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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(X) Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the fiscal year ended SEPTEMBER 30, 2000
Or
( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the transition period from to
Commission File Number 1-8408
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
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: YES
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NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
<S> <C>
Common Stock, $.01 Par Value New York Stock Exchange, Inc.
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SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
Indicate by an (X) 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
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Indicate by an (X) if disclosure of delinquent filers pursuant to item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of voting stock held by non-affiliates of the
Registrant was $253,423,193 as of December 29, 2000.
On December 29, 2000 the Registrant had outstanding 8,927,921 shares of common
stock of $.01 par value, which is the Registrant's only class of common stock.
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PART I
Item 1. Business
GENERAL DEVELOPMENT OF BUSINESS
The Advest Group, Inc. ("AGI"), a Delaware corporation, is a financial services
holding company engaged, with its operating subsidiaries (collectively the
"Company"), in securities brokerage, trading, investment banking, asset
management, trust and other financial services. It is organized under the laws
of Delaware and commenced operations on January 1, 1977. AGI is successor to a
partnership which resulted from mergers of five New York Stock Exchange, Inc.
("NYSE") member firms organized between 1898 and 1919. The Company's
broker/dealer subsidiary, Advest, Inc. ("Advest"), was organized to succeed the
business of the partnership, effective January 1, 1977. Since that date, a
number of other operating subsidiaries in the brokerage and financial services
industries have been established or acquired.
In addition to Advest, operating subsidiaries include Advest Bank and
Trust Company (the "Bank"), a federal savings bank; Boston Advisors
("Advisors"), an investment advisor, and Billings & Company, Inc. ("Billings"),
a real estate services company.
In August 2000, the Board of Directors of the Company approved the
acquisition of all of the ownership interests in the Company by The MONY Group
Inc., ("MONY"), a holding company which, through its subsidiaries, is primarily
engaged in the business of providing a wide range of life insurance and other
financial products and services to higher income individuals. For more
information see Item 8 of this filing - Note 2 of Notes to Consolidated
Financial Statements. On November 20, 2000, this transaction (the "Merger") was
approved by the vote of Advest shareholders at a Special Meeting of Shareholders
held for that purpose. The parties anticipate that the Merger will be
consummated early in calendar 2001. Additional information concerning the
proposed Merger is set forth in the Proxy Statement of the Company dated October
19, 2000 (the "Proxy Statement"). The information set forth in the Proxy
Statement is hereby incorporated by reference, except for the following:
Selected Consolidated Financial Data of MONY (appearing on pages 9 to 11); Risks
with Respect to MONY (appearing on pages 16 to 24); and MONY's Reason for the
Merger (appearing on page 31).
Other material acquisitions and dispositions by the Company during the
past five years follow.
In October 1996, the Company formed The Hannah Consulting Group ("HCG"),
an investment management subsidiary, located in Boston, MA, that provided
investment management services primarily to pension plans. Effective October 1,
1997, HCG was merged into Advest's Investment Management Services Department.
In October 1997, Advest acquired Ironwood Capital Ltd. ("Ironwood"), a
private investment bank that originates and distributes private placements of
taxable fixed income securities. Ironwood and its twelve employees became the
Corporate Fixed Income Group of Advest's Investment Banking Division. The
Company issued 137,060 shares of its common stock in conjunction with the
acquisition which was accounted for as a pooling of interests. Due to the
immaterial effect on the Company's consolidated financial condition, results of
operations and cash flows, operating results of Ironwood were included
prospectively in the Company's consolidated financial statements. Under a
separation agreement entered with the Company during the fourth quarter of
fiscal 1999, the employees of the Corporate Fixed Income Group once again became
an independent corporation, effective September 30, 1999. Expenses related to
the separation agreement were not material to results of operations.
In May 1999, the Company announced that it would enter into two agreements
with Hudson United Bank ("Hudson"), a subsidiary of Hudson United Bancorp, a
Mahwah, New Jersey-based bank holding company. Advest and Hudson entered into a
strategic alliance whereby Hudson became the exclusive provider of banking
products and services to Advest and its clients. The strategic alliance
agreement became effective September 1, 1999 and, concurrently, the Bank ceased
its mortgage origination operations. Under the terms of a separate purchase and
sale agreement, Hudson acquired the
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loan and other financial assets and assumed the deposit liabilities of the Bank.
The purchase and sale agreement was approved by the Office of Thrift Supervision
("OTS") and closed November 30,1999. The Bank retained its federal bank charter
and provides trust and custody services through referrals from Advest's retail
sales force. Under the strategic alliance agreement, upon consumation of the
Merger described above, Hudson will have the right to terminate that agreement
upon 90 days notice. Upon such termination, Hudson will receive a reimbursement
from Advest of a portion of certain fees and expenses previously paid by Hudson
to Advest. On September 29, 2000, Hudson advised Advest that they wish to
exercise their rights under the Agreement to terminate their relationship with
Advest.
Advest is engaged in a broad range of activities in the securities
brokerage, investment banking and asset management businesses. Specific services
include retail brokerage, institutional sales, origination of and participation
in underwritings and distribution of corporate and municipal securities, market
making and trading activities in equities and fixed income securities, research,
custody and asset management.
Advest has been classified by the Securities and Exchange Commission
("SEC") and the Securities Industry Association as a "large regional" brokerage
firm. "Regional" is a term commonly used in the securities industry to indicate
that a firm's headquarters are located outside New York City. Advest has retail
clients in all fifty states with the largest concentration in the Northeast and
Midwest regions and also services institutional accounts throughout the country.
At September 30, 2000, Advest had 95 sales locations, including institutional
and satellite offices, and 500 financial advisors in 15 states and the District
of Columbia.
Advest is a member of all major securities exchanges in the United States,
the National Association of Securities Dealers ("NASD") and the Securities
Investor Protection Corporation ("SIPC"). In addition, Advest is registered with
the Commodity Futures Trading Commission ("CFTC") as a commodity trading advisor
and a futures commission merchant and clears all option transactions through an
independent third party broker.
The Bank commenced operations in 1984 as a state-chartered savings bank
and converted to a federal savings bank during fiscal 1997. The Office of Thrift
Supervision ("OTS") regulates the Bank and its federal charter enables the Bank
to provide trust services in all 50 states. The Bank's headquarters are located
at 90 State House Square, Hartford, Connecticut 06103 and maintains no retail
branches. The Bank has trust representatives in Springfield, MA, Columbus, OH,
Farmington, CT, Pittsburgh, PA and Boca Raton, FL, the last of which was opened
in fiscal 1998. Trust representatives share office space with Advest retail
offices. The Bank's principal business activities consist of soliciting and
servicing fiduciary and retirement plan trust business, primarily to clients of
Advest.
In fiscal 1997, the OTS approved requests by AGI and the Bank for the Bank
to be deemed a "savings association", by virtue of its meeting the test for a
qualified thrift lender, and for AGI, as the sole shareholder of a "savings
association", to be treated as a unitary thrift holding company. In order to
retain its status as a "savings association" the Bank must continue to satisfy
the "qualified thrift lender" test. This test generally requires that an
institution maintain a minimum of 65% of its assets in residential real estate
and related investments. At September 30, 2000, 67.9% of the Bank's portfolio
consisted of such assets.
As previously discussed, the Company entered into two agreements with
Hudson. In concurrence with the terms of the agreements, the Bank ceased its
loan origination and deposit operations. The Bank's principal activities consist
of soliciting and servicing fiduciary and retirement plan trust business,
primarily to clients of Advest.
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
The information required by this item is disclosed in item 8 of this filing in
Note 17 of Notes to Consolidated Financial Statements.
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NARRATIVE DESCRIPTION OF BUSINESS
The principal sources of revenue for the last five years are disclosed in item 6
of this filing under the caption "Five Year Financial Summary." A discussion of
the components of services provided and related compensation follows.
AGENCY COMMISSIONS
During the three years in the period ended September 30, 2000, agency
commissions represented 40%, 42% and 42%, respectively, of the Company's total
revenues. Agency commissions are substantially derived from sales of listed and
over-the-counter securities, mutual funds and insurance products primarily to
retail clients.
For sales of listed securities, Advest acts as an agent for its customers
in the purchase and sale of securities on the major securities exchanges. Advest
executes purchases and redemptions of shares for its clients in many diverse
mutual funds. Included in mutual fund revenues are 12b-1 distribution fees which
Advest receives from mutual fund companies as reimbursement for distributing
shares of their funds. In executing customers' orders in the NASDAQ market,
Advest generally acts as agent with another firm which is a market maker in the
securities being purchased or sold. The market price executed represents the
best inter-dealer market price available. Advest acts as agent for several life
insurance companies and sells life insurance and tax-advantaged annuities to its
brokerage clients. A principal objective of Advest's insurance department is to
assist account executives in protecting the assets of high net worth individuals
and businesses. The insurance department provides customized advice and
recommends appropriate products to meet unique individual, professional or
business needs. Advest also effects for its customers the purchase and sale of
put and call options traded on all major stock exchanges. Other commissions
include commissions from commodity trading, international stocks and bonds,
certificates of deposit and income from correspondent brokers.
PRINCIPAL TRANSACTIONS
Revenue from principal transactions includes realized and unrealized gains and
losses on Advest's trading accounts and related sales credits. Advest's
institutional corporate bond trading desk specializes in investment grade
corporate bonds, while the market-making activities of its retail fixed income
and NASDAQ trading desks primarily involve making product available to clients
and supporting Advest's research and equity capital markets activities. Advest
has an institutional agency and mortgage-backed securities trading groups in New
York City and Boca Raton, Florida, and a Community Reinvestment Act ("CRA") unit
in New York City, which markets securitized loans to banks and other financial
institutions. Advest does not actively participate in the high yield securities
market.
Advest seeks to reduce the risk associated with its trading portfolio,
which has grown substantially during the past three years, on an aggregate
basis. Inventory policies reflect the level of aggregate short and long
positions that may be held for trading and are specified by product line. In
addition, Advest manages the risk associated with its municipal bond trading
securities by entering into derivative transactions, primarily exchange-traded
financial futures contracts, when inventory levels exceed pre-determined levels
as defined in its risk management policy. Derivative positions are generally not
material and are marked-to-market daily. Hedging is limited to the underlying
trading portfolios' interest rate risk and is not speculative in and of itself.
Advest's NASDAQ desk actively engages in trading as principal in various
phases of the over-the-counter securities business and acts as principal to
facilitate the execution of customers' orders. Advest buys, sells and maintains
an inventory of a security in order to "make a market" in that security and to
support the activities of Advest's Equity Capital Markets Group. In recent
years, certain rule changes implemented by the SEC have reduced the profit
spreads of market makers. Primarily in response to the
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SEC changes, there is an ongoing transition in the mix of over-the-counter
business from principal to agency transactions. During fiscal 1999, a
comprehensive review was completed of Advest's NASDAQ trading activities and the
decision was made to reduce overnight inventory and more aggressively manage the
number of stocks it made a market in. As of September 30, 2000, Advest made
dealer markets in the common stock or other equity securities of approximately
247 corporations.
INVESTMENT BANKING
Advest manages and participates in underwritings of corporate and municipal
securities and closed-end funds. Advest's Investment Banking Division also
provides merger and acquisition, consulting and valuation services. Advest's
Investment Banking Division concentrates its efforts on raising capital for
mid-size companies, primarily in the banking, insurance, technology, consumer
and commercial markets and health care industries. Public Finance services
health care and educational institutions as well as state and local issuers
primarily in New England and New York. The Syndicate Department is responsible
for Advest's participation in underwritings managed by Advest and other firms
and acts as co-manager of other offerings, principally closed-end funds.
Generally, the Company does not engage in bridge financing activities. During
fiscal 2000, the Investment Banking Division underwent a significant downsizing
with the departure of more than half of the investment banking professionals.
The Company's investment banking operations were consolidated into the New York
City office with a focus on three areas - financial institutions, technology and
consumer/general industries
Underwriting involves both economic and regulatory risks. An underwriter
may incur losses if it is unable to resell the securities it is committed to
purchase or if it is forced to liquidate its commitments at less than the agreed
purchase price. In addition, under the Securities Act of 1933, other laws and
court decisions with respect to underwriters' liability and limitation on
indemnification of underwriters by issuers, an underwriter is subject to
substantial potential liability for material misstatements or omissions in
prospectuses and other communications with respect to underwritten offerings.
Furthermore, underwriting commitments constitute a charge against net capital
and Advest's underwriting commitments may be limited by the requirement that it
must at all times be in compliance with the net capital Rule 15c3-1 of the SEC.
ASSET MANAGEMENT AND ADMINISTRATION
Advest's Investment Management Services Department ("IMS"), provides various
services for its fee-base accounts including client profiling, asset allocation,
manager selection and performance measurement. The Bank's Trust Services
Department provides personal trust and custody services primarily through
Advest's retail sales force and Advisors provides investment advisory services
to private retail and institutional clients. In June 2000, Advisors launched
three money funds - a money market fund, a U.S. Government fund and a tax-free
fund. Over $1 billion of funds designated for investment in money funds by
Advest's brokerage clients was transferred into these funds. The Company
believes it can generate a more competitive yield by managing the money funds
in-house. Advest also receives service fees related to brokerage clients'
investments in money market funds of a third party money manager. Asset
management and administration revenues also include fees for money market
services, retirement plan administration, Centennial Accounts and securities
custody and safekeeping.
The Advest Centennial Account enables brokerage clients to participate in
an integrated financial services program. Centennial Account clients have access
to their assets through unlimited checkwriting and a Mastercard debit card
issued by a major third party bank as well as on-request loans collateralized by
margined securities. Automated Clearing House ("ACH") deposits and withdrawals
are available to Centennial Accounts who can select among various automatic
daily investment options for idle cash balances, including an FDIC-insured money
market account and various money market mutual funds.
The Bank provides fiduciary, trust and custody services to individuals,
corporate retirement plans,
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financial institutions and other entities. The Bank primarily acquires trust and
custody accounts through Advest's retail sales force.
INTEREST INCOME AND CUSTOMER FINANCING
Advest's customers' transactions in securities are effected on either a cash or
margin basis. In a margin account, the customer pays less than the full cost of
a security purchased and the broker/dealer makes a loan for the balance of the
purchase price which is secured by the securities purchased, or other securities
owned by the investor. The amount of the loan is subject to the margin
regulations (Regulation T) of the Board of Governors of the Federal Reserve
System, NYSE margin requirements, and the firm's internal policies which in some
instances are more stringent than Regulation T or NYSE requirements. Currently,
in most transactions, Regulation T requires that the amount loaned to a customer
for a particular purchase not exceed 50% of the purchase price of a security, so
that initially the customer's equity in the purchase exceeds the NYSE's rules. A
member firm is required to have the customer deposit cash or additional
securities so that the loan to the customer for which marginable equity
securities are pledged as collateral is no greater than 75% of the value of the
securities in the account.
Interest is charged on the amount borrowed to finance customers' margin
transactions. The rate of interest charged customers is based primarily on the
brokers' call rate (the charge on bank loans to brokers secured by firm and
customers' securities), to which an additional amount is added up to 2.75%. The
amount of this interest surcharge is dependent on the average net margin balance
and the dollar amount of commissions charged on account transactions during the
month.
Customer credit balances, retained earnings, cash received from
collateralized financing transactions and short-term borrowings are the primary
source for financing customer margin accounts.
RESEARCH
Through the combined resources of its in-house research staff and correspondent
research provided by three leading outside research firms, Advest provides its
brokerage clients with a full range of research services. These include
corporate data, financial analysis, identification of emerging trends and
objective recommendations. In-house analysts specialize in health care, regional
banking, insurance, technology and specialty retailing and consumer products.
Correspondent research provides information and recommendations on approximately
3,000 domestic and international equities in over 90 industries in 30 countries.
ADMINISTRATION AND OPERATIONS
Administrative and operations personnel are responsible for the execution of
orders, processing of securities transactions, receipt, identification and
delivery of funds and securities, custody of clients' securities, extension of
credit to clients, general accounting and office services functions, internal
financial and management controls and regulatory compliance.
Advest uses the services of a third party data processor for all back
office brokerage operations technology including securities and money
transactions, trade confirmations and statements. A new financial and management
reporting system was installed in fiscal 1999.
The Company believes its internal controls and safeguards are adequate,
although fraud and misconduct by clients and employees are risks inherent in the
securities business. As required by the NYSE and other regulators, the company
carries fidelity bonds covering loss or theft of securities as well as
embezzlement or forgery. The Company believes the amounts of coverage provided
by the bonds is adequate.
EMPLOYEES
The Company employs approximately 1,798 persons primarily at Advest, its
broker-dealer subsidiary.
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Advest has some 1,762 employees including 485 non-trainee retail sales
professionals. The Company considers its compensation and employee benefits,
which include medical, life and disability insurance, a 401(k) defined
contribution plan and restricted stock and option programs, to be competitive
with those offered by other securities firms. None of the Company's employees
are covered by collective bargaining agreements. The Company considers its
relations with its employees to be satisfactory. However, there is considerable
competition for experienced financial services professionals, particularly
financial advisors, and periodically the Company may experience the loss of
valued professionals.
