-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, EqDhgoDSRR3ULoBLUNvzv0Xkiy+Lgnftqv6/XEZUf+JmoZEYFEDVQMNii7sVhclK yB01t2McNdVVLTelfr774Q== 0000319489-97-000014.txt : 19971212 0000319489-97-000014.hdr.sgml : 19971212 ACCESSION NUMBER: 0000319489-97-000014 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 13 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971211 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: ADVEST GROUP INC CENTRAL INDEX KEY: 0000319489 STANDARD INDUSTRIAL CLASSIFICATION: SECURITY BROKERS, DEALERS & FLOTATION COMPANIES [6211] IRS NUMBER: 060950444 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-08408 FILM NUMBER: 97736303 BUSINESS ADDRESS: STREET 1: 90 STATE HOUSE SQ STREET 2: 280 TRUMBULL ST CITY: HARTFORD STATE: CT ZIP: 06103 BUSINESS PHONE: 8605091000 MAIL ADDRESS: STREET 1: 90 STATE HOUSE SQUARE STREET 2: 280 TRUMBULL STREET CITY: HARTFORD STATE: CT ZIP: 06103 10-K 1 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, 1997 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 Name of each exchange on Title of each class which registered Common Stock, $.01 Par Value New York Stock Exchange, Inc. 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 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 $184,116,101 as of December 1, 1997. On December 1, 1997 the Registrant has outstanding 8,680,332 shares of common stock of $.01 par value, which is the Registrant's only class of common stock. Parts I, II and IV incorporate information by reference from the Registrant's 1997 Annual Report to Shareholders. Part III incorporates information by reference from the Registrant's definitive proxy statement for the annual meeting to be held on January 29, 1998. Total number of sequentialy numbered pages 104 Exhibit index sequetial page number page 28 -1- Part I Item 1. Business General Development of Business (1) 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, residential lending, 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 Security Counsellors, Inc. ("BSC"), an investment management company; and Billings & Company, Inc. ("Billings"), a real estate services company. Material acquisitions and dispositions by the Company during the past four years follow. During fiscal 1994, Lyons, Zomback & Ostrowski, Inc., a financial consulting company specializing in the banking industry and a subsidiary of AGI, was merged into the corporate finance division of Advest as the Financial Institutions Group (the "FIG"). The FIG unit serves as an advisor to small and medium-sized community banks. During fiscal 1995, the Company sold the investment advisory business related to its proprietary mutual funds in three separate transactions. The total gain from all sales was $10.1 million and is reported separately on the Consolidated Statement of Earnings. Additional consideration of $.1 and $.6 million was received in fiscal 1997 and 1996, respectively, under the terms of one of the sales agreements. In October 1996, the Company formed The Hannah Consulting Group ("HCG"), an investment management subsidiary. HCG is located in Boston, MA and its employees provide investment management services primarily to pension plans. 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 will be accounted for as a pooling of interests. Due to the immaterial effect on the Company's consolidated financial position, results of operations and cash flows, operating results of Ironwood will be included prospectively in the Company's consolidated financial statements. (2) 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 corporate securities, government and municipal bonds, research, custody and money 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 -2- Northeast and Midwest regions and also services institutional accounts throughout the country. During fiscal 1997, Advest opened 3 new sales offices - - in Norwell, MA, New Canaan, CT and Garden City, NY. At September 30, 1997, Advest had sales locations, including satellite offices, and account executives in 16 states and the District of Columbia as follows: Number of Number of Investment State Locations Executives - --------------------------------------------------------------------- Connecticut 9 72 District of Columbia 1 11 Florida 7 59 Illinois 1 4 Kentucky 3 15 Maine 5 21 Maryland 1 5 Massachusetts 8 52 Missouri 1 11 New Hampshire 3 7 New Jersey 4 24 New York 16 117 Ohio 12 60 Pennsylvania 12 53 Rhode Island 1 11 Vermont 1 3 Virginia 4 13 --- --- 89 538 === === 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 opened for business in 1984 as a state-chartered savings bank. Effective April 15, 1997, the Bank converted to a federal savings bank, and ceased to be a state-chartered bank. As a federal savings bank, the Bank is regulated by the Office of Thrift Supervision ("OTS"), but its deposits continue to be insured under the Bank Insurance Fund of the FDIC. This regulatory and charter change enables the Bank to provide residential lending and trust services in all 50 states. The Bank's headquarters is located at 90 State House Square, Hartford, Connecticut 06103. The Bank closed its sole retail branch located in Hartford, CT during the current fiscal year, subsequent to its conversion to a federal charter which does not require it to have a branch office. The Bank has representative offices in Springfield, Massachusetts and Columbus, Ohio for trust and mortgage origination, respectively, as well as two trust offices opened during fiscal 1997 in New Canaan, CT and Pittsburgh, PA. All representative offices share office space with Advest retail offices. The Bank's principal business activities consist of soliciting and servicing fiduciary and retirement plan trust business and conducting a broad range of mortgage banking services, primarily to clients of Advest. The Bank also provides residential first mortgage and home equity lending funded by customer deposits, together with funds from capital and other borrowings. In recent years, the total assets of the Bank have declined as part of a planned reduction in its asset base. The Bank's loan portfolio includes single and multi-family residential mortgages, consumer -3- loans and commercial mortgages. The Bank has expanded its residential mortgage lending production in recent years, and places excess volume not retained in portfolio with investors, principally federal agencies and major private mortgage conduits. Investments include government and agency obligations and mortgage-backed securities. The Bank does not currently have a material source of deposits other than those obtained through Advest. Deposits in the Bank are insured by the Bank Insurance Fund of the FDIC, subject to applicable limits. In fiscal 1991, 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, 1997, 86.7% of the Bank's portfolio consisted of such assets. (3) The Company's principal executive offices are located at 90 State House Square, Hartford, Connecticut, 06103 (telephone number (860) 509-1000). At September 30, 1997, the Company employed 1,631 persons. The Company considers its compensation and employee benefits, which include medical, life and disability insurance, and a 401(k) defined contribution plan, to be competitive with those offered by other securities firms. None of the Company's employees is 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 investment executives, and periodically the Company may experience the loss of valued professionals. Financial Information about Industry Segments The information required by this item is disclosed on page 45 of the 1997 Annual Report to Shareholders in Note 19 of Notes to Consolidated Financial Statements. Such information is hereby incorporated by reference. Narrative Description of Business (1) Revenues The principal sources of revenue for the last five years are disclosed on page 18 of the 1997 Annual Report to Shareholders under the caption "Five Year Financial Summary". A discussion of the components of services provided and related compensation follows. Agency Commissions Listed Advest acts as an agent for its customers in the purchase and sale of securities on the major securities exchanges. Commissions generated by these customers represent a large portion of the Company's revenue. Mutual Funds Advest executes purchases and redemptions of shares for its clients in many diverse mutual funds. Nasdaq 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. Insurance 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 department provides customized advice and recommends -4- appropriate products to meet unique individual, professional or business needs. Options - Advest also effects for its customers the purchase and sale of put and call options traded on all major stock exchanges. Other - 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 trading positions of Advest and related sales credits as well as realized gains and losses on available for sale securities of the Bank. The Company does not actively participate in the high yield securities market. Advest manages the risk associated with its corporate and municipal bond trading securities by entering into derivative transactions, primarily exchange-traded financial futures contracts, when certain inventory levels are reached. Derivative positions are generally not material and are marked- to-market daily. Advest 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. As of September 30, 1997, Advest made dealer markets in the common stock or other equity securities of approximately 151 corporations. Advest also actively engages in trading municipal and corporate bonds and unit investment trusts. Investment Banking Advest manages and participates as an underwriter of corporate, municipal and government securities, mutual funds and private placement offerings. Its Syndicate Department is responsible for Advest's participation in underwritings managed by Advest and other firms. The Corporate Finance and Public Finance Departments are responsible for offerings managed or co- managed by Advest. 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. Advest also provides merger and acquisition advisory services, appraisals and related services. Generally, the Company does not engage in bridge financing activities. Asset Management and Administration Advest provides money management services to its brokerage customers through its Investment Management Department ("IMD"). IMD provides various services to brokerage clients including client profiling, asset allocation, manager selection, due diligence and performance measurement. Recommended portfolio managers include managers in the proprietary Advest Managed Portfolio Services as well as managers not affiliated with the Company. Revenue is generated from fees and/or commissions. At September 30, 1997, IMD had approximately $2.7 billion of assets under management. BSC, an investment advisor, services private clients and was investment advisor to the -5- Company's proprietary mutual funds, until their sale in fiscal 1995. HCG, an investment management firm acquired by the Company in the current year, provides consulting services primarily to pension funds. Other services include retirement plan administration, securities custody and safekeeping. The Advest Reserve Cash Account ("ARCA") enables brokerage clients to participate in an integrated financial services program. ARCA clients have access to their assets through unlimited checkwriting and a VISA debit card issued by a major third party bank as well as on-request loans collateralized by margined securities. Direct deposit is available to ARCA accounts who can select among several automatic investment options for idle cash balances, including an FDIC-insured money market account with the Bank and five money market mutual funds. Other services offered to all clients include retirement plan servicing, securities custody and asset safekeeping. The Bank, through its Trust Division, provides fiduciary, trustee and custody services to individuals, corporate retirement plans, financial institutions and other entities. The Bank primarily acquires trust and custody accounts through Advest's retail sales force. Advest Bank and Trust Company Net Interest Income Net interest income is the excess of the interest income and loan fee income over interest expense. The Bank derives interest income from loans extended for the purposes of residential, commercial and consumer credit. Funds not used in lending are invested primarily in money market instruments and short and adjustable rate mortgage-backed securities. The Bank's loans and investments are funded by interest-bearing deposits, by debt (primarily advances from the Federal Home Loan Bank of Boston), and by the Bank's equity capital. The Bank's interest and loan fee income has historically exceeded the interest expense of funding and has produced positive net interest income. The Bank is subject to interest rate risk to the degree that the Bank's interest-bearing liabilities reprice or mature more rapidly, and in greater volume, as is the case currently, than its interest-earning assets (see Distribution of assets, liabilities and shareholder's equity, interest rates and interest differentials as disclosed on page 10 of this filing and in Notes 15 and 16 of Notes to Consolidated Financial Statements on pages 43 and 44 in the 1997 Annual Report to Shareholders. Such information is hereby incorporated by reference). 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 -6- balance and the dollar amount of commissions charged on account transactions during the month. Customer credit balances, retained earnings, cash received from stock loan activities, and short-term borrowings are the primary source for financing customer margin accounts. Other Income Other income includes execution fees, exchange and other marketing credits, transfer and service fees, gains on sales of mortgages by the Bank in secondary markets and investment gains and losses. 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 consumer products and services. Correspondent research provides information and recommendations on approximately 3,000 domestic and international equities in over 60 industries in 30 countries. (2) 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. With respect to price, service and product, the Company believes it is competitively well-positioned; it is impossible to predict, however, the effect of the broader distribution locales offered by competing entities or the lower costs which may be offered by certain discount brokers. In addition, there is competition for investment professionals among the large number of companies now in the financial services field. The mortgage banking environment that the Bank operates within is highly competitive. The Bank competes with mortgage companies, banks, savings banks, savings and loans, credit unions, finance companies and other financial intermediaries for conventional and home equity residential loans. The market for qualifying conventional loans is defined and dominated by federal agencies such as Federal National Mortgage Association ("FNMA") and the Federal Home Loan Mortgage Corporation ("FHLMC"), who effectively act as the market makers and are the dominant investors. This market is also highly sensitive to the level and volatility of interest rates, which effects the volume of business being conducted. The Bank in soliciting trust business 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. In attracting deposits, the Bank faces strong competition from numerous savings banks, savings and loan associations, commercial banks, broker/dealers, credit unions, insurance companies, investment firms and mutual funds with offices located primarily in its primary market area. The Bank also faces significant competition for investors' funds from short-term money market funds and other corporate and government securities. The Bank's deposit base is substantially derived from Advest's brokerage clients. A portion of these deposits, primarily certificates of deposits, are acquired on a fee basis and are considered -7- "brokered" under FDIC rules. The Bank does not possess branch operations with which it may attract significant additional retail deposits other than those obtained through Advest. Pursuant to the terms of federal banking regulations concerning brokered deposits, the Bank at September 30, 1997 was deemed to be a "well capitalized" bank and as such was not subject to restrictions regarding brokered deposits. Prior to September 30, 1996, the Bank was deemed to be an "adequately capitalized bank", and as such was limited as to the maximum interest rates it could offer on its brokered deposit products to rates which did not exceed (1) the rate paid on deposits of similar maturity in the Bank's normal market area for deposits accepted or (2) the "national rate" paid on deposits of comparable maturity for deposits accepted outside the Bank's normal market area. The Bank had $61.4 million of brokered deposits as of September 30, 1997. (3) 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. The Company's investment advisory subsidiaries, BSC and HCG, are 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 $24.5 million of coverage per customer for securities held in customers' accounts. 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. The Bank posted pre-tax income of $.7 million and $1.1 million, respectively, for fiscal 1997 and 1996 after posting losses in each of the previous six fiscal years. In July 1991, the Bank -8- entered into a Memorandum of Understanding ("MOU") with its regulators to address certain concerns arising out of an examination of the Bank. In February 1993, the Bank entered into a new MOU with its regulators with terms similar to the original MOU. During 1996, the Bank achieved compliance with all requirements of the MOU and, in July 1996, the MOU was lifted. Refer to pages 19 through 27 of the 1997 Annual Report to Shareholders under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" and on page 36 in Note 5 and on page 41 in Note 12 of the Notes to Consolidated Financial Statements for a further description of capital and regulatory considerations concerning the Bank. Such information is hereby incorporated by reference. Certain legislative and regulatory proposals that could affect the Bank and the banking business in general are pending, or may be introduced, before the United States Congress, various state legislatures and governmental agencies. These proposals include measures that may further alter the structure, regulation and competitive relationship of financial institutions and that may subject financial institutions to increased regulation, disclosure and reporting requirements. The Bank is not restricted by federal bank regulations from the declaration of dividends. No dividends were declared in 1997. (For further discussion concerning dividend restriction applicable to the Bank refer to page 41 of the 1997 Annual Report to Shareholders in Note 12 of Notes to Consolidated Financial Statements. Such information is hereby incorporated by reference.) It cannot be predicted whether or in what form any future legislation or regulations will be enacted or to what extent the business of the Bank may be affected. Federal banking regulations define five categories of capital adequacy for all insured depository institutions, including categories that would prompt supervisory actions. These categories include "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), "adequately capitalized" (greater than 8%, 5% and 4% respectively), "undercapitalized" (less than 8%, less than 4% and less than 4%, respectively), "significantly undercapitalized" (less than 6%, 3% and 3%, respectively) and "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. Financial institutions classified as one of the three undercapitalized categories are subject to progressively more restrictive limitations on activities and may be subject to orders to increase capital and to cease certain activities and practices. A "critically undercapitalized" institution, among other additional restrictions, may, under certain conditions, be placed in a receivership or a conservatorship. Holding Company guarantees apply if an insured institution is classified "undercapitalized". Such holding company guarantees include guarantee of compliance with banking rules, regulations and laws and the improvement of the bank, including limited capital support. As previously disclosed, the Bank, meets the criteria to be classified "well capitalized" bank as of September 30, 1997. (4) Disclosure Requirements for Nonbank Holding Companies Article 9 of Regulation S-X and Industry Guide 3 specify financial statement and certain disclosure requirements for bank holding companies. SEC Staff Accounting Bulletin No. 69 ("SAB 69") details the view of the SEC staff concerning the applicability of Article 9 and Industry Guide 3 to registrants which are not bank holding companies. The bulletin concludes that a nonbank holding company registrant engaged in similar lending and deposit activities should provide certain disclosures relevant to an understanding of the Registrant's operations. In accordance with SAB 69, the Company, a nonbank holding company, makes the following disclosures regarding the Bank. -9- Distribution of Assets, Liabilities and Shareholder's Equity; Interest Rates and Interest Differentials The following table presents for the periods indicated (I) average assets, liabilities and shareholder's equity, (II) interest income and expense, (III) average yields on interest-earning assets and average rates incurred on interest-bearing liabilities, (IV) the net interest spread and (V) net interest margin on interest- earning assets. Yields and rates are computed on a tax equivalent basis at tax rates of 34% for each of the three years ended September 30, 1997. Average balances are calculated predominately on a daily basis.
1997 1996 1995 ------------------------------------------------------------------------------------ Interest Average Interest Average Interest Average Average Income/ Yields/ Average Income/ Yields/ Average Income/ Yields/ (In thousands) Balance Expense Rates Balance Expense Rates Balance Expense Rates - ------------------------------------------------------------------------------------------------------------------------------- Assets Interest-earning assets CD's, time deposits, federal funds and other short-term investments $ 5,674 $ 313 5.52% $ 8,132 $ 436 5.36% $ 6,294 $ 366 5.82% Investment securities: (1) U.S. government and agency obligations 905 54 5.96% 541 32 5.91% 2,107 151 7.17% Other 500 39 7.80% 606 40 6.60% 703 47 6.69% Mortgage-backed securities 18,265 1,186 6.49% 21,815 1,378 6.32% 35,321 2,044 5.79% FHLB stock 2,272 145 6.38% 2,233 145 6.49% 2,129 157 7.37% Loans (net of unearned income) (2) 184,619 13,867 7.51% 206,680 16,040 7.76% 258,011 19,975 7.74% ------------------------------------------------------------------------------------ Total interest-earning assets 212,235 15,604 7.35% 240,007 18,071 7.53% 304,565 22,740 7.47% ------------------------------------------------------------------------------------ Noninterest-earning assets Cash and cash equivalents 817 874 960 Property and equipment 742 683 692 Interest receivable 1,151 1,593 2,339 OREO and other assets 2,654 5,856 16,839 ---------- ---------- ---------- Total noninterest-earning assets 5,364 9,006 20,830 ---------- ---------- ---------- $217,599 $249,013 $325,395 ========== ========== ========== Liabilities and shareholder's equity Interest-bearing liabilities Total deposits (3) $182,739 $7,619 4.17% $215,117 $8,974 4.17% $275,962 $11,370 4.12% FHLB advances 18,240 1,175 6.44% 14,364 1,005 7.00% 23,965 1,605 6.70% ------------------------------------------------------------------------------------ Total interest-bearing liabilities 200,979 8,794 4.38% 229,481 9,979 4.35% 299,927 12,975 4.33% ------------------------------------------------------------------------------------ Noninterest-bearing liabilities Accrued interest payable 739 1,023 1,251 Other liabilities 887 4,004 5,138 Accrued expenses 257 474 232 ---------- ---------- ---------- Total noninterest-bearing liabilities 1,883 5,501 6,621 ---------- ---------- ---------- Shareholder's equity 14,737 14,031 18,847 ---------- ---------- ---------- $217,599 $249,013 $325,395 ========== ========== ========== Net interest income (tax equivalent basis) $6,810 $8,092 $ 9,765 ========= ========= ========= Net interest spread (tax equivalent basis) 2.98% 3.18% 3.14% ========= ========= ========= Net interest income as a percentage of interest-earning assets (tax equivalent basis) 3.21% 3.37% 3.21% ========= ========= ========= (1) Securities available for sale are included in investment securities. (2) Nonaccrual loans at year end are included in the total loan portfolio. (3) Includes net cost of interest rate swaps and caps.
-10- Analysis of Changes in Interest Income and Interest Expense The following table presents an analysis of increases and decreases in interest income and expense in terms of changes in volume and interest rates for the periods indicated. Changes not due solely to either a change in volume or a change in rate have been allocated based on the respective percentage changes in average balances and average rates. The table is presented on a tax equivalent basis at tax rates of 34% for fiscal years 1997 and 1996.
1997 vs. 1996 1996 vs. 1995 Increase (decrease) due to change in Increase (decrease) due to change in (In thousands) Volume Rate Total Volume Rate Total - ------------------------------------------------------------------------------------------------------------------------------------ Interest income CD's, time deposits, federal funds and other short-term investments $( 132) $ 9 $( 123) $ 112 $( 42) $ 70 Investment securities: (1) US government and agency obligations 21 1 22 (120) 1 (119) Other (7) 6 (1) (6) (1) (7) Mortgage-backed securities (225) 33 (192) (883) 217 (666) FHLB stock 3 (3) 0 50 (62) (12) Loans (net of unearned income) (2) (1,677) (496) (2,173) (3,978) 43 (3,935) -------------------------------- ---------------------------- Total interest income (2,017) (450) (2,467) (4,825) 156 (4,669) -------------------------------- ---------------------------- Interest expense Total deposits (3) (1,350) (5) (1,355) (2,634) 238 (2,396) FHLB advances 269 (99) 170 (420) (180) (600) -------------------------------- ---------------------------- Total interest expense (1,081) (104) (1,185) (3,054) 58 (2,996) -------------------------------- ---------------------------- Change in net interest income $( 936) $( 346) $(1,282) $(1,771) $ 98 $(1,673) ================================ ============================ (1) Securities available for sale are included in investment securities. (2) Non-accrual loans at year end are included in the total loan portfolio. (3) Includes net cost of interest rate swaps and caps.
Investment Activities The following table summarizes the composition of the securities portfolio (book values) for the three years ended September 30, 1997:
1997 1996 1995 ---------------------------------------------------------- (In thousands) Amount % Amount % Amount % - -------------------------------------------------------------------------------------------------------------------- US government and agency obligations $ 600 3% $ 599 2% $ 490 3% Mortgage-backed securities 8,002 38% 10,635 42% 21,965 83% Other 500 2% 500 2% 596 2% FHLB stock 2,270 11% 2,233 10% 2,233 8% Securities available for sale (4) 9,677 46% 11,157 44% 1,127 4% ---------------------------------------------------------- Total $21,049 100% $25,124 100% $26,411 100% ==========================================================
The following table sets forth the maturities of investment securities at September 30, 1997 and the weighted average (tax equivalent) yields on such securities:
Five to Within After one but ten After ten one year within five years years years Total ------------------------------------------------------------------------------------------------------ (In thousands) Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield - ------------------------------------------------------------------------------------------------------------------------------------ US government and agency obligations $ 600 5.25% $ 600 5.25% Mortgage-backed securities $8,002 7.00% 8,002 7.00% Other $500 8.00% 500 8.00% FHLB stock 2,270 6.45% 2,270 6.45% Securities available for sale (4) 9,677 5.34% 9,677 5.34% ------------------------------------------------------------------------------------------------------ Total $2,870 6.20% $500 8.00% $0 0.00% $17,679 6.09% $21,049 6.00% ====================================================================================================== (4) Securities available for sale are detailed in Note 4 of Notes to Consolidated Financial Statements in the 1997 Annual Report to Shareholders. As of September 30, 1997, the Bank held no securities investments which exceeded 10% of shareholder's equity. -11-
Lending Activities The following table summarizes the composition of loan portfolio for the three years ended September 30, 1997:
1997 1996 1995 ------------------- ---------------------- ---------------------- (In thousands) Amount % Amount % Amount % - ------------------------------------------------------------------------------------------------- Commercial and financial $ 4,627 2% $ 2,757 2% $ 3,856 3% Real estate construction 3,637 2% 4,946 2% 5,597 1% Real estate mortgage 179,188 94% 177,734 95% 222,424 96% Installment 3,732 2% 1,097 1% 922 - ------------------- ---------------------- ---------------------- Gross total loans $191,184 100% $186,534 100% $232,799 100% ======== ========== =========== Less: Allowance for loan loss 2,479 2,278 2,213 ----------- ------------ ----------- Net total loans $188,705 $184,256 $230,586 =========== ============ ===========
Commercial loans, primarily to individuals and small to medium sized firms, were made at a variety of repayment terms and are primarily collateralized by equipment, marketable securities or inventory primarily located in Connecticut. Real estate mortgage and construction balances as of September 30, 1997 are comprised of residential, commercial and multifamily mortgages of approximately $151.7 million, $23.1 million and $8.0 million, respectively. Commercial real estate loans are primarily located in the Northeast and include as collateral multifamily, health care, office and industrial property. The Bank is no longer an active loan originator in the commercial real estate market. The Bank's residential loan portfolio is primarily collateralized by mortgages on 1-4 family residential properties located throughout the eastern United States with concentrations in Connecticut, New York, Massachusetts, Ohio and Florida. Installment loans are made to individuals. The Bank also occasionally purchases residential mortgage loans for its portfolio from other financial institutions and mortgage bankers. Such purchases are primarily loans collateralized by property located in Connecticut and Massachusetts. During fiscal 1997, home equity lines of credit of approximately $5.8 million were purchased, of which approximately $1.7 million was advanced. The following table shows the interest rate sensitivities of loans outstanding as of September 30, 1997 which are due or reprice in the periods indicated. Loans due within one year include demand loans. After one After Within but within five (In thousands) one year five years years Total - -------------------------------------------------------------------------------------- Commercial and financial $ 777 $ 3,234 $ 616 $ 4,627 Real estate construction 2,610 1,027 - 3,637 Real estate mortgage 1,843 34,313 143,032 179,188 Installment 604 2,737 391 3,732 -------- ---------------------- ----------- Total $5,834 $41,311 $144,039 $191,184 ======== ====================== =========== Fixed interest rate 2,239 $11,926 $ 50,940 Variable interest rate 3,595 29,385 93,099 -------- ---------------------- Total $5,834 $41,311 $144,039 ======== ======================
Nonperforming Assets A summary of nonperforming assets by type follows for the three years ended September 30, 1997:
(In thousands) 1997 1996 1995 - -------------------------------------------------------------------------------------- Non-accrual loans $4,135 $1,422 $ 290 Restructured loans - - - Other real estate owned, net 1,046 984 2,849 ---------------------- ----------- Total nonperforming assets $5,181 $2,406 $3,139 ====================== =========== Nonperforming assets as a percentage of loans and other real estate owned 2.7% 1.3% 1.3% ====================== ===========
Generally loans are placed on nonaccrual status when interest or principal is past due for ninety days or earlier if circumstances indicate collection is doubtful. The Bank resumes the accrual of interest on such loans if, in the opinion of management, the borrower has demonstrated adequate financial resources and intent to meet the terms and conditions of the loan, and all payments are again current. Interest income forgone on nonperforming loans in fiscal years 1997, 1996, and 1995 amounted to $576,000, $297,000 and $508,000, respectively. During 1997 and 1996, approximately $2,000 and $187,000, respectively, of income was recognized on non-accrual loans. This income was recognized while the loans were performing and was realized by cash payments. It is management's policy to reverse all uncollected interest at the time a loan is placed on nonaccrual. -12- Summary of Loan Loss Experience The following table summarizes the Bank's loan loss experience for each of the three years ended September 30, 1997:
(In thousands) 1997 1996 1995 - --------------------------------------------------------------------------------- Balance at beginning of period $2,278 $2,213 $4,645 -------- -------- -------- Charge-offs: Real estate mortgage 725 1,196 7,845 Installment - - - Commercial - 81 483 -------- -------- -------- 725 1,277 8,328 -------- -------- -------- Recoveries: Real estate mortgage 297 273 258 Commercial - 15 1 -------- -------- -------- 297 288 259 -------- -------- -------- Net charge-offs 428 989 8,069 Additions charged to operations 629 1,054 5,637 -------- -------- -------- Balance at end of period $2,479 $2,278 $2,213 ======== ======== ======== Ratio of net charge-offs to average loans outstanding during the period 0.25% 0.48% 3.13% ======== ======== ========
The Bank maintains general reserves for potential losses from its loan portfolio in an Allowance for Possible Loan Losses. (the "ALL"). The ALL is maintained at a level considered by management to be adequate. The adequacy of the ALL is reviewed quarterly by the Bank's management and its Board of Directors, and is determined primarily by management's informed judgment concerning the amount of risk inherent in the portfolio at a point in time. Management's judgment is based on a number of factors including: 1) a detailed risk rating system for commercial loans in which loans are individually reviewed with respect to such criteria as the estimated value of underlying loan collateral and the financial condition of borrowers, 2) recent historical loan loss experience, 3) industry and geographic concentrations, 4) the results of the most recent regulatory examination available, 5) current national and local economic conditions, and 6) other relevant information as may be available. The balance of each risk rating category has a reserve percentage applied for the purpose of estimating each component of the ALL. A substantial portion of outstanding commercial loan portfolio balances on an annualized basis are reviewed periodically by a third party that is independent from the Bank and the results of such review are factored into the risk rating system. Management also reviews monthly, certain monitored performing and all nonperforming loans individually and makes further reserve allocation adjustments. The Bank's one to four family residential mortgage portfolio reserves are evaluated primarily upon the basis of portfolio historical performance. The Bank also maintains an unallocated and supplemental reserve that reflects management's assessment of local and national economic, business and real estate market trends, and the Bank's procedures, controls and personnel. At September 30, 1997 and 1996, the bank classified $2,948,000 and $5,261,000 respectively, of loans as impaired. A loan is considered impaired if it is probable that the Company will be unable to collect scheduled payments according to the terms of the loan agreement. Impaired loans as of September 30, 1997 and 1996 include $0 and $3,810,000 of loans restructured and currently classified as performing, $2,948,000 and $639,000 of loans currently classified as nonaccrual, and $0 and $812,000 of loans in which potential credit problems may lead to future nonaccrual status or possible charge-off. The nonaccrual impaired loans are a component of nonperforming assets. Loans are charged off against the ALL when management believes that collection is unlikely. Loan charge-offs are identified during the loan review process. The charge-offs recorded for all periods were primarily associated with the real estate mortgage portfolios and resulted from the decline in the value of the properties serving as collateral for the loans. The charge-offs recorded during 1995 were also associated with the discounts necessary to attract buyers of those distressed commercial OREO assets included in the Bank's accelerated asset disposition plan and other bulk asset sales. The following table presents the allocation of the reserve for possible loan and lease losses by loan categories for the three years ended September 30, 1997:
1997 1996 1995 -------------------- ------------------------------------------ Loans in Loans in Loans in Amount category Amount category Amount category of as a % of of as a % of of as a % of (Dollars in thousands) reserve total loans reserve total loans reserve total loans - ---------------------------------------------------------- -------------------------------- Commercial and financial $ 40 2% $ 24 2% $ 26 2% Real estate construction 31 2% 44 2% 33 2% Real estate mortgage 1,608 94% 1,587 96% 1,607 96% Installment 75 2% 22 - 18 - Commitments 434 - 340 - 219 - Unallocated 291 - 261 - 310 - -------------------- -------- -------- ------------------- Total $2,479 100% $2,278 100% $2,213 100% ==================== ======== ======== =================== -13-
Deposits The Bank offers a variety of deposit accounts designed to attract both short and long term funds. The Bank provides a money market deposit account to Advest's customers as a component of various cash management products available to those customers. The Bank primarily markets brokered Certificates of Deposit (CD's) through Advest. The Bank also markets retail deposit accounts, such as money market accounts, primarily through Advest. At September 30, 1997, deposits obtained through Advest constituted 75.4% of all deposits at the Bank. Additional deposit information is disclosed in Note 5 of Notes to Consolidated Financial Statements in the 1997 Annual Report to Shareholders. The following table presents the average balances of and average rates paid on deposits for the three years ended September 30, 1997:
1997 1996 1995 -------------------- ------------------------ -------------------- Average Average Average Average Average Average (Dollars in thousands) balance rate balance rate balance rate - ----------------------------------------------------------------------------------------------------------------- Demand noninterest-bearing $ 99 Savings noninterest-bearing 95 $ 98 $ 66 Savings 58 2.98% 19 2.36% 33 1.99% Money market 120,963 2.82% 149,347 2.90% 209,407 3.22% Time certificates 61,524 6.30% 65,653 6.24% 66,456 6.41% -------------------- ------------------------ -------------------- Total deposits $182,739 4.17% $215,117 4.17% $275,962 4.12% ==================== ======================== ====================
Average balances are calculated predominately on a daily basis. The following table sets forth the maturity distribution of time deposits of $100,000 or more as of September 30, 1997: (Dollars in thousands) Amount --------------------------------------------- Three months or less $ 2,621 Over three months to six months 1,593 Over six months to twelve months 1,871 Over twelve months 5,283 ------------ $11,368 ============
Return on Equity and Assets Years ended September 30, ------------------------------------ 1997 1996 1995 - --------------------------------------------------------------------------------------------- Return on assets (net income/average total assets) 0.31% 0.41% * Return on equity (net income/average equity) 4.53% 7.21% * Net interest margin 3.13% 3.25% 3.00% Equity to assets (average equity/average assets) 6.77% 5.63% 5.79% * As a result of net losses in 1995,meaningful. this information is not meaningful.
