declines.
Liquidity and Capital Resources
Six Months Ended March 31, 1999
Total assets increased $346.5 million (28%). Securities borrowed
increased $255.2 million (94%) of which approximately $188.0 million represents
an increase in firm securities borrowed with a corresponding increase in firm
securities loaned. The balance of the increase was used primarily to cover a
$55.5 million (37%) increase in short trading positions, mostly fixed income.
Trading securities increased $89.6 million (37%) primarily related to new
principal trading activities initiated by the broker/dealer in late fiscal
1998, as discussed previously. This increase was financed by short-term
borrowings, which increased $129.3 million, and repurchase agreements of
$16.8 million. Advest began entering into repurchase agreements with US
treasury securities as
11
<PAGE>
collateral in the current quarter to lower the cost of carrying its trading
inventories. (Refer to Summary of Significant Accounting Policies.) The
balance of the increase in short-term borrowings was primarily used to finance
a reduction in customer stock loaned. Total stock loaned increased
$142.6 million, however, firm securities loaned increased $188.0 million, as
discussed above, while customer securities loaned declined $38.7 million since
September 30, 1998.
During the six months ended March 31, 1999, the Company re-purchased
240,900 shares of its common stock at a cost of $4.3 million under a buyback
program begun in August 1990. Cash dividends of $.04 per share and $.05 per
share, respectively, were declared for the quarters ended December 31, 1998
and March 31, 1999. A total of $.8 million was declared and/or paid. At
March 31, 1999, 8,881,026 shares were outstanding.
Subsequent to March 31, 1999, 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
Subsequent Event in the Overview 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 current quarter ending March 31, 1999.
12
<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 statue 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 43,351 shares of its
common stock as compensation to employees under separate Employment Agreements.
Item 4. Submission of Matters to a Vote of Security Holders
The Company commenced solicitation of proxies on December 31, 1998, in
connection with its Annual Meeting held on January 28, 1999. The solicitation
was performed in accordance with Section 14 of the Securities and Exchange Act
of 1934 and the rules thereunder. There was no solicitation in opposition to
management's solicitation. A total of 7,427,700 shares were represented at
the meeting out of the total of 8,895,709 shares issued and outstanding as of
the December 10, 1998 record date for the meeting.
At the Annual Meeting, the reelection as director of Richard G. Dooley
and Robert W. Fiondella to serve for three year terms expiring in 2002 was
considered. All such nominees were reelected to the Board of Directors. The
nominees received the following votes:
In Favor
--------------------------------
Nominee In Person By Proxy Total Withheld
Richard G. Dooley 232 6,777,511 6,777,743 650,478
Robert W. Fiondella 232 6,777,045 6,777,277 650,944
13
<PAGE>
The terms of office of the following continuing directors expire in 2000:
Sanford Cloud, Jr., Grant W. Kurtz, Barbara L. Pearce, and Allen Weintraub.
The terms of office of the following continuing directors expire in 2001:
Ronald E. Compton, William B. Ellis and Marne Obernauer, Jr. The following
director did not continue on the Board of Directors of the Company following
the January 28, 1999 Annual Meeting: John A. Powers.
The only other matter considered at the Annual Meeting was a stockholder
proposal submitted by Mr. John Jennings Crapo concerning disclosure of
charitable contributions by the Company. Mr. Crapo's proposal was defeated,
with the following votes:
In Favor Against Abstaining No Votes
765,174 4,583,701 73,968 2,005,377
No other matters were voted upon at the annual meeting.
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 PricewaterhouseCoopers LLP, the registrant's Independent
Accountants, whose report is included on page 15 of this filing.
(b) Reports on Form 8-K
None.
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 March 31, 1999, and
the related condensed consolidated statements of earnings and cash flows for
the three-month and six-month periods ended March 31, 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
Hartford, Connecticut
April 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 May 12, 1999 /s/ Grant Kurtz
Grant Kurtz,
Chief Executive Officer
and President
Date May 12, 1999 /s/ Martin M. Lilienthal
Martin M. Lilienthal,
Executive Vice President and
Chief Financial Officer
16
<PAGE>
Exhibit Index
Exhibit Description
27 Financial Data Schedule (Selected financial data - for EDGAR
electronic transmission only for SEC.)
17
<TABLE> <S> <C>
<ARTICLE> BD
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-END> MAR-31-1999
<CASH> 11338
<RECEIVABLES> 634909
<SECURITIES-RESALE> 0
<SECURITIES-BORROWED> 525834
<INSTRUMENTS-OWNED> 368795
<PP&E> 12708
<TOTAL-ASSETS> 1579758
<SHORT-TERM> 264065
<PAYABLES> 223143
<REPOS-SOLD> 0
<SECURITIES-LOANED> 358914
<INSTRUMENTS-SOLD> 204738
<LONG-TERM> 34167
<COMMON> 109
0
0
<OTHER-SE> 128969
<TOTAL-LIABILITY-AND-EQUITY> 1579758
<TRADING-REVENUE> 28856
<INTEREST-DIVIDENDS> 31992
<COMMISSIONS> 67737
<INVESTMENT-BANKING-REVENUES> 17406
<FEE-REVENUE> 18406
<INTEREST-EXPENSE> 18298
<COMPENSATION> 97983
<INCOME-PRETAX> 12892
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7735
<EPS-PRIMARY> .97
<EPS-DILUTED> .84
</TABLE>