COMPETITION
All aspects of the business of the Company are highly competitive. Advest
competes with numerous regional and national broker/dealers and other entities,
many of which have greater financial resources than the Company. Because of the
variety of financial services offered by the Company and the various types of
entities that provide such services (including other brokers, banks, insurance
companies and retail merchandise outlets), it is not possible to estimate the
number of companies that compete with the Company for investor assets. Advest
competes with other firms on the basis of transaction prices, quality of
service, product availability and locations. It is impossible to predict the
effect of the broader distribution locales offered by competing entities, or the
lower costs which may be offered by certain discount and online brokers. In
addition, there is competition for investment professionals among the large
number of companies now in the financial services field.
In soliciting trust business, the Bank encounters significant competition
from trust companies, savings banks, savings and loans, insurance companies,
broker/dealers, investment firms, mutual funds, and law firms in attracting
trust accounts, particularly fiduciary relationships.
REGULATION
The securities industry in the United States is subject to extensive regulation
under both Federal and state laws. The SEC is the Federal agency charged with
administration of the Federal securities laws. Much of the regulation of
broker/dealers has been delegated to self-regulatory authorities, principally
the NASD, the CFTC and the securities exchanges. These self-regulatory
organizations conduct periodic examinations of member broker/dealers in
accordance with the rules they have adopted and amended from time to time,
subject to approval by the SEC. Securities firms are also subject to regulation
by state securities commissions in those states in which they do business.
Broker/dealers are subject to regulations which cover all aspects of the
securities business, including sales methods, trading practices among
broker/dealers, uses and safekeeping of customers' funds and securities, capital
structure of securities firms, recordkeeping and the conduct of directors,
officers and employees. Additional legislation, changes in rules promulgated by
the SEC and self-regulatory authorities, or changes in the interpretation or
enforcement of existing laws and rules, may directly affect the mode of
operation and profitability of broker/dealers. The SEC, self-regulatory
authorities and state securities commissions may conduct administrative
proceedings which can result in censure, fine, suspension or expulsion of a
broker/dealer, its officers or employees. Such administrative proceedings,
whether or not resulting in adverse findings, can require substantial
expenditures. The principal purpose of regulation and discipline of
broker/dealers is the protection of customers and the securities markets, rather
than protection of creditors and stockholders of broker/dealers.
Advisors is also subject to extensive Federal and state regulations by the
SEC and state securities commissions.
Advest is required by Federal law to belong to the SIPC. The SIPC fund
provides protection for securities held in customer accounts up to $500,000 per
customer, with a limitation of $100,000 on claims for cash balances. The Company
purchases coverage which provides an additional $49.5 million of coverage per
customer for securities held in customers' accounts.
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As a federal savings bank whose deposits are insured by the FDIC, subject
to applicable limits, the Bank is subject to extensive regulation and
supervision by both the OTS and the FDIC. The Bank is also subject to various
regulatory requirements of the Board of Governors of the Federal Reserve System
(the "Federal Reserve Board") applicable to FDIC insured financial institutions.
This governmental regulation is primarily intended to protect depositors, rather
than shareholders, and concerns, among other matters, capital requirements,
safety and soundness, permissible investments, community reinvestment and credit
discrimination. AGI, for the purpose of ownership of the Bank, is a unitary
savings and loan holding company, and is subject to limited regulation and
certain reporting requirements by the OTS.
Refer to item 7 of this filing under the caption "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and in item 8 of
this filing in Notes 3 and 11 of the Notes to Consolidated Financial Statements
for further information regarding capital and regulatory considerations of the
Bank.
Federal banking regulations define five categories of capital adequacy for
all insured depository institutions, including categories that would prompt
supervisory actions. These categories range from the highest capitalization
designation which is "well capitalized" (with total risk based capital of
greater than 10% of risk adjusted assets, Tier 1 capital of greater than 6% of
risk adjusted assets and leverage capital of greater than 5% of assets) to the
lowest level which is "critically undercapitalized" (tangible capital of less
than 2% of total assets.) In addition, an institution may not be categorized as
"well capitalized" if it is subject to a regulatory order. Holding Company
guarantees apply if an insured institution is classified in one of three
"undercapitalized" designations. The Bank meets the criteria to be classified a
"well capitalized" bank as of September 30, 2000.
Item 2. Properties
The Company's principal executive offices are located at 90 State House Square,
Hartford, Connecticut, 06103 (telephone number (860) 509-1000). The Company
conducts all of its operations from leased premises, generally under
non-cancelable leases with terms up to 15 years.
Item 3. 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. 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 4. Submission of Matters to a Vote of Security Holders
Not applicable.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The information required by this item is disclosed in item 8 of this filing in
Note 8 of the Notes to Consolidated Financial Statements and under the caption
"Quarterly Financial Information".
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SHAREHOLDER INFORMATION
ADDITIONAL INFORMATION - FORM 10K
One copy of the Company's annual report on Form 10-K to the Securities and
Exchange Commission will be provided at no charge upon written request to
Corporate Marketing, The Advest Group, Inc.
The Advest Group, Inc. is listed on the New York Stock Exchange under
the symbol ADV.
REGISTRAR AND TRANSFER AGENT
American Stock Transfer & Trust Company
40 Wall Street, 46th floor
New York, NY 10005
(212) 936-5100 or (800) 937-5449
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP
100 Pearl Street
Hartford, CT 06103
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Item 6. Selected Financial Data
FIVE YEAR FINANCIAL SUMMARY
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For the years ended September 30,
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In thousands, except per share amounts and percentages 2000 1999 1998 1997 1996
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Total revenues $ 418,752 $ 335,238 $ 309,801 $275,204 $241,220
Interest expense 63,528 34,965 31,341 23,799 19,513
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Net revenues 355,224 300,273 278,460 251,405 221,707
Total non-interest expenses 320,097 277,961 250,632 227,323 203,250
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Income before taxes 35,127 22,312 27,828 24,082 18,457
Provision for income taxes 14,397 8,925 10,853 9,873 8,121
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Income from continuing operations 20,730 13,387 16,975 14,209 10,336
Income (loss) from discontinued operations 294 877 977 723 924
Loss on sale of discontinued operations -- (713) -- -- --
---------- ----------- ---------- -------- --------
Net income $ 21,024 $ 13,551 $ 17,952 $ 14,932 $ 11,260
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PER SHARE DATA
Basic earnings:
Income from continuing operations $ 2.61 $ 1.67 $ 2.08 $ 1.77 $ 1.26
Income (loss) from discontinued operations 0.04 0.11 0.12 0.09 0.11
Loss on sale of discontinued operations -- (0.09) -- -- --
---------- ----------- ---------- -------- --------
Net income $ 2.65 $ 1.69 $ 2.20 $ 1.86 $ 1.37
========== =========== ========== ======== ========
Diluted earnings:
Income from continuing operations $ 2.27 $ 1.46 $ 1.82 $ 1.54 $ 1.09
Income (loss) from discontinued operations 0.03 0.10 0.10 0.08 0.09
Loss on sale of discontinued operations -- (0.08) -- -- --
---------- ----------- ---------- -------- --------
Net income $ 2.30 $ 1.48 $ 1.92 $ 1.62 $ 1.18
========== =========== ========== ======== ========
Book value $ 17.07 $ 15.14 $ 13.82 $ 12.24 $ 10.66
Dividends $ 0.23 $ 0.19 $ 0.16 $ 0.09 --
OTHER DATA
Total assets $2,088,889 $ 1,462,621 $1,061,116 $908,040 $779,109
Shareholders' equity $ 150,800 $ 135,136 $ 123,667 $105,653 $ 89,590
Subordinated borrowings -- -- -- -- $ 20,552
Long-term borrowings $ 21,000 $ 30,526 $ 41,308 $ 41,321 $ 19,744
Return on average equity 14.6% 10.5% 15.6% 15.4% 13.2%
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Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
In addition to presenting historical information in this Annual Report and
elsewhere, the Company may make or publish forward-looking statements about
management expectations, strategic objectives, business prospects, anticipated
financial performance and similar matters. The Company cautions readers that any
forward-looking information presented is not a guarantee of future performance.
Numerous factors, many beyond the Company's control, could cause actual results
to differ materially from the expectations expressed. The Company conducts its
businesses in financial markets that are influenced by economic conditions,
monetary policies, interest and inflation rates, market liquidity, national and
international political events, regulatory developments, changing tax law, the
competitive environment, investor sentiment and other risks and uncertainties.
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. As a result, the Company's revenues
and net earnings may vary significantly from period to period and may diverge
significantly from expectations. Any forward-looking statements speak only as of
the date on which they are made, and the Company does not undertake any
obligation to update or revise any forward-looking statements.
BUSINESS ENVIRONMENT AND 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. Advest, Inc. ("Advest"), a
regional broker/dealer and the Company's principal subsidiary, provides
securities brokerage, investment banking, institutional sales and trading and
asset management services to retail and institutional investors through 95 sales
offices in 15 states and Washington, DC. Boston Advisors, Inc., an investment
advisory firm, manages the financial assets of individuals, endowment funds and
retirement plans. Advest Bank and Trust Company (the "Bank"), an FDIC-insured,
federal savings bank, provides trust and custody services primarily through
Advest's branch network. During fiscal 1999, 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 sale
transaction was completed in November 1999. As required, the Company has
restated all prior periods to separately disclose income from discontinued
operations.
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, volume and price levels
in securities markets, demand for investment banking services, interest rates,
inflation and investor sentiment. Technological developments such as the
Internet may also materially impact the Company's operating results. In addition
to competition from other full-service securities firms, the Company faces
competition from other sources including banks, insurance companies, mutual fund
companies, discount and online trading firms. Legislation enacted in 1999 to
eliminate or lessen the restrictions of the Glass-Steagall Act has further
heightened competition among banking, insurance and securities firms. 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.
For the year ended September 30, 2000, the Company reported record net
income of $21.0 million and diluted earnings per share of $2.30 compared with
$13.6 million ($1.48 per share) in 1999 and $18.0
11
<PAGE> 12
million ($1.92 per share) in 1998. Fiscal 2000 revenues were $418.8 million, a
record level for a fifth consecutive year. At September 30, 2000, book value per
share was a record $17.07.
On August 23, 2000, the Board of Directors of the Company approved the
acquisition of all the ownership interests in the Company by The MONY Group Inc.
("MONY"), a holding company which, through its subsidiaries, is primarily
engaged in the business of providing a wide range of life insurance and other
financial products and services to higher income individuals. The acquisition
was approved by a majority of the shareholders of the Company at a special
meeting of shareholders held on November 20, 2000. Pursuant to the terms of the
merger agreement, shareholders of the Company will receive consideration in the
form of cash, MONY common stock or a combination thereof.
Advest, Inc.
For the twelve months ended September 30, 2000, the Dow Jones Industrial Average
closed at 10651, a 3% one year gain, but well off the double-digit gains of the
preceding three years. The S&P 500 and NASDAQ Composite closed up 12% and 34%,
respectively, year-to-year, however, both indices posted declines in each of the
last two quarters. Rising interest rates contributed to declines in stock and
bond underwritings year-to-year. After raising interest rates six times in just
over one year, the Fed left rates unchanged beginning with its June meeting
acknowledging that the economic growth was slowing.
For fiscal 2000, Advest's pre-tax earnings were $34.8 million, up 38%
from fiscal 1999. Total revenues were $413.7 million, a 25% increase and a
record for the sixth year in a row. Double-digit gains and record revenue levels
were attained in nearly every area. Agency commissions increased 19% to $168.8
million, primarily due to over-the-counter, mutual funds and insurance sales.
Revenues from principal transactions increased 31% to $73.8 million due to
increased sales and trading profits for both fixed income and equity securities.
Asset management revenues for Advest, Inc. rose 27% to $47.0 million, with a 40%
increase in fee-based business. Investment banking revenues declined $7.6
million or 23% with over two thirds of the decline due to market adjustments of
securities we receive in conjunction with investment banking activities. The
balance of the decline is primarily attributable to a downsizing of Advest's
investment banking division during the year.
For fiscal 1999, Advest's pre-tax income declined 10% from the prior
year to $25.2 million. The broker/dealer attained record revenues of $331.7
million, up 9% from the prior year's record high. Net interest income declined
$1.0 million (4%) primarily as a result of lower spreads on margin debits and
higher carrying costs of inventory. Total expenses increased 11% to $306.4
million primarily as a result of higher salesmen's compensation and firm payroll
related to technology and capital markets departments. Communications costs
increased $4.5 million (17%) primarily due to technology upgrades and
volume-driven processing costs.
Advest Bank and Trust Company
During fiscal 1999, the Company announced that it would 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 that closed November 30, 1999, Hudson acquired the
loan and other financial assets and assumed the deposit liabilities of the Bank.
Under a strategic alliance agreement, effective September 1, 1999, Hudson is the
exclusive provider of certain FDIC-insured banking products and services to
Advest and its clients. Concurrent with the agreements, the Bank ended its
mortgage origination and deposit services. The Bank has retained its bank
charter and provides trust and custody services through referrals from Advest's
retail sales force. As a federal savings bank, the Bank is regulated by the OTS,
and is able to offer trust and custody services in all 50 states.
Income from discontinued operations reflects the after tax operating
results of the Bank's lending and deposit operations. Operating revenues and
expenses for the Bank's trust and custody operations are reflected in the
Company's consolidated financial statements and are not material to consolidated
results
12
<PAGE> 13
of operations, financial condition or cash flows for the three years in the
period ended September 30, 2000. The Bank is deemed a "well capitalized" bank.
RESULTS OF OPERATIONS
Net income for the years ended September 30, 2000, 1999 and 1998 was $21.0
million, $13.6 million and $18.0 million, respectively. The following table
summarizes results of operations and percentage changes for the three years in
the period ended September 30, 2000.
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------
In millions, except percentages 2000 % 1999 % 1998
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues $ 418.8 25 $ 335.2 8 $ 309.8
Interest expense 63.6 82 34.9 11 31.4
------- --- ------- --- -------
Net revenues 355.2 18 300.3 8 278.4
Non-interest expenses 320.1 15 278.0 11 250.6
------- --- ------- --- -------
Pre-tax income 35.1 57 22.3 (20) 27.8
======= === ======= === =======
Income from continuing operations 20.7 55 13.4 (21) 17.0
Income from discontinued
operations, net of taxes .3 (67) .9 (10) 1.0
Loss on sale of discontinued
operations, net of taxes -- -- (.7) -- --
------- --- ------- --- -------
Net income $ 21.0 55 $ 13.6 (24) $ 18.0
======= === ======= === =======
-----------------------------------------------------------------------------------
</TABLE>
AGENCY COMMISSIONS
The number of investment executives has remained fairly constant over the past
several years, however, the recruitment and retention of experienced
professionals has contributed to substantial increases in average annual
production per broker. Record broker productivity was achieved in each of the
last five fiscal years and, together with record stock market volume and prices,
contributed to the record revenue levels achieved during the same period.
Over-the-counter commissions reflect the impact of certain rule changes
implemented by the SEC which have reduced the profit spreads of market makers
over the past several years. Primarily in response to the SEC changes, there has
been 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.
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------
In millions, except percentages 2000 % 1999 % 1998
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Listed $ 55.6 2 $ 54.5 8 $ 50.5
Mutual funds 50.9 21 42.1 2 41.2
Over-the-counter 40.0 45 27.6 14 24.2
Insurance 15.1 35 11.2 33 8.4
Options 4.7 8 4.4 5 4.2
Other 2.5 42 1.8 38 1.3
------- -- ------- -- -------
$ 168.8 19 $ 141.6 9 $ 129.8
======= == ======= == =======
-----------------------------------------------------------------------------
</TABLE>
Current year agency commissions increased 19% led by over-the-counter
commissions which advanced 45%. Mutual funds revenues, including distribution
fees, increased 21%, surpassing $50 million for the first time. Included in this
increase is a 23% rise in C-share trail business which reflects a
13
<PAGE> 14
positive trend to more fee-based business. Insurance commissions surpassed $15.0
million for the first time with strong gains posted for both life insurance (up
55%) and annuity sales (up 33%). Listed commissions increased 2% as declines in
the June and September quarters substantially offset gains through the first six
months of the fiscal year.
Fiscal 2000 agency commissions achieved a record high with individual
record levels attained across the board. Commissions on listed and
over-the-counter securities increased primarily due to high share volume and
prices. Insurance commissions increased 35% with sales of life insurance
products increasing over 100%, primarily related to the cross-selling efforts of
the insurance and trust departments and expanded education programs for
investment executives.
PRINCIPAL TRANSACTIONS
Revenue from principal transactions includes realized and unrealized gains and
losses on Advest's trading accounts and related sales credits. Advest's
institutional corporate bond trading desk specializes in investment grade
corporate bonds, while the market-making activities of its retail fixed income
and Nasdaq trading desks primarily involve making product available to clients
and supporting Advest's research and equity capital markets activities.
Advest enters into derivative transactions to manage the interest rate
risk associated with its municipal bond inventories. Derivatives are marked to
market daily with unrealized gains and losses reflected in revenue from
principal transactions. (Further discussion of derivatives is included under the
caption "Derivative Financial Instruments" and in Notes 1 and 14 to the
Consolidated Financial Statements.) Advest holds only nominal inventory
positions of high yield securities.
