SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_____________________
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934.
For the fiscal year ended February 28, 1997 Commission file number 1-8527
A.G. EDWARDS, INC.
State of Incorporation: DELAWARE I.R.S. Employer Identification No.:
43-1288229
ONE NORTH JEFFERSON AVENUE
ST. LOUIS, MISSOURI 63103
Registrant's telephone number, including area code: (314) 955-3000
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
COMMON STOCK, $1 PAR VALUE NEW YORK STOCK EXCHANGE
RIGHTS TO PURCHASE COMMON STOCK NEW YORK STOCK EXCHANGE
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No .
Indicate by check mark 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 the 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. X
The aggregate market value of voting stock held by non-affiliates was
approximately $2.2 billion at April 30, 1997.
At April 30, 1997, there were 63,956,050 shares of A.G. Edwards, Inc. Common
Stock, $1 par value, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Stockholders for the fiscal year ended February
28, 1997 (the "1997 Annual Report to Stockholders") are incorporated by
reference into Parts I, II and IV hereof. Portions of the Company's Proxy
Statement filed with the SEC in connection with the Company's Annual Meeting of
Stockholders to be held June 19, 1997 (the "Company's 1997 Proxy Statement") are
incorporated by reference into Part III hereof. Other documents incorporated by
reference in this report are listed in the Exhibit Index beginning on page 14 of
this Form 10-K.
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PART I
ITEM 1. BUSINESS.
(a) General Development of Business
A.G. Edwards, Inc., a Delaware corporation, is a holding company incorporated in
1983 whose principal subsidiary, A.G. Edwards & Sons, Inc. (Edwards), is
successor to a partnership founded in 1887. A.G. Edwards, Inc. and its directly
owned and indirectly owned subsidiaries (collectively referred to as the
Company) provide securities and commodities brokerage, asset management,
insurance, trust, investment banking and other related financial services to
individual, corporate, governmental and institutional clients.
Edwards' business, primarily with individual clients, is conducted through one
of the largest retail branch office networks (based upon number of offices) in
the United States. At February 28, 1997, Edwards had 569 offices (up from 536
at the end of the prior fiscal year) in 48 states and the District of Columbia,
and 12,031 full-time employees (up from 11,279), including 6,070 investment
brokers (up from 5,757) providing services for approximately 1,880,000 clients
(up from 1,720,000). No single client accounts for a significant portion of
Edwards' business. Edwards is a member of all major securities exchanges in the
United States, the National Association of Securities Dealers, Inc. (NASD) and
the Securities Investor Protection Corporation (SIPC). Additionally, Edwards
has memberships on several commodity exchanges and is registered with the
Commodity Futures Trading Commission (CFTC) as a futures commission merchant.
AGE Commodity Clearing Corp. (Clearing), a commodity clearing subsidiary, is
registered with the CFTC as a futures commission merchant (FCM) and operates
exclusively as a commodity clearing company for Edwards. Clearing is a member
of all major U.S. commodities exchanges and the National Futures Association
(NFA). The four A.G. Edwards Trust companies provide investment advisory,
portfolio management and trust services. Gull-AGE Capital Group, Inc. serves as
general partner of 61 real estate partnerships in connection with 24 limited
partnerships sold by Edwards from 1982 through 1985. Edwards Development
Corporation is the sole general partner in Indianapolis Historic Partners (IHP),
a partnership, in which Edwards owns the entire limited partnership interest.
IHP purchased, renovated and operated residential rental property in the
Indianapolis, Indiana area. These properties were sold in fiscal 1997.
(b) Financial Information About Industry Segments
The Company operates in one principal line of business, that of providing
investment services. Because the Company's services use the same distribution
personnel and facilities, and the same support services, it is impractical to
identify the assets, expenses and profitability of any one class of service.
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(c) Narrative Description of Business
Commissions, principal transactions, investment banking and asset management and
service fees were the principal sources of consolidated revenue for the last
three fiscal years. The total amount of revenue contributed by these services,
including the amount of total revenue by class of products or services that
accounted for 10% or more of its consolidated revenues, are set forth on pages
22 and 23 of the 1997 Annual Report to Stockholders under the caption "Ten-Year
Financial Summary." Such information is hereby incorporated by reference.
The Company markets and distributes its products and services to its clients in
the 48 contiguous states and the District of Columbia through its branch office
network, 6,070 investment brokers and 5,961 support employees.
COMMISSIONS
Commission revenue represents the most significant source of revenue for the
Company, accounting for approximately 50% of total revenue in each of the last
five years. The following briefly describes the Company's sources of commission
revenue.
Listed and Over-the-Counter Securities. A significant portion of the Company's
revenue is derived from commissions generated on securities transactions
executed by Edwards, as a broker, in common and preferred stocks and debt
instruments on exchanges or in the over-the-counter markets. Edwards' brokerage
clients are primarily individual investors; however, resources continue to be
directed to further the development of its institutional business. Edwards'
commission rates for brokerage transactions vary with the size and complexity of
the transactions, among other factors.
Options. Edwards acts as broker in the purchase and sale of option contracts to
buy or sell securities, primarily common stocks and stock indexes. Edwards
holds memberships for trading on principal option exchanges.
Mutual Funds. Edwards distributes mutual fund shares in continuous offerings of
open-end funds. Income from the sale of mutual funds is derived primarily from
the standard dealer's discount which varies as a percentage of the client's
purchase price depending upon the size of the transaction and terms of the
selling agreement. Revenues derived from mutual fund sales continue to be a
significant portion of overall revenues. Edwards does not sponsor its own
mutual fund products.
Commodities and Financial Futures. Edwards acts as broker in the purchase and
sale of commodity futures contracts, financial futures contracts and options on
commodity and financial futures contracts. These contracts cover agricultural
products, precious metals, currency, interest rate and stock index futures.
Substantially all of Edwards' clients' futures transactions are executed and
cleared through Clearing. Nearly all transactions in futures contracts are
executed with a relatively low margin deposit, usually 3% to 12% of the total
contract amount. Consequently, the risk to the client and resulting credit risk
assumed by Edwards is substantial, generally greater than on securities
transactions. To limit its exposure, Edwards requires its clients to meet
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minimum net worth requirements and other established credit standards, in
addition to the margin deposits. Regulations of some commodity exchanges limit
the allowable upward or downward price fluctuations for each commodity on a
given day. These restrictions on price fluctuations may preclude purchases or
sales necessary to limit losses or realize gains.
As a member of the clearing associations of the principal commodity exchanges,
Clearing has potentially significant financial exposure in the event other
members default on their obligations to the clearing houses of such exchanges.
Insurance. As agent for several life insurance companies, Edwards distributes
life insurance and tax-deferred annuities. Edwards also provides financial
planning services to assist individuals in structuring financial portfolios to
achieve their financial goals. In addition, A.G. Edwards Life Insurance Company
is licensed to issue life insurance policies under the laws of Missouri, but has
not issued any to date.
PRINCIPAL TRANSACTIONS
Client transactions in the equity and fixed income over-the-counter markets may
be affected by Edwards acting as principal as well as agent. Principal
transactions, including market making, require maintaining inventories of
securities to satisfy customer order flow. These securities are valued in the
Company's financial statements at fair value and unrealized gains or losses are
included in the results of operations. Securities fluctuations may be sudden
and sharp as a result of changes in market conditions. To the extent Edwards
can correctly anticipate such changes, risks may be reduced by varying inventory
levels or by use of hedging strategies.
INVESTMENT BANKING
Edwards is an underwriter of corporate and municipal securities, certificates of
deposit, as well as corporate and municipal unit investment trusts and closed-
end mutual funds. Activities in municipal underwriting include areas of
specialization in financing of municipal projects such as infrastructure
improvements, education, housing and health facilities. As an underwriter,
usually in conjunction with other broker-dealers and financial institutions,
Edwards purchases securities for resale to its clients. Edwards acts as a
consultant to corporations and municipal entities in planning their capital
needs and determining the most advantageous means for raising capital. It also
advises clients in merger and acquisition activities and acts as agent in
private placements.
Underwriting involves risk. As an underwriter, Edwards may incur losses if it
is unable to resell the securities it is committed to purchase or if it is
forced to liquidate all or a part of its commitment at less than the purchase
price. Under federal and state securities laws, an underwriter is exposed to
substantial potential liability for material misstatements or omissions of fact
in the prospectus used to describe the securities being offered. Generally,
issuers agree to indemnify underwriters against such liabilities, but otherwise,
underwriters are not specifically insured. In addition, the commitment of
capital to underwriting may reduce Edwards' regulatory
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net capital position and, consequently, its underwriting participation may be
limited by the requirement that it must at all times be in compliance with the
net capital rules administered by the Securities and Exchange Commission (SEC).
Although it is generally more profitable to manage or co-manage an underwriting,
as opposed to being a participant, managers generally commit to underwriting a
greater portion of the offering than the other members of the underwriting group
and consequently, managers assume a greater risk.
ASSET MANAGEMENT AND SERVICE FEES
Asset management and service fees consist primarily of revenues earned for
providing support and services in connection with assets under third-party
management, including mutual funds. These revenues include fees based on the
amount of client assets under management and transaction-related fees, as well
as fees related to the administration of custodial and other specialty accounts.
Edwards, through the A.G. Edwards Trust companies, provides its clients with a
full range of personal, ERISA and custodial trust services. Through four
separate state charters, the A.G. Edwards Trust Companies are able to provide
trust services to clients in most states.
Clients desiring professional money management are offered three separate
account portfolio services. Edwards, acting as investment manager, offers
portfolio management strategies based on the client's investment objectives.
Through Asset Performance Monitor(R), Edwards provides its clients access to
third-party investment management, performance measurement, management search
and related consulting services. The Pathways(SM) and Spectrum programs are
personalized, fee-based asset allocation programs that utilize mutual fund
investments. Clients select from established asset allocation models, or
customize their own, based on their investment objectives, risk tolerance and
time horizon.
