10-K 1 y44389e10-k.txt FORM 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, 2000 Or ( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. For the transition period from to Commission File Number 1-8408 THE ADVEST GROUP, INC. (Exact name of registrant as specified in its charter) Delaware 06-0950444 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification Number) 90 STATE HOUSE SQUARE, - HARTFORD, CONNECTICUT 06103 (Address of principal executive offices) (Zip Code) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (860) 509-1000 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: YES
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 $253,423,193 as of December 29, 2000. On December 29, 2000 the Registrant had outstanding 8,927,921 shares of common stock of $.01 par value, which is the Registrant's only class of common stock. 2 PART I Item 1. Business GENERAL DEVELOPMENT OF BUSINESS The Advest Group, Inc. ("AGI"), a Delaware corporation, is a financial services holding company engaged, with its operating subsidiaries (collectively the "Company"), in securities brokerage, trading, investment banking, asset management, trust and other financial services. It is organized under the laws of Delaware and commenced operations on January 1, 1977. AGI is successor to a partnership which resulted from mergers of five New York Stock Exchange, Inc. ("NYSE") member firms organized between 1898 and 1919. The Company's broker/dealer subsidiary, Advest, Inc. ("Advest"), was organized to succeed the business of the partnership, effective January 1, 1977. Since that date, a number of other operating subsidiaries in the brokerage and financial services industries have been established or acquired. In addition to Advest, operating subsidiaries include Advest Bank and Trust Company (the "Bank"), a federal savings bank; Boston Advisors ("Advisors"), an investment advisor, and Billings & Company, Inc. ("Billings"), a real estate services company. In August 2000, the Board of Directors of the Company approved the acquisition of all of the ownership interests in the Company by The MONY Group Inc., ("MONY"), a holding company which, through its subsidiaries, is primarily engaged in the business of providing a wide range of life insurance and other financial products and services to higher income individuals. For more information see Item 8 of this filing - Note 2 of Notes to Consolidated Financial Statements. On November 20, 2000, this transaction (the "Merger") was approved by the vote of Advest shareholders at a Special Meeting of Shareholders held for that purpose. The parties anticipate that the Merger will be consummated early in calendar 2001. Additional information concerning the proposed Merger is set forth in the Proxy Statement of the Company dated October 19, 2000 (the "Proxy Statement"). The information set forth in the Proxy Statement is hereby incorporated by reference, except for the following: Selected Consolidated Financial Data of MONY (appearing on pages 9 to 11); Risks with Respect to MONY (appearing on pages 16 to 24); and MONY's Reason for the Merger (appearing on page 31). Other material acquisitions and dispositions by the Company during the past five years follow. In October 1996, the Company formed The Hannah Consulting Group ("HCG"), an investment management subsidiary, located in Boston, MA, that provided investment management services primarily to pension plans. Effective October 1, 1997, HCG was merged into Advest's Investment Management Services Department. In October 1997, Advest acquired Ironwood Capital Ltd. ("Ironwood"), a private investment bank that originates and distributes private placements of taxable fixed income securities. Ironwood and its twelve employees became the Corporate Fixed Income Group of Advest's Investment Banking Division. The Company issued 137,060 shares of its common stock in conjunction with the acquisition which was accounted for as a pooling of interests. Due to the immaterial effect on the Company's consolidated financial condition, results of operations and cash flows, operating results of Ironwood were included prospectively in the Company's consolidated financial statements. Under a separation agreement entered with the Company during the fourth quarter of fiscal 1999, the employees of the Corporate Fixed Income Group once again became an independent corporation, effective September 30, 1999. Expenses related to the separation agreement were not material to results of operations. In May 1999, the Company announced that it would enter into two agreements with Hudson United Bank ("Hudson"), a subsidiary of Hudson United Bancorp, a Mahwah, New Jersey-based bank holding company. Advest and Hudson entered into a strategic alliance whereby Hudson became the exclusive provider of banking products and services to Advest and its clients. The strategic alliance agreement became effective September 1, 1999 and, concurrently, the Bank ceased its mortgage origination operations. Under the terms of a separate purchase and sale agreement, Hudson acquired the 2 3 loan and other financial assets and assumed the deposit liabilities of the Bank. The purchase and sale agreement was approved by the Office of Thrift Supervision ("OTS") and closed November 30,1999. The Bank retained its federal bank charter and provides trust and custody services through referrals from Advest's retail sales force. Under the strategic alliance agreement, upon consumation of the Merger described above, Hudson will have the right to terminate that agreement upon 90 days notice. Upon such termination, Hudson will receive a reimbursement from Advest of a portion of certain fees and expenses previously paid by Hudson to Advest. On September 29, 2000, Hudson advised Advest that they wish to exercise their rights under the Agreement to terminate their relationship with Advest. Advest is engaged in a broad range of activities in the securities brokerage, investment banking and asset management businesses. Specific services include retail brokerage, institutional sales, origination of and participation in underwritings and distribution of corporate and municipal securities, market making and trading activities in equities and fixed income securities, research, custody and asset management. Advest has been classified by the Securities and Exchange Commission ("SEC") and the Securities Industry Association as a "large regional" brokerage firm. "Regional" is a term commonly used in the securities industry to indicate that a firm's headquarters are located outside New York City. Advest has retail clients in all fifty states with the largest concentration in the Northeast and Midwest regions and also services institutional accounts throughout the country. At September 30, 2000, Advest had 95 sales locations, including institutional and satellite offices, and 500 financial advisors in 15 states and the District of Columbia. Advest is a member of all major securities exchanges in the United States, the National Association of Securities Dealers ("NASD") and the Securities Investor Protection Corporation ("SIPC"). In addition, Advest is registered with the Commodity Futures Trading Commission ("CFTC") as a commodity trading advisor and a futures commission merchant and clears all option transactions through an independent third party broker. The Bank commenced operations in 1984 as a state-chartered savings bank and converted to a federal savings bank during fiscal 1997. The Office of Thrift Supervision ("OTS") regulates the Bank and its federal charter enables the Bank to provide trust services in all 50 states. The Bank's headquarters are located at 90 State House Square, Hartford, Connecticut 06103 and maintains no retail branches. The Bank has trust representatives in Springfield, MA, Columbus, OH, Farmington, CT, Pittsburgh, PA and Boca Raton, FL, the last of which was opened in fiscal 1998. Trust representatives share office space with Advest retail offices. The Bank's principal business activities consist of soliciting and servicing fiduciary and retirement plan trust business, primarily to clients of Advest. In fiscal 1997, the OTS approved requests by AGI and the Bank for the Bank to be deemed a "savings association", by virtue of its meeting the test for a qualified thrift lender, and for AGI, as the sole shareholder of a "savings association", to be treated as a unitary thrift holding company. In order to retain its status as a "savings association" the Bank must continue to satisfy the "qualified thrift lender" test. This test generally requires that an institution maintain a minimum of 65% of its assets in residential real estate and related investments. At September 30, 2000, 67.9% of the Bank's portfolio consisted of such assets. As previously discussed, the Company entered into two agreements with Hudson. In concurrence with the terms of the agreements, the Bank ceased its loan origination and deposit operations. The Bank's principal activities consist of soliciting and servicing fiduciary and retirement plan trust business, primarily to clients of Advest. FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS The information required by this item is disclosed in item 8 of this filing in Note 17 of Notes to Consolidated Financial Statements. 3 4 NARRATIVE DESCRIPTION OF BUSINESS The principal sources of revenue for the last five years are disclosed in item 6 of this filing under the caption "Five Year Financial Summary." A discussion of the components of services provided and related compensation follows. AGENCY COMMISSIONS During the three years in the period ended September 30, 2000, agency commissions represented 40%, 42% and 42%, respectively, of the Company's total revenues. Agency commissions are substantially derived from sales of listed and over-the-counter securities, mutual funds and insurance products primarily to retail clients. For sales of listed securities, Advest acts as an agent for its customers in the purchase and sale of securities on the major securities exchanges. Advest executes purchases and redemptions of shares for its clients in many diverse mutual funds. Included in mutual fund revenues are 12b-1 distribution fees which Advest receives from mutual fund companies as reimbursement for distributing shares of their funds. In executing customers' orders in the NASDAQ market, Advest generally acts as agent with another firm which is a market maker in the securities being purchased or sold. The market price executed represents the best inter-dealer market price available. Advest acts as agent for several life insurance companies and sells life insurance and tax-advantaged annuities to its brokerage clients. A principal objective of Advest's insurance department is to assist account executives in protecting the assets of high net worth individuals and businesses. The insurance department provides customized advice and recommends appropriate products to meet unique individual, professional or business needs. Advest also effects for its customers the purchase and sale of put and call options traded on all major stock exchanges. Other commissions include commissions from commodity trading, international stocks and bonds, certificates of deposit and income from correspondent brokers. PRINCIPAL TRANSACTIONS Revenue from principal transactions includes realized and unrealized gains and losses on Advest's trading accounts and related sales credits. Advest's institutional corporate bond trading desk specializes in investment grade corporate bonds, while the market-making activities of its retail fixed income and NASDAQ trading desks primarily involve making product available to clients and supporting Advest's research and equity capital markets activities. Advest has an institutional agency and mortgage-backed securities trading groups in New York City and Boca Raton, Florida, and a Community Reinvestment Act ("CRA") unit in New York City, which markets securitized loans to banks and other financial institutions. Advest does not actively participate in the high yield securities market. Advest seeks to reduce the risk associated with its trading portfolio, which has grown substantially during the past three years, on an aggregate basis. Inventory policies reflect the level of aggregate short and long positions that may be held for trading and are specified by product line. In addition, Advest manages the risk associated with its municipal bond trading securities by entering into derivative transactions, primarily exchange-traded financial futures contracts, when inventory levels exceed pre-determined levels as defined in its risk management policy. Derivative positions are generally not material and are marked-to-market daily. Hedging is limited to the underlying trading portfolios' interest rate risk and is not speculative in and of itself. Advest's NASDAQ desk actively engages in trading as principal in various phases of the over-the-counter securities business and acts as principal to facilitate the execution of customers' orders. Advest buys, sells and maintains an inventory of a security in order to "make a market" in that security and to support the activities of Advest's Equity Capital Markets Group. In recent years, certain rule changes implemented by the SEC have reduced the profit spreads of market makers. Primarily in response to the 4 5 SEC changes, there is an ongoing transition in the mix of over-the-counter business from principal to agency transactions. During fiscal 1999, a comprehensive review was completed of Advest's NASDAQ trading activities and the decision was made to reduce overnight inventory and more aggressively manage the number of stocks it made a market in. As of September 30, 2000, Advest made dealer markets in the common stock or other equity securities of approximately 247 corporations. INVESTMENT BANKING Advest manages and participates in underwritings of corporate and municipal securities and closed-end funds. Advest's Investment Banking Division also provides merger and acquisition, consulting and valuation services. Advest's Investment Banking Division concentrates its efforts on raising capital for mid-size companies, primarily in the banking, insurance, technology, consumer and commercial markets and health care industries. Public Finance services health care and educational institutions as well as state and local issuers primarily in New England and New York. The Syndicate Department is responsible for Advest's participation in underwritings managed by Advest and other firms and acts as co-manager of other offerings, principally closed-end funds. Generally, the Company does not engage in bridge financing activities. During fiscal 2000, the Investment Banking Division underwent a significant downsizing with the departure of more than half of the investment banking professionals. The Company's investment banking operations were consolidated into the New York City office with a focus on three areas - financial institutions, technology and consumer/general industries Underwriting involves both economic and regulatory risks. An underwriter may incur losses if it is unable to resell the securities it is committed to purchase or if it is forced to liquidate its commitments at less than the agreed purchase price. In addition, under the Securities Act of 1933, other laws and court decisions with respect to underwriters' liability and limitation on indemnification of underwriters by issuers, an underwriter is subject to substantial potential liability for material misstatements or omissions in prospectuses and other communications with respect to underwritten offerings. Furthermore, underwriting commitments constitute a charge against net capital and Advest's underwriting commitments may be limited by the requirement that it must at all times be in compliance with the net capital Rule 15c3-1 of the SEC. ASSET MANAGEMENT AND ADMINISTRATION Advest's Investment Management Services Department ("IMS"), provides various services for its fee-base accounts including client profiling, asset allocation, manager selection and performance measurement. The Bank's Trust Services Department provides personal trust and custody services primarily through Advest's retail sales force and Advisors provides investment advisory services to private retail and institutional clients. In June 2000, Advisors launched three money funds - a money market fund, a U.S. Government fund and a tax-free fund. Over $1 billion of funds designated for investment in money funds by Advest's brokerage clients was transferred into these funds. The Company believes it can generate a more competitive yield by managing the money funds in-house. Advest also receives service fees related to brokerage clients' investments in money market funds of a third party money manager. Asset management and administration revenues also include fees for money market services, retirement plan administration, Centennial Accounts and securities custody and safekeeping. The Advest Centennial Account enables brokerage clients to participate in an integrated financial services program. Centennial Account clients have access to their assets through unlimited checkwriting and a Mastercard debit card issued by a major third party bank as well as on-request loans collateralized by margined securities. Automated Clearing House ("ACH") deposits and withdrawals are available to Centennial Accounts who can select among various automatic daily investment options for idle cash balances, including an FDIC-insured money market account and various money market mutual funds. The Bank provides fiduciary, trust and custody services to individuals, corporate retirement plans, 5 6 financial institutions and other entities. The Bank primarily acquires trust and custody accounts through Advest's retail sales force. INTEREST INCOME AND CUSTOMER FINANCING Advest's customers' transactions in securities are effected on either a cash or margin basis. In a margin account, the customer pays less than the full cost of a security purchased and the broker/dealer makes a loan for the balance of the purchase price which is secured by the securities purchased, or other securities owned by the investor. The amount of the loan is subject to the margin regulations (Regulation T) of the Board of Governors of the Federal Reserve System, NYSE margin requirements, and the firm's internal policies which in some instances are more stringent than Regulation T or NYSE requirements. Currently, in most transactions, Regulation T requires that the amount loaned to a customer for a particular purchase not exceed 50% of the purchase price of a security, so that initially the customer's equity in the purchase exceeds the NYSE's rules. A member firm is required to have the customer deposit cash or additional securities so that the loan to the customer for which marginable equity securities are pledged as collateral is no greater than 75% of the value of the securities in the account. Interest is charged on the amount borrowed to finance customers' margin transactions. The rate of interest charged customers is based primarily on the brokers' call rate (the charge on bank loans to brokers secured by firm and customers' securities), to which an additional amount is added up to 2.75%. The amount of this interest surcharge is dependent on the average net margin balance and the dollar amount of commissions charged on account transactions during the month. Customer credit balances, retained earnings, cash received from collateralized financing transactions and short-term borrowings are the primary source for financing customer margin accounts. RESEARCH Through the combined resources of its in-house research staff and correspondent research provided by three leading outside research firms, Advest provides its brokerage clients with a full range of research services. These include corporate data, financial analysis, identification of emerging trends and objective recommendations. In-house analysts specialize in health care, regional banking, insurance, technology and specialty retailing and consumer products. Correspondent research provides information and recommendations on approximately 3,000 domestic and international equities in over 90 industries in 30 countries. ADMINISTRATION AND OPERATIONS Administrative and operations personnel are responsible for the execution of orders, processing of securities transactions, receipt, identification and delivery of funds and securities, custody of clients' securities, extension of credit to clients, general accounting and office services functions, internal financial and management controls and regulatory compliance. Advest uses the services of a third party data processor for all back office brokerage operations technology including securities and money transactions, trade confirmations and statements. A new financial and management reporting system was installed in fiscal 1999. The Company believes its internal controls and safeguards are adequate, although fraud and misconduct by clients and employees are risks inherent in the securities business. As required by the NYSE and other regulators, the company carries fidelity bonds covering loss or theft of securities as well as embezzlement or forgery. The Company believes the amounts of coverage provided by the bonds is adequate. EMPLOYEES The Company employs approximately 1,798 persons primarily at Advest, its broker-dealer subsidiary. 