Short-Term Borrowings
Years ended September 30, ------------------------------------ (Dollars in thousands) 1997 1996 1995 - --------------------------------------------------------------------------------------------- Other short-term borrowings Balance at year end $29,250 $ 4,750 $ 9,500 Weighted-average interest rate at year end 5.90% 6.76% 6.76% Average amount outstanding during the year $ 9,368 $ 7,827 $ 6,692 Maximum amount outstanding at any month end $29,250 $10,500 $17,000 Weighted-average interest rate during the year 6.04% 7.01% 6.41% In the ordinary course of business, short-term borrowings of the Bank consisted primarily of the current portion of fixed-term, fixed-rate advances from the Federal Home Loan Bank. -14-
Item 2. Properties 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 in a number of legal proceedings arising principally from its securities and investment banking business. Some of these actions involve claims by plaintiffs for substantial amounts. While results of litigation cannot be predicted with certainty, in the opinion of management, based on discussion with counsel, the outcome of these matters will not result in a material adverse effect on the financial condition or future results of operations 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 on pages 37 and 38 of the 1997 Annual Report to Shareholders in Note 9 of the Notes to Consolidated Financial Statements and on pages 46 and 47 under the captions "Quarterly Financial Information" and "Shareholder Information", respectively. Such information is hereby incorporated by reference. Item 6. Management's Discussion and Analysis of Financial Condition and Results of Operations The information required by this item is disclosed on pages 19 through 27 of the 1997 Annual Report to Shareholders under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations". Such information is hereby incorporated by reference. Item 7. Financial Statements and Supplementary Data The information required by this item is disclosed in the Consolidated Financial Statements and Notes thereto on pages 28 through 45 and under the caption "Quarterly Financial Information" on page 46 of the 1997 Annual Report to Shareholders. Such information is hereby incorporated by reference. Item 8. 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. Part III Item 9. 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 January 29, 1998. Such information is hereby incorporated by reference. The following table sets forth the executive officers of the Company at December 2, 1997. Executive officers of the Company are appointed annually by the Board of Directors to hold office until their successors are appointed and qualify. -15- Executive Officer Name Age Office Since - ----------------------------------------------------------------------------- Allen Weintraub 62 Chairman and Chief Executive Officer 1977 Grant W. Kurtz 55 President 1985 Murray M. Beach 43 Senior Vice President of Corporate Finance, Advest, Inc. 1996 Allen G. Botwinick 54 Executive Vice President, Administration and Operations 1980 George A. Boujoukos 63 Executive Vice President of Capital Markets, Advest, Inc. 1977 Harry H. Branning 46 Executive Vice President and National Sales Manager, Advest, Inc. 1994 Lee G. Kuckro 56 Senior Vice President, Secretary and General Counsel 1978 Martin M. Lilienthal 55 Senior Vice President, Treasurer and Chief Financial Officer 1977 Item 10. 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 January 29, 1998. Such information is hereby incorporated by reference. Item 11. 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 January 29, 1998. Such information is hereby incorporated by reference. Item 12. 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 January 29, 1998. Such information is hereby incorporated by reference. -16- Part IV Item 13. Exhibits, Financial Statement Schedules and Reports on Form 8-K Page Reference ------------------------ Annual Report 10-K ------------------------ (a) 1. Financial Statements The Consolidated Financial Statements and The Report of Independent Accountants contained in the 1997 Annual Report to Shareholders are incorporated herein by reference: Consolidated Statements of Earnings 28 Consolidated Balance Sheets 29 Consolidated Statements of Cash Flows 30 Consolidated Statement of Changes in Shareholders' Equity 31 Notes to Consolidated Financial Statements 32-45 Report of Independent Accountants 46 2. Financial Statement Schedules Report of Independent Accountants on all schedules 23 Schedule I - Condensed Financial Information of Registrant 24-26 Schedule II - Valuation and Qualifying Accounts 27 3. Exhibits The following is a list of exhibits to this Report on Form 10-K filed herewith or incorporated by reference herein. Prior Filing(s) to which Reference is made, Exhibit Description if applicable - ----------------------------------------------------------------------------- 3(a) Restated Certificate of Exhibit 3(a) to Registrant's Incorporation of Report on Form 10-Q for the quarter Registration ended March 31, 1989 3(b) By-laws of Registrant, Exhibit 3(b) to Registrant's as restated and amemded 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 Filed Herewith Restated By-laws of Registrant 4(a) Shareholder Rights Exhibit to Registrant's Report on Form 8-k Agreement dated as of November 1, 1988 October 31, 1988 between Registrant and The Connecticut Bank and Trust Company, N.A., as Rights Agent -17- Prior Filing(s) to which Reference is made, Exhibit Description if applicable - ----------------------------------------------------------------------------- 10(a) Registrant's 1994 Exhibit A to Registrant's Proxy Non-Employee Director Statement dated December 20, 1994 Stock Option Plan 10(b) First and Second Filed Herewith Amendments to Non-Employee Director Stock Option Plan 10(c) Registrant's 1993 Stock Exhibit A to Registrant's Proxy Option Plan Statement dated December 21, 1993 10(d) Registrant's 1983 Exhibit A to Registrant's Proxy Statement Incentive Stock Option dated December 21, 1983 and Exhibit 10(a) Plan, as amended to Registrant's Report on Form 10-Q for the quarter ended March 31, 1988 10(e) Registrant's Deferred Exhibit 10(f) to Registrant's Report on Compensation Savings and Form 10-K for the fiscal year ended Investment Plan, Amended September 30, 1989, Exhibit 10(j) to and Restated as of Registrant's Report on Form 10-K for its November 17,1989, as fiscal year ended September 30,1990 and amended Exhibit 10(b) of Registrant's Report on Form 10-Q for the quarter ended December 31,1992 10(f) Non-Employee Director Exhibit 10(b) to Registrant's Report on Equity Plan Form 10-Q for the quarter ended June 30, 1996 10(g) Key Professionals Equity Filed Herewith Plan, as amended and restated as of October 1, 1997 10(h) Forms of Executive Officer Exhibit 10 to Registrant's Report on Form Restricted Stock and Stock 10-Q for the quarter ended December 31, Option Agreement for 1995, 1994 and Exhibit 10(c) to Registrant's 1996 (as supplemented) Report on Form 10-Q for the quarter ended and 1997 June 30, 1996 and Exhibit 4.4 to Registrant's Registration Statement on Form S-8, File No. 333-17711; and Exhibit 4.5 to Registrant's Registration Statement 4.6 on Form S-8, File No. 333-17711 10(i) Executive Officer Filed Herewith Restricted Stock and Stock Option Agreement for 1998 -18- Prior Filing(s) to which Reference is made, Exhibit Description if applicable - ----------------------------------------------------------------------------- 10(j) The Advest Thrift Plan Exhibit 10(a) to Registrant's Report on Registrant, effective Form 10-Q for the quarter ended December as of December 31, 1992 31, 1992 and Exhibit 10(a) to Registrant's as amended Report on Form 10-Q for the quarter ended June 30, 1996 10(k) Fifth, Sixth and Seventh Filed Herewith Amendments to the Advest Thrift Plan of Registrant 10(l) Registrant's 1991 Exhibit 10(k) to Registrant's Report on and 1992 Top AE Form 10-k for its fiscal year ended Stock Option Plans September 30, 1991, and Exhibit 10(c) to Registrant's report on form 10-Q for the quarter ended December 31, 1992 10(m) Registrant's Account Exhibit 10(m) to Registrant's Report on Executive Nonqualified Form 10-K for its fiscal year ended Defined Benefit Plan, September 30,1993, Exhibit 10(p) to as amended Registrant's Report on Form 10-K for its fiscal year ended September 30,1995 and Exhibit 10(f) to Registrant's Report on Form 10-Q for the quarter ended June 30, 1996 10(n) Registrant's Nonqualified Exhibit 10(n) to Registrant's Report on Executive Post-employment Form 10-K for its fiscal year ended Income Plan, as amended September 30, 1994and Exhibit 10(e) to Registrant's Report on Form 10-Q for the quarter ended June 30, 1996 10(o) Registrant's 1995, 1996 Exhibit 4.1 to Registrant's Registration and 1997 Advest Equity Statement on Form S-8, File No. 33-56275; Plans Exhibit 4 to Registrant's Registration Statement on Form S-8, File No. 333-00797; and Exhibit 4.3 to Registrant's Registration Statement on Form S-8, File No. 333-17711 10(p) 1998 Advest Equity Plan Filed Herewith 10(q) Amended and Restated Exhibit 10(h) to Registrant's Report on Employement Agreement Form 10-Q for the quarter ended June 30, Chief Executive Officer 1996 10(r) Employment Agreement with Filed Herewith President -19- Prior Filing(s) to which Reference is made, Exhibit Description if applicable - ----------------------------------------------------------------------------- 10(s) Note Purchase Agreement Exhibit 10(a) to Registrant's Report on of Registrant dated Form 10-Q for the quarter ended December as of December 27, 1996 31, 1996 1996 with respect to Registrant's 7.95% Senior Notes due December 31, 2003 10(t) Cash Subordination Exhibit 10(b) to Registrant's Report on Agreement of the Form 10-Q for the quarter ended December Registrant dated as of 31, 1996 January 31, 1997 11 Statement Regarding Filed Herewith Computation of Net Income per Common Share 13 Annual Report to Filed Herewith * shareholders for Fiscal year ended September 30, 1997 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 * Pursuant to Item 601(b) (13) of Regulation S-K, except for those portions of the Annual Report expressly incorporated by reference and included in Exhibit 13, the Annual Report is not to be deemed filed as part of this filing on Form 10-K. (b) Reports on Form 8-K No reports on Form 8-K were filed during the fourth quarter of the year ended September 30, 1997. -20- 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/Martin M. Lilienthal November 20, 1997 Martin M. Lilienthal Senior Vice President and Treasurer (Chief Financial and Principal Accounting 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. Chief Executive Officer, Chairman of the Board and Director (Principal /s/Allen Weintraub Executive Officer) November 20, 1997 Allen Weintraub Senior Vice President and Treasurer (Chief Financial and Principal Accounting /s/Martin M. Lilienthal Officer) November 20, 1997 Martin M. Lilienthal /s/George A. Boujoukos Director November 20, 1997 George A. Boujoukos /s/Sanford Cloud, Jr. Director November 20, 1997 Sanford Cloud, Jr. /s/Richard G. Dooley Director November 20, 1997 Richard G. Dooley /s/William B. Ellis Director November 20, 1997 William B. Ellis -21- SIGNATURES /s/Robert W. Fiondella Director November 20, 1997 Robert W. Fiondella /s/Grant W. Kurtz President and Director November 20, 1997 Grant W. Kurtz Vice Chairman of the /s/ Anthony A. LaCroix Board and Director November 20, 1997 Anthony A. LaCroix /s/Barbara L. Pearce Director November 20, 1997 Barbara L. Pearce /s/John A. Powers Director November 20, 1997 John A. Powers -22- Report of Independent Accountants The Board of Directors and Shareholders of The Advest Group, Inc.: Our report on the consolidated financial statements of The Advest Group, Inc. and Subsidiaries has been incorporated by reference in this Form 10-K from page 46 of the 1997 Annual Report to Shareholders of The Advest Group, Inc. In connection with our audits of such financial statements, we have also audited the related financial statement schedules listed in the index on page 17 of this Form 10-K. In our opinion, the financial statement schedules referred to above, when considered in relation to the basic financial statements taken as a whole, present fairly, in all material respects, the information required to be included therein. /s/ COOPERS & LYBRAND L.L.P. Hartford, Connecticut October 22, 1997 -23- Schedule I Condensed Financial Information of Registrant The Advest Group, Inc. (Parent Company) Condensed Balance Sheets September 30, ----------------- In thousands 1997 1996 - --------------------------------------------------------------- Assets Cash $ 2,166 $ 1,213 Investment in subsidiaries, equity method(a) 109,977 94,144 Receivables from subsidiaries(a) 7,616 5,857 Loans 9,359 9,787 Subordinated Receivable(a) 10,000 -- Held to maturity securities 11,932 11,226 Other assets 6,831 9,855 ----------------------- Total assets $157,881 $132,082 ======================= Liabilities Accounts payable and accrued expenses $ 11,517 $ 12,164 Payable to subsidiaries(a) 5,002 4,553 Borrowings 35,817 5,494 Interest payable 954 77 Subordinated borrowings -- 20,552 ----------------------- Total liabilities 53,290 42,840 Shareholders' equity(b) 104,591 89,242 ----------------------- Total liabilities and shareholders' equity $157,881 $132,082 ======================= (a)Eliminated in consolidation. (b)For an analysis of shareholders' equity and its components, see Registrant's Consolidated Balance Sheets and Statements of Changes in Shareholders' Equity on pages 29 and 31 of the 1997 Annual Report to Shareholders. -24- Schedule I (Continued) The Advest Group, Inc. (Parent Company) Condensed Statements of Earnings For the years ended September 30, - ---------------------------------------------------------------- In thousands 1997 1996 1995 - ---------------------------------------------------------------- Revenues Gain on sale of investment advisory business, net $ 57 $ 627 $ 10,092 Interest 1,741 482 232 Other income 384 65 196 ------------------------------ Total revenues 2,182 1,174 10,520 ------------------------------ Expenses Interest 2,898 2,447 2,452 Loss on call of debentures 607 -- -- Other 1,390 1,259 807 ------------------------------ Total expenses 4,895 3,706 3,259 ------------------------------ Income (loss) before income tax benefit and equity in earnings of subsidiaries (2,713) (2,532) 7,261 Income tax benefit 1,019 459 542 ------------------------------ Income (loss) before equity in earnings of subsidiaries (1,694) (2,073) 7,803 Equity in income (loss) of subsidiaries 15,912 13,871 (1,452) ------------------------------ Net income $14,218 $11,798 $ 6,351 ============================== -25- Schedule I (Continued) The Advest Group, Inc. (Parent Company) Condensed Statements of Cash Flows For the years ended September 30, - --------------------------------------------------------------------- In thousands 1997 1996 1995 - --------------------------------------------------------------------- Operating Activities: Net income $14,218 $11,798 $ 6,351 Equity in (loss) income of subsidiaries (15,912) (13,871) 1,452 Adjustments to reconcile net income to net cash provide by operating activities 600 429 1,580 Gain on sale of investment advisory business, net (57) (627) (10,092) Net (increase) decrease in operating assets 607 (1,335) (20) Net increase (decrease) in operating liabilities 2,335 2,652 (2,103) ------------------------------ Net cash provided by (used for) operating activities 1,791 (954) (2,832) ------------------------------ Financing Activities: Proceeds from long term borrowing 35,000 1,250 1,000 Repayment of short term borrowings (3,570) -- -- Repayment of short term borrowings (1,107) (996) (798) Employee stock transactions 866 1,076 62 Retirement of subordinated borrowings (20,545) -- -- Repurchase of subordinated borrowings -- -- (410) Net (decrease) increase in payables to subsidiaries (1,231) 3,863 3,018 Repurchase of common stock (1,835) (3,799) (2,309) Other 1,241 1,101 846 ------------------------------ Net cash provided by financing activities 8,819 2,495 1,409 ------------------------------ Investing Activities: Proceeds from maturities of held to maturity securities 21,388 18,400 12,500 Proceeds from investment advisory business, net 217 788 10,141 Purchase of held to maturity securities (22,000) (23,388) (15,309) Purchase of available for sale securities (26) (23) -- Sales of OREO, net 655 2,090 -- Principal collections on loans 141 1,135 746 Purchases of subordinated receivable (10,000) -- -- Acquisition of subsidiaries assets -- -- (4,585) Increase in investments in subsidiaries -- -- (152) Loans originated (32) -- (1,761) Recovery on write-offs -- -- 161 ------------------------------ Net cash (used for) provided by investing activities (9,657) (998) 1,741 ------------------------------ Increase in cash 953 543 318 Cash at beginning of period 1,213 670 352 ------------------------------ Cash at period end $ 2,166 $ 1,213 $ 670 ============================== Supplemental Information: Interest paid $ 2,280 $ 2,447 $ 2,452 Income taxes paid $ 7,987 $10,067 $ 2,273 Non-cash transfers (reduction of payable to subsidiaries effected in the form of dividends) $ -- $ 8,500 $ 3,007 Restricted stock awards, net of forfeitures $ 515 $ 56 $ -- -26- Schedule II The Advest Group, Inc. and Subsidiaries Valuation and Qualifying Accounts Additions Charge- Balance at charged to offs Balance beginning cost and and at end In thousands of period expenses recoveries of period - -------------------------------------------------------------------------- For the years ended September 30, - --------------------------------- 1997 - ---- Credit losses: Brokerage customers $ 791 $ 160 $ (27) $ 924 Loans 2,398 671 (590) 2,479 Asset devaluation: Other real estate owned -- -- -- -- Other investments/assets 1,450 84 (233) 1,301 Valuation reserve on deferred taxes 1,671 -- (1,172) 499 ----------------------------------------- $ 6,310 $ 915 $ (2,022) $ 5,203 ========================================= 1996 - ---- Credit losses: Brokerage customers $ 743 $ 160 $ (112) $ 791 Loans 2,334 1,022 (958) 2,398 Asset devaluation: Other real estate owned 718 20 (738) -- Other investments/assets 1,250 56 144 1,450 Valuation reserve on deferred taxes 1,510 161 -- 1,671 ------------------------------------------ $ 6,555 $ 1,419 $ (1,664) $6,310 ========================================== 1995 - ---- Credit losses: Brokerage customers $ 869 $ 473 $ (599) $ 743 Loans 4,900 5,637 (8,203) 2,334 Asset devaluation: Other real estate owned 1,201 4,491 (4,974) 718 Other investments/assets 2,218 (263) (705) 1,250 Valuation reserve on deferred taxes 1,360 150 -- 1,510 ------------------------------------------ $ 10,548 $ 10,488 $ (14,481) $6,555 ========================================== -27- Form 10-K Exhibit Index Exhibit Description Page - ----------------------------------------------------------------------------- 3(c) Second Amendment to Restated By-laws of Registrant 29 10(b) First and Second Amendments to Non-Employee Director Stock Option Plan 30 10(g) Key Professionals Equity Plan, as amended and restated as of October 1, 1997 32 10(i) Executive Officer Restricted Stock and Stock Option Agreement of 1998 43 10(k) Fifth, Sixth and Seventh Amendments to the Advest Thrift Plan of Registrant 50 10(p) 1998 Advest Equity Plan 53 10(r) Employment Agreement with President 66 11 Statement Regarding Computation of Net Income per Common Share 72 13 Selected Excerpts from the Annual Report to Shareholders for fiscal year ended September 30, 1997 73 21 Subsidiaries 102 23 Consent of Coopers & Lybrand L.L.P. 103 27 Financial Data Schedule (Selected financial data - for EDGAR electronic filing only to SEC) 104 -28- EX-3.C 2 Exhibit 3(c) As adopted by the Board of Directors of The Advest Group, Inc. on September 28, 1995 SECOND AMENDMENT TO RESTATED BY-LAWS OF THE ADVEST GROUP, INC. RESOLVED, that Article III, Section 4 of the Bylaws of the Corporation be, and it hereby is, amended in its entirety to read as follows: SECTION 4. Qualification. Directors shall be stockholders. Any person elected as a Director who is not at the time of election a stockholder, shall have a period of six months from the date of election to satisfy the requirement of stock ownership. If, at the end of said six month period, the Director has not become an owner of the common stock of the Corporation, he shall cease to be a Director. No person shall be eligible for election or reelection as a Director after such person has reached his or her 71st birthday. Nor shall any person be appointed as a Director to fill any vacancy after such person has reached his or her 71st birthday. -29- EX-10.B 3 Exhibit 10(b) As adopted by the Board of Directors of The Advest Group, Inc. on September 26, 1996 FIRST AMENDMENT TO THE NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN Effective as of September 26, 1996 The Advest Group, Inc. 1994 Non-Employee Director Stock Option Plan (the "Plan") is hereby amended, effective for all grants after the date hereof, to substitute "2,500 Shares" for "1,500 Shares" in each place where it appears. In other respects, the Plan will continue in full force and effect. -30- As adopted by the Board of Directors of The Advest Group, Inc. on November 20, 1997 SECOND AMENDMENT TO THE NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN Effective as of November 20, 1997 Section 11(b) of The Advest Group, Inc. 1994 Non-Employee Director Stock Option Plan (the "Plan") is hereby amended by inserting the phrase "or other Departures" after "Disability or Death" in the heading of that Section. Section 11(b) is further amended by inserting the following additional sentence at the end thereof: "If a Participant's service as Director is terminated for any other reason, other than voluntary resignation or failure to stand for reelection, any outstanding options shall immediately become exercisable and the Participant shall have the right to exercise any outstanding Option for a three month period following the termination of the Participant's service. In other respects, the Plan will continue in full force and effect. -31- EX-10.G 4 The Advest Group, Inc. Key Professionals Equity Plan Page 10 Exhibit 10(g) THE ADVEST GROUP, INC. KEY PROFESSIONALS EQUITY PLAN Amended and Restated Effective October 1, 1997 The Advest Group, Inc. (the "Company") hereby amends and restates the Key Professionals Equity Plan, for a select group of key employees employed by Advest, Inc. ("Advest"). The purpose of the Plan is to further the long term growth in earnings of Advest by offering incentives to those employees to compensate them for their contributions to the Company and its Affiliates' growth and profits, to encourage their ownership of the Company's stock, and to encourage them to remain in the employ of Advest. ARTICLE I DEFINITIONS When used herein, each of the following terms shall have the corresponding meaning set forth below unless a different meaning is plainly required by the context in which a term is used. Section 1.1. "Affiliate" means the Company's present or future parent corporation, each of the present or future subsidiaries of the Company, and any subsidiaries of the present or future parent of the Company in which the parent holds a controlling interest. Section 1.2. "Base Compensation" means the agreed fixed and non- contingent compensation to be paid to Participant during the Deferral Period. Notwithstanding the foregoing, (i) all amounts designated as incentive, override or bonus payments, whether or not guarnanteed, will be considered Incentive Compensation and not Base Compensation and (ii) the first $50,000 of compensation earned by branch managers for branch management activities (or 1% of branch revenues, if greater) will be considered Base Compensation, and any additional branch manger compensation will be considered Incentive compensation. Section 1.3. "Beneficiary" means any person (including, but not limited to, a Participant's estate) designated by a Participant on a form provided or approved by the Committee to receive any Restricted Shares to which such Participant shall be entitled upon their death in accordance with the terms of the Plan. No designation of Beneficiary shall be effective until filed with the Committee. If more than one Beneficiary is designated, the Beneficiaries shall share equally in any rights or interests of the Participant under the Plan. If a Participant shall fail to file a valid designation form, or if all persons designated on the designation form shall have -32- predeceased him, the Company shall distribute all of the Participant's Restricted Shares to which they shall have been entitled upon death to their estate. Section 1.4. "Board of Directors" means the Board of Directors of the Company or the Executive Committee of such board. Section 1.5. "Cause" shall be deemed to include any act of dishonesty or fraud, gross negligence, gross insubordination or willful or reckless conduct detrimental to the business of the Company or an Affiliate. Section 1.6. "Change of Control" means a transfer or sale of substantially all of the assets of the Company or Advest, Inc. or merger or consolidation of the Company or Advest, Inc. into or with any other corporation or entity, provided either (a) the other corporation or entity is engaged in the retail securities brokerage business or investment banking business at the date of the transaction and such transaction results in Advest, Inc. not surviving such merger or consolidation or (b) a substantial change in the senior management of Advest, Inc. occurs within six months as a result of the transaction. Section 1.7. "Code" means the Internal Revenue Code of 1986, as amended. Section 1.8. "Committee" means an administrative committee designated to administer this Plan in accordance with Article VII. Section 1.9. "Company" means The Advest Group, Inc. and any successor thereto by merger, consolidation, purchase or otherwise. Section 1.10. "Competitor" means another employer with whom the Company or an Affiliate competes for labor and/or market share and which conducts a business substantially similar to that conducted by the Company or an Affiliate. Such employers typically include securities firms, investment banks or securities or investment banking operations of banks or other firms. Section 1.11. "Deferred Amount" for any Participant and for any fiscal year, shall equal (i) 0% of the first $100,000 of Incentive Compensation earned by the Participant for that fiscal year, plus (ii) 20% of the next $200,000 of Incentive Compensation, plus (iii) 25% of the next $300,000 of Incentive Compensation, plus(iv) 30% of the next $400,000 of Incentive Compensation, plus 35% of all addtional Incentive Compensation. Section 1.12. "Deferral Period" for any Participant and for any fiscal year, means the period beginning on the first day of the fiscal year of the Company (beginning with fiscal 1998) and ending on the earliest of: (a) the termination of the Participant's employment with the Company or an Affiliate, (b) the termination of the Plan in accordance with Article VI, or (c) the last day of such fiscal year. Section 1.13. "Effective Date" means October 1, 1997. -33- Section 1.14. "Employee" means any person who is a common-law employee of the Company or an Affiliate. Section 1.15. "Incentive Compensation" means all incentive payments and other earnings due to the Participant for the Deferral Period as defined by the Company other than: (a) Base Compensation and (b) commissions or fees received by the Participant with respect to retail securities activities, except that the first $100,000 of such commissions and fees shall be included in Incentive Compensation for branch managers. Incentive Compensation will be calculated on income before deductions for Federal, state or local taxes, FICA withholding, or 401(k) and other benefit plan reductions, and before any purchases under the Advest Equity Plan or deductions under any other similar plans in which the Participant participates. Incentive Compensation paid after the close of a fiscal year based upon performance during that year will be considered Incentive Compensation for that year. Section 1.16. "Incentive Threshold" shall mean $100,000. The Incentive Threshold shall be deemed to be reached by any Participant for a Deferral Period at such time as the Participant has received Incentive Compensation with respect to the Deferral Period at least equal to the Incentive Threshold. Section 1.17. "Participant" means an Employee participating in the Plan as provided in Article II. Section 1.18. "Permanent Disability" means a mental or physical condition which renders a Participant permanently unable or incompetent to engage in any substantial gainful activity. Section 1.19. "Plan" means "The Advest Group, Inc. Key Professionals Equity Plan". Section 1.20. "Purchase Price" for each share of Restricted Shares shall mean 80% of the closing price per share of the Stock on the Composite Tape of the New York Stock Exchange on the day the Restricted Shares are purchased; provided, however, that the Purchase Price shall not exceed 150% of the book value of the Company, and shall not be less than the lesser of 100% of the book value of the Company or the closing price per share of the stock, with the book value of the Company being determined by the audited financial statements of the Company for its fiscal year ending immediately prior to the purchase date. Section 1.21. "Restricted Shares" means shares of Stock subject to the restrictions set forth in Article IV that are purchased on behalf of Participants with Deferred Amounts. Section 1.22. "Restriction Period" means the period during which a Participant is not permitted to sell, transfer, pledge or assign Restricted Shares pursuant to Section 4.2(a), including any extensions of such period as provided in such Section. -34- Section 1.23. "Stock" means the common stock of the Company. ARTICLE II PARTICIPATION Section 2.1. Participants. Any individual employed by Advest who earns pretax Incentive Compensation in excess of the Incentive Threshold with respect to fiscal 1998 or any subsequent fiscal year during the term of the Plan will become a participant in the Plan for that fiscal year. Notwithstanding the foregoing, Employees who own more than two million dollars worth of stock on the last day of a fiscal year or who have attained age 61 on or prior to the last day of a fiscal year may elect, by delivering written notice to the Committee prior to the end of such fiscal year (or prior to December 31, 1997, in the case of fiscal 1998), not to participate in the plan for the following fiscal year. Section 2.2. Duration of Participation. A Participant shall cease to be a Participant when all restrictions on the Participant's Restricted Shares have lapsed or such shares have been forfeited, or when the Plan is terminated in accordance with Article VI. Section 2.3. Reemployment. Reemployment of a former Participant by the Company or an Affiliate shall not entitle such individual to become a Participant in the Plan unless the individual again becomes a Participant in accordance with Section 2.1, and reemployment of a former Participant by the Company or an Affiliate shall not result in the restoration of any Restricted Shares previously forfeited by such Participant. ARTICLE III DEFERRAL Section 3.1. Amount Deferred. For any Deferral Period, after the Incentive Threshold is reached for a Participant with respect to that Deferral Period the Deferred Amount with respect to any Incentive Compensation will be deducted automatically from each pay check, draw check, bonus check or commission check. All amounts deducted will be held in escrow by Advest on the Participant's behalf. Investment in Restricted Shares will be made following the end of each Deferral Period with amounts deducted with respect to that Deferral Period. Section 3.2. Investment in Restricted Shares. On the 5th business day after the earning release for any fiscal year during which amounts have been deferred, the total of a Participant's Deferred Amounts under Section 3.1 shall be applied to acquire Restricted Shares for such Participant at the then Purchase Price. No interest or other earnings shall accrue on amounts deferred prior to acquisition of Restricted Shares. Fractional Restricted Shares may be acquired by a Participant; provided, that the Committee may establish procedures to eliminate any fractional holdings in a manner equitable to the Participants. -35- Section 3.3. Stock Subject to Purchase. Shares of Stock subject to purchase hereunder shall be previously issued shares reacquired by the Company (including any shares forfeited under this Plan). ARTICLE IV RESTRICTED SHARES Section 4.1. Stock. All Restricted Shares shall be held in the name of The Advest Group, Inc. as escrow agent for Participants until the end of the applicable Restriction Period. Section 4.2. Restrictions. The Restricted Shares purchased hereunder shall be subject to the following restrictions and conditions: (a) Subject to the provisions of the Plan, during the period commencing on the date of the acquisition of any Restricted Shares hereunder and terminating on the last day of the 36th month following the date on which the shares were acquired, a Participant shall not be permitted to sell, transfer, pledge or assign Restricted Shares acquired under the Plan. One year extensions of the Restriction Period for the Restricted Shares purchased hereunder will be made at a Participant's election, which election must be in writing on a form provided by the Committe and must be made no later than one year before the Restriction Period would otherwise terminat; provided, however, that the Committee may at any time determine that no additional extensions of Restriction Periods will be