Edwards offers the UltraAsset Account, Total Asset Account(R) and the Cash
Convenience Account, which combine a full-service brokerage account with a money
market fund. These programs provide for the automatic investment of customer
free credit balances in one of several money market funds. Interest is not paid
on free credit balances held in client accounts. In addition, the UltraAsset
and Total Asset Accounts allow clients access to their margin securities and
money market shares through the use of debit cards and checking account services
provided by a major bank. The UltraAsset Account offers additional advanced
features and special investment portfolio reports.
Edwards provides custodial services for clients' self-directed Individual
Retirement Accounts and Keogh plans.
MARGIN FINANCING
Securities transactions are executed on a cash or margin basis. In margin
transactions, Edwards extends credit to its clients for a portion of the
purchase price, with the client's securities held as
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collateral. The amount of credit is limited by the initial margin regulations
issued by the Board of Governors of the Federal Reserve System. The current
prescribed minimum initial margin for equity securities is equal to 50% of the
value of equity securities purchased. The regulations of the various exchanges
require minimum maintenance margins, which are below the initial margin.
Edwards' maintenance requirements generally exceed the exchanges' requirements.
Such requirements are intended to reduce the risk that a market decline will
reduce the value of the collateral below that of the client's indebtedness
before the collateral can be liquidated.
A substantial portion of the Company's assets and obligations result from
transactions with clients who have provided financial instruments as collateral.
The Company manages its risk associated with these transactions through position
and credit limits, and the continuous monitoring of collateral. Additional
information regarding risks associated with client transactions is set forth in
Note 10 of the Notes to Consolidated Financial Statements under the caption
"Off-Balance Sheet Risk and Concentration of Credit Risk" appearing on page
32 of the 1997 Annual Report to Stockholders. Such information is hereby
incorporated by reference.
A client, borrowing in a margin account, is charged an interest rate based on
the broker call loan rate plus an amount up to 2 1/2% depending on the amount of
the client's borrowings during each interest period. Interest earned on these
balances represents an important source of revenue for Edwards.
Although borrowings from banks, either unsecured or secured by the clients'
collateral securities, are an available source of funds to carry client margin
accounts, the Company's stockholders' equity, cash received from loans of the
clients' collateral securities to other brokers and, to the extent permitted by
regulations, customer free credit balances provide most of the funds required.
RESEARCH
Edwards provides both technical market analysis and fundamental analysis of
numerous industries and individual securities for use by its investment brokers
and clients. In addition, reviews and analysis of general economic conditions,
along with asset allocation recommendations, are also available. These services
are provided by Edwards' research analysts, economists and market strategists.
Revenues from research activities are derived principally through resulting
transactions on an agency or principal basis.
COMPETITION
All aspects of the Company's business are highly competitive. Edwards competes
with numerous broker-dealers, some of whom possess greater financial resources
than the Company. Edwards competes for clients on the basis of price, the
quality of its services, financial resources and reputation within the clients'
communities. There is constant competition to attract and retain personnel
within the securities industry. Competition for the investment dollar and for
clients has increased from other sources, such as commercial banks, savings
institutions, mutual fund management companies, investment advisory companies as
well as from other companies offering insurance, real estate and other
investment opportunities. Recent regulatory actions, which reduced certain
restrictions on bank affiliates engaging in securities activities, may have the
effect of increasing competition from commercial banks and their affiliates for
securities
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underwriting activities and other brokerage services. In addition,
continued legislative proposals, calling for further reductions on restrictions
for brokerage service and underwriting activities, may also lead to increased
competition from commercial banks and their affiliates.
REGULATION
Edwards, as a broker-dealer and FCM, is subject to various federal and state
laws which specifically regulate its activities as a broker-dealer in securities
and commodities, as an investment advisor and as an insurance agent. Clearing,
as a FCM, is regulated as a broker in commodities. Edwards and Clearing are
also subject to various regulatory requirements imposed by the securities and
commodities exchanges and the NASD. The primary purpose of these requirements
is to enhance the protection of customer assets. Under certain circumstances,
these rules may limit the ability of A.G. Edwards, Inc. to make withdrawals of
capital from Edwards and Clearing. These laws and regulatory requirements
generally subject Edwards and Clearing to standards of solvency with respect to
capital requirements, financial reporting requirements, approval of
qualifications of personnel engaged in various aspects of its business, record
keeping and business practices, the handling of their clients' funds resulting
from securities and commodities transactions and the extension of credit to
clients on margin transactions. Infractions of these rules and regulations may
include suspension of individual employees or their supervisors, termination of
employees, limitations on certain aspects of Edwards' and Clearing's regulated
businesses, as well as censures and fines, or even proceedings of a civil or
criminal nature which could result in a temporary or permanent suspension of a
part or all of Edwards' and Clearing's activities. Information regarding
regulatory minimum net capital is set forth in Note 5 of the Notes to
Consolidated Financial Statements under the caption "Net Capital Requirements"
appearing on page 30 of the 1997 Annual Report to Stockholders. Such
information is hereby incorporated by reference.
Under the Market Reform Act of 1990 and the Futures Trading Practices Act of
1992, the SEC and CFTC, respectively, adopted regulations requiring certain
registered broker-dealers and FCMs to maintain, preserve and periodically
describe and report their risk management policies and certain other information
concerning affiliates whose activities are reasonably likely to have a material
impact on the financial or operating condition of the broker-dealer or FCM.
Edwards and Clearing are each subject to one or both of these laws and related
regulations.
Additionally, the four state-chartered trust companies are separately regulated
by banking or trust laws of the states in which they are incorporated or do
business. A.G. Edwards Life Insurance Company is regulated by the insurance
laws of the State of Missouri. The Ceres Investment Company, a commodity pool
operator and general partner of four commodity pools sponsored by Edwards, is
regulated by the CFTC and the NFA.
OTHER MATTERS
As with other organizations, the Company's computer programs were originally
designed to recognize calendar years by their last two digits. Calculations
performed using these truncated fields would not work properly with dates from
the year 2000 and beyond. The Company has initiated efforts to remedy this
situation and expects all programs to be corrected and tested prior
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to the year 2000. The incremental costs of this project will not have a
material effect on the Company's consolidated financial statements. However,
the Company may be adversely impacted if similar efforts of other organizations
are unsuccessful.
ITEM 2. PROPERTIES.
The Company's headquarters, consisting of several buildings located at One North
Jefferson Avenue, St. Louis, Missouri, contains approximately 1,100,000 square
feet of general office space, as well as underground and surface parking and a
five story parking garage. The buildings are located on approximately 590,000
square feet of land owned by the Company. The Company also owns approximately
495,000 square feet of land adjacent to its headquarters and is using this
property principally for additional employee parking areas. The Company began
construction of an additional headquarters building in November 1995, which is
to be completed in the fall of 1997 at a cost of approximately $40 million.
Also, the Company owns two of its branch office buildings and two additional
office buildings which serve as a data processing and contingency planning
facility.
The remainder of the Company's branch offices occupy leased premises. Aggregate
annual rental for branch office premises for the year ended February 28, 1997,
was $36,165,000.
ITEM 3. LEGAL PROCEEDINGS.
(a) Litigation
The Company is a defendant in numerous lawsuits and arbitrations, in some
of which plaintiffs claim substantial amounts, relating primarily to its
securities and commodities business. While results of litigation cannot
be predicted with certainty, management, after consultation with
counsel, believes that resolution of all such litigation will have no
material adverse effect on the consolidated financial statements of the
Company.
(b) Proceedings Terminated during the Fourth Quarter of the Fiscal Year
Covered by This Report.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There were no matters submitted to a vote of security holders during the fourth
quarter of the fiscal year ended February 28, 1997.
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EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth the executive officers of the Company as of
May 1, 1997. Executive officers are appointed by the Board of Directors to hold
office until their successors are appointed and qualified.
<TABLE>
<CAPTION>
Year First
Appointed Executive
Officer of the
Name Age Office & Title Company
<S> <C> <C> <C>
Benjamin F. Edwards III 65 Chairman of the Board, 1983
President and Chief Executive
Officer of the Company.
Chairman of the Board,
President and Chief Executive
Officer of Edwards. Employee
of Edwards for 40 years.
Director of Edwards since 1967.
Robert G. Avis 65 Vice Chairman of the Board of 1984
the Company. Vice Chairman of
the Board, Executive Vice President
of Edwards, Director of the Investment
Banking Division since March 1989 and
Director of the Sales and Marketing
Division of Edwards from September 1984
to February 1997.
Employee of Edwards for 31 years.
Director of Edwards since 1970.
Robert L. Bagby 53 Vice Chairman of the Board of 1991
the Company. Vice Chairman of
the Board, Executive Vice President,
and since March 1995, Director of
the Branch Division of Edwards.
Assistant Director of the Branch
Division of Edwards prior to March 1995.
Employee of Edwards for 22 years.
Director of Edwards since 1979.
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Year First
Appointed Executive
Officer of the
Name Age Office & Title Company
Donnis L. Casey 49 Corporate Vice President of Edwards. 1996
Director of the Staff Division of
Edwards since March 1996.
Assistant Director of the Staff Division
prior to March 1996.
Employee of Edwards for 30
years. Director of Edwards since 1993.
Robert C. Dissett 59 Executive Vice President, 1990
Assistant Treasurer and
Director of Operations of Edwards.
Employee of Edwards for 35 years.
Director of Edwards since 1973.
Benjamin F. Edwards IV 41 Executive Vice President of Edwards. 1996
Director of the Sales and Marketing
Division since March 1997. Regional
Officer of Edwards from March 1995
to February 1997. Assistant Branch
Manager of Edwards from April 1991
to February 1995. Employee of
Edwards for 19 years. Director of
Edwards since 1994.
Alfred E. Goldman 63 Corporate Vice President, Technical 1991
Market Analysis of Edwards.
Employee of Edwards for 37 years.
Director of Edwards since 1967.