6 7 Advest has some 1,762 employees including 485 non-trainee retail sales professionals. The Company considers its compensation and employee benefits, which include medical, life and disability insurance, a 401(k) defined contribution plan and restricted stock and option programs, to be competitive with those offered by other securities firms. None of the Company's employees are covered by collective bargaining agreements. The Company considers its relations with its employees to be satisfactory. However, there is considerable competition for experienced financial services professionals, particularly financial advisors, and periodically the Company may experience the loss of valued professionals. COMPETITION All aspects of the business of the Company are highly competitive. Advest competes with numerous regional and national broker/dealers and other entities, many of which have greater financial resources than the Company. Because of the variety of financial services offered by the Company and the various types of entities that provide such services (including other brokers, banks, insurance companies and retail merchandise outlets), it is not possible to estimate the number of companies that compete with the Company for investor assets. Advest competes with other firms on the basis of transaction prices, quality of service, product availability and locations. It is impossible to predict the effect of the broader distribution locales offered by competing entities, or the lower costs which may be offered by certain discount and online brokers. In addition, there is competition for investment professionals among the large number of companies now in the financial services field. In soliciting trust business, the Bank encounters significant competition from trust companies, savings banks, savings and loans, insurance companies, broker/dealers, investment firms, mutual funds, and law firms in attracting trust accounts, particularly fiduciary relationships. REGULATION The securities industry in the United States is subject to extensive regulation under both Federal and state laws. The SEC is the Federal agency charged with administration of the Federal securities laws. Much of the regulation of broker/dealers has been delegated to self-regulatory authorities, principally the NASD, the CFTC and the securities exchanges. These self-regulatory organizations conduct periodic examinations of member broker/dealers in accordance with the rules they have adopted and amended from time to time, subject to approval by the SEC. Securities firms are also subject to regulation by state securities commissions in those states in which they do business. Broker/dealers are subject to regulations which cover all aspects of the securities business, including sales methods, trading practices among broker/dealers, uses and safekeeping of customers' funds and securities, capital structure of securities firms, recordkeeping and the conduct of directors, officers and employees. Additional legislation, changes in rules promulgated by the SEC and self-regulatory authorities, or changes in the interpretation or enforcement of existing laws and rules, may directly affect the mode of operation and profitability of broker/dealers. The SEC, self-regulatory authorities and state securities commissions may conduct administrative proceedings which can result in censure, fine, suspension or expulsion of a broker/dealer, its officers or employees. Such administrative proceedings, whether or not resulting in adverse findings, can require substantial expenditures. The principal purpose of regulation and discipline of broker/dealers is the protection of customers and the securities markets, rather than protection of creditors and stockholders of broker/dealers. Advisors is also subject to extensive Federal and state regulations by the SEC and state securities commissions. Advest is required by Federal law to belong to the SIPC. The SIPC fund provides protection for securities held in customer accounts up to $500,000 per customer, with a limitation of $100,000 on claims for cash balances. The Company purchases coverage which provides an additional $49.5 million of coverage per customer for securities held in customers' accounts. 7 8 As a federal savings bank whose deposits are insured by the FDIC, subject to applicable limits, the Bank is subject to extensive regulation and supervision by both the OTS and the FDIC. The Bank is also subject to various regulatory requirements of the Board of Governors of the Federal Reserve System (the "Federal Reserve Board") applicable to FDIC insured financial institutions. This governmental regulation is primarily intended to protect depositors, rather than shareholders, and concerns, among other matters, capital requirements, safety and soundness, permissible investments, community reinvestment and credit discrimination. AGI, for the purpose of ownership of the Bank, is a unitary savings and loan holding company, and is subject to limited regulation and certain reporting requirements by the OTS. Refer to item 7 of this filing under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" and in item 8 of this filing in Notes 3 and 11 of the Notes to Consolidated Financial Statements for further information regarding capital and regulatory considerations of the Bank. Federal banking regulations define five categories of capital adequacy for all insured depository institutions, including categories that would prompt supervisory actions. These categories range from the highest capitalization designation which is "well capitalized" (with total risk based capital of greater than 10% of risk adjusted assets, Tier 1 capital of greater than 6% of risk adjusted assets and leverage capital of greater than 5% of assets) to the lowest level which is "critically undercapitalized" (tangible capital of less than 2% of total assets.) In addition, an institution may not be categorized as "well capitalized" if it is subject to a regulatory order. Holding Company guarantees apply if an insured institution is classified in one of three "undercapitalized" designations. The Bank meets the criteria to be classified a "well capitalized" bank as of September 30, 2000. Item 2. Properties The Company's principal executive offices are located at 90 State House Square, Hartford, Connecticut, 06103 (telephone number (860) 509-1000). The Company conducts all of its operations from leased premises, generally under non-cancelable leases with terms up to 15 years. Item 3. Legal Proceedings The Company has been named as defendant, or has been threatened with being named defendant in various actions, suits and proceedings before a court or arbitrator arising principally from its securities and investment banking business. Such matters involve alleged violations of federal and state securities laws and other laws. Certain of these actions claim substantial damages and, if determined adversely to the Company, could have a material adverse effect on the consolidated financial condition, results of operations or cash flows of the Company. While the outcome of any litigation is uncertain, management, based in part upon consultation with legal counsel, believes that the resolution of all matters pending or threatened against the Company will not have a material adverse effect on the financial condition or future results of operations or cash flows of the Company. Item 4. Submission of Matters to a Vote of Security Holders Not applicable. PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters The information required by this item is disclosed in item 8 of this filing in Note 8 of the Notes to Consolidated Financial Statements and under the caption "Quarterly Financial Information". 8 9 SHAREHOLDER INFORMATION ADDITIONAL INFORMATION - FORM 10K One copy of the Company's annual report on Form 10-K to the Securities and Exchange Commission will be provided at no charge upon written request to Corporate Marketing, The Advest Group, Inc. The Advest Group, Inc. is listed on the New York Stock Exchange under the symbol ADV. REGISTRAR AND TRANSFER AGENT American Stock Transfer & Trust Company 40 Wall Street, 46th floor New York, NY 10005 (212) 936-5100 or (800) 937-5449 INDEPENDENT ACCOUNTANTS PricewaterhouseCoopers LLP 100 Pearl Street Hartford, CT 06103 9 10 Item 6. Selected Financial Data FIVE YEAR FINANCIAL SUMMARY
For the years ended September 30, ------------------------------------------------------------------------------------------------------------------------------ In thousands, except per share amounts and percentages 2000 1999 1998 1997 1996 ------------------------------------------------------------------------------------------------------------------------------ Total revenues $ 418,752 $ 335,238 $ 309,801 $275,204 $241,220 Interest expense 63,528 34,965 31,341 23,799 19,513 ---------- ----------- ---------- -------- -------- Net revenues 355,224 300,273 278,460 251,405 221,707 Total non-interest expenses 320,097 277,961 250,632 227,323 203,250 ---------- ----------- ---------- -------- -------- Income before taxes 35,127 22,312 27,828 24,082 18,457 Provision for income taxes 14,397 8,925 10,853 9,873 8,121 ---------- ----------- ---------- -------- -------- Income from continuing operations 20,730 13,387 16,975 14,209 10,336 Income (loss) from discontinued operations 294 877 977 723 924 Loss on sale of discontinued operations -- (713) -- -- -- ---------- ----------- ---------- -------- -------- Net income $ 21,024 $ 13,551 $ 17,952 $ 14,932 $ 11,260 ========== =========== ========== ======== ======== ------------------------------------------------------------------------------------------------------------------------------ PER SHARE DATA Basic earnings: Income from continuing operations $ 2.61 $ 1.67 $ 2.08 $ 1.77 $ 1.26 Income (loss) from discontinued operations 0.04 0.11 0.12 0.09 0.11 Loss on sale of discontinued operations -- (0.09) -- -- -- ---------- ----------- ---------- -------- -------- Net income $ 2.65 $ 1.69 $ 2.20 $ 1.86 $ 1.37 ========== =========== ========== ======== ======== Diluted earnings: Income from continuing operations $ 2.27 $ 1.46 $ 1.82 $ 1.54 $ 1.09 Income (loss) from discontinued operations 0.03 0.10 0.10 0.08 0.09 Loss on sale of discontinued operations -- (0.08) -- -- -- ---------- ----------- ---------- -------- -------- Net income $ 2.30 $ 1.48 $ 1.92 $ 1.62 $ 1.18 ========== =========== ========== ======== ======== Book value $ 17.07 $ 15.14 $ 13.82 $ 12.24 $ 10.66 Dividends $ 0.23 $ 0.19 $ 0.16 $ 0.09 -- OTHER DATA Total assets $2,088,889 $ 1,462,621 $1,061,116 $908,040 $779,109 Shareholders' equity $ 150,800 $ 135,136 $ 123,667 $105,653 $ 89,590 Subordinated borrowings -- -- -- -- $ 20,552 Long-term borrowings $ 21,000 $ 30,526 $ 41,308 $ 41,321 $ 19,744 Return on average equity 14.6% 10.5% 15.6% 15.4% 13.2%
10 11 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD-LOOKING STATEMENTS In addition to presenting historical information in this Annual Report and elsewhere, the Company may make or publish forward-looking statements about management expectations, strategic objectives, business prospects, anticipated financial performance and similar matters. The Company cautions readers that any forward-looking information presented is not a guarantee of future performance. Numerous factors, many beyond the Company's control, could cause actual results to differ materially from the expectations expressed. The Company conducts its businesses in financial markets that are influenced by economic conditions, monetary policies, interest and inflation rates, market liquidity, national and international political events, regulatory developments, changing tax law, the competitive environment, investor sentiment and other risks and uncertainties. These factors can significantly affect the transaction volume, price levels and volatility of financial markets, as well as the competitiveness of the Company's products and services within its industry. As a result, the Company's revenues and net earnings may vary significantly from period to period and may diverge significantly from expectations. Any forward-looking statements speak only as of the date on which they are made, and the Company does not undertake any obligation to update or revise any forward-looking statements. BUSINESS ENVIRONMENT AND OVERVIEW The Advest Group, Inc. ("AGI"), together with its subsidiaries (the "Company"), provides diversified financial services including securities brokerage, trading, investment banking, trust and asset management. Advest, Inc. ("Advest"), a regional broker/dealer and the Company's principal subsidiary, provides securities brokerage, investment banking, institutional sales and trading and asset management services to retail and institutional investors through 95 sales offices in 15 states and Washington, DC. Boston Advisors, Inc., an investment advisory firm, manages the financial assets of individuals, endowment funds and retirement plans. Advest Bank and Trust Company (the "Bank"), an FDIC-insured, federal savings bank, provides trust and custody services primarily through Advest's branch network. During fiscal 1999, the Company announced that it was entering into two agreements with a third party financial institution, which include the sale of the Bank's lending and deposit businesses. The sale transaction was completed in November 1999. As required, the Company has restated all prior periods to separately disclose income from discontinued operations. All aspects of the Company's business are highly competitive and impacted by regulatory and other factors outside of its control, including domestic and global economic and financial conditions, volume and price levels in securities markets, demand for investment banking services, interest rates, inflation and investor sentiment. Technological developments such as the Internet may also materially impact the Company's operating results. In addition to competition from other full-service securities firms, the Company faces competition from other sources including banks, insurance companies, mutual fund companies, discount and online trading firms. Legislation enacted in 1999 to eliminate or lessen the restrictions of the Glass-Steagall Act has further heightened competition among banking, insurance and securities firms. The Company closely monitors its operating environment to enable it to respond promptly to market cycles. In addition, the Company seeks to lessen earnings volatility by controlling expenses, increasing fee-based business and developing new revenue sources. Nonetheless, operating results of any individual period should not be considered representative of future performance. For the year ended September 30, 2000, the Company reported record net income of $21.0 million and diluted earnings per share of $2.30 compared with $13.6 million ($1.48 per share) in 1999 and $18.0 11 12 million ($1.92 per share) in 1998. Fiscal 2000 revenues were $418.8 million, a record level for a fifth consecutive year. At September 30, 2000, book value per share was a record $17.07. On August 23, 2000, the Board of Directors of the Company approved the acquisition of all the ownership interests in the Company by The MONY Group Inc. ("MONY"), a holding company which, through its subsidiaries, is primarily engaged in the business of providing a wide range of life insurance and other financial products and services to higher income individuals. The acquisition was approved by a majority of the shareholders of the Company at a special meeting of shareholders held on November 20, 2000. Pursuant to the terms of the merger agreement, shareholders of the Company will receive consideration in the form of cash, MONY common stock or a combination thereof. Advest, Inc. For the twelve months ended September 30, 2000, the Dow Jones Industrial Average closed at 10651, a 3% one year gain, but well off the double-digit gains of the preceding three years. The S&P 500 and NASDAQ Composite closed up 12% and 34%, respectively, year-to-year, however, both indices posted declines in each of the last two quarters. Rising interest rates contributed to declines in stock and bond underwritings year-to-year. After raising interest rates six times in just over one year, the Fed left rates unchanged beginning with its June meeting acknowledging that the economic growth was slowing. For fiscal 2000, Advest's pre-tax earnings were $34.8 million, up 38% from fiscal 1999. Total revenues were $413.7 million, a 25% increase and a record for the sixth year in a row. Double-digit gains and record revenue levels were attained in nearly every area. Agency commissions increased 19% to $168.8 million, primarily due to over-the-counter, mutual funds and insurance sales. Revenues from principal transactions increased 31% to $73.8 million due to increased sales and trading profits for both fixed income and equity securities. Asset management revenues for Advest, Inc. rose 27% to $47.0 million, with a 40% increase in fee-based business. Investment banking revenues declined $7.6 million or 23% with over two thirds of the decline due to market adjustments of securities we receive in conjunction with investment banking activities. The balance of the decline is primarily attributable to a downsizing of Advest's investment banking division during the year. For fiscal 1999, Advest's pre-tax income declined 10% from the prior year to $25.2 million. The broker/dealer attained record revenues of $331.7 million, up 9% from the prior year's record high. Net interest income declined $1.0 million (4%) primarily as a result of lower spreads on margin debits and higher carrying costs of inventory. Total expenses increased 11% to $306.4 million primarily as a result of higher salesmen's compensation and firm payroll related to technology and capital markets departments. Communications costs increased $4.5 million (17%) primarily due to technology upgrades and volume-driven processing costs. Advest Bank and Trust Company During fiscal 1999, the Company announced that it would enter into two agreements with Hudson United Bank ("Hudson"), a subsidiary of Hudson United Bancorp, a Mahwah, New Jersey-based bank holding company. Under the terms of a purchase and sale agreement that closed November 30, 1999, Hudson acquired the loan and other financial assets and assumed the deposit liabilities of the Bank. Under a strategic alliance agreement, effective September 1, 1999, Hudson is the exclusive provider of certain FDIC-insured banking products and services to Advest and its clients. Concurrent with the agreements, the Bank ended its mortgage origination and deposit services. The Bank has retained its bank charter and provides trust and custody services through referrals from Advest's retail sales force. As a federal savings bank, the Bank is regulated by the OTS, and is able to offer trust and custody services in all 50 states. Income from discontinued operations reflects the after tax operating results of the Bank's lending and deposit operations. Operating revenues and expenses for the Bank's trust and custody operations are reflected in the Company's consolidated financial statements and are not material to consolidated results 12 13 of operations, financial condition or cash flows for the three years in the period ended September 30, 2000. The Bank is deemed a "well capitalized" bank. RESULTS OF OPERATIONS Net income for the years ended September 30, 2000, 1999 and 1998 was $21.0 million, $13.6 million and $18.0 million, respectively. The following table summarizes results of operations and percentage changes for the three years in the period ended September 30, 2000.
------------------------------------------------------------------------------------ In millions, except percentages 2000 % 1999 % 1998 ------------------------------------------------------------------------------------ Revenues $ 418.8 25 $ 335.2 8 $ 309.8 Interest expense 63.6 82 34.9 11 31.4 ------- --- ------- --- ------- Net revenues 355.2 18 300.3 8 278.4 Non-interest expenses 320.1 15 278.0 11 250.6 ------- --- ------- --- ------- Pre-tax income 35.1 57 22.3 (20) 27.8 ======= === ======= === ======= Income from continuing operations 20.7 55 13.4 (21) 17.0 Income from discontinued operations, net of taxes .3 (67) .9 (10) 1.0 Loss on sale of discontinued operations, net of taxes -- -- (.7) -- -- ------- --- ------- --- ------- Net income $ 21.0 55 $ 13.6 (24) $ 18.0 ======= === ======= === ======= -----------------------------------------------------------------------------------
AGENCY COMMISSIONS The number of investment executives has remained fairly constant over the past several years, however, the recruitment and retention of experienced professionals has contributed to substantial increases in average annual production per broker. Record broker productivity was achieved in each of the last five fiscal years and, together with record stock market volume and prices, contributed to the record revenue levels achieved during the same period. Over-the-counter commissions reflect the impact of certain rule changes implemented by the SEC which have reduced the profit spreads of market makers over the past several years. Primarily in response to the SEC changes, there has been an ongoing transition in the mix of over-the-counter business from principal to agency transactions as is evidenced by the sharp decline in principal business and a corresponding increase in agency business.