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------
In millions, except percentages 2000 % 1999 % 1998
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Fixed income commissions $37.8 14 $33.1 55 $21.4
Equity commissions 19.7 37 14.4 (17) 17.4
Other 16.3 85 8.8 47 6.0
----- --- ----- --- -----
$73.8 31 $56.3 26 $44.8
===== === ===== === =====
------------------------------------------------------------------------------------------------
</TABLE>
Revenue from principal transactions increased 31% due to increased sales
and trading profits for both fixed income and equity securities. Principal bonds
commissions increased $4.7 million (14%) led by sales of investment grade
corporate bonds and municipal securities. Fixed income trading profits increased
across the board primarily due to increased institutional and dealer-to-dealer
transactions. The increase was led by a $2.4 million (146%) increase in
municipal bonds trading profits, a $2.0 million (30%) increase in corporate
bonds trading profits and a $.7 million (93%) increase in government bond
trading profits. Principal equity commissions increased $5.3 million (37%) and
related trading profits rose $1.8 million (396%), with the latter gain primarily
related to measures taken last year to reduce the firm's overnight market
exposure by reducing equity inventories.
Fiscal 1999 revenues from principal transactions attained a record high
level for the third year in a row. Commissions on fixed income securities
increased 55%, led by investment grade corporate bonds, up $3.8 million (88%),
government agency obligations, up $2.5 million (170%), and collateralized
mortgage obligations ("CMOs"), up $2.0 million (108%). The increases in
government agency and CMOs sales were due primarily to two new fixed income
sales units established in fiscal 1998. Trading profits for corporate bonds
increased $3.0 million (85%). Advest's municipal inventories trading profits
declined 30% to $1.6 million while related sales credits increased $2.5 million
(34%). On the equity side, current year trading losses were 18% lower than
fiscal 1998. Equity sales credits declined 17% primarily related to a transition
from principal to agency business.
14
<PAGE> 15
INVESTMENT BANKING
To generate investment banking revenue, Advest manages and participates in
underwritings of corporate and municipal securities and closed-end funds.
Advest's Investment Banking Division also provides merger and acquisition and
consulting and valuation services. In general, the Company does not participate
in bridge financing activities. Advest's Investment Banking Division
concentrates its efforts on raising capital for mid-size companies, primarily in
the banking, insurance, technology, consumer and commercial markets and health
care industries. Warrants received in conjunction with investment banking
activities are carried at market value, as prescribed by EITF 96-11. Public
Finance services health care and educational institutions as well as state and
local issuers primarily in New England and New York.
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------
In millions, except percentages 2000 % 1999 % 1998
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Valuation of warrants $ (.8) (120) $ 4.0 300 $ 1.0
Underwriting commissions 14.3 (8) 15.6 (12) 17.7
Consulting and valuation fees 1.6 (6) 1.7 21 1.4
Merger and acquisition fees 3.7 (12) 4.2 (34) 6.4
Private placement fees .8 (58) 1.9 (42) 3.3
Management fees 2.7 (21) 3.4 (8) 3.7
Other 3.1 41 2.2 (46) 4.1
----- --- ----- ---- -----
$25.4 (23) $33.0 (12) $37.6
===== ==== ===== ==== =====
------------------------------------------------------------------------------------------------
</TABLE>
Investment banking revenues declined $7.6 million (23%), with most of
the decline related to a $4.8 million decrease in the valuation of warrants and
securities received in conjunction with investment banking activities.
Investment banking revenues were also impacted by industry conditions and a
significant downsizing of Advest's investment banking division. Following a
record first half where the division completed eight public offerings and eight
merger and acquisition transactions valued at over $800 million, Advest's
Investment Banking Group underwent significant changes during the second half of
the year. Advest's investment banking efforts are now directed from its offices
at One Rockefeller Plaza with the Boston and Chicago investment banking
operations closed. Year-to-year, equity underwriting commissions declined $2.9
million (31%), underwriting fees declined $.7 million (26%) and merger and
acquisition revenues declined $.5 million (12%). Mutual fund underwriting
commissions were $2.0 million with substantially all revenue related to Advest's
June 2000 participation in the sale of a technology fund.
During fiscal 1999, investment banking revenues declined 12% from the
record level attained in fiscal 1998, with declines posted in all business
activities. The Investment Banking Division completed 25 transactions during the
year valued at $738 million, including 8 merger and acquisition transactions
with a combined value of $244 million and 17 public and private placement
transactions valued at over $494 million. The declines in merger and acquisition
income, equity underwriting commissions and related underwriting fees reflect a
dearth of activity in most industry sectors in Advest's target client size.
Private placement fees in the Corporate Fixed Income Group declined 42%; as
previously discussed, the professionals in this group left Advest at the close
of fiscal 1999. These declines were partly offset by a $3.0 million increase in
the valuation account for warrants, primarily related to a $3.7 million realized
gain in the first quarter on an equity investment acquired in connection with
Advest's investment banking activities.
15
<PAGE> 16
ASSET MANAGEMENT AND ADMINISTRATION
Advest's Investment Management Services Department ("IMS"), provides various
services for its fee-base accounts including client profiling, asset allocation,
manager selection and performance measurement. The Bank provides personal trust
and custody services primarily through Advest's retail sales force and Boston
Advisors provides investment advisory services to private retail and
institutional clients. In June 2000, Boston Advisors launched three money funds
- a money market fund, a U.S. Government fund and a tax-free fund. Over $1.0
billion of funds designated for investment in money funds by brokerage clients
of Advest, Inc. have been transferred into these funds. Advest also receives
service fees related to brokerage clients' investments in money market funds of
a third party money manager. Other services include retirement plan
administration, securities custody and safekeeping.
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------
In millions, except percentages 2000 % 1999 % 1998
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Investment management services $34.5 39 $24.8 18 $21.0
Money market accounts 9.0 3 8.7 30 6.7
Advisory and other 7.0 23 5.7 (2) 5.8
----- --- ----- --- -----
$50.5 29 $39.2 17 $33.5
===== === ===== === =====
---------------------------------------------------------------------------------------
</TABLE>
Current year revenues achieved a record high level primarily as a result
of increased fee-based accounts at Advest. Revenues for IMS increased 39%, a
record high, and total assets serviced increased 26% to almost $6 billion.
During the year, 4,300 new accounts were opened representing a 50% increase over
last year. The Bank completed the sale of its lending and deposit operations
during fiscal 2000 and now focuses exclusively on trust and custody services.
For fiscal 2000, trust assets increased 15% to almost $900 million and revenues
increased 27% to $1.7 million.
At September 30, 1999, total assets serviced by IMS in its fee-based
programs were $4.7 billion, up 25% from the prior year. The Bank's revenues
increased 36% to $1.4 million as trust assets serviced increased 52% to $740
million during fiscal 1999. The increase in money market service fee income
related to higher average money market balances and higher interest rates.
OTHER INCOME
Other income includes fees from mutual funds marketing, exchange order flow and
executions and postage at Advest and loan development and service fees at the
Bank.
During fiscal 2000, other income increased $1.4 million (19%) primarily
due to higher fee and postage income at Advest.
During fiscal 1999, other income increased $1.0 million (14%) primarily
due to higher fee income and proceeds from a legal settlement at Advest.
NET INTEREST INCOME
Net interest income is the excess of interest income over interest expense and
is earned primarily by Advest. Advest derives interest income primarily from
financing brokerage customers margin transactions, its stock borrowing
activities and securities inventory. Advest pays interest primarily on brokerage
customer credits held for reinvestment, its stock lending activities and short
and long-term borrowings. As a result of the sale of the Bank's loan and deposit
businesses, all interest income and interest expense related to the discontinued
operations are netted with all other revenue and expense items and reported
separately, net of taxes, on the consolidated statement of earnings. See also
Notes 3 and 12.
16
<PAGE> 17
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------
In millions, except percentages 2000 % 1999 % 1998
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest income:
Brokerage customers $47.2 48 $31.9 (5) $33.5
Stock borrowed 37.8 108 18.2 16 15.7
Investments 1.1 (8) 1.2 33 .9
Security inventory 3.8 (17) 4.6 53 3.0
Other 1.3 (13) 1.5 (65) 4.3
----- -- ----- --- -----
91.2 59 57.4 -- 57.4
----- -- ----- --- -----
Interest expense
Stock loaned 39.6 169 14.7 4 14.1
Brokerage customers 10.3 37 7.5 (19) 9.3
Borrowings 13.3 7 12.4 65 7.5
Other .4 33 .3 40 .5
----- -- ----- --- -----
63.6 82 34.9 11 31.4
----- -- ----- --- -----
Net interest income $27.6 23 $22.5 (13) $26.0
===== == ===== === =====
-------------------------------------------------------------------------------------------------
</TABLE>
Fiscal 2000 net interest income increased $5.1 million (23%). Advest's
net interest income increased $4.7 million (21%) primarily due to higher average
margin debits at Advest and lower financing costs due to increased use of stock
loan financing versus bank loans. The balance of the increase in net interest
income primarily relates to net investment income at the Bank.
Fiscal 1999 net interest income declined $3.5 million (13%) primarily
due to approximately $3.0 million in interest revenue recognized in fiscal 1998
related to the early payoff of a nonperforming mortgage on AGI's books. Advest's
net interest income declined $1.0 million (4%) primarily as a result of lower
average margin interest rates and reduced spreads due to higher costs of
financing the debits. Average margin debits increased 4% to $439.2 million,
however, total interest revenue from margin debits declined $1.6 million (5%).
Average free credit balances increased only 2% to 273.8 million requiring
increased short-term borrowings and stock loan to meet financing requirements of
margin debits and trading inventories. Interest revenue from stock borrowing
activities increased $2.5 million (15%) primarily due to increased short trading
positions.
NON-INTEREST EXPENSES
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------
In millions, except percentages 2000 % 1999 % 1998
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Compensation and benefits $230.1 16 $198.4 10 $180.9
Communications 36.7 14 32.1 17 27.5
Occupancy and equipment 22.8 10 20.8 11 18.7
Professional 7.0 25 5.6 19 4.7
Business development 8.9 16 7.7 7 7.2
Brokerage, clearing and exchange 5.6 10 5.1 13 4.5
Other 9.0 8 8.3 17 7.1
------ -- ------ -- ------
$320.1 15 $278.0 11 $250.6
====== == ====== == ======
-------------------------------------------------------------------------------------------
</TABLE>
Current year compensation and benefits costs increased 16% primarily due
to volume-driven increases in salesmen's compensation and retail and other
incentive compensation. General payroll increased 5%, as firm-wide increases in
headcount offset an approximate 50% decline in investment
17
<PAGE> 18
banking personnel. Communications costs increased primarily due to higher
volume-driven costs of Advest's third party data processor and higher telephone
equipment and line charges. Occupancy and equipment costs increased due to
higher rent expense, personal computers lease expense and service agreements.
Professional fees increased primarily due to higher legal and consulting
expenses at Advest. Business development costs increased primarily due to more
financial advisors qualifying for company-sponsored education and development
programs and an increase in the number of educational programs offered.
During fiscal 1999, volume-driven salesmen's compensation and other
retail compensation expenses accounted for 75% of the increase in compensation
and benefits costs. Higher costs in the equity capital markets, technology and
the fixed income departments comprised most of the balance. Communications costs
increased $4.6 million primarily related to technology upgrades to provide
enhanced desktop services and keep pace with the significant increases in
securities trading volume, and higher volume-driven costs of Advest's third
party data processor. Occupancy and equipment costs increased $2.1 million
primarily due to a $1.0 million (12%) increase in rent expense of Advest's
retail offices and increased expenses related to technology upgrades.
Professional fees increased $.9 million due to higher consulting costs and
personnel agency fees at Advest.
INCOME TAXES
The effective income tax rates were 41%, 40% and 39% respectively for 2000,
1999, and 1998. The higher effective rate for fiscal 2000 recognizes a trend
towards increased levels of income apportioned to various states with higher
average tax rates. The effective rate for periods subsequent to 2000 is
undetermined at this time due to the Company's pending acquisition by MONY,
previously discussed.
For further information on the Company's income taxes, refer to Notes 1
and 12 to the financial statements.
DERIVATIVE FINANCIAL INSTRUMENTS
Advest, Inc.
Advest enters into derivative transactions, primarily short-term exchange-traded
futures, to manage the interest rate risk associated with its trading
inventories, primarily municipal bonds, when inventory levels exceed
pre-determined levels, as defined in its risk management policy. Hedging is
limited to the underlying trading portfolio's interest rate risk and is not
speculative in and of itself. Derivatives and the underlying inventory are
marked to market daily. Positions are reviewed daily and, periodically, the
strategy is re-evaluated based on anticipated inventory levels and composition.
The fair value of a derivative contract is the amount Advest would have
to pay a third party to assume its obligation under the contract or the amount
Advest would receive for its benefits under the contract in the reverse
situation. At September 30, 2000 and 1999, Advest's open derivative positions
were nominal. See Note 14.
LIQUIDITY AND CAPITAL RESOURCES
The Company's total assets were $2.1 billion at September 30, 2000, reflecting a
$626.3 million (43%) increase from fiscal 1999 and a $1.0 billion (97%) increase
from fiscal 1998. The increase in assets is primarily attributable to the
expansion of Advest's stock lending and fixed income trading businesses as well
as higher customer margin debits. The expansion of stock loan activities relates
to three factors: an increase in Advest's matched book business, an increase in
borrowing of fixed income securities to cover higher short trading positions of
Advest's Institutional Corporate Bond Group, and an increase in stock loan of
customer securities to help finance the higher margin debits.
The Company's assets are highly liquid in nature. Liquid assets which
include cash and cash equivalents, receivables from brokerage customers,
securities borrowed, receivables from brokers and
18
<PAGE> 19
dealers, available for sale and trading securities, comprised 96%, 92% and 92%
for the years ended September 30, 2000, 1999 and 1998, respectively.
Net assets of discontinued operations declined $31.0 million (100%) due
to the execution of the purchase and sale agreement with Hudson on November 30,
1999. On December 31, 1999, AGI paid off $7.0 million in short-term borrowings
which was the first installment in what will be annual payments to satisfy a $35
million note payable.
Shareholders' equity increased $27.1 million (22%) during the past two
years, primarily from net earnings, increases to paid-in capital related to the
sales of treasury stock to the Company's equity plans and the exercise of stock
options offset by dividends paid and treasury stock repurchased. The Company
paid or accrued annual dividends of $.23 and $.19 per share for fiscal years
2000 and 1999, respectively. Total dividends declared and/or paid during the
past two fiscal years were $3.7 million. During fiscal years 2000 and 1999,
680,896 shares of the Company's common stock were repurchased, under a buyback
program begun in 1990 for which the repurchase of up to 4,000,000 shares is
authorized. To date, 3,437,673 shares had been purchased under the program.
AGI's principal source of funding is the earnings distributions from its
subsidiaries. As a result of the strategic alliance agreement and purchase and
sale transaction between the Bank and Hudson United Bancorp, the Bank's capital
requirements were significantly reduced. In June 2000, the Bank, with regulatory
approval, paid a $14.8 million dividend to AGI. AGI redeployed $10.0 million of
the dividend in the form of a loan to Advest for the purpose of reducing its
short-term borrowings.
Management believes that earnings distributions from subsidiaries,
together with AGI's own assets and potential proceeds from a shelf registration
offering will be sufficient to meet AGI's current and foreseeable liquidity and
capital requirements. In addition, following its acquisition by MONY, AGI will
have access to substantial additional capital resources.
Advest, Inc.
During fiscal 1997, AGI loaned Advest $10.0 million at a rate of 8% per annum,
utilizing a portion of the proceeds of its $35.0 million borrowing. The loan is
unsecured and subordinated to certain other corporate obligations. The purpose
of the subordinated loan was to increase Advest's regulatory net capital. During
fiscal 2000, AGI loaned Advest and additional $10 million in the form of a note
to reduce its short-term borrowings.
Advest has arrangements with certain financial institutions whereby it
can borrow amounts on a collateralized basis, principally to support securities
settlements, trading inventories, margin debits and underwriting activities.
Increases in average margin balances as well as firm trading positions,
primarily fixed income securities, have resulted in higher short-term borrowing
levels for Advest during the past few years. Advest has uncommitted lines of
credit with three financial institutions in the total amount of $430 million.
With the exception of $40 million in unsecured lines of credit, all of Advest's
lines of credit are for collateralized borrowing for which it has substantial
levels of customer and firm securities that can be pledged. In addition, Advest
pledges customer and firm securities for stock loan as an alternative and lower
cost of financing trading inventories and margin debits.
During the past several years, Advest has made substantial capital
investments primarily in technology-related hardware and software upgrades.
Technology enhancements include the upgrade of desktop computers firm-wide and
expanded hardware, software and telecommunications capacity to provide enhanced
services as well as handle the substantial current and anticipated increases in
securities market volume. At the same time, Advest has increased the number
and/or caliber of its employees firm-wide, particularly its retail sales,
capital markets and technology professionals, which has substantially increased
compensation and benefits costs during the past few years. These costs are
anticipated to remain at similar or higher levels in the future. Management
believes that operating cash flow together with available credit lines will
provide sufficient resources for Advest to meet all present and reasonably
19
<PAGE> 20
foreseeable capital needs. In addition, the acquisition by MONY will enable
Advest and MONY to share and thus better leverage technology costs.