Douglas L. Kelly 48 Secretary of the Company. 1994
Corporate Vice President, Secretary
of Edwards. Director of Law and
Compliance of Edwards
since January 1994. Partner at
the law firm of Peper, Martin,
Jensen, Maichel and Hetlage
prior to joining the Company.
Employee of Edwards for 3 years.
Director of Edwards since 1994.
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Year First
Appointed Executive
Officer of the
Name Age Office & Title Company
Ronald J. Kessler 49 Corporate Vice President and Assistant 1996
Director of Operations of Edwards.
Employee of Edwards for 29 years.
Director of Edwards since 1989.
Eugene J. King 65 Vice President, Controller and 1983
Assistant Treasurer of the Company.
Senior Vice President, Assistant
Treasurer and Controller of Edwards.
Employee of Edwards for 26 years.
Director of Edwards since 1988.
Robert L. Proost 59 Vice President and Treasurer of the 1990
Company. Corporate Vice President,
Treasurer, Assistant Secretary and
Director of Administration of Edwards.
Employee of Edwards for 9 years.
Director of Edwards since 1989.
</TABLE>
Benjamin F. Edwards III and Benjamin F. Edwards IV are father and son.
Benjamin F. Edwards III and Robert G. Avis are stepbrothers.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
The information required by this item is contained in the 1997 Annual Report to
Stockholders on page 43 under the caption "Quarterly Financial Information" and
on page 44 under the caption "Stockholder Information". Such information is
hereby incorporated by reference. The approximate number of equity security
holders of record includes customers who hold the Company's stock in their
accounts on the books of Edwards.
ITEM 6. SELECTED FINANCIAL DATA.
The information required by this item is contained on pages 22 and 23 of the
1997 Annual Report to Stockholders under the caption "Ten-Year Financial
Summary". Such information is hereby incorporated by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
The information required by this item is contained on pages 18 through 21 of the
1997 Annual Report to Stockholders under the caption "Management's Financial
Discussion". Such information is hereby incorporated by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information required by this item is contained in the Consolidated Financial
Statements and Notes thereto, together with the Independent Auditors' Report
thereon of Deloitte & Touche llp dated April 24, 1997, and under the caption
"Quarterly Financial Information" on pages 24 through 33 and page 43 of the 1997
Annual Report to Stockholders. Such information is hereby incorporated by
reference.
Additional Information - Edwards maintains a Stockbrokers Blanket Bond insuring
various loss contingencies. Under the terms of the current policy, Edwards is
responsible for the first $1,000,000 of each such occurrence.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this item is included under the caption "Election of
Directors - Nominees for Directors" on pages 4 through 6 of the Company's 1997
Proxy Statement and in Part I of this Form 10-K on pages 9 through 11 under the
caption "Executive Officers of the Company". Such information is hereby
incorporated by reference.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item is included under the captions "Director
Compensation" and "Executive Compensation" on pages 7 through 16 of the
Company's 1997 Proxy Statement. 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 on pages 7 and 8 of the
Company's 1997 Proxy Statement under the caption "Ownership of the Company's
Common Stock". Such information is hereby incorporated by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this item is contained on page 17 of the Company's
1997 Proxy Statement under the caption "Certain Transactions". Such information
is hereby incorporated by reference.
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PART IV
ITEM 14. FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES,
EXHIBITS AND REPORTS ON FORM 8-K.
PAGE
INDEX NUMBER
(a)1.Financial Statements
Independent Auditors' Report (X)
Consolidated balance sheets (X)
Consolidated statements of earnings (X)
Consolidated statements of stockholders' equity (X)
Consolidated statements of cash flows (X)
Notes to consolidated financial statements (X)
(X) The consolidated financial statements, together with the Independent
Auditors' Report thereon of Deloitte & Touche llp, included on pages 24
through 33 of the Company's 1997 Annual Report to Stockholders, are hereby
incorporated by reference.
2. Financial Statement Schedules
All schedules are omitted due to the absence of conditions under which
they are required or because the required information is provided in the
consolidated financial statements or notes thereto.
3. Exhibits*
Some of the following exhibits were previously filed as exhibits to other
reports or registration statements filed by the Registrant and are incorporated
by reference as indicated below.
3(i) Certificate of Incorporation filed as Exhibit 3(i) to the
Registrant's Form 10-K for the fiscal year ended February 28,
1993.
3(ii) By-laws filed as Exhibit 3(ii) to the Registrant's Form 10-K
for the fiscal year ended February 28, 1994.
4(i) Reference is made to Articles IV, V, X, XII, XIII and XV of
the Certificate of Incorporation filed as Exhibit 3(i) to this
Form 10-K.
4(ii) Reference is made to Article II, Article III Sections 1 and
15, Article IV Sections 1 and 3, Article VI and Article VII
Sections 1-3 of the By-laws filed as Exhibit 3(ii) to this
Form 10-K.
4(iii) Rights Agreement dated as of December 30, 1988 between A.G.
Edwards, Inc. and Boatmen's Trust Company as Rights Agent filed
as Exhibit 4 to the Registrant's Form 8-K Report dated December
30, 1988.
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4(iv) Amendment No. 1 to the Rights Agreement dated December 30,
1988, between A.G. Edwards Inc. and Boatmen's Trust Company as
Rights Agent, dated May 24, 1991 filed as Exhibit 4.4 to
Registrant's Form 10-K for the fiscal year ended February 29,
1992.
4(v) Amendment No. 2 to the Rights Agreement dated December 30,
1988, between A.G. Edwards, Inc. and Boatmen's Trust Company as
Rights Agent, dated June 22, 1995 filed with the Registrant's
Form 8-A/A on August 17, 1995.
10(i) A.G. Edwards, Inc. 1988 Incentive Stock Plan (as amended and
restated) filed as Exhibit 10.2 to Registrant's Form 10-K for the
fiscal year ended February 29, 1992.
10(ii) Certificate of Amendment dated April 27, 1993 to A.G.
Edwards, Inc. 1988 Incentive Stock Plan (Exhibit 10(i)) filed as
Exhibit 10(iii) to Registrant's Form 10-K for the fiscal year
ended February 28, 1994.
11 Computation of per share earnings may be clearly determined from
the consolidated financial statements and notes thereto contained
on pages 24 through 33 in the Company's Annual Report to
Stockholders for the fiscal year ended February 28, 1997 and
incorporated herein by reference.
13 Annual Report to Stockholders for the fiscal year ended
February 28, 1997. Except for those portions of pages expressly
incorporated by reference, the 1997 Annual Report to Stockholders
is not deemed filed as part of this Annual Report on Form 10-K.
21 Subsidiaries of the Registrant.
23 Independent Auditors' Consent.
24 Power of Attorney.
27 Financial Data Schedule. This Financial Data Schedule is only
required to be submitted with the Registrant's Annual Report on
Form 10-K as filed electronically to the SEC's EDGAR database.
*Numbers correspond to document numbers in Exhibit Table of Item 601 of
Regulation S-K.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the fourth quarter of the year ended
February 28, 1997.
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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.
A.G. EDWARDS, INC.
(Registrant)
Date: May 22, 1997 By /s/ Benjamin F. Edwards III
Benjamin F. Edwards III,
Chairman of the Board
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POWER OF ATTORNEY EXHIBIT 24
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Benjamin F. Edwards III, and Robert L. Proost and
each of them, his true and lawful attorneys-in-fact and agents, with full power
of substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign this Report, any and all amendments to this
Report, and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents, and each of them, full power and authority to
do and perform each and every act and thing requisite and necessary to be done,
as fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents or either of
them, or their or his substitute or substitutes, may lawfully do or cause to be
done by virtue hereof.
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/ Benjamin F. Edwards III Chairman of the Board, May 22, 1997
Benjamin F. Edwards III President and Director
(Chief Executive Officer)
/s/ Robert L. Proost Treasurer May 22, 1997
Robert L. Proost (Principal Financial Officer)
/s/ Eugene J. King Vice President May 22, 1997
Eugene J. King (Principal Accounting Officer)
/s/ Robert G. Avis Vice Chairman of the Board May 22, 1997
Robert G. Avis and Director
/s/ Robert L. Bagby Vice Chairman of the Board May 22, 1997
Robert L. Bagby and Director
/s/ Dr. E. Eugene Carter Director May 22, 1997
Dr. E. Eugene Carter
/s/ Robert C. Dissett Director May 22, 1997
Robert C. Dissett
Director May 22, 1997
Dr. Louis Fernandez
/s/ Samuel C. Hutchinson Jr. Director May 22, 1997
Samuel C. Hutchinson Jr.
/s/ David W. Mesker Director May 22, 1997
David W. Mesker
/s/ Donna C.E. Williamson Director May 22, 1997
Donna C.E. Williamson
17
<PAGE>
Exhibit Index
Exhibit Description
13 1997 Annual Report to Stockholders.
21 Subsidiaries of the Registrant.
23 Independent Auditors' Consent.
24 Power of Attorney. Included on Signature Page 17.
18
Management's Financial Discussion
(Year references are to fiscal years ended February 28 (29) unless otherwise
specified)
(General Business Environment)
A.G. Edwards, Inc., is a holding company which, through its operating
subsidiaries, (collectively the "Company") provides securities and commodities
brokerage, investment banking, trust, asset management and insurance services to
its clients through one of the industry's largest retail branch distribution
systems. Its principal subsidiary, A.G. Edwards & Sons, Inc.,
is a St. Louis-based financial services firm with more than 560 locations and
approximately 13,000 total employees in the 48 contiguous states. The Company's
primary business is to provide a full range of financial products and services
to individual investors. The Company also provides products and services to
institutional investors and investment banking services to corporate,
governmental and municipal clients.
Many factors affect the Company's revenues and profitability, including changes
in economic conditions, the level and volatility of interest rates, inflation,
political events, investor sentiment and competition from other financial
institutions. Because these factors are unpredictable and beyond the Company's
control, earnings may fluctuate significantly from period to period.