----------------------------------------------------------------------------- In millions, except percentages 2000 % 1999 % 1998 ----------------------------------------------------------------------------- Listed $ 55.6 2 $ 54.5 8 $ 50.5 Mutual funds 50.9 21 42.1 2 41.2 Over-the-counter 40.0 45 27.6 14 24.2 Insurance 15.1 35 11.2 33 8.4 Options 4.7 8 4.4 5 4.2 Other 2.5 42 1.8 38 1.3 ------- -- ------- -- ------- $ 168.8 19 $ 141.6 9 $ 129.8 ======= == ======= == ======= -----------------------------------------------------------------------------
Current year agency commissions increased 19% led by over-the-counter commissions which advanced 45%. Mutual funds revenues, including distribution fees, increased 21%, surpassing $50 million for the first time. Included in this increase is a 23% rise in C-share trail business which reflects a 13 14 positive trend to more fee-based business. Insurance commissions surpassed $15.0 million for the first time with strong gains posted for both life insurance (up 55%) and annuity sales (up 33%). Listed commissions increased 2% as declines in the June and September quarters substantially offset gains through the first six months of the fiscal year. Fiscal 2000 agency commissions achieved a record high with individual record levels attained across the board. Commissions on listed and over-the-counter securities increased primarily due to high share volume and prices. Insurance commissions increased 35% with sales of life insurance products increasing over 100%, primarily related to the cross-selling efforts of the insurance and trust departments and expanded education programs for investment executives. PRINCIPAL TRANSACTIONS Revenue from principal transactions includes realized and unrealized gains and losses on Advest's trading accounts and related sales credits. Advest's institutional corporate bond trading desk specializes in investment grade corporate bonds, while the market-making activities of its retail fixed income and Nasdaq trading desks primarily involve making product available to clients and supporting Advest's research and equity capital markets activities. Advest enters into derivative transactions to manage the interest rate risk associated with its municipal bond inventories. Derivatives are marked to market daily with unrealized gains and losses reflected in revenue from principal transactions. (Further discussion of derivatives is included under the caption "Derivative Financial Instruments" and in Notes 1 and 14 to the Consolidated Financial Statements.) Advest holds only nominal inventory positions of high yield securities.
------------------------------------------------------------------------------------------------ In millions, except percentages 2000 % 1999 % 1998 ------------------------------------------------------------------------------------------------ Fixed income commissions $37.8 14 $33.1 55 $21.4 Equity commissions 19.7 37 14.4 (17) 17.4 Other 16.3 85 8.8 47 6.0 ----- --- ----- --- ----- $73.8 31 $56.3 26 $44.8 ===== === ===== === ===== ------------------------------------------------------------------------------------------------
Revenue from principal transactions increased 31% due to increased sales and trading profits for both fixed income and equity securities. Principal bonds commissions increased $4.7 million (14%) led by sales of investment grade corporate bonds and municipal securities. Fixed income trading profits increased across the board primarily due to increased institutional and dealer-to-dealer transactions. The increase was led by a $2.4 million (146%) increase in municipal bonds trading profits, a $2.0 million (30%) increase in corporate bonds trading profits and a $.7 million (93%) increase in government bond trading profits. Principal equity commissions increased $5.3 million (37%) and related trading profits rose $1.8 million (396%), with the latter gain primarily related to measures taken last year to reduce the firm's overnight market exposure by reducing equity inventories. Fiscal 1999 revenues from principal transactions attained a record high level for the third year in a row. Commissions on fixed income securities increased 55%, led by investment grade corporate bonds, up $3.8 million (88%), government agency obligations, up $2.5 million (170%), and collateralized mortgage obligations ("CMOs"), up $2.0 million (108%). The increases in government agency and CMOs sales were due primarily to two new fixed income sales units established in fiscal 1998. Trading profits for corporate bonds increased $3.0 million (85%). Advest's municipal inventories trading profits declined 30% to $1.6 million while related sales credits increased $2.5 million (34%). On the equity side, current year trading losses were 18% lower than fiscal 1998. Equity sales credits declined 17% primarily related to a transition from principal to agency business. 14 15 INVESTMENT BANKING To generate investment banking revenue, Advest manages and participates in underwritings of corporate and municipal securities and closed-end funds. Advest's Investment Banking Division also provides merger and acquisition and consulting and valuation services. In general, the Company does not participate in bridge financing activities. Advest's Investment Banking Division concentrates its efforts on raising capital for mid-size companies, primarily in the banking, insurance, technology, consumer and commercial markets and health care industries. Warrants received in conjunction with investment banking activities are carried at market value, as prescribed by EITF 96-11. Public Finance services health care and educational institutions as well as state and local issuers primarily in New England and New York.
------------------------------------------------------------------------------------------------ In millions, except percentages 2000 % 1999 % 1998 ------------------------------------------------------------------------------------------------ Valuation of warrants $ (.8) (120) $ 4.0 300 $ 1.0 Underwriting commissions 14.3 (8) 15.6 (12) 17.7 Consulting and valuation fees 1.6 (6) 1.7 21 1.4 Merger and acquisition fees 3.7 (12) 4.2 (34) 6.4 Private placement fees .8 (58) 1.9 (42) 3.3 Management fees 2.7 (21) 3.4 (8) 3.7 Other 3.1 41 2.2 (46) 4.1 ----- --- ----- ---- ----- $25.4 (23) $33.0 (12) $37.6 ===== ==== ===== ==== ===== ------------------------------------------------------------------------------------------------
Investment banking revenues declined $7.6 million (23%), with most of the decline related to a $4.8 million decrease in the valuation of warrants and securities received in conjunction with investment banking activities. Investment banking revenues were also impacted by industry conditions and a significant downsizing of Advest's investment banking division. Following a record first half where the division completed eight public offerings and eight merger and acquisition transactions valued at over $800 million, Advest's Investment Banking Group underwent significant changes during the second half of the year. Advest's investment banking efforts are now directed from its offices at One Rockefeller Plaza with the Boston and Chicago investment banking operations closed. Year-to-year, equity underwriting commissions declined $2.9 million (31%), underwriting fees declined $.7 million (26%) and merger and acquisition revenues declined $.5 million (12%). Mutual fund underwriting commissions were $2.0 million with substantially all revenue related to Advest's June 2000 participation in the sale of a technology fund. During fiscal 1999, investment banking revenues declined 12% from the record level attained in fiscal 1998, with declines posted in all business activities. The Investment Banking Division completed 25 transactions during the year valued at $738 million, including 8 merger and acquisition transactions with a combined value of $244 million and 17 public and private placement transactions valued at over $494 million. The declines in merger and acquisition income, equity underwriting commissions and related underwriting fees reflect a dearth of activity in most industry sectors in Advest's target client size. Private placement fees in the Corporate Fixed Income Group declined 42%; as previously discussed, the professionals in this group left Advest at the close of fiscal 1999. These declines were partly offset by a $3.0 million increase in the valuation account for warrants, primarily related to a $3.7 million realized gain in the first quarter on an equity investment acquired in connection with Advest's investment banking activities. 15 16 ASSET MANAGEMENT AND ADMINISTRATION Advest's Investment Management Services Department ("IMS"), provides various services for its fee-base accounts including client profiling, asset allocation, manager selection and performance measurement. The Bank provides personal trust and custody services primarily through Advest's retail sales force and Boston Advisors provides investment advisory services to private retail and institutional clients. In June 2000, Boston Advisors launched three money funds - a money market fund, a U.S. Government fund and a tax-free fund. Over $1.0 billion of funds designated for investment in money funds by brokerage clients of Advest, Inc. have been transferred into these funds. Advest also receives service fees related to brokerage clients' investments in money market funds of a third party money manager. Other services include retirement plan administration, securities custody and safekeeping.
--------------------------------------------------------------------------------------- In millions, except percentages 2000 % 1999 % 1998 --------------------------------------------------------------------------------------- Investment management services $34.5 39 $24.8 18 $21.0 Money market accounts 9.0 3 8.7 30 6.7 Advisory and other 7.0 23 5.7 (2) 5.8 ----- --- ----- --- ----- $50.5 29 $39.2 17 $33.5 ===== === ===== === ===== ---------------------------------------------------------------------------------------
Current year revenues achieved a record high level primarily as a result of increased fee-based accounts at Advest. Revenues for IMS increased 39%, a record high, and total assets serviced increased 26% to almost $6 billion. During the year, 4,300 new accounts were opened representing a 50% increase over last year. The Bank completed the sale of its lending and deposit operations during fiscal 2000 and now focuses exclusively on trust and custody services. For fiscal 2000, trust assets increased 15% to almost $900 million and revenues increased 27% to $1.7 million. At September 30, 1999, total assets serviced by IMS in its fee-based programs were $4.7 billion, up 25% from the prior year. The Bank's revenues increased 36% to $1.4 million as trust assets serviced increased 52% to $740 million during fiscal 1999. The increase in money market service fee income related to higher average money market balances and higher interest rates. OTHER INCOME Other income includes fees from mutual funds marketing, exchange order flow and executions and postage at Advest and loan development and service fees at the Bank. During fiscal 2000, other income increased $1.4 million (19%) primarily due to higher fee and postage income at Advest. During fiscal 1999, other income increased $1.0 million (14%) primarily due to higher fee income and proceeds from a legal settlement at Advest. NET INTEREST INCOME Net interest income is the excess of interest income over interest expense and is earned primarily by Advest. Advest derives interest income primarily from financing brokerage customers margin transactions, its stock borrowing activities and securities inventory. Advest pays interest primarily on brokerage customer credits held for reinvestment, its stock lending activities and short and long-term borrowings. As a result of the sale of the Bank's loan and deposit businesses, all interest income and interest expense related to the discontinued operations are netted with all other revenue and expense items and reported separately, net of taxes, on the consolidated statement of earnings. See also Notes 3 and 12. 16 17
------------------------------------------------------------------------------------------------- In millions, except percentages 2000 % 1999 % 1998 ------------------------------------------------------------------------------------------------- Interest income: Brokerage customers $47.2 48 $31.9 (5) $33.5 Stock borrowed 37.8 108 18.2 16 15.7 Investments 1.1 (8) 1.2 33 .9 Security inventory 3.8 (17) 4.6 53 3.0 Other 1.3 (13) 1.5 (65) 4.3 ----- -- ----- --- ----- 91.2 59 57.4 -- 57.4 ----- -- ----- --- ----- Interest expense Stock loaned 39.6 169 14.7 4 14.1 Brokerage customers 10.3 37 7.5 (19) 9.3 Borrowings 13.3 7 12.4 65 7.5 Other .4 33 .3 40 .5 ----- -- ----- --- ----- 63.6 82 34.9 11 31.4 ----- -- ----- --- ----- Net interest income $27.6 23 $22.5 (13) $26.0 ===== == ===== === ===== -------------------------------------------------------------------------------------------------
Fiscal 2000 net interest income increased $5.1 million (23%). Advest's net interest income increased $4.7 million (21%) primarily due to higher average margin debits at Advest and lower financing costs due to increased use of stock loan financing versus bank loans. The balance of the increase in net interest income primarily relates to net investment income at the Bank. Fiscal 1999 net interest income declined $3.5 million (13%) primarily due to approximately $3.0 million in interest revenue recognized in fiscal 1998 related to the early payoff of a nonperforming mortgage on AGI's books. Advest's net interest income declined $1.0 million (4%) primarily as a result of lower average margin interest rates and reduced spreads due to higher costs of financing the debits. Average margin debits increased 4% to $439.2 million, however, total interest revenue from margin debits declined $1.6 million (5%). Average free credit balances increased only 2% to 273.8 million requiring increased short-term borrowings and stock loan to meet financing requirements of margin debits and trading inventories. Interest revenue from stock borrowing activities increased $2.5 million (15%) primarily due to increased short trading positions. NON-INTEREST EXPENSES
------------------------------------------------------------------------------------------- In millions, except percentages 2000 % 1999 % 1998 ------------------------------------------------------------------------------------------- Compensation and benefits $230.1 16 $198.4 10 $180.9 Communications 36.7 14 32.1 17 27.5 Occupancy and equipment 22.8 10 20.8 11 18.7 Professional 7.0 25 5.6 19 4.7 Business development 8.9 16 7.7 7 7.2 Brokerage, clearing and exchange 5.6 10 5.1 13 4.5 Other 9.0 8 8.3 17 7.1 ------ -- ------ -- ------ $320.1 15 $278.0 11 $250.6 ====== == ====== == ====== -------------------------------------------------------------------------------------------
Current year compensation and benefits costs increased 16% primarily due to volume-driven increases in salesmen's compensation and retail and other incentive compensation. General payroll increased 5%, as firm-wide increases in headcount offset an approximate 50% decline in investment 17 18 banking personnel. Communications costs increased primarily due to higher volume-driven costs of Advest's third party data processor and higher telephone equipment and line charges. Occupancy and equipment costs increased due to higher rent expense, personal computers lease expense and service agreements. Professional fees increased primarily due to higher legal and consulting expenses at Advest. Business development costs increased primarily due to more financial advisors qualifying for company-sponsored education and development programs and an increase in the number of educational programs offered. During fiscal 1999, volume-driven salesmen's compensation and other retail compensation expenses accounted for 75% of the increase in compensation and benefits costs. Higher costs in the equity capital markets, technology and the fixed income departments comprised most of the balance. Communications costs increased $4.6 million primarily related to technology upgrades to provide enhanced desktop services and keep pace with the significant increases in securities trading volume, and higher volume-driven costs of Advest's third party data processor. Occupancy and equipment costs increased $2.1 million primarily due to a $1.0 million (12%) increase in rent expense of Advest's retail offices and increased expenses related to technology upgrades. Professional fees increased $.9 million due to higher consulting costs and personnel agency fees at Advest. INCOME TAXES The effective income tax rates were 41%, 40% and 39% respectively for 2000, 1999, and 1998. The higher effective rate for fiscal 2000 recognizes a trend towards increased levels of income apportioned to various states with higher average tax rates. The effective rate for periods subsequent to 2000 is undetermined at this time due to the Company's pending acquisition by MONY, previously discussed. For further information on the Company's income taxes, refer to Notes 1 and 12 to the financial statements. DERIVATIVE FINANCIAL INSTRUMENTS Advest, Inc. Advest enters into derivative transactions, primarily short-term exchange-traded futures, to manage the interest rate risk associated with its trading inventories, primarily municipal bonds, when inventory levels exceed pre-determined levels, as defined in its risk management policy. Hedging is limited to the underlying trading portfolio's interest rate risk and is not speculative in and of itself. Derivatives and the underlying inventory are marked to market daily. Positions are reviewed daily and, periodically, the strategy is re-evaluated based on anticipated inventory levels and composition. The fair value of a derivative contract is the amount Advest would have to pay a third party to assume its obligation under the contract or the amount Advest would receive for its benefits under the contract in the reverse situation. At September 30, 2000 and 1999, Advest's open derivative positions were nominal. See Note 14. LIQUIDITY AND CAPITAL RESOURCES The Company's total assets were $2.1 billion at September 30, 2000, reflecting a $626.3 million (43%) increase from fiscal 1999 and a $1.0 billion (97%) increase from fiscal 1998. The increase in assets is primarily attributable to the expansion of Advest's stock lending and fixed income trading businesses as well as higher customer margin debits. The expansion of stock loan activities relates to three factors: an increase in Advest's matched book business, an increase in borrowing of fixed income securities to cover higher short trading positions of Advest's Institutional Corporate Bond Group, and an increase in stock loan of customer securities to help finance the higher margin debits. The Company's assets are highly liquid in nature. Liquid assets which include cash and cash equivalents, receivables from brokerage customers, securities borrowed, receivables from brokers and 18 19 dealers, available for sale and trading securities, comprised 96%, 92% and 92% for the years ended September 30, 2000, 1999 and 1998, respectively. Net assets of discontinued operations declined $31.0 million (100%) due to the execution of the purchase and sale agreement with Hudson on November 30, 1999. On December 31, 1999, AGI paid off $7.0 million in short-term borrowings which was the first installment in what will be annual payments to satisfy a $35 million note payable. Shareholders' equity increased $27.1 million (22%) during the past two years, primarily from net earnings, increases to paid-in capital related to the sales of treasury stock to the Company's equity plans and the exercise of stock options offset by dividends paid and treasury stock repurchased. The Company paid or accrued annual dividends of $.23 and $.19 per share for fiscal years 2000 and 1999, respectively. Total dividends declared and/or paid during the past two fiscal years were $3.7 million. During fiscal years 2000 and 1999, 680,896 shares of the Company's common stock were repurchased, under a buyback program begun in 1990 for which the repurchase of up to 4,000,000 shares is authorized. To date, 