The Securities and Exchange Commission ("SEC") requires Advest to
maintain liquid net capital to meet its obligations to customers. At September
30, 2000, Advest had excess net capital of approximately $62.0 million and a net
capital ratio of 10.2%. See Note 11.
Advest Bank and Trust Company
The Bank is a member of the FHLBB and, accordingly, has access to advances from
the FHLBB to the extent the Bank possesses eligible collateral. Currently, the
Bank has collateral of $1.8 million which, together with operating cash flow, is
sufficient to meet its current and foreseeable capital and operating needs.
The Federal Deposit Insurance Corporation ("FDIC") requires "well
capitalized" banks to maintain a minimum Tier 1 or leverage capital ratio of 5%.
At September 30, 1999, the Bank's Tier 1 or leverage capital ratio was 9.94%.
The Bank is also subject to the FDIC's risk-based capital regulations which
require the Bank, as "well capitalized", to maintain a total risk-based capital
ratio of 10%, including at least 6% Tier 1 risk-based capital. At September 30,
2000, the Bank's total risk-based and Tier 1 risk-based capital ratios were
169.33% and 169.33%, respectively, which met all regulatory requirements.
Pursuant to the FDIC Improvement Act ("FDICIA"), all banks are subject
to rules limiting brokered deposits and interest rates. Under FDICIA, the Bank
meets the conditions to be deemed a "well capitalized" bank, which means it may
accept brokered deposits without restriction. At September 30, 2000, the Bank
had no of brokered deposits, having ceased its deposit operations with the sale
of its loan and deposit businesses to Hudson United Bancorp, in the first
quarter of fiscal 2000.
CASH FLOWS
Cash and cash equivalents from continuing operations increased $1.8 million. Net
cash provided by operating activities increased $33.4 million primarily due to
net earnings as adjusted for noncash items of $27.5 million. Net cash used in
financing activities decreased $15.5 million primarily due to repayments of
short-term borrowings by AGI and the Bank and the repurchase of treasury stock
by AGI. Net cash used in investing activities decreased $16.1 million primarily
due to capital expenditures and deferred compensation agreements.
ACCOUNTING PRONOUNCEMENTS
In June 2000, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities." SFAS 138 addresses a
limited number of issues causing implementation difficulties for entities that
apply SFAS 133. SFAS 137, "Deferral of the Effective Date of SFAS 133" was
issued in June 1999. SFAS 133, "Accounting for Derivative Instruments and
Hedging Activities" requires that all derivative instruments be recorded on the
balance sheet at their fair value. SFAS 137 defers the effective date for 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 and SFAS 138, during
fiscal 2001, as required. The effect of adoption on the Company's financial
condition, results of operations or cash flows is not expected to be material.
In September 2000, the FASB issued SFAS 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities." SFAS 140
is effective for transfers of financial assets occurring after March 31, 2001,
applied prospectively; effective for disclosures about securitizations and for
reclassification and disclosure about collateral in financial statements for
fiscal years ending after December 15, 2000. The effect of adoption on the
Company's financial condition,
20
<PAGE> 21
results of operations or cash flows is not expected to be material.
Item 7a. Quantitative and Qualitative Disclosures About Market Risk
RISK MANAGEMENT
During its normal course of business, Advest engages in the trading of
securities, primarily fixed income, in both a proprietary and market making
capacity, and holds securities for trading, rather than investment, purposes.
Advest makes a market in certain investment-grade corporate bonds,
mortgage-backed securities, municipal bonds and over-the-counter equities in
order to facilitate order flow and accommodate its retail and institutional
customers. During fiscal 2000 and 1999, Advest significantly increased its
institutional corporate bond, government agency and mortgage-backed securities
trading activities. The activities of these trading areas accounted for most of
a $120.6 million (39%) and $64.7 million (27%) increase in trading inventories
and a $121.6 million (53%) and $81.3 million (54%) increase in short security
positions, for 2000 and 1999, respectively.
Market Risk
Market risk represents the potential change in the value of financial
instruments due to fluctuations in interest rates, foreign currency exchange
rates, equity and commodity prices. In the course of its trading and hedging
activities, the Company is exposed to interest rate and equity price risk.
The Company is exposed to market risk arising from changes in interest
rates. Advest's management seeks to reduce the risk of its trading portfolio on
an aggregate basis. Its risk management activities include inventory and hedging
policies. Inventory policies reflect the level of aggregate short and long
positions that may be held for trading and are specified by product line. Risk
management strategies also include the use of derivatives, principally
exchange-traded futures contracts.
The company is exposed to equity price risk as a result of making a
market in over-the-counter equity securities. Equity price risk arises from
changes in the price and volatility of equity securities. In April 1999, a
comprehensive review was completed of Advest's NASDAQ trading activities and the
decision was made to reduce overnight inventory and more aggressively manage the
number of stocks in which it made a market.
Trading Accounts (Value at Risk Analysis)
For purposes of the Securities and Exchange Commission's market risk disclosure
requirements, the Company has performed a value at risk analysis of its trading
financial instruments and derivatives. The value at risk calculation uses
standard statistical techniques to measure the potential loss in fair value
based upon a one-day holding period and a 95% confidence level. In fiscal year
1999, Advest significantly upgraded its VaR capability by converting to the
Bloomberg Value at Risk System. During 2000, Advest continued to improve the
depth, frequency and range of its VaR management review. Even though these
filings are annual, these total firm, institutional plus retail positions,
computations are now being performed monthly in order to achieve a better
understanding of our entire firm's risk/return profile. The establishment of
improved management controls includes, as needed, the extension of our
monitoring process to the security, product, trader, department, and firm wide
levels. Most significantly, our institutional book of business, which represents
the vast majority of our usual holdings, is typically monitored daily. Although
value at risk models are sophisticated, they can be limited, as historical data
is not always an accurate predictor of future conditions. Accordingly, Advest
manages its market exposure through other measures, including predetermined
trading authorization levels and the hedging requirement policy described
previously.
At September 30, 2000, 1999 and 1998 Advest's value at risk for each
component of market risk and in total was as follows:
21
<PAGE> 22
<TABLE>
<CAPTION>
In thousands 2000 1999 1998
------------------------------------------------------------------------
<S> <C> <C> <C>
Interest rate risk $182 $301 $480
Equity price risk 21 56 77
Diversification benefit (16) (10) (69)
---- ---- ----
Total $187 $347 $488
==== ==== ====
</TABLE>
The potential future loss represented by the total value at risk falls within
predetermined levels of loss that are not material to the Company's results of
operations, financial condition or cash flows. In particular, a noted reduction
in the value at risk experienced in 2000 may be attributable to a year over year
lessening in observable fixed income market volatility.
The value at risk estimate has limitations that should be considered in
evaluating the company's potential future losses based on the year-end portfolio
positions. Recent market conditions may result in statistical relationships that
result in a higher value at risk than would be estimated from the same portfolio
under different market conditions. In addition, a critical risk management
strategy is the active management of portfolio levels to mitigate market risk.
The Company's, in particular Advest's, market risk exposure will continue to
change with changes in the portfolio and market conditions.
Non-trading Accounts (Tabular Presentation)
The following table shows the interest sensitivity of non-trading assets,
liabilities and financial instruments of Advest at September 30, 2000 and 1999,
based on their estimated maturity/repricing structure:
22
<PAGE> 23
<TABLE>
<CAPTION>
SEPTEMBER 30, 2000 Percent of After
In thousands, except percentages Amount Total 2001 2002 2003 2004 2005 2005
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-sensitive assets
Investment securities (a) $ 20,310 100.00% $ 11,970 $2,256 $2,373 $ -- $ -- $3,711
Average interest rate 6.71% 7.41% 6.78% 7.09% -- -- 6.35%
-------------------------------------------------------------------------------------
Total interest-sensitive assets $ 20,310 100.00% $ 11,970 $2,256 $2,373 $ -- $ -- $3,711
-------------------------------------------------------------------------------------
Interest-sensitive liabilities
Other borrowings $262,725 100.00% $241,725 $7,000 $7,000 $7,000 $ -- $ --
Average interest rate 6.42% 6.29% 7.95% 7.95% 7.95% -- --
-------------------------------------------------------------------------------------
Total interest-sensitive liabilities $262,725 100.00% $241,725 $7,000 $7,000 $7,000 $ -- $ --
-------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999 Percent of After
In thousands, except percentages Amount Total 2000 2001 2002 2003 2004 2004
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-sensitive assets
Investment securities (a) $ 21,948 98.82% $ 16,965 $ 750 $ 250 $ -- $ -- $3,983
Average interest rate 5.80% 5.34% 6.37% 7.25% -- -- 5.93%
Interest-bearing deposits 262 1.18% 262 -- -- -- -- --
Average interest rate 5.04% 5.04% -- -- -- -- --
--------------------------------------------------------------------------------------
Total interest-sensitive assets $ 22,210 100.00% $ 17,227 $ 750 $ 250 $ -- $ -- $3,983
--------------------------------------------------------------------------------------
Interest-sensitive liabilities
FHLB advances $ 31,000 16.13% $ 28,500 $1,500 $ -- $ -- $ -- $1,000
Average interest rate 5.59% 5.55% 6.73% -- -- -- 4.99%
Other borrowings 161,190 83.87% 133,164 7,026 7,000 7,000 7,000 --
Average interest rate 5.80% 5.34% 7.94% 7.95% 7.95% 7.95% --
--------------------------------------------------------------------------------------
Total interest-sensitive liabilities $192,190 100.00% $161,664 $8,526 $7,000 $7,000 $7,000 $1,000
--------------------------------------------------------------------------------------
Interest rate derivatives
Interest rate swaps:
Interest rate caps $5,000
Average interest rate 6.00%
------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Investment securities include investment securities available for sale and
FHLB stock.
23
<PAGE> 24
Item 8. Financial Statements and Supplementary Data
THE ADVEST GROUP, INC.
Consolidated Statements of Earnings
<TABLE>
<CAPTION>
In thousands, except per share amounts
Fiscal year ended September 30, 2000 1999 1998
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES
Commissions $168,789 $141,603 $129,825
Interest 91,214 57,431 57,439
Principal transactions 73,748 56,347 44,752
Asset management and administration 50,486 39,188 33,473
Investment banking 25,420 33,006 37,607
Other 9,095 7,663 6,705
-------- -------- --------
Total revenues 418,752 335,238 309,801
-------- -------- --------
EXPENSES
Compensation 230,070 198,322 180,886
Interest 63,528 34,965 31,341
Communications 36,738 32,136 27,530
Occupancy & equipment 22,798 20,813 18,744
Business development 8,897 7,728 7,197
Professional 7,013 5,610 4,686
Brokerage, clearing & exchange 5,570 5,085 4,542
Other 9,011 8,267 7,047
-------- -------- --------
Total expenses 383,625 312,926 281,973
-------- -------- --------
INCOME BEFORE TAXES 35,127 22,312 27,828
Provision for income taxes 14,397 8,925 10,853
-------- -------- --------
INCOME FROM CONTINUING OPERATIONS 20,730 13,387 16,975
Income from discontinued
operations, net of taxes 294 877 977
Loss on sale of discontinued
operations, net of taxes -- (713) --
-------- -------- --------
NET INCOME $ 21,024 $ 13,551 $ 17,952
======== ======== ========
------------------------------------------------------------------------------------------------------------------------------
Per share data:
Basic earnings:
Continuing operations $ 2.61 $ 1.67 $ 2.08
Discontinued operations 0.04 0.11 0.12
Loss on sale of discontinued operations -- (0.09) --
-------- -------- --------
NET INCOME $ 2.65 $ 1.69 $ 2.20
======== ======== ========
Diluted earnings:
Continuing operations $ 2.27 $ 1.46 $ 1.82
Discontinued operations 0.03 0.10 0.10
Loss on sale of discontinued operations -- (0.08) --
-------- -------- --------
NET INCOME $ 2.30 $ 1.48 $ 1.92
======== ======== ========
Dividends declared $ 0.23 $ 0.19 $ 0.16
</TABLE>
See Notes to Consolidated Financial Statements
24
<PAGE> 25
THE ADVEST GROUP, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
In thousands, except per share amounts
September 30, 2000 September 30, 1999
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CASH AND SHORT-TERM INVESTMENTS
Cash and cash equivalents $ 8,460 $ 7,812
Cash and securities segregated under federal and other regulations 258 253
---------- -----------
8,718 8,065
---------- -----------
RECEIVABLES
Securities borrowed 911,612 515,676
Brokerage customers, net 638,322 503,116
Brokers and dealers 13,854 6,447
Other 22,749 30,455
---------- -----------
1,586,537 1,055,694
---------- -----------
SECURITIES
Trading, at market value 427,068 306,426
Available for sale, at market value 7,148 5,063
Held to maturity (market values of $13,161 and $16,886) 13,161 16,885
---------- -----------
447,377 328,374
---------- -----------
OTHER ASSETS
Equipment and leasehold improvements, net 14,387 13,028
Net assets of discontinued operations - 30,972
Other 31,870 26,488
---------- -----------
46,257 70,488
---------- -----------
TOTAL ASSETS $2,088,889 $ 1,462,621
========== ===========
LIABILITIES & SHAREHOLDERS' EQUITY
LIABILITIES
Securities loaned $ 962,588 $ 523,095
Securities sold, not yet purchased, at market value 352,112 230,486
Brokerage customers 255,065 298,119
Short-term borrowings 241,725 161,007
Compensation and benefits 36,350 27,648
Checks payable 23,554 4,971
Brokers and dealers 22,442 10,839
Long-term borrowings 21,000 30,526
Repurchase agreements - 18,406
Other 23,253 22,388
---------- -----------
1,938,089 1,327,485
---------- -----------
SHAREHOLDERS' EQUITY
Common stock, par value $.01, authorized 25,000 shares,
issued 11,121 and 10,914 shares 111 109
Paid-in capital 80,625 76,814
Retained earnings 96,612 77,644
Unamortized restricted stock compensation (1,914) (2,081)
Treasury stock, at cost, 2,287 and 1,989 shares (24,634) (17,350)
---------- -----------
150,800 135,136
---------- -----------
$2,088,889 $ 1,462,621
========== ===========
---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements
25
<PAGE> 26
THE ADVEST GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
In thousands
Fiscal year ended September 30, 2000 1999 1998
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
NET INCOME $ 21,024 $ 13,551 $ 17,952
Income from discontinued operations (294) (877) (977)
Loss on sale of discontinued operations -- 713 --
--------- --------- ---------
Income from continuing operations 20,730 13,387 16,975
Adjustments to reconcile net income to net cash provided
by operating activities of continuing operations:
Depreciation and amortization 7,191 11,071 9,425
Other (464) (3,994) (178)
(Increase) decrease in operating assets:
Securities borrowed (395,936) (245,038) 20,106
Trading securities (120,134) (64,922) (138,472)
Receivables from brokerage customers (135,315) (69,079) (44,791)
Receivables from brokers and dealers (7,407) (1,137) (1,213)
Other 13,803 (17,611) (7,323)
Increase (decrease) in operating liabilities:
Short-term borrowings, net 109,473 1,227 92,000
Securities loaned 439,493 306,820 (42,020)
Securities sold, not yet purchased 121,627 81,297 97,076
Brokerage customers (43,054) (31,856) 10,875
Checks payable 18,583 1,998 (15,394)
Repurchase agreements (18,406) 18,406 --
Other 23,242 8,649 7,083
--------- --------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES OF CONTINUING OPERATIONS 33,426 9,218 4,149
--------- --------- ---------
FINANCING ACTIVITIES
Repayment of short-term borrowings (9,781) (264) (248)
Repayment of long-term borrowings 2,500 -- --
Repurchase of treasury stock (8,397) (2,978) 783
Cash dividends paid (2,056) (1,692) (1,426)
Other 2,273 155 425
--------- --------- ---------
NET CASH USED IN FINANCING ACTIVITIES OF CONTINUING OPERATIONS (15,461) (4,779) (466)
--------- --------- ---------
INVESTING ACTIVITIES
Proceeds from (payments for):
Maturities of held to maturity securities 36,156 23,879 22,712
Sales of available for sale securities 11,639 19,607 42,853
Purchases of available for sale securities (7,183) (13,110) (47,024)
Purchases of held to maturity securities (40,969) (21,539) (20,500)
Capital expenditures (6,005) (4,797) (3,939)
Other (9,793) (3,313) 4,593
--------- --------- ---------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES OF CONTINUING OPERATIONS (16,155) 727 (1,305)
NET CASH USED IN DISCONTINUED OPERATIONS (1,162) (11,236) (955)
--------- --------- ---------
Increase (decrease) in cash and cash equivalents 648 (6,070) 1,423
Cash and cash equivalents at beginning of period 7,812 13,882 12,459
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 8,460 $ 7,812 $ 13,882
========= ========= =========
-----------------------------------------------------------------------------------------------------------------------
Interest paid $ 63,621 $ 34,824 $ 40,517
Income taxes paid $ 13,069 $ 12,386 $ 15,297
Non-cash activities:
Restricted stock awards, net of forfeitures $ 435 $ 1,605 $ 811
-----------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
26
<PAGE> 27
THE ADVEST GROUP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
$.01 par value Unamortized
In thousands, except Common stock Treasury stock restricted
per share amounts --------------- Paid-in Retained ---------------- stock
Shares Amount capital earnings Shares Amount compensation
------ ------ ------- -------- ------ -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AS OF
SEPTEMBER 30, 1997 10,812 $108 $71,309 $49,260 (2,180) $(14,390) $ (571)
Comprehensive income:
Net income 17,952
Unrealized holding gain
on investment securities
(net of taxes of $24)
Total comprehensive income
Exercise of stock options 81 1 577 32 (224)
Dividends declared
($.16 per share) (1,427)
Repurchase of common stock (60) (1,167)
Sale of treasury stock to
equity plan 1,421 90 521
Stock issued under restricted stock
plans, less amortization of $301 601 31 210 (510)
Other (942) 143 950
------ ---- ------- ------- ------ -------- --------
BALANCE AS OF
SEPTEMBER 30, 1998 10,893 109 72,966 65,785 (1,944) (14,100) (1,081)
Comprehensive income:
Net income 13,551
Unrealized holding gain
on investment securities
(net of taxes of $9)
Total comprehensive income
Exercise of stock options 21 - 104 2 34
Dividends declared
($.19 per share) (1,692)
Repurchase of common stock (298) (5,383)
Sale of treasury stock to
equity plan 1,439 123 984
Stock issued under restricted stock
plans, less amortization of $809 1,222 62 587 (1,000)
Other 1,083 66 528
------ ---- ------- ------- ------ -------- --------
BALANCE AS OF
SEPTEMBER 30, 1999 10,914 109 76,814 77,644 (1,989) (17,350) (2,081)
Comprehensive income:
Net income 21,024
Unrealized holding gain
on investment securities
(net of taxes of $0)
Total comprehensive income
Exercise of stock options 207 2 1,249 (90) (1,871)
Dividends declared
($.23 per share) (2,056)
Repurchase of common stock (383) (6,956)
Sale of treasury stock to
equity plan 826 83 776
Stock issued under restricted stock
plans, less amortization of $659 722 3 (50) (13)
Other 1,014 89 817 180
------ ---- ------- ------- ------ -------- --------
BALANCE AS OF
SEPTEMBER 30, 2000 11,121 $111 $80,625 $96,612 (2,287) $(24,634) $ (1,914)
====== ==== ======= ======= ====== ======== ========
</TABLE>
<TABLE>
<CAPTION>
Accumulated
other
In thousands, except comprehensive Shareholders'
per share amounts income, net equity
------------- -------------
<S> <C> <C>
BALANCE AS OF
SEPTEMBER 30, 1997 $ (63) $105,653
Comprehensive income:
Net income
Unrealized holding gain
on investment securities
(net of taxes of $24) 51
Total comprehensive income 18,003
Exercise of stock options 354
Dividends declared
($.16 per share) (1,427)
Repurchase of common stock (1,167)
Sale of treasury stock to
equity plan 1,942
Stock issued under restricted stock
plans, less amortization of $301 301
Other 8
----- --------
BALANCE AS OF
SEPTEMBER 30, 1998 (12) 123,667
Comprehensive income:
Net income
Unrealized holding gain
on investment securities
(net of taxes of $9) 12
Total comprehensive income 13,563
Exercise of stock options 138
Dividends declared
($.19 per share) (1,692)
Repurchase of common stock (5,383)
Sale of treasury stock to
equity plan 2,423
Stock issued under restricted stock
plans, less amortization of $809 809
Other 1,611
----- --------
BALANCE AS OF
SEPTEMBER 30, 1999 -- 135,136
Comprehensive income:
Net income
Unrealized holding gain
on investment securities
(net of taxes of $0) --
Total comprehensive income 21,024
Exercise of stock options (620)
Dividends declared
($.23 per share) (2,056)
Repurchase of common stock (6,956)
Sale of treasury stock to
equity plan 1,602
Stock issued under restricted stock
plans, less amortization of $659 659
Other 2,011
----- --------
BALANCE AS OF
SEPTEMBER 30, 2000 $ -- $150,800
===== ========
</TABLE>
-------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
27
<PAGE> 28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation
The consolidated financial statements include the accounts of The Advest Group,
Inc. ("AGI") and all subsidiaries (collectively the "Company"). The Company
provides diversified financial services including securities brokerage, trading,
investment banking, trust and asset management. Principal operating subsidiaries
are Advest, Inc. ("Advest"), a broker/dealer and Advest Bank and Trust Company
(the "Bank"), a federal savings bank. In November 1999, the Company entered into
a purchase and sale agreement with a third party financial institution, which
included the sale of the Bank's loans and other financial assets and assumption
of the Bank's deposit liabilities. See Note 3, "Discontinued Operations."