effective. The Restriction Period will be determined separately with respect to purchases of Restricted Shares made with respect to each Deferral Period. (b) A Participant shall have the right to direct the vote of their Restricted Shares during the Restriction Period applicable to those shares. A Participant shall have the right to receive any regular dividends on their Restricted Shares. In the event of any change in the outstanding Stock of the Company by reason of any stock split, stock dividend, recapitalization, merger, consolidation, reorganization, combination or exchange of shares or other similar event if such change equitably requires an adjustment in the number or kind of shares that may be issued under the Plan, such adjustment shall be made by the Committee and shall be conclusive and binding for all purposes of the Plan. (c) Restricted Shares shall be transferred to a Participant's brokerage account with Advest, Inc. within a reasonable time after, and only after, the Restriction Period with respect to those shares shall expire (or such earlier time as the restrictions may lapse in accordance with Section 4.3) without forfeiture in respect of such Restricted Shares. -36- Section 4.3. Termination of Employment. The following provisions shall apply to a Participant's Restricted Shares prior to the end of the Restriction Period (including extensions): (a) Upon a Participant's death, Permanent Disability, involuntary termination of employment (other than a termination for Cause) or termination following a Change of Control, (i) the restrictions on a portion of their Restricted Shares shall immediately lapse, and such shares shall be delivered to the Participant or the Participant's designated Beneficiary, as the case may be, within a reasonable time after the occurrence of any such event, (ii) any remaining Restricted Shares will be forfeited, and (iii) any cash held in escrow pending investment in Restricted Shares will be returned to the Participant. The portion of Restricted Shares which will no longer be subject to restrictions will be determined separately for each Deferral Period for which the Participant has acquired shares and will equal 80% of the unvested Restricted Shares purchased for that Deferral Period plus an additional 0.667% for each full month after the date on which the shares were acquired during which the Participant has remained in the full time employment of the Company, up to a maximum of 100%. (b) If a Participant terminates as a result of voluntary departure (other than following a Change of Control or under circumstances justifying termination for Cause), (i) the Restricted Shares will not vest until the completion of the Restriction Period (including any extensions which the Participant has elected) and (ii) any cash held in escrow pending investment will be used to acquire Restricted Shares on the next purchase date. The Restricted Shares will be forfeited if, before they have vested, the Participant engages in any activity as an employee, advisor, or in any other capacity for any Competitor. The Company may require a Participant who has terminated employment under such circumstances to provide such confirmation as the Committee may deem appropriate, to evidence that they have not engaged in any such activity as a condition of their receipt of the Restricted Shares. (c) If a Participant is involuntarily terminated for Cause (or departs under circumstances justifying a termination for Cause) the Participant shall forfeit their Restricted Shares and any cash held in escrow pending investment in Restricted Shares. ARTICLE V WITHHOLDING Section 5.1. Withholding. In the event that the Company determines that it or an Affiliate is required by law to withhold taxes at any time, including, but not limited to the time of vesting of any Restricted Shares, the Company shall have the right to require a Participant to pay to the Company the amount of taxes that the Company or Affiliate is required to withhold or, in lieu thereof, (a) to retain, or sell without notice, a sufficient number of Restricted Shares held by it for the Participant to cover the amount to be withheld, or (b) to withhold the amount of such taxes from any other sums due or to become due from the Company or an Affiliate to the Participant upon such terms and conditions as the Committee shall prescribe. -37- ARTICLE VI ALTERATION OF TERMS, AMENDMENT AND TERMINATION Section 6.1. Power to Alter Terms of Plan. The Board of Directors may, with respect to all Participants for a fiscal year, or with respect to a single Participant or a selected group of Participants, modify the Purchase Price for Restricted Shares, the Restriction Period, the Incentive Threshold or Deferred Amount, or any of the provisions of Sections 4.2 and 4.3, and, in addition may provide for the granting of stock options and/or stock appreciation rights in connection with the purchase of Restricted Shares on such terms as the Board of Directors may determine. In addition, the Board of Directors may, prior to the commencement of any fiscal year, modify the participation requirements set forth in Section 2.1 for such fiscal year. Section 6.2. Power to Amend. The Board of Directors may amend, modify, change, or revise the Plan by amendment at any time; provided, however, that (a) no amendment shall increase the duties or liabilities of the Board of Directors or the Committee without written consent of each member and (b) no amendment shall be made without the written consent of a Participant if the effect of such amendment would reduce the rights of a Participant with respect to Restricted Shares acquired prior to the date of the amendment. Section 6.3. Plan Termination. The continuation of the Plan is not assumed as a contractual obligation of the Company and the right is reserved by the Company at any time to discontinue the Plan. The Plan may be terminated by the Board of Directors at any time, when in its judgment, business, financial or other good causes make such termination necessary or appropriate; such termination to become effective upon the delivery of notice by the Board of Directors or the Committee to the Participants. Termination of the Plan shall cause the Restriction Period to end with respect to all Restricted Shares on the date of such termination. ARTICLE VII ADMINISTRATION OF THE PLAN Section 7.1. Authority and Responsibility of the Committee. The Board of Directors shall appoint the members of a Committee, which members shall hold office at the pleasure of the Board of Directors. Said Committee shall consist of not less than three nor more than eight members, any one or more of whom may, but need not, be an officer of the Company. If there is at any time a vacancy on the Committee for any reason, the Board of Directors shall fill such vacancy, but the Committee may act notwithstanding the existence of vacancies as long as there shall continue to be at least two members of the Committee. The Committee shall select a Chairman from among its members. The Committee shall have overall responsibility for the administration and operation of the Plan. The Committee will have all powers as may be necessary to discharge its duties hereunder. -38- Section 7.2. Committee Duties. The Committee, on behalf of the Participants and all other Beneficiaries of the Plan, will administer and operate the Plan in accordance with the terms of the Plan and will have all powers necessary to accomplish that purpose, including, but not limited to, the following: (a) To issue rules and regulations necessary for the proper conduct and administration of the Plan and to change, alter, or amend such rules and regulations; (b) To construe the Plan; (c) To determine all questions arising in the administration of the Plan, including those relating to the eligibility of persons to become Participants in accordance with Article II and the rights of Participants and their Beneficiaries, and its decisions thereon shall be final and binding upon all persons hereunder; (d) To oversee the retention of records relating to Participants and other matters applicable to the Plan; (e) To make available to Participants and Beneficiaries upon request, for examination during business hours, such records as pertain exclusively to the examining Participant (or Beneficiary); (f) To prescribe procedures to be followed by Participants and Beneficiaries in making claims hereunder; (g) To make available for inspection and to provide upon request at such charge as may be permitted and determined by the Company, such documents and instruments, if any, as the Committee deems appropriate; (h) To prescribe and adopt the use of necessary forms; (i) To appoint such agents and other specialists to aid it in the administration of the Plan as it deems necessary; and (j) To make periodic reports on the operation and administration of the Plan to the Board of Directors as may be required in any articles of incorporation, charter, or by-laws pertaining to the Company. Section 7.3. Records. The regularly kept records of the Committee and the Company shall be conclusive evidence as to all matters contained therein applicable to this Plan. -39- Section 7.4. Committee Decisions Final. The decisions of the Committee concerning matters within its jurisdiction shall be final, binding, and conclusive upon the Company and its Affiliates, the Participants, Beneficiaries and any other person or party interested or concerned. Section 7.5. Committee as Agent. The Committee shall act as agent for the Company in the administration of the Plan. Section 7.6. Plan Expenses. All clerical, legal and other expenses of the Plan shall be paid by the Company. Section 7.7. Allocations and Delegations of Responsibility. (a) Delegations. The Committee shall have the authority to delegate, from time to time, all or any part of its responsibilities under the Plan to such person or persons as it may deem advisable and in the same manner to revoke any such delegation of responsibility. Any action of the delegate in the exercise of such delegated responsibilities shall have the same force and effect for all purposes herein as if such action had been taken by the Committee. The Board of Directors or the Committee shall not be liable for any act or omission of any such delegate. The delegate shall report periodically to the Committee concerning the discharge of the delegated responsibilities. (b) Allocations. The Committee shall have the authority to allocate, from time to time, all or any part of its responsibilities under the Plan to one or more of its members as it may deem advisable, and in the same manner to revoke such allocation of responsibilities. Any action of the member to whom responsibilities are allocated in the exercise of such allocated responsibilities shall have the same force and effect for all purposes hereunder as if such action had been taken by the Committee. The Board of Directors or the Committee shall not be liable for any acts or omissions of such member. The member to whom responsibilities have been allocated shall report periodically to the Committee concerning the discharge of the allocated responsibilities. (c) Limit on Liability. Duties and responsibilities which are carried out in good faith by the Committee hereunder or which have been allocated or delegated pursuant to the terms of the Plan or subsections (a) or (b) of this Section 7.7 shall not create any liability of the Company, Board of Directors, or Committee, or any member thereof. ARTICLE VIII MISCELLANEOUS PROVISIONS Section 8.1. Merger. Any successor corporation to the Company, by merger, consolidation, purchase or otherwise, shall be substituted hereunder for the Company. This Plan -40- shall be binding on all successors to and assigns of the Company; provided that such successors or assigns may terminate the Plan in accordance with the provisions hereof. Section 8.2. Securities Laws. The Committee may require each person purchasing Restricted Shares to represent and agree with the Company in writing that such person is acquiring the shares without a view to distribution thereof. The certificates for such shares may include any legend which the Committee deems appropriate to reflect any restriction on transfer. Furthermore, all certificates for shares of Stock delivered under the Plan shall be subject to such stock-transfer orders and other restrictions as the Committee may deem advisable under the rules, regulations, and other requirements of the Securities and Exchange Commission, any stock exchange upon which the Stock is then listed, and any applicable Federal or state securities law, and the Committee may cause a legend or legends to be put on any such certificates to make appropriate reference to such restrictions. Section 8.3. Indemnification. The Company shall indemnify and hold harmless to the extent legally permitted each member of the Board of Directors, the Committee and each officer and Employee of the Company to whom are delegated duties, responsibilities, and authority with respect to the Plan against all claims, liabilities, fines and penalties, and all expenses reasonably incurred by or imposed upon such delegate or agent (including but not limited to reasonable attorney fees) which arise as a result of actions or failure to act in connection with the operation and administration of the Plan. Section 8.4. Contract of Employment. Nothing contained herein shall be construed to constitute a contract of employment between the Company or an Affiliate and any Employee or Participant. Nothing contained herein will confer upon any Participant the right to be retained in the service of the Company or an Affiliate or limit the right of the Company or an Affiliate to discharge or otherwise deal with any Participant without regard to the existence of the Plan. Section 8.5 Disclosure. Each Participant shall receive a copy of the summary of the Plan and the Committee will make available for inspection by any Participant or Beneficiary a copy of the Plan and any written procedures used by the Committee in administering the Plan. Section 8.6. Headings. The headings of Articles and Sections are included solely for convenience of reference, and if there is any conflict between such headings and the text of the Plan, the text shall control. Section 8.7. Invalidity of Certain Provisions. If any provision of the Plan shall be held invalid or unenforceable, such invalidity or unenforceability shall not affect any other provisions hereof, and the Plan shall be construed and enforced as if such provisions, to the extent invalid or unenforceable, had not been included. -41- Section 8.8. Law Governing. The Plan shall be construed and enforced according to the laws of the State of Connecticut (other than its laws respecting choice of law). Section 8.9. Limitation on Liability. Neither the Company nor any agent or representative of the Company who is an employee, officer, or director of the Company in any manner guarantees the payments to be made under the Plan against loss or depreciation, and to the extent not prohibited by federal law, none of them shall be liable (except for their own gross negligence or willful misconduct), for any act or failure to act, done or omitted in good faith, with respect to the Plan. The Company shall not be responsible for any act or failure to act of any agent appointed to administer the Plan. Section 8.10. Gender. Except when otherwise indicated by the context, any masculine terminology herein shall also include the feminine, and the definition of any term herein in the singular shall also include the plural. THE ADVEST GROUP, INC. By:/s/ Allen Weintraub ------------------- Allen Weintraub Chief Executive Officer ATTEST: - --------------------------- -42- EX-10.I 5 Exhibit 10(i) EXECUTIVE OFFICER 1998 RESTRICTED STOCK AND STOCK OPTION AGREEMENT Percentage of All Income (minimum of 2.5% of Compensation, maximum of 7.5% of Compensation): ------- Percentage of Bonus: ------- Effective Date: January 1, 1998 This Executive Officer Restricted Stock and Stock Option Agreement (the "Agreement") is entered into as of the above date, by the undersigned executive officer ("Executive Officer") and The Advest Group, Inc. (the "Company"). ARTICLE I Election to Participate and Amount Deferred. Executive Officer hereby elects to receive the percentage set forth above of his or her Compensation and/or Bonus (the "Deferred Amount") in the form of Units. A Unit consists of one share of common stock of the Company subject to the restrictions set forth below (the "Restricted Stock") and one non-qualified stock option to purchase shares of common stock of the Company which is not an incentive stock option under Section 422 of the Internal Revenue Code of 1986 (an "Option"). For purposes of this Agreement, Compensation shall mean the amount of earnings due to Executive Officer for the Deferral Period, and shall include amounts contributed to the Company's 401(k) plan, Deferred Compensation Savings and Investment Plan, Key Professionals Equity Plan, or any successor plan(s). Deferral Period shall mean the period beginning on January 1, 1998 and ending on the earliest of: (a) the termination of Executive Officer's employment with the Company or an affiliate of the Company (an "Affiliate"), (b) the termination of this Agreement in accordance with Article IV(D), or (c) December 31, 1998. Executive Officer hereby authorizes the Company to withhold from his or her paycheck, draw, bonus and/or commission the Deferred Amount. Amounts Deferred hereunder (other than amounts deferred out of bonus) shall be withheld from Executive Officer's paycheck in periodic installments. The Company may, but shall not be obligated to, invest any Amount Deferred in insured bank deposit accounts or other money-market investments pending investment under this Agreement. On the fifth business day after the date of release by the Company of annual summary statements of financial data the Executive Officer's Deferred Amount, together with any earnings thereon, shall be applied by the Company to acquire shares of the Company's common stock (the "Stock") at 100% of the closing price per share of the Stock on the New York Stock Exchange on the day the Restricted Stock is purchased to be held as Restricted Stock for Executive Officer. -43- All purchases of Stock to be delivered under this Agreement shall be from the unallocated treasury stock of the Company. Fractional units may be acquired by Executive Officer, provided that the Company may establish procedures to eliminate any fractional holdings of Units held on behalf of Executive Officer as of December 31, 1998. ARTICLE II Restricted Stock Agreement. Executive Officer hereby authorizes Company to hold in the Company's name as escrow agent for Executive Officer, all shares of Restricted Stock to which Executive Officer is entitled. A. Restrictions. Shares of Restricted Stock which are placed into escrow for the benefit of Executive Officer will be subject to the following restrictions and conditions: (1) During the period commencing on the date of the acquisition of any shares of Restricted Stock hereunder and terminating on January 1, 2002 (together with any extensions of such period approved as provided herein) (the "Restriction Period"), Executive Officer shall not be permitted to sell, transfer, pledge or assign shares of Restricted Stock acquired hereunder. One year extensions of the Restriction Period for Restricted Stock purchased hereunder will be made at Executive Officer's election, which election must be in writing on a form provided by the Company and must be made no later than one year before the Restriction Period would otherwise terminate; provided, however, that the Company may at any time determine that no additional extensions of Restricted Periods will be effective; (2) Executive Officer shall have the right to direct the vote of his or her shares of Restricted Stock during the Restriction Period. Executive Officer shall have the right to receive any regular dividends on such shares of Restricted Stock. The Company shall in its sole discretion determine Executive Officer's rights with respect to extraordinary dividends on the shares of Restricted Stock; and (3) Shares of Restricted Stock shall be transferred to Executive Officer's brokerage account with Advest, Inc. within a reasonable time after, and only after, the Restriction Period shall expire (or such earlier time as the restrictions may lapse in accordance with this Article) without forfeiture in respect of such shares of Restricted Stock. B. Termination of Employment. Subject to the provisions of subparagraph (A) above, the following provisions shall apply to Executive Officer's shares of Restricted Stock prior to the end of the Restriction Period (including extensions): (1) Upon Executive Officer's death, Permanent Disability, Retirement with the written consent of the President or the Chief Executive Officer of the Company or an Affiliate by which Executive Officer is employed, voluntary termination of employment more than nine months after a Change of Control, or involuntary termination of -44- employment (other than a termination for Cause), the restrictions on Executive Officer's Restricted Stock shall immediately lapse, and such shares shall be delivered to Executive Officer or Executive Officer's designated Beneficiary, as the case may be, within a reasonable time after the occurrence of any such event. For purposes of this Agreement, the following terms shall have the stated definitions: (i) "Permanent Disability" means a mental or physical condition which renders Executive Officer permanently unable or incompetent to engage in any substantial gainful activity. (ii) "Retirement" means the date Executive Officer retires after attaining the age of fifty-five. (iii)"Change of Control" means a transfer or sale of substantially all of the assets of the Company or merger or consolidation of the Company into or with any other corporation or entity that occurs after the effective date of this Agreement, provided either (a) the other corporation or entity is engaged in the retail securities brokerage business at the date of the transaction and such transaction results in the Company not surviving such merger or consolidation or (b) a substantial change in the senior management of the Company occurs within six months as a result of the transaction. (iv) "Cause" shall be deemed to include any act of dishonesty or fraud, gross negligence, gross insubordination or willful or reckless conduct detrimental to the business of the Company or an Affiliate. (v) "Beneficiary" means any person (including, but not limited to, Executive Officer's estate) designated by Executive Officer on a form provided or approved by the Company to receive any Stock or Options to which Executive Officer shall be entitled upon Executive Officer's death in accordance with the terms of this Agreement. If more than one Beneficiary shall be designated, the Beneficiaries shall share equally in any rights or interests of Executive Officer under this Agreement. If Executive Officer shall fail to file a valid designation form, or if all persons designated on the designation form shall have predeceased Executive Officer, the Company shall distribute all of Executive Officer's Stock and Options to which he or she shall have been entitled upon his or her death to the Executive Officer's estate. (2) Upon Executive Officer's Retirement without the written consent of the President or the Chief Executive Officer of the Company or the Affiliate by which Executive Officer is employed or voluntary termination of employment within nine months of a Change of Control, Executive Officer shall forfeit all of Executive Officer's -45- shares of Restricted Stock and receive in return, without interest, a cash payment equal to (a) the lesser of: (i) the aggregate purchase price for such Restricted Stock, and (ii) the closing price per share of Stock on the Composite Tape of the New York Stock Exchange on Executive Officer's date of termination or Retirement, multiplied by (b) the number of shares of Restricted Stock owned by Executive Officer. (3) If Executive Officer voluntarily terminates employment (other than as set forth in subparagraphs (1) or (2) of this Article), is involuntarily terminated for Cause, or retires prior to attaining the age of fifty-five, Executive Officer shall forfeit Executive Officer's Restricted Stock. ARTICLE III Stock Option Agreement. Executive Officer will be entitled to an Option to purchase one share of stock for each share of Restricted Stock acquired for Executive Officer pursuant to Article I. The Options to which Executive Officer is entitled will be issued under The Advest Group, Inc. 1993 Stock Option Plan on the last date on which Stock is acquired for the Executive Officer pursuant to Article I at an exercise price per share equal to the closing price per share on the Composite Tape of the New York Stock Exchange on the date of the issuance of the Options. The Options are not transferable by Executive Officer other than by will or the laws of descent and distribution, and during the lifetime of Executive Officer the Options may be exercised only by Executive Officer. A. Exercise of Options. Options acquired hereunder will vest and become exercisable on January 1, 2003 (unless earlier forfeited or terminated) and will remain exercisable for a period of twenty-four months, until December 31, 2005. An Option shall not be exercisable unless payment in full is made for the shares being acquired thereunder at the time of exercise; such payment shall be made (a) in United States dollars by cash or check, or (b) in lieu thereof, unless the Company shall in its sole discretion determine otherwise, by tendering to the Company Stock owned by the person exercising the Option (or owned by the person exercising the Option and his or her spouse, jointly) and acquired more than six months prior to such tender, and having a fair market value equal to the cash exercise price applicable to such Option, such fair market value to be determined in such reasonable manner as may be provided for from time to time by the Company or as may be required in order to comply with or to conform to the requirements of any applicable or relevant laws or regulations, or (c) by a combination of United States dollars and Stock as aforesaid. B. Termination Of Employment. An Option shall not be exercisable unless the person exercising the Option has been, at all times during the period beginning with the date of purchase of the Option and ending on the date of such exercise, an employee of the Company or an Affiliate, except that: (1) Upon Executive Officer's death, Permanent Disability, or Retirement with the written consent of the President or the Chief Executive Officer of the Company or the Affiliate by which Executive Officer is employed, the Options shall immediately vest and -46- shall be exercisable by Executive Officer or Executive Officer's designated Beneficiary, as the case may be, for a period of three months after Executive Officer's termination of employment. (2) If Executive Officer's employment is involuntarily terminated (other than a termination for Cause), the Company shall give Executive Officer at least one day's advance notice prior to the date of termination, and the Options shall immediately vest and shall be exercisable by Executive Officer upon receipt of such notice, and shall expire on the date of termination. If Executive Officer voluntarily terminates employment more than nine months after a Change of Control, then the Options shall immediately vest and shall be exercisable by Executive Officer upon the later of a receipt by the Company of notification by Executive Officer of the termination or the tenth day prior to the termination, and shall expire upon the date of termination. (3) Upon Executive Officer's termination of employment (other than as set forth in subparagraphs (1) or (2) of this Article III(B)), Executive Officer shall forfeit Executive Officer's unvested Options. (4) If Executive Officer shall have terminated employment for any reason after the acquisition of Units hereunder but prior to the issuance of the Option portion of such Units, any Option acquired as part of the Unit shall be forfeited as provided in subparagraph (3) of this Article III(B). ARTICLE IV Miscellaneous. A. Change of Election. Following an election by Executive Officer to have an Amount Deferred, he or she at any time during the Deferral Period may choose to discontinue all (but not less than all) Amounts Deferred with respect to Compensation due to him or her during subsequent calendar quarters of the Deferral Period. Such election shall be made on such form as the Company may prescribe and shall become effective as of the first day of the calendar quarter following receipt of such form by the Company. B. Adjustments Upon a Change in Common Stock. In the event of any change in the outstanding Stock of the Company by reason of any stock split, stock dividend, recapitalization, merger, consolidation,reorganization, combination or exchange of shares or other similar event, if such change equitably requires an adjustment in the number or kind of shares that may be issued hereunder, or in the number or kind of shares subject to, or the option price per share under, any outstanding Option which has been purchased by Executive Officer,such adjustment shall be made by the Company and shall be conclusive and binding for all purposes hereunder. In no event shall the excess of the aggregate fair marketvalue of the Stock subject to the Options immediately after any subsitution, exchange or adjustment over the aggregate option price for such Stock be more than the excess of the aggregate fair market value of all of the Stock subject to the Option immediately before any such substitution,exchange or adjustment over the aggregate option price -47- of such Stock nor shall the adjusted Option give the holder thereof any additional benefits he did not have under the old Option. C. Withholding. In the event that the Company determines that it or an Affiliate is required by law to withhold taxes at any time, including, but not limited to, upon the exercise of an Option or upon the vesting of shares of Restricted Stock, the Company shall have the right to require Executive Officer to pay to the Company the amount of taxes that the Company or Affiliate is required to withhold, or, in lieu thereof: (1) retain, or sell without notice, a sufficient number of shares of Restricted Stock held by it for Executive Officer to cover the amount to be withheld, or (2) withhold the amount of such taxes from any other sums due or to become due from the Company or an Affiliate to Executive Officer upon such terms and conditions as the Company shall prescribe. D. Amendment and Termination. The Board of Directors of the Company may amend, modify, change, or revise this Agreement by amendment at any time; provided, however, that (a) no amendment shall increase the duties or liabilities of the Board of Directors or the Company without written consent of each member and (b) no amendment shall be made without the written consent of Executive Officer if the effect of such amendment would reduce the rights of Executive Officer with respect to Units acquired prior to the date of the amendment. The continuation of this Agreement is not assumed as a contractual obligation of the Company and the right is reserved by the Company at any time to discontinue this Agreement. This Agreement may be terminated by the Board of Directors at any time, when in its judgment, business, financial or other good causes make such termination necessary or appropriate; such termination to become effective upon the delivery of notice by the Board of Directors or the Company to Executive Officer. E. Merger. Any successor corporation to the Company, by merger, consolidation, purchase or otherwise, shall be substituted hereunder for the Company. This Agreement shall be binding on all successors to and assigns of the Company; provided that such successors or assigns may terminate this Agreement in accordance with the provisions hereof. F. Securities Laws. Regarding the purchasing of shares pursuant to an Option or shares of Restricted Stock the Company may require Executive Officer to represent and agree with the Company in writing that he or she is acquiring the shares without a view to distribution thereof. The certificates for such shares may include any legend which the Company deems appropriate to reflect any restriction on transfer. Furthermore, all certificates for shares of Stock delivered under this Agreement shall be subject to such stock-transfer orders and other restrictions as the Company may deem advisable under the rules, regulations, and other requirements of the Securities and Exchange Commission, any stock exchange upon which the Stock is then listed, and as any applicable Federal or state securities law, and the Company may cause a legend or legends to be put on any such certificates to make appropriate reference to such restrictions. -48- G. Contract of Employment. Nothing contained herein shall be construed to constitute a contract of employment between the Company or an Affiliate and Executive Officer. Nothing contained herein will confer upon Executive Officer the right to be retained in the service of the Company or an Affiliate or limit the right of the Company or an Affiliate to discharge or otherwise deal with Executive Officer without regard to the existence of this Agreement. H. Headings. The headings of Articles are included solely for convenience of reference, and if there is any conflict between such headings and the text of this Agreement, the text shall control. I. Invalidity of Certain Provisions. If any provision of this Agreement shall be held invalid or unenforceable, such invalidity or unenforceability shall not affect any other provisions hereof, and this Agreement shall be construed and enforced as if such provisions, to the extent invalid or unenforceable, had not been included. J. Law Governing. This Agreement shall be construed and enforced according to the laws of the State of Connecticut (other than its laws respecting choice of law). K. Limitation on Liability. Neither the Company nor any agent or representative of the Company who is an employee, officer, or director of the Company in any manner guarantees the payments to be made under this Agreement against loss or depreciation, and to the extent not prohibited by federal law, none of them shall be liable (except for his own gross negligence or willful misconduct), for any act or failure to act, done or omitted in good faith, with respect to this Agreement. The Company shall not be responsible for any act or failure to act of any agent appointed to administer this Agreement. L. Gender. Except when otherwise indicated by the context, any masculine terminology herein shall also include the feminine, and the definition of any term herein in the singular shall also include the plural. EXECUTIVE OFFICER ----------------- (Signature) ----------------- (Print Executive Officer's Name) THE ADVEST GROUP, INC. By:------------------- Allen Weintraub Chief Executive Officer -49- EX-10.K 6 Exhibit 10(k) As adopted by the Executive Committee of the Board of Directors of The Advest Group, Inc. as of April 11, 1997 FIFTH AMENDMENT TO THE ADVEST THRIFT PLAN Effective as of April 11, 1997 The first sentence of Section 5.10 of The Advest Thrift Plan is hereby amended to read as follows: Any cash dividends received on Shares allocated to Participant's ESOP Accounts, at the discretion of the Board, (a) shall be used to satisfy Stock Obligations, (b) shall be allocated to the Participants' respective ESOP Accounts or (c) shall be allocated to the Participants' respective 401(k) Accounts." -50- As adopted by the Executive Committee of the Board of Directors of The Advest Group, Inc. as of May 1, 1997 SIXTH AMENDMENT TO THE ADVEST THRIFT PLAN Effective as of May 1, 1997 The final paragraph of Section 9.1 of Article IX of The Advest Thrift Plan (beginning "Any such loan") is hereby amended in its entirety to read as follows: "Any loan, shall, by its terms, require that repayment (principal and interest) be amortized in level payments, not less frequently than monthly, over a period not extending beyond five years from the date of the loan, unless such loan is used to acquire a dwelling unit which, within a reasonable time (determined at the time the loan is made) will be used as the principal residence of the Participant. Any such loan shall provide for monthly payments of not less than $20 each and shall be immediately due and payable in full upon death, disability or separation from service." As adopted by the Executive Committee of the Board of Directors of The Advest Group, Inc. as of November 20, 1997 -51- SEVENTH AMENDMENT TO THE ADVEST THRIFT PLAN Effective as of October 1, 1997 1. Section 2.42 of The Advest Thrift Plan (the "Plan") is hereby amended by adding the following new paragraph to the end thereof, to read in its entirety as follows: "Years of Service with Irownood Capital Partners Ltd. and its affiliated corporations shall be recognized for purposes of eligiblity and vesting." 