3,437,673 shares had been purchased under the program. AGI's principal source of funding is the earnings distributions from its subsidiaries. As a result of the strategic alliance agreement and purchase and sale transaction between the Bank and Hudson United Bancorp, the Bank's capital requirements were significantly reduced. In June 2000, the Bank, with regulatory approval, paid a $14.8 million dividend to AGI. AGI redeployed $10.0 million of the dividend in the form of a loan to Advest for the purpose of reducing its short-term borrowings. Management believes that earnings distributions from subsidiaries, together with AGI's own assets and potential proceeds from a shelf registration offering will be sufficient to meet AGI's current and foreseeable liquidity and capital requirements. In addition, following its acquisition by MONY, AGI will have access to substantial additional capital resources. Advest, Inc. During fiscal 1997, AGI loaned Advest $10.0 million at a rate of 8% per annum, utilizing a portion of the proceeds of its $35.0 million borrowing. The loan is unsecured and subordinated to certain other corporate obligations. The purpose of the subordinated loan was to increase Advest's regulatory net capital. During fiscal 2000, AGI loaned Advest and additional $10 million in the form of a note to reduce its short-term borrowings. Advest has arrangements with certain financial institutions whereby it can borrow amounts on a collateralized basis, principally to support securities settlements, trading inventories, margin debits and underwriting activities. Increases in average margin balances as well as firm trading positions, primarily fixed income securities, have resulted in higher short-term borrowing levels for Advest during the past few years. Advest has uncommitted lines of credit with three financial institutions in the total amount of $430 million. With the exception of $40 million in unsecured lines of credit, all of Advest's lines of credit are for collateralized borrowing for which it has substantial levels of customer and firm securities that can be pledged. In addition, Advest pledges customer and firm securities for stock loan as an alternative and lower cost of financing trading inventories and margin debits. During the past several years, Advest has made substantial capital investments primarily in technology-related hardware and software upgrades. Technology enhancements include the upgrade of desktop computers firm-wide and expanded hardware, software and telecommunications capacity to provide enhanced services as well as handle the substantial current and anticipated increases in securities market volume. At the same time, Advest has increased the number and/or caliber of its employees firm-wide, particularly its retail sales, capital markets and technology professionals, which has substantially increased compensation and benefits costs during the past few years. These costs are anticipated to remain at similar or higher levels in the future. Management believes that operating cash flow together with available credit lines will provide sufficient resources for Advest to meet all present and reasonably 19 20 foreseeable capital needs. In addition, the acquisition by MONY will enable Advest and MONY to share and thus better leverage technology costs. The Securities and Exchange Commission ("SEC") requires Advest to maintain liquid net capital to meet its obligations to customers. At September 30, 2000, Advest had excess net capital of approximately $62.0 million and a net capital ratio of 10.2%. See Note 11. Advest Bank and Trust Company The Bank is a member of the FHLBB and, accordingly, has access to advances from the FHLBB to the extent the Bank possesses eligible collateral. Currently, the Bank has collateral of $1.8 million which, together with operating cash flow, is sufficient to meet its current and foreseeable capital and operating needs. The Federal Deposit Insurance Corporation ("FDIC") requires "well capitalized" banks to maintain a minimum Tier 1 or leverage capital ratio of 5%. At September 30, 1999, the Bank's Tier 1 or leverage capital ratio was 9.94%. The Bank is also subject to the FDIC's risk-based capital regulations which require the Bank, as "well capitalized", to maintain a total risk-based capital ratio of 10%, including at least 6% Tier 1 risk-based capital. At September 30, 2000, the Bank's total risk-based and Tier 1 risk-based capital ratios were 169.33% and 169.33%, respectively, which met all regulatory requirements. Pursuant to the FDIC Improvement Act ("FDICIA"), all banks are subject to rules limiting brokered deposits and interest rates. Under FDICIA, the Bank meets the conditions to be deemed a "well capitalized" bank, which means it may accept brokered deposits without restriction. At September 30, 2000, the Bank had no of brokered deposits, having ceased its deposit operations with the sale of its loan and deposit businesses to Hudson United Bancorp, in the first quarter of fiscal 2000. CASH FLOWS Cash and cash equivalents from continuing operations increased $1.8 million. Net cash provided by operating activities increased $33.4 million primarily due to net earnings as adjusted for noncash items of $27.5 million. Net cash used in financing activities decreased $15.5 million primarily due to repayments of short-term borrowings by AGI and the Bank and the repurchase of treasury stock by AGI. Net cash used in investing activities decreased $16.1 million primarily due to capital expenditures and deferred compensation agreements. ACCOUNTING PRONOUNCEMENTS In June 2000, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities." SFAS 138 addresses a limited number of issues causing implementation difficulties for entities that apply SFAS 133. SFAS 137, "Deferral of the Effective Date of SFAS 133" was issued in June 1999. SFAS 133, "Accounting for Derivative Instruments and Hedging Activities" requires that all derivative instruments be recorded on the balance sheet at their fair value. SFAS 137 defers the effective date for SFAS 133 to all fiscal quarters of all fiscal years beginning after June 15, 2000. The Company will adopt SFAS 133, as amended by SFAS 137 and SFAS 138, during fiscal 2001, as required. The effect of adoption on the Company's financial condition, results of operations or cash flows is not expected to be material. In September 2000, the FASB issued SFAS 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." SFAS 140 is effective for transfers of financial assets occurring after March 31, 2001, applied prospectively; effective for disclosures about securitizations and for reclassification and disclosure about collateral in financial statements for fiscal years ending after December 15, 2000. The effect of adoption on the Company's financial condition, 20 21 results of operations or cash flows is not expected to be material. Item 7a. Quantitative and Qualitative Disclosures About Market Risk RISK MANAGEMENT During its normal course of business, Advest engages in the trading of securities, primarily fixed income, in both a proprietary and market making capacity, and holds securities for trading, rather than investment, purposes. Advest makes a market in certain investment-grade corporate bonds, mortgage-backed securities, municipal bonds and over-the-counter equities in order to facilitate order flow and accommodate its retail and institutional customers. During fiscal 2000 and 1999, Advest significantly increased its institutional corporate bond, government agency and mortgage-backed securities trading activities. The activities of these trading areas accounted for most of a $120.6 million (39%) and $64.7 million (27%) increase in trading inventories and a $121.6 million (53%) and $81.3 million (54%) increase in short security positions, for 2000 and 1999, respectively. Market Risk Market risk represents the potential change in the value of financial instruments due to fluctuations in interest rates, foreign currency exchange rates, equity and commodity prices. In the course of its trading and hedging activities, the Company is exposed to interest rate and equity price risk. The Company is exposed to market risk arising from changes in interest rates. Advest's management seeks to reduce the risk of its trading portfolio on an aggregate basis. Its risk management activities include inventory and hedging policies. Inventory policies reflect the level of aggregate short and long positions that may be held for trading and are specified by product line. Risk management strategies also include the use of derivatives, principally exchange-traded futures contracts. The company is exposed to equity price risk as a result of making a market in over-the-counter equity securities. Equity price risk arises from changes in the price and volatility of equity securities. In April 1999, a comprehensive review was completed of Advest's NASDAQ trading activities and the decision was made to reduce overnight inventory and more aggressively manage the number of stocks in which it made a market. Trading Accounts (Value at Risk Analysis) For purposes of the Securities and Exchange Commission's market risk disclosure requirements, the Company has performed a value at risk analysis of its trading financial instruments and derivatives. The value at risk calculation uses standard statistical techniques to measure the potential loss in fair value based upon a one-day holding period and a 95% confidence level. In fiscal year 1999, Advest significantly upgraded its VaR capability by converting to the Bloomberg Value at Risk System. During 2000, Advest continued to improve the depth, frequency and range of its VaR management review. Even though these filings are annual, these total firm, institutional plus retail positions, computations are now being performed monthly in order to achieve a better understanding of our entire firm's risk/return profile. The establishment of improved management controls includes, as needed, the extension of our monitoring process to the security, product, trader, department, and firm wide levels. Most significantly, our institutional book of business, which represents the vast majority of our usual holdings, is typically monitored daily. Although value at risk models are sophisticated, they can be limited, as historical data is not always an accurate predictor of future conditions. Accordingly, Advest manages its market exposure through other measures, including predetermined trading authorization levels and the hedging requirement policy described previously. At September 30, 2000, 1999 and 1998 Advest's value at risk for each component of market risk and in total was as follows: 21 22
In thousands 2000 1999 1998 ------------------------------------------------------------------------ Interest rate risk $182 $301 $480 Equity price risk 21 56 77 Diversification benefit (16) (10) (69) ---- ---- ---- Total $187 $347 $488 ==== ==== ====
The potential future loss represented by the total value at risk falls within predetermined levels of loss that are not material to the Company's results of operations, financial condition or cash flows. In particular, a noted reduction in the value at risk experienced in 2000 may be attributable to a year over year lessening in observable fixed income market volatility. The value at risk estimate has limitations that should be considered in evaluating the company's potential future losses based on the year-end portfolio positions. Recent market conditions may result in statistical relationships that result in a higher value at risk than would be estimated from the same portfolio under different market conditions. In addition, a critical risk management strategy is the active management of portfolio levels to mitigate market risk. The Company's, in particular Advest's, market risk exposure will continue to change with changes in the portfolio and market conditions. Non-trading Accounts (Tabular Presentation) The following table shows the interest sensitivity of non-trading assets, liabilities and financial instruments of Advest at September 30, 2000 and 1999, based on their estimated maturity/repricing structure: 22 23
SEPTEMBER 30, 2000 Percent of After In thousands, except percentages Amount Total 2001 2002 2003 2004 2005 2005 ------------------------------------------------------------------------------------------------------------------------------ Interest-sensitive assets Investment securities (a) $ 20,310 100.00% $ 11,970 $2,256 $2,373 $ -- $ -- $3,711 Average interest rate 6.71% 7.41% 6.78% 7.09% -- -- 6.35% ------------------------------------------------------------------------------------- Total interest-sensitive assets $ 20,310 100.00% $ 11,970 $2,256 $2,373 $ -- $ -- $3,711 ------------------------------------------------------------------------------------- Interest-sensitive liabilities Other borrowings $262,725 100.00% $241,725 $7,000 $7,000 $7,000 $ -- $ -- Average interest rate 6.42% 6.29% 7.95% 7.95% 7.95% -- -- ------------------------------------------------------------------------------------- Total interest-sensitive liabilities $262,725 100.00% $241,725 $7,000 $7,000 $7,000 $ -- $ -- ------------------------------------------------------------------------------------- -----------------------------------------------------------------------------------------------------------------------------
SEPTEMBER 30, 1999 Percent of After In thousands, except percentages Amount Total 2000 2001 2002 2003 2004 2004 ------------------------------------------------------------------------------------------------------------------------------ Interest-sensitive assets Investment securities (a) $ 21,948 98.82% $ 16,965 $ 750 $ 250 $ -- $ -- $3,983 Average interest rate 5.80% 5.34% 6.37% 7.25% -- -- 5.93% Interest-bearing deposits 262 1.18% 262 -- -- -- -- -- Average interest rate 5.04% 5.04% -- -- -- -- -- -------------------------------------------------------------------------------------- Total interest-sensitive assets $ 22,210 100.00% $ 17,227 $ 750 $ 250 $ -- $ -- $3,983 -------------------------------------------------------------------------------------- Interest-sensitive liabilities FHLB advances $ 31,000 16.13% $ 28,500 $1,500 $ -- $ -- $ -- $1,000 Average interest rate 5.59% 5.55% 6.73% -- -- -- 4.99% Other borrowings 161,190 83.87% 133,164 7,026 7,000 7,000 7,000 -- Average interest rate 5.80% 5.34% 7.94% 7.95% 7.95% 7.95% -- -------------------------------------------------------------------------------------- Total interest-sensitive liabilities $192,190 100.00% $161,664 $8,526 $7,000 $7,000 $7,000 $1,000 -------------------------------------------------------------------------------------- Interest rate derivatives Interest rate swaps: Interest rate caps $5,000 Average interest rate 6.00% ------------------------------------------------------------------------------------------------------------------------------
(a) Investment securities include investment securities available for sale and FHLB stock. 23 24 Item 8. Financial Statements and Supplementary Data THE ADVEST GROUP, INC. Consolidated Statements of Earnings
In thousands, except per share amounts Fiscal year ended September 30, 2000 1999 1998 ------------------------------------------------------------------------------------------------------------------------------ REVENUES Commissions $168,789 $141,603 $129,825 Interest 91,214 57,431 57,439 Principal transactions 73,748 56,347 44,752 Asset management and administration 50,486 39,188 33,473 Investment banking 25,420 33,006 37,607 Other 9,095 7,663 6,705 -------- -------- -------- Total revenues 418,752 335,238 309,801 -------- -------- -------- EXPENSES Compensation 230,070 198,322 180,886 Interest 63,528 34,965 31,341 Communications 36,738 32,136 27,530 Occupancy & equipment 22,798 20,813 18,744 Business development 8,897 7,728 7,197 Professional 7,013 5,610 4,686 Brokerage, clearing & exchange 5,570 5,085 4,542 Other 9,011 8,267 7,047 -------- -------- -------- Total expenses 383,625 312,926 281,973 -------- -------- -------- INCOME BEFORE TAXES 35,127 22,312 27,828 Provision for income taxes 14,397 8,925 10,853 -------- -------- -------- INCOME FROM CONTINUING OPERATIONS 20,730 13,387 16,975 Income from discontinued operations, net of taxes 294 877 977 Loss on sale of discontinued operations, net of taxes -- (713) -- -------- -------- -------- NET INCOME $ 21,024 $ 13,551 $ 17,952 ======== ======== ======== ------------------------------------------------------------------------------------------------------------------------------ Per share data: Basic earnings: Continuing operations $ 2.61 $ 1.67 $ 2.08 Discontinued operations 0.04 0.11 0.12 Loss on sale of discontinued operations -- (0.09) -- -------- -------- -------- NET INCOME $ 2.65 $ 1.69 $ 2.20 ======== ======== ======== Diluted earnings: Continuing operations $ 2.27 $ 1.46 $ 1.82 Discontinued operations 0.03 0.10 0.10 Loss on sale of discontinued operations -- (0.08) -- -------- -------- -------- NET INCOME $ 2.30 $ 1.48 $ 1.92 ======== ======== ======== Dividends declared $ 0.23 $ 0.19 $ 0.16
See Notes to Consolidated Financial Statements 24 25 THE ADVEST GROUP, INC. CONSOLIDATED BALANCE SHEETS
In thousands, except per share amounts September 30, 2000 September 30, 1999 --------------------------------------------------------------------------------------------------------------------------------- ASSETS CASH AND SHORT-TERM INVESTMENTS Cash and cash equivalents $ 8,460 $ 7,812 Cash and securities segregated under federal and other regulations 258 253 ---------- ----------- 8,718 8,065 ---------- ----------- RECEIVABLES Securities borrowed 911,612 515,676 Brokerage customers, net 638,322 503,116 Brokers and dealers 13,854 6,447 Other 22,749 30,455 ---------- ----------- 1,586,537 1,055,694 ---------- ----------- SECURITIES Trading, at market value 427,068 306,426 Available for sale, at market value 7,148 5,063 Held to maturity (market values of $13,161 and $16,886) 13,161 16,885 ---------- ----------- 447,377 328,374 ---------- ----------- OTHER ASSETS Equipment and leasehold improvements, net 14,387 13,028 Net assets of discontinued operations - 30,972 Other 31,870 26,488 ---------- ----------- 46,257 70,488 ---------- ----------- TOTAL ASSETS $2,088,889 $ 1,462,621 ========== =========== LIABILITIES & SHAREHOLDERS' EQUITY LIABILITIES Securities loaned $ 962,588 $ 523,095 Securities sold, not yet purchased, at market value 352,112 230,486 Brokerage customers 255,065 298,119 Short-term borrowings 241,725 161,007 Compensation and benefits 36,350 27,648 Checks payable 23,554 4,971 Brokers and dealers 22,442 10,839 Long-term borrowings 21,000 30,526 Repurchase agreements - 18,406 Other 23,253 22,388 ---------- ----------- 1,938,089 1,327,485 ---------- ----------- SHAREHOLDERS' EQUITY Common stock, par value $.01, authorized 25,000 shares, issued 11,121 and 10,914 shares 111 109 Paid-in capital 80,625 76,814 Retained earnings 96,612 77,644 Unamortized restricted stock compensation (1,914) (2,081) Treasury stock, at cost, 2,287 and 1,989 shares (24,634) (17,350) ---------- ----------- 150,800 135,136 ---------- ----------- $2,088,889 $ 1,462,621 ========== =========== ---------------------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements 25 26 THE ADVEST GROUP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