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. All material
intercompany accounts and transactions are eliminated. Certain 1999 and 1998
amounts have been reclassified in the accompanying consolidated financial
statements to provide comparability with the current year presentation.
Cash equivalents are defined as short-term, highly liquid investments
with an original maturity of three months or less including amounts due from
banks, federal funds sold and overnight time deposits. At September 30, 2000 and
1999, federal funds sold were $600,000 and $500,000, respectively.
Receivables from and payables to brokerage customers
Receivables from and payables to brokerage customers arise from cash and margin
transactions executed by Advest on their behalf. In virtually all instances,
receivables are collateralized by securities with market values in excess of the
amounts due. The collateral is not reflected in the accompanying financial
statements. A reserve for doubtful accounts is established based upon reviews of
individual credit risks, as well as prevailing and anticipated economic
conditions. At September 30, 2000 and 1999, the reserve was $614,000 and
$548,000, respectively. Included in payables to brokerage customers are free
credit balances of $235,836,000 and $281,860,000 at September 30, 2000 and 1999,
respectively. Advest pays interest on credit balances when the customer has
indicated that the funds are for reinvestment purposes.
Collateralized financing transactions
Securities loaned and borrowed are accounted for as collateralized financing
transactions and are recorded at the amount of cash collateral received or
advanced. The fee received or paid by Advest is recorded as interest revenue or
expense. The initial collateral advanced or received has a market value in
excess of the market value of the underlying securities. The Company monitors
the market value of securities borrowed and loaned on a daily basis, with
additional collateral obtained or refunded, as necessary.
The Company utilizes short-term repurchase agreements as supplementary
short-term financing and delivers U.S. Treasury securities as collateral for
cash received. 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.
Securities
Advest records securities transactions on a settlement date basis, which does
not differ materially from a trade date basis. Revenues and related expenses for
transactions executed but not settled are accrued on a trade date basis.
28
<PAGE> 29
Advest's trading securities and securities sold, not yet purchased are
valued at market with unrealized gains and losses reflected in current period
revenues from principal transactions or investment banking. Periodically, Advest
receives stock warrants in connection with its investment banking activities.
Warrants are carried at their fair value which is determined using the
Black-Scholes model or another standard option valuation technique.
Securities available for sale are carried at fair value with unrealized
holding gains or losses, net of tax, reflected in shareholders' equity and
comprehensive income. Realized gains and losses are recorded on trade date by
the specific identification method and are included in revenue from principal
transactions.
Securities which the Company has the positive intent and ability to
hold until maturity are carried at amortized cost and classified as held to
maturity investments. Available for sale and held to maturity securities are
reduced to fair value, through charges to income, for declines in value that are
considered to be other than temporary.
Investment banking
Investment banking revenues are recorded, net of expenses, on the settlement
date for management fees and sales concessions, and on the dates the
underwriting syndications are closed for underwriting fees.
Depreciation and amortization
Equipment and leasehold improvements are carried at cost. Depreciation of
equipment for financial accounting purposes is calculated primarily using the
straight-line method and is based upon the estimated useful lives of the assets
ranging from three to ten years. Leasehold improvements are amortized over the
shorter of the terms of the respective leases or the estimated useful lives of
the improvements. At September 30, 2000 and 1999, accumulated depreciation and
amortization were $18,041,000 and $15,236,000, respectively.
The excess cost over the fair value of net assets of acquired companies
is recorded as goodwill and is amortized on a straight-line basis over 40 years.
At September 30, 2000 and 1999, the amount of goodwill reported in other assets
was $5,124,000 and $5,374,000, respectively.
Computer Software
Costs associated with the purchases of computer software have been capitalized
and will be amortized over the straight-line method. Included in other assets at
September 30, 2000 and 1999, was $3,711,000 and $2,479,000, respectively, of
costs related to computer software used to meet the needs of the Company. At
September 30, 2000 and 1999, amortized computer software costs were $1,814,000
and $1,129,000, respectively.
Income taxes
Deferred income taxes are recognized for the future tax consequences of
differences between the tax basis of assets and liabilities and their financial
reporting amounts at each year end based on enacted tax rates applicable to the
periods in which the differences are expected to affect taxable income.
Valuation allowances are established when necessary to reduce deferred tax
assets to an amount which is more likely than not realizable. Income tax expense
is the sum of the taxes currently payable and the change during the period in
deferred tax assets and liabilities.
Derivative financial instruments
Advest uses derivatives (primarily financial futures contracts) solely to manage
the risk associated with its municipal bond trading securities. Derivative
transactions are entered into when inventory levels exceed pre-determined
thresholds specified in Advest's hedging policy, which was developed and is
reviewed at least annually by the chief executive officer of the Company.
Derivatives are considered off-balance-sheet
29
<PAGE> 30
instruments because their notional amounts are not recorded on the balance
sheet. However, the fair values of Advest's futures contracts, which are based
on quoted market prices, are reflected in the consolidated balance sheets within
trading securities and the changes therein are reflected in the operating
activities section of the consolidated statements of cash flows. Futures
contracts are marked to market daily. Unrealized and realized gains and losses
from the termination or sale of the futures contracts are reflected in revenue
from principal transactions.
Recent accounting pronouncements
In June 2000, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities." SFAS 138 addresses a
limited number of issues causing implementation difficulties for entities that
apply SFAS 133. SFAS 137, "Deferral of the Effective Date of SFAS 133" was
issued in June 1999. SFAS 133, "Accounting for Derivative Instruments and
Hedging Activities" requires that all derivative instruments be recorded on the
balance sheet at their fair value. SFAS 137 defers the effective date for 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 and SFAS 138, during
fiscal 2001, as required. The effect of adoption on the Company's financial
condition, results of operations or cash flows is not expected to be material.
In September 2000, the FASB issued SFAS 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." SFAS 140 is
effective for transfers of financial assets occurring after March 31, 2001,
applied prospectively; effective for disclosures about securitizations and for
reclassification and disclosure about collateral in financial statements for
fiscal years ending after December 15, 2000. The effect of adoption on the
Company's financial condition, results of operations or cash flows is not
expected to be material.
NOTE 2: ACQUISITION BY THE MONY GROUP INC.
On August 23, 2000, the Board of Directors of the Company approved the
acquisition of all of the ownership interests in the Company by The MONY Group
Inc., ("MONY"), a holding company which, through its subsidiaries, is primarily
engaged in the business of providing a wide range of life insurance and other
financial products and services to higher income individuals. The acquisition
was approved by a majority of the shareholders of the Company at a special
meeting of shareholders held on November 20, 2000. Pursuant to the terms of the
merger agreement, shareholders of the Company will receive consideration in the
form of cash, MONY common stock or a combination thereof. The amount of such
consideration will be based on the average price of MONY common stock for the
ten consecutive trading days ending five trading days prior to the consummation
of the merger. The consummation of the merger is expected to occur early in
calendar 2001, subject to receipt of regulatory approval from the Office of
Thrift Supervision.
NOTE 3: DISCONTINUED OPERATIONS
During Fiscal 1999, the Company announced that it would 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 effective November 30, 1999, Hudson acquired the
loan and other financial assets and assumed the deposit liabilities of the Bank.
Under the terms of a separate agreement effective September 1, 1999, Advest and
Hudson entered into a strategic alliance whereby Hudson became the exclusive
provider of banking products and services to Advest and its clients and,
concurrently, the Bank ceased its mortgage origination operations.
Under the terms of the purchase and sale agreement, Hudson made a
one-time payment of $2.0
30
<PAGE> 31
million to the Bank. After deducting expenses related to the disposition, the
Bank recognized a pre-tax profit of $.2 million on the transaction. The net loss
of $.7 million on the sale of discontinued operations reflects a $.9 million tax
expense related to the Bank's loan loss reserves. See Note 12.
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
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 Consolidated Statement of Earnings,
Consolidated Balance Sheets and Consolidated Statements of Cash Flows, and have
been reported through their respective dates of disposition as "Income from
discontinued operations, net of taxes," as "Net assets of discontinued
operations," and as "Net cash used in discontinued operations."
Financial information for discontinued operations for the three years
ended September 30, 2000 is summarized below (See Note 12 for analysis of income
taxes):
<TABLE>
<CAPTION>
In thousands 2000 1999 1998
------------ ---- ---- ----
<S> <C> <C> <C>
Statement of earnings data:
Revenues $ 1,969 $ 12,273 $ 15,427
Expenses 1,463 10,811 13,826
------- -------- --------
Income before taxes 506 1,462 1,601
Provision for income taxes 212 585 624
------- -------- --------
Income from discontinued operations $ 294 $ 877 $ 977
======= ======== ========
</TABLE>
<TABLE>
<CAPTION>
Balance sheet data:
<S> <C> <C>
Loans $ -- $ 151,603
Interest receivable -- 1,028
Other assets -- (389)
Deposits -- (120,660)
Interest payable -- (136)
Other payables -- (474)
----- ----------
Net assets of discontinued operations $ -- $ 30,972
===== ===========
</TABLE>
NOTE 4: TRADING SECURITIES
At September 30, 2000 and 1999, trading securities consisted of:
<TABLE>
<CAPTION>
Securities sold,
Trading securities not yet purchased
------------------ -----------------
In thousands 2000 1999 2000 1999
------------ ---- ---- ---- ----
<S> <C> <C> <C> <C>
Corporate obligations $295,769 $175,743 $264,888 $194,710
State and municipal obligations 41,498 42,912 203 314
U.S. government and agency obligations 30,433 51,969 48,963 34,831
Mortgage-backed securities 56,893 31,605 37,034 2
Stocks and warrants 2,475 4,197 1,024 629
-------- -------- -------- --------
$427,068 $306,426 $352,112 $230,486
======== ======== ======== ========
</TABLE>
31
<PAGE> 32
NOTE 5: INVESTMENT SECURITIES
As of September 30, 2000, the amortized cost and fair values of debt securities,
by contractual maturity, were:
<TABLE>
<CAPTION>
Available for sale Held to maturity
------------------ ----------------
Amortized Fair Amortized Fair
In thousands cost value cost value
------------ ---- ----- ---- -----
<S> <C> <C> <C> <C>
Due in one year or less $ -- $ -- $12,773 $12,773
Due after one year through five years 1,886 1,886 388 388
Due after ten years 3,711 3,711 -- --
------ ------ ------- -------
$5,597 $5,597 $13,161 $13,161
====== ====== ======= =======
</TABLE>
For the three years ended September 30, 2000, 1999 and 1998, proceeds
from the sale of securities available for sale were $11,639,000, $19,607,000 and
$42,853,000, respectively, and gross gains realized were $22,000, $0 and
$66,000, respectively. Gross losses realized were $0, $537,000 and $2,000 for
2000, 1999 and 1998, respectively. The amortized cost and fair values of the
Company's available for sale securities at September 30, 2000 and 1999 were:
<TABLE>
<CAPTION>
Amortized Gross unrealized Fair
----------------
In thousands cost gains losses value
------------ ---- ----- ------ -----
<S> <C> <C> <C> <C>
2000
FHLB stock $ 170 $-- $-- $ 170
Mortgage-backed securities 5,597 -- -- 5,597
Other 1,382 -- -- 1,382
------ --- --- ------
$7,149 $-- $-- $7,149
====== === === ======
1999
FHLB stock $2,270 $-- $-- $2,270
Other 2,793 -- -- 2,793
------ --- --- ------
$5,063 $-- $-- $5,063
====== === === ======
</TABLE>
There were no sales of held to maturity securities during the three
years in the period ended September 30, 2000. The amortized cost and fair values
of the Company's held to maturity securities at September 30, 2000 and 1999
were:
<TABLE>
<CAPTION>
Amortized Gross unrealized Fair
----------------
In thousands cost gains losses value
------------ ---- ----- ------ -----
<S> <C> <C> <C> <C>
2000
U.S. government and agency
obligations $12,661 -- -- $12,661
Other 500 -- -- 500
------ --- --- ------
$13,161 $-- $-- $13,161
====== === === ======
1999
Mortgage-backed securities $ 3,983 $ 1 $ -- $ 3,984
U.S. government and agency
obligations 12,402 -- -- 12,402
Other 500 -- -- 500
------ --- --- ------
$16,885 $ 1 $ -- $16,886
====== === === ======
</TABLE>
32
<PAGE> 33
NOTE 6: SHORT-TERM BORROWINGS
In the ordinary course of business, primarily to facilitate securities
settlements and finance margin debits and trading inventories, Advest obtains
bank loans which are collateralized by its trading securities and customers'
margin securities. The loans are payable on demand and bear interest based on
the federal funds rate. At September 30, 2000 and 1999, Advest had $234,701,000
and $125,228,000, respectively, in bank loans all collateralized by firm trading
securities. The weighted average interest rate on bank loans outstanding at
September 30, 2000 and 1999, was 6.81% and 5.57%, respectively, and the weighted
average interest rates during fiscal 2000 and 1999 were 6.24% and 5.21%,
respectively.