Calendar 1996 and the Company's fiscal 1997, which ended February 28, 1997, were
marked by record profitability for the securities industry and the Company. A
growing economy, rising corporate profits, low interest rates and low inflation
provided conditions for another year of increased investor activity, record
trading volumes and higher stock prices in domestic equity markets. The Dow
Jones Industrial Average surpassed two milestones, "6,000" and "7,000,"
finishing the fiscal year at 6,878, a 25 percent gain following a 37 percent
gain in fiscal 1996. The Nasdaq average jumped 19 percent in fiscal 1997
following a 39 percent gain in the prior fiscal year. Industry-wide, corporate
debt and equity underwritings soared to record levels. Merger and acquisition
activities also reached record levels. Mutual funds attracted record inflows of
cash, directed primarily to domestic equity funds. Although interest rates
remained stable, domestic bond markets were volatile as investors expected
inflation as well as interest rates to rise - an environment that led to
substantially lower returns to fixed-income investors, compared with the prior
year.
(Results of Operations)
Revenues, net earnings and earnings per share for the Company reached record
levels in 1997 as the entire securities industry experienced its most profitable
year on record. Revenues for the Company rose 17 percent to $1.7 billion from
$1.5 billion in 1996. Revenues in 1996 were up 23 percent from $1.2 billion in
1995. Net earnings of $219 million increased 28 percent from $171 million in the
previous year. Net earnings in 1996 were up 37 percent from $124 million in
1995. Earnings per share for the Company were $3.36 in 1997 versus $2.65 and
$2.00 in 1996 and 1995, respectively. Profit margins were 12.9 percent in 1997,
compared with 11.7 percent in 1996 and 10.5 percent in 1995.
The number of A.G. Edwards investment brokers reached 6,070 at year end, an
increase of five percent from the prior year end. This growth rate compared with
an average six percent annual growth during the last five years. The number of
locations at the end of 1997 was 569, up from 536 at year-end 1996. It is the
Company's intent to continue expanding its distribution system as opportunities
present themselves.
The following table and discussion summarize the changes in the major categories
of revenues and expenses for the past two years (dollars in thousands):
18
<PAGE>
1997 vs. 1996 1996 vs. 1995
Increase (Decrease)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Revenues:
Commissions $122,717 15% $227,259 39%
Principal transactions 6,640 3 (34,658) (14)
Investment banking 51,160 49 12,269 13
Asset management and
service fees 46,249 24 42,297 28
Interest 13,493 10 28,823 27
Other 1,757 23 135 2
Total $242,016 17% $276,125 23%
Expenses:
Compensation and benefits $151,176 16% $173,019 23%
Communications 5,893 7 5,656 8
Occupancy and equipment 6,806 9 5,969 8
Floor brokerage and clearance 1,874 12 1,920 13
Interest (1,088) (35) (3,665) (54)
Other operating expenses (1,320) (2) 16,273 31
Total $163,341 14% $199,172 20%
</TABLE>
(Commissions)
Commissions are the most significant source of revenue for the Company,
accounting for 55 percent of total revenue in both 1997 and 1996. Commission
revenue jumped 15 percent, from $806 million in 1996 to $929 million in 1997,
and accounted for more than 50 percent of the Company's overall revenue in-
crease for the year. As commissions are transaction-based revenues, they are
directly influenced by changes in trading volume and may vary considerably from
period to period.
Listed equity securities commissions increased eight percent ($27 million) and
over-the-counter equity commission revenue rose 25 percent ($36 million) in 1997
over 1996, fueled by record trading volumes and higher stock prices on the New
York Stock Exchange and the Nasdaq. For the industry, average daily trading
volume for 1997 was up 17 percent on the New York Stock Exchange and 29 percent
on the Nasdaq. The number of equity agency transactions for the Company
increased 17 percent over 1996; however, the average ticket size decreased three
percent.
Company revenues from mutual fund sales rose 17 percent ($33 million) in 1997,
consistent with industry-wide record cash flows into funds. Sales of annuities
also increased $20 million (25 percent) in 1997.
Fiscal 1996's 39 percent ($227 million) increase in total commissions over
fiscal 1995 reflected increased retail investor activity due to higher stock
prices and trading volumes as well as strong cash flows into mutual funds.
(Principal Transactions)
The Company seeks to maintain inventories of debt and equity securities to
satisfy investor demand and, therefore, effects certain transactions with its
clients by acting as principal. Realized and unrealized gains and losses result
from holding securities positions for resale to investors and are included in
principal transaction revenue.
Principal transaction revenue increased three percent ($7 million) in 1997,
primarily due to a 15 percent ($9 million) rise in sales of municipal debt
securities. Growth in municipal debt securities was due, in part, to subsiding
investor concerns about the effect of tax reforms on the municipal securities
market. Lower sales of corporate and government debt securities and smaller
inventory gains, compared with the previous year, partially offset this
increase. Revenue from the principal sale of equity securities also rose six
percent ($3 million) in 1997.
In 1996, revenues from principal transactions declined 14 percent ($35 million).
The decline was due, in large part, to lower interest rates and fear of tax law
changes that might eliminate the tax advantage of municipal securities, causing
investors to seek other investment vehicles. Overall revenue from the sale of
debt securities was down 26 percent ($52 million) in 1996 compared with 1995.
A 47 percent ($18 million) increase in the principal sale of equity securities
partially offset this decrease in 1996.
(Investment Banking)
The Company derives investment banking revenue by underwriting public offerings
of securities for corporations and governmental entities and by providing
advisory services to these clients.
Investment banking revenue grew 49 percent from $105 million in 1996 to $156
million in 1997, as favorable market conditions for these activities continued
during the year. Underwriting fees and concessions advanced 42 percent ($34
million) in 1997, principally due to a 43 percent ($27 million) increase in
revenue from corporate equity and debt issues in 1997. Fees from serving as
managing underwriter in corporate equity and debt offerings rose 33 percent ($5
million) in 1997. Fees from participation in municipal debt offerings increased
$3 million (39 percent). Also, fees received in connection with
19
<PAGE>
serving as advisor in merger and acquisition activities rose
$9 million due to a greater number of larger sized deals in 1997 compared to
1996. The most financially significant investment banking transactions in 1997
for the Company included serving as senior manager of the municipal bond
offerings used to restructure the debt of Orange County, Calif., and serving as
advisor in the $3.4 billion sale of West Publishing, Inc.
In 1996, the increase of $12 million (13 percent) in investment banking revenues
over 1995 was primarily due to increased underwriting fees and concessions
generated from corporate equity and debt offerings, resulting from an improved
market for corporate securities issues.
(Asset Management and Service Fees)
Asset management and service fees consist primarily of revenues earned for
providing support and services in connection with client assets under third-
party management, including mutual funds. These revenues include fees based on
the amount of client assets under management, including assets with the
A.G. Edwards Trust Companies, and transaction-related fees, as well as fees
related to the administration of custodial and other specialty accounts.
Asset management and service fees rose $46 million in 1997, an increase of 24
percent. Fees from the third-party mutual funds were 24 percent ($28 million)
higher over 1996, reflecting the strong cash inflows to funds as well as higher
market valuations of existing assets. Fees for administration of client assets
under other third-party management, as well as the Company's management
services, increased 44 percent ($14 million) in 1997. The number of these
accounts increased 57 percent while the total assets in these programs grew from
$4.2 billion in 1996 to $5.8 billion in 1997, an increase of 38 percent.
The 1996 increase of 28 percent ($42 million) was primarily due to service fees
from third-party mutual funds as a result of an increase in assets under
management from the previous year and higher revenues from transaction-related
fees and other administrative fees.
(Interest)
The Company earns interest revenue principally from financing its clients'
margin accounts, from debt securities carried for resale and from short-term
investments.
Interest revenue rose in 1997 primarily because of a 10 percent ($11 million)
increase in interest earned on margin accounts. Although average margin debits
increased 23 percent, slightly lower average interest rates charged on these
accounts partially offset this increase. Interest earned on short-term
investments increased $6 million, while interest revenues from securities owned
decreased slightly.
The 1996 versus 1995 increase was principally due to a 19 percent ($17 million)
increase in interest earned on margin accounts and from increased short-term
investments.
(Expenses)
Compensation and benefits, the major components of the Company's overall
expense, rose 16 percent in 1997 and 23 percent in 1996. A significant portion
of this expense is variable in nature and directly relates to commissionable
sales and to the Company's profitability. Thus, the year-to-year comparisons
generally reflect the increase in revenue and profitability in both 1997 and
1996. In addition, general and administrative salary expense increased 13
percent ($22 million) in 1997 and nine percent ($13 million) in 1996 because of
general salary increases and an increased number of employees.
All remaining expenses increased a combined $12 million (five percent) over
last year. Communications expense, and occupancy and equipment expense showed
slight increases and were expansion related.
(Income Taxes)
For information concerning the provision for income taxes as well as information
regarding the difference between effective tax rates and statutory rates, see
Note 6 of the Notes to Consolidated Financial Statements.
(Liquidity and Capital Resources)
Average assets increased during each of the last three years primarily as a
result of expansion, increased customer margin activities and growth of
earnings. Assets fluctuate in the normal course of business principally because
of the timing of certain transactions, which may result in corresponding
fluctuations in related liabilities. Customer and broker-dealer related
receivables and securities inventory, which are highly liquid, represent a
substantial percentage of assets. The growth in total assets and liabilities in
1997 was primarily the result of a significant increase in securities lending
transactions, and related securities borrowed transactions, due to a record
level of short stock sales in the stock market.
20
<PAGE>
The principal sources for financing the Company's assets are stockholders'
equity, proceeds from securities lending, bank loans, customer free credit
balances and other payables. The Company has no long-term debt. Cash generated
from operations and proceeds from employee stock plans have kept bank borrowings
at low levels in the past three years. Average daily borrowings were $2 million
in 1997, $5 million in 1996 and $64 million in 1995.