In thousands Fiscal year ended September 30, 2000 1999 1998 ----------------------------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES NET INCOME $ 21,024 $ 13,551 $ 17,952 Income from discontinued operations (294) (877) (977) Loss on sale of discontinued operations -- 713 -- --------- --------- --------- Income from continuing operations 20,730 13,387 16,975 Adjustments to reconcile net income to net cash provided by operating activities of continuing operations: Depreciation and amortization 7,191 11,071 9,425 Other (464) (3,994) (178) (Increase) decrease in operating assets: Securities borrowed (395,936) (245,038) 20,106 Trading securities (120,134) (64,922) (138,472) Receivables from brokerage customers (135,315) (69,079) (44,791) Receivables from brokers and dealers (7,407) (1,137) (1,213) Other 13,803 (17,611) (7,323) Increase (decrease) in operating liabilities: Short-term borrowings, net 109,473 1,227 92,000 Securities loaned 439,493 306,820 (42,020) Securities sold, not yet purchased 121,627 81,297 97,076 Brokerage customers (43,054) (31,856) 10,875 Checks payable 18,583 1,998 (15,394) Repurchase agreements (18,406) 18,406 -- Other 23,242 8,649 7,083 --------- --------- --------- NET CASH PROVIDED BY OPERATING ACTIVITIES OF CONTINUING OPERATIONS 33,426 9,218 4,149 --------- --------- --------- FINANCING ACTIVITIES Repayment of short-term borrowings (9,781) (264) (248) Repayment of long-term borrowings 2,500 -- -- Repurchase of treasury stock (8,397) (2,978) 783 Cash dividends paid (2,056) (1,692) (1,426) Other 2,273 155 425 --------- --------- --------- NET CASH USED IN FINANCING ACTIVITIES OF CONTINUING OPERATIONS (15,461) (4,779) (466) --------- --------- --------- INVESTING ACTIVITIES Proceeds from (payments for): Maturities of held to maturity securities 36,156 23,879 22,712 Sales of available for sale securities 11,639 19,607 42,853 Purchases of available for sale securities (7,183) (13,110) (47,024) Purchases of held to maturity securities (40,969) (21,539) (20,500) Capital expenditures (6,005) (4,797) (3,939) Other (9,793) (3,313) 4,593 --------- --------- --------- NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES OF CONTINUING OPERATIONS (16,155) 727 (1,305) NET CASH USED IN DISCONTINUED OPERATIONS (1,162) (11,236) (955) --------- --------- --------- Increase (decrease) in cash and cash equivalents 648 (6,070) 1,423 Cash and cash equivalents at beginning of period 7,812 13,882 12,459 --------- --------- --------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 8,460 $ 7,812 $ 13,882 ========= ========= ========= ----------------------------------------------------------------------------------------------------------------------- Interest paid $ 63,621 $ 34,824 $ 40,517 Income taxes paid $ 13,069 $ 12,386 $ 15,297 Non-cash activities: Restricted stock awards, net of forfeitures $ 435 $ 1,605 $ 811 -----------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements. 26 27 THE ADVEST GROUP, INC. CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
$.01 par value Unamortized In thousands, except Common stock Treasury stock restricted per share amounts --------------- Paid-in Retained ---------------- stock Shares Amount capital earnings Shares Amount compensation ------ ------ ------- -------- ------ -------- ------------ BALANCE AS OF SEPTEMBER 30, 1997 10,812 $108 $71,309 $49,260 (2,180) $(14,390) $ (571) Comprehensive income: Net income 17,952 Unrealized holding gain on investment securities (net of taxes of $24) Total comprehensive income Exercise of stock options 81 1 577 32 (224) Dividends declared ($.16 per share) (1,427) Repurchase of common stock (60) (1,167) Sale of treasury stock to equity plan 1,421 90 521 Stock issued under restricted stock plans, less amortization of $301 601 31 210 (510) Other (942) 143 950 ------ ---- ------- ------- ------ -------- -------- BALANCE AS OF SEPTEMBER 30, 1998 10,893 109 72,966 65,785 (1,944) (14,100) (1,081) Comprehensive income: Net income 13,551 Unrealized holding gain on investment securities (net of taxes of $9) Total comprehensive income Exercise of stock options 21 - 104 2 34 Dividends declared ($.19 per share) (1,692) Repurchase of common stock (298) (5,383) Sale of treasury stock to equity plan 1,439 123 984 Stock issued under restricted stock plans, less amortization of $809 1,222 62 587 (1,000) Other 1,083 66 528 ------ ---- ------- ------- ------ -------- -------- BALANCE AS OF SEPTEMBER 30, 1999 10,914 109 76,814 77,644 (1,989) (17,350) (2,081) Comprehensive income: Net income 21,024 Unrealized holding gain on investment securities (net of taxes of $0) Total comprehensive income Exercise of stock options 207 2 1,249 (90) (1,871) Dividends declared ($.23 per share) (2,056) Repurchase of common stock (383) (6,956) Sale of treasury stock to equity plan 826 83 776 Stock issued under restricted stock plans, less amortization of $659 722 3 (50) (13) Other 1,014 89 817 180 ------ ---- ------- ------- ------ -------- -------- BALANCE AS OF SEPTEMBER 30, 2000 11,121 $111 $80,625 $96,612 (2,287) $(24,634) $ (1,914) ====== ==== ======= ======= ====== ======== ========
Accumulated other In thousands, except comprehensive Shareholders' per share amounts income, net equity ------------- ------------- BALANCE AS OF SEPTEMBER 30, 1997 $ (63) $105,653 Comprehensive income: Net income Unrealized holding gain on investment securities (net of taxes of $24) 51 Total comprehensive income 18,003 Exercise of stock options 354 Dividends declared ($.16 per share) (1,427) Repurchase of common stock (1,167) Sale of treasury stock to equity plan 1,942 Stock issued under restricted stock plans, less amortization of $301 301 Other 8 ----- -------- BALANCE AS OF SEPTEMBER 30, 1998 (12) 123,667 Comprehensive income: Net income Unrealized holding gain on investment securities (net of taxes of $9) 12 Total comprehensive income 13,563 Exercise of stock options 138 Dividends declared ($.19 per share) (1,692) Repurchase of common stock (5,383) Sale of treasury stock to equity plan 2,423 Stock issued under restricted stock plans, less amortization of $809 809 Other 1,611 ----- -------- BALANCE AS OF SEPTEMBER 30, 1999 -- 135,136 Comprehensive income: Net income Unrealized holding gain on investment securities (net of taxes of $0) -- Total comprehensive income 21,024 Exercise of stock options (620) Dividends declared ($.23 per share) (2,056) Repurchase of common stock (6,956) Sale of treasury stock to equity plan 1,602 Stock issued under restricted stock plans, less amortization of $659 659 Other 2,011 ----- -------- BALANCE AS OF SEPTEMBER 30, 2000 $ -- $150,800 ===== ========
------------------------------------------------------------------------------- See Notes to Consolidated Financial Statements. 27 28 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of presentation The consolidated financial statements include the accounts of The Advest Group, Inc. ("AGI") and all subsidiaries (collectively the "Company"). The Company provides diversified financial services including securities brokerage, trading, investment banking, trust and asset management. Principal operating subsidiaries are Advest, Inc. ("Advest"), a broker/dealer and Advest Bank and Trust Company (the "Bank"), a federal savings bank. In November 1999, the Company entered into a purchase and sale agreement with a third party financial institution, which included the sale of the Bank's loans and other financial assets and assumption of the Bank's deposit liabilities. See Note 3, "Discontinued Operations." The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. All material intercompany accounts and transactions are eliminated. Certain 1999 and 1998 amounts have been reclassified in the accompanying consolidated financial statements to provide comparability with the current year presentation. Cash equivalents are defined as short-term, highly liquid investments with an original maturity of three months or less including amounts due from banks, federal funds sold and overnight time deposits. At September 30, 2000 and 1999, federal funds sold were $600,000 and $500,000, respectively. Receivables from and payables to brokerage customers Receivables from and payables to brokerage customers arise from cash and margin transactions executed by Advest on their behalf. In virtually all instances, receivables are collateralized by securities with market values in excess of the amounts due. The collateral is not reflected in the accompanying financial statements. A reserve for doubtful accounts is established based upon reviews of individual credit risks, as well as prevailing and anticipated economic conditions. At September 30, 2000 and 1999, the reserve was $614,000 and $548,000, respectively. Included in payables to brokerage customers are free credit balances of $235,836,000 and $281,860,000 at September 30, 2000 and 1999, respectively. Advest pays interest on credit balances when the customer has indicated that the funds are for reinvestment purposes. Collateralized financing transactions Securities loaned and borrowed are accounted for as collateralized financing transactions and are recorded at the amount of cash collateral received or advanced. The fee received or paid by Advest is recorded as interest revenue or expense. The initial collateral advanced or received has a market value in excess of the market value of the underlying securities. The Company monitors the market value of securities borrowed and loaned on a daily basis, with additional collateral obtained or refunded, as necessary. The Company utilizes short-term repurchase agreements as supplementary short-term financing and delivers U.S. Treasury securities as collateral for cash received. These repurchase agreements are accounted for as collateralized financings. The fee paid by the Company is recorded as interest expense. The Company monitors the market value of securities transferred on a daily basis, and obtains or refunds collateral as necessary. Securities Advest records securities transactions on a settlement date basis, which does not differ materially from a trade date basis. Revenues and related expenses for transactions executed but not settled are accrued on a trade date basis. 28 29 Advest's trading securities and securities sold, not yet purchased are valued at market with unrealized gains and losses reflected in current period revenues from principal transactions or investment banking. Periodically, Advest receives stock warrants in connection with its investment banking activities. Warrants are carried at their fair value which is determined using the Black-Scholes model or another standard option valuation technique. Securities available for sale are carried at fair value with unrealized holding gains or losses, net of tax, reflected in shareholders' equity and comprehensive income. Realized gains and losses are recorded on trade date by the specific identification method and are included in revenue from principal transactions. Securities which the Company has the positive intent and ability to hold until maturity are carried at amortized cost and classified as held to maturity investments. Available for sale and held to maturity securities are reduced to fair value, through charges to income, for declines in value that are considered to be other than temporary. Investment banking Investment banking revenues are recorded, net of expenses, on the settlement date for management fees and sales concessions, and on the dates the underwriting syndications are closed for underwriting fees. Depreciation and amortization Equipment and leasehold improvements are carried at cost. Depreciation of equipment for financial accounting purposes is calculated primarily using the straight-line method and is based upon the estimated useful lives of the assets ranging from three to ten years. Leasehold improvements are amortized over the shorter of the terms of the respective leases or the estimated useful lives of the improvements. At September 30, 2000 and 1999, accumulated depreciation and amortization were $18,041,000 and $15,236,000, respectively. The excess cost over the fair value of net assets of acquired companies is recorded as goodwill and is amortized on a straight-line basis over 40 years. At September 30, 2000 and 1999, the amount of goodwill reported in other assets was $5,124,000 and $5,374,000, respectively. Computer Software Costs associated with the purchases of computer software have been capitalized and will be amortized over the straight-line method. Included in other assets at September 30, 2000 and 1999, was $3,711,000 and $2,479,000, respectively, of costs related to computer software used to meet the needs of the Company. At September 30, 2000 and 1999, amortized computer software costs were $1,814,000 and $1,129,000, respectively. Income taxes Deferred income taxes are recognized for the future tax consequences of differences between the tax basis of assets and liabilities and their financial reporting amounts at each year end based on enacted tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to an amount which is more likely than not realizable. Income tax expense is the sum of the taxes currently payable and the change during the period in deferred tax assets and liabilities. Derivative financial instruments Advest uses derivatives (primarily financial futures contracts) solely to manage the risk associated with its municipal bond trading securities. Derivative transactions are entered into when inventory levels exceed pre-determined thresholds specified in Advest's hedging policy, which was developed and is reviewed at least annually by the chief executive officer of the Company. Derivatives are considered off-balance-sheet 29 30 instruments because their notional amounts are not recorded on the balance sheet. However, the fair values of Advest's futures contracts, which are based on quoted market prices, are reflected in the consolidated balance sheets within trading securities and the changes therein are reflected in the operating activities section of the consolidated statements of cash flows. Futures contracts are marked to market daily. Unrealized and realized gains and losses from the termination or sale of the futures contracts are reflected in revenue from principal transactions. Recent accounting pronouncements In June 2000, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities." SFAS 138 addresses a limited number of issues causing implementation difficulties for entities that apply SFAS 133. SFAS 137, "Deferral of the Effective Date of SFAS 133" was issued in June 1999. SFAS 133, "Accounting for Derivative Instruments and Hedging Activities" requires that all derivative instruments be recorded on the balance sheet at their fair value. SFAS 137 defers the effective date for SFAS 133 to all fiscal quarters of all fiscal years beginning after June 15, 2000. The Company will adopt SFAS 133, as amended by SFAS 137 and SFAS 138, during fiscal 2001, as required. The effect of adoption on the Company's financial condition, results of operations or cash flows is not expected to be material. In September 2000, the FASB issued SFAS 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." SFAS 140 is effective for transfers of financial assets occurring after March 31, 2001, applied prospectively; effective for disclosures about securitizations and for reclassification and disclosure about collateral in financial statements for fiscal years ending after December 15, 2000. The effect of adoption on the Company's financial condition, results of operations or cash flows is not expected to be material. NOTE 2: ACQUISITION BY THE MONY GROUP INC. On August 23, 2000, the Board of Directors of the Company approved the acquisition of all of the ownership interests in the Company by The MONY Group Inc., ("MONY"), a holding company which, through its subsidiaries, is primarily engaged in the business of providing a wide range of life insurance and other financial products and services to higher income individuals. The acquisition was approved by a majority of the shareholders of the Company at a special meeting of shareholders held on November 20, 2000. Pursuant to the terms of the merger agreement, shareholders of the Company will receive consideration in the form of cash, MONY common stock or a combination thereof. The amount of such consideration will be based on the average price of MONY common stock for the ten consecutive trading days ending five trading days prior to the consummation of the merger. The consummation of the merger is expected to occur early in calendar 2001, subject to receipt of regulatory approval from the Office of Thrift Supervision. NOTE 3: DISCONTINUED OPERATIONS During Fiscal 1999, the Company announced that it would enter into two agreements with Hudson United Bank ("Hudson"), a subsidiary of Hudson United Bancorp, a Mahwah, New Jersey-based bank holding company. Under the terms of a purchase and sale agreement effective November 30, 1999, Hudson acquired the loan and other financial assets and assumed the deposit liabilities of the Bank. Under the terms of a separate agreement effective September 1, 1999, Advest and Hudson entered into a strategic alliance whereby Hudson became the exclusive provider of banking products and services to Advest and its clients and, concurrently, the Bank ceased its mortgage origination operations. Under the terms of the purchase and sale agreement, Hudson made a one-time payment of $2.0 30 31 million to the Bank. After deducting expenses related to the disposition, the Bank recognized a pre-tax profit of $.2 million on the transaction. The net loss of $.7 million on the sale of discontinued operations reflects a $.9 million tax expense related to the Bank's loan loss reserves. See Note 12. Pursuant to Accounting Principles Board Opinion No. 30 "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions," the consolidated financial statements of the Company reflect the disposition of certain assets and liabilities of the Bank. Accordingly, the Company's revenues, costs and expenses, assets and liabilities, and cash flows have been restated to exclude the lending and deposit businesses of the Bank from the respective captions in the Consolidated Statement of Earnings, Consolidated Balance Sheets and Consolidated Statements of Cash Flows, and have been reported through their respective dates of disposition as "Income from discontinued operations, net of taxes," as "Net assets of discontinued operations," and as "Net cash used in discontinued operations." Financial information for discontinued operations for the three years ended September 30, 2000 is summarized below (See Note 12 for analysis of income taxes):
In thousands 2000 1999 1998 ------------ ---- ---- ---- Statement of earnings data: Revenues $ 1,969 $ 12,273 $ 15,427 Expenses 1,463 10,811 13,826 ------- -------- -------- Income before taxes 506 1,462 1,601 Provision for income taxes 212 585 624 ------- -------- -------- Income from discontinued operations $ 294 $ 877 $ 977 ======= ======== ========
Balance sheet data: Loans $ -- $ 151,603 Interest receivable -- 1,028 Other assets -- (389) Deposits -- (120,660) Interest payable -- (136) Other payables -- (474) ----- ---------- Net assets of discontinued operations $ -- $ 30,972 ===== ===========
NOTE 4: TRADING SECURITIES At September 30, 2000 and 1999, trading securities consisted of:
Securities sold, Trading securities not yet purchased ------------------ ----------------- In thousands 2000 1999 2000 1999 ------------ ---- ---- ---- ---- Corporate obligations $295,769 $175,743 $264,888 $194,710 State and municipal obligations 41,498 42,912 203 314 U.S. government and agency obligations 30,433 51,969 48,963 34,831 Mortgage-backed securities 56,893 31,605 37,034 2 Stocks and warrants 2,475 4,197 1,024 629 -------- -------- -------- -------- $427,068 $306,426 $352,112 $230,486 ======== ======== ======== ========
31 32 NOTE 5: INVESTMENT SECURITIES As of September 30, 2000, 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 $ -- $ -- $12,773 $12,773 Due after one year through five years 1,886 1,886 388 388 Due after ten years 3,711 3,711 -- -- ------ ------ ------- ------- $5,597 $5,597 $13,161 $13,161 ====== ====== ======= =======
For the three years ended September 30, 2000, 1999 and 1998, proceeds from the sale of securities available for sale were $11,639,000, $19,607,000 and $42,853,000, respectively, and gross gains realized were $22,000, $0 and $66,000, respectively. Gross losses realized were $0, $537,000 and $2,000 for 2000, 1999 and 1998, respectively. The amortized cost and fair values of the Company's available for sale securities at September 30, 2000 and 1999 were:
Amortized Gross unrealized Fair ---------------- In thousands cost gains losses value ------------ ---- ----- ------ ----- 2000 FHLB stock $ 170 $-- $-- $ 170 Mortgage-backed securities 5,597 -- -- 5,597 Other 1,382 -- -- 1,382 ------ --- --- ------ $7,149 $-- $-- $7,149 ====== === === ====== 1999 FHLB stock $2,270 $-- $-- $2,270 Other 2,793 -- -- 2,793 ------ --- --- ------ $5,063 $-- $-- $5,063 ====== === === ======
There were no sales of held to maturity securities during the three years in the period ended September 30, 2000. The amortized cost and fair values of the Company's held to maturity securities at September 30, 2000 and 1999 were:
Amortized Gross unrealized Fair ---------------- In thousands cost gains losses value ------------ ---- ----- ------ ----- 2000 U.S. government and agency obligations $12,661 -- -- $12,661 Other 500 -- -- 500 ------ --- --- ------ $13,161 $-- $-- $13,161 ====== === === ====== 1999 Mortgage-backed securities $ 3,983 $ 1 $ -- $ 3,984 U.S. government and agency obligations 12,402 -- -- 12,402 Other 500 -- -- 500 ------ --- --- ------ $16,885 $ 1 $ -- $16,886 ====== === === ======
32 33 NOTE 6: SHORT-TERM BORROWINGS In the ordinary course of business, primarily to facilitate securities settlements and finance margin debits and trading inventories, Advest obtains bank loans which are collateralized by its trading securities and customers' margin securities. The loans are payable on demand and bear interest based on the federal funds rate. At September 30, 2000 and 1999, Advest had $234,701,000 and $125,228,000, respectively, in bank loans all collateralized by firm trading securities. The weighted average interest rate on bank loans outstanding at September 30, 2000 and 1999, was 6.81% and 5.57%, respectively, and the weighted average interest rates during fiscal 2000 and 1999 were 6.24% and 5.21%, respectively. Short-term borrowings of the Bank consist primarily of the current portion of advances from the FHLB. At September 30, 2000, there were no short-borrowings. At September 30, 1999, borrowings totaled $28,500,000 at rates from 5.37% to 6.68%. The Bank's borrowings with the FHLB are collateralized by its holdings of FHLB stock as well as otherwise unencumbered mortgage loans and investment securities. The advances are subject to prepayment penalties, which are intended to make the FHLB indifferent to the prepayment and are approximately equivalent to settlement of the obligations at their current fair value. AGI's short-term borrowings at September 30, 2000 and 1999, were $7,024,000 and $7,279,000, respectively, representing the current portion of notes due between 2000 and 2003. Refer to Note 7 for additional information. NOTE 7: LONG-TERM BORROWINGS Long-term borrowings of the Bank were $2,500,000 as of September 30, 1999, and represent the non-current portion of FHLB advances. The borrowings were collateralized in the same manner as short-term borrowings. The borrowing was paid down during 2000 and as of September 30, 2000 the Bank had no long-term borrowings. During fiscal 1997, AGI entered into a private placement transaction with three institutional investors, borrowing $35,000,000 on an unsecured basis. Under the terms of the note, the principal is payable in five equal installments with payments due on December 31, 1999 and on the last day of each December thereafter through and including December 31, 2003. The note is investment-grade rated and bears interest at the rate of 7.95% per annum payable semiannually on the last day of June and December. At September 30, 2000 and 1999, total long-term borrowings of AGI were $21,000,000 and $28,026,000, respectively. NOTE 8: COMMON STOCK Basic earnings per share are calculated by dividing income available to common shareholders by the weighted-average number of common shares outstanding during the period. Diluted earnings per share are calculated by dividing income available to common shareholders by the weighted-average shares of common stock and common stock equivalents outstanding during the period. Common stock equivalents are dilutive stock options that are assumed exercised for calculation purposes. The following table provides the calculation of net income per common share for the years ended September 30, 2000, 1999 and 1998:
In thousands, except per share amounts 2000 1999 1998 -------------------------------------- ---- ---- ---- Net income $ 21,024 $ 13,551 $ 17,952 ======== ======== ======== Average number of common shares outstanding during the period 8,941 8,888 8,877
33 34 Adjustments: Contingently issuable shares (1,022) (892) (726) -------- -------- -------- Average number of common shares outstanding 7,919 7,996 8,151 ======== ======== ======== Basic earnings per common share $ 2.65 $ 1.69 $ 2.20 ======== ======== ========
In thousands, except per share amounts 2000 1999 1998 -------------------------------------- ---- ---- ---- Net income $21,024 $13,551 $17,952 ======= ======= ======= Average number of common shares outstanding during the period 8,941 8,888 8,877 Adjustments: Exercise of stock options 216 293 467 ------- ------- ------- Average number of common shares outstanding 9,157 9,181 9,344 ======= ======= ======= Diluted earnings per common share $ 2.30 $ 1.48 $ 1.92 ======= ======= =======
Under a common stock repurchase program, the Company is authorized to purchase up to 4,000,000 shares. During the years ended September 30, 2000 and 1999, 382,527 and 298,369 shares, respectively, were acquired for a total of 3,437,673 shares repurchased since the start of the program. The payment of dividends on the Company's common stock is subject to (1) the availability of funds from Advest, which may be restricted under the net capital rule of the SEC and the New York Stock Exchange ("NYSE"), and from the Bank, which is subject to minimum bank regulatory requirements, and (2) a Note Purchase Agreement dated as of December 27, 1996 with three institutional investors. Such restrictions have never curtailed the Company's ability to declare dividends. In 1988, the Board of Directors of the Company adopted a shareholder rights plan. The plan provides for the distribution of one common stock purchase right for each outstanding share of common stock of the Company. In March 1998, the Board of Directors adopted an amendment to the plan extending the term of the rights, increasing their exercise price, and making other changes to the plan. After giving effect to this amendment, each right entitles the holder, following the occurrence of certain events, to purchase one share of common stock at a purchase price of $60 per share subject to adjustment. The rights will not be exercisable or transferable apart from the common stock except under certain circumstances in which either a person or group of affiliated persons acquires, or commences a tender offer to acquire 20% or more of the Company's common stock or a person or group of affiliated persons acquires 15% of the Company's common stock and is determined by the Board of Directors to be an "Adverse Person." Rights held by such an acquiring person or persons may thereafter become void. Under certain circumstances, a right may become a right to purchase common stock or assets of the Company or common stock of an acquiring company at a substantial discount. Under certain circumstances, the Company may redeem the rights at $.01 per right. The rights will expire in October 2008 unless earlier redeemed or exchanged by the Company. The Company has 2,000,000 shares, $.01 par value, preferred stock which was authorized by shareholders in 1988. The Board of Directors has full discretion with respect to designating and establishing the terms of each class or series of preferred stock prior to its issuance. No preferred stock has been issued to date. 34 35 NOTE 9: STOCK OPTION PLANS EMPLOYEE STOCK OPTION PLANS The Company's 1993 Stock Option Plan (the "1993 Plan") provides for grants of incentive stock options or nonqualified stock options for up to 500,000 shares of the Company's common stock. Options which are cancelled or expire prior to exercise are subject to reissuance. At September 30, 2000, options for 506,195 shares had been granted under the 1993 Plan, of which 177,295 options were outstanding. In September, 1999, the Board of Directors approved the 1999 Stock Option Plan (the "1999 Plan") which was approved by the Company's Shareholders in January 2000. The 1999 Plan authorized grants of incentive stock options or nonqualified stock options for up to 300,000 shares. Option grants under the 1993 Plan and 1999 Plan are made at the discretion of the Human Resources Committee of the Board of Directors and become exercisable at such times (but not within six months of grant) and expire at such time (but not later than ten years after grant), as that committee determines. Non-employee director stock option plans The Company's 1994 Non-Employee Director Stock Option Plan (the "1994 Plan"), as amended, provided for annual grants of 2,500 nonqualified stock options to each non-employee director through January 1999 up to an aggregate of 100,000 for all directors. In September 1999, the Board of Directors approved the 2000 Non-Employee Director Stock Option Plan (the "2000 Plan"), which was approved by the Company's Shareholders in January 2000. The 2000 Plan authorized continued annual grants at the same level of up to an additional 100,000 options. In August, 2000, the Board of Directors approved an amendment to the 2000 Plan discontinuing further option grants under the 2000 Plan. At September 30, 2000, 74,500 and 20,000 options had been granted, of which 62,500 and 20,000 were outstanding, under the 1994 and 2000 Plans, respectively. Options granted under either Plan become exercisable in equal thirds 30, 42 and 54 months after grant and expire 60 months after grant. Advest equity plans Since 1995, the Company has offered the Advest Equity Plans (the "Equity Plan") to certain eligible employees. The Equity Plan is a salary deferral investment program and is described in more detail in Note 10. For deferrals during calendar 2000 through June 30, 2000, 188,355 options were granted. For deferrals during calendar 1999 and 1998, respectively, 124,130 and 91,724 options were granted. Options granted under the equity plans are nonqualified stock options which will become exercisable five years after the end of the plan year and expire two years later. In August, 2000, the Board of Directors amended the Equity Plan to terminate further deferrals under the Equity Plan after July 31, 2000. Exercise price of options All options granted by the Company to date, or which may be granted under all plans, have or will have exercise prices not less than 100% of the fair market value of the Company's common stock on the date of grant. Pro forma compensation expense The Company applies the intrinsic value method under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," in accounting for stock-based compensation and, accordingly, no compensation cost has been recognized in the financial statements. Had the Company determined compensation cost based on the fair value at the grant date for its stock options under SFAS 123, "Accounting for Stock-Based Compensation", the Company's net earnings would have been the pro forma amounts indicated below: 35 36
In thousands 2000 1999 1998 ------------ ---- ---- ---- Net earnings As reported $21,024 $13,551 $17,952 Pro forma 20,453 12,901 17,573 Basic earnings per share As reported $ 2.65 $ 1.69 $ 2.20 Pro forma 2.58 1.61 2.16 Diluted earnings per share As reported $ 2.30 $ 1.48 $ 1.92 Pro forma 2.23 1.41 1.88
Pro forma compensation expense associated with option grants is recognized over the vesting period. The impact of applying SFAS 123 on pro forma disclosure for the years shown is not fully representative of the potential impact on pro forma net earnings for future years, which will include compensation expense related to vesting of 1998, 1999, 2000 and subsequent grants. However all options will vest and be cashed out prior to the closing date of the Company's acquisition by MONY. Stock option activity Transactions under the Company's stock option plans are summarized below:
Number of Weighted-average shares exercise price ------ -------------- Options outstanding at September 30, 1997 865,984 $ 9.35 Granted 127,533 26.13 Forfeited (14,031) 6.51 Exercised (144,506) 12.45 -------- Options outstanding at September 30, 1998 834,980 12.34 Granted 249,336 18.82 Forfeited (38,393) 12.28 Exercised (18,989) 8.11 ------- Options outstanding at September 30, 1999 1,026,934 13.99 Granted 406,624 18.43 Forfeited (208,992) 21.45 Exercised (242,915) 7.43 ---------- OPTIONS OUTSTANDING AT SEPTEMBER 30, 2000 981,651 $15.89 ==========
At September 30, 2000, 1999 and 1998, options were exercisable, respectively, on 66,084, 224,327 and 151,348 shares and the weighted average exercise prices were $14.63, $7.22 and $6.84. The weighted-average fair value of options granted in 2000, 1999, and 1998 were $7.60, $7.46 and $10.16 per option, respectively. Fair value is estimated as of the grant date based on a Black-Scholes 36 37 option pricing model using the following weighted-average assumptions:
2000 1999 1998 ---- ---- ---- Risk-free interest rate 6.51% 5.07% 5.59% Expected life 5.35 YRS 5.64 yrs 5.19 yrs Expected volatility 39.3% 37.8% 36.0% Dividend yield 1.10% 1.10% 0.79%
The following table summarizes information related to outstanding and exercisable options at September 30, 2000:
Options outstanding Options exercisable -------------------------------------------------- ------------------- Weighted- Weighted- Weighted- average average average Number of exercise remaining Number of exercise Exercise prices shares price life (in years) shares price --------------- --------- --------- --------------- -------- --------- $8.50-$11.38 323,922 $ 9.60 2.5 29,496 $ 9.93 $15.44-$22.63 624,302 18.59 6.1 36,588 18.42 $23.75-$30.00 33,427 26.38 3.3 -- ------- ------ --- ------ ------ Total 981,651 $15.89 4.8 66,084 $14.63 ======= ====== === ====== ======
NOTE 10: EMPLOYEE COMPENSATION AND BENEFIT PLANS Advest Thrift Plan The Company maintains the Advest Thrift Plan (the "Thrift Plan") which is a qualified employee stock ownership plan ("ESOP") and 401(k) plan covering all employees who have completed one year of service. The Company matches 100% of participants' contributions to their Thrift Plan accounts up to 2% of compensation. In addition, the Company has made or will make discretionary contributions to participants' Thrift Plan accounts equal to 1.5%, 1.5% and 2.5% of their compensation for the calendar years ended December 31, 2000, 1999 and 1998, respectively. For fiscal 2000, effective at the closing for the Company's merger with MONY (see Note 2) the Company will make a discretionary contribution to each participant's Thrift Plan account of 20 shares of common stock of MONY. All employees, regardless of employment tenure, will receive the discretionary contribution. Contribution expense for fiscal 2000, 1999 and 1998 was $4,400,000, $3,573,000 and $4,324,000, respectively. No ESOP contributions have been made by the Company since 1993. Defined Benefit Plans The Company's Account Executive Nonqualified Defined Benefit Plan (the "AE Defined Benefit Plan"), effective October 1, 1992, as amended, offers certain high-performing financial advisors retirement benefits based upon a formula reflecting their years of service, the gross commissions they generate and Company contributions to their Thrift Plan 401(k) accounts. During fiscal 2000, the Company amended the AE Defined Benefit Plan to permit commencement of benefit distributions at age 55 under some circumstances, and to provide other enhanced benefits to participants. The Company's Executive Nonqualified Post-Employment Income Plan (the "Executive Defined Benefit Plan"), effective October 1, 1993, as amended, provides certain senior executives with income for 10 years after retirement equal to a percentage of their final average earnings based upon a formula reflecting years of service, assumed social security benefits and Company contributions to certain other 37 38 benefit plans on the executive's behalf. In June 1999, the Board of Directors adopted an amendment to the Executive Defined Benefit Plan which increased the amount of incentive compensation considered in determining final average earnings. Although the AE Defined Benefit Plan and the Executive Defined Benefit Plan are considered to be "unfunded," assets have been set aside in revocable trusts for each to fund future payments. These trusts are available to general creditors of the Company in the event of liquidation. The fair value of these trusts, which are included in trading securities and other assets, at September 30, 2000 was $15,903,000, which was more than the projected benefit obligation by $2,910,000. The following table sets forth the status of the AE Defined Benefit Plan and Executive Defined Benefit Plan as well as amounts recognized in the Company's consolidated financial statements at September 30, 2000 and 1999:
In thousands 2000 1999 Change in benefit obligations: Benefit obligation, beginning of year $ 10,670 $ 9,686 Service cost 1,281 1,302 Interest cost 837 625 Amendments 504 391 Actuarial (gain) loss (270) (1,328) Benefits paid (29) (6) -------- -------- Benefit obligation, end of year $ 12,993 $ 10,670 ======== ======== Change in Plan Assets: Fair value of plan assets at beginning of year $ -- $ -- Employer contribution 29 6 Benefits paid (29) (6) -------- -------- Fair value of plan assets at end of year $ -- $ -- ======== ======== Funded status $(12,993) $(10,670) Unrecognized actuarial (gain) loss (524) (281) Unrecognized prior service cost 1,126 742 -------- -------- Accrued benefit cost $(12,391) $(10,209) ======== ========
Pension expense for the plans for the three years in the period ended September 30, 2000 is included in the following components:
In thousands 2000 1999 1998 ------------ ---- ---- ---- Service cost $1,282 $1,302 $1,167 Interest cost 837 625 558 Recognized net actuarial (gain) loss (28) (2) 6 Amortization of prior service cost 121 72 53 ------ ------ ------ Net benefit costs $2,212 $1,997 $1,784 ====== ====== ======
The following table provides the assumptions used in determining the projected benefit obligation for the plans for the three years in the period ended September 30, 2000: 38 39
2000 1999 1998 ---- ---- ---- Weighted average discount rate 8.00% 7.625% 6.50% Rate of increase in future compensation levels 5.00% 5.00% 5.00%