2. Section 4.1 of the Plan is hereby amended by deleting the phrase "this Section 4.1" at the end thereof, and substituting the phrase "eligibility and vesting". 3. Article V of the Plan is hereby amended by adding the following new Section 5.15 to the end thereof, to read in its entirety as follows: "5.15 Special Transfers. Except for purposes of Section 5.3 and 5.4 hereof, all amounts transferred to the Plan from the Ironwood Capital Partners Ltd. 401(k) Plan shall be treated as Employee contributions pursuant to Section 5.2 of the Plan." -52- EX-10.P 7 Exhibit 10(p) THE ADVEST GROUP, INC. 1998 EQUITY PLAN The Advest Group, Inc. hereby establishes the 1998 Equity Plan, for a select group of top performing account executives and key employees. The purpose of the Plan is to further the long term growth in earnings of the Company by offering incentives to select Employees to compensate them for their contributions to the Company's growth and profits, to encourage their ownership of the Company's stock, and to encourage them to remain in the employ of the Company. ARTICLE I DEFINITIONS When used herein, each of the following terms shall have the corresponding meaning set forth below unless a different meaning is plainly required by the context in which a term is used. Section 1.1. "Affiliate" means the Company's present or future parent corporation, each of the present or future subsidiaries of the Company, and any subsidiaries of the present or future parent of the Company in which the parent holds a controlling interest. Section 1.2. "Beneficiary" means any person (including, but not limited to, a Participant's estate) designated by a Participant on a form provided or approved by the Committee to receive any Stock or Options to which such Participant shall be entitled upon such Participant's death in accordance with the terms of the Plan. No designation of Beneficiary shall be effective until filed with the Committee. If more than one Beneficiary shall be designated, the Beneficiaries shall share equally in any rights or interests of the Participant under the Plan. If a Participant shall fail to file a valid designation form, or if all persons designated on the designation form shall have predeceased the Participant, the Company shall distribute all of the Participant's Stock and Options to which he shall have been entitled upon his death to such Participant's estate. Section 1.3. "Board of Directors" means the Board of Directors of the Company or the Executive Committee of such Board. Section 1.4. "Cause" shall be deemed to include any act of dishonesty or fraud, gross negligence, gross insubordination or willful or reckless conduct detrimental to the business of the Company or an Affiliate. Section 1.5. "Change of Control" means a transfer or sale of substantially all of the assets of the Company or merger or consolidation of the Company into or with any other -53- corporation or entity that occurs after the Effective Date, provided either (a) the other corporation or entity is engaged in the retail securities brokerage business at the date of the transaction and such transaction results in the Company not surviving such merger or consolidation or (b) a substantial change in the senior management of the Company occurs within six months as a result of the transaction. Section 1.6. "Code" means the Internal Revenue Code of 1986, as amended. Section 1.7. "Committee" means an administrative committee designated to administer this Plan in accordance with Article X. Section 1.8. "Company" means The Advest Group, Inc. and any successor thereto by merger, consolidation, purchase or otherwise. Section 1.9. "Compensation" means the amount of earnings due to the Participant for the Deferral Period as defined by the Company. Compensation shall include amounts contributed to a Participant's account established under the Company's or an Affiliate's 401(k) plan or The Advest Group, Inc.'s Deferred Compensation Savings and Investment Plan, or any successor plan(s). Section 1.10. "Deferral Period" means the period beginning on January 1, 1998 and ending on the earliest of: (a) the termination of a Participant's employment with the Company or an Affiliate, (b) the termination of the Plan in accordance with Article IX, or (c) December 31, 1998. Section 1.11. "Deferred Amount" or "Amount Deferred" means that portion of a Participant's Compensation a Participant has elected to receive in the form of Units in accordance with Section 3.1. Section 1.12. "Effective Date" means December 1, 1997. Section 1.13. "Employee" means any person who is a common-law employee of the Company or an Affiliate. Section 1.14. "Options" means non-qualified stock options to purchase shares of Stock that are not incentive stock options under Section 422 of the Code and that are received as a part of a Unit by Participants with Deferred Amounts. Section 1.15. "Participant" means an Employee participating in the Plan as provided in Article II. Section 1.16. "Permanent Disability" means a mental or physical condition which renders a Participant permanently unable or incompetent to engage in any substantial gainful activity. -54- Section 1.17. "Plan" means "The Advest Group, Inc. 1998 Equity Plan". Section 1.18. "Restricted Stock" means shares of Stock subject to the restrictions set forth in Article IV that are received as part of a Unit by Participants with Deferred Amounts. Section 1.19. "Retirement" means the date a Participant retires after attaining the age of fifty-five. Section 1.20. "Stock" means the common stock of the Company. Section 1.21. "Unit" means a grouping consisting of one share of Restricted Stock and one Option. Section 1.22. "Unit Price" means the amount of Compensation a Participant must elect to forego receiving in cash in order to receive a Unit under the Plan. Such price shall be the closing price per share of the Stock portion of the Unit on the Composite Tape of the New York Stock Exchange on the day the Unit is acquired. ARTICLE II ELIGIBILITY Section 2.1. Participants. An Employee eligible to become a Participant in this Plan for the Deferral Period is any Employee who: (a) is an account executive, other than an account executive in the first 36 months of a recruitment loan program (measured as of January 1, 1998), who is a member of the Chairman's Council, the Advisory Council, the President's Council, or the Associates' Council by the standards the Company has set based upon levels of achievement with respect to the last complete fiscal year commencing prior to such Deferral Period; or (b) is a key employee designated by the Chief Executive Officer of the Company on a list provided by the Chief Executive Officer to the Committee on or before December 31, 1997 as eligible to participate in the Plan ("Key Employees"). Notwithstanding the foregoing, Employees who are executive officers shall not be eligible to participate in the Plan. Section 2.2. Duration of Participation. A Participant shall cease to be a Participant on the earliest of: (a) the date all restrictions with respect to Stock purchased hereunder lapse and all Options purchased hereunder have terminated, (b) the date such Stock and Options are forfeited in accordance with Section 4.3 or Section 5.5, or (c) the date the Plan is terminated in accordance with Article IX. -55- Section 2.3. Reemployment. Reemployment of a former Participant by the Company or an Affiliate shall not entitle such individual to become a Participant in the Plan unless the individual again becomes a Participant in accordance with Section 2.1, and reemployment of a former Participant by the Company or an Affiliate shall not result in the restoration of any Stock or Options previously forfeited by such Participant. ARTICLE III DEFERRAL Section 3.1. Amount Deferred. During the Deferral Period: (a) A Participants who is a member of the Chairman's Council may elect to receive a minimum of 2.5% and a maximum of 10% of his or her Compensation in the form of Units. (b) A Participant who is (i) a member of the Advisory Council, (ii) a member of the President's Council, or (iii) a Key Employee who had total compensation during 1997 of $125,000 or more, may elect to receive a minimum of 2.5% and a maximum of 7.5% of his or her Compensation in the form of Units. (c) A Participant who is (i) a member of the Associates' Council, or (ii) a Key Employee who had total compensation during 1997 of less than $125,000, may elect to receive a minimum of 1.5% and a maximum of 5% of his or her Compensation in the form of Units. (d) In addition to the percentage elections set forth above in clause (b) or (c), whichever may be applicable, a salaried Key Employee who elects at least the minimum level of investment may also elect to receive a greater percentage, up to a maximum aggregate of 100%, of his or her Compensation above base salary in the form of Units, provided that at no time may the amount of Compensation received in the form of Units exceed the maximum permitted percentages of Compensation specified in clause (b) or (c) above, whichever may be applicable. Notwithstanding the foregoing, no Participant may elect to receive during the Deferral Period Units with an aggregate Unit Price in excess of $50,000, and no further Units shall be acquired for Participants under the Plan if such acquisition would cause the aggregate number of Units sold to exceed 400,000. If, based upon Participant elections, the Committee anticipates at the commencement of 1998 that these aggregate limit is likely to be exceeded, the Committee may reduce the maximum percentage investments in a manner it determines to be equitable to all participants. Participants will be notified of any reduction applicable to them by January 31, 1998. -56- Section 3.2. Receipt of Units. Amounts deferred hereunder shall be withheld from a Participant's paycheck in periodic installments. On the last business day of each month, the total of a Participant's Deferred Amounts under Section 3.1 shall be applied to acquire Units for such Participant at the then Unit Price. No interest or other earnings shall accrue on amounts deferred prior to acquisition of Units. Fractional units may be acquired by a Participant; provided, that the Committee may establish procedures to eliminate any fractional holdings of Units held on behalf of Participants as of December 31, 1998 in a manner equitable to all Participants. Section 3.3. Stock Subject to Purchase. Shares of Stock subject to purchase hereunder shall be previously issued shares reacquired by the Company (including any shares forfeited under this Plan). ARTICLE IV RESTRICTED STOCK Section 4.1. Stock. All shares of Restricted Stock shall be held in the name of The Advest Group, Inc. as escrow agent for Participants. Section 4.2. Restrictions. The shares of Restricted Stock purchased hereunder shall be subject to the following restrictions and conditions: (a) Subject to the provisions of the Plan and the Restricted Stock Agreements, during the period commencing on the date of the acquisition of any shares of Restricted Stock hereunder and terminating on January 1, 2002 (together with any extensions of such period approved as provided herein) (the "Restriction Period"), a Participant shall not be permitted to sell, transfer, pledge or assign shares of Restricted Stock acquired under the Plan. One year extensions of the Restriction Period for Restricted Stock purchased hereunder will be made at a Participant's election, which election must be in writing on a form provided by the Committee and must be made no later than one year before the Restriction Period would otherwise terminate; provided, however, that the Committee may at any time determine that no additional extensions of Restricted Periods will be effective. (b) A Participant shall have the right to direct the vote of such Participant's shares of Restricted Stock during the Restriction Period, in accordance with Section 4.4. A Participant shall have the right to receive any regular dividends on such shares of Restricted Stock. The Committee shall in its sole discretion determine a Participant's rights with respect to extraordinary dividends on the shares of Restricted Stock. (c) Shares of Restricted Stock shall be transferred to a Participant's brokerage account with Advest, Inc. within a reasonable time after, and only after, the Restriction Period shall expire (or such earlier time as the restrictions may lapse in -57- accordance with Section 4.2(a) or Section 4.3) without forfeiture in respect of such shares of Restricted Stock. Section 4.3. Termination of Employment. Subject to the provisions of Section 4.2(a), the following provisions shall apply to a Participant's shares of Restricted Stock prior to the end of the Restriction Period (including extensions): (a) Upon a Participant's death, Permanent Disability, Retirement with the written consent of the President or the Chief Executive Officer of the Company or the Affiliate by which the Participant is employed, voluntary termination of employment more than nine months after a Change of Control, or involuntary termination of employment (other than a termination for Cause), the restrictions on such Participant's Restricted Stock shall immediately lapse, and such shares shall be delivered to the Participant or the Participant's designated Beneficiary, as the case may be, within a reasonable time after the occurrence of any such event. (b) Upon a Participant's Retirement without the written consent of the President or the Chief Executive Officer of the Company or the Affiliate by which the Participant is employed or voluntary termination of employment within nine months of a Change of Control, the Participant shall forfeit all of such Participant's shares of Restricted Stock and receive in return, without interest, a cash payment equal to (i) the lesser of: (1) the aggregate Unit Price for such Restricted Stock, and (2) the closing price per share of Stock on the Composite Tape of the New York Stock Exchange on the Participant's date of termination or Retirement, multiplied by (ii) the number of shares of Restricted Stock owned by the Participant. (c) If a Participant voluntarily terminates employment (other than as set forth in subsections (a) or (b) of this Section 4.3), is involuntarily terminated for Cause, or retires prior to attaining the age of fifty-five, such Participant shall forfeit such Participant's Restricted Stock. Section 4.4. Voting Rights. During the Restriction Period the shares of Restricted Stock shall be voted by the Chairman of the Committee, and the Chairman shall vote such shares in accordance with instructions received from Participants. Shares as to which no instructions are received shall be voted by the Chairman proportionately in accordance with instructions received from Participants in the Plan. ARTICLE V OPTIONS Section 5.1. Issuance. Options received as part of a Unit shall be issued to the Participant (or the Participant's designated Beneficiary in accordance with Section 5.5(c) below) on July 1, 1998 and January 1, 1999, in each case with an exercise price per share equal to the closing price per share on the Composite Tape of the New York Stock Exchange on the last business day prior to the issuance of the Options and covering the purchase of a -58- number of shares of Stock equal to the number of shares of Restricted Stock acquired by the Participant during the preceding six calendar months. Section 5.2. Stock Option Agreement. Recipients of Options shall enter into a Stock Option Agreement or Agreements with the Company, in such form as the Committee shall determine, which Agreement or Agreements shall set forth, among other things, the exercise price or prices of the Options (or the formula for determining such exercise price), the term of the Option and provisions regarding exercisability of the Options granted thereunder. Section 5.3. Transfer Restrictions. Options are not transferable other than by will or the laws of descent and distribution. During the lifetime of a Participant, the Options may be exercised only by the Participant. Section 5.4. Exercise of Options. Options acquired hereunder will vest and become exercisable on January 1, 2004 (unless earlier forfeited or terminated) and will remain exercisable for a period of twenty-four months, until December 31, 2005. An Option shall not be exercisable unless payment in full is made for the shares being acquired thereunder at the time of exercise; such payment shall be made (a) in United States dollars by cash or check, or (b) in lieu thereof, unless the Committee shall in its sole discretion determine otherwise, by tendering to the Company Stock owned by the person exercising the Option (or owned by the person exercising the Option and his or her spouse, jointly) and acquired more than six months prior to such tender, and having a fair market value equal to the cash exercise price applicable to such Option, such fair market value to be determined in such reasonable manner as may be provided for from time to time by the Committee or as may be required in order to comply with or to conform to the requirements of any applicable or relevant laws or regulations, or (c) by a combination of United States dollars and Stock as aforesaid. Section 5.5. Termination of Employment. An Option shall not be exercisable unless the person exercising the Option has been, at all times during the period beginning with the date of purchase of the Option and ending on the date of such exercise, an Employee of the Company, except that: (a) Upon a Participant's death, Permanent Disability, Retirement with the written consent of the President or the Chief Executive Officer of the Company or the Affiliate by which such Participant is employed, voluntary termination of employment more than nine months after a Change of Control, or involuntary termination of employment (other than a termination for Cause), the Options shall immediately vest and shall be exercisable for a period of three months after the Participant's termination of employment by the Participant or the Participant's designated Beneficiary, as the case may be. (b) Upon a Participant's voluntary termination of employment (other than as set forth in subsection (a) of this Section 5.5), involuntary termination for Cause, retirement prior to attaining the age of fifty-five, or Retirement without the written consent of the President or the Chief Executive Officer of the Company or the Affiliate -59- by which such Participant is employed, the Participant shall forfeit such Participant's unvested Options. (c) If a Participant shall have terminated employment for any reason after the acquisition of Units hereunder but prior to the issuance of the Option portion of such Units, any Option acquired as part of the Unit shall be forfeited as provided in subsection (b) of this Section 5.5. ARTICLE VI ELECTION Section 6.1. Election. A Participant as defined in Section 2.1 shall elect the Amount Deferred as defined in Section 3.1 for the Deferral Period on such forms as the Committee may prescribe according to Section 10.2(h). Such election shall be made by or on December 31, 1997. Section 6.2. Change of Election. Following an election by a Participant made pursuant to Section 6.1 to have an Amount Deferred, such Participant at any time during the Deferral Period may choose to discontinue all (but not less than all) Amounts Deferred with respect to Compensation due to the Participant during subsequent calendar quarters of the Deferral Period. Such election shall be made on such form as the Committee may prescribe and shall become effective as of the first day of the calendar quarter following receipt of such form by the Committee. ARTICLE VII ADJUSTMENTS UPON A CHANGE IN COMMON STOCK In the event of any change in the outstanding Stock of the Company by reason of any stock split, stock dividend, recapitalization, merger, consolidation, reorganization, combination or exchange of shares or other similar event if such change equitably requires an adjustment in the number or kind of shares that may be issued under the Plan, or in the number or kind of shares subject to, or the option price per share under, any outstanding Option which has been purchased by any Participant, such adjustment shall be made by the Committee and shall be conclusive and binding for all purposes of the Plan. In no event shall the excess of the aggregate fair market value of the Stock subject to the Options immediately after any substitution, exchange or adjustment over the aggregate option price for such Stock be more than the excess of the aggregate fair market value of all of the Stock subject to the Option immediately before any such substitution, exchange or adjustment over the aggregate option price of such Stock nor shall the adjusted Option give the holder thereof any additional benefits he did not have under the old Option. -60- ARTICLE VIII WITHHOLDING In the event that the Company determines that it or an Affiliate is required by law to withhold taxes at any time, including, but not limited to, upon the exercise of an Option or upon the vesting of shares of Restricted Stock, the Company shall have the right to require a Participant to pay to the Company the amount of taxes that the Company or Affiliate is required to withhold or, in lieu thereof, (a) to retain, or sell without notice, a sufficient number of shares of Restricted Stock held by it for the Participant to cover the amount to be withheld, or (b) to withhold the amount of such taxes from any other sums due or to become due from the Company or an Affiliate to the Participant upon such terms and conditions as the Committee shall prescribe. ARTICLE IX AMENDMENT AND TERMINATION Section 9.1. Power to Amend. The Board of Directors may amend, modify, change, or revise the Plan by amendment at any time; provided, however, that (a) no amendment shall increase the duties or liabilities of the Board of Directors or the Committee without written consent of each member and (b) no amendment shall be made without the written covenant of a Participant if the effect of such amendment would reduce the rights of a Participant with respect to Units acquired prior to the date of the amendment. Section 9.2. Plan Termination. The continuation of the Plan is not assumed as a contractual obligation of the Company and the right is reserved by the Company at any time to discontinue the Plan. The Plan may be terminated by the Board of Directors at any time, when in its judgment, business, financial or other good causes make such termination necessary or appropriate; such termination to become effective upon the delivery of notice by the Board of Directors or the Committee to the Participants. ARTICLE X ADMINISTRATION OF THE PLAN Section 10.1. Authority and Responsibility of the Committee. The Board of Directors shall appoint the members of a Committee, which members shall hold office at the pleasure of the Board of Directors. Said Committee shall consist of not less than three nor more than eight members, any one or more of whom may, but need not, be an officer of the Company. If there is at any time a vacancy on the Committee for any reason, the Board of Directors shall fill such vacancy, but the Committee may act notwithstanding the existence of vacancies as long as there shall continue to be at least two members of the Committee. The Committee shall select a Chairman from among its members. The Committee shall have overall responsibility for the administration and operation of the Plan. The Committee will have all powers as may be necessary to discharge its duties hereunder. -61- Section 10.2. Committee Duties. The Committee, on behalf of the Participants and all other Beneficiaries of the Plan, will administer and operate the Plan in accordance with the terms of the Plan and will have all powers necessary to accomplish that purpose, including, but not limited to, the following: (a) To issue rules and regulations necessary for the proper conduct and administration of the Plan and to change, alter, or amend such rules and regulations; (b) To construe the Plan; (c) To determine all questions arising in the administration of the Plan, including those relating to the eligibility of persons to become Participants in accordance with Article II and the rights of Participants and their Beneficiaries, and its decisions thereon shall be final and binding upon all persons hereunder; (d) To oversee the retention of records relating to Participants and other matters applicable to the Plan; (e) To make available to Participants and Beneficiaries upon request, for examination during business hours, such records as pertain exclusively to the examining Participant (or Beneficiary); (f) To prescribe procedures to be followed by Participants and Beneficiaries in making claims hereunder; (g) To make available for inspection and to provide upon request at such charge as may be permitted and determined by the Company, such documents and instruments, if any, as the Committee deems appropriate; (h) To prescribe and adopt the use of necessary forms; (i) To appoint such agents and other specialists to aid it in the administration of the Plan as it deems necessary; and (j) To make periodic reports on the operation and administration of the Plan to the Board of Directors as may be required in any articles of incorporation, charter, or by-laws pertaining to the Company. Section 10.3. Records. The regularly kept records of the Committee and the Company shall be conclusive evidence as to all matters contained therein applicable to this Plan. Section 10.4. Committee Decisions Final. The decisions of the Committee concerning matters within its jurisdiction shall be final, binding, and conclusive upon the Company and its -62- Affiliates, the Participants, Beneficiaries and any other person or party interested or concerned. Section 10.5. Committee as Agent. The Committee shall act as agent for the Company in the administration of the Plan. Section 10.6. Plan Expenses. All clerical, legal and other expenses of the Plan shall be paid by the Company. Section 10.7. Allocations and Delegations of Responsibility. (a) Delegations. The Committee shall have the authority to delegate, from time to time, all or any part of its responsibilities under the Plan to such person or persons as it may deem advisable and in the same manner to revoke any such delegation of responsibility. Any action of the delegate in the exercise of such delegated responsibilities shall have the same force and effect for all purposes herein as if such action had been taken by the Committee. The Board of Directors or the Committee shall not be liable for any act or omission of any such delegate. The delegate shall report periodically to the Committee concerning the discharge of the delegated responsibilities. (b) Allocations. The Committee shall have the authority to allocate, from time to time, all or any part of its responsibilities under the Plan to one or more of its members as it may deem advisable, and in the same manner to revoke such allocation of responsibilities. Any action of the member to whom responsibilities are allocated in the exercise of such allocated responsibilities shall have the same force and effect for all purposes hereunder as if such action had been taken by the Committee. The Board of Directors or the Committee shall not be liable for any acts or omissions of such member. The member to whom responsibilities have been allocated shall report periodically to the Committee concerning the discharge of the allocated responsibilities. (c) Limit on Liability. Duties and responsibilities which are carried out in good faith by the Committee hereunder or which have been allocated or delegated pursuant to the terms of the Plan or subsections (a) or (b) of this Section 10.7 shall not create any liability of the Company, Board of Directors, or Committee, or any member thereof. ARTICLE XI MISCELLANEOUS PROVISIONS Section 11.1. Merger. Any successor corporation to the Company, by merger, consolidation, purchase or otherwise, shall be substituted hereunder for the Company. This -63- Plan shall be binding on all successors to and assigns of the Company; provided that such successors or assigns may terminate the Plan in accordance with the provisions hereof. Section 11.2. Securities Laws. The Committee may require each person purchasing shares pursuant to an Option or shares of Restricted Stock to represent and agree with the Company in writing that such person is acquiring the shares without a view to distribution thereof. The certificates for such shares may include any legend which the Committee deems appropriate to reflect any restriction on transfer. Furthermore, all certificates for shares of Stock delivered under the Plan shall be subject to such stock- transfer orders and other restrictions as the Committee may deem advisable under the rules, regulations, and other requirements of the Securities and Exchange Commission, any stock exchange upon which the Stock is then listed, and any applicable Federal or state securities law, and the Committee may cause a legend or legends to be put on any such certificates to make appropriate reference to such restrictions. Section 11.3. Indemnification. The Company shall indemnify and hold harmless to the extent legally permitted each member of the Board of Directors, the Committee and each officer and Employee of the Company to whom are delegated duties, responsibilities, and authority with respect to the Plan against all claims, liabilities, fines and penalties, and all expenses reasonably incurred by or imposed upon such delegate or agent (including but not limited to reasonable attorney fees) which arise as a result of actions or failure to act in connection with the operation and administration of the Plan. Section 11.4. Contract of Employment. Nothing contained herein shall be construed to constitute a contract of employment between the Company or an Affiliate and any Employee or Participant. Nothing contained herein will confer upon any Participant the right to be retained in the service of the Company or an Affiliate or limit the right of the Company or an Affiliate to discharge or otherwise deal with any Participant without regard to the existence of the Plan. Section 11.5 Disclosure. Each Participant shall receive a copy of the summary of the Plan and the Committee will make available for inspection by any Participant or Beneficiary a copy of the Plan and any written procedures used by the Committee in administering the Plan. Section 11.6. Headings. The headings of Articles and Sections are included solely for convenience of reference, and if there is any conflict between such headings and the text of the Plan, the text shall control. Section 11.7. Invalidity of Certain Provisions. If any provision of the Plan shall be held invalid or unenforceable, such invalidity or unenforceability shall not affect any other provisions hereof, and the Plan shall be construed and enforced as if such provisions, to the extent invalid or unenforceable, had not been included. Section 11.8. Law Governing. The Plan shall be construed and enforced according to the laws of the State of Connecticut (other than its laws respecting choice of law). -64- Section 11.9. Limitation on Liability. Neither the Company nor any agent or representative of the Company who is an employee, officer, or director of the Company in any manner guarantees the payments to be made under the Plan against loss or depreciation, and to the extent not prohibited by federal law, none of them shall be liable (except for his own gross negligence or willful misconduct), for any act or failure to act, done or omitted in good faith, with respect to the Plan. The Company shall not be responsible for any act or failure to act of any agent appointed to administer the Plan. Section 11.10. Gender. Except when otherwise indicated by the context, any masculine terminology herein shall also include the feminine, and the definition of any term herein in the singular shall also include the plural. THE ADVEST GROUP, INC. By: /S/ ALLEN WEINTRAUB --------------------- Allen Weintraub Chief Executive Officer ATTEST: /S/ DAVID A. HOROWITZ - --------------------- -65- EX-10.R 8 Exhibit 10(r) EMPLOYMENT AGREEMENT BETWEEN THE ADVEST GROUP, INC. AND GRANT W. KURTZ THIS EMPLOYMENT AGREEMENT is entered into as of this first day of October, 1997 between GRANT W. KURTZ ("Mr. Kurtz") and The Advest Group, Inc. ("Advest"). W I T N E S S E T H WHEREAS, Mr. Kurtz has been employed by Advest since 1985 and has served as its President since March 1995; and WHEREAS, the parties now wish to enter into this Agreement (the "Employment Agreement") to set forth their mutual understanding concerning Mr. Kurtz's continued employment by Advest; NOW, THEREFORE, for good and valid consideration the parties agree as follows: 1. Employment and Duties. Advest hereby agrees to employ Mr. Kurtz as President, to perform all of the duties and responsibilities normally performed and pertinent to this office, reporting to and under the direction of the Chief Executive Officer. Mr. Kurtz agrees to be so employed. 