Capital expenditures for the past three years have been financed from
operations. Construction of an additional headquarters building, which began in
November, 1995, is expected to cost about $40 million. The Company expended $22
million in connection with this construction through February 28, 1997.
In May, 1996, the Board of Directors authorized a repurchase of up to 22 million
shares of the Company's common stock over a 5 1/2-year period, to fund employee
stock plans and partially offset the past effects of these plans. In 1997,
2.3 million shares were purchased at an aggregate cost of $65 million. These
treasury shares were purchased with funds generated from operations. Future
purchases, as well as dividend payments and the costs of expansion, are also
expected to be funded from operations.
Because of the Company's size, earnings history and strong financial condition,
management believes adequate sources of credit are available, if needed, to
finance higher trading volumes, branch expansion, stock repurchases and major
capital expenditures.
The Company's principal subsidiary, A.G. Edwards & Sons, Inc., is required by
the Securities and Exchange Commission (SEC) to maintain specified amounts of
liquid net capital to meet its obligations to customers (see Note 5 of the Notes
to Consolidated Financial Statements). The net capital of A.G. Edwards & Sons,
Inc., in excess of that required by the SEC was approximately $850 million on
February 28, 1997, up from $689 million the previous year.
(Other Matters)
As with other organizations, the Company's computer programs were originally
designed to recognize calendar years by their last two digits. Calculations
performed using these truncated fields would not work properly with dates from
the year 2000 and beyond. The Company has initiated efforts to remedy this
situation and expects all programs to be corrected and tested prior to the year
2000. The incremental costs of this project will not have a material effect on
the Company's consolidated financial statements.
(Recent Accounting Pronouncements)
Effective in January, 1998, the Company will adopt certain provisions of
Statement of Financial Accounting Standards No. 125, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities"
(SFAS 125), which are applicable to its business. SFAS 125 introduces a
financial-components approach which focuses on the recognition of financial
assets and liabilities an entity controls and the derecognition of financial
assets and liabilities for which control has been transferred. The adoption of
this statement is not expected to have a material effect on the Company's
financial condition or results of operations.
In February, 1997, SFAS No. 128, "Earnings per Share," was issued and is
effective for financial statements issued for periods ending after December 15,
1997. This statement changes the method for calculating and disclosing earnings
per share. This statement will not have a material effect on the Company's
financial statements.
21
<PAGE>
<TABLE>
<CAPTION>
Ten-Year Financial Summary
Year Ended: 1997 1996 1995 1994 1993
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Revenues:
Commissions:
Listed Securities $ 365,908 $ 338,241 $ 236,629 $ 273,363 $ 231,312
Options 33,850 29,432 21,576 21,135 19,167
Over-the-Counter Securities 178,752 142,696 80,525 94,075 69,199
Mutual Funds 222,146 189,109 147,709 248,146 193,820
Commodities 16,038 16,448 15,261 16,766 13,016
Insurance 112,099 90,150 77,117 74,862 46,757
Total 928,793 806,076 578,817 728,347 573,271
Principal Transactions:
Equities 58,427 55,334 37,565 40,260 31,266
Debt Securities 154,580 151,033 203,460 146,705 184,040
Total 213,007 206,367 241,025 186,965 215,306
Investment Banking:
Underwriting Fees and Selling Concessions 114,426 80,572 70,156 111,379 87,061
Management Fees 41,733 24,427 22,574 35,594 21,251
Total 156,159 104,999 92,730 146,973 108,312
Asset Management and Service Fees 241,349 195,100 152,803 135,163 107,306
Interest:
Margin Account Balances 118,373 107,192 89,971 60,491 50,098
Securities Owned and Deposits 29,462 27,150 15,548 14,074 14,631
Total 147,835 134,342 105,519 74,565 64,729
Other 9,340 7,583 7,448 6,628 5,464
Total Revenues 1,696,483 1,454,467 1,178,342 1,278,641 1,074,388
Expenses:
Compensation and Benefits 1,080,931 929,755 756,736 828,409 692,127
Communications 86,257 80,364 74,708 73,048 66,899
Occupancy and Equipment 85,883 79,077 73,108 67,258 61,701
Floor Brokerage and Clearance 18,149 16,275 14,355 15,062 15,016
Interest 2,065 3,153 6,818 1,113 1,886
Other Operating Expenses 68,241 69,561 53,288 50,180 46,774
Total Expenses 1,341,526 1,178,185 979,013 1,035,070 884,403
Earnings Before Income Taxes 354,957 276,282 199,329 243,571 189,985
Income Taxes 135,900 105,700 75,210 88,700 70,560
Net Earnings $ 219,057 $ 170,582 $ 124,119 $ 154,871 $ 119,425
Per Share Data:
Earnings $ 3.36 $ 2.65 $ 2.00 $ 2.57 $ 2.07
Cash Dividends $ 0.66 $ 0.60 $ 0.56 $ 0.52 $ 0.43
Book Value $ 19.68 $ 17.00 $ 14.76 $ 13.08 $ 10.66
Other Data:
Total Assets $4,244,340 $3,102,085 $2,224,282 $2,236,590 $2,111,192
Stockholders' Equity $1,261,303 $1,088,684 $ 919,281 $ 790,367 $ 615,240
Cash Dividends $ 41,851 $ 37,769 $ 34,200 $ 30,843 $ 24,624
Return on Average Equity 18.6% 17.0% 14.5% 22.0% 21.6%
Pretax Return on Average Equity 30.2% 27.5% 23.3% 34.7% 34.3%
Net Earnings as a Percent of Revenues 12.9% 11.7% 10.5% 12.1% 11.1%
Average Common and Common
Equivalent Shares Outstanding 65,211 64,429 62,178 60,354 57,827
<FN>
Per share data have been restated for stock splits and stock dividends.
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
Year Ended: 1992 1991 1990 1989 1988
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Revenues:
Commissions:
Listed Securities $ 203,936 $ 140,096 $ 129,288 $ 95,276 $114,906
Options 21,745 20,002 18,141 14,201 26,668
Over-the-Counter Securities 69,415 38,842 38,236 30,608 41,687
Mutual Funds 146,377 80,529 70,299 46,675 87,096
Commodities 13,941 12,322 11,941 12,413 12,087
Insurance 47,343 39,514 40,424 39,082 36,120
Total 502,757 331,305 308,329 238,255 318,564
Principal Transactions:
Equities 23,157 10,922 11,741 9,166 7,680
Debt Securities 165,284 145,732 116,624 97,247 60,406
Total 188,441 156,654 128,365 106,413 68,086
Investment Banking:
Underwriting Fees and Selling Concessions 77,464 44,167 42,395 54,308 35,847
Management Fees 13,389 11,161 11,542 12,071 7,472
Total 90,853 55,328 53,937 66,379 43,319
Asset Management and Service Fees 87,461 61,084 47,020 30,654 23,083
Interest:
Margin Account Balances 47,026 51,209 50,489 44,260 39,722
Securities Owned and Deposits 16,915 15,025 14,817 11,321 8,279
Total 63,941 66,234 65,306 55,581 48,001
Other 5,206 4,302 4,066 3,430 3,477
Total Revenues 938,659 674,907 607,023 500,712 504,530
Expenses:
Compensation and Benefits 594,404 422,524 374,119 301,421 309,753
Communications 62,468 58,323 52,527 47,601 42,738
Occupancy and Equipment 56,035 49,783 42,560 36,097 32,459
Floor Brokerage and Clearance 13,741 11,461 10,031 9,400 10,648
Interest 1,186 4,229 6,314 8,604 7,126
Other Operating Expenses 42,793 36,925 29,948 45,292 45,303
Total Expenses 770,627 583,245 515,499 448,415 448,027
Earnings Before Income Taxes 168,032 91,662 91,524 52,297 56,503
Income Taxes 62,500 32,500 32,700 17,348 20,490
Net Earnings $ 105,532 59,162 $ 58,824 $ 34,949 $ 36,013
Per Share Data:
Earnings $ 1.88 $ 1.10 $ 1.09 $ 0.66 $ 0.67
Cash Dividends $ 0.37 $ 0.29 $ 0.28 $ 0.26 $ 0.26
Book Value $ 8.84 $ 7.19 $ 6.45 $ 5.64 $ 5.20
Other Data:
Total Assets $1,577,143 $1,402,627 $1,126,004 $1,062,640 $869,940
Stockholders' Equity $ 492,010 $ 385,869 $ 343,539 $ 300,585 $274,100
Cash Dividends $ 20,622 $ 15,480 $ 15,185 $ 13,904 $ 13,990
Return on Average Equity 24.0% 16.2% 18.3% 12.2% 13.6%
Pretax Return on Average Equity 38.3% 25.1% 28.4% 18.2% 21.3%
Net Earnings as a Percent of Revenues 11.2% 8.8% 9.7% 7.0% 7.1%
Average Common and Common
Equivalent Shares Outstanding 56,101 54,016 53,922 53,119 53,561
<FN>
Per share data have been restated for stock splits and stock dividends.
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
Consolidated Balance Sheets
Year Ended: February 28, February 29,
1997 1996
(In thousands, except per share amounts)
<S> <C> <C>
Assets:
Cash and cash equivalents $ 62,799 $ 52,587
Cash and government securities, segregated under
federal and other regulations 400,991 402,785
Securities purchased under agreements to resell 200,000 92,013
Securities borrowed 1,392,864 613,266
Receivables:
Customers, less allowance for doubtful accounts
of $3,550 and $3,470 1,677,354 1,428,063
Brokers, dealers and clearing organizations 14,635 13,921
Securities inventory, at fair value:
State and municipal 98,516 117,602
Government and agencies 39,666 36,112
Corporate 25,785 42,078
Property and equipment, at cost, net of accumulated depreciation
and amortization of $196,414 and $167,139 189,795 178,556
Deferred income taxes 56,558 42,614
Other assets 85,377 82,488
$4,244,340 $3,102,085
Liabilities and Stockholders' Equity:
Checks payable $ 174,736 $ 148,970
Securities loaned 1,458,426 660,489
Payables:
Customers 816,668 719,989
Brokers, dealers and clearing organizations 47,842 78,647
Securities sold but not yet purchased, at fair value 17,670 21,871
Employee compensation and related taxes 414,177 331,098
Income taxes 13,536 12,630
Other liabilities 39,982 39,707
Total Liabilities 2,983,037 2,013,401
Stockholders' Equity:
Preferred stock, $25 par value:
Authorized, 4,000,000 shares, none issued
Common stock, $1 par value:
Authorized, 250,000,000 shares
Issued, 64,312,658 shares 64,313 64,313
Additional paid-in capital 229,235 232,058
Retained earnings 976,011 798,805
1,269,559 1,095,176
Less-
Treasury stock, at cost (234,921 and 267,650 shares) 8,256 6,492
Total Stockholders' Equity 1,261,303 1,088,684
$4,244,340 $3,102,085
<FN>
See Notes to Consolidated Financial Statements.