Equity Plans The Company has offered the Advest Equity Plan (the "Equity Plan") to certain top performing financial advisors and designated key employees since the 1995 calendar year. The Equity Plan allows those employees to defer a portion of their compensation on a calendar year basis, and invest it on a pre-tax basis in units consisting of one share of the Company's common stock and one option to purchase an additional share of common stock. The share portion of the unit is issued monthly from treasury stock and will be restricted for three years after the year of deferral. The option portion is described under Note 9. Both the restricted stock and options will be subject to forfeiture under certain circumstances. The Company offers similar plans to executive officers. In August, 2000, the Board of Directors amended the Equity Plan to terminate further deferrals after July 31, 2000 due to the Company's pending acquisition by MONY, discussed in Note 2. Under the Advest Equity Plan and other arrangements, restricted stock awards are made, and shares issued, to certain key employees without cash payment by the employee. The shares are restricted for a vesting period, generally five years from the award date. Certain key employees were awarded, net of forfeitures, 26,575 and 44,872 shares of restricted stock, with a fair value of $405,000 and $1,262,000, during 2000 and 1999, respectively. As of September 30, 2000, stock awards for 125,955 shares were outstanding, with restrictions expiring at various dates through 2010. The deferred cost of the restricted stock awards is amortized on a straight-line basis. Under the Key Professionals Equity Plan and under employment agreements with certain key employees, a portion of the key employee's compensation is invested in restricted shares of the Company's stock on a discounted basis. Under these arrangements, during fiscal 2000 and 1999, 14,058 and 17,024 shares were issued with a fair value of $279,000 and $343,000, respectively, at discounts ranging from 75% to 80% of fair market value. These shares are subject to forfeiture if certain conditions are not met. Under the terms of the merger agreement between the Company and MONY described in Note 2, at the time of the merger each restricted share will be converted into a combination of 50% cash and 50% MONY common stock. Immediately after the merger, the cash will be distributed to the participants. The shares of MONY stock will vest immediately, except that shares received by the Company's executive officers, shares received with respect to the Key Professionals Equity Plan, and shares received with respect to certain individual stock awards aggregating more than 2,599 shares, will continue to be restricted and will vest on the schedule previously established. Management Incentive Plan The Company has a Management Incentive Plan (the "MIP") which provides for incentive compensation to certain salaried employees. Compensation is presently based on the Company's pre-tax income. During fiscal 2000, 1999 and 1998, MIP compensation was $2,995,000, $1,777,000 and $2,812,000, respectively. In order to incent designated executive officers, management personnel and other key employees subsequent to the merger, the Company will establish new Key Employees Incentive Plan providing for aggregate incentives of up to $15 million based upon achievement of certain performance goals. 39 40 NOTE 11: CAPITAL AND REGULATORY REQUIREMENTS Advest is subject to the net capital rule adopted and administered by the NYSE and the SEC. Advest has elected to compute its net capital under the alternative method of the rule which requires the maintenance of minimum net capital equal to 2% of aggregate debit balances arising from customer transactions, as defined. The NYSE also may require a member firm to reduce its business if net capital is less than 4% of aggregate debit balances and may prohibit a member firm from expanding its business and declaring cash dividends if net capital is less than 5% of aggregate debit balances. As of September 30, 2000, Advest's regulatory net capital of $77,115,000 was 10.17% of aggregate debit balances and exceeds required net capital by $61,950,000. Advest maintains separate accounts for the exclusive benefit of customers in accordance with Securities and Exchange Commission Rule 15c3-3, as determined by periodic computations. The rule allows Advest to maintain the required amounts in cash or qualified securities. Under bank regulatory restrictions, the Bank is required to maintain a minimum level of capital. With its conversion to a federal charter during fiscal 1997, the Bank is required to limit annual dividends to a percentage of retained net income of the most recent four-quarter period, as defined. No dividends were declared or paid by the Bank during the past three fiscal years. At September 30, 2000, the Bank's Tier 1 leverage capital, Tier 1 risk-based, and total risk-based capital ratios were 62.53%, 169.33% and 169.33%, respectively, which met all regulatory requirements for well capitalized banks. NOTE 12: INCOME TAXES The provision for income taxes for the years ended September 30, 2000, 1999 and 1998 consisted of the following:
In thousands 2000 1999 1998 ------------ ---- ---- ---- Current: Federal $11,029 $7,559 $11,645 State and local 3,189 2,006 3,666 ------- ------ ------- 14,218 9,565 15,311 ------- ------ ------- Deferred: Federal (23) (743) (3,259) State and local 202 103 (1,199) ------- ------ ------- 179 (640) (4,458) ------- ------ ------- Provision for income taxes $14,397 $8,925 $10,853 ======= ====== =======
At September 30, 2000 and 1999, deferred tax assets and liabilities were comprised of:
In thousands 2000 1999 ------------ ---- ---- Deferred tax assets: Provision for credit losses and asset devaluation $2,531 $3,006 Employee benefits 6,398 6,629 State tax credits -- 144 Other 9 91 ------ ------ Total deferred tax assets $8,938 $9,870 ------ ------
40 41 Deferred tax liabilities: Tax loan loss reserve in excess of base year $ 201 $ 301 Depreciation 1,103 964 Partnership basis difference 1,687 1,743 Other 28 333 ------ ------ Total deferred tax liabilities $3,019 $3,341 ------ ------ Net deferred tax assets $5,919 $6,529 ====== ======
The Company will only recognize a deferred tax asset when, based on available evidence, realization is more likely than not. Accordingly, at September 30, 2000 and 1999, the Company has recorded no valuation allowance against federal and state deferred tax assets based on reversals of existing taxable amounts and anticipated future earnings. Effective fiscal 1997, the Bank changed its tax bad debt method to the specific charge-off method in accordance with provisions of the Small Business Job Protection Act. The change in method resulted in taxable income of approximately $1,485,000 representing the excess of the Bank's tax bad debt reserve at September 30, 1996 over the reserve that arose in tax years beginning before December 31, 1987 (base year reserve). Generally, the income is being recognized ratably over a six-year period. Accordingly, the deferred tax liability resulting from the change in method is approximately $201,000 and $301,000, at September 30, 2000 and 1999, respectively. As of September 30, 1998, the Bank did not record a deferred tax liability for its base year reserve of $2,155,000 (as it was not anticipated that a tax liability would be incurred in the foreseeable future.) A tax liability, relating to the base year reserve, would be incurred if certain excess distributions were made with respect to the bank's stock or if the bank failed to qualify as a bank for tax purposes. In May 1999, the Company announced the sale of the Bank's deposit and lending businesses. As a result of this sale, the Bank would make excess distributions with respect to its stock. Accordingly, a deferred tax liability was established at September 30, 1999 in the amount of $862,000. The deferred tax was charged to income from discontinued operations. See Note 3. A reconciliation of the difference between the statutory federal income tax rate and the effective income tax rate follows for the three years ended September 30, 2000:
Percent of pre-tax income 2000 1999 1998 ------------------------- ---- ---- ---- Statutory income tax rate 35.0% 35.0% 35.0% State and local income taxes, net of federal tax effect 6.3 6.7 6.9 Recognition of state net operating losses -- -- (1.1) Tax-exempt interest income (0.4) (1.0) (1.1) Intangible assets 0.3 0.3 0.3 Other (0.2) (1.0) (1.0) ------ ------- ------- Effective income tax rate 41.0% 40.0% 39.0% ====== ======= =======
41 42 NOTE 13: COMMITMENTS AND CONTINGENCIES Leases The Company conducts all of its operations from leased premises, and leases data processing and communications equipment under noncancelable operating leases primarily varying from one to ten years, with certain renewal options for similar terms. Minimum rentals based upon the original terms (excluding taxes, insurance and maintenance expenses which also are obligations) at September 30, 2000 are (in thousands):
Data processing Fiscal year ended Office & communications September 30, facilities equipment Total 2001 $ 9,555 $ 6,591 $16,146 2002 9,091 2,615 11,706 2003 8,242 122 8,364 2004 6,788 -- 6,788 2005 5,667 -- 5,667 2006 and thereafter 9,352 -- 9,352 ------- ------ ------- $48,695 $9,328 $58,023 ======= ====== =======
Rental expense under these leases was $12,030,000, $10,799,000 and $9,637,000 for the years ended September 30, 2000, 1999 and 1998, respectively. Loan guarantees and letters of credit At both September 30, 2000 and 1999, Advest was contingently liable under bank letter of credit agreements in the amount of $5,335,000 which are collateralized by securities held in customer accounts. At September 30, 2000 and 1999, the Bank and AGI were contingently liable under standby letters of credit and commitments to extend credit to customers in the amount of $0 and $93,628,000, respectively. Litigation The Company has been named as defendant, or has been threatened with being named defendant in various actions, suits and proceedings before a court or arbitrator arising principally from its securities and investment banking business. Such matters involve alleged violations of federal and state securities laws and other laws. Certain of these actions claim substantial damages and, if determined adversely to the Company, could have a material adverse effect on the consolidated financial condition, results of operations or cash flows of the Company. While the outcome of any litigation is uncertain, management, based in part upon consultation with legal counsel, believes that the resolution of all matters pending or threatened against the Company will not have a material adverse effect on the financial condition or future results of operations or cash flows of the Company. NOTE 14: FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK In the normal course of business, Advest executes, settles and finances customer and proprietary securities transactions. These activities may expose Advest to off-balance-sheet risk in the event that customers or other parties are unable to fulfill their contractual obligations. In accordance with industry practice, Advest records securities transactions executed on behalf of its customers on settlement date which is generally three business days after trade date. Should a customer 42 43 or broker fail to deliver cash or securities as agreed, Advest may be required to purchase or sell securities at unfavorable market prices. Customer securities activities, including the sale of securities not yet purchased ("short sales"), are transacted on either a cash or margin basis. For margin transactions, in which Advest extends credit to customers, it seeks to control its risk by requiring customers to maintain margin collateral in compliance with various regulatory and internal guidelines. Advest monitors required margin levels daily and requests customers to deposit additional collateral or liquidate securities positions when necessary. Such transactions expose Advest to off-balance-sheet risk in the event margin requirements are not sufficient to cover customer losses. Advest's collateralized financing activities require it to pledge customer and firm securities as collateral for various secured financing sources such as bank loans, repurchase agreements and securities loaned. In the event the counterparty is unable to meet its contractual obligations, Advest may be exposed to the off-balance-sheet risk of acquiring securities at prevailing market prices. The Company monitors the credit standing of counterparties with whom it conducts business. Risk is further controlled by monitoring the market value of securities pledged on a daily basis and by requiring adjustment of collateral levels as needed. Advest has sold securities that it does not currently own and will therefore be obligated to purchase such securities at prevailing market prices in the future. These obligations are recorded in the financial statements at the market values of the related securities and Advest will incur a loss if the market value of the securities increases. Advest seeks to manage the interest rate risk associated with its municipal bond inventories by entering into derivative transactions, principally short-term futures contracts. The average fair value of futures contracts during the years ended September 30, 2000 and 1999 were $624,274 and $680,725, respectively. Net trading profits (losses) of $(47,000), $56,000 and $(162,000) were realized in 2000, 1999 and 1998, respectively. At September 30, 1999, Advest had only nominal open positions. At September 30, 2000, Advest had no open positions. Advest hedges its taxable fixed income positions by taking short positions in like products with similar maturities as well as U.S. treasuries. The Bank enters into interest rate cap contracts as part of its interest rate risk management strategy. The notional values do not represent direct credit exposures. The Bank's credit exposure is limited to the net difference between the calculated pay and receive amounts on each transaction which is generally netted and paid quarterly. At September 30, 1999 the Bank had one interest rate cap contract with a notional value of $5.0 million, strike rate of 6% and unamortized premium of $0.1 million. There were no cap contracts at September 30, 2000. NOTE 15: CONCENTRATIONS OF CREDIT RISK Advest generally conducts business with brokers and dealers located in the New York metropolitan area that are members of the major securities exchanges. Advest's clients are predominantly retail investors located throughout the United States but primarily in the Northeast and Florida. Advest's activities primarily involve collateralized arrangements and may result in credit exposure if the counterparties do not fulfill their obligations. Advest's exposure to credit risk can be directly impacted by volatile securities markets which may impair the ability of counterparties to satisfy their contractual obligations. NOTE 16: FAIR VALUE OF FINANCIAL INSTRUMENTS Fair values generally represent estimates of amounts at which a financial instrument could be exchanged between willing parties in a current transaction other than in forced liquidation. Where current exchange prices are not available, other valuation techniques are used, such as discounting the expected future cash flows. Fair value estimates are subjective and depend on a number of significant assumptions based on 43 44 management's judgment regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors. In addition, a wide range of valuation techniques are permitted, making comparisons difficult, even between similar entities. The fair value of other financial assets and liabilities (consisting primarily of receivables from and payables to brokers, and dealers and customers and securities borrowed and loaned) are considered to approximate the carrying value due to the short-term nature of the financial instruments. The fair value of advances from the FHLB, including the current portion, are estimated using rates which approximate those currently being offered by the FHLB for advances with similar remaining maturities. The fair value of interest rate cap agreements are obtained from quoted market prices and dealer quotes. These values represent the estimated amount that the Company would receive or pay to terminate the agreements at the reporting date, taking into account current interest rates and the current credit worthiness of the counterparties. The fair values of the Company's financial instruments at September 30, 2000 and 1999 are:
2000 1999 ------------------------- -------------------------- CARRYING FAIR Carrying Fair In thousands AMOUNT VALUE amount value ------------ ------ ----- ------ ----- Financial assets: Investment securities $20,310 $ 20,310 $ 21,948 $ 21,949 Financial liabilities: Short-term borrowings 241,725 241,725 161,007 161,080 Long-term borrowings 21,000 21,000 30,526 30,769
NOTIONAL FAIR Notional Fair In thousands AMOUNT VALUE amount value ------------ ------ ----- ------ ----- Unrecognized financial instruments: Interest rate caps $ -- $ -- $ 5,000 $ 49 Commitments to extend credit -- -- (92,924) -- Standby letters of credit (5,335) (27) (6,039) (27)
NOTE 17: SEGMENT REPORTING In 1999, the Company adopted the provisions of SFAS 131, "Disclosures About Segments of an Enterprise and Related Information." The Company's reportable segments are Private Client, Capital Markets, Interest and Other. The Private Client segment includes securities brokerage and investment management services including the sale of equities, mutual funds, fixed income products and insurance to individual investors through Advest's 95 retail offices. The Capital Markets segment includes market-making activities on over-the-counter equities, institutional trading in both equities and fixed income products, trading in corporate bonds, government agency and mortgage-backed securities, corporate underwriting and merger and acquisition, public finance and syndicate participations. Sales credits associated with underwritten offerings are reported in the Private Client segment when sold to individual investors and in the Capital Markets segment when sold to institutional investors. The Interest segment includes revenue from financing margin debits, stock borrowing activities and trading and investment securities. The Other segment includes all corporate expenses and miscellaneous revenues and expenses, which are not allocated to the reportable segments. The Company has not disclosed asset information by segment as the information is not produced internally. All of the Company's business is within the U.S. 44 45 The following table summarizes financial information by segment for the three years in the period ended September 30, 2000:
In thousands 2000 1999 1998 ------------ ---- ---- ---- Revenues: Private Clients $262,250 $218,211 $202,205 Capital Markets 53,026 52,275 41,719 Interest 91,214 57,431 57,439 Other 12,262 7,321 8,438 -------- -------- -------- $418,752 $335,238 $309,801 ======== ======== ======== Income before taxes: Private Clients $66,964 $53,501 $49,985 Capital Markets (4,233) (5,078) (4,525) Interest 27,686 22,466 26,098 Other (55,290) (48,577) (43,730) -------- -------- -------- $35,127 $22,312 $27,828 ======= ======= =======
45 46 QUARTERLY FINANCIAL INFORMATION (unaudited)
In millions, except 2000 by fiscal quarters 1999 by fiscal quarters --------------------------------------- ------------------------------------ per share data 1st* 2nd* 3rd 4th 1st 2nd 3rd 4th -------------- ---- ---- --- --- --- --- --- --- Revenues $ 103.3 $ 113.9 $99.1 $ 102.4 $82.6 $79.7 $86.7 $86.2 Income before taxes $ 9.5 $ 10.1 $ 7.3 $ 8.2 $ 7.5 $ 4.8 $ 4.9 $ 5.1 Income from continuing operations $ 5.5 $ 5.8 $ 4.6 $ 4.8 $ 4.5 $ 2.9 $ 2.9 $ 3.1 Income from discontinued operations 0.3 -- -- -- 0.2 0.1 0.3 0.3 Loss on sale of discontinued operations -- -- -- -- -- -- (0.7) -- ------- ------- ----- ------- ----- ----- ----- ----- Net income $ 5.8 $ 5.8 $ 4.6 $ 4.8 $ 4.7 $ 3.0 $ 2.5 $ 3.4 ======= ======= ===== ======= ===== ===== ===== ===== Per share data: Basic earnings: Continuing operations $ 0.70 $ 0.73 $0.57 $ 0.62 $0.57 $0.36 $0.36 $0.38 Discontinued operations 0.03 -- -- -- 0.02 0.02 0.04 0.03 Loss on sale of discontinued operations -- -- -- -- -- -- (0.09) -- ------- ------- ----- ------- ----- ----- ----- ----- Net income $ 0.73 $ 0.73 $0.57 $ 0.62 $0.59 $0.38 $0.31 $0.41 ======= ======= ===== ======= ===== ===== ===== ===== Diluted earnings: Continuing operations $ 0.60 $ 0.63 $0.50 $ 0.53 $0.49 $0.32 $0.32 $0.33 Discontinued operations 0.03 -- -- -- 0.02 0.01 0.04 0.03 Loss on sale of discontinued operations -- -- -- -- -- -- (0.08) -- ------- ------- ----- ------- ----- ----- ----- ----- Net income $ 0.63 $ 0.63 $0.50 $ 0.53 $0.51 $0.33 $0.28 $0.36 ======= ======= ===== ======= ===== ===== ===== ===== Dividends $ 0.05 $ 0.06 $0.06 $ 0.06 $0.04 $0.05 $0.05 $0.05 Stock price range: High $20-9/16 $20-1/8 $21-15/16 $33-15/16 $23-7/16 $25-1/4 $22-3/16 $25-1/8 Low $16 $15-5/8 $16-7/8 $20-3/4 $14-1/8 $18-3/8 $18-5/16 $17-1/2 Close $18-3/8 $19 $20-15/16 $31-11/16 $18-1/2 $18-1/2 $19-15/16 $18-1/4
46 47 Report of Independent Accountants To the Board of Directors and Shareholders of The Advest Group, Inc.: In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of earnings, changes in shareholders' equity and of cash flows present fairly, in all material respects, the financial position of The Advest Group, Inc. and its subsidiaries (the "Company") at September 30, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 2000, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion. PricewaterhouseCoopers, LLP Hartford, CT October 25, 2000, except for Note 2 as to which the date is November 21, 2000. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure There were no disagreements with the Company's independent accountants on any accounting or financial disclosure matters. 47 48 PART III Item 10. Directors and Executive Officers of the Registrant The information required for "Directors" by this item is included under the caption "Election of Directors" in the Company's Proxy Statement to be filed with the Securities and Exchange Commission in connection with the Company's annual meeting to be held in calendar 2001, if such a meeting is held. Such information is hereby incorporated by reference. The following table sets forth the executive officers of the Company at January 2, 2001. Executive officers of the Company are appointed annually by the Board of Directors to hold office until their successors are appointed and qualify.