Short-term borrowings of the Bank consist primarily of the current
portion of advances from the FHLB. At September 30, 2000, there were no
short-borrowings. At September 30, 1999, borrowings totaled $28,500,000 at rates
from 5.37% to 6.68%. The Bank's borrowings with the FHLB are collateralized by
its holdings of FHLB stock as well as otherwise unencumbered mortgage loans and
investment securities. The advances are subject to prepayment penalties, which
are intended to make the FHLB indifferent to the prepayment and are
approximately equivalent to settlement of the obligations at their current fair
value.
AGI's short-term borrowings at September 30, 2000 and 1999, were
$7,024,000 and $7,279,000, respectively, representing the current portion of
notes due between 2000 and 2003. Refer to Note 7 for additional information.
NOTE 7: LONG-TERM BORROWINGS
Long-term borrowings of the Bank were $2,500,000 as of September 30, 1999, and
represent the non-current portion of FHLB advances. The borrowings were
collateralized in the same manner as short-term borrowings. The borrowing was
paid down during 2000 and as of September 30, 2000 the Bank had no long-term
borrowings.
During fiscal 1997, AGI entered into a private placement transaction
with three institutional investors, borrowing $35,000,000 on an unsecured basis.
Under the terms of the note, the principal is payable in five equal installments
with payments due on December 31, 1999 and on the last day of each December
thereafter through and including December 31, 2003. The note is investment-grade
rated and bears interest at the rate of 7.95% per annum payable semiannually on
the last day of June and December.
At September 30, 2000 and 1999, total long-term borrowings of AGI were
$21,000,000 and $28,026,000, respectively.
NOTE 8: COMMON STOCK
Basic earnings per share are calculated by dividing income available to common
shareholders by the weighted-average number of common shares outstanding during
the period. Diluted earnings per share are calculated by dividing income
available to common shareholders 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 following table provides the calculation of net income per common
share for the years ended September 30, 2000, 1999 and 1998:
<TABLE>
<CAPTION>
In thousands, except per share amounts 2000 1999 1998
-------------------------------------- ---- ---- ----
<S> <C> <C> <C>
Net income $ 21,024 $ 13,551 $ 17,952
======== ======== ========
Average number of common shares
outstanding during the period 8,941 8,888 8,877
</TABLE>
33
<PAGE> 34
<TABLE>
<S> <C> <C> <C>
Adjustments:
Contingently issuable shares (1,022) (892) (726)
-------- -------- --------
Average number of common
shares outstanding 7,919 7,996 8,151
======== ======== ========
Basic earnings per common share $ 2.65 $ 1.69 $ 2.20
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
In thousands, except per share amounts 2000 1999 1998
-------------------------------------- ---- ---- ----
<S> <C> <C> <C>
Net income $21,024 $13,551 $17,952
======= ======= =======
Average number of common shares
outstanding during the period 8,941 8,888 8,877
Adjustments:
Exercise of stock options 216 293 467
------- ------- -------
Average number of common
shares outstanding 9,157 9,181 9,344
======= ======= =======
Diluted earnings per common share $ 2.30 $ 1.48 $ 1.92
======= ======= =======
</TABLE>
Under a common stock repurchase program, the Company is authorized to
purchase up to 4,000,000 shares. During the years ended September 30, 2000 and
1999, 382,527 and 298,369 shares, respectively, were acquired for a total of
3,437,673 shares repurchased since the start of the program.
The payment of dividends on the Company's common stock is subject to
(1) the availability of funds from Advest, which may be restricted under the net
capital rule of the SEC and the New York Stock Exchange ("NYSE"), and from the
Bank, which is subject to minimum bank regulatory requirements, and (2) a Note
Purchase Agreement dated as of December 27, 1996 with three institutional
investors. Such restrictions have never curtailed the Company's ability to
declare dividends.
In 1988, the Board of Directors of the Company adopted a shareholder
rights plan. The plan provides for the distribution of one common stock purchase
right for each outstanding share of common stock of the Company. In March 1998,
the Board of Directors adopted an amendment to the plan extending the term of
the rights, increasing their exercise price, and making other changes to the
plan. After giving effect to this amendment, each right entitles the holder,
following the occurrence of certain events, to purchase one share of common
stock at a purchase price of $60 per share subject to adjustment. The rights
will not be exercisable or transferable apart from the common stock except under
certain circumstances in which either a person or group of affiliated persons
acquires, or commences a tender offer to acquire 20% or more of the Company's
common stock or a person or group of affiliated persons acquires 15% of the
Company's common stock and is determined by the Board of Directors to be an
"Adverse Person." Rights held by such an acquiring person or persons may
thereafter become void. Under certain circumstances, a right may become a right
to purchase common stock or assets of the Company or common stock of an
acquiring company at a substantial discount. Under certain circumstances, the
Company may redeem the rights at $.01 per right. The rights will expire in
October 2008 unless earlier redeemed or exchanged by the Company.
The Company has 2,000,000 shares, $.01 par value, preferred stock which
was authorized by shareholders in 1988. The Board of Directors has full
discretion with respect to designating and establishing the terms of each class
or series of preferred stock prior to its issuance. No preferred stock has been
issued to date.
34
<PAGE> 35
NOTE 9: STOCK OPTION PLANS
EMPLOYEE STOCK OPTION PLANS
The Company's 1993 Stock Option Plan (the "1993 Plan") provides for grants of
incentive stock options or nonqualified stock options for up to 500,000 shares
of the Company's common stock. Options which are cancelled or expire prior to
exercise are subject to reissuance. At September 30, 2000, options for 506,195
shares had been granted under the 1993 Plan, of which 177,295 options were
outstanding. In September, 1999, the Board of Directors approved the 1999 Stock
Option Plan (the "1999 Plan") which was approved by the Company's Shareholders
in January 2000. The 1999 Plan authorized grants of incentive stock options or
nonqualified stock options for up to 300,000 shares. Option grants under the
1993 Plan and 1999 Plan are made at the discretion of the Human Resources
Committee of the Board of Directors and become exercisable at such times (but
not within six months of grant) and expire at such time (but not later than ten
years after grant), as that committee determines.
Non-employee director stock option plans
The Company's 1994 Non-Employee Director Stock Option Plan (the "1994 Plan"), as
amended, provided for annual grants of 2,500 nonqualified stock options to each
non-employee director through January 1999 up to an aggregate of 100,000 for all
directors. In September 1999, the Board of Directors approved the 2000
Non-Employee Director Stock Option Plan (the "2000 Plan"), which was approved by
the Company's Shareholders in January 2000. The 2000 Plan authorized continued
annual grants at the same level of up to an additional 100,000 options. In
August, 2000, the Board of Directors approved an amendment to the 2000 Plan
discontinuing further option grants under the 2000 Plan. At September 30, 2000,
74,500 and 20,000 options had been granted, of which 62,500 and 20,000 were
outstanding, under the 1994 and 2000 Plans, respectively. Options granted under
either Plan become exercisable in equal thirds 30, 42 and 54 months after grant
and expire 60 months after grant.
Advest equity plans
Since 1995, the Company has offered the Advest Equity Plans (the "Equity Plan")
to certain eligible employees. The Equity Plan is a salary deferral investment
program and is described in more detail in Note 10. For deferrals during
calendar 2000 through June 30, 2000, 188,355 options were granted. For deferrals
during calendar 1999 and 1998, respectively, 124,130 and 91,724 options were
granted. Options granted under the equity plans are nonqualified stock options
which will become exercisable five years after the end of the plan year and
expire two years later. In August, 2000, the Board of Directors amended the
Equity Plan to terminate further deferrals under the Equity Plan after July 31,
2000.
Exercise price of options
All options granted by the Company to date, or which may be granted under all
plans, have or will have exercise prices not less than 100% of the fair market
value of the Company's common stock on the date of grant.
Pro forma compensation expense
The Company applies the intrinsic value method under Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," in accounting for
stock-based compensation and, accordingly, no compensation cost has been
recognized in the financial statements. Had the Company determined compensation
cost based on the fair value at the grant date for its stock options under SFAS
123, "Accounting for Stock-Based Compensation", the Company's net earnings would
have been the pro forma amounts indicated below:
35
<PAGE> 36
<TABLE>
<CAPTION>
In thousands 2000 1999 1998
------------ ---- ---- ----
<S> <C> <C> <C>
Net earnings
As reported $21,024 $13,551 $17,952
Pro forma 20,453 12,901 17,573
Basic earnings per share
As reported $ 2.65 $ 1.69 $ 2.20
Pro forma 2.58 1.61 2.16
Diluted earnings per share
As reported $ 2.30 $ 1.48 $ 1.92
Pro forma 2.23 1.41 1.88
</TABLE>
Pro forma compensation expense associated with option grants is
recognized over the vesting period. The impact of applying SFAS 123 on pro forma
disclosure for the years shown is not fully representative of the potential
impact on pro forma net earnings for future years, which will include
compensation expense related to vesting of 1998, 1999, 2000 and subsequent
grants. However all options will vest and be cashed out prior to the closing
date of the Company's acquisition by MONY.
Stock option activity
Transactions under the Company's stock option plans are summarized below:
<TABLE>
<CAPTION>
Number of Weighted-average
shares exercise price
------ --------------
<S> <C> <C>
Options outstanding at
September 30, 1997 865,984 $ 9.35
Granted 127,533 26.13
Forfeited (14,031) 6.51
Exercised (144,506) 12.45
--------
Options outstanding at
September 30, 1998 834,980 12.34
Granted 249,336 18.82
Forfeited (38,393) 12.28
Exercised (18,989) 8.11
-------
Options outstanding at
September 30, 1999 1,026,934 13.99
Granted 406,624 18.43
Forfeited (208,992) 21.45
Exercised (242,915) 7.43
----------
OPTIONS OUTSTANDING AT
SEPTEMBER 30, 2000 981,651 $15.89
==========
</TABLE>
At September 30, 2000, 1999 and 1998, options were exercisable,
respectively, on 66,084, 224,327 and 151,348 shares and the weighted average
exercise prices were $14.63, $7.22 and $6.84.
The weighted-average fair value of options granted in 2000, 1999, and
1998 were $7.60, $7.46 and $10.16 per option, respectively. Fair value is
estimated as of the grant date based on a Black-Scholes
36
<PAGE> 37
option pricing model using the following weighted-average assumptions:
<TABLE>
<CAPTION>
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Risk-free interest rate 6.51% 5.07% 5.59%
Expected life 5.35 YRS 5.64 yrs 5.19 yrs
Expected volatility 39.3% 37.8% 36.0%
Dividend yield 1.10% 1.10% 0.79%
</TABLE>
The following table summarizes information related to outstanding and
exercisable options at September 30, 2000:
<TABLE>
<CAPTION>
Options outstanding Options exercisable
-------------------------------------------------- -------------------
Weighted- Weighted- Weighted-
average average average
Number of exercise remaining Number of exercise
Exercise prices shares price life (in years) shares price
--------------- --------- --------- --------------- -------- ---------
<S> <C> <C> <C> <C> <C>
$8.50-$11.38 323,922 $ 9.60 2.5 29,496 $ 9.93
$15.44-$22.63 624,302 18.59 6.1 36,588 18.42
$23.75-$30.00 33,427 26.38 3.3 --
------- ------ --- ------ ------
Total 981,651 $15.89 4.8 66,084 $14.63
======= ====== === ====== ======
</TABLE>
NOTE 10: EMPLOYEE COMPENSATION AND BENEFIT PLANS
Advest Thrift Plan
The Company maintains the Advest Thrift Plan (the "Thrift Plan") which is a
qualified employee stock ownership plan ("ESOP") and 401(k) plan covering all
employees who have completed one year of service. The Company matches 100% of
participants' contributions to their Thrift Plan accounts up to 2% of
compensation. In addition, the Company has made or will make discretionary
contributions to participants' Thrift Plan accounts equal to 1.5%, 1.5% and 2.5%
of their compensation for the calendar years ended December 31, 2000, 1999 and
1998, respectively. For fiscal 2000, effective at the closing for the Company's
merger with MONY (see Note 2) the Company will make a discretionary contribution
to each participant's Thrift Plan account of 20 shares of common stock of MONY.
All employees, regardless of employment tenure, will receive the discretionary
contribution. Contribution expense for fiscal 2000, 1999 and 1998 was
$4,400,000, $3,573,000 and $4,324,000, respectively. No ESOP contributions have
been made by the Company since 1993.
Defined Benefit Plans
The Company's Account Executive Nonqualified Defined Benefit Plan (the "AE
Defined Benefit Plan"), effective October 1, 1992, as amended, offers certain
high-performing financial advisors retirement benefits based upon a formula
reflecting their years of service, the gross commissions they generate and
Company contributions to their Thrift Plan 401(k) accounts. During fiscal 2000,
the Company amended the AE Defined Benefit Plan to permit commencement of
benefit distributions at age 55 under some circumstances, and to provide other
enhanced benefits to participants.
The Company's Executive Nonqualified Post-Employment Income Plan (the
"Executive Defined Benefit Plan"), effective October 1, 1993, as amended,
provides certain senior executives with income for 10 years after retirement
equal to a percentage of their final average earnings based upon a formula
reflecting years of service, assumed social security benefits and Company
contributions to certain other
37
<PAGE> 38
benefit plans on the executive's behalf. In June 1999, the Board of Directors
adopted an amendment to the Executive Defined Benefit Plan which increased the
amount of incentive compensation considered in determining final average
earnings.
Although the AE Defined Benefit Plan and the Executive Defined Benefit
Plan are considered to be "unfunded," assets have been set aside in revocable
trusts for each to fund future payments. These trusts are available to general
creditors of the Company in the event of liquidation. The fair value of these
trusts, which are included in trading securities and other assets, at September
30, 2000 was $15,903,000, which was more than the projected benefit obligation
by $2,910,000.
The following table sets forth the status of the AE Defined Benefit
Plan and Executive Defined Benefit Plan as well as amounts recognized in the
Company's consolidated financial statements at September 30, 2000 and 1999:
<TABLE>
<CAPTION>
In thousands 2000 1999
<S> <C> <C>
Change in benefit obligations:
Benefit obligation, beginning of year $ 10,670 $ 9,686
Service cost 1,281 1,302
Interest cost 837 625
Amendments 504 391
Actuarial (gain) loss (270) (1,328)
Benefits paid (29) (6)
-------- --------
Benefit obligation, end of year $ 12,993 $ 10,670
======== ========
Change in Plan Assets:
Fair value of plan assets at beginning of year $ -- $ --
Employer contribution 29 6
Benefits paid (29) (6)
-------- --------
Fair value of plan assets at end of year $ -- $ --
======== ========
Funded status $(12,993) $(10,670)
Unrecognized actuarial (gain) loss (524) (281)
Unrecognized prior service cost 1,126 742
-------- --------
Accrued benefit cost $(12,391) $(10,209)
======== ========
</TABLE>
Pension expense for the plans for the three years in the period ended
September 30, 2000 is included in the following components:
<TABLE>
<CAPTION>
In thousands 2000 1999 1998
------------ ---- ---- ----
<S> <C> <C> <C>
Service cost $1,282 $1,302 $1,167
Interest cost 837 625 558
Recognized net actuarial (gain) loss (28) (2) 6
Amortization of prior service cost 121 72 53
------ ------ ------
Net benefit costs $2,212 $1,997 $1,784
====== ====== ======
</TABLE>
The following table provides the assumptions used in determining the
projected benefit obligation for the plans for the three years in the period
ended September 30, 2000:
38
<PAGE> 39
<TABLE>
<CAPTION>
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Weighted average discount rate 8.00% 7.625% 6.50%
Rate of increase in future compensation levels 5.00% 5.00% 5.00%
</TABLE>
Equity Plans
The Company has offered the Advest Equity Plan (the "Equity Plan") to certain
top performing financial advisors and designated key employees since the 1995
calendar year. The Equity Plan allows those employees to defer a portion of
their compensation on a calendar year basis, and invest it on a pre-tax basis in
units consisting of one share of the Company's common stock and one option to
purchase an additional share of common stock. The share portion of the unit is
issued monthly from treasury stock and will be restricted for three years after
the year of deferral. The option portion is described under Note 9. Both the
restricted stock and options will be subject to forfeiture under certain
circumstances. The Company offers similar plans to executive officers. In
August, 2000, the Board of Directors amended the Equity Plan to terminate
further deferrals after July 31, 2000 due to the Company's pending acquisition
by MONY, discussed in Note 2.
Under the Advest Equity Plan and other arrangements, restricted stock
awards are made, and shares issued, to certain key employees without cash
payment by the employee. The shares are restricted for a vesting period,
generally five years from the award date. Certain key employees were awarded,
net of forfeitures, 26,575 and 44,872 shares of restricted stock, with a fair
value of $405,000 and $1,262,000, during 2000 and 1999, respectively. As of
September 30, 2000, stock awards for 125,955 shares were outstanding, with
restrictions expiring at various dates through 2010. The deferred cost of the
restricted stock awards is amortized on a straight-line basis.