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Earnings
Year Ended: February 28, February 29, February 28,
1997 1996 1995
(In thousands, except per share amounts)
<S> <C> <C> <C>
Revenues:
Commissions $ 928,793 $ 806,076 $ 578,817
Principal transactions 213,007 206,367 241,025
Investment banking 156,159 104,999 92,730
Asset management and service fees 241,349 195,100 152,803
Interest 147,835 134,342 105,519
Other 9,340 7,583 7,448
1,696,483 1,454,467 1,178,342
Expenses:
Compensation and benefits 1,080,931 929,755 756,736
Communications 86,257 80,364 74,708
Occupancy and equipment 85,883 79,077 73,108
Floor brokerage and clearance 18,149 16,275 14,355
Interest 2,065 3,153 6,818
Other operating expenses 68,241 69,561 53,288
1,341,526 1,178,185 979,013
Earnings before income taxes 354,957 276,282 199,329
Income taxes 135,900 105,700 75,210
Net earnings $ 219,057 $ 170,582 $ 124,119
Earnings per share $ 3.36 $ 2.65 $ 2.00
<FN>
See Notes to Consolidated Financial Statements.
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
Consolidated statements of Stockholders' Equity
Three years ended February 28, 1997 Common Additional Retained Unamortized Treasury
Stock Paid-in Earnings Expense Stock
Capital of Restricted
Stock Awards
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Balances, March 1, 1994 $60,446 $165,124 $576,073 $(11,276) $ -
Net earnings 124,119
Cash dividends - $0.56 per share (34,200)
Treasury stock acquired (2,766)
Stock issued:
Employee stock purchase/option plans 1,293 17,538 3,500
Restricted stock 555 12,201 439 (734)
Amortization of restricted stock awards 6,969
Balances, February 28, 1995 62,294 194,863 665,992 (3,868) -
Net earnings 170,582
Cash dividends - $0.60 per share (37,769)
Treasury stock acquired (12,511)
Stock issued:
Employee stock purchase/option plans 1,376 22,282 3,280
Restricted stock 643 14,913 189 2,739
Amortization of restricted stock awards 3,679
Balances, February 29, 1996 64,313 232,058 798,805 - (6,492)
Net earnings 219,057
Cash dividends - $0.66 per share (41,851)
Treasury stock acquired (64,805)
Stock issued:
Employee stock purchase/option plans (6,041) 42,938
Restricted stock 3,218 20,103
Balances, February 28, 1997 $64,313 $229,235 $976,011 $ - $(8,256)
<FN>
See Notes to Consolidated Financial Statements.
</TABLE> 26
<PAGE>
<TABLE>
<CAPTION>
Consolidated statements of Cash Flows
Year Ended: February 28, February 29, February 28,
1997 1996 1995
(In thousands)
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net earnings $ 219,057 $ 170,582 $ 124,119
Noncash items included in earnings:
Depreciation and amortization 33,066 31,141 28,722
Amortization/expense of restricted stock awards 22,173 21,697 18,778
Deferred items (13,944) (13,096) (6,095)
(Increase) decrease in operating assets:
Segregated cash and government securities 1,794 (358,977) 151,918
Securities borrowed (779,598) (333,595) (36,250)
Receivable from brokers, dealers and
clearing organizations (714) 15,825 (12,309)
Receivable from customers (249,291) (68,891) (141,027)
Securities inventory 31,825 (43,230) 15,197
Other assets (9,388) (10,274) 927
Increase (decrease) in operating liabilities:
Checks payable 25,766 41,997 (4,974)
Securities loaned 797,937 280,762 104,432
Payable to brokers, dealers and clearing organizations (30,805) (4,319) (264,773)
Payable to customers 96,679 304,248 60,517
Securities sold but not yet purchased (4,201) (17,607) 15,369
Employee compensation and related taxes 83,079 84,978 (39,093)
Income taxes 906 10,260 (7,589)
Other liabilities 275 8,081 (5,111)
Net cash provided by operating activities 224,616 119,582 2,758
Cash Flows From Investing Activities:
Securities purchased under agreements to resell (107,987) (49,194) 71,734
Purchase of property and equipment (44,305) (42,127) (50,851)
Long-term investments included in other assets 6,499 5,738 (8,535)
Net cash (used in) provided by investing activities (145,793) (85,583) 12,348
Cash Flows From Financing Activities:
Employee stock transactions 38,045 27,404 22,983
Purchase of treasury stock (64,805) (12,511) (2,766)
Cash dividends paid (41,851) (37,769) (34,200)
Net cash used in financing activities (68,611) (22,876) (13,983)
Net increase in cash and cash equivalents 10,212 11,123 1,123
Cash and cash equivalents, at beginning of year 52,587 41,464 40,341
Cash and cash equivalents, at end of year $ 62,799 $ 52,587 $ 41,464
Interest payments totaled $2,650 in 1997, $3,806 in 1996 and $6,425 in 1995.
Supplemental disclosures of noncash financing activities:
Restricted stock awards, net of forfeitures, totaled $21,768 in 1997,
$18,291 in 1996 and $11,561 in 1995.
<FN>
See Notes to Consolidated Financial Statements.
</TABLE>
27
<PAGE>
Notes to Consolidated Financial Statements
Three years ended February 28, 1997
(Dollars in thousands, except per share amounts)
(1. Summary of Significant Accounting Policies)
The consolidated financial statements include the accounts
of A.G. Edwards, Inc., and its wholly owned subsidiaries (collectively referred
to as the Company) and are prepared in conformity with generally accepted
accounting principles. In accordance with accounting principles and industry
practice, management has made use of estimates concerning certain assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and certain revenues and expenses during the reporting
period. Actual results could differ from these estimates. All material
intercompany balances and transactions have been eliminated in consolidation.
Where appropriate, prior years' financial information has been reclassified to
conform with the current-year presentation.
The Company is in one principal line of business, that of providing investment
services, including securities and commodities brokerage, asset management,
insurance, trust, investment banking, and other related financial services to
individual retail, corporate, governmental and institutional clients. These
services are provided through its principal subsidiary, A.G. Edwards & Sons,
Inc., and other wholly owned subsidiaries.
Cash equivalents consist of interest-earning investments purchased with
maturities of 90 days or less at the date of acquisition.
Securities purchased under agreements to resell (Resale Agreements) are recorded
at amounts at which the purchased securities will be resold, including accrued
interest. Cash and government securities segregated under federal and other
regulations include Resale Agreements of $350,000 in 1997 and 1996. The
Company's policy is to obtain possession or control of securities purchased
under Resale Agreements and to obtain additional collateral when necessary to
minimize the risk associated with this activity.
Securities borrowed and securities loaned are recorded at
the amount of the cash collateral provided for securities borrowed transactions
and received for securities loaned transactions, respectively. The adequacy of
the collateral is continuously monitored and adjusted when deemed necessary to
minimize the risk associated with this activity. Substantially all of these
transactions are executed under master netting agreements, which give the
Company right of offset in the event of counterparty default.
Customer securities transactions are recorded on settlement date. Revenues and
related expenses for transactions executed but unsettled are accrued on a trade-
date basis.
Securities inventory and securities segregated under federal and other
regulations are recorded on a trade-date basis and are carried at fair value.
Fair value is based on quoted market or dealer prices, pricing models, or
management's estimates. Unrealized gains and losses are reflected in revenue.
Depreciation of buildings is provided using both straight line and accelerated
methods over estimated useful lives of 15 to 45 years. Leasehold improvements
are amortized over the lesser of the life of the lease or estimated useful life
of the improvement. Depreciation of equipment is provided over esti- mated
useful lives of five to 10 years using both straight line and accelerated
methods.
Earnings per share is based on the weighted average number of common shares and
common share equivalents outstanding of 65,211,000 in 1997, 64,429,000 in 1996
and 62,178,000 in 1995. Common share equivalents represent the effect of shares
issuable under the Company's employee stock plans. Primary and fully diluted
earnings per share are substantially the same.
Effective in January, 1998, the Company will adopt certain provisions of
Statement of Financial Accounting Standards No. 125, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities" (SFAS
125), which are applicable to its business. SFAS 125 introduces the financial-
components approach, which focuses on the recognition of financial assets and
liabilities an entity controls and the derecognition of financial assets and
liabilities for which control has been transferred. The adoption of this
statement is not expected to have a material effect on the Company's financial
condition or results of operations.
In February, 1997, SFAS No. 128, "Earnings per Share,"
was issued and is effective for financial statements issued for periods ending
after December 15, 1997. This statement
28
<PAGE>
changes the method for calculating and disclosing earnings per share. This
statement will not have a material effect on the Company's financial statements.
(2. Bank Loans)
Bank loans are short-term borrowings with interest generally based on the
federal funds rate. Such loans are payable on demand and may be unsecured or
collateralized by customer-owned securities held in margin accounts. The average
of such borrowings was $2,191 in 1997, $4,878 in 1996 and $63,803 in 1995, at
effective interest rates of 5.8 percent, 6.5 percent and 5.0 percent,
respectively. Substantially all such borrowings were secured by customer-owned
securities. There were no borrowings outstanding at February 28, 1997, and
February 29, 1996.