2. Term. The term of this Agreement shall commence as of October 1, 1997 and continue through September 30, 2002, unless earlier terminated pursuant to Section 5. The term "Agreement Term" shall mean the term of this Agreement plus any extensions thereto. 3. Compensation. Mr. Kurtz's compensation shall be established each year by the Compensation Committee of the Board of Directors and will include both salary and additional compensation under the Management Incentive Plan ("MIP") adopted by the Board of Directors. In no event shall Mr. Kurtz's salary be less than his salary as of the date this Agreement is executed, or any amount to which his salary is thereafter increased; provided, however, that Mr. Kurtz's salary shall with his written consent be subject to reduction in the event of a reduction in the salaries of senior executive officers of Advest generally. Nor will Mr. Kurtz's share of the MIP be less than any other participant eligible for MIP other than the Chief Executive Officer. 4. Representations. Mr. Kurtz agrees that during the term of his employment with Advest he will not be employed by any other person or organization except for Advest subsidiaries and except also for outside directorships in accordance with Advest's usual policies. 5. Termination. This Agreement may be terminated by Mr. Kurtz's voluntary resignation upon a minimum of three months notice (other than in the case of unforeseen health problems). If Mr. Kurtz's employment is terminated during the Agreement Term, the following provisions shall apply: -66- (a) Termination of Employment by Advest Without Cause or by Mr. Kurtz for Good Reason. If, before the end of the Agreement Term, Advest terminates Mr. Kurtz's employment for any reason other than for Cause (as defined below), or if Mr. Kurtz terminates his employment with Advest for Good Reason (as defined below), Advest shall pay to Mr. Kurtz immediately after the date of termination in a lump-sum in immediately available funds, an amount equal of the sum of (i) Mr. Kurtz's annual base salary which is accrued but unpaid as of the date of the termination, (ii) that portion of Mr. Kurtz's additional compensation under the MIP ("Bonus") which is earned with respect to the fiscal year ending prior to the date of termination but that is unpaid as of the date of termination, (iii) the product of (A) the amount of the Bonus to which Mr. Kurtz would have been entitled had he been employed by Advest on the last day of the fiscal year containing the date of termination (calculated based upon Mr. Kurtz's average Bonus for the three years immediately prior to his termination of employment) multiplied by (B) a fraction, the numerator of which is the number of days which have elapsed in such fiscal year through the date of termination and the denominator of which is 365 ("Pro-Rata Annual Bonus"), (iv) Mr. Kurtz's salary through the end of the Agreement Term, and (v) Mr. Kurtz's Bonus through the end of the Agreement Term (calculated based upon his average Bonus for the three years immediately prior to his termination of employment). In addition, notwithstanding any other provision of this Agreement, if Mr. Kurtz's employment is terminated by Advest other than for Cause or by Mr. Kurtz for Good Reason, all options granted to Mr. Kurtz under the Advest Group, Inc. 1993 Stock Option Plan, the Advest Group, Inc. 1986 Stock Option Plan, the Advest Group, Inc. 1983 Incentive Stock Option Plan, the Advest Group Executive Equity Plans, and any other outstanding equity that Mr. Kurtz received under any other plan or agreement (collectively, "Equity Incentive Awards"), shall immediately and fully vest upon the date of termination, and shall remain exercisable for not less than 90 days therefrom. Through the end of the Agreement Term, Mr. Kurtz shall also continue to participate in all Advest- sponsored incentive, savings and retirement plans, and shall continue to receive benefits under all welfare benefit plans, practices, policies and programs provided by Advest (including, and without limitation, medical, prescription, dental, disability, employee life, group life, dependent life, accidental death and travel insurance plans and programs) applicable to other senior executives of Advest; provided, however, that any amounts paid under this sentence shall be reduced by any similar benefits earned by Mr. Kurtz as a result of employment by another employer. For purposes of this Agreement, "Good Reason" shall mean the occurrence of any one of the following events: (i) failure of Mr. Kurtz to continue to be appointed or elected to the positions of President and member of the Board of Directors of Advest; (ii) assignment of Mr. Kurtz of any duties materially and adversely inconsistent with Mr. Kurtz's position as President and member of the Board of Directors, including status, offices, or responsibilities, or any other -67- action of Advest that results in a material and adverse change in such position, status, offices, titles or responsibilities or any other material adverse change to the terms and conditions of Mr. Kurtz's employment under this Agreement; (iii) any material and adverse change in Mr. Kurtz's reporting responsibilities; (iv) any material breach by Advest of the provisions of this Agreement; (v) Advest's requiring, without written consent of Mr. Kurtz, that Mr. Kurtz be based at any office or location more than 50 miles from his regular place of business as of the date of the execution of this Agreement; (vi) the liquidation or dissolution of Advest, or sale of substantially all of the assets of Advest or the sale of assets of Advest which produce more than 30% of Advest's gross revenues unless in advance of any such sale Mr. Kurtz waives this provision in writing; or (vii) any purported termination of Mr. Kurtz's employment under this Agreement which is not for Cause in strict accordance with Sections 5(a) and 5(d) and of this Agreement. For purposes of this Agreement, "Cause" shall mean willful misconduct, gross negligence, the conviction of Mr. Kurtz of a criminal offense for violation of the securities laws or involving moral turpitude, or a determination by the Board (a "Determination") that (i) Mr. Kurtz has or is engaged in the securities industry in any capacity, including as an employee or consultant, that the Board has determined to be materially detrimental to Advest or its business, and Mr. Kurtz has not provided the Board with adequate assurance that he will refrain therefrom after written request from the Board, or (ii) Mr. Kurtz has breached his obligation under Section 6. Notwithstanding the foregoing, Mr. Kurtz shall not be deemed to have been terminated for Cause without (1) Cause having been committed by Mr. Kurtz, (2) advance written notice provided to Mr. Kurtz not less than fourteen (14) days prior to the date of termination, setting forth Advest's intention to consider terminating Mr. Kurtz including a statement of the date of termination and the specific detailed basis for such consideration for Cause, (3) an opportunity for Mr. Kurtz, together with his counsel, to be heard before the Board during the fourteen (14) day period ending on the date of termination, (4) determination in accordance with the next to last sentence of this Section 5(a) by the members of the Board, that the actions of Mr. Kurtz constituted Cause and that Mr. Kurtz's employment should accordingly be terminated for Cause, and (5) a written determination provided by the Board setting forth in full specificity the basis of such termination of employment. By determination of the Board in accordance with the next to the last sentence of this Section 5(a), Advest may suspend Mr. Kurtz from his duties for a period of up to thirty (30) days with full pay and benefits hereunder during the period of time in which the Board is making a determination as to whether to terminate for Cause. Any determination by the Board hereunder shall be made by the affirmative vote of the non- employee members of the Board with a vote in favor of the determination by a number of non-employee members who constitute at least 75% of -68- the non-employee members of the Board. Any purported termination of employment of Mr. Kurtz by Advest which does not meet each and every substantive and procedural requirement of this Section 5(a) shall be treated for all purposes under this Agreement as a Termination of Employment Without Cause as addressed under this Section 5(a). (b) Termination Due to Death. If before the end of the Agreement Term Mr. Kurtz's employment terminates due to death, Advest shall immediately after the date of such termination pay to Mr. Kurtz, or to Mr. Kurtz's Beneficiary (as defined below), a lump-sum amount equal to the sum of (A) Mr. Kurtz's annual base salary which is accrued but unpaid as of the date of termination, plus (B) that portion of Mr. Kurtz's annual Bonus which is earned with respect to the fiscal year ending prior to the date of termination but which is unpaid as of the date of termination, plus (C) Mr. Kurtz's Pro-Rata Annual Bonus for the fiscal year containing the date of termination. In addition, Mr. Kurtz's Equity Incentive Awards shall immediately and fully vest upon the date of termination, and shall remain exercisable for not less than one year therefrom. For purposes of this Agreement, Mr. Kurtz's "Beneficiary" shall mean such person as Mr. Kurtz shall designate pursuant to Section 11.2 of the Advest Thrift Plan, or, if no such beneficiary designation is in effect, his estate. (c) Termination Due to Disability. If before the end of the Agreement Term Mr. Kurtz's employment is terminated due to a mental or physical disability which prevents Mr. Kurtz from performing the essential functions of the office of President for a continuous period of at least six months, and which in the opinion of the Board of Directors will be permanent or will last for an indefinite duration, Mr. Kurtz shall receive immediately after the date of termination: (i) all benefits which are normally provided to senior Advest executives in the event of disability, and (ii) a lump-sum amount equal to the sum of (A) Mr. Kurtz's annual base salary which is accrued but unpaid as of the date of termination, plus (B) that portion of Mr. Kurtz's annual Bonus which is earned with respect to the fiscal year ending prior to the date of termination but which is unpaid as of the date of termination, plus (C) Mr. Kurtz's Pro-Rata Annual Bonus for the fiscal year containing the date of termination. In addition, Mr. Kurtz's Equity Incentive Awards shall immediately and fully vest upon the date of termination, and shall remain exercisable for not less than one year therefrom. (d) Termination of Employment by Advest for Cause, or by Mr. Kurtz for other than Good Reason. If Mr. Kurtz's employment is terminated by Advest for Cause, or by Mr. Kurtz for other than Good Reason, Mr. Kurtz shall receive immediately after the date of termination a lump-sum amount equal to the sum of (i) Mr. Kurtz's annual base salary which is accrued but unpaid as of the date of termination, and (ii) that portion of Mr. Kurtz's annual Bonus which is earned with respect to the fiscal year ending prior to the date of termination but which is unpaid as of the date of termination. (e) Other Termination Benefits. In addition to any amounts or benefits payable upon a termination of employment under the terms of this Agreement, and except as otherwise provided herein, Mr. Kurtz shall be entitled to any payments or benefits provided under the terms of any -69- plan, policy or program of Advest or as otherwise required by applicable law; provided, however, that amounts payable hereunder shall be reduced by any severance compensation to which Mr. Kurtz may be entitled and is paid under any plan, policy, or program of Advest. (f) Notwithstanding anything to the contrary set forth in this Agreement, in the event that Advest is otherwise obligated to provide certain benefits under this Agreement, Advest may elect to provide an alternative benefits as follows: (i) In the event that Advest would otherwise be obligated to alter the vesting or exercisability provisions of any Equity Incentive Awards, in its discretion Advest may offer to pay to Mr. Kurtz in lieu thereof a lump sum amount equal to the amount, if any, by which the market value of the underlying equity as of the date of termination exceeds the exercise price. Mr. Kurtz may accept this offer by Advest or elect to exercise any rights he may have under the Equity Incentive Awards without modification. (ii) To the extent that it would violate applicable law or regulation or the provisions of any Advest-sponsored incentive, savings or retirement plan or any welfare benefit plan, practices policy or program, Advest shall be excused from offering Mr. Kurtz participation in such plan, policy or program. In that event, Advest shall pay to Mr. Kurtz an amount equal to the net after-tax cost that would be incurred by Mr. Kurtz in obtaining comparable alternative benefits. In the case of any benefits receivable under health, life or disabilty insurance policies, this amount will be deemed to be the net after-tax cost of obtaining such coverage. (iii) Advest will use its best efforts to obtain for Mr. Kurtz Directors and Officers insurance coverage to the extent called for under paragraph 6(c) and will do so unless it would involve excessive and unreasonable expense. If Advest fails to obtain required coverage for Mr. Kurtz, without limitation of Advest's obligations under Section 6(c), it will nevertheless provide to Mr. Kurtz indemnification for costs and expenses comparable to that which would have been provided by such a policy. 6. Confidential Information. Mr. Kurtz shall not at any time after termination of employment reveal to anyone other than authorized representatives of Advest, or use for his own benefit or the benefit of any third party, any trade secrets, customer information or other information that has been designated as confidential by Advest or is understood by Mr. Kurtz to be confidential, unless such information is or becomes available to the public or is otherwise public knowledge or in the public domain for reasons other than Mr. Kurtz's acts or omissions. 7. Amendments. This Agreement can only be altered by written amendment executed by both parties. -70- 8. Arbitration. Any claim controversy arising between the parties shall be settled by arbitration before a New York Stock Exchange, National Association of Securities Dealers, or American Arbitration Association panel at the option of the employee. The arbitrators shall have no authority to modify any provision of this Agreement or to award a remedy for a dispute involving this Agreement other than a benefit specifically provided under this Agreement. The decision of the arbitrators shall be final and binding on Advest and Mr. Kurtz, who shall each pay their own legal fees and expenses associated with arbitration and share any arbitration fees. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the date first written above. THE ADVEST GROUP, INC. By: /S/ ALLEN WEINTRAUB /s/ GRANT W. KURTZ ----------------------- ------------------ Allen Weintraub Grant W. Kurtz Chief Executive Officer in his individual capacity CONFIRMED By: /S/ RICHARD G. DOOLEY -------------------------------- Richard G. Dooley Chairman, Compensation Committee for the Board of Directors -71- EX-11 9
Exhibit 11 The Advest Group, Inc. and Subsidiaries Computation of Net Income Per Common Share For the years ended September 30, ---------------------------------------------------- Assuming (Primary) Full dilution ---------------------------------------------------- In thousands, except per share amounts 1997 1996 1995 1997 1996 1995 - ------------------------------------------------------------------------------ Net income $14,218 $11,798 $6,351 $14,218 $11,798 $6,351 Interest expense on debentures, net -- -- -- 249 814 1,001 ------------------------------------------------------- Net income applicable to common stock $14,218 $11,798 $6,351 $14,467 $12,612 $7,352 ======================================================== Average number of common shares outstanding during the period 8,512 8,426 8,501 8,512 8,426 8,501 Additional shares assuming: Exercise of stock options 366 322 234 416 329 270 Conversion of debentures -- -- -- 466 1,515 1,527 --------------------------------------------------------- Average number of common shares outstanding 8,878 8,748 8,735 9,394 10,270 10,298 ======================================================== Net income per share $ 1.60 $ 1.35 $ 0.73 $ 1.54 $ 1.23 $ 0.71 ======================================================== -72-
EX-13 10 [Page 1 of Annual Report]
Financial Highlights For the years ended September 30, - ------------------------------------------------------------------------------------------------------- In thousands, except per share amounts and percentages 1997 1996 1995 - ------------------------------------------------------------------------------------------------------- Revenues $ 289,345 $261,381 $232,633 Income before taxes $ 24,098 $ 21,068 $ 11,761 Net income $ 14,218 $ 11,798 $ 6,351 Net income per common and common equivalent shares: Primary $ 1.60 $ 1.35 $ 0.73 Assuming full dilution $ 1.54 $ 1.23 $ 0.71 Total assets $1,076,806 $965,177 $830,815 Shareholders' equity $ 104,591 $ 89,242 $ 78,932 Book value per share $ 12.12 $ 10.62 $ 9.42 Return on average equity 14.8% 14.0% 8.4% -73-
[Page 18 of Annual Report]
Five Year Financial Summary For the years ended September 30, - ---------------------------------------------------------------------------------------------------------------------- In thousands, except per share amounts and percentages 1997 1996 1995 1994 1993 - ---------------------------------------------------------------------------------------------------------------------- Revenues Commissions: Listed $ 49,499 $ 43,390 $ 39,773 $ 36,284 $ 39,199 Mutual funds 36,661 34,210 22,693 22,337 21,448 Over-the-counter 23,352 19,714 12,554 10,374 9,527 Insurance 8,227 7,969 4,487 5,164 3,634 Options 4,339 3,552 3,071 2,570 2,407 Other 954 1,280 1,686 2,761 1,620 --------------------------------------------------------------------------- 123,032 110,115 84,264 79,490 77,835 --------------------------------------------------------------------------- Interest: Margin accounts 28,670 25,246 23,761 17,868 14,158 Loans 13,867 16,041 20,005 19,016 19,615 Stock borrowed 10,645 6,970 3,773 978 645 Investments 2,953 3,836 6,132 6,793 6,227 Securities inventory 2,525 1,849 1,470 1,016 1,015 Other 1,222 1,283 941 413 783 --------------------------------------------------------------------------- 59,882 55,225 56,082 46,084 42,443 Principal transactions 43,880 38,591 41,424 32,297 33,662 Investment banking 29,429 28,166 17,470 25,743 31,102 Asset management and administration 25,844 20,050 16,810 16,399 14,111 Gain on sale of investment advisory business, net 57 627 10,092 0 0 Other 7,221 8,607 6,491 5,216 2,878 --------------------------------------------------------------------------- Total revenues 289,345 261,381 232,633 205,229 202,031 --------------------------------------------------------------------------- Expenses Compensation and benefits 163,200 147,091 121,611 114,800 111,615 --------------------------------------------------------------------------- Interest: Stock loaned 10,261 6,496 4,050 1,103 731 Brokerage customers 8,565 8,769 9,928 6,342 5,383 Deposits 7,596 8,449 11,002 9,613 11,290 Borrowings 5,369 4,651 4,704 5,064 5,120 Other 667 1,060 882 462 498 --------------------------------------------------------------------------- 32,458 29,425 30,566 22,584 23,022 Communications 23,955 20,917 18,999 19,135 17,154 Occupancy and equipment 17,758 17,567 17,369 15,614 15,637 Professional 6,729 5,543 5,468 6,231 5,248 Business development 6,664 5,613 4,204 4,532 4,033 Brokerage, clearing and exchange 4,788 4,221 3,922 3,693 3,579 Provision for credit losses and asset devaluation 915 1,258 10,338 5,411 4,292 Other 8,780 8,678 8,395 7,874 9,380 --------------------------------------------------------------------------- Total expenses 265,247 240,313 220,872 199,874 193,960 --------------------------------------------------------------------------- Income before taxes and extraordinary credit 24,098 21,068 11,761 5,355 8,071 Provision for income taxes 9,880 9,270 5,410 2,302 2,903 --------------------------------------------------------------------------- Income before extraordinary credit 14,218 11,798 6,351 3,053 5,168 Extraordinary credit - utiliztion of operating loss carryforwards 0 0 0 0 2,103 --------------------------------------------------------------------------- Net income $ 14,218 $ 11,798 $ 6,351 $ 3,053 $ 7,271 =========================================================================== - ---------------------------------------------------------------------------------------------------------------------- Per share data Primary net income $ 1.60 $ 1.35 $ 0.73 $ 0.34 $ 0.79 Net income assuming $ 1.54 $ 1.23 $ 0.71 $ 0.34 $ 0.75 full dilution Book value $ 12.12 $ 10.62 $ 9.42 $ 8.62 $ 8.16 Dividends declared $ 0.09 $ 0.00 $ 0.00 $ 0.00 $ 0.00 Other data Total assets $1,076,806 $ 965,177 $ 830,815 $ 884,855 $ 885,182 Shareholders' equity $ 104,591 $ 89,242 $ 78,932 $ 73,980 $ 73,989 Subordinated borrowings $ 0.00 $ 20,552 $ 20,552 $ 20,997 $ 21,375 Long-term borrowings $ 41,321 $ 19,744 $ 17,240 $ 30,388 $ 15,038 Return on average equity 14.8% 14.0% 8.4% 4.1% 10.2% Average common and common equivalent shares outstanding 8,878 8,748 8,735 8,997 9,248 - ---------------------------------------------------------------------------------------------------------------------- -74-
[Page of 19 Annual Report] MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview The Advest Group, Inc. ("AGI"), together with its subsidiaries (the "Company"), provides diversified financial services including securities brokerage, trading, investment banking, consumer lending, trust and asset management. Advest, Inc. ("Advest"), a regional broker/dealer and the Company's principal subsidiary, provides brokerage, investment banking and asset management services to retail and institutional investors through 89 sales offices in 16 states and Washington, DC. Advest Bank and Trust Company (the "Bank"), an FDIC-insured, federal savings bank, offers residential mortgage lending and trust services primarily through Advest's branch network. All aspects of the Company's business are highly competitive and impacted by regulatory and other factors outside of its control, including general economic and financial conditions, the volume and price levels of securities markets, the demand for investment banking services and interest rate volatility. The Company closely monitors its operating environment to enable it to respond promptly to market cycles. In addition, the Company seeks to lessen earnings volatility by controlling expenses, increasing fee-based business and developing new revenue sources. Nonetheless, operating results of any individual period should not be considered representative of future performance. For the year ended September 30, 1997, the Company reported record net income and earnings per share of $14.2 million ($1.60 per share) compared with net income of $11.8 million ($1.35 per share) in 1996 and $6.4 million ($.73 per share) in 1995. Record revenue levels were achieved for the third consecutive year with individual record levels attained from agency commissions, principal transactions and asset management activities. Subsequent to fiscal year end, during the week ending October 31, 1997, the equity markets experienced one of the most volatile weeks in market history. On October 27, the Dow Jones Industrial Average ("DJIA") posted its largest ever single day point decline - 554 points - causing the first use of the halt feature implemented following the market turmoil of October 1987. As a percentage, the decline was 13% from its August record high of 8259, however, the DJIA was still up 11% for the calendar year. One day later, the DJIA posted its single largest one day point increase of 337 on record trading volume. By week's end, the DJIA had recouped most of the losses in a very volatile trading week, limiting losses for the week to 273 points. This unanticipated volatility underscores the fact that the markets can be unpredictable and are impacted by many factors, in this case, turmoil in foreign markets. The economy remains healthy with low interest rates, inflation and unemployment and there are no indications that recent events are anything more than a normal market correction, defined as declines of 10% or more. However, as previously noted, markets are impacted by many factors out of the Company's control and their direction cannot be predicted with any certainty. Advest, Inc. Despite some mid-year volatility, the equity markets continued their unprecedented upward momentum of the past seven years throughout fiscal 1997. Sustained by healthy corporate earnings, low levels of inflation, unemployment and interest rates, the Dow Jones Industrial Average surpassed 6000, 7000 and 8000, achieved a record high 8259, and closed at 7945 on September 30, a 35% one year gain. The S&P 500 and Nasdaq indices also set several new highs during the period closing up 38% and 35%, respectively. For the second consecutive year, technology stocks led the way much of the year and small-cap stocks substantially outperformed the blue chips in the fourth quarter. Equity underwriting remained at high levels, benefiting from low interest rates and a steady infusion of cash into mutual funds. Advest's results were favorably impacted by the robust markets. It reported pre-tax income of $26.8 million, a record high and an increase of 20% from the prior year. Total revenues increased 13% to $269.7 million, a record high with record levels achieved in all categories with the exception of other income. Total expenses increased 12% to $242.9 million, primarily due to increased compensation costs related to market-driven sales compensation and higher firm-wide payroll. Advest Bank and Trust Company The Bank's 1997 pre-tax earnings were $.7 million compared with $1.1 million last year. The decline is primarily attributable to a change in the mix of average loans outstanding to lower yielding mortgages and home equity lines from higher yielding commercial loans as well as a $2.7 million increase in nonperforming assets ("NPAs"). During 1997 and 1996, the Bank continued its strategic transition from a portfolio residential and commercial lender to a mortgage banker, originating loans primarily for sale into secondary markets, and a provider of personal trust services. The Bank provides first mortgage and home equity lending and trust services primarily through referrals from Advest's retail sales force. During 1997, $90.4 million of residential mortgage and home equity loans were originated and secondary market mortgage transactions totaled $30.1 million. Trust assets increased 61% to approximately $475 million. At September 30, 1997 the Bank's leveraged capital, risk-based and Tier 1 capital ratios were 6.84%, 10.04% and 8.79%, respectively, which satisfied all regulatory requirements. The Bank is deemed a "well capitalized" bank and as such is able to accept brokered deposits without restriction. -75- [Page 20 of Annual Report] Effective April 15, 1997, the Bank converted to a federal savings bank, and ceased to be a state-chartered bank. As a federal savings bank, the Bank is regulated by the Office of Thrift Supervision ("OTS"), but its deposits continue to be insured under the Bank Insurance Fund of the FDIC. This regulatory and charter change enables the Bank to provide residential lending and trust services in all 50 states. Other During fiscal 1995, the Company sold the investment advisory business related to its proprietary mutual funds in three separate transactions. The total gain from all sales was $10.1 million and is reported as a separate line item on the Consolidated Statements of Earnings. Fiscal 1997 and 1996 revenues include $.1 million and $.6 million, respectively, in trailer payments received under the terms of one of the sales agreements. Year 2000 In anticipation of technology and other changes required for the transition to the year 2000, the Company has been in regular contact with all of its external providers of technology and software services. The Company will be an active participant in the testing process of securities industry procedures. In addition, committees have been formed to identify all internal processes and services that will be impacted. Work has already commenced to effect all required changes on a timely basis. Management has not determined what the cost associated with implementing all necessary changes for the Year 2000 conversion will be but does not expect it to be material to the Company's results of operations, financial condition or cash flows. Management believes the Company has taken all reasonable precautions to ensure a smooth transition. However, like all securities firms, the Company's brokerage business is highly dependent on outside service providers and, as such, any problems encountered would potentially have a material adverse effect on the Company's business activities and, accordingly, its results of operations, financial condition and cashflows. Subsequent Event 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 will become 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 will be accounted for as a pooling of interests. Due to the immaterial effect on the Company's consolidated financial position and results of operations, operating results of Ironwood will only be included prospectively in the Company's consolidated financial statements. Results of Operations Net income for the years ended September 30, 1997, 1996 and 1995 was $14.2 million, $11.8 million and $6.4, million respectively. The following table summarizes percentage changes for revenues, expenses and pre-tax income for the three years in the period ended September 30, 1997. - -------------------------------------------------------------------------- % % In thousands, Increase Increase except percentages 1997 (Decrease) 1996 (Decrease) 1995 - -------------------------------------------------------------------------- Revenues Commissions $123,032 12% $110,115 31% $84,264 Interest 59,882 8 55,225 (2) 56,082 Principal transactions 43,880 14 38,591 (7) 41,424 Investment banking 29,429 4 28,166 61 17,470 Asset management and administration 25,844 29 20,050 19 16,810 Gain on sale of investment investment advisory business,net 57 (91) 627 (94) 10,092 Other 7,221 (16) 8,607 33 6,491 ---------------------------------------------- 289,345 11 261,381 12 232,633 Interest expense 32,458 10 29,425 (4) 30,566 ---------------------------------------------- Net revenues 256,887 11 231,956 15 202,067 ---------------------------------------------- Non-interest expenses 232,789 10 210,888 11 190,306 ---------------------------------------------- Pre-tax income $ 24,098 14% $ 21,068 79% $ 11,761 ============================================== - ----------------------------------------------------------------------------- -76- [Page 21 of Annual Report] Commissions Current year agency commissions increased $12.9 million (12%) to a record $123.0 million as equity markets sustained the upward momentum of the past seven years. Year-to-year revenue gains were posted in each quarter. Commissions