Under the Key Professionals Equity Plan and under employment agreements
with certain key employees, a portion of the key employee's compensation is
invested in restricted shares of the Company's stock on a discounted basis.
Under these arrangements, during fiscal 2000 and 1999, 14,058 and 17,024 shares
were issued with a fair value of $279,000 and $343,000, respectively, at
discounts ranging from 75% to 80% of fair market value. These shares are subject
to forfeiture if certain conditions are not met.
Under the terms of the merger agreement between the Company and MONY
described in Note 2, at the time of the merger each restricted share will be
converted into a combination of 50% cash and 50% MONY common stock. Immediately
after the merger, the cash will be distributed to the participants. The shares
of MONY stock will vest immediately, except that shares received by the
Company's executive officers, shares received with respect to the Key
Professionals Equity Plan, and shares received with respect to certain
individual stock awards aggregating more than 2,599 shares, will continue to be
restricted and will vest on the schedule previously established.
Management Incentive Plan
The Company has a Management Incentive Plan (the "MIP") which provides for
incentive compensation to certain salaried employees. Compensation is presently
based on the Company's pre-tax income. During fiscal 2000, 1999 and 1998, MIP
compensation was $2,995,000, $1,777,000 and $2,812,000, respectively.
In order to incent designated executive officers, management personnel
and other key employees subsequent to the merger, the Company will establish new
Key Employees Incentive Plan providing for aggregate incentives of up to $15
million based upon achievement of certain performance goals.
39
<PAGE> 40
NOTE 11: CAPITAL AND REGULATORY REQUIREMENTS
Advest is subject to the net capital rule adopted and administered by the NYSE
and the SEC. 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. As of September 30, 2000, Advest's
regulatory net capital of $77,115,000 was 10.17% of aggregate debit balances and
exceeds required net capital by $61,950,000.
Advest maintains separate accounts for the exclusive benefit of
customers in accordance with Securities and Exchange Commission Rule 15c3-3, as
determined by periodic computations. The rule allows Advest to maintain the
required amounts in cash or qualified securities.
Under bank regulatory restrictions, the Bank is required to maintain a
minimum level of capital. With its conversion to a federal charter during fiscal
1997, the Bank is required to limit annual dividends to a percentage of retained
net income of the most recent four-quarter period, as defined. No dividends were
declared or paid by the Bank during the past three fiscal years. At September
30, 2000, the Bank's Tier 1 leverage capital, Tier 1 risk-based, and total
risk-based capital ratios were 62.53%, 169.33% and 169.33%, respectively, which
met all regulatory requirements for well capitalized banks.
NOTE 12: INCOME TAXES
The provision for income taxes for the years ended September 30, 2000, 1999 and
1998 consisted of the following:
<TABLE>
<CAPTION>
In thousands 2000 1999 1998
------------ ---- ---- ----
<S> <C> <C> <C>
Current:
Federal $11,029 $7,559 $11,645
State and local 3,189 2,006 3,666
------- ------ -------
14,218 9,565 15,311
------- ------ -------
Deferred:
Federal (23) (743) (3,259)
State and local 202 103 (1,199)
------- ------ -------
179 (640) (4,458)
------- ------ -------
Provision for income taxes $14,397 $8,925 $10,853
======= ====== =======
</TABLE>
At September 30, 2000 and 1999, deferred tax assets and liabilities
were comprised of:
<TABLE>
<CAPTION>
In thousands 2000 1999
------------ ---- ----
<S> <C> <C>
Deferred tax assets:
Provision for credit losses and
asset devaluation $2,531 $3,006
Employee benefits 6,398 6,629
State tax credits -- 144
Other 9 91
------ ------
Total deferred tax assets $8,938 $9,870
------ ------
</TABLE>
40
<PAGE> 41
<TABLE>
<S> <C> <C>
Deferred tax liabilities:
Tax loan loss reserve in
excess of base year $ 201 $ 301
Depreciation 1,103 964
Partnership basis difference 1,687 1,743
Other 28 333
------ ------
Total deferred tax liabilities $3,019 $3,341
------ ------
Net deferred tax assets $5,919 $6,529
====== ======
</TABLE>
The Company will only recognize a deferred tax asset when, based on
available evidence, realization is more likely than not. Accordingly, at
September 30, 2000 and 1999, the Company has recorded no valuation allowance
against federal and state deferred tax assets based on reversals of existing
taxable amounts and anticipated future earnings.
Effective fiscal 1997, the Bank changed its tax bad debt method to the
specific charge-off method in accordance with provisions of the Small Business
Job Protection Act. The change in method resulted in taxable income of
approximately $1,485,000 representing the excess of the Bank's tax bad debt
reserve at September 30, 1996 over the reserve that arose in tax years beginning
before December 31, 1987 (base year reserve). Generally, the income is being
recognized ratably over a six-year period. Accordingly, the deferred tax
liability resulting from the change in method is approximately $201,000 and
$301,000, at September 30, 2000 and 1999, respectively.
As of September 30, 1998, the Bank did not record a deferred tax
liability for its base year reserve of $2,155,000 (as it was not anticipated
that a tax liability would be incurred in the foreseeable future.) A tax
liability, relating to the base year reserve, would be incurred if certain
excess distributions were made with respect to the bank's stock or if the bank
failed to qualify as a bank for tax purposes. In May 1999, the Company announced
the sale of the Bank's deposit and lending businesses. As a result of this sale,
the Bank would make excess distributions with respect to its stock. Accordingly,
a deferred tax liability was established at September 30, 1999 in the amount of
$862,000. The deferred tax was charged to income from discontinued operations.
See Note 3.
A reconciliation of the difference between the statutory federal income
tax rate and the effective income tax rate follows for the three years ended
September 30, 2000:
<TABLE>
<CAPTION>
Percent of pre-tax income 2000 1999 1998
------------------------- ---- ---- ----
<S> <C> <C> <C>
Statutory income tax rate 35.0% 35.0% 35.0%
State and local income taxes,
net of federal tax effect 6.3 6.7 6.9
Recognition of state net
operating losses -- -- (1.1)
Tax-exempt interest income (0.4) (1.0) (1.1)
Intangible assets 0.3 0.3 0.3
Other (0.2) (1.0) (1.0)
------ ------- -------
Effective income tax rate 41.0% 40.0% 39.0%
====== ======= =======
</TABLE>
41
<PAGE> 42
NOTE 13: COMMITMENTS AND CONTINGENCIES
Leases
The Company conducts all of its operations from leased premises, and leases data
processing and communications equipment under noncancelable operating leases
primarily varying from one to ten years, with certain renewal options for
similar terms. Minimum rentals based upon the original terms (excluding taxes,
insurance and maintenance expenses which also are obligations) at September 30,
2000 are (in thousands):
<TABLE>
<CAPTION>
Data processing
Fiscal year ended Office & communications
September 30, facilities equipment Total
<S> <C> <C> <C>
2001 $ 9,555 $ 6,591 $16,146
2002 9,091 2,615 11,706
2003 8,242 122 8,364
2004 6,788 -- 6,788
2005 5,667 -- 5,667
2006 and thereafter 9,352 -- 9,352
------- ------ -------
$48,695 $9,328 $58,023
======= ====== =======
</TABLE>
Rental expense under these leases was $12,030,000, $10,799,000 and
$9,637,000 for the years ended September 30, 2000, 1999 and 1998, respectively.
Loan guarantees and letters of credit
At both September 30, 2000 and 1999, Advest was contingently liable under bank
letter of credit agreements in the amount of $5,335,000 which are collateralized
by securities held in customer accounts.
At September 30, 2000 and 1999, the Bank and AGI were contingently
liable under standby letters of credit and commitments to extend credit to
customers in the amount of $0 and $93,628,000, respectively.
Litigation
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. 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.
NOTE 14: FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
In the normal course of business, Advest executes, settles and finances customer
and proprietary securities transactions. These activities may expose Advest to
off-balance-sheet risk in the event that customers or other parties are unable
to fulfill their contractual obligations.
In accordance with industry practice, Advest records securities
transactions executed on behalf of its customers on settlement date which is
generally three business days after trade date. Should a customer
42
<PAGE> 43
or broker fail to deliver cash or securities as agreed, Advest may be required
to purchase or sell securities at unfavorable market prices.
Customer securities activities, including the sale of securities not
yet purchased ("short sales"), are transacted on either a cash or margin basis.
For margin transactions, in which Advest extends credit to customers, it seeks
to control its risk by requiring customers to maintain margin collateral in
compliance with various regulatory and internal guidelines. Advest monitors
required margin levels daily and requests customers to deposit additional
collateral or liquidate securities positions when necessary. Such transactions
expose Advest to off-balance-sheet risk in the event margin requirements are not
sufficient to cover customer losses.
Advest's collateralized financing activities require it to pledge
customer and firm securities as collateral for various secured financing sources
such as bank loans, repurchase agreements and securities loaned. In the event
the counterparty is unable to meet its contractual obligations, Advest may be
exposed to the off-balance-sheet risk of acquiring securities at prevailing
market prices. The Company monitors the credit standing of counterparties with
whom it conducts business. Risk is further controlled by monitoring the market
value of securities pledged on a daily basis and by requiring adjustment of
collateral levels as needed.
Advest has sold securities that it does not currently own and will
therefore be obligated to purchase such securities at prevailing market prices
in the future. These obligations are recorded in the financial statements at the
market values of the related securities and Advest will incur a loss if the
market value of the securities increases.
Advest seeks to manage the interest rate risk associated with its
municipal bond inventories by entering into derivative transactions, principally
short-term futures contracts. The average fair value of futures contracts during
the years ended September 30, 2000 and 1999 were $624,274 and $680,725,
respectively. Net trading profits (losses) of $(47,000), $56,000 and $(162,000)
were realized in 2000, 1999 and 1998, respectively. At September 30, 1999,
Advest had only nominal open positions. At September 30, 2000, Advest had no
open positions. Advest hedges its taxable fixed income positions by taking short
positions in like products with similar maturities as well as U.S. treasuries.
The Bank enters into interest rate cap contracts as part of its
interest rate risk management strategy. The notional values do not represent
direct credit exposures. The Bank's credit exposure is limited to the net
difference between the calculated pay and receive amounts on each transaction
which is generally netted and paid quarterly.
At September 30, 1999 the Bank had one interest rate cap contract with
a notional value of $5.0 million, strike rate of 6% and unamortized premium of
$0.1 million. There were no cap contracts at September 30, 2000.
NOTE 15: CONCENTRATIONS OF CREDIT RISK
Advest generally conducts business with brokers and dealers located in the New
York metropolitan area that are members of the major securities exchanges.
Advest's clients are predominantly retail investors located throughout the
United States but primarily in the Northeast and Florida. Advest's activities
primarily involve collateralized arrangements and may result in credit exposure
if the counterparties do not fulfill their obligations. Advest's exposure to
credit risk can be directly impacted by volatile securities markets which may
impair the ability of counterparties to satisfy their contractual obligations.
NOTE 16: FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair values generally represent estimates of amounts at which a financial
instrument could be exchanged between willing parties in a current transaction
other than in forced liquidation. Where current exchange prices are not
available, other valuation techniques are used, such as discounting the expected
future cash flows. Fair value estimates are subjective and depend on a number of
significant assumptions based on
43
<PAGE> 44
management's judgment regarding future expected loss experience, current
economic conditions, risk characteristics of various financial instruments and
other factors. In addition, a wide range of valuation techniques are permitted,
making comparisons difficult, even between similar entities. The fair value of
other financial assets and liabilities (consisting primarily of receivables from
and payables to brokers, and dealers and customers and securities borrowed and
loaned) are considered to approximate the carrying value due to the short-term
nature of the financial instruments.
The fair value of advances from the FHLB, including the current
portion, are estimated using rates which approximate those currently being
offered by the FHLB for advances with similar remaining maturities. The fair
value of interest rate cap agreements are obtained from quoted market prices and
dealer quotes. These values represent the estimated amount that the Company
would receive or pay to terminate the agreements at the reporting date, taking
into account current interest rates and the current credit worthiness of the
counterparties.
The fair values of the Company's financial instruments at September 30,
2000 and 1999 are:
<TABLE>
<CAPTION>
2000 1999
------------------------- --------------------------
CARRYING FAIR Carrying Fair
In thousands AMOUNT VALUE amount value
------------ ------ ----- ------ -----
<S> <C> <C> <C> <C>
Financial assets:
Investment securities $20,310 $ 20,310 $ 21,948 $ 21,949
Financial liabilities:
Short-term borrowings 241,725 241,725 161,007 161,080
Long-term borrowings 21,000 21,000 30,526 30,769
</TABLE>
<TABLE>
<CAPTION>
NOTIONAL FAIR Notional Fair
In thousands AMOUNT VALUE amount value
------------ ------ ----- ------ -----
<S> <C> <C> <C> <C>
Unrecognized financial instruments:
Interest rate caps $ -- $ -- $ 5,000 $ 49
Commitments to extend credit -- -- (92,924) --
Standby letters of credit (5,335) (27) (6,039) (27)
</TABLE>
NOTE 17: SEGMENT REPORTING
In 1999, the Company adopted the provisions of SFAS 131, "Disclosures About
Segments of an Enterprise and Related Information." The Company's reportable
segments are Private Client, Capital Markets, Interest and Other. The Private
Client segment includes securities brokerage and investment management services
including the sale of equities, mutual funds, fixed income products and
insurance to individual investors through Advest's 95 retail offices. The
Capital Markets segment includes market-making activities on over-the-counter
equities, institutional trading in both equities and fixed income products,
trading in corporate bonds, government agency and mortgage-backed securities,
corporate underwriting and merger and acquisition, public finance and syndicate
participations. Sales credits associated with underwritten offerings are
reported in the Private Client segment when sold to individual investors and in
the Capital Markets segment when sold to institutional investors. The Interest
segment includes revenue from financing margin debits, stock borrowing
activities and trading and investment securities. The Other segment includes all
corporate expenses and miscellaneous revenues and expenses, which are not
allocated to the reportable segments. The Company has not disclosed asset
information by segment as the information is not produced internally. All of the
Company's business is within the U.S.
44
<PAGE> 45
The following table summarizes financial information by segment for the three
years in the period ended September 30, 2000:
<TABLE>
<CAPTION>
In thousands 2000 1999 1998
------------ ---- ---- ----
<S> <C> <C> <C>
Revenues:
Private Clients $262,250 $218,211 $202,205
Capital Markets 53,026 52,275 41,719
Interest 91,214 57,431 57,439
Other 12,262 7,321 8,438
-------- -------- --------
$418,752 $335,238 $309,801
======== ======== ========
Income before taxes:
Private Clients $66,964 $53,501 $49,985
Capital Markets (4,233) (5,078) (4,525)
Interest 27,686 22,466 26,098
Other (55,290) (48,577) (43,730)
-------- -------- --------
$35,127 $22,312 $27,828
======= ======= =======
</TABLE>
45
<PAGE> 46
QUARTERLY FINANCIAL INFORMATION (unaudited)
<TABLE>
<CAPTION>
In millions, except 2000 by fiscal quarters 1999 by fiscal quarters
--------------------------------------- ------------------------------------
per share data 1st* 2nd* 3rd 4th 1st 2nd 3rd 4th
-------------- ---- ---- --- --- --- --- --- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $ 103.3 $ 113.9 $99.1 $ 102.4 $82.6 $79.7 $86.7 $86.2
Income before taxes $ 9.5 $ 10.1 $ 7.3 $ 8.2 $ 7.5 $ 4.8 $ 4.9 $ 5.1
Income from continuing
operations $ 5.5 $ 5.8 $ 4.6 $ 4.8 $ 4.5 $ 2.9 $ 2.9 $ 3.1
Income from discontinued
operations 0.3 -- -- -- 0.2 0.1 0.3 0.3
Loss on sale of discontinued
operations -- -- -- -- -- -- (0.7) --
------- ------- ----- ------- ----- ----- ----- -----
Net income $ 5.8 $ 5.8 $ 4.6 $ 4.8 $ 4.7 $ 3.0 $ 2.5 $ 3.4
======= ======= ===== ======= ===== ===== ===== =====
Per share data:
Basic earnings:
Continuing operations $ 0.70 $ 0.73 $0.57 $ 0.62 $0.57 $0.36 $0.36 $0.38
Discontinued operations 0.03 -- -- -- 0.02 0.02 0.04 0.03
Loss on sale of discontinued
operations -- -- -- -- -- -- (0.09) --
------- ------- ----- ------- ----- ----- ----- -----
Net income $ 0.73 $ 0.73 $0.57 $ 0.62 $0.59 $0.38 $0.31 $0.41
======= ======= ===== ======= ===== ===== ===== =====
Diluted earnings:
Continuing operations $ 0.60 $ 0.63 $0.50 $ 0.53 $0.49 $0.32 $0.32 $0.33
Discontinued operations 0.03 -- -- -- 0.02 0.01 0.04 0.03
Loss on sale of discontinued
operations -- -- -- -- -- -- (0.08) --
------- ------- ----- ------- ----- ----- ----- -----
Net income $ 0.63 $ 0.63 $0.50 $ 0.53 $0.51 $0.33 $0.28 $0.36
======= ======= ===== ======= ===== ===== ===== =====
Dividends $ 0.05 $ 0.06 $0.06 $ 0.06 $0.04 $0.05 $0.05 $0.05
Stock price range: High $20-9/16 $20-1/8 $21-15/16 $33-15/16 $23-7/16 $25-1/4 $22-3/16 $25-1/8
Low $16 $15-5/8 $16-7/8 $20-3/4 $14-1/8 $18-3/8 $18-5/16 $17-1/2
Close $18-3/8 $19 $20-15/16 $31-11/16 $18-1/2 $18-1/2 $19-15/16 $18-1/4
</TABLE>
46
<PAGE> 47
Report of Independent Accountants
To the Board of Directors and Shareholders
of The Advest Group, Inc.:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of earnings, changes in shareholders' equity and of cash
flows present fairly, in all material respects, the financial position of The
Advest Group, Inc. and its subsidiaries (the "Company") at September 30, 2000
and 1999, and the results of their operations and their cash flows for each of
the three years in the period ended September 30, 2000, in conformity with
accounting principles generally accepted in the United States of America. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion.