(3. Employee Stock Plans)
The Company applies the provisions of Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees," (APB No. 25), and related
interpretations in accounting for its employee stock plans. Accordingly, as
options granted under the plans are either "non-compensatory" or are fixed cost
stock options at market value at date of grant, under APB No. 25 no compensation
expense has been recognized. If compensation expense for the Company's stock
options and stock purchase plan had been determined based on the estimated fair
value of the options granted, consistent with SFAS
No. 123, "Accounting for Stock Based Compensation," the Company's net earnings
and earnings per share would have been reduced to $214,000 and $3.28,
respectively, in 1997, and $166,000 and $2.58, respectively, in 1996. The Black-
Scholes option pricing model was used to calculate the estimated fair value of
the options.
Employee Stock Purchase Plan
Options to purchase 1,250,000 shares of common stock granted to employees under
the Company's stock purchase plan are exercisable October 1, 1997, at 85 percent
of market price based on dates specified in the plan. Employees purchased
1,246,883 shares at $22.47 per share in 1997, 1,247,073 shares at $18.09 per
share in 1996 and 1,228,565 shares at $15.30 per share in 1995. Of the shares
exercised, treasury shares were utilized for all of the shares purchased in 1997
and for 132,559 shares in 1995. The fair value of the options granted under this
plan was estimated using the following assumptions for 1997 and 1996,
respectively: dividend yield of 2.21 percent and
2.41 percent; an expected life of one year; expected volatility
of 25 percent and 23 percent; and risk-free interest rates of 5.74 percent and
5.81 percent. The fair value of the options granted in 1997 and 1996 was $5.89
and $5.17, respectively.
Restricted Stock and Stock Options
Under the Company's Incentive Stock Plan, three types of benefits may be granted
to officers and key employees: restricted stock, stock options and stock
appreciation rights. Such awards are subject to forfeiture upon termination of
employment during a restricted period. Through February 28, 1997, no stock
appreciation rights have been granted.
Restricted stock awards are made, and shares issued, without cash payment by the
employee. The shares are restricted for a vesting period, generally three years
from the award date. In 1994, the Company amended the plan to define the service
period in connection with stock awards to coincide with the period for which the
amount of the award is determined. Therefore, beginning in 1994, awards are
expensed in the year granted. For awards before 1994, this amount was amortized
over the vesting period. Eligible employees as of February 28, 1997, were
awarded 693,816 shares with a market value of $22,070. As of February 29 (28),
1996 and 1995, the awards were 742,755 and 546,590 shares, respectively, with
corresponding market values of $18,480 and $11,888. As of February 28, 1997,
restricted stock awards covering 2,668,329 shares were outstanding, with the
restrictions expiring at various dates through the year 2000.
Stock options are granted to purchase common stock at
100 percent of market value at date of grant. Such options are exercisable
beginning three years from date of grant and expire eight years from date of
grant, or earlier upon termination of employment. The fair value of each option
grant was estimated at the date of grant using the following assumptions for
1997 and 1996, respectively: dividend yield of 2.21 percent and
2.41 percent; expected lives of six years; expected volatility of 25 percent and
23 percent; risk-free interest rates of 6.41 percent and 5.89 percent; and a
forfeiture rate of eight percent. The fair value of options granted under this
plan in 1997 and 1996 was $9.43 and $6.57, respectively.
A summary of the status of the Company's stock options as of February 28 (29),
1997, 1996 and 1995, and changes during the years ending on those dates is
presented as follows:
29
<PAGE>
<TABLE>
<CAPTION>
1997 1996 1995
Shares Weighted- Shares Weighted- Shares Weighted-
(000) Average (000) Average (000) Average
Exercise Exercise Exercise
Price Price Price
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of year 3,241 $18.91 3,008 $17.03 2,848 $15.55
Granted 528 $31.81 563 $24.88 473 $21.75
Exercised (413) $13.77 (270) $10.34 (265) $ 9.21
Forfeited (27) $20.51 (60) $19.46 (48) $18.87
Outstanding, end of year 3,329 $21.58 3,241 $18.91 3,008 $17.03
Treasury shares utilized for exercises 413 133 67
</TABLE>
The following table summarizes information about outstanding stock options at
February 28, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
Range of Number Weighted-Average Weighted- Number Weighted-
Exercise Outstanding Remaining Average Exercisable Average
Prices (000) Contractual Exercise (000) Exercise
Life (years) Price Price
<C> <C> <C> <C> <C> <C>
$10 - $15 408 1.4 $11.73 408 $11.73
$16 - $20 1,050 4.4 $18.39 326 $19.80
$21 - $25 1,343 5.9 $23.06 332 $21.80
$26 - $32 528 8.0 $31.81 0
Total 3,329 1,066
</TABLE>
(4. Employee Profit Sharing Plan)
The Company has an employee profit sharing plan covering substantially all
employees, whereby the Company is obligated to match, in specified amounts as
defined therein, portions of contributions made by eligible employees.
Additional contributions may be made at the discretion of the Company. Required
and discretionary contributions totaled $65,754 in 1997, $56,107 in 1996 and
$41,788 in 1995.
(5. Net Capital Requirements)
A.G. Edwards & Sons, Inc., is subject to net capital rules administered by the
Securities and Exchange Commission (SEC) and the New York Stock Exchange. Under
such rules, this subsidiary must maintain net capital of not less than two
percent of aggregate debit items, as defined, arising from customer transactions
and would be restricted from expanding its business or paying cash dividends and
loans to affiliates if its net capital were less than five percent of such
items. These rules also require A.G. Edwards & Sons, Inc., to notify and
sometimes obtain approval of the SEC and other regulatory organizations for
substantial withdrawals of capital and loans to affiliates. At February 28,
1997, the subsidiary's net capital of $882,248 was 54 percent of aggregate debit
items and $849,609 in excess of the minimum required.
Certain other subsidiaries are also subject to minimum capital requirements that
may restrict the payment of cash dividends and advances to A.G. Edwards, Inc.
The only restriction with regard to the payment of cash dividends
by A.G. Edwards, Inc., is its ability to obtain cash dividends and advances from
its subsidiaries, if needed.
30
<PAGE>
(6. Income Taxes)
The provisions for income taxes consist of:
1997 1996 1995
Current:
Federal $124,871 $ 99,934 $67,821
State and local 24,973 18,862 13,484
Subtotal 149,844 118,796 81,305
Deferred (13,944) (13,096) (6,095)
Total $135,900 $105,700 $75,210
Deferred income taxes reflect temporary differences in the basis of the
Company's assets and liabilities for income tax purposes and for financial
reporting purposes, using current tax rates. These temporary differences result
in taxable or deductible amounts in future years.
Deferred tax assets totaled $73,337 at February 28, 1997, and $60,826 at
February 29, 1996, and consisted primarily of employee benefits that are not
currently deductible. The Company expects to fully realize these deferred tax
assets, given the Company's historical levels of earnings and related taxes
paid; accordingly, no valuation allowance has been established. Deferred tax
liabilities totaled $16,779 at February 28, 1997, and $18,212 at February 29,
1996, and consisted primarily of accelerated depreciation deductions.
The Company's effective tax rate was 38 percent in 1997, 1996 and 1995, which
differed from the federal statutory rate of 35 percent. State and local taxes,
net of federal benefit, increased the effective rate by four percent in 1997,
1996 and 1995. No other single item had a material impact on the difference in
the rates.
(7. Stockholders' Rights Plan)
The Company's Stockholders' Rights Plan, as amended, provides for the
distribution of one Common Stock Purchase Right for each outstanding share of
the Company's common stock. The rights cannot be exercised or traded apart from
the common stock until, without the prior consent of the Company, a third party
either acquires 20 percent or more of the Company's outstanding common stock or
commences a tender or exchange offer that would result in the third party
acquiring 20 percent or more of the outstanding common stock. Each right, upon
becoming exercisable, entitles the registered holder to purchase one share of
common stock for $90 from the Company. If a person actually acquires 20 percent
or more of the Company's common stock without the Board of Directors' consent,
then each right will entitle its holder, other than the acquiring company, to
purchase for $90 the number of shares of the Company's common stock (or in the
event of a merger or other business combination, the number of shares of the
acquirer's stock), which has a market value of $180. The rights, which are
redeemable by the Company at a price of $0.00384 each prior to a person's
acquiring 20 percent or more of the Company's common stock, are subject to
adjustment to prevent dilution and expire June 22, 2005.
(8. Stock Repurchase Program)
The Company's stock repurchase program, which began in May, 1996, authorizes the
Company to repurchase up to 22 million of its outstanding shares over a
5 1/2-year period. This program supersedes an existing stock repurchase program.
The Company purchased 2,289,000 shares at an aggregate cost of $64,805 in 1997,
500,000 shares at a cost of $12,511 in 1996 and 162,700 shares at a cost of
$2,766 in 1995. Repurchased shares are added to treasury stock to be used for
employee stock plans and to partially offset the past effect of these plans.
(9. Commitments and Contingent Liabilities)
The Company has long-term operating leases for office space and communications
equipment. Minimum rental commitments under all such noncancelable leases, some
of which contain escalation clauses and renewal options, at February 28, 1997,
are as follows:
Year ending February 28 (29),
1998 $41,200
1999 38,100
2000 32,300
2001 26,500
2002 21,000
Later years 45,700
Total $204,800
Rental expense under all operating leases and equipment
maintenance contracts was $39,598 in 1997, $36,381 in 1996 and $34,203 in 1995.
31
<PAGE>
In the normal course of business, the Company enters into when-issued and
underwriting commitments. Transactions relating to open commitments at February
28, 1997, and subsequently settled, had no material effect on the consolidated
financial statements as of that date.