on listed securities increased $6.1 million (14%). Record revenue levels were attained for a second consecutive year from over- the-counter securities, up $3.6 million (19%), mutual funds, including distribution and deferred sales charges, up $2.5 million (7%) and insurance products, primarily variable annuities, up $.3 million (3%). Agency commissions increased $25.9 million (31%) to $110.1 million in fiscal 1996 reflecting strong equity markets throughout the year. Mutual fund revenues, including distribution and deferred sales charges, increased $11.5 million (51%), over-the-counter issues, increased $7.2 million (57%) and insurance products, primarily variable annuities, increased $3.5 million (78%). Commissions on listed securities gained $3.6 million (9%). Principal Transactions Revenue from principal transactions includes realized and unrealized gains and losses on Advest's trading accounts and related sales credits. During the second quarter of fiscal 1996, Advest established a corporate bond trading desk specializing in investment grade corporate bonds. Advest enters into derivative transactions to manage the interest rate risk associated with its municipal and corporate 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 15 to the Consolidated Financial Statements.) Advest holds only nominal inventory positions of high yield securities. Realized gains and losses on the Bank's trading and available for sale securities are reflected in revenue from principal transactions. Current year revenue from principal transactions increased $5.3 million (14%) to a record $43.9 million. Over-the-counter trading profits were $.6 million compared with a loss of $1.9 million in 1996 and related commissions increased $1.8 million (11%). Corporate bond trading profits increased $1.1 million (191%) in that trading department's first full year of operations. Municipal and government bond trading profits rose $.5 million (25%) and $.3 million (59%), respectively. Commissions on debt securities declined $.8 million (4%) reflecting investor interest in the equity markets. Advest realized a $76,000 loss on derivative transactions in the current year compared with a $20,000 profit in the prior year. The Bank posted a $72,000 loss from principal transactions in the current year compared with a small profit in 1996. In fiscal 1996, revenue from principal transactions declined $2.8 million (7%) to $38.6 million. Equity commissions increased $3.9 million (31%) reflecting strong investor demand for small cap stocks during 1996. This increase was substantially offset by a $3.3 million swing in over-the-counter trading results from a $1.4 million profit in 1995 to a loss of $1.9 million in 1996. Commissions on debt securities declined $2.7 million (12%) primarily reflecting interest rate uncertainty and strong equity markets. Investment Banking To generate investment banking revenue, Advest manages and participates in underwritings of corporate and municipal securities and closed-end funds. Advest's Corporate Finance Department also provides merger and acquisition, consulting and valuation services. In general, the Company does not participate in bridge financing activities. Advest's Corporate Finance Department concentrates its efforts on raising capital for mid-size companies, primarily in the banking, insurance, high tech 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. Current year investment banking revenues rose $1.3 million (4%) to $29.4 million. Consulting and valuation fees increased $1.2 million (122%) while merger and acquisition fees declined $.8 million (13%). Corporate Finance completed 15 public offerings and private placements raising over $412 million for clients. Commissions on equity underwritings and unit investment trust offerings each increased $1.1 million reflecting year-to-year gains of 14% and 42%, respectively. Underwriting fees declined $.2 million (6%) as a result of a substantial fee related to the conversion of a mutual company to a stock company earned in fiscal 1996. Prior year revenues included a $1.1 million gain on the exercise of stock warrants. Investment banking revenues increased $10.7 million (61%) in fiscal 1996. Underwriting fees, including private placements, increased $3.2 million (555%) and related commissions increased $2.6 million (48%). Syndicate trading profits increased $.7 million (81%). Merger and acquisition fees rose $2.5 million (66%). Consulting and valuation fees declined $.9 million (49%). Public finance underwriting fees more than doubled to $1.1 million. During 1996, Advest recognized gains of $1.1 million on the exercise of warrants, a 239% increase from the prior year. -77- [Page 22 of Annual Report] Asset Management and Administration Advest's Investment Management Department provides various services for its managed account base including client profiling, asset allocation, manager selection and performance measurement. The Bank provides personal trust services primarily through Advest's retail sales force. Boston Security Counsellors ("BSC"), an investment advisor, services private clients and was investment advisor to the Company's proprietary mutual funds, until their sale in fiscal 1995. Hannah Consulting Group ("HCG"), an investment management firm acquired by the Company in the current year, provides consulting services primarily to pension funds. Other services include retirement plan administration, securities custody and safekeeping. Current year revenues increased $5.8 million (29%) to $25.8 million, a record high for the third consecutive year. Advest's revenues increased $4.9 million (27%) due primarily to increased money management fees. During the year, Advest's Investment Management Department opened 1,226 new accounts and together with increased business from existing accounts increased its managed account base more than $1 billion. At September 30, 1997, managed accounts totaled $2.8 billion, reflecting a 44% year-to-year gain. HCG, acquired by the Company in the current year, generated $.5 million in management fees. The Bank's revenues increased $.3 million primarily related to higher trust revenues. Revenues increased $3.2 million (19%) in fiscal 1996. Advest's revenue increased $4.8 million (36%) primarily related to increased managed account business. BSC's revenue declined $1.9 million (61%). The 1995 sale of the Company's proprietary mutual fund advisory business accounted for a $2.1 million decline in revenue as BSC had served as sole investment advisor for the funds. Revenue from BSC's private client business increased $.2 million (15%) in 1996. The Bank's revenues increased $.2 million (41%) primarily due to growth in trust business. Other Income Other income declined $1.4 million (16%) to $7.2 million in the current year primarily due to a $.6 million (38%) decline in execution fee income at Advest related to regulatory changes which impact over-the-counter trading revenues. Fiscal 1996 revenues also included a $.9 million gain on the sale of an equity investment. During 1996, other income increased $2.1 million (33%). Advest's revenue increased $1.7 million primarily due to higher fee income and a $.9 million first quarter gain on the sale of an equity investment. Fiscal 1995 revenue included a $.5 million gain from the sale of an exchange seat. The Bank's income increased $.3 million in 1996 primarily due to a $.4 million increase in gains on secondary markets mortgage transactions. Net Interest Income Net interest income is the excess of interest income and loan fee income over interest expense and is derived primarily by the Bank and Advest. The Bank derives most of its interest income from residential mortgage and home equity loans and from investments. The Bank's loans and investments are primarily funded by interest-bearing deposits, advances from the Federal Home Loan Bank of Boston ("FHLBB") and by the Bank's equity capital. The Bank also enters into derivative transactions, including interest rate swap and interest rate cap contracts, as part of its interest rate risk management. The net payments or receipts under these contracts are accounted for as an adjustment to interest expense. (Further discussion of derivatives appears under the caption "Derivative Financial Instruments" and in Note 15.) 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. The components of interest revenue and expense are detailed in the Five Year Financial Summary on page 17. Current year net interest income increased $1.6 million (6%). Advest's net interest income increased $2.4 million (12%) primarily due to significantly higher average margin balances. Average free credit balances in brokerage accounts increased during the year but not enough to support the increased margin balances. Together with higher securities inventory levels, this resulted in increased bank borrowings which reduced overall interest spreads. The Bank's net interest income declined $1.3 million (16%) during 1997. The decline is attributable to a year-to-year $29 million (12%) decrease in average assets and a change in the mix of average loans to lower yielding residential mortgages and home equity lines from higher yielding commercial loans. In addition, NPAs increased $2.7 million in the current year primarily due to three commercial loans which were placed in a nonaccrual status and which had an average interest rate of 10%. The Bank's ratio of earning assets to total bank assets was 93.5% in the current year compared with 96.7% in 1996. AGI's net interest improved $.8 million primarily due to lower borrowing rates associated with its current year private placement of $35 million of notes. The proceeds were used to retire its convertible debentures and other higher cost debt and loan $10 million to Advest with the balance invested in short-term securities. -78- [Page 23 of Annual Report] Net interest income increased $.3 million (1%) to $25.8 million in 1996. Advest's net interest increased $1.7 million (10%) primarily due to significantly higher average margin balances. Interest spreads declined slightly primarily due to lower average interest rates in 1996, a sizable decline in average free credit balances in brokerage accounts and increased borrowing costs related to higher levels of trading inventories, specifically corporate bonds. Increased stock lending/borrowing activities also favorably impacted net interest income in fiscal 1996. The Bank's net interest income declined $1.7 million (17%) during 1996. The decline was attributable to a $48.3 million (18%) decline in the Bank's asset base. Non-Interest Expenses Current year compensation costs increased $16.1 million (11%). Advest's compensation costs increased $15.3 million (11%) related primarily to increased sales compensation and related incentives and higher firm payroll costs. HCG, acquired in the current fiscal year, had compensation costs of $.7 million. Communication costs increased $3.0 million (15%) primarily due to substantial upgrades in software, quote services and service bureaus in the Company's firm-wide Advantage2000 System. In addition, Advest's costs for its third party back office data processor increased $.9 million (29%) primarily related to higher securities transaction volume. Professional fees increased $1.2 million (21%). Advest's professional fees increased $.5 million with consulting fees and personnel agency fees increasing $.5 million (57%) and $.3 million (40%), respectively and legal fees declining $.4 million (15%). Professional fees for AGI increased $.5 million primarily due to increased consulting costs associated with the Company's centennial celebration. HCG, acquired in the current year, incurred $.4 million in consulting expenses. Business development costs increased $1.1 million (19%) primarily due to increases in the number of investment executives qualifying, as a result of sales production and contests, to attend Advest's National Sales and Education Conference and other Company-sponsored events. Brokerage, clearing and exchange costs increased $.6 million (13%) due to increased securities volume. The provision for credit losses and asset devaluation declined $.3 million (27%) primarily due to lower loss provisions required at the Bank. Other expenses were substantially unchanged year-to-year, however, the current year expenses includes a $.6 million loss on the second quarter retirement of the Company's outstanding convertible debentures. This loss was substantially offset by declines in carrying costs of other real estate owned. Fiscal 1996 compensation costs increased $25.5 million (21%). Advest's compensation increased $26.7 million (23%) primarily as a result of increased sales compensation and related incentives and higher firm payroll. BSC's payroll declined $.6 million (49%) as a result of personnel reductions related to the sale of the Company's proprietary mutual fund advisory business in fiscal 1995. Communication costs increased $1.6 million (9%) primarily due to higher volume-driven costs for Advest's third party back office data processing provider and increased software and supplies costs related to technology upgrades. Business development costs increased $1.4 million (34%) primarily due to significant increases in the number of investment executives qualifying, as a result of sales production and contests, to attend various Company-sponsored events. Provisions for credit losses and asset devaluation declined $9.1 million in 1996 due to substantial charges recorded in fiscal 1995 primarily related to an accelerated asset disposition plan at the Bank. Other expenses increased $.6 million (7%) primarily due to higher settlement costs at Advest which were partly offset by a decline in FDIC deposit insurance premiums at the Bank. Income Taxes The effective income tax rates were 41%, 44% and 46%, respectively, for 1997, 1996 and 1995. The effective tax rate declined to 41% in the current year due to reduced state tax obligations, primarily in Connecticut, where a portion of the previously reserved tax benefit of state carryforward losses was recognized. The higher rates of 1996 and 1995 are reflective of greater levels of income apportioned to states with higher average tax rates. At September 30, 1997 the Company had net deferred tax assets, net of a $.5 million valuation allowance, of $2.2 million. The Company expects to realize all deferred tax assets, except for certain state net operating loss carryforwards for which it has established the above valuation allowance. For further information on the Company's income taxes refer to Notes 1 and 13 to the Consolidated Financial Statements. Derivative Financial Instruments Advest Bank and Trust Company The Bank enters into transactions involving derivative securities, including interest rate swap and interest rate cap contracts as part of the Bank's management of interest rate risk. (See Note 1 for further disclosure.) Swap and cap contracts are used to hedge the cost of funds so that a more stable net interest income will be earned by the Bank. The Bank is exposed to credit- related losses in the event of nonperformance by counterparties but does not expect any parties to fail to meet their obligations. The Bank currently has outstanding contracts only with the -79- [Page 24 of Annual Report] FHLBB, which is the counterparty in $10.0 million and $5.0 million of the Bank's swap and cap contracts, respectively. The notional amounts of contracts entered into by the Bank and their potential credit exposure are in Note 15. 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 and corporate 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, at least annually, 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, 1997, Advest had only nominal open positions. At September 30, 1996, Advest had no open positions. (See Note 15.) Asset Quality Advest Bank and Trust Company The Bank's primary lending activity is originating loans collateralized by owner-occupied one-to-four family residential property. During 1997 and 1996, respectively, $37.0 million and $43.1 million of fixed rate and adjustable loans were originated, and secondary market sales and loan securitizations totaled $30.1 million and $67.8 million. In addition, in 1997 and 1996, respectively, $58.1 million and $47.1 million of home equity lines of credit were originated and retained in portfolio and advances on home equity lines of credit increased by a net $19.2 million and $16.1 million for the respective year. Residential (including home equity line of credit loan advances) and commercial loan portfolios increased $8.0 million and decreased $6.0 million, respectively, in 1997, and increased $26.4 million and $20.1 million, respectively, in 1996. At September 30, 1997 and 1996, respectively, the Bank's loan portfolio was comprised of $151.7 million and $143.7 million of single-family residential mortgages and $39.5 million and $42.9 million of commercial and other loans, representing 79% and 77% and 21% and 23% of total loans, respectively. During fiscal 1995, the Bank evaluated alternatives to expedite the disposition of its NPAs and implemented an accelerated asset disposition plan with the objectives of allowing Bank management to focus on its residential mortgage banking and trust businesses and expediting conditions under which a Memorandum of Understanding ("MOU") the Bank was subject to would be lifted. Both in anticipation of and in accordance with the plan, the Bank recorded loss provisions of $5.6 million in 1995 to dispose of NPAs and commercial real estate loans. In July 1996, the Bank's regulators lifted the MOU. At September 30, 1997 and 1996, the Bank's NPAs were $5.2 million and $2.4 million, respectively, reflecting 2% and 1%, respectively, of total bank assets. At September 30, 1997 and 1996, respectively, earning assets were 93.5% and 96.7% of total bank assets. Loan delinquency was 3.43%, 1.84% and .87% of total loans at September 30, 1997, 1996 and 1995, respectively. Had interest been accrued at contractual rates on nonaccrual and re-negotiated loans, interest income would have increased by approximately $.6 million, $.3 million and $.5 million in 1997, 1996 and 1995, respectively. Bank loans classified impaired as of September 30, 1997 and 1996, respectively, totaled $2.9 million and $5.3 million. Included in Bank impaired loans at September 30, 1996 were $3.8 million of restructured loans that had been returned to accruing status under the terms of their restructuring, and $.8 million of loans where there was potential credit problems. Both situations were satisfactorily resolved in the current year. All remaining amounts classified impaired for both fiscal 1997 and 1996 were included in nonaccrual loans, (See Note 2.) Advest Group, Inc. At September 30, 1995, the Bank transferred $4.6 million of NPAs to AGI in accordance with an accelerated asset disposition. The assets were transferred at their expected sales prices which reflected discounts from fair value. During 1997 and 1996, respectively, $.9 million and $3.2 million of these assets were liquidated. AGI holds a $9.0 million first mortgage on a property owned by a real estate limited partnership for which Billings Management Company, a subsidiary of the Company, serves as general partner. The first payment under the mortgage is not due until January 2000, therefore, the loan is technically performing. The property has been at full occupancy with a waiting list for most of the past four years, however, given its significant future financial commitments, the Company has decided to treat the mortgage as a nonperforming loan and, accordingly, no interest income is being accrued. -80- [Page 25 of Annual Report] Liquidity and Capital Resources The Company's total assets were $1.1 billion at September 30, 1997, reflecting a 12% increase from the prior year. Substantially all of the increase was attributable to Advest where assets increased $110.4 million (15%). The increase is primarily due to higher receivables related to stock borrowing activities and higher margin debits. With the primary exception of loans held in portfolio by the Bank which comprise 18% of total assets, 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 dealers, available for sale and trading securities comprised 75% of total assets at September 30, 1997 compared with 72% for the prior year. Shareholders' equity increased $15.3 million (17%) to $104.6 million, primarily as a result of a $14.2 million increase in retained earnings from current year operating results and a $2.5 million increase in paid-in capital primarily related to the sales of treasury stock to the Company's equity plans and the exercise of stock options. The Company paid quarterly dividends of $.03 per share on April 15, 1997, July 15, 1997 and October 15, 1997. The total amount paid was $.8 million. At September 30, 1997, 2,696,277 shares of the Company's common stock had been purchased since the inception of the stock buyback program in August 1990, at an average price of $6.17 per share. AGI's principal source of funding is the earnings distributions from its subsidiaries which are unrestricted. In December 1996, AGI issued $35 million 7.95% seven year senior notes in an unsecured private placement transaction with three institutional investors. In December 1996, AGI repaid in full its outstanding indebtedness of $4.4 million, including accrued interest and fees, under a loan from a third party bank. On January 30, 1997, the Company redeemed $20.3 million outstanding principal amount of its 9% convertible subordinated debentures due 2008. The redemption price was 101.2% of the par value of the debentures, together with accrued interest. A total of 18,716 shares were issued to debenture holders electing to convert $.3 million par value of debentures into the Company's common stock at the conversion price of $13.57. Cash was issued in lieu of fractional shares. The conversion of the debentures eliminated the potential dilution of the Company's common stock by 15%. Advest, Inc. In addition to funds generated from operations, sources used by Advest to finance assets include credit balances in brokerage accounts which increased $36.5 million (13%), short-term borrowings which decreased $1.8 million (5%), deposits for securities loaned which increased $44.3 million (21%), securities sold short which increased $4.7 million (10%) and long-term borrowings which declined $6.3 million (100%). In January 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 loan was to increase Advest's regulatory net capital. On April 1, 1997, Advest repaid in full an outstanding secured collateralized note in the amount of $6.3 million to an unrelated third party lender. Prior to fiscal 1996, Advest's short-term borrowings primarily resulted from timing differences related to trade settlements and were usually repaid within a day or two. A significant increase in margin debits and Advest's corporate bond trading inventories, together with the securities industry conversion to same day funds settlement in February 1996, have resulted in substantial and recurring short-term borrowings by Advest. Advest has arrangements with certain financial institutions whereby it can borrow amounts on a collateralized basis, principally to support securities settlements and underwriting activities, including an uncommitted line of credit of $90 million with its lead lending bank. Advest has substantial levels of customer and firm securities which can be used as collateral. During fiscal 1998, Advest has planned approximately $2.5 million of new expenditures related to technology upgrades. Management believes that operating cash flow together with available credit lines will provide sufficient resources to meet all present and reasonably foreseeable capital needs. The Securities and Exchange Commission ("SEC") requires Advest to maintain liquid net capital to meet its obligations to customers. At September 30, 1997, Advest had excess net capital of approximately $51.9 million. (See Note 12.) Advest Bank and Trust Company At September 30, 1997, the Bank's regulatory liquid assets included cash, federal funds and qualified securities (which include all available for sale and certain held to maturity securities) of $6.5 million. In addition, 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. At September 30, 1997, the Bank had uncommitted, eligible collateral of $137.9 million. Without giving effect to any operating results from subsequent periods, management believes that the Bank has sufficient capital to comply with the regulatory requirements. Pursuant to federal statute, federal savings banks are subject to a liquidity requirement that specifies that at least 5% of total Bank assets to be invested in qualified assets. As of September 30, 1997, the Bank's liquidity ratio was 5.07%. -81- [Page 26 of Annual Report] The Federal Deposit Insurance Corporation ("FDIC") requires banks to maintain a minimum leverage capital ratio of between 4% and 5%. At September 30, 1997, the Bank's leverage capital ratio was 6.84%. The Bank is also subject to the FDIC's risk-based capital regulations which require the Bank to maintain a total risk-based capital ratio of 8%, including at least 4% Tier 1 capital. At September 30, 1997, the Bank's total risk-based and Tier 1 capital ratios were 10.04% (with capital of $17.4 million) and 8.79% (with capital of $15.2 million), 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, 1997, the Bank had $61.4 million of brokered deposits. Cash Flows Cash and cash equivalents increased $1.0 million, and $4.2 million in fiscal 1997 and 1996, respectively, compared with a negligible increase in 1995. The current year increase resulted from increases in cash of $1.0 million and $.8 million at AGI and the Bank, respectively, offset by a decrease in cash of $.8 million at Advest. AGI's cash from financing activities increased $10.0 million primarily related to a $35 million private placement of notes offset by a $20.5 million payment for the retirement of the Company's convertible debentures and $4.6 million of other debt repayment. AGI's cash from investing activities declined $9.7 million primarily related to a $10.0 million subordinated loan to Advest. The 1996 increase was attributed to increases in cash of $2.7 million, $.9 million and $.5 million at Advest, the Bank and AGI, respectively. Advest generated $25.2 million from financing activities, primarily short-term borrowings, but used $7.7 million for investing and $14.9 million in operating cash primarily to finance increased margin debits and trading inventories. The Bank generated $47.5 million from investing activities, primarily loan collections and sales of available for sale securities, and used $47.0 million for financing activities, primarily a decrease in deposits. The break even results for 1995 resulted from $1.0 million and $.3 million increases at the Bank and AGI, respectively, which were offset by a $1.3 million decline at Advest. The Bank's increase was primarily attributed to net funds generated by the accelerated asset disposition plan and improved cash flow from operations. Advest generated strong cash flow primarily from operations and a $6.25 million long-term borrowing in 1995. However, the broker/dealer made significant 1995 capital investments in computer hardware and software to support its sales force. In addition, Advest incurred high costs associated with the recruitment of investment professionals. During the current year, the Company generated $10.4 million of operating cash primarily related to increased net income, as adjusted for non-cash items, of $24.6 million, higher short inventory positions up $4.7 million and increased liabilities. This was offset by a net $26.5 million cash used for stock borrowing activities. $11.3 million of cash was used in investing activities due primarily to an increase in loans originated of $79.6 million compared with cash receipts from mortgage payments of $43.8 million and $26.4 million of cash received on the sale of loans. Cash from financing activities increased $1.9 million primarily as a result of a $35 million private placement of notes by AGI which was offset by a $20.5 million payment to retire its debentures as well as other debt extinguishment. The Bank's deposits declined $21.6 million necessitating increased net short-term borrowings of $20.4 million to support its lending activities. During fiscal 1996, the Company used $20.4 million of operating cash primarily to finance a $43.8 million increase in margin debits, a $17.4 million decline in brokerage customer credits and a $9.8 million increase in trading inventories net of short sales. Operating cash was provided primarily by net income plus non-cash items of $19.1 million and a $31.0 million decline in segregated cash required by Rule 15c3-3. Financing activities used $14.2 million of cash primarily related to a $44.5 million decline in deposits of the Bank which was partly offset by a net increase of $23.3 million in short-term borrowings. Investing activities generated $38.8 million of cash, including $25.2 million decrease in available for sale securities, $49.3 million in proceeds from loan sales which were offset by the use of $30.7 million for net loan originations. During fiscal 1995, the Company generated $28.9 million of operating cash primarily from $6.4 million of net income adjusted for non-cash revenue and expense items. Margin debits declined $13.1 million and 15c3-3 requirements for segregated customer funds declined $18.0 million generating cash. Brokerage customer credits declined $10.5 million and Advest increased its trading positions $11.1 million decreasing operating cash. Financing activities used $93.6 million primarily due to a $56.2 million decline in customer deposits at the Bank. Advest's short-term borrowings declined $22.5 million and its long-term debt increased $6.25 million. The Bank paid down its short and long-term borrowings by $9.5 million and $10.0 million, respectively. Investing activities produced positive cash flow of $64.7 million primarily as a result of $49.5 -82- [Page 27 of Annual Report} million in proceeds from the sales of performing and NPAs of the Bank and $29.6 million from securities sales by the Bank. The Company generated $10.1 million of cash from the sales of its proprietary mutual fund investment advisory business. Risk Management During its normal course of business, Advest keeps an inventory of securities which consists largely of fixed income securities. To make product available and facilitate order flow to its retail and institutional customers, Advest makes markets in investment-grade corporate bonds, mortgages and mortgage- backed securities, municipal bonds and over-the-counter equities. Advest holds only nominal positions of high yield securities. Trading positions are held for re-sale, not investment. Since trading positions are generally biased, specifically, more long than short or the reverse, they are exposed to market risk related to fluctuations in interest rates. Trading authorization levels for each category of inventory have been established above which policy requires that derivative transactions be entered into. Through the use of derivatives, principally exchange-traded futures contracts, management seeks to manage the risk of the portfolio in aggregate and not the value of any individual security. The Bank is engaged in the business of attracting deposits and investing such deposits, together with funds from capital and other borrowings, in loans, primarily residential, and investments. The Bank conducts mortgage banking with investors, principally federal agencies and major private mortgage conduits, retaining nominal balances of new production in portfolio, primarily interest rate sensitive home equity lines of credit. Investments include government and agency obligations, mortgage-backed securities and money market instruments. The Bank enters into interest rate swap and cap contracts as part of its interest rate risk management strategy. These instruments are intended to maintain a targeted level of net interest margin between the return on the Bank's interest-earning assets and the cost of funds. Potential future losses associated with the Company's non-hedged financial instruments are within pre-determined levels of loss tolerance which are not material to results of operations, financial condition or cash flows. Accounting Pronouncements In fiscal 1997, the Company adopted SFAS 123, "Accounting for Stock- based Compensation," as required. SFAS 123 encourages, but does not require companies to record compensation cost for stock-based employee compensation plans at fair value. The Company has elected to continue to account for stock- based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion 25, "Accounting for Stock Issued to Employees." (Refer to Note 10.) Effective October 1, 1996, the Company prospectively adopted Statement of Financial Accounting Standards ("SFAS") 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." Effective January 1, 1997, the Company prospectively adopted SFAS 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," as amended by SFAS 127, "Deferral of the Effective Date of Certain Provisions of FASB Statement No. 125." The adoptions of SFAS 121 and SFAS 125, as amended by SFAS 127 which the Company will adopt in its 1998 fiscal year as required, have not had a material impact on the Company's financial position, results of operations or cash flows. The Financial Accounting Standards Board ("FASB") issued SFAS 128, "Earnings Per Share" in February 1997. The Company will adopt SFAS 128 in its 1998 fiscal year, as required, and its implementation will not have a material impact on the Company's computation of earnings per share. The FASB issued SFAS 129, "Disclosure of Information about Capital Structure" in February 1997. The Company will adopt SFAS 129 in its 1998 fiscal year, as required, and its implementation will not have a material impact on the Company's financial condition, results of operations or cash flows. The FASB issued SFAS 130, "Reporting Comprehensive Income" and SFAS 131, "Disclosures about Segments of an Enterprise and Related Information" in June 1997. The Company will adopt these pronouncements in its 1999 fiscal year, as required. The Company is reviewing the provisions of both statements and has not yet determined whether their implementation will have a material impact on the presentation of the Company's financial condition, results of operations or cash flows. -83- [Page 28 of Annual Report] The Advest Group, Inc. Consolidated Statements of Earnings Fiscal years ended September 30, (In thousands, except per share amounts) 1997 1996 1995 - ----------------------------------------------------------------------------------------------------- Revenues Commissions $ 123,032 $ 110,115 $ 84,264 Interest 59,882 55,225 56,082 Principal transactions 43,880 38,591 41,424 Investment banking 29,429 28,166 17,470 Asset management and administration 25,844 20,050 16,810 Gain on sale of investment advisory business, net 57 627 10,092 Other 7,221 8,607 6,491 -------------- -------------- -------------- Total revenues 289,345 261,381 232,633 -------------- -------------- -------------- Expenses Compensation 163,200 147,091 121,611 Interest 32,458 29,425 30,566 Communications 23,955 20,917 18,999 Occupancy and equipment 17,758 17,567 17,369 Professional 6,729 5,543 5,468 Business development 6,664 5,613 4,204 Brokerage, clearing and exchange 4,788 4,221 3,922 Provision for credit losses and asset devaluation 915 1,258 10,338 Other 8,780 8,678 8,395 -------------- -------------- -------------- Total Expenses 265,247 240,313 220,872 -------------- -------------- -------------- Income before taxes 24,098 21,068 11,761 Provision for income taxes 9,880 9,270 5,410 -------------- -------------- -------------- Net income $ 14,218 $ 11,798 $ 6,351 ============== ============== ============== Net income per common and common equivalent shares: Primary $ 1.60 $ 1.35 $ 0.73 Assuming full dilution $ 1.54 $ 1.23 $ 0.71 Cash dividends per common share $ 0.09 $ 0.00 $ 0.00 Average common and common equivalent shares outstanding: Primary 8,878 8,748 8,735 Assuming full dilution 9,394 10,270 10,298 See Notes to Consolidated Financial Statements -80-