Executive Officer Name Age Office Since ---- --- ------ -------- Grant W. Kurtz 58 President and Chief Executive Officer 1985 Allen G. Botwinick 57 Executive Vice President of Administration and Operations 1980 George A. Boujoukos 66 Senior Executive Vice President and Director Capital Markets of Advest, Inc. 1977 Lee G. Kuckro 59 Executive Vice President, Secretary and General Counsel 1978 Martin M. Lilienthal 58 Executive Vice President, Treasurer and Chief Financial Officer 1977 Daniel J. Mullane 47 President of Private Client Group of Advest, Inc. 2000
Item 11. Executive Compensation The information required by this item is included under the caption "Remuneration of Directors and Officers" and "Certain Transactions" of the Company's Proxy Statement to be filed with the Securities and Exchange Commission in connection with the Company's annual meeting to be held in calendar 2001, if such a meeting is held. Such information is hereby incorporated by reference. Item 12. Security Ownership Of Certain Beneficial Owners And Management The information required by this item is contained under the caption "Election of Directors" in the Company's Proxy Statement to be filed with the Securities and Exchange Commission in connection with the Company's annual meeting to be held in calendar 2001, if such a meeting is held. Such information is hereby incorporated by reference. Item 13. Certain Relationships and Related Transactions The information required by this item is included under the caption "Certain Transactions" of the Company's Proxy Statement to be filed with the Securities and Exchange Commission in connection with the Company's annual meeting to be held in calendar 2001, if such a meeting is held. Such information is hereby incorporated by reference. 48 49 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
Page Reference -------------- (a) 1. Financial Statements The Consolidated Financial Statements and The Report of Independent Accountants contained herein: Consolidated Statements of Earnings 24 Consolidated Balance Sheets 25 Consolidated Statements of Cash Flows 26 Consolidated Statements of Changes in Shareholders' Equity 27 Notes to Consolidated Financial Statements 28-45 Report of Independent Accountants 47 2. Financial Statement Schedule Report of Independent Accountants on schedule 56 Schedule II - Valuation and Qualifying Accounts 57
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 ------- ----------- -------------------------------------------- 2(a) Agreement and Plan of Merger dated Exhibit 2.1 to Report on Form 8-K dated as of August 23, 2000 by and among September 1, 2000 of The MONY Group Inc. The MONY Group Inc., MONY Acquisition Corp. and The Advest Group, Inc. 3(a) Restated Certificate of Exhibit 3(a) to Registrant's Incorporation of Registration Report on Form 10-Q for the quarter ended March 31, 1989 3(b) By-laws of Registrant, as restated Exhibit 3(b) to Registrant's Report on Form 10-Q and amended for the quarter ended March 31, 1989 and Exhibit 3(a) to Registrant's Report on Form 10-Q for the quarter ended June 30, 1990 3(c) Second Amendment to Restated Exhibit 3(c) to Registrant's Report on Form By-laws of Registrant 10-K for its fiscal year ended September 30, 1997
49 50
Prior Filing(s) to which Reference is made, Exhibit Description if applicable ------- ----------- -------------------------------------------- 4(a) Shareholder Rights Agreement Exhibit to Registrant's Report on Form 8-K dated dated as of October 31, 1988, November 1, 1988; to Exhibit 4 to Registrant's as amended on March 12, 1998 Report on Form 8-K dated March 13, 1998 and and August 23, 2000 Exhibit 3 to Registrant's Report on Form 8-A/A filed December 21, 2000 10(a) Registrant's 1994 Non-Employee Exhibit A to Registrant's Proxy Statement Director Stock Option Plan, as December 20, 1994; Exhibit 10(b) to amended Registrant's Report on Form 10-K for its fiscal year ended September 30,1998 10(b) Registrant's 2000 Non-Employee Exhibit B to Registrant's Proxy Statement Director Stock Option Plan for its Annual Meeting of Stockholders to be held January 27, 2000 10(c) Registrant's 1993 Stock Option Exhibit A to Registrant's Proxy Statement Plan dated December 21, 1993 10(d) Registrant's 1999 Stock Option Exhibit B to Registrant's Proxy Statement for Plan its Annual Meeting of Stockholders to be held January 27, 2000 10(e) Registrant's Deferred Exhibit 10(f) to Registrant's Report on Form Compensation Savings and 10-K for the fiscal year ended September 30, Investment Plan, Amended and 1989, Exhibit 10(j) to Registrant's Report on Restated as of November 17, Form 10-K for its fiscal year ended September 30, 1989, as amended 1990 and Exhibit 10(b) of Registrant's Report on Form 10-Q for the quarter ended December 31, 1992 10(f) Non-Employee Director Equity Exhibit 10(b) to Registrant's Report on Form Plan 10-Q for the quarter ended June 30, 1996 10(g) Key Professionals Equity Plan, Exhibit 10(g) to Registrant's Report on Form as amended and restated as of 10-K for its fiscal year ended September 30, 1997 October 1, 1997
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Prior Filing(s) to which Reference is made Exhibit Description if applicable ------- ----------- -------------------------------------------- 10(h) Forms of Executive Officer Exhibit 10 to Registrant's Report on Form 10-Q Restricted Stock and Stock for the quarter ended December 31, 1994 and Option Agreement for 1995, Exhibit 10(c) to Registrant's Report on Form 1996 (as supplemented) 10-Q for the quarter ended June 30, 1996 and and 1997 and 1998 Exhibit 4.4 to Registrant's Registration Statement on Form S-8, File No. 333-17711; Exhibit 4.5 to Registrant's Registration Statement on Form S-8, File No. 333-17711; and Exhibit 10(i) to Registrant's Report on Form 10-K for its fiscal year ended September 30, 1997 10(i) The Advest Thrift Plan, amended Exhibit 10(j) to Registrant's Report on Form 10-K and restated effective as of for its fiscal year ended September 30, 1999 January 1, 1999 10(j) First Amendment to Filed Herewith The Advest Thrift Plan 10(k) Registrant's Account Executive Exhibit 10(m) to Registrant's Report on Form Nonqualified Defined Benefit 10-K for its fiscal year ended September 30, Plan, as amended 1993, Exhibit 10(p) to Registrant's Report on Form 10-K for its fiscal year ended September 30, 1995; Exhibit 10(f) to Registrant's Report on Form 10-Q for the quarter ended June 30, 1996 and Exhibits 10(a) and 10(b) to Registrant's Report on Form 10-Q for the quarter ended June 30, 2000 10(l) Registrant's Nonqualified Exhibit 10(n) to Registrant's Report on Form Executive Post-employment 10-K for its fiscal year ended September 30, 1994 Income Plan, as amended and Exhibit 10(e) to Registrant's Report on Form 10-Q for the quarter ended June 30, 1996; Exhibit 10(b) to Registrant's Report on Form 10-Q for its fiscal quarter ended June 30, 1999 10(m) Registrant's 1995 through 1998 Exhibit 4.1 to Registrant's Registration Statement Advest Equity Plans on Form S-8, File No. 33-56275; Exhibit 4 to Registrant's Registration Statement on Form S-8, File No. 333-00797; Exhibit 4.3 to Registrant's Registration Statement on Form S-8, File No. 333-17711; and Exhibit 10(p) to Registrant's Report on Form10-K for its fiscal year ended September 30, 1997
51 52
Prior Filing(s) to which Reference is made, Exhibit Description if applicable ------- ----------- -------------------------------------------- 10(n) Advest Equity Plan, amended Exhibit 10(n) to Registrant's Report on Form 10-K and restated as of June 3, 1999 for its fiscal year ended September 30, 1999 10(o) Amended and Restated Exhibit 10(h) to Registrant's Report on Form Employment Agreement with 10-Q for the quarter ended June 30, 1996; former Chief Executive Officer, Exhibit 10(a) to Registrant's Report on Form as amended 10-Q for its fiscal quarter ended December 31, 1998 10(p) Employment Agreement with Exhibit 10(r) to Registrant's Report on Form Chief Executive Officer and 10-K for its fiscal year ended September 30, 1997; President, as amended Exhibit 10(a) Registrant's Report on Form 10-Q for its fiscal quarter ended June 30, 1999 10(q) Form of Executive Agreement dated Exhibit 10(q) to Registrant's Report on Form September 24, 1998 10-K for its fiscal year ended September 30, 1998 10(r) Note Purchase Agreement of Exhibit 10(a) to Registrant's Report on Form Registrant dated as of December 27, 10-Q for the quarter ended December 31, 1996 1996 with respect to Registrant's 7.95% Senior Notes due December 31, 2003 10(s) Cash Subordination Agreement of Exhibit 10(b) to Registrant's Report on Form the Registrant dated as of January 31 10-Q for the quarter ended December 31, 1996 1997 10(t) Support Agreement dated as of Exhibit 10.1 to Report on Form 8-K dated August 23, 2000 by and among The September 1, 2000 of The MONY Group, Inc. MONY Group Inc., Peter R. Kellogg, Grant W. Kurtz, Allen Weintraub, and George A. Boujoukos. 10(u) Stock Option Agreement dated as of Exhibit 10.2 to Report on Form 8-K dated August 23, 2000 by and between The September 1, 2000 of The MONY Group, Inc. Advest Group, Inc. and The MONY Group Inc. 10(v) First Amendment to Filed Herewith The Advest Thrift Plan 10(w) Form of Executive Agreement Filed Herewith dated August 23, 2000
52 53
Prior Filing(s) to which Reference is made, Exhibit Description if applicable ------- ----------- -------------------------------------------- 10(x) Employment Agreement dated Filed Herewith August 23, 2000 between MONY and Registrant's Chief Executive Officer 10(y) Change of Control Employment Filed Herewith Agreement dated August 23, 2000 between MONY Life Insurance Company and Registrant's Chief Executive Officer 10(z) Letter Agreement dated August 23, Filed Herewith 2000 between Registrant and former Chief Executive Officer amending prior Employment Agreement 21 Subsidiaries Filed Herewith 23 Consent of Independent Filed Herewith Accountants 27 Financial Data Schedule Selected financial data - for EDGAR electronic filing only to SEC
(b) Reports on Form 8-K No reports on Form 8-K were filed during the fourth quarter of the year ended September 30, 2000. 53 54 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. THE ADVEST GROUP, INC. By /s/ Grant W. Kurtz January 10, 2001 ----------------------------- Grant W. Kurtz President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. /s/ Allen Weintraub Chairman of the Board January 10, 2001 ------------------------------- Allen Weintraub President, Chief Executive /s/ Grant W. Kurtz Officer and Director January 10, 2001 --------------------------------- Grant W. Kurtz Executive Vice President and Treasurer (Chief Financial and Principal Accounting /s/ Martin M. Lilienthal Officer) January 10, 2001 ------------------------------- Martin M. Lilienthal /s/ Sanford Cloud, Jr. Director January 10, 2001 ---------------------------------- Sanford Cloud, Jr. /s/ Ronald E. Compton Director January 10, 2001 ------------------------------ Ronald E. Compton /s/ Richard G. Dooley Director January 10, 2001 -------------------------------- Richard G. Dooley
54 55 SIGNATURES /s/ William B. Ellis Director January 10, 2001 -------------------------------- William B. Ellis /s/ Robert W. Fiondella Director January 10, 2001 ------------------------------ Robert W. Fiondella /s/ Peter R. Kellogg Director January 10, 2001 --------------------------------- Peter R. Kellogg /s/ Marne Obernauer, Jr. Director January 10, 2001 ------------------------------ Marne Obernauer, Jr. /s/ Barbara L. Pearce Director January 10, 2001 --------------------------------- Barbara L. Pearce
55 56 REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE The Board of Directors and Shareholders of The Advest Group, Inc.: Our audits of the consolidated financial statements referred to in our report dated October 25, 2000, appearing in this Annual Report on Form 10-K also included an audit of the financial statement schedule listed in Item 14(a)(2) of this Form 10-K. In our opinion, this financial statement schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. /s/ PricewaterhouseCoopers LLP Hartford, Connecticut October 25, 2000, except for Note 2 as to which the date is November 21, 2000. 56 57 SCHEDULE II THE ADVEST GROUP, INC. AND SUBSIDIARIES Valuation and Qualifying Accounts
Additions Balance at charged to Charge-offs Balance beginning cost and and at end In thousands of period expenses recoveries of period ------------ --------- -------- ---------- --------- For the years ended September 30, 2000 Credit losses: Brokerage customers $ 548 $ 109 $ (43) $ 614 Asset devaluation: Other investments/assets 1,740 (275) (758) 707 ------- ------- ------- -------- $2,288 $(166) $(801) $1,321 ====== ====== ====== ====== 1999 Credit losses: Brokerage customers $ 791 $100 $(343) $ 548 Asset devaluation: Other investments/assets 1,371 503 (134) 1,740 ------- ----- ------- ------- $2,162 $603 $(477) $2,288 ====== ==== ====== ====== 1998 Credit losses: Brokerage customers $ 719 $ 88 $ (16) $ 791 Asset devaluation: Other investments/assets 1,507 (13) (123) 1,371 ------- -------- ------- ------- $2,226 $ 75 $(139) $2,162 ====== ====== ====== ======
57 58 FORM 10-K Exhibit Index
Exhibit Description ------- ----------- 10(j) First Amendment to The Advest Thrift Plan 10(v) Second Amendment to The Advest Thrift Plan 10(w) Form of Executive Agreement dated August 23, 2000 10(x) Employment Agreement dated August 23, 2000 between MONY and Registrant's Chief Executive Officer 10(y) Change of Control Employment Agreement dated August 23, 2000 between MONY Life Insurance Company and Registrant's Chief Executive Officer 10(z) Letter Agreement dated August 23, 2000 between Registrant and former Chief Executive Officer amending prior Employment Agreement 21 Subsidiaries 23 Consent of PricewaterhouseCoopers LLP 27 Financial Data Schedule (Selected financial data - for EDGAR electronic filing only to SEC)