At February 28, 1997, and February 29, 1996, the Company had $119,975 and
$94,938, respectively, of outstanding letters
of credit, principally to satisfy margin deposit requirements with
a clearing corporation. Of this amount, $15,000 and $8,000, respectively, were
collateralized by customer-owned securities.
The Company is a defendant in a number of lawsuits, in some of which plaintiffs
claim substantial amounts, relating primarily to its securities and commodities
business. While results of litigation cannot be predicted with certainty,
management, after consultation with counsel, believes that resolution of all
such litigation will have no material adverse effect on the consolidated
financial statements of the Company.
(10. Financial Instruments)
Off-Balance Sheet Risk and Concentration of Credit Risk
The Company records customer transactions on a settlement date basis, generally
three business days after trade date. The risk of loss on unsettled transactions
is identical to settled transactions and relates to customers' and other
counterparties' inability to fulfill their contracted obligations.
In the normal course of business, the Company also executes customer
transactions involving the sale of securities not yet purchased, the purchase
and sale of futures contracts, and the writing of option contracts on both
securities and futures. In the event customers or other counterparties such as
broker-dealers or clearing organizations fail to satisfy their obligations, the
Company may be required to purchase or sell financial instruments in order to
fulfill its obligations at prices that may differ from amounts recorded in the
balance sheet.
Customer financing and securities settlement activities generally require the
Company to pledge customer securities as collateral in support of various
financing sources. Additionally, customer securities may be pledged as
collateral to satisfy margin deposits at various clearing organizations. To the
extent these counterparties are unable to fulfill their contracted obligation
to return securities pledged, the Company is exposed to the risk of obtaining
securities at prevailing market prices to meet its customer obligations.
Securities sold but not yet purchased represent obligations of the Company to
deliver specified securities at contracted prices. Settlement of such
obligations may be at amounts greater than those recorded in the balance
sheet.
A substantial portion of the Company's assets and obligations result from
transactions with customers and other counterparties who have provided
financial instruments as collateral. Volatile trading markets could impair the
value of such collateral and affect customers' and other counterparties' ability
to satisfy their obligations to the Company.
The Company manages its risk associated with the aforementioned transactions
through position and credit limits, and the continuous monitoring of collateral.
Additional collateral is requested from customers and other counterparties when
appropriate.
Derivatives
The Company does not act as dealer, trader or end-user of complex derivatives
such as swaps, collars and caps. The Company provides advice and guidance on
complex derivative products to selected clients; however, this activity does
not involve the Company acquiring a position or commitment in these products.
The Company will occasionally hedge a portion of its debt inventory through the
use of financial futures contracts. These transactions are not material to the
Company's financial condition or results of operations.
Fair Value Considerations
Substantially all the Company's financial instruments are carried at fair value
or amounts that approximate fair value. Customer receivables, primarily
consisting of floating-rate loans collateralized by margin securities, are
charged interest at rates similar to other such loans made throughout the
industry. The Company's remaining financial instruments are generally short-term
in nature and liquidate at their carrying values.
32
<PAGE>
Independent Auditors' Report
To the Board of Directors and Stockholders of
A.G. Edwards, Inc.:
We have audited the accompanying consolidated balance sheets of A.G. Edwards,
Inc. and subsidiaries as of February 28, 1997 and February 29, 1996, and the
related consolidated statements of earnings, stockholders' equity and cash flows
for each of the three years in the period ended February 28, 1997. 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 in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of A.G. Edwards, Inc. and subsidiaries
as of February 28, 1997 and February 29, 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
February 28, 1997, in conformity with generally accepted accounting principles.
April 24, 1997
St. Louis, Missouri
33
<PAGE>
<TABLE>
<CAPTION>
Quarterly Financial Information (Unaudited)
Cash Stock Price Revenues Earnings Net Earnings
Dividends Trading Range (in millions) Before Tax Earnings per Share
per Share High - Low (in millions) (in millions)
<S> <C> <C> <C> <C> <C> <C>
Fiscal 1996 by Quarter
First $0.14 23 5/8 - 20 3/8 $325.3 $57.2 $35.4 $0.56
Second $0.14 25 1/2 - 22 $362.0 $70.0 $43.3 $0.67
Third $0.16 27 - 23 1/2 $361.9 $69.8 $43.0 $0.67
Fourth $0.16 26 15/16 - 22 5/8 $405.3 $79.3 $48.9 $0.75
Fiscal 1997 by Quarter
First $0.16 26 1/4 - 22 1/2 $428.5 $92.0 $56.4 $0.87
Second $0.16 29 1/2 - 25 1/2 $407.1 $85.0 $52.2 $0.80
Third $0.16 31 7/8 - 27 3/8 $404.5 $81.0 $51.0 $0.79
Fourth $0.18 41 1/4 - 30 1/4 $456.4 $97.0 $59.5 $0.90
</TABLE>
43
<PAGE>
Stockholder Information
Annual Meeting
The 1997 Annual Meeting of Stockholders will be held at the Company's
headquarters, One North Jefferson, St. Louis, Missouri, on Thursday, June 19,
1997, at 10:00 a.m. Notice of Annual Meeting, Proxy Statement and Proxy Voting
Card are mailed in May to each stockholder. The Proxy Statement describes the
items of business to be voted on at the Annual Meeting and provides information
on the Board's nominees for director and their principal affiliations with other
organizations, as well as other information about the Company.
Quarterly Reports
Mailed in June, September and December, the quarterly
reports contain a Chairman's letter, a balance sheet and a summary of earnings.
Dividend Payment Dates
The next four anticipated dividend payment dates are July 1 and October 1, 1997,
and January 2 and April 1, 1998.
Form 10-K
The Form 10-K Annual Report filed with the Securities
and Exchange Commission, which provides further details on A.G. Edwards'
business, is available at no charge from the Secretary, A.G. Edwards, Inc., One
North Jefferson, St. Louis, Missouri 63103.
Stock Exchange Listing
A.G. Edwards, Inc., stock is traded on the New York Stock Exchange. (The stock
symbol is AGE.) The approximate number of stockholders on February 28, 1997, was
21,400.
Registrar/Transfer Agent
Boatmen's Trust Company, St. Louis, Missouri.
Account protection package
The securities held by A.G. Edwards & Sons, Inc., for the accounts of clients
are protected up to $500,000, including up to $100,000 for cash claims, by the
Securities Investor Protection Corporation (SIPC). In addition to the SIPC
coverage, securities held in client accounts are provided $49.5 million in
protection by an independent commercial insurance company.
Exchange Memberships
A.G. Edwards companies are members of all major stock and commodity exchanges,
including the American, Boston, Chicago, New York, Pacific and Philadelphia
stock exchanges; the Chicago Board Options Exchange; the Chicago Board of Trade;
the Chicago Mercantile Exchange; the New York Futures Exchange and other
commodity exchanges; as well as the National Futures Association and the
National Association of Securities Dealers.
44
<PAGE>
EXHIBIT 21
A.G. EDWARDS, INC.
REGISTRANT'S SUBSIDIARIES
The following listing includes the registrant's directly-owned subsidiaries
and indirectly-owned subsidiaries (certain subsidiaries which are not
significant are omitted from the listing), all of which are included in the
consolidated financial statements:
State of
Incorporation/
Name of Company Organization Subsidary of
A.G. Edwards & Sons, Inc. (Edwards) Delaware Registrant
The Ceres Investment Company Missouri Edwards
Indianapolis Historic Partners Indiana Edwards
AGE Commodity Clearing Corp. Delaware Registrant
A.G. Edwards Life Insurance Company Missouri Registrant
Edwards Development Corporation Missouri Registrant
A.G. Edwards Trust Company (Missouri Trust) Missouri Registrant
A.G. Edwards Asset Performance Monitor, Inc. Missouri Missouri Trust
A.G. Edwards Trust Company New Jersey Registrant
A.G. Edwards Trust Company Texas Registrant
A.G. Edwards Trust Company Florida Registrant
A.G.E. Properties, Inc. (Properties) Missouri Registrant
A.G.E. Realty Corp. Missouri Properties
A.G.E. Redevelopment Corporation Missouri Properties
GULL-AGE Capital Group, Inc. Delaware Registrant
AGE Investments, Inc. Delaware Registrant
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in the Registration Statements
(File Nos. 33-61949, 33-52786, 33-36609 and 33-23837) of the A.G. Edwards,
Inc. 1988 Incentive Stock Plan on Form S-8 of our report dated April 24,
1997, appearing in and/or incorporated by reference in the Annual Report on
Form 10-K of A.G. Edwards, Inc. for the year ended February 28, 1997.
/s/ Deloitte & Touche LLP
May 27, 1997
St. Louis, Missouri
<TABLE> <S> <C>
<ARTICLE> BD
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-28-1997
<PERIOD-END> FEB-28-1997
<CASH> 62,799
<RECEIVABLES> 1,691,989
<SECURITIES-RESALE> 200,000
<SECURITIES-BORROWED> 1,392,864
<INSTRUMENTS-OWNED> 163,967
<PP&E> 189,795
<TOTAL-ASSETS> 4,244,340
<SHORT-TERM> 0
<PAYABLES> 1,453,423
<REPOS-SOLD> 0
<SECURITIES-LOANED> 1,458,426
<INSTRUMENTS-SOLD> 17,670
<LONG-TERM> 0
0
0
<COMMON> 64,313
<OTHER-SE> 1,196,990
<TOTAL-LIABILITY-AND-EQUITY> 4,244,340
<TRADING-REVENUE> 213,007
<INTEREST-DIVIDENDS> 147,835
<COMMISSIONS> 928,793
<INVESTMENT-BANKING-REVENUES> 156,159
<FEE-REVENUE> 193,263
<INTEREST-EXPENSE> 2,065
<COMPENSATION> 1,080,931
<INCOME-PRETAX> 354,957
<INCOME-PRE-EXTRAORDINARY> 354,957
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 219,057
<EPS-PRIMARY> 3.36
<EPS-DILUTED> 3.36
</TABLE>