PricewaterhouseCoopers, LLP
Hartford, CT
October 25, 2000, except for Note 2 as to which
the date is November 21, 2000.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
There were no disagreements with the Company's independent accountants on any
accounting or financial disclosure matters.
47
<PAGE> 48
PART III
Item 10. Directors and Executive Officers of the Registrant
The information required for "Directors" by this item is included under the
caption "Election of Directors" in the Company's Proxy Statement to be filed
with the Securities and Exchange Commission in connection with the Company's
annual meeting to be held in calendar 2001, if such a meeting is held. Such
information is hereby incorporated by reference.
The following table sets forth the executive officers of the Company at
January 2, 2001. Executive officers of the Company are appointed annually by the
Board of Directors to hold office until their successors are appointed and
qualify.
<TABLE>
<CAPTION>
Executive
Officer
Name Age Office Since
---- --- ------ --------
<S> <C> <C> <C>
Grant W. Kurtz 58 President and Chief Executive Officer 1985
Allen G. Botwinick 57 Executive Vice President of Administration
and Operations 1980
George A. Boujoukos 66 Senior Executive Vice President and Director
Capital Markets of Advest, Inc. 1977
Lee G. Kuckro 59 Executive Vice President, Secretary
and General Counsel 1978
Martin M. Lilienthal 58 Executive Vice President, Treasurer and
Chief Financial Officer 1977
Daniel J. Mullane 47 President of Private Client Group of
Advest, Inc. 2000
</TABLE>
Item 11. Executive Compensation
The information required by this item is included under the caption
"Remuneration of Directors and Officers" and "Certain Transactions" of the
Company's Proxy Statement to be filed with the Securities and Exchange
Commission in connection with the Company's annual meeting to be held in
calendar 2001, if such a meeting is held. Such information is hereby
incorporated by reference.
Item 12. Security Ownership Of Certain Beneficial Owners And Management
The information required by this item is contained under the caption "Election
of Directors" in the Company's Proxy Statement to be filed with the Securities
and Exchange Commission in connection with the Company's annual meeting to be
held in calendar 2001, if such a meeting is held. Such information is hereby
incorporated by reference.
Item 13. Certain Relationships and Related Transactions
The information required by this item is included under the caption "Certain
Transactions" of the Company's Proxy Statement to be filed with the Securities
and Exchange Commission in connection with the Company's annual meeting to be
held in calendar 2001, if such a meeting is held. Such information is hereby
incorporated by reference.
48
<PAGE> 49
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
<TABLE>
<CAPTION>
Page Reference
--------------
<S> <C>
(a) 1. Financial Statements
The Consolidated Financial Statements and The Report of
Independent Accountants contained herein:
Consolidated Statements of Earnings 24
Consolidated Balance Sheets 25
Consolidated Statements of Cash Flows 26
Consolidated Statements of Changes in Shareholders' Equity 27
Notes to Consolidated Financial Statements 28-45
Report of Independent Accountants 47
2. Financial Statement Schedule
Report of Independent Accountants on schedule 56
Schedule II - Valuation and Qualifying Accounts 57
</TABLE>
3. Exhibits
The following is a list of exhibits to this Report on Form 10-K filed
herewith or incorporated by reference herein.
<TABLE>
<CAPTION>
Prior Filing(s) to which Reference is made,
Exhibit Description if applicable
------- ----------- --------------------------------------------
<S> <C> <C>
2(a) Agreement and Plan of Merger dated Exhibit 2.1 to Report on Form 8-K dated
as of August 23, 2000 by and among September 1, 2000 of The MONY Group Inc.
The MONY Group Inc., MONY
Acquisition Corp. and The Advest
Group, Inc.
3(a) Restated Certificate of Exhibit 3(a) to Registrant's
Incorporation of Registration Report on Form 10-Q for the quarter ended
March 31, 1989
3(b) By-laws of Registrant, as restated Exhibit 3(b) to Registrant's Report on Form 10-Q
and amended for the quarter ended March 31, 1989 and Exhibit
3(a) to Registrant's Report on Form 10-Q for the
quarter ended June 30, 1990
3(c) Second Amendment to Restated Exhibit 3(c) to Registrant's Report on Form
By-laws of Registrant 10-K for its fiscal year ended September 30, 1997
</TABLE>
49
<PAGE> 50
<TABLE>
<CAPTION>
Prior Filing(s) to which Reference is made,
Exhibit Description if applicable
------- ----------- --------------------------------------------
<S> <C> <C>
4(a) Shareholder Rights Agreement Exhibit to Registrant's Report on Form 8-K dated
dated as of October 31, 1988, November 1, 1988; to Exhibit 4 to Registrant's
as amended on March 12, 1998 Report on Form 8-K dated March 13, 1998 and
and August 23, 2000 Exhibit 3 to Registrant's Report on Form 8-A/A filed
December 21, 2000
10(a) Registrant's 1994 Non-Employee Exhibit A to Registrant's Proxy Statement
Director Stock Option Plan, as December 20, 1994; Exhibit 10(b) to
amended Registrant's Report on Form 10-K for its
fiscal year ended September 30,1998
10(b) Registrant's 2000 Non-Employee Exhibit B to Registrant's Proxy Statement
Director Stock Option Plan for its Annual Meeting of Stockholders to be
held January 27, 2000
10(c) Registrant's 1993 Stock Option Exhibit A to Registrant's Proxy Statement
Plan dated December 21, 1993
10(d) Registrant's 1999 Stock Option Exhibit B to Registrant's Proxy Statement for
Plan its Annual Meeting of Stockholders to be
held January 27, 2000
10(e) Registrant's Deferred Exhibit 10(f) to Registrant's Report on Form
Compensation Savings and 10-K for the fiscal year ended September 30,
Investment Plan, Amended and 1989, Exhibit 10(j) to Registrant's Report on
Restated as of November 17, Form 10-K for its fiscal year ended September 30,
1989, as amended 1990 and Exhibit 10(b) of Registrant's Report on
Form 10-Q for the quarter ended December 31,
1992
10(f) Non-Employee Director Equity Exhibit 10(b) to Registrant's Report on Form
Plan 10-Q for the quarter ended June 30, 1996
10(g) Key Professionals Equity Plan, Exhibit 10(g) to Registrant's Report on Form
as amended and restated as of 10-K for its fiscal year ended September 30, 1997
October 1, 1997
</TABLE>
50
<PAGE> 51
<TABLE>
<CAPTION>
Prior Filing(s) to which Reference is made
Exhibit Description if applicable
------- ----------- --------------------------------------------
<S> <C> <C>
10(h) Forms of Executive Officer Exhibit 10 to Registrant's Report on Form 10-Q
Restricted Stock and Stock for the quarter ended December 31, 1994 and
Option Agreement for 1995, Exhibit 10(c) to Registrant's Report on Form
1996 (as supplemented) 10-Q for the quarter ended June 30, 1996 and
and 1997 and 1998 Exhibit 4.4 to Registrant's Registration Statement
on Form S-8, File No. 333-17711; Exhibit
4.5 to Registrant's Registration Statement on
Form S-8, File No. 333-17711; and
Exhibit 10(i) to Registrant's Report on Form
10-K for its fiscal year ended September 30, 1997
10(i) The Advest Thrift Plan, amended Exhibit 10(j) to Registrant's Report on Form 10-K
and restated effective as of for its fiscal year ended September 30, 1999
January 1, 1999
10(j) First Amendment to Filed Herewith
The Advest Thrift Plan
10(k) Registrant's Account Executive Exhibit 10(m) to Registrant's Report on Form
Nonqualified Defined Benefit 10-K for its fiscal year ended September 30,
Plan, as amended 1993, Exhibit 10(p) to Registrant's Report on
Form 10-K for its fiscal year ended September 30,
1995; Exhibit 10(f) to Registrant's Report on
Form 10-Q for the quarter ended June 30, 1996 and
Exhibits 10(a) and 10(b) to Registrant's Report on
Form 10-Q for the quarter ended June 30, 2000
10(l) Registrant's Nonqualified Exhibit 10(n) to Registrant's Report on Form
Executive Post-employment 10-K for its fiscal year ended September 30, 1994
Income Plan, as amended and Exhibit 10(e) to Registrant's Report on Form
10-Q for the quarter ended June 30, 1996;
Exhibit 10(b) to Registrant's Report on Form
10-Q for its fiscal quarter ended June 30, 1999
10(m) Registrant's 1995 through 1998 Exhibit 4.1 to Registrant's Registration Statement
Advest Equity Plans on Form S-8, File No. 33-56275; Exhibit 4 to
Registrant's Registration Statement on Form S-8,
File No. 333-00797; Exhibit 4.3 to
Registrant's Registration Statement on Form S-8,
File No. 333-17711; and Exhibit 10(p) to
Registrant's Report on Form10-K for its fiscal
year ended September 30, 1997
</TABLE>
51
<PAGE> 52
<TABLE>
<CAPTION>
Prior Filing(s) to which Reference is made,
Exhibit Description if applicable
------- ----------- --------------------------------------------
<S> <C> <C>
10(n) Advest Equity Plan, amended Exhibit 10(n) to Registrant's Report on Form 10-K
and restated as of June 3, 1999 for its fiscal year ended September 30, 1999
10(o) Amended and Restated Exhibit 10(h) to Registrant's Report on Form
Employment Agreement with 10-Q for the quarter ended June 30, 1996;
former Chief Executive Officer, Exhibit 10(a) to Registrant's Report on Form
as amended 10-Q for its fiscal quarter ended December 31,
1998
10(p) Employment Agreement with Exhibit 10(r) to Registrant's Report on Form
Chief Executive Officer and 10-K for its fiscal year ended September 30, 1997;
President, as amended Exhibit 10(a) Registrant's Report on Form 10-Q
for its fiscal quarter ended June 30, 1999
10(q) Form of Executive Agreement dated Exhibit 10(q) to Registrant's Report on Form
September 24, 1998 10-K for its fiscal year ended September 30, 1998
10(r) Note Purchase Agreement of Exhibit 10(a) to Registrant's Report on Form
Registrant dated as of December 27, 10-Q for the quarter ended December 31, 1996
1996 with respect to Registrant's
7.95% Senior Notes due December
31, 2003
10(s) Cash Subordination Agreement of Exhibit 10(b) to Registrant's Report on Form
the Registrant dated as of January 31 10-Q for the quarter ended December 31, 1996
1997
10(t) Support Agreement dated as of Exhibit 10.1 to Report on Form 8-K dated
August 23, 2000 by and among The September 1, 2000 of The MONY Group, Inc.
MONY Group Inc., Peter R. Kellogg,
Grant W. Kurtz, Allen Weintraub, and
George A. Boujoukos.
10(u) Stock Option Agreement dated as of Exhibit 10.2 to Report on Form 8-K dated
August 23, 2000 by and between The September 1, 2000 of The MONY Group, Inc.
Advest Group, Inc. and The MONY
Group Inc.
10(v) First Amendment to Filed Herewith
The Advest Thrift Plan
10(w) Form of Executive Agreement Filed Herewith
dated August 23, 2000
</TABLE>
52
<PAGE> 53
<TABLE>
<CAPTION>
Prior Filing(s) to which Reference is made,
Exhibit Description if applicable
------- ----------- --------------------------------------------
<S> <C> <C>
10(x) Employment Agreement dated Filed Herewith
August 23, 2000 between MONY and
Registrant's Chief Executive Officer
10(y) Change of Control Employment Filed Herewith
Agreement dated August 23, 2000
between MONY Life Insurance
Company and Registrant's Chief
Executive Officer
10(z) Letter Agreement dated August 23, Filed Herewith
2000 between Registrant and former
Chief Executive Officer amending
prior Employment Agreement
21 Subsidiaries Filed Herewith
23 Consent of Independent Filed Herewith
Accountants
27 Financial Data Schedule Selected financial data - for EDGAR electronic
filing only to SEC
</TABLE>
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the fourth quarter of the year
ended September 30, 2000.
53
<PAGE> 54
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
THE ADVEST GROUP, INC.
By /s/ Grant W. Kurtz January 10, 2001
-----------------------------
Grant W. Kurtz
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<S> <C> <C>
/s/ Allen Weintraub Chairman of the Board January 10, 2001
-------------------------------
Allen Weintraub
President, Chief Executive
/s/ Grant W. Kurtz Officer and Director January 10, 2001
---------------------------------
Grant W. Kurtz
Executive Vice President and
Treasurer (Chief Financial
and Principal Accounting
/s/ Martin M. Lilienthal Officer) January 10, 2001
-------------------------------
Martin M. Lilienthal
/s/ Sanford Cloud, Jr. Director January 10, 2001
----------------------------------
Sanford Cloud, Jr.
/s/ Ronald E. Compton Director January 10, 2001
------------------------------
Ronald E. Compton
/s/ Richard G. Dooley Director January 10, 2001
--------------------------------
Richard G. Dooley
</TABLE>
54
<PAGE> 55
SIGNATURES
<TABLE>
<S> <C> <C>
/s/ William B. Ellis Director January 10, 2001
--------------------------------
William B. Ellis
/s/ Robert W. Fiondella Director January 10, 2001
------------------------------
Robert W. Fiondella
/s/ Peter R. Kellogg Director January 10, 2001
---------------------------------
Peter R. Kellogg
/s/ Marne Obernauer, Jr. Director January 10, 2001
------------------------------
Marne Obernauer, Jr.
/s/ Barbara L. Pearce Director January 10, 2001
---------------------------------
Barbara L. Pearce
</TABLE>
55
<PAGE> 56
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE
The Board of Directors and Shareholders
of The Advest Group, Inc.:
Our audits of the consolidated financial statements referred to in our report
dated October 25, 2000, appearing in this Annual Report on Form 10-K also
included an audit of the financial statement schedule listed in Item 14(a)(2) of
this Form 10-K. In our opinion, this financial statement schedule presents
fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements.
/s/ PricewaterhouseCoopers LLP
Hartford, Connecticut
October 25, 2000, except for Note 2 as to which
the date is November 21, 2000.
56
<PAGE> 57
SCHEDULE II
THE ADVEST GROUP, INC. AND SUBSIDIARIES
Valuation and Qualifying Accounts
<TABLE>
<CAPTION>
Additions
Balance at charged to Charge-offs Balance
beginning cost and and at end
In thousands of period expenses recoveries of period
------------ --------- -------- ---------- ---------
<S> <C> <C> <C> <C>
For the years ended September 30,
2000
Credit losses:
Brokerage customers $ 548 $ 109 $ (43) $ 614
Asset devaluation:
Other investments/assets 1,740 (275) (758) 707
------- ------- ------- --------
$2,288 $(166) $(801) $1,321
====== ====== ====== ======
1999
Credit losses:
Brokerage customers $ 791 $100 $(343) $ 548
Asset devaluation:
Other investments/assets 1,371 503 (134) 1,740
------- ----- ------- -------
$2,162 $603 $(477) $2,288
====== ==== ====== ======
1998
Credit losses:
Brokerage customers $ 719 $ 88 $ (16) $ 791
Asset devaluation:
Other investments/assets 1,507 (13) (123) 1,371
------- -------- ------- -------
$2,226 $ 75 $(139) $2,162
====== ====== ====== ======
</TABLE>
57
<PAGE> 58
FORM 10-K
Exhibit Index
<TABLE>
<CAPTION>
Exhibit Description
------- -----------
<S> <C>
10(j) First Amendment to The Advest Thrift Plan
10(v) Second Amendment to The Advest Thrift Plan
10(w) Form of Executive Agreement dated August 23, 2000
10(x) Employment Agreement dated August 23, 2000 between
MONY and Registrant's Chief Executive Officer
10(y) Change of Control Employment Agreement dated August 23, 2000
between MONY Life Insurance Company and Registrant's
Chief Executive Officer
10(z) Letter Agreement dated August 23, 2000 between Registrant
and former Chief Executive Officer amending prior
Employment Agreement
21 Subsidiaries
23 Consent of PricewaterhouseCoopers LLP
27 Financial Data Schedule (Selected financial data - for EDGAR
electronic filing only to SEC)
</TABLE>