[Page 29 of Annual Report] The Advest Group, Inc. Consolidated Balance Sheets September 30, September 30, In thousands, except share and per share amounts 1997 1996 - -------------------------------------------------------------------------------------------- -------------- Assets Cash and short-term investments Cash and cash equivalents $ 12,459 $ 11,461 Cash and securities segregated under federal and other regulations 265 265 ----------------- -------------- 12,724 11,726 ----------------- -------------- Receivables Brokerage customers, net 389,137 352,434 Loans, net 199,166 194,956 Securities borrowed 290,745 219,919 Brokers and dealers 4,096 5,394 Other 12,751 11,212 ----------------- -------------- 895,895 783,915 ----------------- -------------- Securities Trading, at market value 94,841 93,937 Held to maturity (market values of $20,931 and $22,876) 21,034 22,959 Available for sale, at market value 13,978 15,127 ----------------- -------------- 129,853 132,023 ----------------- -------------- Other assets Equipment and leasehold improvements, net 14,500 14,187 Other 23,834 23,326 ----------------- -------------- 38,334 37,513 ----------------- -------------- Total assets $ 1,076,806 $965,177 ================= ============== Liabilities & shareholders' equity Liabilities Brokerage customers 319,101 282,618 Deposits 169,583 191,186 Securities loaned 258,295 213,996 Short-term borrowings 61,496 39,301 Securities sold, not yet purchased, at market value 52,113 47,438 Long-term borrowings 41,321 19,744 Compensation and benefits 25,477 21,517 Checks payable 18,366 16,976 Brokers and dealers 9,389 7,634 Subordinated borrowings 0 20,552 Other 17,074 14,973 ----------------- -------------- 972,215 875,935 ----------------- -------------- Commitments and contingent liabilities (see Notes 1, 12 and 14) Shareholders' equity Common stock, par value $.01, authorized 25,000,000 shares, issued 10,812,404 and 10,710,289 shares 108 107 Paid-in capital 71,309 68,842 Retained earnings 48,198 34,754 Net unrealized loss on securities available for sale, net of taxes (63) (223) Treasury stock, at cost, 2,179,725 and 2,306,948 shares (14,390) (14,182) Unamortized restricted stock compensation (571) (56) ----------------- -------------- 104,591 89,242 ----------------- -------------- Total liabilities and shareholders's equity $ 1,076,806 $ 965,177 ================= ============== See Notes to Consolidated Financial Statements -84-
[Page 30 of Annual Report] The Advest Group,Inc. Consolidated Statements of Cash Flows Fiscal years ended September 30, In thousands 1997 1996 1995 - ---------------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES Net income $ 14,218 $ 11,798 $ 6,351 Adjustments to reconcile net income to net cash provided by (used for) operating activities: Depreciation and amortization 8,526 8,221 8,905 Provision for credit losses and asset devaluation 915 1,258 10,338 Loss on retirement of subordinated borrowings 607 0 0 Deferred income taxes (122) 107 1,730 Other 292 (1,496) (218) (Increase) decrease in operating assets: Receivables from brokerage customers, net (36,794) (43,823) 13,079 Securities borrowed (70,826) (109,238) (44,930) Receivables from brokers and dealers 1,298 (3,003) 1,148 Trading securities (904) (52,437) (6,633) Cash and securities segregated under federal and other regulations 0 30,994 18,046 Other (1,989) 917 104 Increase (decrease) in operating liabilities: Brokerage customers 36,483 (17,393) (10,526) Securities loaned 44,299 100,364 34,173 Securities sold, not yet purchased 4,675 42,591 2,660 Checks payable 1,390 10,225 (49) Other 8,389 1,133 4,784 ------------------------------------------ Net cash provided by (used for) operating activities 10,457 (19,782) 38,962 ------------------------------------------ FINANCING ACTIVITIES Net decrease in deposits (21,603) (44,470) (56,229) Proceeds from short-term borrowings 57,436 0 0 Repayment of short-term borrowings (37,044) (10,496) (10,298) Short-term brokerage borrowings, net (1,800) 33,800 (22,501) Proceeds from long-term borrowings 35,000 8,250 7,250 Repayment of long-term borrowings (9,820) 0 (10,000) Retirement of subordinated borrowings (20,545) 0 0 Other 272 (1,318) (1,811) ------------------------------------------ Net cash provided by (used for) financing activities 1,896 (14,234) (93,589) ------------------------------------------ INVESTING ACTIVITIES Proceeds from (payments for): Sales of available for sale securities 4,871 26,290 23,075 Maturities of available for sale securities 1,759 1,969 2,544 Maturities of held to maturity securities 24,000 22,252 18,466 Purchases of available for sale securities (1,598) (3,033) (1,215) Purchases of held to maturity securities (22,000) (23,986) (16,439) Sale of investment advisory business, net 217 788 10,141 Loans sold 26,350 49,257 36,129 Sales of OREO, net 791 3,959 6,021 Principal collections on loans 43,830 21,777 60,432 Loans originated (79,570) (52,439) (67,674) Other (9,948) (8,024) (6,745) ------------------------------------------ Net cash (used for) provided by investing activities (11,298) 38,810 64,735 ------------------------------------------ Increase in cash and cash equivalents 1,055 4,794 10,108 Cash and cash equivalents at beginning of period 11,461 7,294 7,278 ------------------------------------------ Cash and cash equivalents at end of period $ 12,516 $ 12,088 $ 17,386 ========================================== Interest paid $ 31,705 $ 29,580 $ 30,560 Income taxes paid $ 7,987 $ 10,067 $ 2,273 Non-cash activities: Securities available for sale from held to maturity / investment securities $ 0 $ 9,962 $ 20,891 Securitization of mortgages $ 3,684 $ 27,307 $ 26,315 Restricted stock awards, net of forfeitures $ 515 $ 56 $ 0 See Notes to Consolidated Financial Statements. -85-
[Page 31 of Annual Report] The Advest Group,Inc. Consolidated Statements of Changes in Shareholders' Equity
Net unrealized gain (loss) on securities available for $.01 par value Unamortized sale, Common stock Treasury stock restricted net Share- In thousands, except -------------------- Paid-in Retained -------------------------- stock of holders' share and per share amount Shares Amount capital earnings Shares Amount compensation taxes Equity - ---------------------------------------------------------------------------------------------------------------------------------- Balance as of September 30, 1994 10,570,222 $106 $67,405 $16,605 (1,987,357) $(10,136) $ - $ - $ 73,980 Adjustment to beginning balance for change in accounting principle (57) (57) Net income 6,351 6,351 Exercise of stock options 14,266 62 62 Repurchase of common stock (344,554) (2,309) (2,309) Sale of treasury stock to equity plans 129,392 846 846 Change in unrealized gain (loss), net of taxes 59 59 -------------------------------------------------------------------------------------------------------- Balance as of September 30, 1995 10,584,488 106 67,467 22,956 (2,202,519) (11,599) (57) 59 78,932 Net income 11,798 11,798 Exercise of stock options 125,801 1 571 138,270 504 1,076 Repurchase of common stock (398,900) (3,799) (3,799) Sale of treasury stock to equity plans 782 150,499 677 1,459 Change in unrealized gain (loss), net of taxes (225) (225) Stock issued under restricted stock plans, less amortization of $1 22 5,702 35 (56) 1 -------------------------------------------------------------------------------------------------------- Balance as of September 30, 1996 10,710,289 107 68,842 34,754 (2,306,948) (14,182) (113) (166) 89,242 Net income 14,218 14,218 Exercise of stock options 83,399 1 839 60,925 26 866 Dividends declared ($.09 per share) (774) (774) Repurchase of common stock (183,200) (1,835) (1,835) Sale of treasury stock to equity plans 1,104 191,296 1,221 2,325 Change in unrealized gain (loss), net of taxes 160 160 Conversion of subordinated debentures at $13.57 per share 18,716 254 254 Stock issued under restricted stock plans, less amortization of $95 255 54,436 355 (515) 95 Other 15 3,766 25 40 -------------------------------------------------------------------------------------------------------- Balance as of September 30, 1997 10,812,404 $108 $71,309 $48,198 (2,179,725) $(14,390) $(628) $(6) $104,591 ======================================================================================================== See Notes to Consolidated Financial Statements -86-
[Page 32 of Annual Report] 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"). Principal operating subsidiaries are Advest, Inc. ("Advest"), a broker/dealer and Advest Bank and Trust Company (the "Bank"), a federal savings bank. The Company provides diversified financial services including securities brokerage, trading, investment banking, consumer lending, trust and asset management. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. All material intercompany accounts and transactions are eliminated. Certain 1996 and 1995 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, 1996, Federal funds sold were $3,200,000. There were no positions at September 30, 1997. Cash and securities segregated under federal and other regulations Investments held in special reserve accounts for the exclusive benefit of customers, in accordance with Rule 15c3-3, are primarily securities purchased under agreements to resell which are financing transactions collateralized by U.S. Government and Agency obligations and are carried at the amounts at which the securities will be subsequently resold. The collateral, which is held by a third party custodian bank, is valued daily and additional collateral is obtained when appropriate. There were no positions at September 30, 1997 and 1996. Certain interest-bearing cash deposits are held in special reserve accounts for the exclusive benefit of customers. Loans Loans are carried at their unpaid principal balances, and related interest is recognized as income when earned but only to the extent considered collectible. Generally loans are placed on a nonaccrual status when interest or principal is unpaid for ninety days or earlier if circumstances indicate collection is doubtful. The Company resumes the accrual of interest on a delinquent loan if, in the opinion of management, the borrower has demonstrated adequate financial resources and intent to meet the terms and conditions of the loan, and all payments are current. If a loan has been restructured during a period in which it was delinquent, or had sufficiently met the definition of a restructured troubled loan in any other regard, a loan would not be restored to accruing status until 1) adequate collateral coverage had been provided and 2) an appropriate period (minimum six months) has elapsed during which the restructured loan has performed according to the terms and conditions of the restructuring. Loan origination fees and direct costs related to origination are deferred and amortized into interest income over the contractual life of the loan, using the level yield method. When a loan is prepaid or sold, any remaining unamortized fees and costs are credited or charged to income at that time. Loans, usually mortgages, held for sale are carried at the lower of cost or market, as determined by outstanding commitments from investors or current investor yield requirements calculated on the aggregate loan basis, stratified based on their predominate risk characteristics, including loan type, amortization type (fixed or adjustable), and note rate. Gains and losses resulting from changes in carrying values are included in other income. Allowance for loan losses Management's determination of the adequacy of the allowance, established through charges against income, is based upon continuing evaluation of the risk characteristics of the loan portfolio, current economic and real estate market conditions, reviews of specific loans, estimates of current value of underlying collateral, changes in loan portfolio composition, the results of the most recent regulatory examination and other relevant factors. Loans are charged against the allowance when management believes that collection is unlikely. Any subsequent recoveries are credited to the allowance. The Company's reserves are general reserves and are available to absorb losses to the total loan portfolio as well as off-balance-sheet commitments, such as commitments to extend credit, guarantee and standby letters of credit. 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 -87- [Page 33 of Annual Report] 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, 1997 and 1996, the reserve was $719,000 and $791,000, respectively. Included in payables to brokerage customers are free credit balances of $288,070,000 and $259,910,000 at September 30, 1997 and 1996, respectively. Advest pays interest on credit balances when the customer has indicated that the funds are for reinvestment purposes. Securities loaned and securities borrowed Advest loans, to other brokers and dealers, securities owned by its customers and others for which it receives cash deposits or other securities as collateral. Advest also borrows securities from one broker/dealer and lends to another. Securities borrowed and securities loaned are recorded at the amount of cash collateral advanced or received, respectively. The initial collateral advanced or received has a market value equal to the market value of the underlying securities. The values of such securities at September 30, 1997 and 1996 approximate amounts owed. Trading positions 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 and investment banking. Investment securities Securities available for sale are carried at fair value with unrealized holding gains or losses, net of tax, credited or charged directly to shareholders' equity. 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. 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, 1997 and 1996, accumulated depreciation and amortization were $37,215,000 and $33,314,000, 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 periods between 15 and 40 years. At September 30, 1997 and 1996, the amount of goodwill reported in other assets is $5,874,000 and $6,124,000, respectively. Revenues from securities transactions and investment banking Advest records securities transactions on a settlement date basis, which does not materially differ from a trade date basis. Revenues and related expenses for transactions executed but not settled are accrued on a trade date basis. Securities transactions of the Bank are recorded on a trade date basis. 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. Provision for credit losses and asset devaluation The provision for credit losses and asset devaluation reflects reserve accruals and writedowns for loans, other real estate owned ("OREO") and certain other investments and receivables. Income taxes Deferred income taxes are recognized for the future tax consequences of differences between the tax bases 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. Net income per common and common equivalent shares Primary net income per share is calculated by dividing net income by the average shares of common stock and common stock equivalents outstanding during the period. Common stock equivalents are dilutive stock options which are assumed exercised for calculation purposes. Fully diluted calculations assume full conversion of the Company's outstanding subordinated debentures into common stock and elimination of the related interest expense, net of taxes. The debentures were retired in January 1997. (See Note 8.) The Financial Accounting Standards Board ("FASB") has issued Statement of Financial Accounting Standards ("SFAS") 128, "Earnings Per Share" in February 1997. The Company will adopt SFAS 128 in its 1998 fiscal year, as required, and its implementation will not have a material impact on the Company's computation of earnings per share. -88- [Page 34 of Annual Report] Derivative financial instruments Advest uses derivatives (primarily financial futures contracts) solely to manage the risk associated with its municipal and corporate bond trading inventories. 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 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. The Bank enters into interest rate swap and cap contracts as part of its interest rate risk management strategy. Such instruments are held for purposes other than trading. These swaps and caps are intended to maintain a targeted level of net interest margin between the return on the Bank's interest-earning assets and the cost of funds. Interest rate swaps involve the exchange of fixed and floating rate interest payments based on an underlying notional amount. The Bank accrues interest expense based on a fixed contract rate and accrues interest income based on a floating rate which is reset according to the contract index (usually tied to 3-month LIBOR) and settled quarterly. Interest rate cap contracts provide that, in exchange for the payment of an initial premium, the Bank will receive payments from the counterparty in the event that interest rates rise above a predetermined level (the "strike rate"). The Bank amortizes the premium monthly over the term of the cap contract as interest expense, and accrues interest income when the reset of the contract rate (usually tied to 3-month LIBOR) exceeds the strike rate, settled quarterly. Interest income and interest expense arising from interest rate swap and cap contracts are recorded as components of accrued interest in the consolidated balance sheet, as components of cash flows from operating activities in the consolidated statements of cash flows, and as components of interest expense in the consolidated statements of earnings. In the unlikely event of perceived inability of a counterparty to meet the terms of a contract, the Bank would record interest income on a cash basis. Unamortized premiums paid on cap contracts are recorded as a component of deposits in the consolidated balance sheets, with amortization of such premiums reflected as a component of cash flows from operating activities in the consolidated statements of cash flows and as a component of interest expense in the consolidated statements of earnings. Stock-based compensation In fiscal 1997, the Company adopted SFAS 123, "Accounting for Stock-based Compensation," as required. SFAS 123 encourages, but does not require companies to record compensation cost for stock-based employee compensation plans at fair value. The Company has elected to continue to account for stock- based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." (Refer to Note 10.) Other accounting pronouncements Effective October 1, 1996, the Company prospectively adopted SFAS 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." Effective January 1, 1997, the Company prospectively adopted SFAS 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," as amended by SFAS 127, "Deferral of the Effective Date of Certain Provisions of FASB Statement No. 125." The adoptions of SFAS 121 and SFAS 125, as amended by SFAS 127 which the Company will adopt in its 1998 fiscal year as required, have not had a material impact on the Company's financial position, results of operations or cash flows. The FASB issued SFAS 129, "Disclosure of Information about Capital Structure" in February 1997. The Company will adopt SFAS 129 in its 1998 fiscal year, as required, and its implementation will not have a material impact on the Company's financial condition, results of operations or cash flows. The FASB issued SFAS 130, "Reporting Comprehensive Income" and SFAS 131, "Disclosures about Segments of an Enterprise and Related Information" in June 1997. The Company will adopt these pronouncements in its 1999 fiscal year, as required. The Company is reviewing the provisions of both statements and has not yet determined whether their implementation will have a material impact on the presentation of the Company's financial condition, results of operations or cash flows. -89- [Page 35 of Annual Report] Note 2: Loans At September 30, 1997 and 1996, loans consisted of: ------------------------------------------------ In thousands 1997 1996 ------------------------------------------------ Advest Bank and Trust Company: Mortgages Commercial $ 23,144 $ 27,717 Multi-family residential 7,975 11,285 1 - 4 family residential conventional 73,846 84,987 Home equity credit 77,860 58,691 Commercial 4,627 2,757 Consumer 3,732 1,097 Advest Group, Inc.: Mortgages Commercial 9,000 9,000 1 - 4 family residential 232 555 Home equity credit 127 232 Other 1,102 1,033 -------- -------- $201,645 $197,354 ======== ======== ------------------------------------------------ The Company maintains an allowance for possible future loan losses and asset devaluation. For the three years in the period ended September 30, 1997, activity in the allowance for loan losses was as follows: --------------------------------------------------- In thousands 1997 1996 1995 --------------------------------------------------- Balance at the beginning of the year $2,398 $2,334 $4,900 Provisions 671 1,022 5,637 Charge-offs (838) (1,249) (8,462) Recoveries 248 291 259 ------------------------------ Balance at the end of the year $2,479 $2,398 $2,334 ============================== - ----------------------------------------------------------- Nonperforming assets include nonaccruing loans, loans ninety days past due and accruing interest, loans renegotiated on other than prevailing market terms and OREO. OREO is included in other assets in the consolidated balance sheets. All other nonperforming assets are classified as loans. It is management's policy to reverse all uncollected interest at the time a loan is placed on nonaccrual. Interest forgone on nonaccrual and restructured loans of the Bank was $576,000, $297,000 and $509,000 for the years ended September 30, 1997, 1996 and 1995, respectively. As of September 30, 1997, no additional funds were committed to clients whose loans have been restructured or were nonperforming. At September 30, 1997 and 1996, nonperforming assets were comprised of: --------------------------------------------------- In thousands 1997 1996 --------------------------------------------------- Advest Group, Inc.: Nonaccrual loans $ 9,326 $ 9,555 OREO 159 800 Advest Bank and Trust Company: Nonaccrual loans 4,135 1,422 OREO, net 1,046 984 Other 750 750 ---------------------- $15,416 $13,511 ====================== Nonperforming assets as a percentage of loans and OREO 7.6% 6.8% ====================== Nonperforming assets as a percentage of total assets 1.4% 1.4% ====================== At September 30, 1997 and 1996, the Company classified $2,948,000 and $5,261,000, respectively, of loans as impaired. A loan is considered impaired if it is probable that the Company will be unable to collect scheduled payments according to the terms of the loan agreement. Impaired loans as of September 30, 1997 and 1996 include $-0- and $3,810,000 of loans restructured and currently classified as performing, $2,948,000 and $639,000 of loans currently classified as nonaccrual, and $-0- and $812,000 of loans in which potential credit problems may lead to future nonaccrual status or possible charge-off. The nonaccrual impaired loans are a component of nonperforming assets. Note 3: Trading Positions At September 30, 1997 and 1996, Advest's trading positions consisted of: - ----------------------------------------------------------------- Securities sold, Trading securities not yet purchased ------------------ ----------------- - ----------------------------------------------------------------- In thousands 1997 1996 1997 1996 - ----------------------------------------------------------------- Corporate obligations $55,546 $53,114 $32,298 $44,825 State and municipal obligations 24,627 25,796 1,402 183 U.S. government and agency obligations 10,559 10,612 16,244 697 Stocks and warrants 4,109 4,415 2,169 1,733 -------------------------------------- $94,841 $93,937 $52,113 $47,438 ====================================== - ----------------------------------------------------------------- -90- [Page 36 of Annual Report] Note 4: Investment Securities As of September 30, 1997, the amortized cost and fair values of debt securities, by contractual maturity, were: - ---------------------------------------------------------------- Available for sale Held to maturity --------------------------------------- Amortized Fair Amortized Fair In thousands cost value cost value - ---------------------------------------------------------------- Due in one year or less $ -- $ -- $12,532 $12,549 Due after one year through five years -- -- 500 500 Due after ten years 9,677 9,575 8,002 7,882 -------------------------------------- $9,677 $9,575 $21,034 $20,931 ====================================== - ---------------------------------------------------------------- For the three years ended September 30, 1997, 1996 and 1995, respectively, proceeds from the sale of securities available for sale were $4,871,000, $26,290,000 and $23,075,000 and gross gains realized were $11,000, $115,000 and $152,000, respectively. Gross losses realized were $82,000 and $255,000 for 1997 and 1995, respectively, and there were no gross losses realized for 1996. The amortized cost and fair values of the Company's available for sale securities at September 30, 1997 and 1996 were: - --------------------------------------------------------------- Gross unrealized Amortized ---------------- Fair In thousands cost gains losses value - --------------------------------------------------------------- 1997 ---- FHLB stock $ 2,270 $ -- $ -- $ 2,270 Mortgage-backed securities of federal agencies 9,066 49 (157) 8,958 Other 2,740 25 (15) 2,750 ------------------------------------- $14,076 $ 74 $(172) $13,978 ===================================== 1996 ---- FHLB stock $ 2,233 $ -- $ -- $ 2,233 Mortgage-backed securities of federal agencies 8,998 7 (350) 8,655 Other mortgage-backed securities 99 -- -- 99 Other 4,132 15 (7) 4,140 ------------------------------------- $15,462 $ 22 $(357) $15,127 ===================================== - --------------------------------------------------------------- There were no sales of held to maturity securities during the three years in the period ended September 30, 1997. The amortized cost and fair values of the Company's held to maturity securities at September 30, 1997 and 1996 were: - --------------------------------------------------------------- Gross unrealized Amortized ---------------- Fair In thousands cost gains losses value - --------------------------------------------------------------- 1997 ---- Mortgage-backed securities $ 8,002 $3 $(123) $ 7,882 U.S. government and agency obligations 12,532 -- 17 12,549 Other 500 -- -- 500 ------------------------------------- $21,034 $3 $(106) $20,931 ===================================== 1996 ---- Mortgage-backed securities $10,635 $11 $(85) $10,561 U.S. government and agency obligations 11,824 -- (9) 11,815 Other 500 -- -- 500 ------------------------------------- $22,959 $11 $(94) $22,876 ===================================== - --------------------------------------------------------------- Note 5: Deposits Pursuant to the FDIC Improvement Act ("FDICIA"), banks are subject to rules limiting brokered deposits and related interest rates. The Bank meets the conditions of such rules to be deemed a "well capitalized" bank and as such may accept brokered deposits without restriction. At September 30, 1997 and 1996, deposits at the Bank consisted of: - ------------------------------------------------ In thousands 1997 1996 - ------------------------------------------------ Money market $107,499 $127,840 Certificates of deposit 61,673 63,271 Savings 411 75 --------------------- $169,583 $191,186 ===================== - ------------------------------------------------ Note 6: Short-term Borrowings In the ordinary course of business, primarily to facilitate securities settlements and finance 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, 1997 and 1996, Advest had $32,001,000 and $33,801,000, respectively, in firm loans outstanding. The weighted average interest rate on bank loans outstanding at September 30, 1997 and 1996, was 5.85% and 5.71%, respectively, and the weighted average interest rates during fiscal 1997 and 1996 were 5.82% and 5.86%, respectively. Short-term borrowings of the Bank consisted primarily of the current portion of advances from the Federal Home Loan Bank ("FHLB"). At September 30, 1997, borrowings totaled $29,250,000 at rates from -91- [Page 37 of Annual Report] 5.61% to 7.17%. At September 30, 1996, borrowings totaled $4,750,000 at rates from 6.30% to 8.60%. The Bank has unused short term credit lines of approximately $7,942,000 with the FHLB at September 30, 1997. 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. Based on available qualified collateral balances of approximately $137,902,000, the Bank had total borrowing capacity with the FHLB of approximately $104,654,000 at September 30, 1997. 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, 1997 were $245,000 which represented the current portion of a promissory note due in 2000. At September 30, 1996, AGI's short-term borrowings were $750,000, representing the current portion of a mortgage due a third party lender which was repaid in full in December 1996. Refer to Note 7 for additional information on both borrowings. Note 7: Long-term Borrowings Long-term borrowings of the Bank were $5,750,000 and $8,750,000 as of September 30, 1997 and 1996, respectively, and represent the non-current portion of FHLB advances. The borrowings are collateralized in the same manner as short-term borrowings. As of September 30, 1997, the interest rates and maturities of outstanding borrowings were: --------------------------------------------------------- In thousands Interest rates Amount --------------------------------------------------------- Year ending September 30, 1999 6.58% $ 750,000 Year ending September 30, 2001 6.27% - 6.68% 3,500,000 Year ending September 30, 2002 6.73% 1,500,000 ---------- $5,750,000 ========== - ------------------------------------------------------------ At September 30, 1996, Advest had long-term borrowings of $6,250,000, consisting entirely of a non-recourse note, collateralized exclusively by furniture and computer equipment. Under the terms of the note, the principal was due October 1, 1998, however, on April 1, 1997, Advest repaid the note in full. The note bore interest at the variable rate of the LIBOR rate plus 2.5% per annum. As required by the non-recourse note, AGI signed a collateralized letter of credit with a third party bank guaranteeing 20% of Advest's debt. Upon repayment of the note, the letter of credit was canceled and the collateral, consisting of government securities, was released. At September 30, 1997 and 1996, long-term borrowings of AGI were $35,571,000 and $4,744,000, respectively. On December 26, 1996, AGI entered into a private placement transaction with three institutional investors. AGI borrowed $35,000,000 on an unsecured basis and received an investment grade rating. Under the terms of the note, the principal is payable in 5 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 bears interest at the rate of 7.95% per annum payable semiannually on the last day of June and December. On November 1, 1995, AGI signed a promissory note with a third party lender for $1,250,000 due November 1, 2000. Under the terms of the note, the principal is payable in 60 equal monthly installments at an interest rate of 6.25%. On December 27, 1996, AGI repaid in full a loan from a third party lender on a first mortgage which bore interest at 1.25% over prime with interest and principal payments due monthly. The debt was collateralized by a first mortgage on real estate managed by a subsidiary, as well as a pledge of subsidiary stock. This collateral was released following repayment of the loan. Note 8: Subordinated Borrowings In December 1996, the Company called for redemption of all of its then outstanding 9% convertible subordinated debentures due in 2008. On January 30, 1997, the Company redeemed $20,298,000 at the redemption price of 101.2% of the par value of the debentures, together with accrued interest. A total of 18,716 shares were issued to debenture holders electing to convert $254,000 par value of debentures into the Company's common stock at the conversion price of $13.57. Cash was issued in lieu of fractional shares. Note 9: Common Stock The Company instituted a common stock repurchase program in August 1990. A total of 3,000,000 shares have been authorized to be repurchased under the program. During the years ended September 30, 1997 and 1996, 183,200 and 398,900 shares, respectively, were acquired for a total of 2,696,277 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 a consortium of third party institutional investors. Such restrictions have never curtailed the Company's -92- [Page 38 of Annual Report] ability to declare dividends; however, until the current fiscal year, the Company had not paid a dividend since December 1990. The Company resumed quarterly dividend payments, currently $.03 per share, as of April 15, 1997. 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. Each right entitles the holder, following the occurrence of certain events, to purchase one share of common stock at a purchase price of $30 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 1998 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. Note 10: Stock Option Plans 1993 Stock Option Plan The Company's 1993 Stock Option Plan (the "1993 Plan"), established during fiscal 1994, provides for grants of incentive stock options or nonqualified stock options for up to 500,000 shares of the Company's common stock. At September 30, 1997, options for 363,061 shares had been granted under the 1993 Plan, of which 329,894 options were outstanding. Option grants under the 1993 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. 1994 Non-Employee Director Stock Option Plan The Company's 1994 Non-Employee Director Stock Option Plan (the "1994 Plan"), established during fiscal 1995, as amended, provides for annual grants of 2,500 incentive stock options to each director not employed by the Company up to an aggregate of 100,000 options for all directors. At September 30, 1997, options for 37,000 shares had been granted, of which 34,000 options were outstanding under the 1994 Plan. Options granted under the 1994 Plan become exercisable in equal thirds 30, 42 and 54 months after grant and expire 60 months after the grant. Prior Stock Option Plans At September 30, 1997, the Company had outstanding an aggregate of 125,946 options issued to employees under stock option plans maintained by the Company in prior years under which no further grants are authorized. These include 29,483 and 33,462 nonqualified stock options granted to top investment executives under performance-based plans offered in calendar 1991 and 1992, respectively, which become exercisable five years after grant and expire one year thereafter. These also include 63,001 five-year options granted to executive officers and key employees other than investment executives in February 1993. Advest Equity Plans During calendar 1997, 1996 and 1995 the Company offered the Advest Equity Plan (the "Equity Plan") to certain eligible employees. The Equity Plan is a salary deferral investment program and is described in more detail in Note 11. For deferrals during 1996 and 1995, 155,125 and 169,708, respectively, nonqualified stock options were granted. For deferrals during 1997 through June 30, 1997, 64,273 options were granted and additional options will be granted based on deferrals from June 30, 1997 through December 31, 1997. 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. Exercise Price of Options All options granted by the Company to date, or which may be granted under the 1993 Plan, the 1994 Plan and the Equity Plan, 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. -93- [Page 39 of Annual Report] 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, the Company's net earnings would have been the pro forma amounts indicated below: In thousands 1997 1996 --------------------------------------------- Net earnings As reported $14,218 $11,798 Pro forma 14,022 11,698 Primary earnings per share As reported $1.60 $1.35 Pro forma 1.58 1.34 Fully diluted earnings per share As reported $1.54 $1.23 Pro forma 1.52 1.22 --------------------------------------------- Pro forma compensation expense associated with option grants is recognized over the vesting period. The initial impact of applying SFAS 123 on pro forma disclosure is not representative of the potential impact on pro forma net earnings for future years, which will include compensation expense related to vesting of 1996, 1997 and subsequent grants. Transactions under the Company's stock option plans are summarized below: ------------------------------------------------------------- Number of Weighted-average shares exercise price ------------------------------------------------------------- Options outstanding at September 30, 1994 705,767 $4.27 Granted 156,500 5.98 Forfeited (50,358) 5.54 Exercised (13,266) 4.40 --------- Options outstanding at September 30, 1995 798,643 4.52 Granted 431,818 9.03 Forfeited (1,244) 5.21 Exercised (327,148) 2.84 --------- Options outstanding at September 30, 1996 902,069 7.29 Granted 172,838 15.70 Forfeited (22,249) 8.42 Exercised (186,674) 5.38 --------- Options outstanding at September 30, 1997 865,984 $9.35 ========= - ---------------------------------------------------------------------- At September 30, 1997, 1996 and 1995, options were exercisable on 145,987, 116,537 and 190,501 shares, respectively, and the weighted average exercise price were $5.87, $5.63 and $4.62, respectively. The weighted-average fair value of options granted in 1997 and 1996 is $6.67 and $3.72 per option, respectively. Fair value is estimated as of the grant date based on a Black-Scholes option pricing model using the following weighted-average assumptions: 1997 1996 --------------------------------------- Risk-free interest rate 6.33% 5.67% Expected life 5.41 yrs 4.9 yrs Expected volatility 36.00% 36.00% Dividend yield 0.46% --% --------------------------------------- The following table summarizes information related to outstanding and exercisable options at September 30, 1997: - --------------------------------------------------------------------------- Options outstanding Options exercisable --------------------------------------------------------- Weighted- Weighted- Weighted- average average average Exercise Number of exercise remaining Number of exercise prices shares price life shares price - --------------------------------------------------------------------------- $5.13 - $ 6.25 282,779 $ 5.91 1.52 yrs 145,987 $5.87 $8.50 - $ 11.375 519,532 9.45 4.85 yrs -- -- $23.75 63,673 23.75 7.26 yrs -- -- -------------------------------------------------------- Total 865,984 $ 9.35 3.69 yrs 145,987 $5.87 ======================================================== - --------------------------------------------------------------------------- -94- [Page 40 of Annual Report] Note 11: 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 Thrift Plan is the successor to the December 31, 1992, merger of the Employee Stock Ownership Plan, Incentive Savings Plan and Employees' Retirement Plan. 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 2.5%, 2.5% and 2.0% of their compensation for calendar 1997, 1996 and 1995, respectively. Contribution expense for fiscal 1997, 1996 and 1995 was $3,900,735, $3,610,731 and $2,624,281, 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, offers certain high- performing investment executives 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. The Company's Executive Nonqualified Post-Employment Income Plan (the "Executive Defined Benefit Plan"), effective October 1, 1993, 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 benefit plans on the executive's behalf. 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, 1997 was $7,754,000, which was more than the projected benefit obligation by $372,000. 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, 1997 and 1996: ------------------------------------------------ In thousands 1997 1996 ------------------------------------------------ Actuarial present value of benefit obligations: Vested $ 38 $ -- Non-vested 5,607 3,952 ------------------- Accumulated benefit obligation 5,645 3,952 Effect of projected future compensation levels 1,737 1,440 ------------------- Projected benefit obligation 7,382 5,392 Unrecognized net loss (354) (111) Unrecognized prior service cost (476) (529) ------------------ Accrued pension liability $6,552 $4,752 ================== - --------------------------------------------------------- Pension expense for the plans for the three years ended September 30, 1997 is included in the following components: --------------------------------------------------- In thousands 1997 1996 1995 --------------------------------------------------- Service cost $1,369 $1,257 $ 878 Interest cost 408 288 175 Net amortization and deferral 23 65 6 --------------------------- Net benefit costs $1,800 $1,610 $1,059 =========================== --------------------------------------------------- The following table provides the assumptions used in determining the projected benefit obligation for the plans for the three years ended September 30, 1997: - ----------------------------------------------------------------- 1997 1996 1995 - ----------------------------------------------------------------- Weighted average discount rate 7.25% 7.5% 7.0% Rate of increase in future compensation levels 5.0 5.0 5.0 - ----------------------------------------------------------------- Equity Plans For calendar 1997, 1996 and 1995 the Company offered the Advest Equity Plan (the "Advest Equity Plan") to certain top performing investment executives and designated key employees. The Advest Equity Plan allows those employees to defer a portion of their compensation 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 10. Both the restricted stock -95- [Page 41 of Annual Report] and options will be subject to forfeiture under certain circumstances. For calendar 1997, 1996 and 1995, the Company offered substantially similar plans to executive officers, although under the executive officer plans restricted stock was purchased on the open market through December 1996 and options granted under the 1993 Stock Option Plan. Beginning with fiscal 1996, the Company offered certain key professionals the opportunity to defer a portion of their compensation over certain levels and invest it in restricted stock at a discounted price of 75% of market. Also, beginning with calendar 1996, 50% of the annual retainer of each director of the Company (or a greater portion, at their election) is invested in restricted stock at 100% of market. Management Incentive Plan The Company has a Management Incentive Plan (the "MIP") which provides for incentive compensation to salaried employees. Compensation presently is based on the Company's pre-tax income. During fiscal 1997, 1996 and 1995, MIP compensation was $2,311,000, $2,482,000 and $1,330,000, respectively. For fiscal 1996, any MIP award to an executive officer in excess of 150% of the amount of the MIP award for the prior fiscal year was invested in restricted shares of the Company's common stock. Restricted Stock 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 54,436 and 5,702 shares of restricted stock, with a fair value of $1,432,000 and $56,000, during 1997 and 1996, respectively. As of September 30, 1997, stock awards for 60,138 shares were outstanding, with restrictions expiring at various dates through 2003. The deferred cost of the restricted stock awards is amortized on a straight-line basis. Note 12: 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, 1997, Advest's regulatory net capital of $60,733,000 was 14% of aggregate debit balances and exceeds required net capital by $51,870,000. Under bank regulatory restrictions, the Bank is required to maintain a minimum level of capital. With its conversion to a federal charter in April 1997, the Bank is required to limit annual dividends to the total of the current and prior four quarters retained net income. No dividends have been declared or paid by the Bank in fiscal year 1997. At September 30, 1997, the Bank's leverage capital, risk-based and Tier 1 capital ratios were 6.84%, 10.04% and 8.79%, respectively, which met all regulatory requirements. At September 30, 1996, the Bank's leverage capital, risk-based and Tier 1 capital ratios were 6.56%, 10.44% and 9.19%, respectively, which also met regulatory requirements. Refer to discussion in Management's Discussion and Analysis under the caption "Liquidity and Capital Resources - Advest Bank and Trust Company." Note 13: Income Taxes The provision for income taxes for the three years ended September 30, 1997 consisted of the following: -------------------------------------------------- In thousands 1997 1996 1995 -------------------------------------------------- Current: Federal $7,549 $5,893 $1,695 State and local 2,453 3,270 1,985 --------------------------- 10,002 9,163 3,680 --------------------------- Deferred: Federal 380 181 1,747 State and local (502) (74) (17) --------------------------- (122) 107 1,730 --------------------------- Provision for income taxes $9,880 $9,270 $5,410 =========================== - ---------------------------------------------------------- At September 30, 1997 and 1996, deferred tax assets and liabilities were comprised of: ------------------------------------------------- In thousands 1997 1996 ------------------------------------------------- Deferred tax assets: Provision for credit losses and asset devaluation $2,709 $2,753 Employee benefits 4,756 4,446 Lease commitments -- 434 FAS115 losses 35 112 State NOL carryforwards 1,069 1,671 Valuation allowance - state taxes (499) (1,671) Other 46 86 ------------------- Total deferred tax assets $8,116 $7,831 ------------------- Deferred tax liabilities: Tax loan loss reserve in excess of base year $ 528 $ 614 Depreciation 1,430 1,367 Investment income 168 449 Partnership basis difference 2,487 2,305 Other 1,325 961 ------------------- Total deferred tax liabilities $5,938 $5,696 ------------------- Net deferred tax asset $2,178 $2,135 =================== ------------------------------------------------- -96- [Page 42 of Annual Report] The Company will only recognize a deferred tax asset when, based on available evidence, realization is more likely than not. Accordingly, at September 30, 1997 and 1996, the Company has recorded no valuation allowance against federal deferred tax assets based on reversals of existing taxable amounts and anticipated future earnings. A valuation reserve has been established to cover state net operating loss carryforwards which are not expected to be realized due to short carryforward time periods. At September 30, 1997, state net operating loss carryforwards were approximately $11,250,000 which expire in various years between 1998 and 2000. 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, 1997 follows: ------------------------------------------------------ Percent of pre-tax income 1997 1996 1995 ------------------------------------------------------ Statutory income tax rate 35.0% 35.0% 34.0% State and local income taxes, net of federal tax effect 6.9 9.8 11.1 Recognition of state net operating losses (1.5) -- -- Tax-exempt interest income (1.5) (1.6) (1.9) Intangible assets 0.4 0.4 0.7 Other 1.7 0.4 2.1 -------------------------- Effective income tax rate 41.0% 44.0% 46.0% ========================== ------------------------------------------------------- Effective for the fiscal year ended September 30, 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 will result 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 will be recognized ratably over a six year period. Accordingly, the deferred tax liability resulting from the change in method is approximately $528,000 at September 30, 1997. As of September 30, 1997, the Bank has not recorded a deferred tax liability for its base year reserve of $2,155,000. An income tax liability could be incurred if certain excess distributions were made with respect to the Bank's stock. It is not anticipated that such excess distributions would be made. Note 14: Commitments and Contingent Liabilities 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, 1997 are (in thousands): ---------------------------------------------------------- Data processing Fiscal year ended Office & communications September 30, facilities equipment Total ---------------------------------------------------------- 1998 $ 7,313 $1,895 $ 9,208 1999 5,890 1,077 6,967 2000 5,836 759 6,595 2001 5,551 759 6,310 2002 4,247 428 4,675 2003 and thereafter 11,601 -- 11,601 ------------------------------------- $40,438 $4,918 $45,356 ===================================== ---------------------------------------------------------- Rental expense under these leases was $9,338,000, $8,928,000 and $9,458,000 for the years ended September 30, 1997, 1996 and 1995, respectively. Loan guarantees and letters of credit Billings Management Company, a subsidiary of the Company, acts as general partner in various real estate limited partnerships. At September 30, 1997 and 1996, AGI was a guarantor of borrowings by one of the partnerships in the amount $275,000 and $503,000, respectively. The borrowings are uncollateralized. At September 30, 1996, AGI was contingently liable under a collateralized bank letter of credit in the amount of $1,250,000 required under the terms of a non-recourse note entered into between Advest and a third party lender. The note was repaid in full during fiscal 1997 and the letter of credit was canceled. (See Note 7.) At September 30, 1997 and 1996, Advest was contingently liable under bank letter of credit agreements in the amount of $1,835,000 and $1,255,000, respectively, which are collateralized by securities held in customer accounts. At September 30, 1997 and 1996, the Bank and AGI were contingently liable under standby letters of credit and commitments to extend credit to customers in the amount of $88,800,000 and $68,405,000, respectively. The value of collateral required to be held for letter of credit commitments as of September 30, 1997 ranges from 0% to 1174% of individual commitments with a weighted average of 148%. -97- [Page 43 of Annual Report] Litigation The Company has been named as defendant in a number of legal proceedings arising principally from its securities and investment banking business. Some of these actions involve claims by plaintiffs for substantial amounts. While results of litigation cannot be predicted with certainty, in the opinion of management, based on discussion with counsel, the outcome of these matters will not result in a material adverse effect on the financial condition or future operating results of the Company. Note 15: 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 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 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 securities as collateral for various secured financing sources such as bank loans 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 trading positions, primarily its municipal and corporate 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, 1997 and 1996 were $875,752 and $598,303, respectively. A net trading loss of $76,000 was realized in 1997, a net trading profit of $20,000 was realized in 1996 and a net trading loss of $100,000 was realized in fiscal 1995. At September 30, 1997, Advest had only nominal open positions. In 1996 there were no open hedge positions. The Bank is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments involve, to varying degrees, elements of credit and interest rate risk. The Bank's exposure to credit loss in the event of nonperformance by the other party to the financial instrument is represented by the contractual amount of these instruments. The Bank uses the same credit policies in making commitments as it does for existing loans and management believes that the Bank controls the risk of these financial instruments through credit approvals, limits and monitoring procedures. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Since many of the commitments could expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The amount of collateral obtained, if deemed necessary by the Bank, upon extension of credit is based on credit evaluation of its customer. Collateral held varies but may include income-producing commercial properties, accounts receivable, inventory and property, plant and equipment. Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of customers to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in standing loan facilities to customers. The Bank holds real estate and marketable securities as collateral supporting those commitments for which collateral is deemed necessary. The Bank enters into interest rate swap and 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. -98- [Page 44 of Annual Report] The following table illustrates the Bank's outstanding swap and cap contracts at September 30, 1997: - --------------------------------------------------------------------- Maturities --------------------- Balance Balance In thousands 1998 1999 2001 9/30/97 9/30/96 - --------------------------------------------------------------------- Fixed pay interest rate swaps: Notional value $5,000 $5,000 $ -- $10,000 $20,000 Weighted average receive rate 5.813% 5.719% --% 5.719% 5.556% Weighted average pay rate 8.790% 7.090% --% 7.940% 7.145% Interest rate caps: Notional value $ -- $ -- $5,000 $ 5,000 $ 5,000 Strike rate --% --% 6.000% 6.000% 6.000% Unamortized premium $ -- $ -- $ 167 $ 167 $ 51 Total notional value $5,000 $5,000 $5,000 $15,000 $25,000 - --------------------------------------------------------------------- In the absence of these interest rate swaps, net interest income would have been higher by approximately $233,000 in 1997, $441,000 in 1996 and $472,000 in 1995. In the absence of these cap contracts, net interest income would have been higher by approximately $75,000 in 1997 and $57,000 in 1996, and lower by approximately $128,000 in 1995. Note 16: 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. When entering into interest rate swap and cap agreements, the Bank is subject to the risk of dealing with counterparties and their ability to meet the terms of the contracts. The Bank enters into swap and cap contracts with counterparties that are either highly rated by recognized rating agencies or are federal agencies. The Bank minimizes the credit risk by performing credit reviews on the swap counterparties and minimizes the interest rate risk by its asset and liability management policies. Note 17: Related Parties As of September 30, 1997 and 1996, loans to related parties made by the Bank totaled approximately $3,623,000 and $4,764,000, respectively. There were approximately $1,130,000 of new loans and $2,271,000 of repayments during 1997. Related parties include directors and executive officers of the Company, and their respective affiliates in which they have a 10% or more interest. Such loans were made in the ordinary course of business. As of September 30, 1997, all loans to related parties were performing. Note 18: 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 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 receivable from and payable to brokers and dealers, customers, securities borrowed and loaned) are considered to approximate the carrying value due to the short-term nature of the financial instruments. For residential one to four family real estate mortgages, fair value is estimated using quoted market prices for similar loans, adjusted for differences in loan characteristics. For multi-family mortgages, commercial real estate loans and commercial and consumer loans, fair value is estimated by discounting the expected future cash flows using the current rates at which similar loans would be originated to borrowers with similar credit ratings for comparable remaining maturities. Fair values for fixed-rate certificates of deposit are estimated by discounting future cash flows using interest rates currently offered on time deposits with similar remaining maturities. The fair value of advances from the FHLB, including the current portion, are estimated using rates which approximate -99- [Page 45 of Annual Report] those currently being offered by the FHLB for advances with similar remaining maturities. The fair value of interest rate swap and 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, 1997 and 1996 are: - --------------------------------------------------------------- 1997 1996 ------------------------------------- Carrying Fair Carrying Fair In thousands amount value amount value - --------------------------------------------------------------- Financial assets: Loans, net $199,166 $202,103 $194,956 $196,135 Investment securities 35,012 34,909 38,086 38,003 Financial liabilities: Deposits 169,583 169,747 191,186 191,554 Short-term borrowings 61,496 61,544 39,301 39,326 Long-term borrowings 41,321 41,273 19,744 19,873 Subordinated borrowings -- -- 20,552 21,374 Notional Fair Notional Fair In thousands amount value amount value ------------------------------------------------------------- Unrecognized financial instruments: Fixed pay interest rate swaps $10,000 $(163) $ 20,000 $(317) Interest rate caps 5,000 114 5,000 16 Commitments to extend credit (87,922) 6 (67,935) 31 Standby letters of credit (2,193) (3) (2,975) (11) ------------------------------------------------------------- Note 19: Segment Reporting The Company operates principally in the financial services and banking industries. Operations in the financial services industry include agency transactions, principal transactions, investment banking, asset management and consulting. The banking operations include residential mortgage lending, trust services and investment of funds generated from borrowings and customer deposits. Financial information by industry segments for the three years in the period ended September 30, 1997 are summarized as follows: ------------------------------------------------------------------ Financial In thousands services Banking Other Consolidated ------------------------------------------------------------------ 1997 ---- Total revenues $271,105 $ 16,925 $ 1,315 $ 289,345 Operating income (loss) 26,100 720 (2,722) 24,098 Identifiable assets 812,116 222,014 42,676 1,076,806 Capital expenditures 4,235 377 4 4,616 Depreciation and amortization 8,230 364 (68) 8,526 1996 ---- Total revenues $240,509 $ 19,324 $ 1,548 $261,381 Operating income (loss) 22,604 1,074 (2,610) 21,068 Identifiable assets 712,176 219,245 33,756 965,177 Capital expenditures 5,573 344 14 5,931 Depreciation and amortization 7,694 332 195 8,221 1995 ---- Total revenues $207,573 $ 23,464 $ 1,596 $232,633 Operating income (loss) 23,175 (9,301) (2,113) 11,761 Identifiable assets 530,997 269,500 30,318 830,815 Capital expenditures 4,182 193 2 4,377 Depreciation and amortization 8,391 313 201 8,905 ------------------------------------------------------------------- Note 20: Subsequent Event On October 2, 1997, the Company announced that it has entered into a letter of intent to acquire Ironwood Capital, Ltd. ("Ironwood"), a private investment bank, in exchange for 137,060 shares of AGI common stock. The closing is expected to occur on or before November 15, 1997 and it is anticipated that the acquisition will be accounted for as a pooling of interests. Following the acquisition, Ironwood and its twelve employees will become the Corporate Fixed Income Group within the Investment Banking Division of Advest. Restatement of prior years' financial statements, as required under a pooling of interests transaction, would not have a material impact on the Company's financial condition, results of operations or cash flows. Consequently, Ironwood will be included in consolidated financial statements of the Company prospectively from the acquisition date. -100- [Page 46 of Annual Report] REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders of The Advest Group, Inc.: We have audited the accompanying consolidated balance sheets of The Advest Group, Inc. and Subsidiaries as of September 30, 1997 and 1996, and the related consolidated statements of earnings, changes in shareholders' equity and cash flows for each of the three years in the period ended September 30, 1997. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express and opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits 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. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of The Advest Group, Inc. and Subsidiaries as of September 30, 1997 and 1996, and the consolidated results of their operations and their cash flows for each of the three years in the period ended September 30, 1997, in conformity with generally accepted accounting principles. As discussed in Note 1 to the consolidated financial statements, the Company adopted the provisions of Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of" as of October 1, 1996. As discussed in Notes 1 and 10 to the consolidated financial statements, the Company adopted the provisions of Statement of Financial Accounting Standards No. 123 "Accounting for Stock-Based Compensation", as of October 1, 1996. As discussed in Note 1 to the consolidated financial statements, the Company adopted the provisions of Statement of Financial Accounting Standards No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities", as amended by Statement of Financial Accounting Standards No. 127, "Deferral of the Effective date of Certain Provisions of FASB Statement No. 125" as of January 1, 1997. Coopers & Lybrand L.L.P. Hartford, Connecticut October 22, 1997
Quarterly Financial Information (unaudited) - ----------------------------------------------------------------------------------------------------------------- In millions, except 1997 by fiscal quarters 1996 by fiscal quarters -------------------------------------------------------------------------------- per share data 1st 2nd 3rd 4th 1st 2nd 3rd 4th - ----------------------------------------------------------------------------------------------------------------- Cash dividends per common shares $- $ .03 $ .03 $ .03 $- $- $- $- Stock price range: High $10-7/8 $15 $27-1/2 $27-1/2 $9-3/4 $10-1/8 $11 $10-5/8 Low $9 $10-3/8 $11-1/2 $20-1/2 $8-1/2 $8-5/8 $9-5/8 $9-1/4 Close $10-3/4 $11-7/8 $23-3/4 $26-5/16 $8-1/2 $9-5/8 $10-1/4 $9-3/4 Revenues $69.9 $68.5 $72.7 $78.2 $65.0 $65.9 $68.6 $61.8 Income before taxes $5.9 $5.5 $5.9 $6.9 $5.8 $6.3 $5.6 $3.4 Net income $3.3 $3.2 $3.4 $4.4 $3.1 $3.5 $3.1 $2.1 Net income per common share $.38 $.36 $.38 $.48 $.36 $.40 $.35 $.24
-101 EX-21 11 Exhibit 21 The Advest Group, Inc. List of Subsidiaries Jurisdiction Present Name Where Incorporated Ownership - ------------------------------------------------------------------- Advest, Inc. Delaware 100% Advest Insurance Agency, Inc. Massachusetts 100% Balanced Capital Services, Inc. Connecticut 100% Vercoe Insurance Agency, Inc. Ohio 100% Advest Bank and Trust Company Connecticut 100% A.B. Realty Corp. Connecticut 100% Advest Capital, Inc. Connecticut 100% Advest Properties, Inc. Delaware 100% Advest Transfer Services, Inc. Delaware 100% Bank Street Management Company Connecticut 100% Billings & Company, Inc. Connecticut 100% Billings Management Co. Connecticut 100% Boston Security Counsellors, Inc. Massachusetts 100% Central Row Corp. Connecticut 100% The Hannah Consulting Group, Inc. Connecticut 100% SRNY, Ltd. (formerly Shore & Reich, Ltd.) Connecticut 100% Coordinated Planning, Ltd. New York 100% -102- EX-23 12 Exhibit 23 CONSENT OF INDEPENDENT ACCOUNTANTS The Board of Directors and Shareholders of The Advest Group, Inc.: We consent to the incorporation by reference in the registration statements of The Advest Group, Inc. and Subsidiaries on Form S-8 (File No. 2-92868) concerning its 1983 Incentive Stock Option Plan, Form S-8 (File No. 33-17674) concerning its 1986 Incentive Stock Option Plan, Form S-8 (File No. 33-72042) concerning its Advest Thrift Plan, Form S-8 (File No. 33-56275) concerning its 1995 Equity Plan, Form S-8 (File No. 333-00797) concerning its Executive Officer 1996 Restricted Stock and Stock Option Agreement; Form S-8 (File No. 33-60425) concerning its 1990, 1991, and 1992 Top Account Executive Stock Option Plans, its 1993 Stock Option Plan and its 1994 Non-Employee Director Option Plan; and Form S-8(File No. 333-17711) concerning its Key Professionals Equity Plan, 1996 Executive Equity Plan, 1997 Executive Equity Plan and 1997 Equity Plan, of our reports dated October 22, 1997, on our audits of the consolidated financial statements and financial statement schedules of The Advest Group, Inc. and Subsidiaries as of September 30, 1997 and 1996 and for each of the three years in the period ended September 30, 1997, which reports are incoporated by reference and included, respectively, in this Annual Report on Form 10-K. /s/ COOPERS & LYBRAND L.L.P. Hartford, Connecticut December 11, 1997 -103- EX-27 13
BD 1000 12-MOS SEP-30-1997 SEP-30-1997 12724 605150 0 290745 129853 14500 1076806 61496 214412 0 258295 52113 41321 108 0 0 104483 1076806 43880 59882 123032 29429 25844 32458 163200 24098 0 0 0 14218 1.60 1.54
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